Tuesday January 27, 2015 – Weekly Market Update

I am a day late on publishing this due to the major
blizzard that was supposed to hit our area.

We are certainly quite fortunate in that it looks like
we only got about 4 inches of snow when the
experts were calling for over two feet.

To say we dodged a bullet is an understatement
when you see parts of Long Island buried in that
type of snow.

If you were in the path, I hope you faired well.

Back to the markets.

One of the themes I keep mentioning is that I expect
tremendous volatility this year.

And it certainly has worked out that way.

Out of the four trading days last week, three of them
had daily ranges of around 25 points. And Thursday’s
range was almost 40 points.

The S & P 500 now has an average daily range of
26.87 points.

So you can be sure that moves like this will be fairly
common.

The question is what do you do to make money in
an environment like this?

You put on a trade and promtly watch the DOW
sink over 200 points.

It is not a great feeling.

There are a couple of things you can do. One is to
look for markets that appear to be oversold and
forming a bottom.

One market like this is gold and the GDX, which
is the gold miners index.

Let me share a trade I did last Friday on NUGT.

NUGT is an etf that mimicks the GDX, which the
exception that it is leveraged three times the GDX.

In other words, if the GDX moves up 50 cents, in
theory, NUGT should move up $1.50.

Last Friday, I bought NUGT at $17.93. I then sold the
$18 call that expired that day and collected 16 cents
per share.

NUGT was trading just under $18 when I did this.

I then watched how NUGT traded into the close.

It ended up dropping a bit and was around $17.70.

So, just before the close I sold the $18 call that
expires this Friday and collected another $1.12 per share.

I was naked on the second set of calls, but because
I have the margin to do this, it was no problem.

And my risk was that NUGT would have to run up
about 30 cents in a few minutes.

So, in the span of a few hours, I collected $1.28 per
share.

As I write this, NUGT is trading for $19.84 or $1.84
above the strike price.

If NUGT settles above $18 this Friday, the calls will
be assigned.

The return for holding the stock will be 7.5%. When
you consider the holding period is only 6 days, that
is not too bad.

Of course the week is not over and it could drop.

But, if it does, I will sell another round of calls.

But the point is that you need to be looking for
situations where there is a buying opportunity.

A lot of stocks are priced too high. And if you get
caught chasing them, you can lose substantial
money.

Why not look at sectors that have been beaten
down?

For example the steel sector. The steel sector is
down over 12% for the month.

A few of the companies in the sector are reporting
this week. Take AKS for example.

They reported profit of 14 cents per share versus
a consensus of 8 cents.

Another company that reported today is Nucor (NUE).

NUE reported 68 cents per share of profits versus a
consensus of 56 cents.

Both stocks are up today on the news.

Lets look at how these companies have traded.

AKS hit a high of $11.37 back in August of last year.
Since then it dropped to a low of $3.83 this month.

It lost 66% of it’s value since last summer.

Now it reported decent earnings and is moving up.

And NUE hit a high of almost $60 last September
and dropped to a low of $45.13 this month.

It lost 25% as it pulled back. And now it is starting to
reverse after their earnings announcement.

I could go through the same analysis on two other
companies reporting this week, STLD & X.

But I will spare you that analysis.

But, based on what AKS and NUE reported, I would
generally expect more of the same for STLD and X.

I often hear the mantra that you should not try and catch
a falling knife.

But, if you think about it, aren’t maximum profits made
after a stock pulls back?

Let’s look again at AKS. Right now it is trading at $4.33
per share. The pivot low is $3.83.

Say you bought the stock right now and used that low
as your stop loss price.

You could enter the deal with about a 13% risk.

And if this low turns out to be a major bottom, I would
expect the first rally to take out $6.25.

That is the next prior high. So, if it complied you would
be sitting with returns of about 44%. With a risk of 13%.

And if it ran to the prior high at $11.37, your return
could be as much as 162%.

I hope this has been helpful.

Until next week, trade safely.

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One Response to Tuesday January 27, 2015 – Weekly Market Update

  1. Thanks for helping out, excellent information.

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