I Heard It Through the Grapevine

Dear SlingShot Trader Subscriber,

Rumors, rumors, rumors. They seem to be the lifeblood of trading on Wall Street these days. Traders are so desperate to stay ahead of the curve that they’ll jump at the slightest bit of news from anywhere. We saw this in spades yesterday as traders reacted to a story printed in The Guardian stating that leaders from both Germany and France had reached an agreement to add another 2 trillion euros to the European Financial Stability Fund (EFSF) to try to buoy up struggling European countries such as Greece as well as the European banking sector.

Unfortunately, this story — according to reports from officials in both countries cited – isn’t exactly true. That’s right: It was just a rumor. However, that rumor had enough power to send the S&P 500 (SPX) up to its highest levels since the market collapsed in early August.

That’s pretty powerful stuff.

So how are we supposed to trade in this crazy market environment? It’s simple: We take what the market gives us, and we watch the underlying fundamentals.

 

Take What the Market Gives You

Taking what the market gives you often is easier said than done, but during the past few months, taking what the market gives you has entailed riding out volatile price swings in a channel between clearly defined support and resistance levels. The market is challenging the upside of that channel right now, but it hasn’t yet shown a convincing breakthrough of resistance. That means it’s too early to stop trading the channel because the market hasn’t given us a breakout.  

Sure, we’ve seen a huge rally during the past two weeks that has been spurred on by a lot of short covering and some renewed optimism, but the market hasn’t given us a breakout yet. It may come shortly — but it hasn’t come yet.

We actually hope that the breakout through resistance does come soon because it would give us a tremendous opportunity to make money as the market starts to trend in line with the underlying fundamentals.

 

Watch the Underlying Fundamentals

The underlying fundamentals supporting the U.S. stock market are strong. Yes, we know Apple (AAPL) had a rare earnings miss last night, thanks to consumers delaying buying more iPhones because they thought the iPhone 5 was coming. And a few other companies have missed earnings. But did you know that more than 70 percent of the companies that have reported earnings so far this earnings season have beaten analyst expectations? That’s quite impressive, and it shows that corporate America is still strong.

We’re also seeing some signs of life in the housing market. We even saw an unexpected jump in housing starts this morning.

Perhaps most important, we saw a huge bullish surge on the rumor that Germany and France have reached an agreement to take action to solve the problems in Europe. Why is this most important? Because it tells us that if the problems in Europe weren’t still there, and if there weren’t so much uncertainty about the steps that will, or should, be taken to address those problems, then the U.S. stock market would be in a solid bullish uptrend.

 

The Bottom Line for Next Week

If the S&P 500 can give us a solid breakout above resistance this week, we could be in for a nice bullish run, because the underlying fundamentals of the stock market warrant some optimism. Stock prices are too low. Wall Street’s risk aversion has pushed multiples down too far, and the slightest change in investor confidence could push those multiples higher.

However, we need to beware of head fakes. The market may rise briefly above resistance, only to fall back down the very next day. Plus, if the market teases us with a bit of a breakout but doesn’t offer any confirmation before the weekend, we need to take it with a grain of salt because European finance ministers are meeting to discuss potential solutions to their problems this weekend, and if they come back to the markets with disappointing news on Monday, any soft or timid break of resistance will be meaningless as stocks reverse course and drop yet again.

In short, we’ll continue to take — and make money from — what the market gives us while making sure that we stay nimble enough to react.

 

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll discuss some of these in tonight’s webinar live at 6 p.m. ET tonight.

  10/19 – Fed Beige Book

  10/20 – Weekly Jobless Claims

  10/20 – Existing Home Sales

  10/21 – McDonald’s (MCD) Earnings Announcement

  10/25 – Consumer Confidence

 

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via email. 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.

 

Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.

McDonald’s (MCD)On Oct. 18, we recommended you to “buy to open” the Nov 87.50 Puts for $1.95 or less. We entered the trade for $1.87.

 

Positions Closed

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

Infosys Technologies (INFY)On Oct. 12, we recommended you “sell to close” the Nov 55 Calls. We closed the position for $3.80 for a profit of 94.87%.

Fastenal (FAST)On Oct. 13, we recommended you “sell to close” the Nov 32.50 Puts. We closed the position for $1.25 for a profit of 19.05%.

Halliburton (HAL)On Oct. 19, we recommended you “sell to close” the Nov 30 Puts. We closed the position for 77 cents for a loss of 26.67%.

Wells Fargo (WFC)On Oct. 19, we recommended you “sell to close” the Nov 23 Puts. We closed the position for 51 cents for a loss of 25%.

 

Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

McDonald’s (MCD) See Positions Opened above.

 

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.

 

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader