The so-called ‘Trump Rally’, that daily confuses the wizards of Wall Street because it doesn’t want to roll over and die, had an equally confusing, initial effect on Emerging Markets traders.
Those markets, and particularly the big four BRIC countries, responded by taking it square on the chin for the first month after the election. Their currencies, too, struggled in the wake of the the torpor and hysteria that prevailed in those first heady weeks of the transition.
After everyone calmed down, of course, the EMs quickly jumped on the bandwagon and have been streaming skyward ever since.
Apparently, the confusion lay in conflicting understandings of the Trump team’s economic policies, and whether they, indeed, had a realistic chance of passage through Congress. A subsequent softening of positions on trade played a role, too. What began as a clear, strident anti free-trade agenda during the campaign may, in the end, not be legislated in its entirety so quickly, if at all. And that, too, spurred hope among Emerging Market investors that it was safe to dive back in.
At this point, we’ve passed some major hurdles, including a number of important technical ones, and the way appears cleared for continuing advances from the Emerging Markets as a group.
Take a look here –
This is a chart of the iShares MSCI Emerging Markets ETF (NYSE:EEM), among the largest and most actively traded instruments of its kind, and it shows – among other things – a tremendous fifteen percent surge off the December bottom that struck new 52 week highs just last Thursday.
But perhaps more importantly, it also possesses a technical development that’s patently bullish for the stock – one that we believe will catalyze a host of new bulls to enter on the long side, and it is: all the major moving averages are now unfurled and streaming higher (red box).
All that notwithstanding, however, it’s likely that the latest surge has run its course, and we’ll see some sideways movement for a spell, ‘backing and filling’ as the toads on The Street call it.
Accordingly, our trade for the week is a play on the expectation of higher prices from the Emerging Markets, but before we get there, let’s have a look at one trade that requires your immediate attention.
Pay attention. This initiative was opened three weeks ago in a letter called Overripe Fruit, it’s gone rancid and needs a fix.
The trade involved the selling of CALLs on an overheated Apple (NASDAQ:AAPL) stock. Specifically, we urged you to consider selling ten (10) AAPL February 24th 135 CALLs for $0.18 each and one March 24th 134 CALL for $0.84, for a total credit of $2.64.
And even though the chart showed Apple stock in a vulgar heat at the time, it has since kept rising, and on Friday it closed at $136.66, leaving us short ten lots of the stock at 135, for a total paper loss of $1396.00 (1660-264). And that’s an issue that needs to be addressed forthwith.
We’re doing it as follows –
First off we’re selling ten PUTs to close out the short. We’re using the AAPL March 31st 136 PUTs, each of which sells for $2.17. Your credit on that segment of the trade is therefore $2170. If the stock closes below that level by expiration, you’ll automatically be bought back in.
Beyond that, we’re also advising you to take those proceeds and buy ten March 3rd 137 CALLs for $0.85 each, for a net total credit of $1320. Should the stock trade north of 137 by this Friday, you’ll also be bought back in.
All told, the repair covers all but $0.75 of the current liability and locks in the loss ($75) if, to repeat, AAPL moves above 137 by this Friday, or below 136 by the end of March.
We’ll, of course, be monitoring the trade on a weekly basis to ensure it unfolds to our advantage and potentially lock in a happier ending should the opportunity avail itself.
As to the open, March 24th 134 CALL, originally bought for $0.84, we’re going to leave it as is for the time being and continue to monitor it along with the above fix.
If you’ve been with us for any length of time, you know that we’re always keen to dig as deep as we need to best exploit the theme we’re considering.
And this week, that research has brought us to the Indian sub-continent, where the technical setup on the NSE shows great promise.
Have a look first at the daily chart –
This is the Wisdom Tree India Earnings Fund (NYSE:EPI) for the last two years, and its salient features are as follows –
- A clear, reverse head and shoulders pattern – or two, if you prefer (in red and blue) – whose upside counts project to a target price of either $23.50 or $28.50,
- A uniform unfolding of all her major moving averages that was completed exactly four trading sessions ago (black box),
- New highs and a break above a 23 month resistance line (blue line) that looked adamantine until that same trading session four days ago, and
- RSI and MACD indicators that are neither too hot nor too cold (green).
As to whether we’re headed to the first or second of those aforementioned upside counts, the preponderance of evidence weighs in favor of the latter, $28.50, considering that we’re just two percentage points from the lower level and all the good news just arrived last week.
Now, have a look at the weekly –
Here, we see 1) all the weekly MAs trending higher and price above them all, 2) an RSI indication that’s super-waterline as of New Year’s (in green), and 3) a MACD reading that just confirmed that bullish breakout three weeks ago.
In other words, the time is right to jump aboard this one like a wild pack of Bandar-log.
We’re buying India for the next eight months, and this is how it’s going down –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
And with EPI trading today at exactly $22.64, the trade is priced to perfection!
With kind regards,
Hugh L. O’Haynew