Posted in Newsletter
By: Tom Gentile on October 19th, 2022 • 9 mins read
Originally published via our newsletter previously. Subscribe for early access!
The CPI report will either confirm the assessment of the PPI numbers in that things are still not good or bring a bit of optimism, (less likely, but surprises do happen).
One thing that has consistently been alluded to today if you were paying attention to the financial news networks is even with the PPI numbers coming in showing inflation risks are still high. The markets held up pretty well.
Or another way they were saying it is the markets did not sell off dramatically with the numbers that were deemed NOT good for the markets.
This is an interesting perspective in that if one hears that, and they are relatively new to the markets and investing / trading they may ask, is the fact things are not selling off on bad news really a ‘reason’ to buy?
Think about this. People who are not hedge fund or professional money managers for any firm may not feel confident in buying right now on their own due to many uncertainties for our economy and those overseas, (see England’s concerns).
But there is money that people provide to their brokerage accounts and the folks that manage that money DOES have to put that money to work and find places to invest.
The selling off in the markets is providing for some a lot of securities they or their firm likes at multiples they like or find attractive, and some may be looking at the current prices as those same stocks as being ‘on sale’ and they are picking these things up at a bargain.
Not at a level to where it is causing a bullish trend for the markets, but there is much work to be done to avoid a recession while fighting off inflation before tides to turn.
— Tom Gentile
C1P: Chief 1-Percenter
Corners of the Market
SPY – SPDR S&P 500
The past couple of weeks in this newsletter this panel on SPY, which represents the stocks/equities corner of the market, the Fibonacci replacement tools was placed on it.
It was placed on this page to show potential target price levels based on Fibonacci the SPY could bounce to should a recovery of sorts take place.
Now, that term recovery is not to intimate that the bear market would be over and all would be right in the economic universe, but that fears about the recession are waning and the Fed’s fight against inflation is possibly going to bring about at least a ‘soft landing’ to the point investors are willing to put even more money to work in the equities markets.
For it is those last two items, lowering of inflation and avoidance of a recession that I believe will be the catalyst for things to reverse the year=to-date bear market we are experiencing.
TLT – iShares 20+ Year Treasury Bond ETF
The answer to the question, was the Darknet R signal the bottom for TLT is no, it was not.
The question now, a week later, is will the low established three trading days ago be the bottom for TLT?
It is slightly up off that low the last two trading days. The bullish reversal day today may look encouraging, but even in this 100-day candle chart on TLT you have seen this pattern paly out numerous times only to fail and see TLT make new lows.
If one is looking for the inverse correlation of equities lower and bonds higher, that hasn’t happened this year as both equities and bonds have traded in a more correlated fashion – and the trend for both corners of the market has been decisively bearish.
The thing is say we get the positive resolution to the two items expressed in the SPY panel for the economy, does that mean equities trend higher and the inverse correlation kicks in and bonds stay bearish?
UUP – Invesco DB US Dollar Index Bullish Fund
I’ve been writing for some time now that of all the intermarket analysis observations the one that stands out the most is the ‘Inverse’ correlation between the US Dollar and US Equities.
The entire year it seems that as the US Dollar trades higher making all-time high after all-time high, all other corners of the markets emphasized and analyzed in these newsletter, has been trading lower.
This past week the US Dollar is trading higher.
It is making an effort it seems to regain the previous all-time high established last month.
Should it do that, the technical item to see is if it hits that previous high and becomes a double top.
Will that be a double top that the US Dollar reacts to as a resistance it rolls over from or does it break out and continue to make new highs?
USO – United States Oil Fund, LP
Over the past month the Energy sector was the best performing sector.
The last three trading days sees USO pulling back.
I love to consider trades based off a technical pattern of Old Resistance becoming New Support, (and vice versa) and any chance I get to point out this pattern when it occurs I do so.
That pattern is usually easiest to see in a visual example where the security the pattern occurs is trading in a sideways or parallel direction.
The chart above on USO shows that it is possible for this pattern to occur on securities that are in an uptrend or downtrend.
The descending resistance line USO broke out above5-trading days ago has the chance of now becoming a new support for USO.
A close of a day or more under the trend line could nullify this notion.
GLD – SPDR Gold Shares
Tools and Observations
This one will be a short entry on this part of the newsletter
When it comes to looking for investment opportunities we pretty much leave that to others who are long-term investors.
We are options traders.
Though that’s the case, (we do have some long-term investments, but that isn’t the means we primarily use to go after consistent cash flow.
Trading options is.
This does not mean we don’t look at things at times from a long-term investment point of view when it comes to our options trading.
The reason we need to do this and give some respect to the long-term investing approach and those that use it is because it is those folks that make long-term investment decisions that can help drive a stock higher and that influx of cash to those securities provides the price moves and patterns we look to in our analysis to take a bullish stance on and look to incorporate bullish option strategies on.
The perspective we are looking at today is one of looking for turnaround candidates.
A turnaround stock is one that has been so beaten down in price that it may be on multi-week, month, or yearly lows.
What makes them a turnaround candidate and one that may be worth trading is one where that company is making progress in turning their ship around.
They are companies that are beaten up for a reason, but they are now making business decisions that may lead to the company ‘turning’ things around and regaining profitability and therefor trust from enough investors that their stock is being purchased again.
Purchased to the point their stock chart shows the potential for bottoming out and trending back up again.
The key thing to recognize is turnarounds don’t happen overnight.
It takes a lot of good to regain the faith and confidence in investors that they are fixing their problems. Especially hard to gain that trust and deployment of capital on that stock from those that previously owned during the slide to where they are at now.
A few items that could help turn things around are new management, new products or services that are an improvement vs. the old ways and a reduction in operational cost such as employee reduction, more cost-effective means to produce their product or a combination of the two.
When the money comes back in to the stock we as options traders will start to see that in the charts of these companies.
We could see technical patterns like a breakout of a horizontal or base support that has existed for a while. We could see a cup and handle pattern. We could see bullish candle reversal patterns.
You can look to those technical price patterns and accompany them with oscillators like Stochastics, MACD and ADX/DMI.
Those are all viable means to assess a bullish technical viewpoint, but before you can analyze a chart you have to find ‘the’ charts to analyze.
A way to find a list of potential turnaround candidates is the 52-week Low scanner in the tools.
Log in to the tools (you are already in since you couldn’t be reading this newsletter without having logged in to do so).
Do the following sequence:
Stocks > Stock Analysis > Hi/Low
You will get to this page.
On the above portion of the page select 52 (or leave it as it defaults to that)
In the Searched Stocks box select Stock Lists: S&P 500 Optionable (or whichever one you want. And yes, you can create your own list in the tools if you like).
Select the Wizard: Stocks with Latest Lowest Close for Weeks Chosen
Then click ‘ Search’
The list will populate as the page refreshes, and this is what it looks like today:
There are 103 securities that are trading at 100% of their 52-week low, meaning that are at their 52-week low.
Here are the first 5 on the list:
It is now up to you how you and your brokers further research these companies.
You and your team needs to decide if you will analyze from a purely fundamental standpoint or purely use technical analysis or incorporate research from both perspectives.
We wish you well in your endeavors to find your opportunities on turnaround candidates if you feel it worth your time to do so.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
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