Sitting Pretty on Three Open Trades (XLU, GLD, GMCR)

It’s always worth a second look when the leading sector of the market begins to turn over and yell ‘SPANK ME!’

And so it is now with the utilities, one of the market’s biggest gainers since New Year’s, which topped out at the beginning of May and has been edging lower ever since.

Now, on the one hand, this is no surprise at all. In fact, it’s an inevitability. Every leading sector eventually gives way to a rival, turns lower and regroups before climbing again.

The question that confronts us, though, is a little more subtle. And that is, whether the turn lower in the utilities is a mere matter of sector rotation, or whether it signals the start of a general retreat for equities of some unknown magnitude and duration.

horses

We leave it as an open question, because although we have our opinions, it’s important to note that that market leaders’ turning lower are also a potential harbinger of a bearish swerve.

That said, have a look here at the Select Sector SPDR Utilities ETF (NYSE:XLU), for the last six months –

xlu519

The first item of note is just how much power the move has had. From New Year’s until last week we had virtually wholesale positive action on the stock. The sector rose almost 18%, which, for a stodgy quarter like the utilities, is nothing short of breath taking. Remember, these guys are supposed to be the preserve of widows and orphans.

That said, we note also the break below the short term moving average, and it’s coming to rest on the rising five-month trend line (in red). That’s the threshold. Should it hold, we’ll likely see a bounce toward former highs. Should it break, there’s a sizeable chasm that exists before the stock reaches its next logical line if support at the 137 DMA, now at $39.80 and rising.

Volume Surge

Volume, too, supports the notion of a recent top in the action, surging just as new highs were registered on the stock at the beginning of May. We had a total of 17 days out of 21 with above average volume in the lead-up to the top.

Finally, RSI has been weak for a week already, falling as it has below its telltale midway ‘waterline’ and MACD looks but a few days away from confirming a bearish trend. Should she, too, submerge below that marker, we’ll likely get a rash of technical selling that should pull XLU back into the range of the 137 DMA.

Which is all good for us, as we have an open trade on the stock in the form of two open options positions – one long XLU June 38 PUT and one short XLU January 42 CALL.

The trade was opened back on the 24th of February in a letter called Downside Betting on Freeport and the Utilities and involved four options total, two of which we’ve already closed profitably. And while it’s too early at this stage to act on the remaining two, we bring the above analysis only to raise the issue of a possible market decline in the weeks or months ahead.

What! A bear market!? Did he say a BEAR MARKET!?

We didn’t say a ‘bear market’, we said a decline. And to repeat what we wrote above, we haven’t a clue if it will happen or, if it does, how deep or long it will carry. Our prejudice is toward it being short and shallow, if it comes to pass. In the meantime, we watch.

beardedlady

[Absolutely ridiculous.]

We’re somewhat more confident, however, that a downside move in gold is in the cards. Last week we sold CALLs on the SPDR Gold Trust (NYSE:GLD) and we produced a chart to show that the chance of an imminent decline for the commodity was sizeable.

Today, we produce a slightly longer-dated chart that similarly indicates just how dangerous a long gold position currently is. Have a look here –

gld519

The chart spells it out fairly eloquently, but for those who require a brief explanation, it goes like this.

For starters, RSI and MACD are underwater. That’s bearish.

Second, a descending triangle is a bearish pattern and here we have two such formations, one within the other. All of which leads us to expect –

A break below support at $123 that carries as low as $114.

At that point, some continued play should be expected before an eventual break to a selloff bottom (below $114) ensues.

Keep a close eye.

How’s this pertinent?

Glad you asked.

As mentioned above, we have an open trade from last week that shorted GLD May 127 CALLs (May 30 expiry).

We sold six for $0.53 each, and they’re now going for $0.39. In short, we’re up 25% on the trade, and time is doing its job oh so well.

Things are eroding, as they should.

Two weeks ’til expiry.

And we’re keeping a close watch.

Bring it on home, Elroy.

We’re going to close with a look at a third open trade. This one needs some work.

We’ll open by showing you a chart of the stock in question, Keurig Green Mountain Inc. (NASDAQ:GMCR).

It’s a chart that’s about as bearish as they come, though Green Mountain has surprised us in the past.

Here it is –

gmcr519

It looks like a goner to us. At least for the near term.

Consider –

  • GMCR never closed the gap that opened in early February (blue arrow),
  • She’s put in a double top, with strong resistance at $125 (red line),
  • RSI and MACD are diverging bearishly from price (in black, at bottom),
  • And a notoriously bearish, Japanese candle shooting star reversal pattern emerged just as the stock topped early last week (insert).

We sold the May 80 PUTs on GMCR that expired worthless and gave us a 100% return. But we also bought the June 80 PUTs and those are now a good distance off. In order to recoup any potential loss from that sinful misdeed, we’re going to sell a CALL spread today to generate cash.

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Wall Street Elite recommends you consider the following trade – selling the GMCR June 125 CALLs for $1.39 and buying the June 135 CALLs for $0.36. Total credit is $1.03 per pair. Consider five pairs for a purse of $5.15.

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Wall Street Elite recommends you consider the following trade – selling the GMCR June 125 CALLs for $1.39 and buying the June 135 CALLs for $0.36. Total credit is $1.03 per pair. Consider five pairs for a purse of $5.15.

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We’re betting resistance will hold.

With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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