This Trade Targets a 100% Return in Two Months

Stocks got hammered again on Tuesday and all four indices suffered significant losses. The worst performance came from the Dow with a loss of 2.21% and it was followed by the S&P with a loss of 1.82%. The Nasdaq lost 1.7% and the Russell was actually the best performer with a loss of 1.66%.

All ten main sectors lost ground yesterday and once again it was the utilities sector that led the way, but in yesterday’s action it had a loss of 0.47%. The only other sector that managed to keep its loss under one percent was the healthcare sector (-0.99%).

[hana-code-insert name=’adsense-article’ /]The energy sector suffered the worst loss on Tuesday and it was 3.25%.

The consumer discretionary sector lost 2.27% as the second worst performer.

In all, there were five sectors that lost over two percent.

My scans remained bearishly skewed yesterday and even moved to a more bearish slant.

There were 41 names on the bearish list and nine on the bullish side.

The barometer dropped from 24.6 to 0.3 once these results were added.

Given the greater number of signals, it shouldn’t be a surprise that today’s trade idea is another bearish one. Bank of New York Mellon (NYSE: BK) appeared on the bearish list and its fundamental ratings aren’t terrible, but the chart outweighs the fundamentals in this case. The EPS rating is above average at 68 and the SMR rating is a B.

We see on the chart that the stock has been trending lower since June with a recent bounce bringing the stock back up to the trendline. The stochastic readings are in overbought territory and just made a bearish crossover and the 10-day RSI came close to overbought territory before turning lower.

Buy to open the January 2019 $50-strike puts on BK at $2.20 or better. These options expire on January 18. The stock will need to drop to $45.60 for these options to double and that means it won’t have to break through support from its most recent low. I suggest a target gain of 100% with a stop at $50.25.

— 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.