Trade This Stock’s Drop for a Potential 100% Return in About Five Weeks

The selling pressure that hit the market on Tuesday carried over to Wednesday. All four indices opened in positive territory, but the bullish enthusiasm was short lived. The indices were all in negative territory by midday.

The Nasdaq registered the biggest loss at 0.80% and it was followed by the Russell with a drop of 0.73%. The S&P fell 0.66% and the Dow lost 0.58%.

The sector performances weren’t nearly as negative as they were on Tuesday, but there were still seven that lost ground while only three moved higher. The industrial sector led the way with a gain of 0.60%. The energy sector moved up 0.43% and the materials sector inched up 0.32%.

The communication services sector dropped 1.21% as the worst performer and it was followed by the consumer discretionary sector fell 1.12%. The financial sector lost 1.04%, giving us three sectors with losses greater than 1.0%.

My scans remained negative and the bearish list was once again considerable. There were 88 bearish signals compared to only three bullish signals.

The barometer moved a little lower with those numbers being added in to the equation. It came in with a reading of -111.7, down from -107.3.

I wasn’t really looking to make four straight bearish trade ideas, but with only three stocks to choose from on the bullish side there wasn’t much of a choice. There were several stocks that presented opportunities on the short side, but the one that stood out the most was Kraft Heinz (Nasdaq: KHC). The fundamentals aren’t terrible with an EPS rating of 67 and a C SMR grade. However, the chart was what got my attention.

The chart shows how the stock fell from mid-August through mid-September before rallying over the last few weeks. Now the stock is overbought and it is hitting resistance at its 50-day moving average. I am looking for another leg lower over the next month.

Buy to open the November 35-strike puts on KHC at $3.65 or better. These options expire on November 20, 2020. I suggest a target gain of 100% and that means the stock will need to drop to $27.70. The stock dropped to the $28.50 area in September and I look for it to move to that level or even lower. I recommend a stop at $33.50.

— 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.