• Daily Game Plan – Gap and Chop

    by  • January 10, 2013 2:15 pm • Broad Market Analysis, Bryan Sapp’s Daily Game Plan, Charts to Watch • 0 Comments

    MARKET CHECK

    Markets were strong near the open this morning, with a bullish gap higher leading to responsive buying, and a rally to new 2013 highs.  However, this exuberance quickly waned as the S&P 500 sold off 9 points from top to bottom.  What looked like a textbook “gap and trap” day has now turned into yet another day of choppy price action.  After a failed breakdown below key price levels, markets have rallied back to the middle of the daily range, and are now moving sideways.

    At present levels, the S&P 500 is up about 0.4% on the day, while the Russell 2000 lags the broad market, down about 0.1%.  After selling off this morning, bonds have rallied back near breakeven after the 1:00 30-year auction saw strong demand.  Perhaps the most noteworthy intermarket action is occurring in the metals today.  Gold and silver are both up more than 1%, and gold and silver miners are up over 2%.  A major reason for this strength could be attributed to the forex markets, where the Euro is rallying strongly, now over $1.32, and the U.S. Dollar index has broken the 80 level.  Watch these two price areas going forward as an indicator of the market’s appetite for risk.

     

    CHART OF THE DAY

    Monster Beverage Corporation (MNST) – The energy drink maker has been atop many news stories lately, as fears have emerged that their beverages have caused a number of recent deaths.  However, at this point, I believe the now priced-in fears have become overblown.  In addition to this, sentiment toward the equity has become very, very bearish.  At current levels, the front three months’ option open interest is at the most bearish level seen at any point over the course of the past 52 weeks.  Additionally, over 13 puts have been purchased for every call over the past 10 days.  This creates the potential for a bearish options unwind, which could drive the shares much higher.

    The 50-day moving average(blue trendline) has been a great guide for MNST since 2011.  The pullback to it here could be a signal that MNST is setting up for a bounce.  I like a long entry here with an initial target of 55 and a stretch target of 60, currently the site of MNST’s 200-day moving average.  Should MNST close below the 48 level, it would be a signal to exit the position.

     

    courtesy of stockcharts.com

    WHAT I’M EXPECTING

    Continued choppy, upward price action.  Today’s failed breakdown has to be frustrating for bears.  Sentiment continues to be bearish overall, and should these new bears be forced to capitulate, there’s the potential for an outsized move between now and next Friday.  Given that the VIX is currently around 13.60, near multi-year lows, buying option premium here makes a lot of sense.  Just be sure to give your thesis enough time to play out.

     

     

    About

    Bryan Sapp is a Senior Trading Analyst at Schaeffer’s Investment Research, where he has specialized in volatility-based options trading since early 2010. With Bryan at the helm, Schaeffer’s Volatility Trader generated a 2012 portfolio return of 70% for subscribers. This real-time option recommendation service exclusively trades short-term straddles. Prior to joining the research team at Schaeffer’s, Bryan honed his skills as a speculator by trading his own account, and playing poker professionally to pay his way through college. Bryan attended the University of Louisville, where he received his Bachelors in Economics and an MBA with an Entrepreneurship focus.

    http://www.schaeffersresearch.com/

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