Chart Dump

Lots of great setups again. Going through my old list...

One Last Bear Rampage in 2022: Communication Services

Netflix Dies at 200-Day MA

I don't normally use the daily moving averages for anything, but wow. That's extremely bearish price action.

Sometimes Stocks Break From the Herd

Netflix could explode higher on positive earnings. It for certain will if the market puts in at least an intermediate-term low. For the record, I don't think expect this rally will last more than a day or two, if it even goes beyond today.

The Running of the Bears Begins

It felt like a big rally was building because even into late day trading yesterday, bulls ran scared from every rally and bear poured in. Many days would see a rally that collapsed in the afternoon. Bears were confident the market would turn lower and bulls fearful they were right. That's how a day like today eventually arrives, completing a month-long base.

Once ES clears 3950, the target off the base is 4250 area. Another 8 percent rally ahead.

NQ has a target of 10 percent off the base, taking it to around 13500. That takes it into spitting distance of clearing the consolidation zone in late April and early May. It would only need another 3 percent from there to tag the 25 percent rally line I drew on the chart.

Bonds aren't cooperating yet, but they might struggle until the Fed meeting next week. This is my biggest loser in the portfolio.

I bought puts on $USO when CL was at $99 and got out before that surge, then shorted again when it was in that consolidation pattern. I think there's only risk up to around $102 or $103 from here.

Stocks can get squeezed for no reason at all except the prices rises, but my assumption is that oil will fall and bonds will rally, and that will provide some "fundamental" support for a rally. I also thought earnings might be less bad. Netflix delivered on that score after hours. It beat on earnings, missed on revenue and beat on subscribers (losing less that forecast). I don't trust AH gains, but Netflix is up 7 percent after hours. If Meta delivered that same jump, it would translate into a 1.25 percent rally in XLC. Netflix's after hours gain is included on this chart:

If XLC breaks out of the same base formed on ES and NQ, the target is near $63 per share. If Nasdaq can rally 10 percent though, I think XLC can go a bit further.

Finally, another fundamental is Europe's energy disaster. I didn't think Russia who shut off the gas because it makes them into the bad guys. Why turn it off if Germany is shooting itself in the foot? Today, Gazprom did a test to turn on the gas. German stocks rallied strongly. The Germany ETF gained 4.64 percent. I have some August calls at $24 strike since I thought Russia would not turn off the gas, and that the euro would bounce a little. EWG fell nearly 40 percent from January high and has plenty of room to dead cat bounce before. The DAX has about 3 percent and 6 percent to rally before filling the gaps from June. Whatever percent the EURUSD rallies, tack that on.

Netflix Beats on Earnings, Subscribers

Missed on revenue. It was up between 5 and 7 percent after hours. If guidance holds, it should push up to or even into the gap in the days and weeks ahead.

XLC Holdings

 This post will go through some of the holdings in XLC. Many of these have horizontals at gaps. Most look doomed, including Disney, but I'm here for a bounce, not a long-term hold.

Earnings Hell For Single Stock Traders

Did you catch financial earnings today? Several of the top-10 gainers in the S&P 500 were bank stocks.

I expect hell for earnings season. Netflix exemplifies the wild ride that could be coming this earnings season for single stocks and it's why I held off on buying NFLX calls this morning despite being bullish on XLC. 

I think Netflix could get to within striking distance of $250 per share quickly on a positive earnings report. Positive means however the market interprets earnings and guidance. If Netflix announces a total disaster and the stock jumps 10 percent, that tells me "the market" was pricing in the apocalypse and didn't get it, hence positive.

For the bears, Netflix is also perched about $30 above long-term support. I lean on the bullish partially because I think that support will hold, but the stock could easily hit that level after bad earnings on Tuesday after the bell. Between you me and the wall dear readers, if NFLX tumbles to around $158 per share post-earnings and the overall market is well into rally mode, I plan to be buying. That said, if it loses $158 the next support is the next open gap down around $100 per share. I don't think that would come as quickly, but a really bad earnings report that takes out $158 has a target between $150 and $100. 

Side note: I noticed heavy put buying in XLF today and I almost jumped in to buy calls because everyone thinks this bounce is overdone and falling rates will harm financials. The latter is definitely correct over the coming months, but the direction of rates affects relative performance of financials, not absolute performance. Many of these stocks bounced off or near lows today. If the market rallies, they could run even if long-term yields continue falling.

ES and NQ Reach Target Zones

A big rally of 15-25 percent, versus a little rally of 10 percent, requires skeptical bulls and bears. Thus far, volume has been light outside of some areas such as biotech. I see stocks such as NFLX and META struggle to hold gains because bulls sell out on any weakness. Neither has rallied relative to SPY or QQQ as would be expected in a genuine rally.

Conversely, bears remain confident. The indexes are higher, but only closing in on around 10 percent gains off the lows. Weakness in stocks such as NFLX and META shows the market won't rally here. These stocks are toast in a couple weeks. Earnings season will massacre them.

If I'm wrong and this is a small rally, with new lows or a serious test of prior lows (maybe a higher low?), then the current area is right around where it makes sense to start scaling into short positions. The S&P 500 Index has to test the June high of 3950 for a larger rally and that would also be the best spot for the market to turn lower on a smaller rally. The obvious play here to me is short crude oil first if bearish because if the stock market goes lower, I expect it will be a "deflationary" move in which the Nasdaq/growth/tech outperform the Dow/value/energy. Then energy in case it rallies with stocks. Then other commodities, financials, and then maybe more targeted growth stocks with good setups.

I'm playing the long side, still mostly July calls, but starting adding August with SMH today. Waiting to buy USO puts.

The Nasdaq hit one of my lines today, there's another going way back to Dec 2020 and March 2021 lows that is about 100 points, less than 1 percent higher. Even if going higher, this would be a spot for a pullback. If Nasdaq goes through, then expect ES will head towards that 3950 area next.

Speaking of XLC

The XLC trade has been a loser thus far because META and NFLX are very weak. I think this sector is ripe for a squeeze for this reason, but also worth watching for reshorting if it doesn't find any strength aside from a squeezy rally. I still expect both META and NFLX will see crazy gains on squeezes. They're both "at the starting line" here should the Nasdaq extend its gains. If not now, maybe in a week, or two. I have been in and out of both on short-term options looking to catch that squeeze. Their options are both far more liquid than XLC.

Communication Services and the 50-day MA

I can see a bearish interpretation. This market is either turning lower from here and if so, it is going lower very soon. As in get your puts loaded now. Conversely, support is still holding on the indexes. ES and RTY are green. If the market turns higher, these will all break their 50-day MAs in the midst of a more powerful counter-trend rally.

Short-term, that horizonal on Netflix is a major resistance level.

Both Sides

I can see both sides, the short-term bull and bear case. The bears can say the rally is already 10 percent. That's a good spot for termination if this isn't a more substantial bull run. The bull case is that stocks like Netflix didn't make new lows in June and in this case, is only up about 20 percent. The bear case is "that's because this wave isn't done yet."

I'm looking for a reversal here if it is coming, otherwise I think a stock like Netflix and Meta are going up enough to test their big gaps.

A Few Ways to Look at XLC Lotto Calls

Here are a couple conservative ways to price an XLC rally.

First, I'm assuming a rally for these purposes. If the market goes down, XLC is right at support and will sink into the abyss. This is a high-risk trade, but one that I believe has substantial upside in a rally.

Second, I'm not assuming a major market rally. If you assume a major market rally, there are two ways to look at XLC. One is as a QQQ proxy. Both have fallen almost the same amount this year. Another is that XLC fell about one-third more going back to October. If stocks such as Meta and Netflix snap back harder on a rally, then XLC should outperform in a rally. I'm totally ignoring these scenarios, but if those happen, then XLC OTM calls are cheap.

One potential target for XLC is the higher gap. That is about a 6.7 percent gain. Not very interesting to me as an options trade. There is not much of a rally coming to the market if this plays out. Better to be shorting the rips if this scenario happens.

Two, the most recent range. This one can get interesting with July $58 strikes selling for 45 cents. Those could quadruple if XLC gets into this range, more if the rally is frontloaded and time value gets added on. A rally of this size would correlate with a roughly 10 percent bounce in the broader market, which would also mean new lows are coming next. This would not qualify as a big rally, rather one that will exhaust quickly.

Another view is conservative targets for the top-10 holdings in XLC. If all of those stocks make those moves (the biggest would be 27 percent for Netflix and 16 percent for Meta), and the rest of the portfolio bounced a similar amount, XLC would reach $59.30, an 8.8 percent rise from here.

Put these scenarios together and a move towards $60 seems likely to me if the market rallies to any degree.

Smaller rallies are compelling options trades only if frontloaded because time value would remain high. Shorter rallies should be frontloaded because they shouldn't last long, so as long as a moderately bullish move or better is the dominant assumption, there are interesting trades available. If the market moves sideways for awhile, short-term options will collapse in value and return nothing even if the forecast ultimately plays out into August.

Big Bucks, No Whammies

The most compelling trade comes if there's a big market rally now instead of later. I've discussed how this scenario might play out: oil tanks, bonds rally, the Fed shifts dovish to whatever degree. That scenario could take XLC up to the resistance line that still sits around $68 in early August. That's a 25 percent rally, not an outlandish gain in a major bear market rally. In that case, further OTM strikes can still be had cheap and offer 10x or more returns today.

The August calls become interesting in an extended rally because earnings season will be in late July. Who knows what happens then, but Meta and Netflix both have gaps way higher. I can't imagine what might take them towards those areas, but if by some chance there was something positive or simply less-bad amid a general rally, it would give a huge tailwind to XLC. For example, Meta has a gap at $244.65, call it $245. Price of Meta is $159, XLC $54.70. Meta is 17.7 percent of XLC. If Meta hit that level, that move alone with all other stocks held unchanged would take XLC to $59.90.

Another point on options: VIX is low. Many people have discussed this and most traders I've seen comment have complained about it, but it's actually a gift for directional options traders (buying puts or calls outright) because premiums do not reflect potential price moves.

Having said all this, options are highly risky trades. The most common result of buying puts and calls near or out-of-the-money is a 100 percent loss if held into expiry. I don't mind 100 percent losses if I can make 1000 percent or more returns at least one-out-of-ten times.

In conclusion, I think XBI and IBB are the higher probability trades, They offer great potential returns via options or leveraged ETFs, or via individual holdings with strong rebound potential. The cheap calls here were ones I picked up last week, such as $120 strike IBB calls for 45 cents and $121 calls for 35 cents. Traders should exercise increasing caution as prices rise because this is still a bear market.

What makes XLC interesting here is that it hasn't moved yet. It still has outlier potential in a wild, major bear market rally that catches everyone off guard and triggers massive squeezes in annihilated stocks such as Meta and Netflix. If there is any broader market rally underway, even a small one to 10 percent, then XLC will see a big gain soon that will eliminate this window of opportunity because the probability of further gains will collapse as options prices spike. If XLC can rally about 7 percent quickly (5 to 7 trading days), it's possible the July $60 strike could go from around $0.20 today to around $1.00, a 5x gain. I wouldn't touch that strike a week from now because the risk that the rally could soon end would be substantial.

To stress again: XLC is ugly right now.  It didn't positively diverge the way XBI and IBB did last week. Meta made a new low yesterday. It's outperforming the Nasdaq today, but not really considering it should pop in a rally. If I was bearish right now, Meta would be what I'd short because it is going to be at new 52-week lows immediately in a downturn. That makes this XLC trade more of a pure bet on a rally because it's going to take a sentiment shift that traps bears, plus a big rally that has bulls chasing from the sidelines. 

I can't put a hard probability on this, I can only say if you are a high risk speculator, this strikes me as a high enough reward given the potential risk because I believe the market isn't properly pricing in the risk of a bigger rally. If you aren't comfortable with any one of those assumptions, this is not a good trade. On the flip side, if you're bearish on the overall market, a small position in OTM XLC calls would offer great protection from a worst-case rally that catches you mispositioned.

Netflix Down Too

Another reason XLC lagged today.

XLC for a Bounce

I played this with July $60 strike calls.

Update: added Aug $65 calls. 

I will sell some of the $60 strike. 
 

META and NFLX are delaying the rally. The former is below the latter above a long-term support line, the NFLX is lifetime support.

Netflix Fills the Gap and Keeps Going

If a company like Apple, Google or Microsoft deliver a bad report or lower their guidance, the whole market is going sink into the abyss like Netflix and Facebook.

Ding Dong The Bulls Are Dead: Netflix Craters 25pc on Earnings

I expected earnings season would crush stocks and Netflix is the latest example.

Netflix Loses 200,000 Customers, First Decline in a Decade

The streaming service lost 200,000 customers in the first quarter, according to a statement Tuesday, the first time it has shed subscribers since 2011. Netflix also projects it will lose another 2 million customers in the current second quarter, setting up its worst year ever as a public company.

Investors, analysts and Hollywood executives had been bracing for the company to report a sluggish start to the year, but Wall Street still expected Netflix to add 2.5 million customers. The shares, already down more than 40% this year, tumbled as much as 24% to $265.11 in after-hours trading.

Netflix management pointed to four causes, including the prevalence of password sharing and growing competition. The company said there are 100 million households that use its service and don’t pay for it, on top of its 221.6 million subscribers. The company is experimenting with ways to sign up those viewers.

Consumers will start cutting back because of inflation. This sentence in Netflix's investor letter cannot be overemphasized:

Co-Chief Executive Officers Reed Hastings and Ted Sarandos had dismissed the company’s recent slowdown in growth as a speed bump related to the pandemic, which accelerated its growth in 2020. But its subscriber acquisition has slowed for a year and a half, and the company hasn’t reverted to pre-pandemic levels.

“The big Covid boost to streaming obscured the picture until recently,” the company wrote in its letter.

Most of the S&P 500 outside of materials and energy benefited from a big inflation boost that obscured the picture. Reality will start emerging via margin pressure.

As for NFLX, there is a gap at $227 that sure looks like a likely destination if the afterhours drop holds into Wednesday trading.

The Bear is Back: What Goes Up, Must Come Down

I don't care what sends the market down, but if you make my guess, my hunch is earnings warnings.

Rollovers