Deep Breath. Hold. Exhale. (UPS,HD)

There’s growing evidence that the worst is behind us and that markets are calming.

 

Against a backdrop of stabilizing oil prices (now having thoroughly tested the $30 level and come away secure), traders big and small seem to be taking a breath.

 

Volatility, too, as measured by the CBOE’s VIX index, has fallen back to its trendline, a move that we believe marks the end of the panic attack of the first six weeks of the year.

 

Have a look here –

VIX

Transportation stocks, too, have been climbing steadily, looking every bit the solid citizens they were until their late 2015 tumble had everyone worried they were about to be deported to Tijuana.

 

Thankfully, they’re now back, and if not pointing as yet to a robust carriage of goods over the next three to six months, they’re at least indicating that the December/January selloff was overdone.

 

More on the transports in a moment.

 

The final tally for fourth quarter earnings was also better than the consummate wreckage analysts expected, with both top and bottom line beats coming in relatively strong.

best beat rate

Profits (top chart) beat Wall Street analyst expectations by the best rate in half a decade, while revenues bested in better than half the reports this period.

 

Who woulda thunk?

 

Bond prices, too, have come off strongly, painting a picture of a fast unwind on the part of safe haven investors who worried about a much bigger tumble on the major indexes.

 

Taken together, we see that the entire 2016 panic – the worst start to a trading year in history – was more likely a case of hyperventilation than true asphyxiation.

 

The markets are fine, friends.

 

And that’s bad news for gold.

 

Not that again!

 

Sorry, folks. But we feel obliged to keep you posted.

 

It could well be the case that the precious metal bear market, after five years, has now run its course. But the evidence in front of us would indicate otherwise. To our view, it points perhaps to a violent bear market rally that has now run its course.

 

And yes, we’re aware that inflows into gold ETFs like the SPDR Gold Trust (NYSE:GLD) are off the charts (see below). We’re also aware that the hedgies and other big speculators reversed their bets massively after New Year’s, from an historical record short position in December to a current net bullish posture as high as any in the past year.

never better

Acknowledged.

 

But we can’t argue with the charts, either.

 

And below we offer a weekly chart going back to 2013 that shows GLD still within a three year, declining trading range – albeit at the top of that range – and having trouble breaking higher.

GLD

For all the money that was thrown at gold ETFs this last month – and it was a formidable, record-breaking $7.8 billion – GLD could not climb out of a multi-year declining trend channel (in black).

 

More than that, the action of the last six weeks is something we’ve seen before – twice even, in the last three years (boxed, in red). GLD sprung from the bottom of its trend channel to the top in similar time frames in the summer of 2013 and again later that winter on less volume than the current climb.

 

Now that could be read several ways. But the way we parse it is: GLD bulls just flailed about for the last eight weeks, used up a whole lot of ammunition, and have very little to show for it.

Jokers

Oh, my.

 

We’re not opposed to gold rising. In fact, we’ll very merrily go long GLD and the rest of the precious metals once the tide turns. But until we see a break from the trend channel, at the very least, nothing is proven.

 

Stay tuned for updates on the very emotional issue of gold investing.

 

Now, to our trades…

 

Two trades to report on today. The first was opened on the 28th of January in a missive called 2008? Again!?, in which we called on you to perform three separate operations –

 

  1. Buy the HD February 26th 121 PUT, then trading for $3.55,
  2. Sell three HD February 26th 113 PUTs, each trading for $1.38, and
  3. Purchase the HD February 26th 129 CALL for $0.88.

 

Altogether, your debit was $0.39.

 

And then…

 

A week later, in Taking a Stab at Oil, we recommended you sell off both the long CALL and PUT. The former traded for $1.22, while the latter fetched $2.52. That was $3.74 in your pocket while we awaited the expiry of the short PUTs.

 

And last Friday they expired. Worthless.

 

Total net on the trade is $3.35 on $0.39 expended, or a rollicking 859% in just over a month.

 

And that’s about as leggy as Daisy Duke as they come.

Lookit that car

Next on the docket was a trade initiated on the 5th of November, in a letter called Short Squeeze Leads to a Kick in the Bulls. There, we urged you to buy a CALL and sell a PUT on transport giant UPS.

 

The upshot of that venture was ownership of the shares, which have recovered nicely ever since.

 

We’re now going to piggyback on that latest success by betting on further strength in the transports in general, and in UPS in particular.

 

Here’s a current chart of UPS –

UPS

We see two very strong bullish indications on the chart, the first, a ‘scoop’ from the short term moving average (in black), and the second, an ascending triangle with resistance at $99.10 (in red). Once UPS punches above that line, there should be heavy fire from the long term moving average (yellow line) at $100.50. Thereafter, we expect smooth sailing.

 

Will it happen, though?

 

Seeing as it’s less than a two percent move, chances are pretty good, considering both the ascending triangle and the ‘scoop’, a feature that provides some good momentum. Add to that RSI and MACD readings that are wholly bullish but not overdone, and we could even see a big pop in the offing.

 

For that reason we’re playing it with a bullish calendar ratio backspread.

 

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Options Trader Elite recommends you consider selling one UPS May 95 CALL for $5.75 and buying two (2) UPS July 100 CALLs for $3.55 each. Total debit on the trade is $1.35.

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Many happy returns,

 

Matt McAbby

 

 

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