This Trade Targets a 100% Return in One Month

The market opened lower yesterday and remained there throughout the day. All three of the main indices experienced significant losses with the Nasdaq leading the way down with a 0.81% loss. The Dow lost 0.78% and the S&P lost 0.68%. The indices did rally in the closing minutes to trim the losses, but not enough to change my outlook.

All ten sectors fell yesterday, but only one experienced a loss greater than one percent. The healthcare sector dropped 1.29% as the worst performing sector and it was followed by the tech sector with a loss of 0.94%.

The energy sector only lost 0.06% and that was good enough to finish as the best performing sector.

My scans got even more bearishly skewed last night with 108 bearish signals and only two bullish signals.

This took the barometer down to -66.4 and that is the fifth time this year it has gone below -60—January 25, March 1, March 14, and April 20 were the others.

As I did in February and April, I am recommending a bearish trade idea on the SPDR S&P 500 ETF (NYSE: SPY).

The overall signal from my barometer and the number of stocks that were in overbought territory on their daily charts are the main factors.

The three blue arrows on the chart above mark the times when my barometer has gone below -60 and when there was a bearish crossover in the stochastics at the same time. The big negative reading from the barometer on March 1 came a few days after the stochastics crossover. We also see how the SPY has created a trendline and it just moved above the line in the last few days before dipping back below it yesterday.

Buy to open the June18 272-strike puts on SPY at $4.75 or better. These options expire on June 15. Based on the suggested entry price the ETF will need to drop to $262.50 for these options to double. That is exactly what I look to happen and would set a target gain of 100%. I would also suggest at stop should the SPY move above $275.

— Rick Pendergraft

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.