Two Trades with 100% Potential Returns in Eight Weeks

Friday saw all four indices move lower, but the losses were much greater for the Russell and the Nasdaq than they were for the S&P and the Dow. The Russell suffered the worst loss at 1.89% while the Nasdaq lost 1.46%. The S&P lost 0.66% and the Dow lost 0.30%. Disappointing earnings from Intel and Twitter weighed on the tech sector and that is the culprit behind the Nasdaq lagging.

Seven of the 10 main sectors moved lower on Friday and the aforementioned tech sector suffered the worst loss at 1.71%. The healthcare sector lost 0.72% as the second worst performing group.

[hana-code-insert name=’adsense-article’ /]On the plus side, the financial sector led the way with a gain of 0.21% and it was followed by the consumer staples sector with a gain of 0.13%.

My scans reversed course after three days of bullishly skewed results.

Friday’s scans produced 25 bearish signals and 16 bullish signals and the barometer fell from 12 to 6.3 as a result.

I have to say that going through the charts and the data from Friday presented a difficult decision on which trade idea looked the best.

Pure Storage (NYSE: PSTG) was on the bullish list with poor fundamentals while Morgan Stanley (NYSE: MS) was on the bearish list with good fundamentals.

Pure Storage has an EPS rating of a 55 and a D on the SMR rating. Morgan Stanley has an EPS rating of 94 and it scores a B on the SMR rating.

Rather than limit it to one trade idea today, I decided to give you an option trade for both.

Pure Storage’s chart shows an upwardly sloped trend channel and Morgan Stanley’s chart shows a downwardly slope trend channel. Pure Storage is sitting just above the lower rail of its channel and the stochastics just made a bullish crossover, while Morgan Stanley is right at the upper rail of its channel and the stochastics just made a bearish crossover.

Buy to open the Sep18 $22.50-strike calls on PSTG at $2.00 or better. These options expire on September 21. I would set a target of at least $26 for the stock and that would give investors a 100% gain and there could be more room above that. I would set a stop at $22 for this trade.

Buy to open the Sep18 $52.50-strike puts on MS at $2.50 or better. These options expire on September 21. For these options to double, the stock will need to drop to $47.50. That is well above the recent low and far from the lower rail of the channel. I would look to close half at the $47.50 level and then check to see where the oscillators are at that time. If they aren’t in oversold territory, I would look to keep the second half open to try to capture more than 100% on the second half. I would suggest a stop at $51.50.

— 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.