Monday started the week off on a bit of a sour note. Stocks opened higher and moved even higher as the morning went on and in to the afternoon. Unfortunately stocks turned lower halfway through the afternoon session and the gains were erased. Three of the four indices wound up in the red for the day.
The Dow managed to hang on for a gain of 0.04%, but it was considerably higher earlier in the day. The Nasdaq took the worst loss at 2.13% and it was followed by the Russell with a drop of 1.34%. The S&P fell 0.94% to round out the losses.
The sectors were mixed on the day with five moving lower, one unchanged, and four moving higher. The materials sector was unchanged on the day.
The healthcare sector led the way with a gain of 0.57%. The financial sector finished as the second best performer with a move of 0.47%.Two sectors took bigger hits than the others with the tech sector falling 2.06% and the communications services sector dropping 2.01%. Those were the only two sectors that lost more than 2.0%.
My scans went back to a bearish skew after the big reversal yesterday. There were 63 bearish signals and 37 bullish signals.
The barometer changed very little, but it did remain in negative territory with a reading of -8.8.
With so many stocks and ETFs to choose from, it was difficult to decide whether to suggest a bullish trade idea or a bearish one. After looking at all of them, there were nine that I reviewed the risk/reward relationship and the option pricing. I settled on a bearish trade idea on Twitter (NYSE: TWTR). The stock was on the bearish list, but its fundamental ratings aren’t terrible—EPS rating 63 and SMR rating of a B. It was the chart that sold me on the trade.
We see that the stock topped out just below $37 in early June and it topped out again in the same area last week. The stochastic indicators and the 10-day RSI both hit overbought territory last week and have now turned lower. The stochastic indicators made a bearish crossover last night.
Buy to open the August 36-strike puts on TWTR at $4.30 or better. These options expire on August 21. I suggest a target gain of 75% which means the stock needs to drop to $28.45. The stock was down to $28.23 in June, so it won’t have to break below that recent low to hit our target. I recommend a stop at $36.50.
— Rick Pendergraft
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