We got short at the top on Friday, but how long will Mr. Market let us enjoy the ride? Our vehicle, QQQ put options, nearly ran off the road on Tuesday when the Dow began the day with a 125-point rally. A pullback in the early going shaved that gain by two-thirds, but by early afternoon bulls were beating on the highs, threatening to send bears into a new round of short-covering. The pessimists got a reprieve, however, when something spooked the market late in the session, sending the Industrial Average into a 225-point dive that left it 66 points lower on the day. It was not a session for the faint-hearted. Still, the outcome boosted the value of our put position, leaving Rick’s Picks subscribers in good shape to try to lock in a profit no matter what the stock market does as 2011 draws to an unpredictable close. » Read the full article
I’m tracking the purchase of some Jan 134 calls yesterday in SPY — a first step in legging on the 134-137-140 butterfly. SPY is falling too hard for me to be comfortable, but we’ll stick with the position nonetheless, since it would give us reason to root for a rally for a rare change.
We hold two Jan 54 puts and two Jan 53 puts with a profit-adjusted cost basis of, respectively, 0.76 and 0.57. I’d suggested shorting December 54 and 53 monthly puts against them for the same price, but I’ll now recommend instead that you short January calls three strikes below what you own for the same price or higher. Thus, if you hold eight January 54 puts for 0.76, you should try to short eight January 51 puts against them for at least 0.76. I estimate that the Cubes would need to fall to around 54.80 (Note: I’ve raised this number) within the next week or so to get the offer filled. Our current, minimum downside objective is 54.87, a Hidden Pivot midpoint. _______ UPDATE (10:42 a.m. EST): I am recommending that you complete the spread immediately by hitting the 0.69 bid or the 0.54 bid in, respectively, Jan 51 puts or Jan 50 puts. Once you’ve completed the spread(s) as suggested, this reverse-Santa Rally position will offer great odds, since, although either spread will produce a profit of $300 if Santa drops dead (so to speak), the most we can lose in theory, commissions aside, is $7 on each Jan 54-51 put spread and $3 on each Jan 53-50 put spread. _______ FURTHER UPDATE (1:24 p.m. EST): The Cubes fell a bit lower after the trading alert was disseminated above and in the chat room, and it would therefore have been possible to short either the Jan 51 puts or the Jan 50 puts for somewhat more than we paid for the long side of our position. Officially, however, I will record a short sale at the prices suggested above. That will give a cost basis of 0.07 ($7) for the Jan 54-51 puts spread, and 0.03 $3.00) for the Jan 53-Jan 50 put spread. Thus, in theory — and almost surely in practice, the most we can lose, based on two spreads at either pair of strikes, is, respectively, $14 or $6. The potential gain would be $600 for either position, predicated on the QQQs trading $50 or lower come January 20.
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The stock’s stall two weeks ago near a 1268.66 midpoint resistance shown suggests it could get to 1354.32 on a breakout. Although we cannot predict with confidence if or when this will happen because PCLN has been meandering sideways for the last five weeks, as a riskless play I’ll suggest buying the August 16 1340-1350-1360 call butterfly spread for ‘even’ 32 times. This means you would short two 1350 calls, buy one 1340 call and one 1360 call for no debit or credit. In practice the easiest way to do this will be to buy the 1340/1350 call spread 1:1 at targeted swing lows, and to sell the 1350/1360 call spread 1:1 at targeted highs. If you do either and then get a move your way of as little as perhaps $2.50, legging into the ‘fly for free (or even a small credit) would be relatively easy. The maximum profit on this position would be 32 x $1000 = $32,000, although in practice we’d be doing well to come away with half that much if the stock were to rally to 1350 by August 16.
The futures looked like they could go either way as Monday’s session drew to a close. However, the stall within 0.70 of the 1318.30 midpoint resistance I’d flagged implies that a decisive move past it would reach its D-target sibling at 1331.60. Alternatively, my worst-case target for the near term would be the 1278.20 Hidden Pivot support in the lower-right quadrant of the chart — or possibly even 1271.70 if any lower. The accuracy of this target would be affirmed by a bounce, possibly tradable, from within two or three ticks of the 1302.00 midpoint support. ________ UPDATE (9:57 a.m. EDT): Gold has bounced $14 this morning from a low just two ticks (0.20) from the 1302.00 midpoint pivot flagged above. Now, if the futures breach the support, we’ll know EXACTLY where they are headed.
Crude futures have been pretty whacky lately, but not so whacky as to fool us if we are monitoring the lesser charts. Notice that the recent high fell within 23 cents of the 103.71 target. Although we usually allow 21 cents of leeway, this is still close enough to affirm that price action in this vehicle is both predictable and tradable. Accordingly, traders can use the downtrending abc shown to bottom-fish at either the p=102.71, or at D=102.09. If the bull trend begun from last Tuesday’s low is going to continue, we should see the upward reversal occur from p or very near it. Please note that despite crude’s recent plunge, I still have significantly higher targets outstanding, the first of which is 109.21, basis the August futures. _______ UPDATE (4:12 p.m. EDT): Wowie! The futures trampolined $2.22 from within 6 cents of the 102.71 correction target flagged above. If you caught a ride from near the low and still hold contacts, please let me know in the chat room so that I can establish a tracking position for your further guidance.
Netflix’s so-far $37 selloff has followed a peak last week at 475.87 that slightly overshot a Hidden Pivot at 474.50 I’d characterized as ‘a big-picture target where an important top is even more likely.’ A chat-roomer who evidently took this prediction to heart reported buying puts last Thursday for 1.24 that he cashed out for 8.90 yesterday. This could be just the start of NFLX’s comeuppance for all those who inflated this gas-bag to undeserved heights. If you took a position and are still holding it, please let me know in the chat room and I will update guidance. For now, though, let me suggest that you take profits on half of any short position entered near the recent top. _______ UPDATE (July 10, 10:23 p.m.): Bears failed to achieve a Hidden Pivot target yesterday, presumably because DaBoyz shook the stock down so hard on the opening bar that it exhausted sellers prematurely. The missed target suggests that traders will enjoy decent odds bottom-fishing the midpoint pivot shown at 433.62 (see inset, a new chart) with a stop-loss as tight as 8 cents. If it’s hit, expect the selling to continue down to at least 423.05, a Hidden Pivot that can be bottom-fished with as tight a stop-loss as you can abide. _______ UPDATE (July 14, 11:07 p.m. EDT): A turn from 428.20, precisely between the two pivots flagged above, left our bid high and dry. The bull leg that has followed could be the start of a rally cycle with the potential to reach 486.86. First, though, let’s see whether buyers can tackle a midpoint pivot at 457.53 that is associated with the target. _______ UPDATE (July 16 at 6:47 p.m.): Let’s not overlook the downside — specifically, the 433.69 midpoint pivot and its D sibling at 411.67. Bears can short the break for a move to either, and both can be bottom-fished with the tight stop-loss you can abide. ______ UPDATE (July 22, 12:15 a.m.): The stock turned higher from $2 above the midpoint support, implying that bulls are about to dominate once again. Call prices are on the moon, however — way too expensive for a straight directional bet. Instead, I’ll suggest buying the August 2 – July 25 calendar spread eight times for 1.50, day order, contingent on the stock trading 451.00 or higher. Please report any fills in the chat room. _______ UPDATE (July 22, 12:05 p.m.): With today’s huge air pocket, the stock obviously remains in the grip of DaBoyz. My assumption will always be that steep declines in NFLX are brazen shakeouts, engineered by strong hands to steal stock at fire-sale prices from weak hands. In this instance, the downdraft appears likely to hit 413.96 before DaBoyz run it up again. If and when that number is hit, you can bottom-fish there with the tightest stop-loss imaginable.
The Dollar Index turned higher yesterday an inch from a correction target that had been three weeks in coming (see inset). This portends a bullish change for the intermediate term. The actual target is 79.74, and there is always a chance it will be breached. If so, there’s an alternative target at 79.62, but if it fails as well, especially without a fight, the implication would be more slippage to as low as 78.91, where a key low recorded in early May would thereupon beg to be tested. _______ UPDATE (11:17 p.m. EDT): Yesterday’s low occurred at 79.74 exactly. If the dollar is about to reverse and move higher, it will have to happen here, and now. _______ UPDATE (July 9, 2:33 a.m. ET): The dollar rallied strongly for a few days, but it is still not out of the woods because the move narrowly failed to clear an important ‘external’ peak at 80.38 recorded on 6/26. _______ UPDATE (July 16, 6:55 p.m.): DXY came within an inch of a clear and important Hidden Pivot rally target at 80.60 yesterday (see inset, a new chart). However, it will have to push past it to imply that the rally from the July 1 low (which had been predicted to-the-penny) is more than just a flash-in-the-pan.