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Trade of the Day: Avon (AVP)

Our index indicators are still giving bullish to neutral readings, unchanged from a week ago. The Dow Industrials and S&P 500 remain above their 50-day moving averages, but the Nasdaq continues to trend below its 50-day average. Since falling below its 50-day average in early April, the Nasdaq has made three attempts to move back above it, but has failed each time. It must move above 4,140 to make that happen. Meanwhile, the Dow must stay above 16,370, and the S&P 500 above 1,860, to maintain their primary bullish trends.

Our internal indicators continue to lean to the bullish side, but a cautionary note has appeared, as the 200-day Moving Averages Index has fallen below its 50-day moving average. On the other hand, the Advance/Decline Index and Cumulative Volume Index remain bullish. Also, seven of nine S&P 500 sector funds are bullish, down from eight of nine last week. The Dow Transports and Dow Utilities are bullish as well.

Although they are currently undergoing a pullback, long-term Treasury bonds (TLT) continue to be one of the strongest asset classes. Even if its current pullback continues a while longer, TLT will maintain its primary bullish trend by staying above its 50-day moving average at $109.60. In somewhat of a curious occurrence, the U.S. dollar has been in a bearish trend, while Treasuries have strengthened. It is natural to assume that if Treasuries are strong, the dollar will be also, but so far this year that has not been the case.

Following a week when they looked to be rolling over, key commodities have regained their footing. Oil has moved back above its 50-day moving average and into a primary bullish trend, though it won’t take much of a price correction for that to change.

Copper remains in a neutral to bearish trend as it continues to struggle to break out of a months-long trading channel. Gold is in a primary bearish trend, but may be finding increased support in the $124 area. However, if that support fails, another meltdown by gold cannot be ruled out.

All in all, trends in Treasury bonds and commodities continue to argue that accelerating economic growth is not in the near future. Combined with our S&P 500 index and other indices indicators remaining bullish to neutral, options traders should continue a neutral weighting between bullish and bearish positions

Since the previous Trade of the Day featured Micron Technology (MU) Call options, today we’ll provide a bearish put option in cosmetics retailer Avon (AVP) to help with a  balanced strategy to play the S&P 500.

Buy the AVP July 13 Put options at 50 cents or lower (Thursday’s closing stock price was $13.30). After entry, take profits if AVP stock price hits $12.30 or the option price hits $1.00. Exit if the stock price closes above $13.80 or the option price closes below 30 cents.

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