Top Trade Ideas for the Week January 20, 2015: Bonus Idea

• Posted by Greg Harmon
• on January 20th, 2015

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

Merck, $MRK, has been moving in a sideways channel that on closer inspection shows a series of higher highs and now also a higher low. An uptrend? Since the start of 2015 it has moved higher quickly and then started a consolidation. A break of that consolidation to the upside carries a target of 68. The RSI on the daily chart is strongly in the bullish zone while the MACD is rising. Both support that break higher. Short interest is low at 1% and the company is expected to report earnings February 4th before the market opens.

Merck, Ticker: $MRK, Daily

On the longer monthly chart this name gets very interesting. Sitting at 13 year resistance and coming off of a double bottom, the price action is tracing out a bearish Shark harmonic. This pattern has a Potential Reversal Zone I (PRZ) at 88.60 and PRZ II at 106.65 (not shown). The stock also carries a 2.90% dividend. There is resistance at 63 and then 68 followed by 72 and 76.50 before 80. Support lower comes at 61.75 and 60.30 followed by 58.75 and 56.75 before 53.40.

Merck, Ticker: $MRK, Monthly

Trade Idea 1: Buy the stock on a move over 63 with a stop at 61.50.
A straight buy for the move higher with protection.

Trade Idea 2: Buy the January 30 Expiry 63 Calls (offered at 86 cents late Friday).
A short term upside trade with risk defined to the premium paid.

Trade Idea 3: Buy the January 30 Expiry 61.5/63 bullish Risk Reversal (54 cents).
A short term upside trade with leverage from the short 61.5 Puts, relying the large Open Interest at the 62 Strike as a speed break should it fall.

Trade Idea 4: Buy the January 2016 Expiry 65 Calls ($3.85).
A longer term upside trade with defined risk.

Trade Idea 5: Buy the April/January 2016 Expiry 65 Call Calendar ($3.40).
A longer term upside trade, with lowered cost from the short April Calls. The plan would be to roll the short calls out, and up if necessary, as they near Expiration.

Trade Idea 6: Buy the stock and add a February 62.5/60 Put Spread, April 67.5 Covered Call, Collar (16 cents).
A longer term upside trade with protection through the earnings event with a low cost. Sell the Put Spread after earnings should the price fall, and if it rises above the Call Strike roll the Calls up and out, preferably for a credit.

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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 another holiday shortened week, the equity markets still look a bit vulnerable to more pullback.

Elsewhere look for Gold to continue its uptrend while Crude Oil consolidates in the downtrend. The US Dollar Index looks to continue higher along with US Treasuries. The Shanghai Composite looks to resume its move higher despite being very overbought while Emerging Markets continue to consolidate in a bear flag in the downtrend.

Volatility looks to remain low but creeping higher making a headwind for the equity index ETF’s SPY, IWM and QQQ. Their charts show differing reactions with the IWM consolidating in the top of its year long range, and the SPY trying to reverse a pullback, while the QQQ looks biased lower in the short run. Longer term the SPY and QQQ remain in uptrends while the IWM consolidates. 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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