Invest and Trade Profitably with Jon Johnson

Weekender for 3/1

1. Market Summary

Excerpted from Thursday’s paid content of Investment House Daily by Jon Johnson.

Rising From Ruins?

– A lower open saw stocks start to rebound. Then, they didn’t.
– A change in the news scuttled a rebound attempt.
– The DJ30 and the S&P 400 gave up the last part of the liquidity rally.
– The S&P 500 experienced its fastest selloff into correction territory thanks to a rally that had only been built on liquidity.
– The factors that will support a rebound are ready to happen. However, when the rebound comes, what will happen then?

After a lower open, stocks appeared to have set the stage for a rebound. They sold at the bell and dove until 10:30 a.m. EST. Then, they reversed and a solid rally ensued for two and a half hours. While the gloom was high enough, the selling was also strong enough.

Then, the story changed as the selling was only strong enough with regards to the same news. I have recently commented about the news being stale in terms of anything new. I then stated that if this scenario remained true, then stocks could bounce due to the size and rapidity of the decline.

Alas, the news changed. A non-traveler case of coronavirus turned up in California on top of 33 other cases in the Golden State. Plus, 8,400 people are also under observation there. Not surprisingly, the direction of the market changed due to this news. As Gothmog, the orc captain at the Siege of Minas Tirith, said in Lord of the Rings: The Return of the King, “Fear. The city is rank with it.” This is an example of the kind of fear that turns markets.

Technical Analysis:

NASDAQ: The NASDAQ gapped lower, failed a rebound attempt (that early move higher) and closed right at the 61% Fibonacci retracement. That leaves it still 180 points over the 200-day simple moving average (SMA).

S&P 500: The S&P 500 plunged through the 200-day SMA and dove to the 78% Fibonacci retracement of the October to February move. This is the last retracement level before it gets to 100% and goes the way of the DJ30 and S&P 400. This fact makes the Thursday close a very important one. If it were to hold and the S&P 500 were to start to bounce, then we would start looking at the retracement levels of the selloff. We would then see if the index bounces and note how it will react at each one, i.e. would it stall or still look good because good stocks were moving to take it out?

NOTE: The figures and information above are from the 2/27 report.

Watch the Investment House Videos For This Week Here!

NOTE: The videos are from the 2/26 report.

2. Targets Hit

Here is one completed trade from Investment House Daily, offering insights into our trading strategy and the target that we have hit this week:

Sunrun Inc. (NASDAQ:RUN): We saw RUN break through the 200-day SMA in the second half of January. Then, as is often the case, it tested that break and came back to the 200-day SMA for about a week at the end of the month. After we put it on the report, it tried to break higher and then faded back to the 10-day exponential moving average (EMA) for a session.

On Feb. 3, RUN made a break higher that stuck, and we bought stock for $17.50. We also bought April $16.00 call options for $2.65. This was perfect timing as RUN soon extended its run. It rallied for four sessions, tested one and then took off upside for the next two weeks. When the COVID-19 news hit, RUN started to show some volatility. It gapped lower on Monday and then recovered to produce a gain. This was a great course of action as it showed that people were rushing to get in on the dip.

On Feb. 25, RUN gapped sharply higher and then started to fade. That was our cue. With all the “new” news about the coronavirus, it was time to sell. We sold the stock for $21.02 and banked a 20.1% gain. We also sold the options for $5.50 and banked a 107.5% gain.

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Here are two completed trades from Technical Traders Alert, offering insights into our trading strategy and the targets that we have hit this week:

Caterpillar Inc. (NYSE:CAT): Obviously, this stock is exposed to China, but more than that, the rest of the world was inevitably going to catch the COVID-19 virus and further dampen CAT’s outlook. After dropping in January, CAT rebounded to test the break lower in February. It even made it back to key resistance at the 50-day EMA in the middle of the month and then faded.

On Feb. 20, CAT tried to move higher and then reversed. That was our cue to get in and we purchased March $135.00 puts for $5.10. CAT bumped the 20-day EMA during the next session, but then gapped back below the 200-day SMA on Monday. From there, it was a pretty straight shot lower.

