"Stock prices continue to behave bearishly," caution David Nassar and Larry McMillan, options experts and editors of the industry-leading The MarketWatch Options Trader.
Here, they offer a bearish market overview along with a bullish look at beverage stocks -- along with an options play on PepsiCo (NYSE: PEP).
The advisors explain, "Rallies can't gain footholds, while declines are deeper and more long-lasting than seem possible. As a result, there is an oversold condition in this market -- one which can spur sharp, but short-lived rallies at any time -- but a true intermediate-term buy signal is not at hand, for none of our indicators have turned bullish.
"The Standard & Poor's 500 turned bearish when the index fell through what had been support at 1490. That was the last piece of the bearish puzzle. The market has been under extreme pressure ever since. Any rallies towards 1490 can be sold, as that level now represents resistance.
"Meanwhile, where is support? It was at 1430-1440, but that level gave way and it seems likely now that the averages will test 1410 (the August closing lows) and perhaps 1370 -- which is multiple support from both August and March.
"Should that give way, then a true bear market would be underway. Support levels are somewhat meaningless in a nasty decline like this anyway; it is more important to monitor oversold conditions.
"The equity-only put-call ratios remain strongly on sell signals as they continue to climb on their charts. They are not 'oversold' yet, in our opinion. However, some of the minor index ratios are beginning to get oversold, as evidenced by the S&P 500 futures weighted put-call ratio which is very high on its chart and may be rolling over to a buy signal.
"Market breadth has been abysmal. Advances have only outnumbered declines one day in the last eleven trading days! Breadth has reached extremely oversold levels, not seen since the August bottom.
"However, the market needs to see, at least, back-to-back days of advances leading declines before one could say that breadth was turning truly positive. That hasn't happened in some time.
"So, none of our major indicators are bullish. In reality, only breadth is deeply oversold. The others have room to run before they reach oversold levels. However, that doesn't mean that this market can't occasionally be traded from the long side, when it gets very oversold.
"Just remember that 'oversold' does not mean 'buy.' Short-lived rallies arise out of oversold conditions, but true intermediate-term buy signals only arise when our technical indicators give multiple, confirmed buy signals.
"It might seem strange to recommend a long position in the midst of a horrendous market decline, but Coca Cola (NYSE: KO) and PepsiCo (NYSE: PEP) have been moving up. Both made all-time highs recently. We favor PEP slightly, just because it's been a little stronger. Stock volume patterns are positive, and there is support at 74.
"Specifically, for options traders, we are recommending purchase of the January 72.5 PepsiCo calls at a price of $4.10 or less. We also suggest to stop yourself out on any close below 73 ½.."
Each day, Steven Halpern's TheStockAdvisors.com website features the latest investment commentary and favorite stock picks of the nation's leading financial newsletter advisors.
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