The NASDAQ Gets a Wedgie (QQQ,FCX,TYL)

A quick look at the financial press indicates that the Fed has now moved unequivocally beyond the political.

 

Rather, it has become perfectly presidentially partisan.

 

And how’s that?

 

Consider: the U.S. central bank laid out clear, ongoing guidelines that indicated at precisely what hour it was prepared to raise interest rates.  That hour arrived with the latest Federal Open Market Committee meeting (an unbelievably ironic moniker for what these people actually do) yesterday, and what happened?

 

In a move that shocked only the naïve, the Yellen Gang decided that they would “wait for further evidence of continued progress toward [their] objectives”.

1

Translation – the case for higher rates is already upon us, but 1) because there’s an election around the corner, and 2) because the market has been a bit shaky of late, and 3) because we have no intention of setting off a torrent of selling before the Democrats are reelected

new president is elected, we decided, without cause, to hold off.

 

A bit harsh, you say?   We don’t think so.  If you consider that three Open Market Committee members dissented from the Janets’ decision to delay – the biggest dissenting bloc in three years – then it’s clear the political angle is sharper than it has been.

 

But will the market stabilize now and move higher?

 

Hard to say.  Yesterday’s post-Fed action was all green, signaling to many that the party will continue until at least December, the next meeting at which they can apolitically pull the trigger on rates (they meet again November 1st and 2nd, but no one expects any action just days before the election).

 

For our part, however, the lights look green only until the election – and that remains so if, and only if, the current technical formation on the Dow and S&P 500 fails to develop.  As Hugh L. O’Haynew, our partner in crime, opined in this week’s Wall Street Elite, the descending triangle seen on the chart of those two indexes continues to be the driving technical force currently in play.  Unless and until it’s replaced by a new formation, the odds are in favor of a quick decline.

 

Here’s the chart in question –

2

It’s bearish, no question, but only as long as it remains so.  The declining triangle is a negative formation, but if it morphs into, say, a rectangle, trading between the 18,000 and 18,400 level for the next ten days or more, we’ll note it as such and expect a reversal higher.

 

We should add that the action on the NASDAQ Composite has been stronger than that of the Dow and S&P, but even there a negative formation is emerging, and one that’s equally reliable – the dreaded rising wedge!

3

A rising wedge generally forms over the course of several weeks and becomes negative when a breakout below the lower rising trendline occurs.

 

Have a look –

 

This is the NASDAQ Composite for the last six months.  Note especially the picture over the last two weeks –

4

We have a rising wedge (in red) that’s on the verge of a breakdown.  It has formed in tandem with a new break to bull market highs (however marginal).  Price is now above all her moving averages and the MAs themselves are all rising.  RSI and MACD are both trending constructively above their respective waterlines, too (in green).

 

In short, it’s all-systems-go bullish for the NASDAQ, save for that nagging rising wedge.  And we may have to wait no more than a day or two to get the breakdown there we expect.

 

Hold on to your Clydesdales!

 

Before we get to our trade for the week, we have two earlier initiatives to report on.

 

Get your pencils out.

 

The first was our June 30th bet from a letter called July Rant, in which we urged you to sell the TYL July 170 CALL for $1.70 and buy the TYL September 170 CALL for $8.70.  Total debit on the trade was $7.00.

 

Our thinking was clear – TYL had reached the top of its trend channel and was due for a rest.  We sold the near term CALL and pocketed the full premium on it.  Trouble for us is TYL took longer than expected to reignite.  By last Friday’s expiry the shares had climbed to $170.93, meaning we bought the stock and earned back just $93 of our initial $7.00 debit.

 

The good news is things have moved further in our direction ever since.  As of this writing, Tyler Tech is trading for $173.15, and we have little reason to believe the climb will cease.  For that reason, we’re urging you to sit tight, hold your shares and let the trend be your friend.

5

We move now to July 14th and a letter entitled Dexter’s Walking Shoes.  In that missive our rec was as follows – sell four (4) FCX July 29th 11.50 PUTs for $0.24 each and buy one FCX September 14 CALL for $0.89.  Total credit on the trade was $0.07.

 

Everything went well on this one, at first; the four PUTs expired worthless and the stock held its own for nearly six weeks.  Then it fell to hell.  In the end, everything expired worthless and we come home with our initial seven cents.

 

This Week is Now!

 

This week, we’re going to put our money on the aforementioned uncertainty for the indexes over the near term.  And we’re going to play it using the Qubes (QQQ), a trustworthy proxy for the NASDAQ.

 

We’re going to buy a near term strangle, expiring just a week out.  And it goes like this –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

Breakeven levels arrive at 119.37 and 116.63.

 

Many happy returns,

 

Matt McAbby

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.