This IBM (IBM) Trade Targets a 100%-Plus Return in Two Months

The indices finished split yesterday with the Russell and Nasdaq moving higher while the Dow and S&P finished lower. That snapped a four-day winning streak for the S&P and that was the longest winning streak since February. The final numbers showed the Nasdaq gaining 0.38% and the Russell gained 0.26%. The Dow experienced the worst loss at 0.34% while the S&P only lost 0.04%.

The sectors were slightly skewed to down side with six finishing lower and only four finishing higher. The energy sector led the way with a gain of 1.2% as oil prices jumped for a fourth straight day.

[hana-code-insert name=’adsense-article’ /]On the down side, the industrial sector lost 0.97% for the worst performance and it was followed by the 0.8% by the utilities sector.

My scans turned decidedly more bearish last night with 73 names on the bearish list and only 10 on the bullish list.

The net score of -63 is the worst single day reading since July 11 and it took the barometer in to negative territory with a reading of -25.4.

Today’s trade idea comes from the bearish list which makes it the second bearish idea out of the last eight.

The stock is International Business Machines (NYSE: IBM) and the stock gets average to slightly above average on the IBD ratings, but the chart is the main driver behind this trade. The EPS rating is a 44 and the SMR rating is a B.

You can see the downtrend the stock has been in since January and how the highs all connect very nicely along a trendline. The stock hit that trendline on Monday and has since turned lower the last two days. This caused the stochastic readings to make a bearish crossover out of overbought territory. They did the same thing at the high in January and again in April when it hit the lower high that created the trendline.

Buy to open the Oct18 $150-strike puts on IBM at $6.50 or better. These options expire on October 19. I look for the stock to drop back down to the previous low down at the $136 level. That would make these options worth $14 and would give investors a gain of over 100%. I suggest a target gain of at least 100% with a stop at the $147.50.

— 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.