An important thing to remember about stock movements, and one that’s been documented in abundant fashion by market technicians, is the propensity of both individual stocks and indexes to perform a ‘test’ of prior lows after falling.
That is, stocks fall to new lows every day, bounce, and more often than not, reverse course a second time to ‘test’ whether that former low was, indeed, a firm bottom.
Of course, should the security in question pierce below its former low, it’s likely further declines are in store. Should support hold, however, the stock is almost assuredly headed back toward its last retracement high.
Have a look now at a chart of the S&P 500 for the last six months, and pay particular attention to the far right edge of the chart, where an apparent ‘W’ shaped bottom is being etched out –
This is the test we were talking about.
The index could fall another 30 points, or roughly two percent, and still be on the good side of the test, and it’s our view that that’s precisely what will occur.
The oversold RSI read in late August also supports our contention that a mid-term bottom was set at that time (green circle), and we’re now looking at a test of support at roughly 1865 (blue line).
Not that everyone agrees, of course…
Hedge fund billionaire Carl Icahn reported yesterday that he’s more hedged now than he’s ever been. And with a net worth slightly larger than ours (estimated at some $20 billion), the man admittedly has some experience in these matters.
The issue is interest rates, as far as he’s concerned, and he warns that we could be in for a financial catastrophe because the Federal Reserve has been late in raising rates.
With all due respect, however, we don’t think he’s right.
There will be an economic/financial implosion at some point, to be sure, and it’ll likely coincide with widespread, global military engagements, in which American forces will also participate; we just don’t see it occurring yet. At the earliest, we expect a late spring/early summer kickoff to the worst stock rout in history – and maybe one helluva war. But more on that in coming letters.
In the meantime, we have four trades to report on, one of which requires action on your part.
Let’s go through them.
The first, we opened on August 18th in a letter called The Russian Bear – In Living Color. There, we recommended you sell the RSX November 18 CALL for $0.34 and purchase the RSX November 15 PUT, selling for $0.74. Total outlay for the trade was $0.40 per pair.
And where do we stand today?
Well, fortunately for all who put on the trade, Russia follows the oil market, and the oil market has been in a swoon, currently hovering just above eight year lows.
The options in question, therefore, stand priced as follows –
November 18 CALL – $0.16
November 15 PUT – $0.81
Buy back the former and sell the latter and you have $0.65 in hand. That’s a $0.25 profit on $0.40 down, or 62% in six weeks.
And we’re taking it.
A legitimate question, my little squishy headed friend. And the answer is as follows.
The oil market could be headed back toward a test of its own lows, and if that’s the case the Russian market will follow suit and make the trade even richer. But if it doesn’t happen – if oil bounces here, and our trade loses the profit it currently has – we’re less than 60 days from expiry, and that’s but the wink of an eye in options-land.
Better take the cash – a good haul by any standard – and run.
Next up is our August 25th initiative that called on you to sell the XHB September 35 PUT for $0.73. The letter was called The World is Falling Apart
And as of the options expiration you now possess the full premium taken in at the outset. That’s 100% return friends. And it feels good!
Third on the block is a trade we launched just a week later, on the first of September. That letter was called Two China Trades, a Win and a Wait, and we urged you wholeheartedly to take advantage of a slumping Shanghai index and sell CALLs on FXI.
Specifically, we recommended you sell the September 25th 37.50 CALLs for $0.87 each. Your credit was $174, and that’s where it ended. Congratulations to readers Joe Russo and Ben Zona who reported selling multiple lots.
Finally, we look at the following week’s trade (September 8th), in which we sold a strangle on electric auto manufacturer, Tesla Motors (NASDAQ:TSLA). The letter in question was Best Timing: Short Strangle on Tesla, and the trade shook out as follows –
With TSLA trading at 245.75 and looking like it was ready for a breather, we recommended you sell pairs of out-of-the-money CALLs and PUTs (strangles) to soak up some cash. We kept the trade near-term and took advantage of recent volatility to rake in some rich premium.
The actual numbers went like this –
We advised selling the TSLA September 25th 225 PUT for $3.50 and the TSLA September 25th 262.50 CALL for $3.30. Your total credit was $6.80.
So long as Tesla stayed between $218.20 and $269.30, we came home with the full profit.
And so it was. Last Friday’s options expiry saw TSLA close safely below $260, both options expired worthless, and we were rewarded with a handsome $680 profit for every pair traded.
Tesla is now trading in almost the same place it was a month ago, volatility is still thick, and we’re just as big fans of the trade today as we were then.
So we’re re-launching, as it were.
Wall Street Elite recommends you consider 1) closing out your RSX trade as detailed above, and 2) selling the October 30th TSLA 270 CALLs for $4.95 and 230 PUTs for $6.65. Total credit is $11.60 per strangle.
With kind regards,
Hugh L. O’Haynew