This Trade Targets a Near 100% Return by June

Option Trade of the Day: SPDR S&P Retail ETF (XRT)

The market bounced back a little yesterday, but the indices closed well off of their highs. At the highs of the day, the S&P was up approximately 2%, but all three of the main indices saw their gains pared considerably. The S&P gained 0.33% on the day while the Nasdaq led the way with a gain of 0.51%.

[hana-code-insert name=’adsense-article’ /]Seven of the ten main sectors moved higher on the day, but there was a considerable disparity between the winners and the losers.

Healthcare and tech led the way with gains of 0.98% and 0.77%, while industrials and consumer discretionary lost 0.3% and 0.22%, respectively.

My scans were decidedly bearish last night with 58 bearish signals and not a single bullish signal.

This caused my barometer to drop to negative 21.2.

This could be a bad sign for the market over the next few days.

The SPDR S&P Retail ETF (NYSE: XRT) was among the bearish signals and one thing that jumped out at me was the number of retail names that were on the bearish list. For that reason, I have a bearish trade idea on the XRT for you today.

Looking at the chart of the XRT we see that the fund has had trouble moving back above its 50-day moving average over the last couple of months. It also caught my eye that the stochastic readings made a bearish crossover. There is minor support in the $44.65-$44.75 range, but if we get down there again, this will be the fourth test of that level in the last two months. I look for a break of that support and see the blue line as the next layer of support and that is down at $41.70.

Buy to open the May18 45-strike puts on XRT at $1.70 or better. These options expire on May 18. If the XRT dips down to $41.70 like I am projecting, the intrinsic value of these options will be $3.30 and that would be good enough for a 94% gain. With any luck, the options will still have some time premium priced in and we can collect a 100% gain.

— 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.