1. Market Summary
Excerpted from Thursday’s paid content of Investment House Daily by Jon Johnson.
The Epidemic Rages On
– Stocks overcame early weakness and produced more modest gains even though the range was still large.
– All of the action potentially showed that a relief bounce was brewing.
– Money is moving from virus stocks to virus-trashed stocks. Is this an expiration rebalance or something more?
– The Philly Fed tanked as the number of jobless claims rose, but did not explode.
– The market is looking for fiscal stimulus three.
There was just a 0.95% move in the DJ30 and a 0.47% move in the S&P 500. The NASDAQ led the large caps with a 2.3% move, but the small-caps and mid-caps were the big percentage movers again. This time, the move was not to the downside. After the passage of the second fiscal stimulus bill and an announcement that a third bill would reportedly include more small business relief, the abused and battered small-caps began to see some money come their way.
As the percentages show, it was no barn burner session in light of the prior four weeks. However, some individuals have viewed that fact as a positive. Their hypothesis is that volatility has to decline in order for the market to stage a recovery. Well, most people would certainly like to see volatility decline on a downside session versus the upside.
There is, however, some truth to their theory. As often as not, a bottom that comes quietly is better than one that comes violently. When that happens, it usually does not take the form of a V-shaped or a knifepoint turn in the market — those usually happen on a violent drop that is followed by a violent reversal.
We’ve seen more of the same action from the S&P 500, the NASDAQ, the DJ30 and the PHLX Semiconductor Sector (SOX). They reached lower, recovered and then held the same general levels of this past week. As noted over the course of the week, this statement suggests that the indices are getting sold out and are ready to try a move upside.
NOTE: The figures and information above are from the 3/19 report.
NOTE: The videos are from the 3/18 report. There were only two videos this week.
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:
Moderna Inc. (NASDAQ:MRNA): As it is one of the “virus stocks,” MRNA has been volatile but remained positive overall. We saw the stock testing that big late February surge as March got underway. It then sold to the 50-day moving average (MA) during the second week of March. While March 13 was a down day, the stock closed well off of the low because it had rebounded from the selling to hold the 50-day MA.
After we put it on the report, MRNA jumped higher on March 16. As that was our entry signal, we bought stock for $26.54 and April $25.00 calls for $5.00. Soon after, the stock surged, gapped higher on Tuesday and opened a bit lower on Wednesday. Then, it surged upside. After MRNA hit our initial target, we sold our stock for $34.64 and banked a 30% gain. We also sold our options for $10.80 and banked a gain of 116%.
Walmart Inc. (NYSE:WMT): Old, stodgy WMT is also a “virus stock” due to people purchasing everything, including life’s necessity… toilet paper, in a panic. WMT has been as volatile as its inventory of toilet paper since it broke higher in early March and then tanked. However, not only did it recover just as quickly, it recovered big-time.
We got in as WMT moved over the 200-day MA by buying May $125.00 calls when the stock was at $119.45. Yes, we went that far out on the strike price because that strike price had relatively normal spreads and pricing. We bought those calls for $3.50.
As WMT was moving higher, it hit our initial target on March 18. As a result, we sold half of our calls for $8.40 and banked a gain of 140%.
Since WMT continued higher during the next session, we sold the rest of our options for $11.00 and banked a gain of 214%. Now that WMT is testing back toward the 200-day simple moving average (SMA), we may reload again if it can hold and show a good move up from there.
Here are three completed trades from Technical Traders Alert, offering insights into our trading strategy and the targets that we have hit this week:
Gilead Sciences, Inc. (NASDAQ:GILD): Virus stocks are about as common as test kits — okay, bad joke — and GILD is one of those kits — er, stocks. While it moved up while the market swan-dived, it has also been volatile (as most virus stocks are). On March 16, we saw GILD throw a big candlestick doji at the 200-day SMA after a weeklong pullback test of the prior surge.
We put it on the report, and GILD shot higher off of that support during the next session. Since that was the entry signal, we moved in and bought May $145.00 call options for $10.00. After that, GILD went straight up and moved to our target intraday on March 19. After GILD hit the target, it started to waffle. So, we sold our options for $17.00 and banked a gain of 90%.
Lam Research Corporation (NASDAQ:LRCX): Update. We sold the last part of our LRCX puts on March 16. LRCX had moved up off the 200-day SMA during the prior session and then gapped below it with that market move. As it had gapped lower and was holding the opening price, we figured that it would not get much better than that.
