Top Trade Ideas for the Week February 2, 2015: Bonus Idea

• Posted by Greg Harmon
• on February 2nd, 2015

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

Illinois Tool Works, $ITW, rose from the October low to 98 in early December. After pulling back to a support area near 92 it retested 98 before tightening the the consolidation range to between 91.50 and 94.50. The Bollinger Bands® are tightening now which is often a precursor to a move and the question is will it be to the upside or the downside?

A break below 91.50 looks to retrace back to the gap at 88 at least, the next support area, with a larger gap to fill down to 83.85. A break above the range, over 94.50, would look to retake the high at 98 as a first test.

The momentum indicators are not giving any signal. The RSI is flat near the mid line and the MACD is also flat, near zero. Short interest is low under 2% and the company is estimated to report earnings next April 28th before the market open.

Illinois Tool Works, Ticker: $ITW

Trade Idea 1: Buy the stock on a move over 94.50 with a stop at 93.

Trade Idea 2: Buy the February 95 Calls (offered at 80 cents late Friday).

Trade Idea 3: Buy the February 95/97.5 call Spread (65 cents).

Trade Idea 4: Buy the February 95/97.5 Call Spread and sell the February 90 Puts (10 cents).

Trade 1 is a straight buy. Trade 2 improves on this by defining the risk no matter what to the premium paid, 80 cents. Trade 3 caps the upside and gives more leverage for a
maximum 3.8:1 return, but also lowers the capital at risk. Trade 4 adds significant leverage to Trade 3 and uses margin, while exposing you to owning the stock at 90 should it fall below that at February Expiry.

Trade Idea 5: Sell the stock short on a move under 91.50 with a stop at 93.

Trade Idea 6: Buy the February 92.5 Puts ($1.35) on the same trigger.

Trade Idea 7: Buy the March 90/85 Put Spread (90 cents).

Trade Idea 8: Buy the March 90/85 1×2 Put Spread (45 cents).

Trade 5 is the straight downside short sell trade while Trade 6 defines the risk to the $1.35 paid. Trade 7 gives it more time, capping the potential gain, but still offering a better than 4:1 payout possibility. Trade 8 adds leverage to Trade 7 with, exposing you to owning the stock at 80 if it closes under 85 at March Expiry.

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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 February sees the equity markets biased to start the month to the downside.

Elsewhere look for Gold to continue to consolidate in the short term uptrend while Crude Oil may be ready for a bounce or reversal in the downtrend. The US Dollar Index seems ready to consolidate sideways in the uptrend while US Treasuries continue to be biased higher. The Shanghai Composite is also consolidating in its uptrend while Emerging Markets look to have failed in their attempt to rally and are biased to the downside.

Volatility looks to remain low but drifting up easing the wind behind the equity markets to a light breeze. The equity index ETF’s SPY, IWM and QQQ, all see risk to the downside in both the daily and weekly charts with the QQQ the strongest on the longer timeframe followed by the IWM and then the SPY, but the IWM possibly a bit stronger on the short timeframe over both the QQQ and SPY. Use this information as you prepare for the coming week and trad’em well.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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