After the Trend Comes the Channel

Dear Slingshot Trader Subscribers, 

We all know that what has happened in the past is not a guarantee that it is going to happen again in the future, but we do find – as Mark Twain so aptly put it – that the past and the future often tend to rhyme, and it looks like the market might be ready to rhyme right now.

Rhyming with the S&P 500

Let’s start with the S&P 500 and see how this stock index is getting ready to rhyme.

If you look back to the beginning of 2010, you will see a major run up in the value of the S&P 500 that looks quite similar to the run up we’ve seen so far in 2012.

chart1
Chart courtesy of MetaStock

So what happened at the end of the run up that started in 2010? Well, as you can see in the chart above, the S&P 500 started to consolidate in a relatively wide channel. Stocks seemed to get caught in a cycle of bouncing up and off of support only to run up higher, hit resistance and turn back around.

Here’s where the potential rhyming comes in. The S&P 500 has just enjoyed another extended run up, and it now looks like it is starting to consolidate in a fairly wide channel. Does this mean stocks are going to plummet tomorrow? Probably not. Does this mean that stock may be limited from moving up past the recent resistance levels that were set above 1,400 in the near term? Most likely.

None of this is bad news. It simply means there will be opportunities for both bullish and bearish trades in our portfolio.

Rhyming with Spanish Bond Yields

Now let’s take a look at the yield on the Spanish 10-year government bond.

Yields on European bonds have been a good barometer for investor sentiment and confidence in the Eurozone. When yields have been rising, it has been a sign that investors are becoming increasingly nervous about the economic stability in the Eurozone. When yields have been falling, it has been a sign that investors are becoming increasingly confident.

It seems the magic number for yields in the danger zone during the past few years has been 6%. When yields rise above that level, it means investor nerves are getting raw.

As you can see in the chart of Spanish 10-year government bonds below, yields climbed above 6% in July and August 2011 – when the markets fell – and once again in November 2001 – when the markets corrected once again.

chart2
Chart courtesy of Bloomberg.com

If you look closely, yields were recently up above the 6% level. Is this a sign? Is the market rhyming once again?

We aren’t convinced just yet that we’re going to see pullbacks like we saw last year, but we have been put on notice. Even if the market doesn’t come toppling down, it does add more credence to the thought that the market may be stuck consolidating in a sideways-trending channel though.

The Bottom Line for Next Week

If the market does indeed start to rhyme with movements it has made in the past, we are in for some volatility and some back and forth during this earnings season. We fully expect this to be the case.

Once again, this is not a bad thing. It opens up a lot of opportunities for us to make money both to the upside and to the downside.

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll be discussing some of these in tonight’s webinar.

Apr. 19 – Weekly Jobless Claims
Apr. 19 – Existing Home Sales
Apr. 19 – Philadelphia Fed Survey
Apr. 20 – American Electric Power (AEP) Earnings Announcement
Apr. 20 – Kimberly-Clark (KMB) Earnings Announcement
Apr. 24 – S&P Case-Shiller Home Price Index
Apr. 24 – New Home Sales
Apr. 24 – Consumer Confidence
Apr. 25 – Whirlpool (WHR) Earnings Announcement
Apr. 25 – Durable Goods Orders
Apr. 25 – FOMC Meeting Announcement

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here. You can also see more trade-specific details by clicking on the trade links below.

Open Positions

These are the SlingShot Trader positions that are currently open and active.

American Electric Power (AEP) On April 12, we recommended you to “buy to open” the May 37 Puts for $0.85 or less. The stock has moved higher during the last few trading periods, but we still like the trade.

Kimberly-Clark (KMB) On April 16, we recommended you to “buy to open” the May 75 Calls for $1.15 or less. If you can still get into it at a price below our recommended maximum, we still like the trade.

Whirlpool (WHR) On April 17, we recommended you to “buy to open” the May 65 Puts for $2.95 or less. If you can still get into it at a price below our recommended maximum, we still like the trade.

Closed Positions

These are the SlingShot Trader positions we closed during the past week of trading.

Intel (INTC) On April 16, we recommended you “sell to close” the May 28 Calls. We closed the position for $0.91 for a gain of 18.18%.

TD Ameritrade (AMTD) On April 17, we recommended you to “sell to close” the May 18 Puts. We closed the position for $0.32 for a loss of 28.89%.

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader