Monday ended in the green but mostly flat. After a very strong Friday, I’m still considering Monday’s trading a win for the buyers. The media dubbed it a down day due to trade-war worries but I disagree. The U.S. and China are both cordial so that is evidence that the talks went well.
This week it will be more about earnings than speculation. A few names stand out as important such as the bank stocks, Netflix (NASDAQ:NFLX) and International Business Machines (NYSE:IBM), to name a few. This morning the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite futures are all up by just under 0.3%. This is perhaps on strong morning earnings results or just continuation of the price action from last week.
In the options pits there were 12.5 million calls and only 11.5 million puts. In spite of the business rhetoric being tentative, the action suggested that there is optimism brewing.
On the other hand, the CBOE single-session equity put/call volume ratio yesterday was 0.61. This is still below the 10-day moving average. So investors are still weary of the geopolitical situation or of the earnings season that is starting this week.
Options activity was abuzz in a handful of stocks like JPMorgan Chase (NYSE:JPM), Procter & Gamble (NYSE:PG) and Beyond Meat (NASDAQ:BYND).
Let’s take a closer look.
JPMorgan Chase (JPM)
JPM reported earnings this morning and the company beat on top and bottom lines. Management didn’t leave much for the bears to sink their teeth into. The stock spiked 2% on the news. On the face of it, JPM stock should rally from here.
The problem with this is that of late, bank stock earnings spikes quickly revert lower. So I would caution against chasing the JPM upside especially into the resistance line. JPM stock has failed at $120 in September so the onus is on the bulls to take it out. But if the buyers can can break above $120, then they can use it as a baseline for new highs from there.
If this happens, then JPM stock would literally be in uncharted territory. If I’m long JPM then I stay long with proper stops. Once it breaks out into open air, it may gather strong momentum since JPM is the cream of the crop of the bank stocks. But there are other bank earnings reports due out soon and they may temper some of the JPM jubilation today.
Procter & Gamble (PG)
This morning PG stock is slightly green in the pre-market session, but that doesn’t mean there aren’t risks. Technically, PG is hanging on by a thread above a bearish stock pattern — and if it unfolds it would target $115 per share or lower.
The PG bulls need to avoid losing losing $119 per share or else they risk reverting to the next pivot zone below. Back in June, the zone around $112 played an important role in giving PG stock a 10% rally and the bears would love to take it back.
So the trade here would be to either chase this breakdown if it happens, but then buy the dip if the earnings are strong. Or, wait for a bounce and try to short PG anywhere near $122 per share. That is where I believe the sellers will be in the short term. This is nothing against the company, but it is what the short-term charts suggest. The sellers are in control for as long as PG stock is under $122. Earnings are due out soon and they may change the whole setup. So make sure you know the timelines in this stock before you trade it.
Beyond Meat (BYND)
You gotta love Wall Street. They fall in love with a stock and take it to the moon. Then without warning they spit it back out like it was garbage all along. BYND stock was a darling just weeks ago –and now investors completely lost their appetite as if it is poison.
I have no doubt that the industry that BYND helped make mainstream will grow exponentially. But I agree with traders that it doesn’t mean that BYND stock deserved the valuation it got. It was similar to the pot stock craze, and those big names can’t find love now either.
So when I am unsure about the fundamentals and valuations, I fall back on the charts as they never lie. There, BYND stock is in trouble. When the bulls lost $132.40 per share they triggered a bearish pattern that could be targeting $88 per share. They will likely at least close the open gap from the June earnings report near $109 per share.
So the trade here would be to get on board of this short trade opportunity to the target. Or, wait for a pop and short BYND if it reaches the $133 neckline zone again. Keep in mind that BYND is a momentum stock so tight stops are a must.
In any of these three situations I have to divest my emotions from the trades. Nothing noted here is to speak against fundamentals with the companies. It is important to note the unusual activity then learn the levels that matter in the short term.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
