Will New Virus Fears Derail the Rally?

Coronavirus fears are beginning to infect the minds of traders who are convinced stocks only go up every single day…

A wild seven-day win streak courtesy of the Nasdaq led to some overbought conditions in the market. So I wasn’t too surprised to see Wednesday’s sharp selloff. Of course, the financial media is taking full advantage of the market’s sudden drop and milking the virus story, along with additional concerns about the viability of some state’s reopening plans.

But even this new barrage of bearish news couldn’t produce any significant downside follow-through on Wednesday. By lunch, the averages were in the green and the S&P 500 showed it was trying to hold well above 3,000 and its 200-day moving average.

spx

We’ve experienced some quick pullbacks already this month, yet we haven’t seen anything that should really worry us about the viability of the recovery. And all along the way, we’ve been buying up opportunities as they present themselves.

With our in-the-money options, we’re protected on days like yesterday.

For one, we buy our options below the current price of the stock for extra cushion on down days.

And two, the strike prices we go for are at or below major support levels.

This allows us to take advantage of ALL the upside potential while limiting downside risk. Because if you can’t keep your head on straight during the market’s inevitable hard resets, how are you supposed to book gains when the next bounce materializes?

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: Cruising for more losses

greg guenthner
Our frothy stock market rally was hit by some profit taking earlier this week. The Dow tanked more than 700 points Wednesday while increasing coronavirus infection rates started to dominate the news cycle.

And as some fear crept back into the picture, we began to see some of last month’s resurgent speculative names take additional punishment.

You’ll recall that the “reopen” trade was getting a little out of control as rabid traders were bidding up some of the worst stocks on the market. Casinos, airlines, beaten-down retailers, and crazy alt-energy truck companies enjoyed impressive rallies as talks of normalization intensified.

A rout that began earlier this month punished anyone who was late to the snapback party. Now it looks like a negative news cycle wants to wipe out what’s left of these trades.

Cruise lines are taking some serious damage. Just check out this chart of Carnival Corp. (NYSE:CCL):

ccl

It appears the breakout above $17.50 earlier this month just wasn’t meant to be. After failing to hold its gains, CCL continues to slip farther below this line in the sand. As of Wednesday afternoon, shares had fallen 40% from their June 8 highs.

If you’re trying to trade these reopen plays, do not assume that the sharp upside moves will stick. There’s plenty of headline risk out there that can quickly deflate many of these damaged stocks.

Trading Tip of the Day

Many newer traders get caught in the trap of trying to buy stocks that have recently dropped in hopes of a quick turnaround.

Yes, turnaround plays are some of the most lucrative trades you’ll ever see. But you won’t hit a winner if you’re only buying because the stock is down big.

Remember, downtrends can last a long time—longer than most investors expect. Snatching up shares of an ailing stock just because it’s cheap or has taken a beating recently is a surefire way to get in hot water.

When you’re looking for turnaround plays, make sure the chart is showing signs of life. Sure, you might miss the first leg of a comeback move. But you won’t lose a chunk of change by taking a chance with a stock that’s in free-fall…

— Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the managing editor of The Rude Awakening and editor of Agora Financial's Microcap Millionaires. Over the past decade, Greg has helped build Agora Financial's small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate and countless other websites and publications. Greg is a member of...

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