Top Trade Ideas for the Week July 11, 2016: Bonus Idea

• Posted by Greg Harmon
• on July 11th, 2016

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

Express Scripts, $ESRX, had bounced off of support at 79.60 several times in 2014 and 2015. At the start of 2016 it went right there again a few days into 2016. This time it did not hold though. It broke down to new lower lows finding support finally in February when the market bottomed. Over the next 6 weeks it consolidated in a symmetrical triangle, breaking that to the upside, confirming a reversal higher, in April. The stock spent several weeks retesting the break out trend line as support before finally moving higher in May.

Friday was a big day technically on several fronts. The move broke above short term consolidation. It pushed the stock price past its 200 day SMA for the first time since beginning of the year. And it closed a gap down from January. As it sits over prior resistance the RSI is rising and bullish and the MACD is crossed up and rising. These momentum indicators support further upward price action. The Bollinger Bands® opened to the upside as well.

There is resistance above at 79.60 and 81 followed by 82.25 and 84.75 before a gap fill to 85 and then 88.90. Support may come lower at 76 and 74 before 73. Short interest is elevated at 6.3% and the company is expected to report earnings July 26th after the close.

Options for this week show a focus of open interest at the current price, from 77.5 to 78. But there is also some size at 75 below. There is very little open interest for the July 29 Expiry, the first beyond the earnings date. The at-the-money straddle is pricing an expected move of $3.25 or about 4.1% by the Friday after the report, giving a range of 74.65 to 81.20. A more liquid read in the August monthly options shows all of the put open interest between the 62.5 and 75 strikes, while it from 67.5 to 80 on the call side. The take away from that is there is a slight bias lower in August options.

Express Scripts, Ticker: $ESRX

Trade Idea 1: Buy the stock (over 77) with a stop at 76.

Trade Idea 2: Buy the stock with a July 29 Expiry 77.5/74.5 Put Spread ($1.00) and sell a August 80 Covered Call ($1.20 credit).

Trade Idea 3: Buy the July 22 Expiry 77.5 Calls ($1.38).

Trade Idea 4: Buy the July 29 Expiry 77.5/80 Call Spread ($1.43).

Trade Idea 5: Buy the July 29 Expiry 78/81 Call Spread ($1.38) and sell the July 29 Expiry 74 Put (47 cent credit).

Trade 1 is a straight stock trade with a stop loss as protection. Trade 2 uses an options collar as protection, earnings a small credit in the process. Trade 3 recognizes that the stock does not pay a dividend, and so seeks upside with options, limiting capital at risk. Trade 4 looks for capped upside into the earnings report and Trade 5 adds leverage to reduce the cost, selling puts at the expected lower level of the move.

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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 July Options Expiration week sees the equity indexes are strong and looking for new highs.

Elsewhere look for Gold to continue higher but perhaps see a short term pullback first, similar to the picture for Crude Oil. The US Dollar Index looks to continue higher toward the top of the broad consolidation while US Treasuries are continue higher but with some caution as they are getting extended.

The Shanghai Composite and Emerging Markets both look better to the upside in their consolidation ranges. Volatility looks to remain subdued and possible moving lower keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ. Their charts agree, with the SPY looking for new all-time highs quickly, the IWM chasing and the QQQ looking to break a range by making a new 2016 high. Use this information as you prepare for the coming week and trad’em well.

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