Netflix adds 5.3M subscribers in Q3 >>> READ MORE

Trade of the Day: Barrick Gold Corp. (ABX)

Continue to focus on calls, but don't ignore the put side


Stocks struggled Thursday for the third time in four days. But January still was a very good month for the indexes. Whether that positive momentum can carry forward is an open question.

How You’ll Know the Pullback is Coming

Our indicators are giving bullish readings, unchanged for several weeks now. The indexes struggled slightly this past week, with only one positive day out of the past four. So an expected pullback, or at least a “pause to refresh,” may be getting underway. If that is the case, the primary bullish trends will stay in place as long as the Dow closes above 13,420, the S&P 500 above 1455, and the Nasdaq above 3075. Those prices represent the index’s current 50-day moving averages. Longer-term bullish support is available at the 200-day moving averages, which for the Dow is at 13,080, the S&P 500 at 1405, and the Nasdaq at 2990.

When Bad Trends Aren’t All That Bad

Our internal indicators are confirming the strength in the price indexes, as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index all are bullish. Also, all nine S&P sector index funds are primary bullish. And seven of eight global index funds are primary bullish, with iShares MSCI Brazil Index ETF (NYSE:EWZ) still a laggard. A slight pullback should be welcome by “late to the party” investors who can use the moving average supports for quick exits if need be.

But be warned, momentum does seem to be waning. Recent economic reports have not exactly been sparkling. Following a negative GDP report earlier this week, all eyes are now awaiting Friday’s employment report. A poor report might actually be welcomed by stock traders, as it would signal that the Fed will keep its accommodating monetary policy in place.

Even with the Fed’s current easy money policy, long-term Treasury bonds, as tracked by the iShares Barclays 20+ Yr Treasury Bond ETF (NYSE:TLT) continue to correct. The break below its 200-day moving average by TLT has been confirmed by its 50-day moving average following suit. TLT managed to bump higher off minor support on Thursday and could enjoy a sharper move higher Friday if employment numbers show stagnation. An extended pullback by stocks would also send money back into Treasuries. But absent those possibilities, a fall to $111 looks like it is in the future for TLT. Falling bond prices of course mean rising interest rates.

The Bottom Line

With our indicators remaining bullish, options buyers should continue to buy calls. But lighten up on your buying, and continue to prune your portfolio of current call positions that haven’t been working as well as hoped or might be running out of time. And as always, keep some puts in your portfolio. Stocks are due for a pullback, and potential causes for one are plentiful.

Recommendation: I always like to buy undervalued options, and this cheap put offers inexpensive insurance for the downside.

Buy Barrick Gold Corporation (NYSE:ABX) Apr. 30 put options at 80 cents or lower, when the stock price is around $31.90. After entry, take profits if the stock price hits $29.60 or the option price reaches $1.70. Exit if the stock price closes above $33.00 or the option price falls to 50 cents.

InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. 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.  Try Maximum Options today for 2 months for only $99.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC