1. Market Summary
Excerpted from Thursday’s paid content of Investment House Daily by Jon Johnson.
Another Lower Open
– We saw another sharp, lower open, but after the large-cap stocks hit the 50-day moving average (MA), the buying returned.
– The Philly Fed misses, but not as horrendously as the Empire State Manufacturing Survey.
– The Nasdaq gaps below the 50-day MA. After the buying started, it recovered to that level. Meanwhile, the DJ30 tapped the 50-day MA and used that to rebound.
– Even after the selling, many areas held their patterns well. Thus, they remain in great positions to move higher.
The large-cap indices tested the 50-day MA. If the market is going to play by the same rules that it has for the past two years with regard to the large-cap indices, the market is at a buy point. As I discussed on Wednesday night, we opined that Thursday could be a situation where the NASDAQ breaks the 50-day exponential moving average (EMA) while the S&P 500 and the DJ30 moved down to that level. That is pretty much exactly what happened.
All three of the major indices rebounded to different degrees, but all had the same effect. The Nasdaq rebounded to hold the 50-day MA on the close and posted a slight gain. The DJ30 bounced to a tight doji. While there was no recovery to positive figures, the doji is a pretty good signal of more to come. The S&P 500 rallied off of its test above the 50-day MA and also put in a modestly positive close.
In general, tests of the 50-day MA for the large-cap indices have proven to be an entry point for pretty much all of 2020 and 2021. Thus, again, if this market continues to play by the same rules, Facebook and its fellow large-cap stocks should be buys.
P.S. Las Vegas Money Show, September 12-14, Bally’s Hotel & Resort: Join me and many other speakers. For more information, go to Johnson.MoneyShow.com. A special registration code of 053412 is embedded in the link to help my readers secure early bird pricing and a seat at the event.
NOTE: The figures and information above are from the 8/19 report.
NOTE: The videos are from the 8/18 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:
Kroger Co. (NYSE: KR): KR? Grocery stores? Yes, profit margins are thin and competition is fierce, but with the fires, droughts, floods and earthquakes, getting food to people is fundamental. Whether that theory holds water or not is irrelevant. What is relevant is what KR’s chart shows us.
After a break to a higher rally high in mid-July, as KR moved up off a 50-day MA test, it faded to the 10 day EMA. As we love playing the first tests of breakouts, we put a play on the report.
On July 26, KR broke higher. This was our entry signal. We moved bought October $40 call options and paid $2.14 per option.
KR took another couple of sessions to really start the move, but when it did, it really moved. It rallied into early August and cleared the upper channel line in its five-month channel. After it tested for three sessions, it then rallied again. KR continued this stair-step move into mid-August and hit our initial target on Aug. 16. We then sold half of the options for $3.97 and banked a solid 85% gain.
Then, KR stopped stepping and started sprinting. It surged on Tuesday and Wednesday before stalling on Thursday. At this time, it faded from a higher high and showed a tombstone doji. After a good run, a candlestick indication can signal a pullback.
On Friday, KR started a bit lower. While we were ready to take some more gains, it then rebounded. After moving near the Thursday intraday high, it started to stall somewhat. So, we opted to bank another half of the gains by selling our options for $7.20. This produced a 236% gain.
We are letting the last part work to see if KR can generate some more gains for us.
3. Pick of the Week
CSX (CSX Corp. — $33.76, +0.01): Rails
STATUS: CSX produced a nice set up in a four-month cup-with-handle base. It then rallied to a higher high in early May, peaked and then fell into the current base. It tested down to the 200-day simple moving average (SMA) in mid-July and then gapped over the 50-day MAs. After CSX tested that move, it then rallied into last week and formed the right side of the cup base.
Over the past four sessions, CSX has tested, faded in a flag pattern to test the 10-day EMA and formed the handle to the cup base. While it tried to break higher on Wednesday, it faded to flat. Since this is an excellent setup, we will move in when CSX breaks higher and holds the move. A rally to the target will give us a 75% gain in the options.
VOLUME: 8.526M Avg Volume: 10.35M
ENTRY POINT: $34.08 Volume=12M Target=$36.48 Stop=$33.28
POSITION: CSX NOV 19 2021 33.00 Calls — (54 delta)
4. Covered Call Options Play
Timken Steel Corp. (NYSE: TMST) — Timken Steel Corp. is currently trading at $14.06. The Sept. 17 $15 Calls (TMST20210917C00015000) are trading at $0.75. That provides a return of about 13% if TMST is above $15 by the expiration.