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Trade of the Day: Mellanox (MLNX)

The semis are sinking - use put options to profit


Major stock indexes continued their mad dash higher last week, even overcoming a collapse by the market’s largest single stock, Apple (NASDAQ:AAPL). But when everything looks this good, that is when you should start getting cautious.

Our indicators are giving bullish readings, unchanged for several weeks now. While the major price indices are stochastically overbought and a pullback should be expected, the primary bullish trends will remain in place as long as the Dow stays above 13,325, the S&P 500 above 1,445, and the NASDAQ above 3,060. Those prices represent each index’s current 50-day moving averages.

And even if those support levels fail during a pullback, longer-term bullish support is available at the 200-day moving averages, which for the Dow is at 13,040, the S&P 500 at 1,400, and the NASDAQ at 2,985.

Our internal indicators are confirming the strength in the price indexes, as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index all are bullish. Also, eight of nine S&P sector index funds are primary bullish, and the laggard Utilities Select Sector SPDR (NYSE:XLU) is improving. And seven of eight global index funds are primary bullish, with the laggard Brazil (NYSE:EWZ) also improving.

So, the “risk on” appetite for stocks remains in play. Even “late to the party” investors can consider tip-toeing in here, using the moving average supports for quick exits if need be.

All the money moving into stocks has to come from somewhere, and right now much of it is coming from fixed income assets, as evidenced by weakness in U.S. Treasury bonds (NYSE:TLT). We’ve been watching TLT for several weeks for possible confirmation of a fall into a primary bearish trend, and on Thursday that may have happened as TLT’s 50-day moving average dipped slightly below its 200-day. If this trend continues chart support at $118 becomes extremely important. A failure there could signal that a bigger move out of bonds may be underway, along with a concurrent rise in long-term interest rates.

Of course, a major move higher by interest rates is exactly what the Federal Reserve is working against. For the past few years it has been running monetary policy with an objective of a flat, artificially low yield curve. A potential popping of the current bond bubble would be met by increased Fed action to keep bond prices high and yields low. So beware those who are ready to sell-short the bond market. You will be fighting the Fed, and doing that is hardly ever a good idea.

With our indicators remaining bullish, options buyers should continue to buy calls. But again, don’t go overboard, and in fact you should look to prune your portfolio somewhat of current call positions that haven’t been working as well as hoped or might be running out of time. And as always, keep some puts in your portfolio. Stocks are due for a pullback, and potential causes for one are plentiful.

A name that emerged from my Power Options scans with a bearish bias is Mellanox (NASDAQ:MLNX), which sits in the semiconductor space. There are other weak names in the sector, including Xilinx (NASDAQ:XLNX), Rambus (NASDAQ:RMBS) and Intel (NASDAQ:INTC), which are all trending down, as well as Cypress Semiconductors (NASDAQ:CY), which is on sell watch.

Buy MLNX puts are incredibly cheap right now, which is a driving factor in all of our Maximum Options trades.

Buy the MLNX March 40 Puts options at 90 cents or lower. After entry, take profits if the stock price hits $42.8 or the option price hits $2.7). Exit if the stock price closes above $55.10 or the options price hits 50 cents.

InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.  Try Maximum Options today for 2 months for only $99.

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