Leverage The Coming Pop and the Russell 1000

The recent burst to new highs on the major indexes – including the long awaited ALL-TIME breakout for the NASDAQ (which we’ll likely get today or tomorrow) – has been predicated on two important developments.

The first is USD consolidation.

Everyone was getting wobbly in the knee looking at the American greenback grow like a time lapse photo of an Oregon redwood. “When will it stop,” they shouted! “How can our exports compete!? If the buck keeps rising, corporate America will be dashed on the rocks! Thrown to the wolves! Crushed by Big Foot!”

And like a child who yells loud enough for long enough, they got exactly what they wished for.

The dollar backed off, as you can see on the chart below –

usd downturn

But the dollar’s rise is not likely over. As the chart also shows, the action on the buck got a little too heated at the beginning of the month, rising too far too fast to be sustainable. What we’re seeing now is simply profit taking, a healthy return to trend that offers everyone a much needed breather before the next leg higher begins.

Seeking Stability

The second factor that goosed the indexes higher was perceived oil price stability. We say ‘perceived’ because that’s all it takes in this investment house of mirrors to get the masses flocking toward whatever treat has most recently caught the taste bud fancy of Wall Street.

But we contend that oil price stability – long wished for by all who ride the equity pony – has actually arrived. It’s a point of debate, to be sure, with, on the one hand, those who see the current supply glut literally overwhelming the storage capacity of the continental U.S. – a development they predict will occur shortly before the kids bolt from school for summer mischief-making.

At that point, these folks claim, all the jars and cans and empty boats will have been filled with the black goop, and producers will have no choice but to unload their most recent stock at flea market prices, breaking the oil market altogether and sending the longs for cover.

But we look at it differently. Via the most recent price action in oil and the oil producers, we see a bottom for prices – at least for the intermediate-term, and most likely for the duration.

Here’s a chart of the Select Sector SPDR Energy ETF (NYSE:XLE), a composite of the major American producers.

Have a gander –

XLE Price Lows

We did a more thorough run-down on the charts of crude oil itself last week in Can Oil Overcome the Dollar?, and it behooves all who missed it to click here for a refresher.

But this week’s chart may be even more significant.  The producers, in our experience, tend to lead the price of oil.

And what are they currently saying?

First, note the successive bursts in volume as each successive low was hit over the last six months (blue dots). This pattern is consistent with an extended bottoming process.

Note, too, that both RSI and MACD indicators began turning higher with the first of the lows set in October, creating a positive divergence with the stock’s price for the next three months. Divergences such as these are reliable harbingers of a change in trend, particularly if they’re extended affairs – as this one is. They essentially tell us that the momentum in the selling is slowing, as stocks move into the hands of stronger buyers.

One Final Oil Chart

The chart below is also indicative of a change in trend for crude.

It’s a graphic that shows the number of standard deviations (SD) that the oil sector is trading above or below its 50 day moving average. The blue area is considered a normal trading range – within a single SD of the 50 DMA. The green and blue areas represent more exaggerated trading activity, at two standard deviations from the norm.

Beyond that, trading moves into the vast unknown, in excess of two SD.  And that’s precisely where oil is resided for much of the last half year.

Take a look –

Energy Sell Pressures

The square red boxes highlight just those periods of G-force selling in the last six months, periods when selling in the oil patch was literally off the charts. And as you can see, they were several and sustained.

Around New Year’s, however, you can also see that the selling began to temper, and oil commenced its slow climb toward a more normal range of action.

And with that, we’ve found comfort in the caverns of Wall Street.

The markets are poised for another bump higher now that the dollar and oil have cooled their jets. And we expect to see outsized gains from the financial sector as that rise materializes.

But before we get to our trade for the day, we have one trade to report on.

It was an initiative we opened on December 16th in a letter called I only Eat what I Kill. There, we urged you to purchase a speculative PUT on the Market Vectors Gold Miners ETF (NYSE:GDX) – the GDX March 15 PUT, for $0.77.

And to our great sadness it closed last Friday out of the money for a $0.77 loss.

Bad call.

It happens.

On to the Russell 1000

This week we’re going to focus on the financials as they’re now poised for a sharp break higher.

As the following chart demonstrates, the financials have formed an ascending triangle, a technical formation that speaks to continued gains once price pokes above resistance.

Take a look –

Russell 1000

This is the Russell 1000 Financial Services Index for the last year, and it shows the aforementioned ascending triangle (in red). Price is now just three quarters of one percent from breaking above resistance, an eventuality that we believe would send technicians into a buying frenzy.

This gives us a great speculative opportunity.  And here’s how we’re going to leverage it for our advantage…

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We recommend you consider the purchase of a speculative CALL on the Direxion Daily Financial Bull 3x Shares (NYSE:FAS).  The FAS is a stock that moves in a 3:1 ratio against the Russell 1000. That makes it the most leveraged means available of playing the move we’re expecting.

Options Trader Elite recommends you consider a speculative purchase of the FAS October 130 CALL for $16.00.

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We recommend you consider the purchase of a speculative CALL on the Direxion Daily Financial Bull 3x Shares (NYSE:FAS).  The FAS is a stock that moves in a 3:1 ratio against the Russell 1000. That makes it the most leveraged means available of playing the move we’re expecting.

Options Trader Elite recommends you consider a speculative purchase of the FAS October 130 CALL for $16.00.

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With love of the hunt,

Hugh L. O’Haynew, Normandy Options and Stocks Research

See what people are saying...

  1. jay shah

    Hugh,
    i just signed up. i have a few questions regarding the membership. is there any contact email or phone number i can reach out to you guys at regarding membership?

    As far as today’s article, i was wondering the followings.
    1) do you give out targets on upside or downside? in the case what would be your target on FAS?
    2) Why did you decide to buy FAS calls instead of XLF calls. i noticed FAS bid/ask has a huge spread.
    3) will you sending out an email/text on when it is time to sell or take a loss?

    Thanks.
    Jay

    • Hugh L. O'Haynew

      Hi Jay,
      Welcome aboard. If you need to make contact, try here — http://normandyresearch.com/contact/
      As for follow-up, yes, we advise and report on every trade we open, without fail.
      All the best!
      Hugh

  2. Chuck

    I’m gaining courage to plunge into options but I can’t afford to lose much. Can you suggest reference material?

  3. Jay

    Hugh-

    Any thoughts on FAS at this point as the market have sold off in the last 3 days?

  4. Joel

    FXI 80+ RSI today. Nice trade.

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