Trade of the Day: Micron Technology (MU)

Only a few call options pass muster in this environment

   

After threatening to do so for the past few weeks, momentum has turned to the downside. And a key indicator is saying that the trouble is likely to continue.

Our index indicators are giving bullish to neutral readings, a downgrade from last week’s bullish readings. The culprits for the downgrade are the Dow and S&P 500, which have fallen below their 50-day moving averages. With that break, the Dow is now looking at its 200-day moving average at 14,500 as bull market support, and the S&P 500 at 1570. The Nasdaq is still above its 50-day average, and will remain so by staying above 3560.

Our internal indicators have weakened along with the indexes. The Advance/Decline Index is now bullish to neutral, while the Cumulative Volume Index remains bullish. And five of the nine S&P sector funds have fallen below their 50-day moving averages. Perhaps most important, the 200-day Moving Averages Index, which has been outright bearish for more than two months, has regained its status as a most reliable indicator. We’ve been warning that the indicator has been signaling that rising interest rates would eventually cause trouble for stocks, and that now appears to be happening.

That is seen in the 20+ Yr Treasury Bond ETF (TLT), which has cracked yet again. From a chart perspective, a TLT fall to $93.50 is in on the table, which would restore Treasury yields and interest rates to mid-2011 levels. Of course, the Federal Reserve will do all it can to keep that from happening, maybe even becoming the only buyer of bonds left in the market.

With our indicators weakening, options players should seek a balance between bullish and bearish positions. Become more cautious with your call buying, and step up your put buying. After threatening to do so over the past few weeks, momentum has turned lower, and conditions are right for that trend to continue.

One call option that passes muster in these conditions is in Micron Technology (MU).

Recommendation: Buy MU October 15 call options at $1.00 or lower. After entry, take profits if the stock price hits $16.10 or the option price reaches $2.00. Exit if the stock price closes below $13.10 or the option price falls to 60 cents.

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