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Chart Advisor: The Slide Resumes

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Friday, 17th September, 2021

1/ Nasdaq breaks support as sellers step in 

2/ Option traders pessimistic on Disney

3Could Home Depot reverse its trend?   

4/ The bottom line

1/ Nasdaq Breaks Support as Sellers Step In 

Major indexes pulled back today, with the Nasdaq 100 ETF (QQQ) falling by 1.3%. After establishing support yesterday, sellers took the reins and chased buyers early, retaining control for the majority of the trading session. The S&P 500 Index ETF (SPY) fell nearly 1%.  

After being on an unprecedented tear since the beginning of the pandemic, markets are showing a bit of lasting weakness. Inflation fears have yet to send investors to safe havens such as gold or the typically strong sectors of the S&P 500. Indeed, both QQQ and SPY have recently been nearly outperformed by State Street’s Consumer Discretionary Sector ETF (XLY) as seen on the chart below.  

While this sector is classified as non-essential consumer goods and services, it appears to be showing relative strength as of late. Coupled with the recently reported surge in retail sales, consumers seem more willing to spend on luxuries than expected. This could suggest a slightly stronger economic outlook than recent market activity implies.  

2/ Option Traders Pessimistic on Disney 

The share price of Disney (DIS) has pulled back recently, but remains in a slightly above average range, as illustrated by the chart below. Despite falling nearly 1% over the last five days, DIS has shown some resiliency, closing just above its 20-day moving average. Put option pricing is elevated compared to the past year, and the open interest for these options is rising, while the inverse is occurring with call options.

Even so, calls have a slight edge in DIS open interest, where there remain nearly 656,000 calls compared to over 608,000 puts. Recent volumes also have call options out in front, accounting for 60% of the total option trades for DIS over the last five days.  

Despite signs of resiliency in the price action, the DIS bull run has been slowing. Over the last year, DIS stock has risen 40%, but has only gained 3% year-to-date. That’s a pretty stark contrast.  

For Oct. 15, the next monthly option expiration date after today, at-the-money call and put open interest is deadlocked at 45,000 each. However, out-of-the money options favor puts by over 20,000. Out-of-the-money puts also decline at a much slower rate than out-of-the-money calls. While the DIS price action has remained in an above-average range, option traders are placing bets that the share price will continue to decline in the near term.  

3/ Could Home Depot Reverse its Trend? 

While many equities and indexes have struggled in September, Home Depot (HD) has been on an upward trend since the month began. The share price has risen from a below-average range and has recently been closing above its 20-day moving average. The company’s stock has climbed 27% year-to-date, bolstered by a strong run in March and April. 

Option traders appear to be positioned for a trend reversal. While the open interest on put options has seen only a mild rise recently, the open interest for calls has fallen more than 9% in the past five days. There are currently nearly 149,000 calls in the open interest compared to 159,000 puts. 

Recent activity favors calls over puts, which would normally represent a bullish outlook. However, implied volatility for call options has been falling, which means traders are selling these options more than buying them.  

4/ The Bottom Line 

Stocks sold off as sellers pushed prices lower into the close of the week. Some traders appear to be betting that two stocks in the discretionary sector, DIS and HD, might also reverse trend and add to that downward momentum.   

Originally posted on 17th September, 2021

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