1. Market Summary
Excerpted from Thursday’s paid content of Investment House Daily by Jon Johnson.
Coronavirus Earnings Season Begins
– The market cannot put good earnings to use and suffers a down session.
– As is so often the case in this move, a new high is met with selling.
– The economic data from March remains terrible, with 434 jobs lost to every COVID-19 death, but the anecdotal evidence is showing a solid snapback.
– The S&P 500 hit the 78% Fibonacci retracement of the selloff.
– After a good third leg, the market is ready for a test. What kind of test is the question.
– We are watching the leaders at the end of the month to see if they can hold their near support.
On Wednesday, we discussed that the third leg was right at the length of the prior two legs off of the March low. However, we were looking to get an upside morning to take some gains. It didn’t happen. After getting about all the good news it could absorb from surprisingly better-than-expected earnings, the faucet was turned off for the day.
Futures were lower on NYSE indices and positive on the NASDAQ thanks again to some solid tech earnings. Some made it through the session upside. For instance, ServiceNow was propelled by strong earnings, Microsoft gapped upside for a modest gain and Apple gapped higher and rallied before its results. While most other companies did not hold the line for the day, overall losses were modest.
Recent anecdotal evidence is showing that consumers are coming back quickly. After talking with car dealers in Texas, I learned that they have noticed a very recent surge in sales. One said that, as of the market’s close on Wednesday, his dealership had sold 21 autos/trucks and 15 ATV’s. Then, he added that if these figures are an indication, the recovery will be a good one. This is a positive indication that the shutdown did not shut down the desire to continue business.
The NASDAQ 100 was the only index higher on the day, and that was thanks to the few names that were noted earlier: Apple, Google, Microsoft and Amazon. The other indices are due for a pullback after a six-session move higher on the third leg off of the March low.
S&P 500: After topping 2,900 on Wednesday, the large-caps were sold on stronger volume. As the index held at just over 2,900, this was not much of a loss. Perhaps the higher volume was just caused by end-of-the-month position rolling. The S&P 500 did touch the 78% Fibonacci retracement of the selloff — an important level of resistance.
NASDAQ: A few big names kept losses at the flat line. That works for us, however, because the index has been driven by the big names. That said, the presence of a nice rally and a good boost on the initial earnings means that the NASDAQ is now due for a pullback.
NOTE: The figures and information above are from the 4/30 report.
NOTE: The videos are from the 4/29 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:
Docusign Inc. (NASDAQ:DOCU): As it was one of the leaders out of the March low, DOCU has provided us with some good plays on the recovery. For example, it set up a very nice inverted head-and-shoulders pattern and broke higher. This gave us, as noted, some good plays.
In late April, the stock was setting up again and testing a breakout to a new high with a week-long lateral consolidation. We put it on the report on April 18 as it was testing in order to be ready when it made the move. On April 22, after an intraday test of the 10-day exponential moving average (EMA), DOCU broke higher.
We bought June $100.00 call options when the stock was at $102.12. Then, DOCU moved smartly higher into Tuesday and put in its third gap in a row. With that gap, DOCU started to falter. We then sold our options for $15.00 and banked a 44% gain.
Here are two completed trades from Technical Traders Alert, offering insights into our trading strategy and the targets that we have hit this week:
Apple Inc. (NASDAQ:AAPL): We saw AAPL break higher from a ragged pattern off of the March lows. It then moved up through the 50-day moving average (MA) in mid-April. AAPL tested that move and came back to fill the gap higher. After it held the gap, we put AAPL on the report as we were looking to enter when AAPL broke back upside to continue the breakout move. Earnings were coming on April 30, and it looked as if we would get a good rally into the results.
On April 23, AAPL started upside. As a result, we moved in with some May $275.00 call options for $14.00 when the stock was at $278.22. While AAPL stalled during that session, it was up the following day. Indeed, it continued higher into April 30.
That was our plan, and while AAPL was not at the target on earnings day, we had a decent gain. Thus, we sold two-thirds of the position for $20.50 and acquired a 46% gain.
On Friday, May 1, AAPL gapped lower and then rebounded into the black. Since we used May options, which are designed for a shorter trade, we took the rest of the gains when the reversal started to pause after a good move. That is, we sold the rest of the options for $24.10 and banked a 72% gain on the remaining position.
Lululemon Athletica Inc. (NASDAQ:LULU): This is another name-brand stock that was recovering from the selloff. We saw LULU moving laterally below the 200-day simple moving average (SMA) in mid-April. After we put it on the report on April 15, it made the break higher on the following day. Thus, we moved in with June $210.00 call options when the stock was at $211.94.
LULU surged on April 17 by gapping and rallying to $225. Since this was an outstanding course of action, we let the stock move. Well, the stock faded during the next session. It then sold back to the 200-day SMA on the day after that. However, we once again let the stock work some more as it held its support with a low volume dip.
This strategy paid off this week as LULU broke higher once again and rallied to our initial target on Wednesday. We then sold our options for $31.50 and banked a gain of 50%.
No trades were completed by the Success Trading Group this week due to the state of the market.
Even so, 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
CMG (Chipotle Mexican Grill–$882.47; +15.45)
STATUS: CMG gapped upside on Wednesday due to strong earnings during the COVID-19 economic shutdown. The company even grew its sales. The gap higher took CMG through the same gap low from late February as the virus-related selling really got going. As this was a sloppy recovery base for CMG, this was just one of the reasons why we were not so enthralled to play it.
The gap on earnings, however, speaks for itself. After that gap, CMG tested into Friday, held the gap and just consolidated laterally. When a stock makes a strong gap such as this, we want to be ready for a new break higher if the stock were to move laterally afterward.
There was a similar setup from Amazon that I remember from early 2009. This was when Amazon’s stock gapped upside on earnings that surprised everyone and then moved laterally for a week or so. When it started upside, we were all over it for a big score as Amazon was leading the way out of the bear market.
I am not saying that CMG is doing the same thing here, but the gap/consolidation action is a very reliable way for us to make money. We want to move in on a break higher through the entry. A move to the target will give us a 90% gain on the options.
VOLUME: 530.183K Avg Volume: 1.016M
ENTRY POINT: $888.02 Volume=1.5M Target=$999.91 Stop=$846.69
POSITION: CMG JUN 19 2020 890.00 Calls — (53 delta)
4. Covered Call Options Play
Floor & Decor Holdings Inc. (NYSE:FND) — Floor & Decor Holdings Inc. is currently trading at $42.40. The June 20 $42.50 Calls (FND20200620C00042500) are trading at $3.20. That provides a return of about 10% if FND is above $42.50 by the expiration.