1. Market Summary
Excerpted from Wednesday’s paid content of Investment House Daily by Jon Johnson.
Another Move Higher
– We saw another move higher, but the indices show equivocal action again.
– Day-to-day rotation and volatility continue, as the small-cap stocks led Wednesday after getting clocked on Tuesday.
– Cloud software, some chips and some online retailers are setting up.
– Thursday was the last trading day of the week.
Santa has not been all that generous during this “Santa Claus” rally week. It has been more of a bumpy, daily rotation sleigh ride, as the indices trade off of leadership on a day-to-day basis. On Tuesday, the small caps were lit up to the downside. On Wednesday, they staged a respectable 1.05% recovery.
At least the indices held onto their gains through the close, but they were slim gains indeed for the large-cap indices. Meanwhile, the Russell 2000, S&P 400 and PHLX Semiconductor Sector (SOX) posted nice gains on the heels of some pretty sharp Tuesday downside.
Wednesday saw the smaller caps perform upside again, and SOX began to work on the consolidation of its last run. The small caps are extended and likely need to test more before any significant rise, regardless of what happened on Wednesday. However, SOX could post a new breakout after this consolidation completes.
S&P 500, NASDAQ, DJ30: The large-cap indices gapped higher on Monday in a breakout move from their three-week ranges. However, they did little after that initial move and reversed to close lower on Tuesday. They then managed to produce slim gains on Wednesday, after another gap upside was followed by a fade that led the indexes to close below their opening prices. They are having a hard time keeping it up, so to speak.
NOTE: The figures and information above are from the 12/31 report.
NOTE: The videos are from the 12/31 report.
2. Targets Hit
Here are several completed trades from Investment House Daily, offering insights into our trading strategy and the targets that we have hit this week:
PetIQ Inc. (NASDAQ: PETQ): Not all nice gains come from “name brand” stocks. Some are just ordinary, boring stocks that set up good patterns and deliver solid, easy returns. PETQ spent the period from October to mid-December forming an inverted head-and-shoulders bottoming pattern. This is a pattern that has delivered us countless gains during this long rally.
We saw PETQ break higher in early December and then start to test. We put the play on the report when it faded to test the break over the resistance at the 50-day and 200-day moving averages (MAs) that were at the breakout point in the pattern. On Dec. 16, PETQ moved higher, completed the test and was ready for the next leg upside.
That was our entry signal, and we bought stock for $32.48 and April $33 call options for $3.60. As anticipated, PETQ stepped higher up the 10-day exponential moving average (EMA) into this week and hit our initial target on Monday. Then, we sold half of the stock for $37.15 and banked a 14% gain. We also sold half of the options for $6.40 and banked a 77% gain.
We also banked gains in these positions during the week:
Apple Inc. (NASDAQ: AAPL): 114% gain in the options
Floor & Decor Holdings Inc. (NYSE: FND): 45% gain in the options
Peloton Interactive Inc. (NASDAQ: PTON): 141% gain in the options
Snap Inc. (NYSE: SNAP): 19.6% gain in the stock, 94% gain in the options
Here are two completed trades from Technical Traders Alert, offering insights into our trading strategy and the targets that we have hit this week:
Broadcom Inc. (NASDAQ: AVGO): Although it is one of the leaders of the semiconductor sector, we like AVGO because it makes strong moves when it sets up. Furthermore, it sets up quite a bit because the big money likes buying AVGO. As we saw more opportunities heading toward the end of the year, we wanted to be in for yet another run.
In mid-November, AVGO was setting up to break higher from a seven-week base. We put it on the report and watched for the move that came on Nov. 19. We then entered by buying January $380 calls for $22, as the stock was trading for $383.74. AVGO then broke higher, rallied steadily up the 10-day EMA and hit our initial target on Dec. 4. At that time, we sold half of the options for $35.80 and banked a 62% gain.
We let it work, however, because it was in a strong move. AVGO came back to test the 20-day EMA into Dec. 11 and showed a doji on that test. That had us looking at another AVGO play. The stock then broke higher, and we entered a new position by buying March $410 calls for $27.90 when the stock was at $412.43.
AVGO ran nicely higher from that test to a new high on Dec. 18. Then, AVGO paused, which is a normal thing to do after a good new break. Subsequently, it tested the 10-day EMA and tried to bounce. However, it got mired in a lateral move that could not break $435. It may eventually do that, but with January options on our initial position, we decided to bank the rest of the gains. That is, we sold them for $48 and banked a 118% gain.
Perhaps we got cold feet ahead of the end of the year and the potential for new fund allocations. After all, we also sold the March options for $36 and banked a 29% gain. While this was not the gain that we wanted, we took it. If AVGO breaks higher again, we will move in once more.
Paylocity Holding Corp. (NASDAQ: PCTY): We like playing PCTY as it can move well. During the period from November to mid-December, it set up a triangle consolidation. After we put the play on the report, we watched to see if PCTY would make the upside break. After it did that on Dec. 21, we moved in with February $200 call options for $16.80.
PCTY stepped nicely higher into this past week. It paused and then gapped higher on Dec. 28. During that session, however, the market stalled and leaders started to roll over. As a result, we did not hesitate to sell the options for $21.50. Thus, we banked a 28% gain.
While this was not the gain we anticipated, we nevertheless banked it. Then, PCTY slid back over the next three sessions. Now, it is setting up again with this breakout test. We are ready to move in as PCTY breaks back upside once more.
There were no trades in the Success Trading Group this week.
Still, now is a good time to become a member of the Success Trading Group. The system is geared towards bringing you consistent, short-term gains of 5-10% and you can expect four to six trades every month.
3. Pick of the Week
CRWD (CrowdStrike Holdings — $205.93, -6.62)
STATUS: CRWD surged to a new high with the run through last Tuesday. It has since tested and dropped to the 10-day EMA and the 38% Fibonacci retracement of that run higher. There was low volume on the fade, but there was a nice jump in volume on Tuesday as well. This was due to the fact that CRWD tested and held this near support.
Even so, CRWD is not extended in terms of the number of runs up the 10-day EMA. In early December, it broke out from a seven-week base and came off of the 50-day MA. This is its second 10-day EMA test, and that leaves it with room to run. We want to move in as CRWD moves up through the entry point and holds the move. A rally to the target will give us a 65% gain in the options.
VOLUME: 8.137M Avg. Volume: 5.342M
ENTRY POINT: $212.65 Volume=8M Target=$239.97 Stop=$203.32
POSITION: CRWD MAR 19 2021 210.00 Calls — (53 delta)
4. Covered Call Options Play
Danaos Corp. (NYSE: DAC) — Danaos Corp. is currently trading at $20.58. The Feb. 20 $22.50 Calls (DAC20210220C00022500) are trading at $1.35. That provides a return of about 20% if DAC is above $22.50 by the expiration.