Stock Needs Some Air, Mate! (SPXC,NOC)

We’ve got a single trade to report on today, so pull up a chair, gird your loins and make ready for WAR!

And Don’t Forget Your Louis Vuitton Sandals, Honcho.

We start with our January 6^th recommendation from 2020 Vision – Trading The Future of Iraq.  You’ll recall that we urged you to sell an NOC CALL spread and use the funds to buy an NOC PUT spread.

The details went like this –

Sell the NOC May 15th 390 CALL for $14.00 and buy the NOC May 15th 400 CALL for $10.70.  Then use those funds to purchase the NOC May 15th 380 PUT for $23.10 and sell the NOC May 15th 375 PUT for $20.00.  Total credit on the trade was $0.20.

NOC has tumbled nicely, and we believe it’s prudent to cash in today on the long side of the trade.

Sell your 380 for $26.30 and buy back the 375 for $24.10, and you pocket $2.20, bringing your current net credit on the initiative up to $2.40.

As for the short CALL spread, we’re leaving it for now and letting the market’s downward bias and the ravages of time do their trusty work.

We’ll keep you posted on any need to act.

And now on to this week’s manly endeavor!

We’re venturing the industrial sector this week with a trade on mid-cap ventilation and cooling systems manufacturer, SPX Corp. (NYSE:SPXC), a company with a market cap of $2.3 billion and offices in Charlotte, N.C.

The stock caught our attention last week when it dumped sharply on a day the broad market index, SPX (no relation), pushed higher.

A closer look revealed this wasn’t the stock’s only weakness.

But before we get there, a few fundamentals –

SPXC offers no dividend, trades with a trailing P/E of 28.14 and carries a Price to Book of 4.81.

Interesting, too, that over the last six months, insiders have sold off 35% of their holdings.

Hmm…

Think that’s worrisome?

Check out the weekly chart –

This is SPXC going back three years, and as you can see, the stock has had a tremendous run over the last eight months, climbing 80% in almost a straight line (in red).

However –

1. A weekly overbought reading (red box) appears to have triggered some doubts,
2. As price separates lower from its longer term trend channel (in red),
3. Volume dries up (in black),
4. RSI and MACD diverge sharply lower against price (in green),
5. And the stock appears poised to retrace toward its longer term moving averages (in blue).

Weekly RSI overbought signals are always to be taken seriously, and SPXC’s was prolonged, lasting nearly a full month.

The table is set for a strong bout of selling on any general weakness in the market.

Now look at the daily –

Here, too, a daily RSI overbought read was signaled back in November (red circle) – followed directly by negative divergence (in green).

But more than that –

• Three bullish fan-lines are now complete (in red) and the short term MA has rolled over.
• A textbook bearish engulfing pattern appeared at the very top of the move, and
• Volume has trailed off significantly since then (circled, in black).
• MACD looks ready to go sub-waterline in the next day or two, an event that would trigger a good measure of technical selling, and
• We have a gap to fill (in blue) that will likely bring the shares down to the $43 level – precisely the line at which the all-important 137 day moving average currently sits.

All told, it’s anything but promising.

And we’re playing it like this –

A Jew and His Money recommends you consider selling the SPXC June 19^th 50 CALL for $4.00 and buying the SPXC June 19^th 55 CALL for $2.05 (credit $1.95). Then use those funds to purchase the SPXC May 15^th 50 PUT for $2.95 and sell the SPXC May 15^th 40 PUT for $0.55 (debit $2.40).  Total debit on the trade is $0.45.

Watch those expiries!

Maximum profit on the trade is $9.55.

Maximum loss is $5.45.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew