This Trade Targets a Potential 75% Return in a Little Over One Month

Monday created some strange results for the indices and the sectors. When futures opened on Sunday night, S&P contracts opened higher around 1.5%.

When Pfizer announced that it had seen successful results from its virus vaccine, markets around the world jumped sharply. By the time the stock market opened, S&P futures were up 4.5% and Russell futures were up 7.0%.

The gains carried over to the cash market and we saw huge gains out of three of the indices. The Nasdaq was higher, but not by nearly as much as the others. By the end of the day, the gains would slip a little and the Nasdaq would move in to the red.

The Russell did lead the way with a gain of 3.7% and it was followed by the Dow with a move of 2.95%. The S&P notched a gain of 1.17% and the Nasdaq lost 1.53%.

The sector results were mixed with six moving higher and four moving lower, but it was the two biggest gainers that really stood out. The energy sector jumped an incredible 14.28% as oil jumped 7.67%.

Under ordinary circumstances the gain by the financial sector would have been jaw dropping, but the gain of 8.33% was only good enough for second place on Monday.

As for the worst performing sectors, the communication services sector fell 0.85% and the tech sector dropped 0.72%.

My scans continued to move toward a more negative posture with 61 bearish signals and three bullish signals. There were a number of bond ETFs on the bearish list, but those are not included in the count above or in the calculation of the barometer.

The barometer fell to -32 from -7.3 once these results were added in to the equation.

Many of the big moves we saw yesterday were irrational in my opinion. A successful vaccine is certainly good news, but it isn’t going to get the global economy turned around tomorrow. With so few choices on the bullish list and some really odd looking charts on the bearish list, I chose a bearish trade idea for today. The KraneShares CSI China Internet ETF (AMEX: KWEB) was on the bearish list and had a bearish pattern on its chart.

What we see on the chart is a bearish engulfing pattern. The fund opened significantly higher as the global rally started, but it fell throughout the day and finished the day down 2.48%. The open was above the highest price from Friday and the close was lower than the lowest price on Friday. The body from Monday’s action engulfs the previous day’s body and in a bearish fashion.

Buy to open the December 79-strike puts on KWEB at $5.50 or better. These options expire on December 18, 2020. I suggest a target gain of 75% and that means the stock will need to drop to $69.38. That low is below the late October low, but not as low as the fund was in September. I recommend a stop at $80.00.

— 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.