Stocks came under pressure on Wednesday and all four indices finished lower as a result. All four indices opened higher, but they dropped in to negative territory in the morning session and remained there throughout the rest of the day.
The Nasdaq fell 1.94% and was the worst performer on the day. The Russell dropped 0.82% and the S&P declined 0.79%. The Dow held up the best, but it still lost 0.35%.
Seven of the 10 main sectors lost ground on the day with the tech sector taking the worst hit at -1.92%. The communication services sector fell 1.19% and that was the second worst performance.
The energy sector and the industrial sector tied for the best performance, each gaining 0.22%. The materials sector logged a gain of 0.06% as the third sector that finished in the black.
My scans turned decidedly more negative last night with 174 bearish signals and 10 bullish signals.
The barometer dropped sharply once these results were added in to the calculation, falling from-33.9 to -88.0.
With the abundance of bearish signals and the extreme negative reading from the barometer, today’s trade idea is a bearish one and it’s on a familiar name. American Airlines (Nasdaq: AAL) has been the subject of several bearish trade ideas on the past. The company’s EPS rating is poor at 7 and the stock doesn’t have an SMR rating due to the fact that it’s been losing money and you can’t calculate an ROE or a profit margin.
The daily chart for American Airlines showed a bearish engulfing pattern and that got my attention, however the weekly chart was even more concerning. We see how the highs from 2018 and the first quarter of this year connect to form a downwardly sloped trend line. The stock came close to hitting that trend line early in the day yesterday before dropping sharply.
Buy to open the February 19-strike puts on AAL at $3.95 or better. These options expire on February 19, 2021. I suggest a target gain of 75% and that means the stock will need to drop to $12.08. I recommend a stop at $19.10.
— Rick Pendergraft
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