What Will Bounce First In This Drop?

From Keith Harwood, OptionHotline.com

The market can’t find a way to stop going down.  But should everything be going down?

Looking at tech, the general market, and bonds, it simply seems like the market can’t find a floor, yet.  But with the drastic pullback, it feels like betting on continued downside is a hard bet to make.

With that kind of setup, I start to look for just one sector that I can bet on bullish behavior.  If I can find one, then I know that in a bounce for the market, that sector has a chance for even better performance than the general market.

This setup is often referred to as throwing out the baby with the bathwater.  We have some sectors that probably shouldn’t be sold off even in current general market conditions.  However, when people are looking to liquidate, they sell the bad, the good, and everything in between.  So, what I’m looking for now is the good that got sold.  That’s the stuff that big money managers will likely be buying first, because they recognize it shouldn’t have been sold.

To find that, I look for something that just had a nice bullish run due to a big bullish fundamental input.  And that’s oil.  Let’s look at the US oil ETF, USO:

As you can see, oil was pulling back just like stocks, but then OPEC+ decided to cut production.  That was a big bullish input to oil prices, which should benefit oil companies in spite of the market fall.  And initially, oil companies did benefit, as we can see in this chart of XLE:

This ETF isn’t nearly as bearish as the general market, but did have a minor pullback to start this week as oil pulled back from its big run.  That seems like an attractive buying opportunity if investors return to the market, particularly if oil continues this bullish run based upon the fundamentals.

But perhaps even better is a lagging ETF that I have talked about many times.  Alternative energy, via ICLN is an interesting case here.  It often lags the oil and oil company moves but has been getting a bit more interest from the market this year.  However, the last month has been AWFUL for ICLN.  Let’s take a look at the chart:

With this type of setup, I can start to consider a recovery in ICLN that could turn into a bullish trend if oil goes back to prior highs (and that’s certainly not out of the question with the move by OPEC+).  The key here is to always define the risk and find leverage via options, and that’s what I’ll be evaluating today.

If you’d like to learn more, please go to https://optionhotline.com to review how I traditionally apply technical signals and probability analysis to my options trades.  As always, if you have any questions, never hesitate to reach out.

Keith Harwood

[email protected]

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