Top Trade Ideas for the Week May 31, 2016: Bonus Idea
- Posted by Greg Harmon
- on May 31st, 2016
Here is your Bonus Idea with links to the full Top Ten:
Discover Financial Services, $DFS, peaked at the end of 2014. It started a long move lower in 2015, fast at first and then saw a consolidation before another dip. In November 2015 it started to accelerate down again, finding a bottom with the market February 2016. At that point momentum had reached the early 2015 lows as well.
But then things started looking up. The stock started higher in a steady trend. It hit the 200 day SMA in April, just over a 38.2% retracement of the downward leg, and stopped. But not for long. A gap higher quickly found the 61.8% retracement of the downward leg and then it was knocked back.
This created a bull flag. The price broke the flag to the upside as 3 thing s happened. The RSI turned back higher, holding in the bullish range. The MACD crossed up while holding in positive territory. The 50 day SMA crossed up through the 200 day SMA in a Golden Cross.
This gives an upside target to 68.78 in late July using an AB=CD pattern to measure. This would gain further significance if the price can get above the next level of resistance at 57.61, point B. There is resistance above that at 59.75 and 60.30 followed by 63.10 and 64.40 before 65.50 and 66.75. Support lower comes at 55 and 53.50 followed by 52.50. Short interest low at 1.5% and the company is expected to report earnings next July 20th.
Checking the options chains, this week sees the biggest open interest at 57, just overhead. June monthly options are biggest at 57.50 on the Call side, and July monthly sees a change with open interest below on both the Call and Put Side. Puts are large at 47.5 and 45, while Calls are big at 52.50. The closest contract after the earnings report is currently the October monthly. The Call open interest exceeds the Put side and is centered on 57.5.
Discover Financial Services, Ticker: $DFS
Trade Idea 1: Buy the stock on a move over 57.60 with a stop at 55.
Trade Idea 2: Buy the stock and add a July 8 Expiry 56.5/53.5 Put Spread ($1.00) and sell a October 62.5 Call (70 cents). A cost of 30 cents for the collar.
Trade Idea 3: Buy the July 57.5 Calls ($1.20).
Trade Idea 4: Buy the June/July 57.5 Call Calendar (70 cents).
Trade Idea 5: Buy the June/July 57.5 Call Calendar and sell the July 52.5 Puts (30 cents).
Trade Idea 1 is a straight stock buy with a stop to protect the downside, while Trade Idea 2 adds a Put Spread to profit for the first bit of downside in exchange for capping the upside at 62.5 in October. Trade Idea 3 limits your risk to $1.25 for the upside until July Expiry, and Trade Idea 4 funds that by selling the shorter dated Calls at the Strike with the biggest open interest, looking for it to hold the stock back in June. Trade Idea 5 then adds leverage by selling the 52.5 Put, a level where the gap would fill in the chart.
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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 as the markets head into the Memorial Day Weekend and the unofficial start of Summer, sees equities are looking strong, but not quite free of caution.
Elsewhere look for Gold to continue lower while Crude Oil continues to the upside. The US Dollar Index looks to improve while US Treasuries continue to consolidate. The Shanghai Composite is also in consolidation mode but with a downward bias while Emerging Markets are biased to the upside in the short term.
Volatility looks to remain subdued keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ. Their charts also suggest more upside, and are stronger looking on the weekly timeframe, with rising pennants on the daily timeframe giving minor caution of a short term pullback or consolidation. 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.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded since 1986 and held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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