Trade Alert: Charting the Market, plus 2 New Instant Dividend Trades to Place
Stocks bounced back last week thanks to solid post-earnings report moves from big tech, especially from Alphabet (GOOGL). For the week, the S&P 500 Index (SPX) surged 2.7% higher – led by a 5% gain for technology – but the S&P remains down about 3% from recent highs. We'll take advantage of the bounce to sell some calls, as I'm recommending below.
Let's take a closer look at a chart of the S&P 500 to see where we stand right now. Below you can see the key market support (green line) and resistance levels (red line). They line up with substantial volume at price bars (green and red bars), which means that plenty of trading activity took place at these prices:
Overhead resistance is roughly 5,150-5,200 for the S&P 500. Support sits at about 4,750, which also lines up nicely with our own Smart Moving Average for the S&P.
The first leg down erased about 5.5% from the index. That could be it; after all, there is no law that it must be a 10% pullback, although stocks are a bit overdue for a correction.
You can also see in the chart above that our timing cycle indicators are in a valley turn area (blue shading) right now. The cycle is apparently having the expected effect of turning stocks around starting last week. Note that the next peak area (orange shading) begins mid-May.
This week is another busy week for earnings, plus there is a Fed policy meeting Tuesday and Wednesday. Not much is expected from the Fed, since they've already dialed back rate cut expectations. But these policy meetings often trigger unexpected volatility.
So far, the recent pullback looks a lot like the one in August-October last year. The S&P 500 made three distinctive legs lower, with brief rallies in between, as the chart below clearly shows:
If we keep following the rough 2023 pattern, then the peak and correction start in April: equivalent to last August, as you see above. Next, stocks should bounce, which began last week right on cue. But stocks could be stopped well short of new highs only to roll over to the downside again.
Last year, the first leg lower in the S&P was, you guessed it, about 5%. Then a 4% rally developed in late August-early September, only to fail and roll over again. The second leg down was about 7% in September 2023. Stay tuned. As for Ultimate Income, we were put shares of CVS Healthcare (CVS) Friday, as expected. Now, let's start making the stock pay us regular dividends, in addition to its generous 3.8% quarterly dividend.
Also, our covered-call options on Halliburton (HAL) expired out of the money. Since the stock is in a peak turn area right now, let's sell another round of covered calls. Here's what to do.
Actions to Take...
1. Sell to open the CVS Healthcare (CVS) May 10, 2024, $71 call option (CVS240510C00071000) at a limit price of $0.50 or more, good 'til canceled.
2. Sell to open the Halliburton (HAL) May 10, 2024, $40 call option (HAL240510C00040000) at a limit price of $0.25 or more, good 'til canceled.
Place these two trades right away, and keep watch for more Ultimate Income updates and possible trades later this week.
Good investing,
Mike Burnick Senior Analyst, Ultimate Income
P.S. If you have any questions or concerns, please reach out to me at emailmikeburnick@tradesmith.com and include "Ultimate Income" in the subject line.
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