April 12th, 2023

4200 Or Bust

The market melt-up continues. Looking at a daily chart of the S&P 500 (SPX), you can see it’s not exactly a chart that looks like it’s fitting into a nice bullish pattern of moving higher with higher highs and higher lows. We’ve had several days of sideways movements and no real retracements.

Yet, since March 13th we’ve slowly been melting up and put in a respectable 7.8% gain in nearly a month.

It’s been tricky during day-to-day trading, but we keep moving higher.

From a chart perspective, we managed to trade higher than the previous peak, set in early March, and slowly, but surely, we’re marching our way to 4200.

A move above 4200 would certainly help the bulls stay in control, especially since that will mean getting through after a banking crisis and an earnings season that is not looking like it will be stellar.

More importantly, a move above 4200 would be a 20% gain from the October lows and that would signify the S&P 500 moved into an official bull market.

I can already hear you typing in and saying, there’s no way we’re getting up to 4200 because of the recession and because rate hikes are continuing and so on.

And yet, here we are. Every mention of a recession since October has not been able to keep the market down. Every mention of job losses or ongoing war overseas or any other piece of bad news has not been able to keep this market down.

I’m watching the Russell 2000 (IWM) to see how receptive the market is to risk. In two days this week, the IWM has risen by 2.3%. Did someone mention a looming recession? To be fair, IWM is pretty flat over the last three weeks.

I mentioned earlier that this earnings season is looking weak and that’s true, but when expectations are so bad, any signal of life can breathe life into this market and we could be well on our way to 4200.

We could see a stronger finish through April and maybe this year we will once again use the mantra of, “sell in May and go away.” If you don’t remember last June, go look it up on a chart. It was not a pretty sight last year.

We’ve had such strong reactions to FOMC minutes and CPI numbers, it’s hard to come up with a trade idea. I prefer to sit out these days and wait for a direction to emerge. But that’s not very fun for you to read. So let’s get to it.

Westrock (WRK) has been in a downtrend since April of last year and it looks like it is fighting resistance around $31. Here’s the weekly chart. It’s touching the 9-period exponential moving average and stalling out.

Let’s head on down to the daily timeframe and you can see a potential double top forming.  That double top is also forming around the 50-day moving average.  But what about the rebound up from $26 to its current price of $30.05?  I think that was a nice corrective move, but I’m looking for a continuation move down to $25.

Earnings are coming up in early May, so this is a short-term trade idea. Even though I want to be out before earnings, I still don’t like buying options with less than 60 – 80 days, so the 19 MAY expiration is out.

I’m looking at the 21-JULY 30 put for around $170 per contract.

Another trade idea is a broken-wing butterfly.
+1 19-MAY 37.5 put
-2 19-MAY 30 put
+1 19-MAY 27.5 put
Debit 4.55

Using this trade, as long as the stock stays below $33 at expiration, you are profitable on the trade. However, just remember that earnings are set to come out around 5/5/23. I would look to be out of this trade by 4/28/23. The trade is a debit of about $455, so my profit target is about 10-15%. No, I’m not going for that max gain of $300. Take your profit and move on.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.