Markets, the final frontier
09/12/18

●VMC experienced heavy call options volume on Tuesday after Monday’s big down move

●The stock came close to a longer-term support level before rallying yesterday

●Industrials have been strongest market sector over the past month


 

A stock that’s been trending mostly lower over the past couple of months moves sideways for a few weeks, creating what appears to be an obvious near-term support level on the daily chart. Then it breaks below that level with its biggest down day in more than month. A sign the downtrend has kicked back into gear?

This isn’t a hypothetical scenario, it’s the recent price action in construction materials supplier (concrete, asphalt, etc.) Vulcan Materials (VMC). Industrial stocks like VMC may not get a lot of play in today’s tech-centric market landscape, but there’s no advantage in ignoring interesting market action wherever it occurs. Besides, industrials have been the strongest S&P 500 (SPX) sector over the past month (+3.7%), even if VMC hasn’t necessarily been participating in the fun recently.

But as the following daily chart shows, after Monday’s breakdown, Vulcan shares bounced back yesterday, up more than 1% in early trading while the SPX was up only 0.16%:

Vulcan Materials (VMC), 5/23/18–9/11/18. Vulcan Materials (VMC) price chart. Breakdown or bear trap?

Source: OptionsHouse

The hot news about VMC coming across the wire was…actually, there wasn’t any. But traders monitoring unusual options activity would have noticed the following:

Total VMC options volume was more than three times the daily average just a little more than one hour into the trading session.

High call/put ratio: 24 calls traded for every put.

Around five times the average daily call options volume, as shown in the following LiveAction scan:

LiveAction scan: Unusual call options activity, 9/11/18. Five times more calls than usual

Source: OptionsHouse

VMC was soon up more than 2% intraday. Heavy options volume concentrated in call options doesn’t guarantee bulls are grabbing control of the market, but it’s a development worth pondering on an otherwise slow news day—especially considering how VMC was moving on a longer time frame.

The following chart shows that while the stock had just broken below short-term support, it had approached the long-term support in the form of the lower boundary of a very wide, long-term trading range:

Vulcan Materials (VMC), 4/29/15–9/10/18. Vulcan Materials (VMC) price chart. The big picture

Source: OptionsHouse

The stock has been swinging between the extremes of this range for the better part of two years.

All of which may have some traders wondering whether Monday’s breakdown was a bear trap. Luckily, bulls would have the ability to test that hypothesis with fairly little risk, since a decisive move below Monday’s low would blow a hole in the bullish outlook in the near term and fuel downside momentum. On the other hand, additional upside follow-through would have the potential to further squeeze shorts who jumped in on Monday’s breakdown, and propel the stock higher.

It’s only logical.

Market Mover Update: After pulling back to its mid-August swing high, Amazon (AMZN) rallied more than 1.5% intraday.  

November WTI crude oil futures (CLX8) jumped more than 2% yesterday, breaking the downtrend of the previous five days.

September bitcoin futures (BTCU8) fell again yesterday, creeping closer to a widely watched support level around $6,000. The market has fallen around 16% since September 4.

 

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1 CNBC. Buy Tesla shares 'even with drama,' Baird analyst says after factory tour. 9/10/18.

2 MarketWatch. Why these bullish analysts found new love for Tesla shares. 9/10/18.