A Pullback Begets a Bounce (UNG, DIA, SPY)

The charts don’t lie. And while a great deal of experience may be necessary to read them accurately, it can’t be said that technical analysis is in any way be detrimental to the health of your investment portfolio. _______________________________________________________

But that’s only half the story. Because refraining from lying is one thing. But screaming out the truth so that all can hear is a different matter altogether. And that’s precisely what happened two weeks ago when we looked at the chart of the United States Natural Gas ETF (NYSE:UNG), a particularly volatile issue over the last year, and listened while it bellowed out Tarzan-like that it was about to turn higher, and that we should keep a steely grip on our bats, ready to swat the fastball that was headed our way.

 

flippin

And so we did. The letter was called Hopping on a Gas Bounce (July 28th) and there we wrote –

“We’ve been watching the price of natural gas plummet of late as investment dollars exited en masse from the commodity for no apparent reason… [R]ecently, a waterfall selloff… brought prices into deeply oversold RSI territory while simultaneously completing an exact Fibonacci count lower. And what’s it all mean? Well, we say there’s a rebound about to occur, and we also say pony ‘em up for this one, even if it is only a speculative position.”

And we couldn’t have been more right. The chart we produced at the time looked like this –

ung811

And it told the entire story.

The truth, the whole truth and nothing but the truth.

From the day we wrote that piece until now the action has been all higher – not dramatically so, but enough to make us a good bit of money on a trade that we knew had legs from the get-go. Everything lined up. From 1) the oversold RSI read (in green, at bottom) to 2) an exact Fibonacci count (green, at top) to 3) the clean drop to the long term moving average (in yellow). And we made a nice whack’o’cash in the process. The price of the stock is only up some 5% since we wrote the piece, but the options we recommended have soared. We told you to buy the October 20 CALLs, then trading for $1.67. They’re now going for $2.21. That’s a gain of $0.54, or 32% in a fortnight. For those who like math, it’s an annualized return of 832%. And that beats spending your birthday in jail. Sell your CALLs today, friends. And congratulations to all those who followed our lead and went in big.

Market Update: Buy the Dips! The Dips are a Gift! Long live the Dips!

The current downturn in the major market averages has been a cause for concern for many investors. A look at the latest poll results from the American Association of Individual Investors (AAII) shows an abundant fear residing in the heart of Joe average investor. Take a look –

aaii8

For only the second time this year, bearish sentiment has overtaken bullish by a margin of 38.23% to 30.89%. And that’s significant. It’s also the highest level of bearish sentiment we’ve seen since last August. All of which, of course, bodes well for the markets over the mid-term, as fear readings such as these rarely if ever accompany market tops. On the contrary, the last time we saw bears in greater abundance than bulls was in early February when the market dipped and then went on to stage a 12% surge over the next-six months.

A Time to Buy?

We believe it’s time spend some money. There are a goodly number of positive indications that are signaling we’re at an auspicious buying opportunity. Have a look at the earnings beat rate for starters.

beatrate

With 75% of the S&P 500 reporting, the average large cap stock has beaten earnings estimates by 5.3%. And a full 70% of companies on the index have posted beats! That’s a remarkable feat and bodes well for the near term as well. Look, too, at how deeply oversold the market has become during the last three weeks’ of selling –

sp811

The chart indicates that the S&P 500 is now trading more than two standard deviations below its 50-day moving average (green area), a widely accepted indication of an oversold market condition, and one that regularly leads to a short term bounce. Note that the last time we saw a read like this was also in February, coterminous with the horrid sentiment numbers discussed above. – And while the above is an indication of the depth below the 50day moving average to which the index has dropped, the following chart gives an indication of the total number of stocks currently found in that space. Have a look see –

worstread The chart makes clear that at 23% we’re in a worse state than at any time in the last year. And that, too, bodes well for a bump higher.

What do we buy?

As far as stock selection goes, at this stage, you could literally take your pick, as the entire market should be springing higher as early as the opening bell today (Monday).

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That said, however, we would tend toward cyclical issues, technology, financials, energy, materials and consumer discretionaries, all of whom should outperform the more staid and better yielding sectors of the market. And yet we’re not going to choose any of these today. Rather, we’re choosing to sell PUTs on the indexes and pocket some premium to put toward some purchases in the weeks ahead. Specifically, we’re targeting the SPDR Dow Jones Industrial ETF (NYSE:DIA) and the SPDR S&P 500 ETF and selling our PUTs just below the long term moving average, seen in yellow on the charts below.

diaspy It’s the bounce that counts. And that’s what we’re betting on.

Wall Street Elite recommends you consider 1) closing your speculative UNG CALL position as outlined above, and 2) selling the DIA December 155 PUT for $3.10 and the SPY December 174 PUT for $2.81, for a total credit to you of $5.91 per pair traded.

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That said, however, we would tend toward cyclical issues, technology, financials, energy, materials and consumer discretionaries, all of whom should outperform the more staid and better yielding sectors of the market. And yet we’re not going to choose any of these today. Rather, we’re choosing to sell PUTs on the indexes and pocket some premium to put toward some purchases in the weeks ahead. Specifically, we’re targeting the SPDR Dow Jones Industrial ETF (NYSE:DIA) and the SPDR S&P 500 ETF and selling our PUTs just below the long term moving average, seen in yellow on the charts below.

diaspy It’s the bounce that counts. And that’s what we’re betting on.

Wall Street Elite recommends you consider 1) closing your speculative UNG CALL position as outlined above, and 2) selling the DIA December 155 PUT for $3.10 and the SPY December 174 PUT for $2.81, for a total credit to you of $5.91 per pair traded.

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With kind regards,

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

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