There had been a gap to the upside during the second week of October, and our target was for a test or a fill of that gap. We let CAT work, and on Friday morning, CAT gapped lower and more than filled that gap after a feverish fear-driven close the day before.

As CAT started to try and claw back from that gap fill, we sold the position for $15.12 and banked a gain of 196%.

United Therapeutics Corporation (NASDAQ:UTHR): Viruses equate to drug stocks. While some gapped higher immediately as they were tied more directly to the coronavirus, one can also look for great stocks that are in positions that money just wants to chase because it is after drug stocks. UTHR is one of those stocks.

We saw UTHR break out in early February. It then tested for three sessions in a perfect one-two-three test of the 10-day EMA. In strong moves, you often see a strong breakout followed by three modest sessions downward to test that 10-day EMA. Indeed, this trajectory often is the catalyst for the next move higher. After we put UTHR on the report, the same pattern happened to it as well.

On Feb. 11, UTHR started upside and we entered the play with March $100.00 call options for $6.60 when the stock was at $101.55. UTHR then gapped higher and rallied during the next session, tested in place (i.e. it paused and didn’t give up any gains) for two sessions and then started back upside through Friday. On this past Monday, UTHR gapped upside, rallied sharply and closed near the high. With that kind of close, there was no reason to exit.

On Feb. 25, UTHR gapped upside and then started to fade immediately. After a gap higher during the prior session on top of a strong run, this action indicated that a test was coming. We sold the options for $14.60 and banked a gain of 121%.

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Here is one completed trade from the Success Trading Group, offering insights into our trading strategy and the target that we have hit this week:

Square Inc. (NYSE:SQ)

With the market in a massive and record-setting selloff, we opted to wait for the selling to abate and play the upside. With over 1000 new lows, the fact the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) is at 49 (the highest it has been since early 2018) and 15% losses on the indices in just a week, the time to move is approaching. We are looking for Square, Datadog, Chewy and Slack Technologies, among others, to provide us with some sharp snap-back moves when the coiled spring unleashes back upside.

An example of what we are looking for can be found in Friday’s trade on SQ. First, we saw SQ holding up well after its solid earnings report. As the coronavirus did not sink SQ, we knew that it would bounce and would likely do so several times. Then, while we saw SQ gap lower, it soon recovered nicely.

When it moved over its intraday resistance, we issued a buy alert for $80.08 at 10:35 a.m. EST. As SQ moved smartly higher to our anticipated target point, we sold the position at 10:58 a.m. EST for $81.94 and banked a 2.3% gain. In this market, a gain of 2.3% in 23 minutes works.

This is an example of what you’ll get by becoming 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.

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3. Pick of the Week

DDOG (Datadog–$44.17; -1.72)

EARNINGS: 05/14/2020

STATUS: Although it was a new stock that only emerged in September 2019, DDOG immediately set up an inverted head-and-shoulders base and gapped higher in mid-November. It then formed another base into late January and broke out and rallied until mid-February. Once earnings were released after the markets closed on Feb. 13, DDOG gapped lower on Valentine’s Day, but only modestly so. It held near its support, and then, in the midst of all the market selling, it simply tested the 50-day moving average (MA), moved laterally and prepped for the next move higher.

That is what leaders do when there is market turmoil. It is also worth reiterating that while earnings did not rocket DDOG higher, they also did not drop it like a rock. Indeed, we have seen similar stocks survive earnings with a modest loss and then jump back up. Currently, we are watching for DDOG to break back upside. When it does, we will move in. A rally to the target will give us a 15% gain on the stock and a 75% gain on the options.

VOLUME: 2.877M Avg Volume: 2.445M

BUY POINT: $46.54 Volume=3M Target=$53.94 Stop=$44.03

POSITION: DDOG APR 17 2020 46.00C — (50 delta) &/or Stock

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4. Covered Call Options Play

Evoqua Water Technologies Corp. (NYSE:AQUA) — Evoqua Water Technologies Corp. is currently trading at $20.97. The April 18 $22.50 Calls (AQUA20200418C00022500) are trading at $1.30. That provides a return of about 20% if AQUA is above $22.50 by the expiration.

Learn more about our Covered Call Tables here!

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