Volatility increased yesterday as stocks got bounced around quite a bit throughout the day. There were concerns about the first phase of the trade deal not getting signed until after the first of the year and the minutes from the latest FOMC meeting were released in the afternoon. Stocks were moving along rather quietly, but dropped sharply around midday.
All four of the main indices would end up losing ground on the day with the Nasdaq taking the worst loss at 0.51%, and that was after it rallied back toward the end of the day. The Russell fell 0.42%, the Dow dropped 0.40%, and the S&P lost 0.38%.
[hana-code-insert name=’adsense-article’ /]The sectors were primarily lower on the day, but three sectors did manage to gain ground.The energy sector led the way with a gain of 1.01%.
The utilities sector moved up 0.60% and consumer staples sector tacked on 0.23%.
As for the sectors that lost ground on Wednesday, the materials sector dropped 1.25% as the worst performer.
The industrial sector declined 0.79% and that was the second worst performance.
My scans produced 48 bearish signals last night and there were eight names on the bullish list.
The barometer dropped to -25.8 from -13.4 as a result of yesterday’s scans.
I had a hard time selecting a stock for today’s trade idea. There was one stock on the bullish list that I liked and three on the bearish list. The problem was, the bullish one had poor fundamentals and the bearish ones had good fundamentals. In the end it was a stock on the bearish list that I thought gave the best risk/reward scenario. E*Trade Financial (Nasdaq: ETFC) gets an 88 on the EPS rating scale and an A on the SMR rating.
The reason I chose ETFC for today was based on the chart. The stock has been trending lower since it peaked in June ’18 and the highs from the last nine months connect with the current price level to form a trend line. What really jumped out at me was how both the RSI and the stochastics are in overbought territory at this time. Each time this has happened over the last nine months, the stock has dropped sharply in the following weeks.
Buy to open the January 47-strike puts on ETFC at $3.05 or better. These options expire on January 17. In order for these options to double the stock will need to drop to $40.90. The stock dropped well below this level at the beginning of October, so it won’t have to face much support to hit our target. I suggest a target gain of 100% with a stop at $46.75.
— Rick Pendergraft
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