Furthermore, since we had March options, we wanted to cash in on the volatility that the move had engendered. In the end, it turns out that we could have held them into Wednesday because that was when the stock bottomed. Even so, we still sold our puts for $71.00. Since we had bought them for $19.10, we earned a return that was 3.7 times greater than what we had paid for them.
Zoom Video Communications Inc. (NASDAQ:ZM): We have two positions in ZM as this leading “virus stock” offered us nice returns. We entered our first position on Feb. 10 by buying stock for $89.62. We also bought some March $90.00 call options. Since that position rallied into early March, we were able to bank a 300% option gain and a 29% stock gain on Feb. 28.
The stock then tested from that run and used much of March to do so. It then held its support at its prior highs and the 20-day exponential moving average (EMA). Thus, we put another play on the report. On March 16, ZM started to break higher. Thus, we bought May $115.00 call options for $17.00 — compare that to the $7.00 we spent in February for $90 at-the-money calls. Volatility has truly impacted pricing.
While ZM faded back that day, it started its next run on March 17 and ran straight up until Friday. On Thursday, we sold the last of our March options for $34.50 and banked a gain of 390%. We also sold some stock, but not all of it, for $124.24 and banked a gain of 38%.
On Friday, ZM rallied a bit higher. Concurrently, we sold half of the options on our second position for $17.00 and banked a gain of 70%. This example shows the difference that historical volatility plays. On the first position, which we played when things were calmer, a 16-point move returned a gain of 190%. On the second position, which we played after volatility exploded, an 18-point move returned a gain of 70%.
This figure was less than half of what we earned under low-volatility conditions. This kind of scenario is also why we are so careful with what plays we put on the report. While some stocks may be good names and many have good technical patterns, if the risk/reward is not there, we will forego the play.
Here are two completed trades from the Success Trading Group, offering insights into our trading strategy and the targets that we have hit this week:
Kroger Co. (NYSE:KR)
You knew that grocers were going to do well due to the panic over the virus — or at least you did if you read our reports. Thus, when we saw KR testing the 50-day MA after its initial break higher in late February, we wanted to be ready to play it. On March 16, KR started up off that 50-day MA test.
At that point, we bought the stock for $31.11. As KR surged, we sold the stock for $32.11 and banked a 3.21% gain. Our only regret was that we did not hold on for another day or two. KR is, however, testing right now, and it will likely stay near the 10-day EMA. This will set up another great entry for a nice, quick gain — if investors still like these “virus stocks.”
EQT Corp. (NYSE:EQT)
We saw EQT showing signs that it wanted to turn the corner from a long downtrend. However, the 50-day MA had held EQT in check for months as it trended lower. Then, we saw some changes taking shape in February because the moving average convergence/divergence (MACD) started up when the stock made lower price lows. We also saw a short double bottom drift higher and then make a strong upside break through the 50-day MA on March 9.
As we knew a test was coming, we wanted to use that test to enter. In the end, we moved in on March 10 and bought the stock for $7.59. EQT then tested for another two sessions and held the support. As the stock rallied higher on March 13, we sold the position for $7.94 and banked a gain of 4.6%.
These are examples 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.
3. Pick of the Week
TWLO (Twilio–$82.50; +8.41)
STATUS: After a nasty gap lower on March 12, TWLO acted as if it was getting sold out. It gapped lower again on Monday, but held at $70. After that, it spent the week working laterally over that level. On Thursday, a solid upside break on strong volume looked like it could be the start of a relief move after four weeks of downside.
When you look past the action, you will see that a gap near $100 serves as a point of resistance. A move to that position will give us a 70% gain on the options. If the move stalls a little lower, there still will be good profits.
VOLUME: 4.206M Avg Volume: 3.877M
ENTRY POINT:$84.69 Volume=4.2M Target=$95.97 Stop=$81.34
POSITION: TWLO APR 17 2020 $85.00 Calls — (45 delta)
4. Covered Call Options Play
Advanced Micro Devices Inc. (NASDAQ:AMD) — Advanced Micro Devices Inc. is currently trading at $41.88. The May 16 $42.00 Calls (AMD20200516C00042000) are trading at $6.05. That provides a return of about 18% if AMD is above $42.00 by the expiration.