1. Market Summary
Excerpted from Wednesday’s paid content of Investment House Daily by Jon Johnson.
Vaccine Announcement Boosts Futures
– Pfizer Inc.’s (PFE) announcement regarding a vaccine boosts stock futures.
– Recovery stocks start the new quarter higher, but immediately regress. Leader stocks start slow, but then surge.
– The Institute for Supply Management (ISM) roars to expansion.
– The Federal Open Market Committee’s (FOMC) minutes show that the Fed plans to buy bonds for years to come. Also, a jobs report closed this short week of trading.
Recovery trading was up to start the new quarter. Transportation, banks and machinery were up during the premarket session and jumped up out of the gate. Leadership stocks were problematic as they lagged the recovery stocks and opened relatively flat.
Futures were sluggish after a solid, but below expectations, Automatic Data Processing, Inc. (ADP) jobs report (2.360 million vs. 3.75 million expected and 3.065 million prior) and a second week of declining mortgage applications. Some experts have said that the number of applications is down because of a lack of homes. However, when I look at several websites, there are lots of homes with a red arrow by the price. This indicates a falling price. Is there really a lack of homes? I’m not seeing it.
Then, positive virus-related news hit. Weary of seeing the number of COVID-19 cases climb day after day, investors received a treat on Wednesday morning when PFE announced the results of an ongoing test of its vaccine and that 24 of 24 patients were able to successfully produce antibodies. PFE is said to be very staid with regard to testing, and the fact that it felt compelled to say something was seen as a real positive. While there have been some side effects, they are allegedly rather minor, e.g. fever. There was nothing like what happened to Alan on “Two and a Half Men.” For those of you who have not seen the show, was testing an experimental drug and believed that he had dropped a third testicle.
NASDAQ: This index hit a new all-time closing high as the NASDAQ gapped modestly higher and then rallied from there. Rising and above-average volume accompanied the gains.
S&P 500: The S&P 500 edged higher, but hit the 3,130 level again. This was where the index had moved during the third week of June and produced a high of 3,150. While the index is still in the range and is not in a bad position, it is still not making much of an effort to break through the March recovery high, much less the prior all-time high.
NOTE: The figures and information above are from the 7/1 report due to the Fourth of July holiday.
NOTE: The video is from the 7/1 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 DOCU keeps winning, we are impelled (and even happy) to put it on the report when we see it form new entries that could make us money. On June 26, DOCU broke higher from a short one-two-three pullback after a bounce higher to another all-time high. We put it on the report during the weekend of June 27. On Monday and Tuesday, DOCU did not do much and even faded a good part of the prior Friday move. However, it managed to hold on to the 10-day exponential moving average (EMA).
Indeed, the fact that DOCU flashed a very nice and tight doji just over the 10-day EMA indicated that the next move is coming. Even so, this pattern could only serve as an indicator. We still wanted to see the move. On Wednesday, we did. After DOCU started higher off of the 10-day EMA, we bought September $180 call options when the stock’s price was $179.19. DOCU finished around this figure at the end of that session.
After Friday’s jobs report, DOCU gapped modestly higher, and it looked like this would be a good day in the making. While it was not great, it was good. Just after 11:00 a.m. ET, DOCU started a very steady and very strong rally upward. DOCU initially built up strength and then bolted higher at 12:00 p.m. ET.
That move took DOCU to within a whisker of our target at $200. When it faltered the move at a position that was just a hair short of $200 — a logical resistance point — we sold half of our option position for $30.30 and banked a 66% gain. Given that this was a play which we had entered eight minutes before the market closed on Wednesday, this was not a bad course of events at all. We kept half the position, as noted, and we now want to see if DOCU can make another “signature” move for us.
Here is one completed trade from Technical Traders Alert, offering insights into our trading strategy and the target that we have hit this week:
Tesla Inc. (NASDAQ:TSLA): When TSLA runs (pun intended), it makes dramatic moves that include big bursts upside. Inevitably, it then needs to recharge. We saw TSLA setting up in May with a rather classic tight consolidation at the 10-day EMA. It then broke higher to start June, but immediately went into another consolidation that was extremely tight and flat. This told us that TSLA needed a bit more consolidation and that it would likely make a solid upside break. So, we put it on the report. On June 8, TSLA broke higher with a gap. So, we moved in and bought August $950 call options when the stock’s price was $949.94.
TSLA paused and then gapped sharply higher to $1,027 on June 10. Although it looked great, TSLA then stalled as it needed to recharge after a very short trip. Then, it worked laterally in a tight range to the end of June and faded back to the 20-day EMA from June 24 to June 26. Upon seeing this, we were somewhat put out as TSLA options cost a bundle. However, TSLA was holding the 20-day EMA, and it had used this line as both the support and the launch point for moves on this run three times before. Thus, we held on tight.
On Monday, TSLA started a bit higher. It broke out on big volume on Tuesday. On Wednesday, it was up again. Then came Thursday and the announcement that the company had exceeded its Q2 delivery estimates. As a result, TSLA gapped upside by almost 100 points. Upon seeing this, we sold half of the position for $286 and banked a 145% gain. We will let the rest work to see if TSLA can continue this run. If so, we will let it run until it needs another recharge. If not, we will take the remaining great gains.
There were no trades in the Success Trading Group this week.
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
SPOT (Spotify Technology–$258.90; +0.70)
STATUS: Flag. SPOT experienced a massive breakout from a five-week range in mid-June. That move broke SPOT out from a two-year base. After surging into last Thursday, SPOT is testing back in a very orderly flag pattern, and its volume is falling off nicely. This shows that there is no real selling. There is just a lack of bids after a super run.
The 10-day EMA is racing up to meet it, and when the stock and the 10-day EMA converge, this movement may act as a catalyst for the next leg higher. At other times, such a convergence can allow the stock to take off before the two meet. However, this will only happen if the stock is very strong.
Thus, we want to be ready in the event that SPOT decides to just take off. If SPOT tests more, we will adjust our entry. If it moves from here, we will enter. A move to the target from the entry point will give us a 70% gain on the options.
VOLUME: 3.395M Avg Volume: 3.281M
ENTRY POINT: $261.12 Volume=4.5M Target=$293.98 Stop=$251.23
POSITION: SPOT AUG 21 2020 260.00 Calls — (54 delta)
4. Covered Call Options Play
Rite Aid Corp. (NYSE:RAD) — Rite Aid Corp. is currently trading at $17.29. The August 22 $18 Calls (RAD20200822C00018000) are trading at $1.75. That provides a return of about 16% if RAD is above $18 by the expiration.