This Trade Targets a 100% Return by mid-December

Monday saw all four indices move higher and it saw a new all-time high for the S&P 500. The S&P gained 0.56% on the day and that was the third best gain. The Nasdaq led the way with a gain of 1.01% and it was followed by the Russell with a gain of 0.89%. The Dow was the biggest laggard on the day and yet it still gained 0.49%.

Seven of the sectors moved higher on the day while three moved lower. The tech sector led the way with a gain of 1.25% and it was followed by the healthcare sector with a gain of 1.03%. These were the only two that gained over 1.0%.

[hana-code-insert name=’adsense-article’ /]The utilities sector was the worst performer for a second straight day with a decline of 1.36%.

The energy sector was the second worst performer with a loss of 0.57%.

My scans generated yet another negative result on Monday with 46 names on the bearish list and only nine names on the bullish list.

The barometer came in with a reading of -32.3 and that is the fourth straight reading between -30 and -35.

Today’s trade idea is another bearish one and this one is on an energy stock.

The sector represented a third of the stocks on the bearish list, but the one that stood out the most to me was EOG Resources (NYSE: EOG). The company’s fundamental ratings are mixed with an EPS rating of 25 and an SMR rating of an A.

There were several things that jumped out on the chart. First, the stock has been trending lower over the last six months. A trend channel has formed that defines the cycles within the overall trend. The stock isn’t up at the upper rail at this time, but seems to be hitting resistance at its 50-day moving average. What really jumped out were the last three instances where the daily stochastic readings were in overbought territory and then experienced a bearish crossover. Each instance was a really good shorting signal.

Buy to open the December 72.50-strike puts on EOG at $4.55 or better. These options expire on December 20. In order for these options to double the stock will need to drop to $63.40. This is slightly below the low reached in early October, but not by much. Each of the last three bearish crossovers from the stochastics has preceded drops of at least 25%. We only need a drop of 13.5% from the high to get a double. I suggest a target gain of 100% with a stop at $74.50.

— 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.