This Trade Targets a 100% Return in Two Months

The four main indices all got crushed on Monday after the latest round of trade tariff threats made their way around the global financial markets. The Nasdaq got hit the hardest with a loss of 2.06% followed by the Russell 2000 with a loss of 1.67%. The S&P lost 1.37% and the Dow lost the least with a drop of 1.33%.

The two main defensive sectors of utilities (+1.66%) and consumer staples (+0.43%) were the only ones that moved higher on Monday. Of the eight that moved lower, three dropped over two percent and another four dropped over one percent.

[hana-code-insert name=’adsense-article’ /] The worst performer was the consumer discretionary sector with a loss of 2.17%.

The energy sector lost 2.09% and the tech sector lost 2.08%.

Despite the huge drop in stocks, my scans produced more bullish signals than bearish ones last night.

The count was 32 names on the bullish list and 22 names on the bearish side.

The barometer came in at a reading of 6.4.

One of the names on the bullish list was the Materials Select Sector SPDR (NYSE: XLB).

The materials sector has been getting hit pretty hard of late partially because it is at the heart of the tariff discussions with aluminum and steel. When the tariff banter dies down for a few days the ETF has rallied.

You can see how each of the last four times the stochastic readings have reached oversold levels and then had a bullish crossover, the stock has rallied at least 5%. Back in February and April, the rallies were good for gains of approximately 7.5%. I am looking for a move of at least 7% this time around.

Buy to open the Aug18 56-strike calls on XLB at $2.85 or better. These options expire on August 17. For the options to double on an intrinsic basis, the XLB would need to get to $61.70. That is a little more than 7%, so we will need some time premium to still be built in to the price or for it to exceed my expectations. I suggest a target gain of 100% and a stop loss of $56.75.

— 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.