It's always something!
Early this morning, India and Pakistan shot down each other's planes and now what used to be the World's most likely place for nuclear war to break out is once again the World's most likely place for nuclear war to break out – which says a lot since Trump's finger is still on the button but he's been bumped to #2 by this new tussle.
This is still backlash from the terror attack on India, which killed 40 people we didn't care about on Valentine's Day and India retaliated and bombed what they claim was a Militant Base inside of Pakistan. We still sell arms to both countries, so this war is great for us! Actually, Pakistan already pissed off Trump and the GOP by switching to China as their main weapon supplier (much cheaper).
The Futures are already recovering from a sharp drop this morning as Nuclear War is way down on this Planet's list of things to worry about what with the planet boiling us alive and all the insects dying. If that doesn't bother us – what's a little background radiation going to do?
What's really concerning is the S&P's repeated failure to hold 2,800, which still has us wondering if this whole rally is topping out 5% below the September highs (2,940) and, of course, the Russell is still unable to crack the 1,600 mark – which we said last week was a big problem. In fact, I also said in last Wednesday's Morning Report:
We had an in-depth look at /RTY in yesterday's Live Member Chat Room where we concluded:
So, that being the case, we would expect the 5% Rule to be obeyed between 1,440 and 1,800 which is 360 points so 72-point bounce lines to 1,512 (weak), 1,584 (strong), 1,656, 1,728 (weak retrace – where we failed before) and 1,800. So expect good resistance at 1,584 and no more than a strong retrace of that run from 1,440 (if we're bullish) which is 144 so 29(ish) down to 1,555 (weak retrace) and 1,526 and we'll see how that goes.
In other words, our 5% Rule™ predicted a run to 1,584 and now the 200 dma is 1,587 so we're pretty confident taking a short up here with very tight stops over the line that risk a loss of $50 per point, per contract so let's say we call 1,580 the shorting line and 1,590 the stop (though I would add another short at 1,586 to average 1,583) so the risk would be losing 8 points over 1,590 ($400 per contract) and our pullback goal is 1,555, which is 25 points (from our initial entry) for a $1,250 per contract gain and possibly 1,526, for a total of $2,700 per contract at that level.
As you can see, we made a pretty perfect call that day and we dropped to 1,570 on Thursday for a nice $700 per contract gain (better than expected) and we got another entry and another drop already this week so now we go back to flat and see what happens if they test 1,584 again – but we only start a short on the cross back UNDER our line – not while it's going up! That saves you a lot of money. If we keep going down, 1,555 is back in play but, so far, this is not a bearish move – just healthy consolidation near the top. We like the bear side as the macros tell us we'd rather be short than long up here but the technicals are still strong.
Meanwhile, this month is already over and Friday is March! Spring is in the air though there's one of those nasty Arctic Blasts coming across the country next week as GLOBAL WARMING pushes warm air into the Arctic which then displaces an equal amount of cold air that normally stays in its place. That's what these blasts are – a destablization of our Planet (Earth)'s entire weather system and you can see on the right-hand side of the chart how the same displacement is sending ridiculously hot air to Greenland.
This is why we are still long on Coffee (/KCN19) Futures (see Monday's Morning Report) as it doesn't take much temperature variation to destroy fragile coffee plants. So far, all the forecasts have been for great crops this year and the warehouses are already nearly full so there's a tremendous amount of short interest in the Futures and the market is ripe for a very nice squeeze if the weather changes the mood next week. /KCN19 is the July Futures contract, now $101 and each $1 move in the Coffee price is $375 per contract (and it requires $2,970 of margin to trade a contract). A good squeeze could easily pop the contracts back over $104 for a $1,000+ per contract gain – so worth playing over the weekend.
Also on Monday morning, we discussed playing oil long off the $56 line and I outlined the following options trade for those of you who are Futures-Impaired:
Of course, as investors, we have yet another way to hedge this because we know that, if oil is lower in the Summer, then Airlines will do better than last year as fuel is 30% of their operating costs. Alaska Air (ALK) is one of our favorite Airline stocks (now $62) so what we can do is promise to buy 200 shares of ALK for $60 ($12,000) by selling 2 July $60 puts for $3.20 ($640). So now our hedge looks like this:
Sell 2 ALK July $60 puts for $3.20 ($640)
Buy 5 UCO June $20 calls for $2 ($1,000)
Sell 5 UCO June $23 calls for $1 ($500) Now we have a net $140 credit and, if all goes well, the short puts expire worthless and we collect $1,500 on the spread and that would be a net gain of $1,640 – covering almost the entire anticipated increase in gasoline costs and our worst-case scenario is that we're forced to buy 200 shares of ALK for a bit under $12,000 (we still have the $140 credit) and we would then sell options against that to further lower the basis.
Trading is FUN & PROFITABLE when you have the right tools at your disposal and understand how to use them. These aren't complicated concepts and, if you own a business that spends money on commodities, whether it's gasoline or heating oil or soybeans, wheat, copper or coffee… you SHOULD learn how to hedge your commodity costs – you'll save a lot more than you do by going with cheaper toilet paper!
UCO has barely moved and it's only been a couple of days but the ALK July $60 puts have dropped to $3 ($600) and the June spread is now $2 ($1,000)/1.04 ($520) so a net $120 credit is up $20 (16.66%) so far but still good for a new trade with plenty of room to run and I'm mentioning it so soon because the new Gasoline contracts (April delivery) are already up 0.20 from last month, which are just terminating and that indicates some very bullish sentiment which means this trade now has a higher probability of success than it did on Monday – based on this new information.
Powell speaks to Congress at 10am and we also get Factory Orders at 10 so we'll see how the indexes hold up into that. Powell could not have been more doveish yesterday if he'd have sprouted wings and started cooing so I can't imagine that anything he says today will really help get us over 2,800 and there's plenty he can say that can send us lower during the Q&A so please – be careful out there!
Oh yes, and tomorrow morning, at 8:30 am, we get our Q4 GDP Report, which is bound to be below 2%, down from 3.4% in Q3 so it would be silly to be long into that!