1. Market Summary
Excerpted from Thursday’s paid content of Investment House Daily by Jon Johnson.
– We saw more lethargy as the stimulus “talks” are nothing more than tag lines for the news outlets.
– It is a tale of two markets. The small-cap stocks and the mid-cap stocks jumped. However, the large-cap indices are both flat and showing nice doji tests.
– All this slow action is frustrating and shaking out players, but those in the know cannot stop watching the good patterns. We want to see the chips make moves higher. On Friday, we also saw if those stocks and the ones that were showing good patterns had performed the requisite moves.
Thursday was a tale of two markets, more or less. All the indices were up — outside of the NASDAQ 100 — but small- and mid-caps were the clear leaders. Smaller financials posted strength (e.g. Texas Capital Bancshares Inc.), along with small energy stocks (e.g. Southwestern Energy Company) and other less well-known stocks. Is the January effect coming early thanks to the run higher in the big and biggish tech stocks? It was strong enough to push the Russell 2000 and S&P 400 up nicely off of their seven sessions of consolidation that tested the 20-day exponential moving average (EMA).
On the other end of the day’s spectrum, you have the large-caps. Again, all were higher. However, this is barely true when we look at the big picture. The large-cap indices all tested lower and either dipped toward or reached the 50-day simple moving average (SMA) on the session low. This was followed by a rebound that sent them back up over the 20-day EMA to close. They also showed pretty decent dojis. Then, we saw another doji with a dip lower that produced a recovery. In contrast, the prior two dojis sported gains and then faded back.
We want the indices to put in that shakeout, which is what they have been doing for the past eight sessions. The dip lower and rebound on Thursday has moved them a bit closer to accomplishing that goal. While all of this has been frustratingly slow, it sometimes takes a bit of time to get through the process. Thus, despite what is seemingly painfully slow action (when compared to more recent moves, such as the one where Tesla gapped higher and then gave up 20 points to close just modestly higher), the process appears to be working.
NASDAQ, S&P 500, DJ30: All of these indices reached lower, moved near the 50-day SMA and then rebounded. We saw a nice doji with the tail acting up as more investors and traders were ready to bail. This current consolidation is eight sessions in the making and is getting to the point where it will make a move — in one direction or another. The action looks good in these indices, but the good looks will need good leaders to break them higher.
NOTE: The figures and information above are from the 10/22 report.
NOTE: The videos is from the 10/21 report.
2. Targets Hit
Here are two completed trades from Investment House Daily, offering insights into our trading strategy and the targets that we have hit this week.
Laboratory Corp. of America Holdings (NYSE: LH): It is not all about tech, and of course, we keep an eye on all the sectors of the market. That is why we noticed LH when it formed an inverted head-and-shoulders pattern at the bottom of a pullback from the July peak. We put it on the report as it put the finishing touches on its pattern in late September.
Then, we moved in when it broke higher on Sept. 29. We bought November $185 call options for $12.40 when the stock was at $187.86. LH moved up, tested one more day on Oct. 2 and then started a steady rise and fall up the 10-day EMA. This past week, LH broke through the July peak and accelerated as the week continued. On Oct. 23, we sold half of the options for $24.50 and banked a 95% gain.
Pinterest Inc. (NYSE: PINS): We saw PINS break higher from a seven-week trading range on Sept. 22. Regretfully, I have to say that we missed that initial break. That does not mean, however, that we missed the move. As we know that a stock may test the breakout, we watched as PINS did just that over the following three sessions. We saw the move and put the play on the report. When PINS broke higher again to continue the breakout move on Sept. 28, we moved in.
We bought some stock for $41.02 and some November $40 call options for $5.60. It was not an explosion higher. Rather, it was a steady breakout move to the upside that rode higher along the 10-day EMA. In early October, PINS became a bit frustrating as it stopped rising. Instead, it moved in a very tight lateral range for 11 sessions. While it was still solid, time was wasting away.
After we gave it another week, PINS made its move. It broke higher, rallied into this week and hit our initial target on Wednesday, Oct. 21. At this point, we sold half of the stock for $50.62 and banked a 23% gain. We also sold some of our options for $11.80 and banked an 110%.
Here are two completed trades from Technical Traders Alert, offering insights into our trading strategy and the targets that we hit this week:
ServiceNow Inc. (NYSE: NOW): This is one of the cloud stocks that started to build a new base immediately after the initial September selling. It then formed a solid double bottom at the 50-day moving average (MA). On Sept. 25, NOW broke higher from the short base. So, we entered the play by buying November $480 call options for $36.50.
Then, NOW performed a pretty textbook move, rose up the 10-day EMA for 18 sessions and hit our target on Oct. 19. As this was a big run that hit our target, we sold our options for $59 and banked a gain that was just over 60%.
Zoom Video Communications Inc. (NASDAQ: ZM): After the nice run to late September made us a good deal of money, we began to watch for the next opportunity to play ZM. In late September, ZM looked to be in the later stages of a nice pennant consolidation along the near support at the 10-day EMA. It did not take long to move. On Oct. 5, ZM broke higher, and we bought December $490 call options for $74.90.
Then, ZM decided that it needed three more sessions and moved in a very tight lateral range. Finally, it broke higher. ZM rallied into Monday and put in a seven-session run to the initial target. That is exactly what we were looking for on the first leg. So, we sold half of the position for $119.20 and banked a 59% gain.
After this, ZM faded to test. Now we will let the December options bounce and look to pick up more gains as they bounce up off of this test.
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 toward bringing you consistent, short-term gains of 5-10% and you can expect four to six trades every month.
3. Pick of the Week
MDT (Medtronic–$110.13, +2.61)
STATUS: This stock is setting up some good bases. MDT sold off hard through March and then rebounded. From April to July, it formed a nice trading range and broke back through the 200-day SMA from late August into early September. Then, it sold back during the September selling. Even so, the leaders formed new bases.
For instance, MDT carved out a seven-week inverted head-and-shoulders pattern that used the 50- and 200-day SMAs as support. A strong break higher on Friday took MDT just past the highs in the base. We want to play a solid move through the entry point with an eye on the highs from January as our target. That move will give us an 85% gain on the options.
VOLUME: 6.406M Avg Volume: 4.403M
ENTRY POINT: $110.06 Volume=5M Target=$119.44 Stop=$107.05
POSITION: MDT DEC 18 2020 110.00 Calls — (54 delta)
4. Covered Call Options Play
Orion Energy Systems Inc. (NASDAQ:OESX) — Orion Energy Systems Inc. is currently trading at $7.27. The Dec. 19 $7.50 Calls (OESX20201219C00007500) are trading at $0.75. That provides a return of about 16% if OESX is above $7.50 by the expiration.