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Major stock indexes continue to struggle, and our indicators are saying that the struggles may not be over.
Our index indicators are giving bullish to neutral readings, unchanged from last week, as the Dow and S&P 500 continue to trade below their 50-day moving averages. The Nasdaq is still above its 50-day average. For the overall bull market to remain in force, the Dow needs to stay above its 200-day moving average at 14,550, and the S&P 500 above its at 1575. The Nasdaq will remain in a primary bull market by staying above its 50-day moving average at 3565.
The primary cause of the current index weakness is, of course, rising interest rates, though some earnings troubles in the retail sector are also contributing. Weakness in retail is seen as weakness in consumer spending, which accounts for more than two-thirds of the U.S. economy. Consumers also are not likely to be helped by recent trends in the commodity indexes, most of which have arrested long downtrends by crossing back above their 50-day moving averages. A whiff in inflation brewing? Only agriculture-based indexes remain bearish among the commodities.
As for Treasury prices and yields, the Barclays Long-Term Treasury Fund (TLT) continues to track lower, a downtrend that began more than a year ago. Many analysts expect money moving out of Treasuries to move toward and help prop up stock prices, but recent chart patterns in both stocks and commodities do not yet support that supposition. When will the downtrend in Treasury prices (and rise in Treasury yields) end? According to the charts, flimsy support for TLT awaits at $94, and more solid support at $90. And even then, yields would still be at historically low levels. But as we mentioned last week, we do not expect the Fed to allow TLT to fall that low, at least not in the near future.
With our indicators continuing to weaken, options players should begin to weight more toward bearish than bullish position. Become more cautious with your call buying, and step up your put buying. Bullish momentum continues to weaken, and conditions are right for that trend to continue.
As American stocks are seeing a surge of popularity, a bearish bet on emerging markets is looking like a good trade. My Power Options system found a way to leverage the downside with puts on a 3X leveraged bullish fund.
Recommendation: Buy Direxion Daily Emerging Market Bull 3X (EDC) October 20 Put options at $1.45 or lower. After entry, take profits if the ETF price hits $18.70 or the option price reaches $2.90. Exit if the ETF price closes above $24.1 or the option price falls to $1.00.
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