This Trade Targets a 100%-Plus Return in Seven Weeks

Investors can’t seem to make up their minds this week as we have seen a big down day followed by a big up day and yesterday was another big down day. President Trump announced new tariffs on Canadian and Mexican products on Thursday and that caused stocks to slide. The Dow took the hardest hit with a loss of 1.02%. The S&P lost 0.69% and the Nasdaq suffered the least with a loss of 0.27%.

Nine of the ten main sectors lost ground yesterday with the consumer staples sector getting hit the hardest with a loss of 1.57%.

This was due to the multinational aspect of the industry and the likely impact from the latest round of the tariff war.

The industrial sector was the second worst performer with a loss of 1.48% and it will likely suffer from the latest tariffs as well.

The only sector that moved higher yesterday was the utilities sector with a gain of 0.16%.

My scans were bullishly skewed for a second straight night with 44 names on the bullish list and 25 on the bearish list.

Adding these numbers in to my barometer calculations caused it to move in to positive territory at 5.5. This is the first positive reading since May 10.

One sector that got my attention last night was the energy sector as there were 10 stocks on the bullish list from the sector, by far the most of any sector. One of those energy stocks in particular caught my eye as it is one of the few with really good fundamentals. That company is Diamondback Energy (Nasdaq: FANG). The company scores a 96 on IBD’s EPS rating system and an A in the SMR category.

You can see on the chart that the stock has formed a trend channel that dates back to last October. The stock is just above the lower rail of the channel and its stochastic readings are down in oversold territory, but have just made a bullish crossover. Looking at the previous encounters with the lower rail and a bullish crossover in the stochastics, the stock has rallied over 20% each of the last three times. A 20% jump from yesterday’s closing price would put the stock up near $145.

Buy to open the Jul18 $120-strike calls on FANG at $7.00 or better. These options expire on July 20. A target of $145 seems a little too ambitious, but I think the stock can easily reach $136 and that would make these options worth $16 and would mean a gain of 128%. I would set a target of $136 for the stock or 100% gain for the option, whichever one you are more comfortable with. I would also set a stop loss at $117.50.

— Rick Pendergraft

Paul Ryan is set to introduce a new tax to Congress, and it will cost Americans an additional 30 cents or more per gallon at the pump. Investors like Bill Gates, Warren Buffett, and George Soros have collectively sold billions of oil stocks recently. Now a former intelligence operative is stepping forward to explain why this is the end for Big Oil. Click here to continue...

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.