What a week!
Right when the market was set to make new lows—rumors of a U.S./China trade deal brought optimism back into stocks.
With “Phase One” of a trade deal on the way… new all-time highs are almost certain to be the next stop.
Retail sales numbers on Tuesday will set the tone for the week… followed by housing and manufacturing on Thursday, and a smattering of Fed speakers…overall fairly quiet.
And you know what?
There are three trades that are smack dab on my radar that you need to know about to start your week…
1) Booz Allen Hamilton Hldg (BAH)
Go back as far as your charts will take you. Look at BAH. Since 2012 the stock has been on an absolute tear. Trough to peak, this stock returned an astounding 3,248%.
So, I’m not going out on a limb here when I say it might have gotten overheated. The cybersecurity sector lit up the markets over the last decade as demand skyrocketed.
Still, I won’t tell you that this secular story is over. But, the stock isn’t about to make new highs soon.
Earlier in September, the stock had a wicked selloff that it hasn’t recovered from.
BAH weekly chart
Even with a broader market recovery, the stock keeps floating sideways along the 13-period moving average.
Price continues to find resistance up around $73 – which is also a 50% retracement of the recent move.
Given this underperformance, I’m bearish on the stock for the medium-term. I’ve got a couple of ways to play this sentiment.
Sell call spreads
I’m a big fan of selling option spreads. This puts you in control of your risk and profit potential.
Look at the broader market early next weeks for signs of strength. If we get a pop over the recent swing highs up near $74, that’s where you’ll want to put on the trade.
I’d be looking to sell something near the money going out about a couple of weeks. I wouldn’t want to hold anything that goes through their earnings on Nov. 1st.
You can use put options as a way to leverage your money. Although riskier, this trade pays you handsomely when it wins.
Similar to the call spread setup, look for price to get above the previous highs before opening the trade. I would buy puts that go into mid to late November.
With earnings on November 1st, implied volatility will increase the closer we get. This drives up the option price and works in your favor.
However, you want to be out of the options before earnings. If you use call spreads, I’d have a stop of 2x your max profit. For puts I’d use two daily closes over $75.
BAH daily chart
2) Papa John’s International (PZZA)
Despite all the controversy surrounding the company, they make a mighty fine pizza.
This stock works really well with my TPS system. I look for three things with these setups.
- Clear trend
- Squeeze in momentum
My squeeze indicator looks at the Bollinger Bands and the Average True Range. I want to see the Bollinger Bands inside the Average True Range to indicate a squeeze.
The daily chart shows a clear uptrend, a nice wedge pattern, and a squeeze forming.
PZZA daily chart
This stock could shoot up past the old highs towards $56-$57. It’s also running 26.14% short interest, which could give the move some serious legs.
I’d only play this trade through either buying the stock or call options. In either case, I’d want to pick up the stock between the 8 and 21-period exponential moving average. This is my ‘buy zone.’ My stop would be a noticeable daily close below the bottom of the chart pattern.
If you play the call options, I will go out about 30 days. I prefer to take options that are a bit in-the-money.
Regardless, keep an eye for earnings in early November.
3) Amazon (AMZN)
I won’t bother introducing Amazon because if you don’t know them…where have you been the last 20 years?
The stock has been beaten down the last few weeks. However, I think it’s made a bottom for a while.
Price found support at a previous swing point on the daily chart and the big number of $1,700.
AMZN daily chart
When you move to the hourly chart, you see a noticeable low put in on good volume back on the 3rd. We’ve had a steady set of lower highs leading into resistance of $1745.
AMZN 60-minute chart
This stock should take off early next week, especially if we get a pop in the market. I would play this trade with call options.
Earnings come up on Oct. 24th. Implied volatility will expand, increasing the option price, and working in our favor. While I prefer options that are slightly in-the-money, if you want to spend less, I would go as high as the $1760 options.
I expect the stock will make a run for the 200-period moving average on the hourly chart. You want to stop with a close below the previous swing low.
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