Stocks ended a weak week on a down note Friday, closing out the first negative week in the past seven. But while upward momentum continues to wane, the bullish trend still remains intact.
The iShares Barclays 20+ Yr Treasury Bond ETF (TLT) has staged a mini-rally over the past week. But we’ve seen this act before, most recently during the first part of July. Eventually, TLT turned lower again and fell below support. We see no reason to believe that same pattern won’t be followed this month, with support this time residing in the $105.50 area. Except for a two-month reprieve earlier this year, TLT remains in a downtrend that began last November.
But so far, even as TLT and my internal 200-day Moving Averages Index signal that trouble may be brewing, most other indicators are saying that all is well. Until proven otherwise, those are the indicators to believe. In addition to the Advance/Decline Index and Cumulative Volume Index being bullish, volatility indexes continue to grind toward historic lows. In particular, the CBOE Market Volatility has returned to its lows near 12, a point at which it looks to have established support. If it falls below that, there is a good chance it will return to its all-time low at 10.50, at level it last visited in 2007, right before all heck broke loose.
With our indicators continuing to give bullish readings, options players should continue to favor buying calls over puts. But as we mentioned, upward momentum has waned over the past few weeks, and with trading volumes reduced by summer vacations, a sharp downdraft could happen with just one or two negative news events. So keep some puts in your portfolio just in case.
One good candidate for puts right now is Newmont Mining (NEM).
NEM is a gold mining stock. The stock has been in a downtrend along with the price of gold for almost a year. Along the way it has rallied up to its 50-day moving average five different times only to be turned back and sent lower each time. Following the price pop on Thursday and Friday, it is nearing that average again, and if history repeats the stock should be heading lower again shortly.
Recommendation: Buy the NEM Oct. 26 put (NEM131019P00026000) at a suggested price of $1.10 ($110 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $25.70. That should give you an option price of about $2.30, for a 109% profit.
Close this position and cut losses if the stock closes above $30.40, when the option price should be about 70 cents. The stock is currently trading at $29.51.
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