Market breadth is starting to weaken, which is causing the current rally to lose some momentum. But I don’t plan to fight the Federal Reserve while it provides unprecedented levels of support to the economy. I’m staying cautiously bullish, and this morning I recommend taking a bullish position on Fox Corporation (NASDAQ:FOXA).
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
Technically, the market is coming up against some potential resistance levels that we should be aware of. As you can see in the chart above, the S&P 500 index hit resistance in the 2,940 area last week before pulling back a bit.
This has been a key inflection point for the index going all the way back to the highs in October of 2018. This level also served as resistance in May and August of 2019.
It looks like the bulls are eager to challenge that level again, but even if they overcome 2,940, the 200-day moving average (blue line) is just above around 3,000.
The 200-day is starting to slope downward, which is not a good sign. That tells me that the longer-term trend for the market is no longer to the upside. If the S&P fails to clear that level, I would anticipate a return to higher volatility and a bearish bias.
Whatever happens at the 200-day moving average, I no longer think it’s likely that the market will retest its March lows. I think it’s much more likely that the index will find some support before it gets back to those levels.
Support from the Fed
In my view, the only thing propping up this market is the Federal Reserve and approximately $4 trillion worth of new stimulus. Other central banks in major economies are also adding huge amounts of liquidity to the market.
The balance sheet of the Fed has now climbed to $6.7 trillion as of May 6. Last week it was $6.6 trillion. That’s a rise of $100 billion in just one week, which is far above the pace of past quantitative easing programs.
The last thing I want to do is “fight the Fed,” so when looking at taking a cautiously bullish stance, I am, like so many other traders, turning to the “stay-at-home” stocks.
FOXA has tons of cable programming for consumers to dive into while socially distancing, and I expect the stock to see more buying as a result.
FOXA’s Earnings and Profit-Taking
The company released earnings on Wednesday, and according to Zacks Research the company beat expectations for the fourth quarter in a row. The stock jumped higher the next day but fell throughout the session. I think investors were taking profits.
In the chart below, you can see that the stock rose above and then fell below its 50-day moving average. If it can clear that level, I think it will develop support and push higher.
Daily Chart of Fox Corporation (FOXA) — Chart Source: TradingView
We don’t know when this pandemic will end, and stocks that benefit from more people staying at home are going to be most appealing in this market. FOXA fits that description.
FOXA is flirting with a push above $26, so that’s where we’ll set our strike price for this bullish call option.
Buy to open the Fox Corporation (FOXA) July 17th $26 Calls (FOXA200717C00026000) at $1.20 or lower.
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