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This morning, I am recommending a bearish trade on Air Lease Corporation (NYSE:AL), a company that purchases commercial jet transport aircraft directly from manufacturers like The Boeing Company (NYSE:BA) and Airbus and leases them to airlines.
Despite yesterday’s strong rally, my indicators are giving bearish readings this week, a downgrade from last week’s neutral readings. Market breadth is beginning to weaken, and many stocks have moved up into overbought territory, which tells me now is the time to exercise caution. But there are two things making me question those readings: the Fed and the tape.
The Federal Open Market Committee (FOMC) left the federal funds rate unchanged this week, and it announced it will begin slowing the pace at which it unloads securities from its balance sheet in May. While this does show that the central bank is concerned about global growth, this is a bullish development.
And this week, the S&P 500 broke above strong resistance at the 2,800 level. The action in the market — the tape — is telling me we are back in a bullish mode again. Old resistance levels often act as new support levels after being broken to the upside, and as long as the 2,800-2,825 range holds up going forward, the market should continue to trend upwards.
My regular readers know my two main trading rules: Don’t fight the Fed, and don’t fight the tape, or the action in the market. So when I was looking for a bearish trade to match my bearish readings, I looked to AL because of the recent BA news coverage.
Exposure to Bad News
For those that haven’t heard, recent coverage has revealed that BA’s safety analysis on 737 MAX jets was flawed. After the recent crash of a Boeing 737 MAX 8 jet, BA has come under fire. Anytime there is “headline risk” like this, you want to have a bearish position.
AL does have some exposure to this issue because it leases the Boeing 737 MAX 8. That means it will likely be affected by this news. Because the Fed and the tape are looking bullish, a bearish play on a stock with negative news coverage could be a good way to keep some downside trades in a portfolio.
Resistance at $36 Emerges
On the daily chart, we see that AL encountered resistance at the $39 level in late February. The stock had been between its 50- and 200-day moving average since mid January, but the rejection at $39 sent the stock below its 50-day moving average at the start of March.
Daily Chart of Air Lease Corporation (AL) — Chart Source: TradingView
The stock tried to recover, but this time it met resistance at just under the $36 level. It is too early to say the stock has found a new, strong resistance level, but that rejection at $36 isn’t a good sign for AL. Taking the bad news surrounding BA into account, I think AL is a good target for a bearish put option.
Buy to open the Air Lease Corporation (AL) May 17th $30 Puts (AL190517P00030000) at $0.35 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.