That’s it. We’re in a downdraft. A potentially short one, albeit, confined within a longer term uptrend. But it’s a downdraft nonetheless.
Last Thursday, senior Normandy know it all, Matt McAbby, offered you a short term trade on the QQQs that’s worked out well. Friday’s action saw the QUBES drop by better than one percent, and the setup still slightly favors a further decline.
We’ll have more to show-and-tell on short term market direction in a moment, but we want first to take an opportunity to discuss a few potential market-turning catalysts on the horizon.
The first and most important item on the agenda is the upcoming vote on Britain’s exit from the European Union, a deal that’s come to be known as ‘Brexit’.
The issue is a rather weighty one, though we can’t say it’ll affect markets in any meaningful way over the long term. Certainly banks and bonds will be affected in the short term, but the decision is hardly likely to upend any one country or region, financially or economically, for keeps.
What’s rather more likely is that the market will be erratic going into the vote as well as coming out of it. And it’s looking increasingly to us that that will translate into a sustained slide that carries into Thursday’s polling, followed by a spike back to current levels or higher should Britons vote to stay. Should they choose to leave, however, we could see sideways to slightly higher markets in the weeks following the poll.
In a year’s time, it’ll all have been a wash. No matter where the Limeys decide to anchor themselves, the end result will have been the same.
That said, the chart below shows that the issue is on investors’ minds. A recent survey of Bank of America/Merrill Lynch clients had the following to offer on the greatest immediate dangers to equity markets.
As you can see, Britain’s poll tops the list.
Marriages and Divorces
We’re in no way married to the above prognostications regarding which way markets will trend around the vote. We offer them only as a potential scenario based on experience, and, at the same time, want you to be assured that we’ll be following nothing but our own, proprietary short term indicators to guide us in the matter.
As for those indicators, and what they’re signalling, look here –
This is an amalgam of several charts and indicators of varying frequencies over the last five trading sessions. And what they show is anything but categorical.
What we can derive from them is as follows. At the top, the price chart is indicating a potential descending triangle in the making (in red), a bearish formation indicative of distribution. Should the bottom, horizontal line be sundered, a wave of selling would likely wash the QQQs lower to the 104 range – roughly 4270 on the NDX chart.
And that could very easily make for a 50% to 100% gain on our open options.
The RSI and MACD indicators from the quarter-hour and hourly charts are all rising in unison, indicating that the selling pressure is waning. And while it could pick up again in an instant, there’s also an equally good chance that the lower red line will hold as support and QQQ will bounce higher from here.
Either way, we’ll be sitting on the trigger and will inform you ASAP of any moves that need be made.
As for now, it’s time to be patient. And watch.
Trades to Open and Close
We have five trades that either closed with last Friday’s options expiry or that require your attention today.
Pencils at the ready!
- We start with our December 15th trade, from a letter called The Great Wall Street Book of Revelations, in which we urged you to sell the NFLX June 120 CALL for $20.12 and buy two out-of-the-money NFLX June 145 CALLs for $10.30 each. Total debit on the trade was $0.48.
Then, on March 15th, in our letter called Kill the BuzzTurds!, we bought back the 120 CALL for $3.00 and left the two 145s to ride.
And that’s where it ended. We expected to be able to pull something noteworthy out of the long calls, but the market had a different idea. Loss on the trade is $3.48.
- Next was our March 1st initiative from a letter entitled Silver Dollar Anyone? The trade had you buy the SLV June 14 PUT for $0.77 and sell the UUP June 26 PUT for $0.78. Your credit was a penny on every pair traded.
On Friday, the SLVs closed out-of-the-money, but the UUPs were in, with expiry coming at $24.39, putting us in the clink $1.61.
Our advice? Let it be. With the dollar in the middle of an advance, you’ll recover the loss in short order. And in the meantime, take the opportunity to sell the UUP December 24 PUT for a credit of $0.42.
- A winner to report from our March 29th missive, The Urban Banking Reversal. In that letter we recommended you consider selling three (3) FXI May 35.50 CALLs, then trading at $0.39 and three (3) FXI June 29 PUTs, then selling for $0.53. Total credit on the trade was $2.76.
As of last Friday, all options are out of the money worthless, and we pocket the full $276 credit.
- Finally, in a letter on the 10th of May called Dow Jones Goes to War, we bought a straddle and sold another on DIA. The short straddle has since been closed (on May 31st), and today we’re closing the PUT leg of the long straddle. It’s the DIA July 172 PUT and it goes for $1.68.
One long CALL is all that remains of the trade.
A New Trade
Finally, we arrive at a very simple precious metals trade based on a Japanese candle formation that just appeared on both the gold and silver charts. It’s called a bearish engulfing pattern, and it looks like this –
We’re buying PUTs.
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With kind regards,
Hugh L. O’Haynew