As the new year begins, we’re certainly seeing some portfolio allocations changing. Tech stocks were weak to start the year, which isn’t surprising given the incredible run that technology stocks have had for years. But now, it seems that investors are generally buying the market again.
So, where are the real opportunities in this choppy market? Is it in finding the stocks that have yet to recover from last week’s lows, buying the stocks that were first to recover, or some other alternative allocation?
For myself, I’m looking for stocks that seem to have been hit for the wrong reasons and are now at a technical inflection point that could cause some algorithmic and program-based buying going forward. To find those stocks, I start with the big picture and then start to work my way down to sectors and eventually individual stocks that could outperform the market. These tend to be the stocks that top my Outlier Watch List as they are some of the best short-term opportunities that I see in the market.
With that in mind, I’ll start with a view of SPY, an ETF designed to replicate the performance of the S&P 500:
As we can see, it got hit along with the broad market profit taking to start the year but seems to be improving already. However, that alone isn’t particularly exciting. I’d like to see if I can find something more interesting, and after evaluating several ETF’s, I’ve decided to dive deeper into JETS, an ETF made up of airlines:
The chart above shows JETS is testing December highs while also breaking back through the 200-Day Moving Average last week. As of now, it’s above all key moving averages that I monitor, and seems like it could be setting up a bull trend.
To get a bit more leverage and clearer technical entry point, I then looked through many components of JETS and settled on one of my favorite setups here. That’s in LUV, the stock symbol for Southwest Airlines:
LUV is a very similar chart to JETS, but it’s still below the 200-Day Moving Average which has been providing resistance for the last month. If JETS continues to firm, it will provide a tail wind to the sector components, and if that can push LUV back above the 200-Day Moving Average, it could lead to more aggressive buying.
Sometimes, a sector laggard in the short-term gives an interesting opportunity for that stock to play catch up. Other times, that stock is lagging because it is simply flawed relative to its peers. In either case, I always like using options to structure my trades so that I can define my risk and increase my leverage! LUV certainly fits that setup and gives me something interesting to look at when markets are a bit murky.
As always, go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And please, if you have any questions, never hesitate to reach out.