Trade of the Day: Home Depot (HD)

Our index indicators continue to give bullish readings, unchanged from a week ago. The market’s pullback earlier this week was not unexpected, as we’ve been warning that stochastic indicators are showing a severely overbought technical condition. This condition has not been resolved, so some further weakness might still be in the cards.

During Wednesday’s selling, the index’s 50-day moving averages showed that they could act as solid support foundations if need be. Currently those averages sit at 17,450 for the Dow Industrials, 2,020 for the S&P 500 and 4,635 for the Nasdaq.

An indication that some more selling still might be in the cards comes from our internal indicators. The 200-day Moving Averages Index has weakened to level-1 bearish, and the Cumulative Volume Index has fallen to level-2 bearish. But the Advance/Decline Index remains level-1 bullish. Seven of the nine major S&P sector funds are in primary bullish trends, down from eight a week ago, with materials joining energy as the laggards. And, not unexpectedly, volatility indexes have jumped higher.

Also not unexpectedly, Treasury bonds (TLT) continue to move higher with the current volatility in stocks, as Treasuries are seen as the safest haven in the world. TLT remains bullish above $120. Last week we mentioned that a reason TLT has been strong is because the global economy isn’t. That remains the case and is reflected by the bearish trends in which currencies and stock markets outside the U.S. remain mired. The dollar remains bullish above $23.15, and junk bonds remain bearish.

Of course, the biggest market news continues to be oil, the price of which continues to fall. For all the good that lower energy prices bring to developed economies, some of the potential downside of that was evident over the past week, primarily forecasts of lower demand for oil in the coming year. Lower demand equates with slower economic growth, and that sentiment may be leaking into U.S. stocks. Unrest in stocks is also seen in gold, which has nudged back above its 50-day moving average and has been cooking up a nice little rally over the past month or so.

While potential trouble has become more evident, momentum in the major stock indexes continues to lean to the bullish side, and options traders should evenly weight bullish and bearish positions. Today’s trade is on the bullish side of that equation.

Buy the Home Depot Inc (HD) Feb 105 Calls (HD150220C00105000) at $1.50 or lower. After entry, take profits if the stock price hits $104.30 or the option price hits $3.10. Exit if the stock price closes below $98.30.

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