Did you miss Tuesday’s TradeKing Midday Market Call? Here’s a quick recap.
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Analysis from QuickTakesPro founder and Barron’s columnistMichael Kahn, CMT: S&P 500 (SPX) – at the time of this broadcast, SPX was near 1278, flat from Monday. We’ve been discussing the “Head and Shoulders” pattern for some time now. The height of this pattern, taken from its peak to the neckline, when dropped down from the highest point of the pattern’s neckline, matches the level of the former peak from mid-October. If we drop that same height again from the October high, it gives us a possible downward target for the SPX from 1210 to 1230. SPX is below its 200-day moving average of 1285.65, with it acting as a type of speed bump to the downside for the index. It could pop to 1300 short term, but overall, looking like a downtrend. Nasdaq Composite (COMP / I:COMP) – Very similar to the SPX. Nasdaq seems to be sitting on its 200-day moving average of around 2763. This is also around its level of support from the October peak. The previous level of support (hit 5 times between March 2011 and December 2011) before the rally started in 2012 is about 2600. We could be looking at that level as a downward target going forward.
Discussion from TradeKing Senior Options Analyst Brian Overby: VIX – at the time of this broadcast, VIX was 25.27 down about 1 point on the day. VIX has been trading in a range between the 100 day and 200 day moving averages, between about 18.75 and 25 respectively. It spiked up through the 200 day level. Once that happened, the VIX futures markets retracted. June, July and August were trading as high as 28, 29 and 30 but dropped to 26.05, 27.65 and 28.25 respectively. From the looks of things, the market expects it to remain around 25 volatility going forward, with all the uncertainty in the Eurozone.
Quick Takes Pro “Chart of the Day” – Caterpillar – symbol (CAT) CAT – At the time of this broadcast, CAT was 83.56 up .30 from yesterday. CAT is a chart I look at often since it is considered by many to be a bell-whether for the economy. Big downtrend in CAT since March. The price of 83.56 is way below the 200 day moving average of 96.64. So it’s possible to think the 200-day MA can act like a leash, and the stock can snap back up, reverting to the mean in some way. It is a bit extended to the downside. The RSI index is indicating that “the bears are getting tired”. It is not out of the long term downtrend, but we could see a short term rally on any kind of positive surprise in the market (i.e., federal reserve easing or some good news out of Europe). If it has this short term rally, we could be looking at a level between 86.42 and 90, maybe 92.26. Again, I am not saying CAT will return to its highs any time soon. The overall trend is still on the downside.
Technical tools used: – Moving averages – RSI – Support / resistance – Trendline – Fibonacci retracement
Options Guy’s potential options trade based on “Chart of the Day” – CAT Long Call Spread (AKA Bull Call Spread). CAT –You can see from the volatility chart there is some nervousness as a result of CAT’s big downtrend. There is a significant difference of 10 percentage points between the 30-day historical volatility of 30% and the implied volatility mean of 40%. This is a significant difference for CAT. With that uncertainty in the market, and the elevated level of implied volatility around 40%, we are looking at a slightly in-the-money Long Call Spread (AKA Bull Call Spread) to go along with Michael’s short term view that CAT is headed higher. This is a more appropriate strategy than other bullish plays like a Short Put Spread (AKA Bull Put Spread) or just a Long Call. Also, time decay will be accelerating as we are less than 2 weeks from expiration. This would be particularly harmful to a long call strategy.
CAT Long Call Spread (AKA Bull Call Spread): – Buy 1 CAT Jun 82.50 Call – Sell 1 CAT Jun 87.50 Call – Long call spread market was Bid 2.14, Mid 2.16, Ask 2.18 – At the time CAT was 83.63 – 11 days till expiration – Max potential loss is $2.16 debit (mid price) if CAT is at or below 82.50 at June expiration. – Max potential gain is $2.84 if CAT is at or above 87.50 (calculated by the $5 difference between the strikes, less the net debit paid of $2.16) – Multi-leg commission to enter is $6.25
CAT – Earnings-based trade: Diagonal Spread with Calls: Consider this trade if CAT moves up in the near term, ahead of the earnings release on July 25. Maybe look back to this trade or something similar (ie. maybe different strikes) a week or two from now. This is just one to keep in the back pocket if you would like something to have in play as earnings approaches. – Sell 1 CAT July 85 Call – Buy 1 CAT Aug 87.50 Call – Diagonal call spread market was Bid .05 credit, Mid .07 debit, Ask .20 debit. – The goal is for the July 85 call to expire worthless. – If the July 85 Call expires worthless, it significantly reduces the cost of owning the Aug 87.50 Call. – This trade will have a margin requirement of $2.50 because the call you are short has a lower strike price than the call you are long, determined by the difference between the strike prices. – Max potential loss is $2.57 (debit of mid price plus margin requirement of 2.50) – Max potential gain if spread is exited on July expiration is approximately $2.50 using TradeKing’s P&L Calculator – Max potential gain after July expiration with remaining long August call exited by August expiration is unlimited if you remain in the long call position by itself (though unlikely) – Multi-leg commission to enter is $6.25 TradeKing Options Tools used: – Detailed Quote / Earnings