Climbing Behind the Virus (FB, XLE)

We’ve got two operations to perform today. The first is to review the situation with oil, including a look back at a trade we opened last week.

The second is to get a bead on the overall market after a month of declines.

With those two items accomplished, we’ll offer you a trade and let you get back to panicking about Ebola.

obama
You’re right, pal.

Sorry.

We start with oil.

Let’s make a psychotropic flashback to The Oil Dipstick Indicator, last week’s missive that encouraged you to purchase a CALL spread on the Select Sector SPDR Energy ETF (NYSE:XLE).

In that letter we wrote,

“…the end of the oil slide is imminent…Crude contracts are now showing a steep decline in the number of long bets as a percentage of open interest. That is …we have a record low number of bulls for the series, a contrarian development that points toward an end to the latest round of selling.”

And regarding XLE –

“After a precipitous decline that saw volume climb to six times its average daily level and RSI sink below the deeply oversold 20 threshold, we see a bounce in the offing.”

Now, there will be those who’ll tell us that we’re premature in our ‘bounce’ call, and that it’s too early to enter the long side of the crude trade – and they could be right. But we offer the following chart to show that we believe otherwise.

Take a look –


xle

The telltale signs of a near term bottom are in.

The deeply oversold (sub-20) RSI read bodes well for us (red circle), as does the wild swell in volume that accompanied the selloff (in green). Taken together, they indicate that the selling is finished for the time being

And while anything could still happen, the XLE spread is looking good, oil is looking fine and we’re choosing to hold the trade a while longer. And we hope good reader Roddy will, too, after getting filled on XLE’s drop below 80. Wonderful call from an apparently very talented trader.

We would also like to point out that there was no volume surge at the late June highs similar to that experienced over the last two weeks, a development that supports the theory that the June top was but a temporary high in an ongoing bull move.

And with oil moving higher…

 

Many contend that the swoon in the stock market was the direct result of oil’s pullback, and we’re partial to that thinking. It follows, therefore, that if the bottom’s in for oil, the broad market should be heading higher as well.

And it is.

For now.

Have a look at two charts. The first is the Dow (DJIA) and the second our favorite 21st century corporate pin-up whore, Facebook (NYSE:FB).

Why the Dow?

 

The Dow is still emblematic of the U.S. equity market. It’s still the most widely watched and best known of the country’s major market indices – even if it is the narrowest and least representative.

That said, here it is for the last six months –

djia
Our take on the technicals is as follows –

First, the mid-September top came on a great surge in volume – nearly five-times the average daily truck – indicating something was afoot. It was also a day that saw a major reversal. The day’s trade started at 17,267, put on nearly 100-points and then reversed on massive selling to close just above the open.

That was a sign of a potential top. And, indeed, since then the action was all lower. Until last week, when the Dow touched the all-important long term (411-day) moving average (red arrow) and reversed higher, gaining 263-points Friday without looking back.

Prognosis: How Long?

 

With the current technical situation still unclear and fated to remain so until we see either a) oil continuing to surge higher, or b) the Dow climbing above its 137-day moving average, a line that now resides just below 16,800, we should expect traders to be cautious and the Dow to remain stuck in a range between the long term MA and the 137 day MA – call it a 1000 point range between, say, 15,800 and 16,800.

We’ll be heading higher, that’s for darn sure. The only question is how long it takes traders to reassert themselves, gather their confidence and reinstate their long bets as before.

timetrap

What’s with the eye?

 

As we’re wont to repeat in this space – the greater the distraction, the greater the chance we’ll see outsized gains on the indexes. And now we’ve got precisely that.

Ebola is a major health risk and poses a tremendous security risk to our nation as well. Some have even drawn parallels with the Black Plague of the 14th century, though as of today, that comparison seems somewhat premature.

The U.S. elections in November are another major distraction, and as we draw closer to them, all eyes will be turned to senate races and state legislatures and analyzing probabilities and fallouts.

And it’s precisely under such a cover that we expect this all-too-liquid market to stealthily return to its highs and press on.

godscried

We therefore have every confidence offering you the following trade, one that employs the poster child of the greatest bull-market of all time – the world’s greatest time-waster and friend of government spy agencies across the globe – Facebook Inc.

But before we get to the details of the trade – which, of course, is a bullish call on the stock – take a look at the chart –

fb1020
Facebook is a technical joy at present.

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After opening a gap in mid-July and drifting more or less sideways for the next three- months, the gap was filled late last week – finally. At that point, we got a heavy volume day that pushed the stock higher by a wild 4.5% (Friday).

We now sit just a day or two from a full-out bullish indication from FB’s MACD indicator, which stands to confirm RSI’s push last week above her own waterline.

The bull is back.

And Facebook’s the leader.

Wall Street Elite recommends you consider buying a speculative FB March 85 CALL for $4.00 and selling the FB October 31st 71.50 PUT for $1.90. Total debit on the trade is $2.10 per pair.
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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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