My indicators are giving bullish readings this week, an upgrade from last week’s strong bearish readings, thanks to the gap higher we saw on Monday. But that doesn’t mean I’m back in the bullish camp. The market is still going through some very volatile intraday swings that make forecasting where the market will go next a difficult task.
Regular readers know my main mantras are, “Don’t fight the Fed” and “Don’t fight the tape.” In other words, don’t ignore the fact that the Federal Reserve, as well as Congress and the Trump administration, are doing whatever they can to keep the market from falling further.
But the economy is still in bad shape, and fortunately, an options trader can take on bearish and bullish positions for a relatively low cost. For today, I’m going to recommend a bearish position on Cooper Tire & Rubber Company (NYSE:CTB), the international replacement tire manufacturer.
Reopening is Slow Going
CTB, like many manufacturers, had to shutter its many factories because of the COVID-19 pandemic. The company has plants in North and Central America, Europe and Asia, and because the global pandemic is truly global, many of its factories had to be closed.
When different countries started to “reopen,” CTB started to open its plants in the U.S., Asia, and Europe. But even as some of its factories got started, others closed. The COVID-19 outbreak in Mexico lagged the outbreaks in the rest of the world, and the Mexican government classified CTB’s factory as non-essential at the end of April, forcing a closure.
The other issue facing CTB is the pace of reopening on the consumer side. Just because businesses and offices are allowed to reopen, doesn’t mean consumers are going to start traveling or offices will reopen. Fear is still a powerful force.
Demand for CTB’s product won’t recover all at once because the reopening of different countries is happening gradually, and people won’t start behaving normally all at once. They won’t all “hit the road” as soon as possible.
Resistance at its 200-Day Moving Average
CTB has been performing well — the company will benefit from the general optimism in the market right now — but it is approaching its 200-day moving average (MA), which could keep a lid on CTB’s rally.
In the chart below, you can see that CTB’s intraday high was just below its 200-day MA. Moving averages often act as support and resistance for stocks, and CTB could be starting a channel between its 50-day and 200-day MAs.
Daily Chart of Cooper Tire & Rubber Company (CTB) — Chart Source: TradingView
As I said above, traders shouldn’t fight the Fed or the action in the market. CTB doesn’t look like it is on the verge of a total collapse — just a pullback. It’s last resistance level before its recent bounce was just above $22, and after getting rejected at its 200-day MA, I could see it testing that old resistance as support before heading higher.
With a strike price of $23 on a bearish put option, traders don’t need the stock to move too far before they have an in-the-money trade.
Buy to open the Cooper Tire & Rubber Company (CTB) July 17th $23 Puts (CTB200717P00023000) at $1.30 or lower.
InvestorPlace advisor Ken Trester also 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.