Sit Down and Prepare for an Explosive Bull Movement! (QQQ,TSLA)
In last week’s Options Trader Elite, fellow scribbler Matt McAbby discussed the current state of the commodities and left you with a trade on the entire complex using DBC as the underlying.
His discussion included closer looks at oil and gold, among other things, and suggested a breakout in either or both was just a matter of time.
Today, we want to revisit his work and take a slightly different tack with regard to crude oil in particular, because we believe there could be a lead-laden shotgun trade for anyone who points his investment weapon in the right direction.
So, to review…
We’re sitting at what appears to be the beginning of a serious regional conflict in Syria, one that may eventually pull in some of the world’s largest armies, at least five of which possess nuclear armaments.
Predictably, the latest round of exploding projectiles in the Middle East has also stoked the energy complex, with Brent Crude breaking to a new 40 month high just last week. And that, as McAbby suggested, will likely spur a great deal of technical trading in the weeks ahead.
And yet a longer term perspective offers a potentially less rosy take on price direction.
Have a look –
First up, it’s clear this move began some years ago, and that current levels – as strong as they might appear – are actually well confined within a price channel that was established back in January 2016.
Oil’s current price, at the top of that price channel (or, at least, very close to it), suggests that any near-term upside could meet with strong resistance, as technicians relieve themselves of their holdings in anticipation of a return to the lower trendline.
As it currently stands, another two percent rise would bring oil to the upper edge of its channel, while the downside thereafter could see a drop of between 15 to 20 percent.
The immediate upside potential is real – granted – and should hostilities rope other major world powers into the fray, longer term prospects for crude are certainly higher. But according to the technical picture, the risk/reward ratio is now clearly skewed in favor of the bears.
While oil and the commodities have been strengthening to the geopolitical tune, the equity market has been palpitating, with elevated VIX readings and subdued sentiment. The fear is, in part, due to the same news of trade and shooting wars, but also stems from a foreboding that the rally that kicked off with the new President’s ascension to power has now run its course.
The ‘investor on the street’ offers the best proof of this.
The following weekly sentiment chart from the American Association of Individual Investors (AAII) reveals a dire sense of where markets are next headed.
The numbers paint a dismal picture. Bullish percentage is at its lowest level since last August after falling four straight weeks, while the bears have tacked on 20% over that period to sit at their highest levels since March, 2017.
As we’ve discussed in previous letters, this sentiment ‘inversion’, with bears outnumbering neutrals outnumbering bulls, correlates highly with strong bullish moves in the three month period following the inversion. And we remind you that it was only two weeks ago that we saw this same pattern play out.
We also see that the slyest foxes in the game – the knights of global finance at Goldman Sachs – have issued a warning for the tech sector, claiming in a recent letter to clients that ‘regulation’ issues and the ‘re-classification’ of certain businesses, like Google and Facebook, as ‘communications services’ rather than ‘information technology’ companies will force a change in the way those companies are valued.
With that, they recommend clients wind down their ownership in tech, as the sector becomes less attractive to growth investors.
What’s important to remember, however, is that the individual stocks will not be affected by the re-classification, nor is there much chance of regulatory changes for the industry as a whole this year. The real problem resides in those who purchase or already own ‘tech’ ETFs, who will experience a re-juggling of the components therein and any weakness that ensues because of it.
The broad indexes, however, like the Dow, S&P 500 and NASDAQ Composite should not experience any change.
New Moves Imminent
The tech names are very likely to experience a near term surge, being as they’re the market leaders, and seeing as the average horn-honker doesn’t now want any part of them.
We also believe that there is no imminent storm in the Middle East and that this latest round of siren wailing is no more than that. No one wants a shooting match in the sand – least of all the major powers.
Look for an accompanying decline in the price of oil once the matter is put to rest – for the time being, anyway – over the next couple of weeks.
As the techs climb and crude declines we are positioning ourselves to cash in.
But first, we close one down…
Last week we opened a trade using Tesla as the base, expecting a powerful move that would lead to a quick profit from a long strangle.
But it didn’t work.
The letter was called She Thought She Was Going to the Dentist, and there we urged you to consider buying the TSLA April 20th 340 CALL for $1.47 and the TSLA April 20th 255 PUT for $2.07. Total debit on the trade was $3.54.
Today, the CALLs are worth $0.10 and the PUTs $0.36. sell them both and get what you can.
And Now We Return to the Oil/Tech Initiative
Have a look at a chart of the US Oil Trust ETF (NYSE:USO) and the PowerShares QQQ NASDAQ Trust (NASDAQ:QQQ) for the last month –
As you can see the spread has widened ridiculously, and we say it’s ready to close.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the USO January 18th 15 PUT for $2.19 and selling the QQQ January 18th 125 PUT $2.37. Total credit on the trade is $0.18.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
The USO options are deep-in-the-money, while the Qubes are deep-out-of-the-money!
With kind regards,
Hugh L. O’Haynew