This Trade Targets a 100% Return in 6 Weeks

Tuesday saw all four of the main indices move higher and all four experienced decent gains. The Dow led the way with a gain of 0.68% followed by the Nasdaq with a gain of 0.64%. The S&P notched a gain of 0.63% and the Russell lagged the other three, but still gained 0.30%.

All 10 of the main sectors moved higher yesterday with the materials sector leading the way with a gain of 1.64%.

[hana-code-insert name=’adsense-article’ /]The industrial sector gained 1.04% and it was the only other sector to log a gain over one percent.

The biggest laggards yesterday were the financial sector (+0.41%) and the energy sector (+0.42%).

My scans produced more bearish signals than bullish signals for a third straight night.

There were 39 names on the bearish list and 14 on the bullish side.

The barometer dipped to -21.5 as a result of the bearish skew.

Today’s trade idea is yet another bearish one. I didn’t really want to make it four bearish trades in a row, but none of the combinations looked all that great. The subject of today’s trade is the iShares MSCI China ETF (Nasdaq: MCHI).

The chart shows how the fund has been trending lower over the last four months. A trend channel has clearly defined the swings and the upper rail was just hit for the fourth time. I look for the next cycle to be another downward move and it should take the fund below the $50 level.

Buy to open the December $57-strike puts on MCHI at $3.40 or better. These options expire on December 21. These options will double if the fund drops to $50.20 and that will be above the lower rail. I suggest a target gain of 100% with a stop at the 50-day moving average. I wouldn’t close the trade unless the fund closes above the 50-day.

— 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.