That was quite the market rotation on Tuesday, wasn’t it?

The high-flying semi-conductor stocks sold off after they saw new all-time highs.  Micron (MU), for example, was up 20% from Thursday’s close to Monday’s close, then back down 13% on Tuesday.  It’s a whipsaw.

And to avoid the whipsaw, I want to highlight just how well the Stock Forecast Toolbox worked to help set up a trade plan last week despite this market chop.  If you missed it, check out the replay here.  If you don’t want to watch the full video, I’ll give a quick synopsis of the trade idea after we look at the chart:

DAL dipped to just under $82.  John Boyer and I discussed the way the Toolbox was showing it as an initial opportunity to sell the June 26th $81/80 put credit spread for $0.24 (now trading for $0.04) with the goal of adding a call vertical on a dip to $82 or lower.  Well, it dipped to $81.90 on Wednesday.  From there, it rallied to $86.72 by the close on Tuesday, roughly in line with the Toolbox’s projected rally to $87.  It’s at the profit target, and if one were savvy enough to follow the plan and buy the July 17th $82.50/$87.50 call spread for $1.92 on the close last Wednesday, per the gameplan, it would have netted a return of about 50% so far.  This is why I love the toolbox – it helps me structure a plan and gives me the confidence to buy a dip in stocks like DAL so that I can trade with confidence.

But that’s enough about DAL.  It’s time for me to put together my next trading plan.  And this week, I want to focus on another name in the same sector with a similar setup – Southwest Airlines (LUV):

Just like we saw last week with DAL, LUV is pressing higher and looks scary to buy.  And the Forecast Toolbox says, once again, I should buy a dip.  I have time to enter the trade, once again:

I can structure this idea just like in DAL – I think it’s likely the stock will dip to $47 or a bit lower, and I want to buy in that case.  The put credit spread isn’t quite as attractive as DAL was last week, as the $46.5/$45.5 put credit spread expiring on July 2nd is trading for $0.16 right now.  Selling that could get me started, but given the return on risk, this is a setup where the better plan appears to be to wait for the dip (if it comes) and then look to buy the July 17th $47.5/$52.5 call spread, which I expect would be trading for around $1.50 on a dip to $47.00 (and is currently priced at $2.33).  The key for me is that while I don’t want to buy it here, a dip in the stock price gives me confidence that the model is right, and that gives me confidence that a bounce is coming.  And if I execute on that game plan and the model is right, as it was in DAL, I can potentially generate another 50% return in a week.  There are times when the Toolbox identifies trades that I know I need to enter with urgency, but in the case of DAL last week or LUV this week, I don’t need to execute the trade today.  It’s all about setting up a game plan so that if the market gives me an entry opportunity, I can buy with confidence while the market is nervous, and that’s a powerful position to be in.

As the market continues to show opportunities with stock patterns that can be identified with the power of AI, be sure to take advantage of the free 7-Day Trial of the Stock Forecast Toolbox!

If you have any questions, never hesitate to reach out.

Keith Harwood

Keith@OptionHotline.com