Top Trade Ideas for the Week January 5, 2015: Bonus Idea

• Posted by Greg Harmon
• on January 5th, 2015

Here is your Bonus Idea with links to the full Top Ten:

CF Industries, $CF, has moved mainly sideways in a range between 230 and 280 all of 2014, but with a slight drift higher. Since October it has settled into the start of a symmetrical triangle, a tightening range, bouncing around a mid point of 260. Since touching the bottom rail in mid-December it rocketed up to the top rail, and then had only a minor pullback, in a bull flag, that it broke to the upside on Friday.

The Measured Move out of the bull flag targets 304 above. But a break of the symmetrical triangle looks higher to a target of 320. The stock has some major support for a continued move higher. The momentum indicators are bullish. The RSI pulled back only to 60 before reversing higher, while the MACD gave a buy signal at that December low and has been rising since.

The stock has been under accumulation since June and during this consolidation accumulation has been strong. Short interest in the stock is low at only 2.3% and it is expected to report earnings next on February 24th before the open.

CF Industries, Ticker: $CF

Trade Idea 1: Buy the stock on a break over 280 with a stop at 270.
A straight break out buy with defined risk below the low of the flag.

Trade Idea 2: Buy the January 280/290 Call Spread (offered at $3.36 late Friday) on the same trigger. A short term trade for the upside using 290 due to the high level of open interest there in the January Expiry options contracts. This give nearly a 3:1 reward to risk ratio.

Trade Idea 3: Buy the January 280/290 Call Spread and sell the January 260 Put ($2.45). The same idea as trade #2 but adding leverage (and margin usage) from the short put. This looks for the large open interest at 260 to act as a break at expiry should it fall, and gives a better than 4:1 reward to risk ratio. You also risk being put the stock at 260.

Trade Idea 4: Buy a January 30 Expiry 280/January 290 Call Diagonal ($5.76). This looks for an upside break and the large open interest at 290 to act as a magnet or break in the short run. As the short January Calls expire look to sell January 23 Expiry or January 30 Expiry upside Calls to take out some money.

Trade Idea 5: Buy a February 280/January 290 Call Diagonal ($9.06) and sell a January/February 260 Put Calendar ($5.45 credit). This trade should be worked the same as #4 on the long side, as the short calls expire continue to sell new ones. But it also adds leverage with the short calendar, but with protection below 260 for the first 2 weeks. It uses margin for the long dated short put and exposes you to owning the stock at 260 in February.

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After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, heading into the first full week of 2015 week, sees the equity index ETF’s looking as though they may continue to the downside.

Elsewhere look for Gold to continue in its tight range while Crude Oil continues lower. The US Dollar Index looks strong and should continue higher while US Treasuries are biased higher, and on the edge of a breakout. The Shanghai Composite continues to look strong but very overbought while Emerging Markets are weak and biased to the downside. Volatility looks to remain subdued keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ, despite the moves lower this week.

Their charts show a downside bias with the QQQ leading the way and the IWM the strongest, possibly confirming a rotation from one to the other. The possible reversal candles Friday could always kick in and the indexes move higher though. Use this information as you prepare for the coming week and trad’em well.

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