This Trade Targets a 125% Return in 3 Months

All four of the main indices finished modestly lower on Friday and all four were in positive territory at midday. The Russell 2000 had the worst loss at 0.26%. The Dow (-0.03%), Nasdaq (-0.07%), and the S&P (-0.09%) all three had losses of under 0.1%. The trade tensions were the primary culprit in the reversal.

With the losses on the indices being so small I expected the sector performances to be split, but in fact there were seven sectors that moved lower and only three moved higher on the day.

[hana-code-insert name=’adsense-article’ /]The consumer staples sector led the way with a gain of 0.61% and the financial sector was the second best with a gain of 0.18%.

The telecom sector was the worst performer with a loss of 0.89% and it was followed by the utilities sector which lost 0.7%.

My scans produced more bearish signals than bullish signals again on Friday and that is the tenth straight day where that has been the case.

The final tallies were 63 on the bearish list and 16 on the bullish list.

The barometer dropped to a reading of -33.1.

One name on the bearish list that stood out for poor fundamentals and a downward trend on the chart was Nuance Communications (Nasdaq: NUAN).

The software company scores a 32 on IBD’s EPS rating system and it scores a C in the SMR rating. Earnings have declined by an average of 6% per year for the last three years while sales have only increased at a rate of 1% over that same period.

The chart shows a downward sloped trend channel that started back in January. What really caught my eye were the two previous times both the RSI and stochastics were in overbought territory and then reversed. The drop in January/February was 17% and the drop in March/April was 19%.

Buy to open the Oct18 $16-strike puts on NUAN at $1.35 or better. These options expire on October 19. If we were to get a 17% to 19% drop this time, the stock would move down between $12.65 and $12.95 and would make these options worth at least $3.05 and that would be good for a gain of 125%. I would target $13 on the stock to take profits and would set a stop loss at $15.65.

— 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.