This Trade Targets a 100% Return in Eight Weeks

Friday saw quiet trade ahead of the Memorial Day weekend with two of the indices moving lower and one moving higher. The Nasdaq was the lone gainer among the three with a 0.13% move to the upside. The Dow and the S&P both lost 0.24% on the day.

Seven of the ten main sectors moved lower on Friday with the energy sector getting hit hard with a loss of 2.6%.

[hana-code-insert name=’adsense-article’ /]The materials sector lost 0.54% and no other sector lost more than a half percent.

On the plus side, utilities led the way with a gain of 0.44%.

My scans produced more bearish signals than bullish signals for the 14th straight night.

The tally from Friday night was 11 names on the bullish list and 22 names on the bearish list.

My barometer posted a reading 0f -22.4 and that is the 11th straight day of negative readings for the barometer.

Despite the bearish overtones from the scans, the one stock that stood out the most was on the bullish list. Network Appliances (Nasdaq: NTAP) caught my attention for the pattern on the daily chart as well as its fundamentals. The stock shows a 70 on the IBD EPS rating system and an A on the SMR rating.

Looking at the daily chart we see that the stock has formed a trend channel over the last six months and the recent dip brought the stock down to the lower rail of the channel. The stock did see a bullish crossover in its stochastics on Friday and the last three times this happened the stock rallied at least 15% in the following weeks.

Buy to open the Jul18 $65-strike calls on NTAP at $3.75 or better. These options expire on July 20. The stock will need to get to $72.50 for these options to double, at least on intrinsic value. That would take the stock up to its recent high, but it will still be below the upper rail of the channel. I would suggest a target of 100% as a gain and would use $65 as the stop-loss point.

— 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.