This Trade Targets a 100%-250% Return in One Month

The winning streak came to an end for three of the four indices on Friday. All four of them were down significantly in early trade, but rallied back and almost made it to positive territory.

The lone exception was the Russell which managed a gain of 0.14% and extended its winning streak to six days. The losses for the Dow and S&P were minimal at 0.02% and 0.01%, respectively. The Nasdaq lost 0.21% on the day.

Six of the 10 sectors dropped on Friday while four moved higher.

None of the moves were greater than 1.0% on either side.

The healthcare sector notched the biggest gain at 0.33% and it was followed by the consumer staples sector with a gain of 0.29%.

The biggest loss came from the energy sector at 0.59% and it was followed by the communication services sector with a loss of 0.50%.

My scans turned even more bearish on Friday evening with one name on the bullish list and 119 names on the bearish list.

The barometer dropped from -30.2 to -72.6 once these results were added in to the equation.

There were a number of stocks on the bearish list that I considered for the trade idea for today, but Bausch Health Companies (NYSE: BHC) seemed to make the most sense. The company’s fundamental ratings are mixed with a 31 EPS rating, but a B in the SMR rating system. Sales and earnings have been declining in the last three years.

You can see how the stock has been trending lower in recent months and a trend line has formed that connects the series of highs between declines in the stock. The drop in December was a sharp one and then the stock rallied back in the last few weeks to hit the trend line. The stochastic readings are in overbought territory and made a bearish crossover on Friday.

Buy to open the February $23-strike puts on BHC at $1.65 or better. These options expire on February 15. These options will double if the stock drops to $19.70. The most recent low was at $17.20, so these options will double well before the stock hits a new low. With this trade I suggest closing the first half at 100% and then waiting to see if the stock falls further. If the stock drops to its old low, the second half could produce a gain of 250%. I suggest a stop at $23.20.

— 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.