The major stock indexes appear to be topping out. If they follow through with their cycles, it is time for the indexes, and most stocks, to fall off into a short-term cycle low. Stochastics that are well in the overbought area have been crossing to the downside, setting up for what technically is a sell signal.
However this is a bull market and fake sell signals in the Stochastics have become common. The Russell 2000 index is the weakest of the big three, but even the NASDAQ Composite is showing a need to pause. The energy sector in particular is showing weakness. Many big-name energy stocks took a hit yesterday.
In going through yesterday's charts of the major indexes and sector ETF's, one sector's chart stood out from the rest. The retail sector, particularly RTH, jumped to a new all-time high as energy stocks were tanking.
Checking seasonal track records, the energy sector does not have much to show for the next several weeks. Over the next 12 weeks, XLE has gained an average 0.1%, with gains in only 9 out of 15 years:
Over that same period, RTH has gained an average 3.6%, with gains in 10 out of 13 years. Take out 2008's market crash in September and this sector has done quite well.
I took a look at the top 10 holdings in RTH, and wrote down the percentage gains each stock produced yesterday:
So while the overall indexes appear to be topping out, or at least pausing, the retail sector is on a tear. Lowe's set a new all-time high. Costco gapped-up on high volume to set a new high. If your charting tool colors volume bars green on up-close days and red on down-close days, you're going to be seeing a lot of green on the right side of these charts.
When checking the seasonal patterns of the above stocks, one stood out. You can probably guess it – Amazon. Over the next 17 weeks, AMZN has averaged a 31% gain, with gains in a high 82% of the years.
But at $346 a share, it is not an easy trade to consider. When I noticed iVolatility.com was showing that AMZN's Implied Volatilities are at the lowest levels of the past year,…
… a straddle trade becomes a consideration. A straddle trade would be purchasing an October 345 call and an October 345 put, aiming to sell both sides sometime before expiration.
With AMZN currently at 345.95, an October 345 straddle would have a slight bias to the upside, but this trade could capture a movement in either direction. It just so happens AMZN has been channeling upwards, and is in the middle of the channel. Again, another positive for a straddle trade.
Now what are the odds of profit with the above straddle trade? At current Bid/Ask spread mid-prices, the AMZN October 345 straddle would cost about $2,157 per contract.
At October expiration, the breakeven on the high side for this straddle would be 366.46, meaning AMZN would have to gain at least 5.9% by October 17th for this straddle trade to breakeven. On the downside, the breakeven is 323.26, a 6.6% loss in the stock. So how likely are movements like this within the next 6 weeks?
Going back to the seasonal chart, this time focusing on the 6 week period, we find that AMZN has gained an average 7.4%. But notice that AMZN has gained 5.9% on the high side, or lost 6.6% on the downside in 12 of the 17 years. 10 of the years had double-digit moves.
Amazon.com is due to announce earnings on October 23rd, after the close. This is past October option expiration, so earnings will not be a direct factor. The above seasonal chart may be showing the tendency for AMZN to rise going into earnings though.
Straddle trades are not for conservative investors. But they can be played relatively conservatively. If you target getting out as soon as a 20% profit is reached, the odds of success on a straddle trade increases. At expiration of the above straddle, the 20% profit points come out to 370.86 and 319.00. Look again at the ‘channeling' chart of AMZN above. Those 20% profit targets happen to coincide with the top and bottom of the channel.
So while this is not one of the highest probability trades that could be found right now, it is an interesting one to consider. A straddle trade can profit even if the markets tank, and with this being September, a lot of the financial press will be reminding you of 1987 and 2008.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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