Trade of the Day: CVR Refining LP (CVRR)

Our index indicators are giving neutral readings, unchanged from the previous week, as the Dow Industrials and S&P 500 remain below their 50-day moving averages. But the Nasdaq is above its 50-day moving average. As we’ve pointed out, the indices falling below their 50-day averages has proven to be just a pause in momentum during the current multi-year bull market. The 200-day moving averages are the more important support. For the Dow, that average is currently at 17,370; for the S&P 500, it is 2,005; and for the Nasdaq, that level is 4,630.

Giving encouragement to the idea that the current market lull is only temporary, our internal indicators are pointing to a return of more bullish ways. The 200-day Moving Averages Index has improved to level 3 bullish, and the Advance/Decline Index and Cumulative Volume Index are level 1 bullish. Level 1 is the strongest reading, level 3 the weakest. Three of the nine major S&P sector funds are level 1 bullish, up from two a week ago.

But one sub-index to keep an eye on is the economically-sensitive Dow Jones Transportation Average, which is very close to falling below its 200-day moving average. Doing so would be a sign that the market is beginning to take seriously the onset of a weaker U.S. economy.

More evidence of that concern was shown by Treasury bonds (TLT). TLT fell sharply during February and early March — but, as we speculated, that proved to be mostly profit-taking following a sharp rally. TLT has now moved back into a bullish trend, signaling that the market is not overly concerned with the Fed raising interest rates (when interest rates rise, TLT falls, and vice versa).

The U.S. dollar (UUP) remains bullish, but is continuing the consolidation it has been in over the past few weeks, another sign that the market is re-thinking earlier concerns about the Fed raising interest rates.

Commodities are perking up slightly, which runs counter to the “weak economy” argument being shown by TLT and UUP. However, the bounce in commodities is most likely a response to the massive monetary stimulus taking place in Europe and elsewhere around the world. Should the stimulus have a positive effect, the resulting uptick in global economies implies increased demand for commodities. But our internal indicators continue to show a U.S. economy tracking toward its worst year since 2008.

With the major stock indices giving neutral readings and economic indicators struggling, options traders should continue to evenly weight between bullish and bearish positions. Central banks-generated momentum could push stocks higher, but slowing growth could cause the market to make an about-face very quickly.

Today’s recommendation is for a bullish trade on an oil refiner; these stocks have done particularly well despite the rocky current climate, as rising gas prices but continued low crude oil prices create a wider “spread” for the industry.

Buy the CVR Refining LP (CVRR) May 22.50 Calls (CVRR150515C00022500) at $0.40 or lower. After entry, take profits if the stock price hits $22.40 or the option price hits $1.10. Exit if the stock price closes below $19.60.

Note: This is a relatively thinly-traded option chain, so you may need to be patient to get established at my recommended entry. Avoid buying a large number of contracts at once to prevent wild price swings; instead, enter your orders in smaller lots of five or 10 contracts. These are regular monthly options that expire on May 15.

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