Top Trade Ideas for the Week January 19, 2016: Bonus Idea

• Posted by Greg Harmon
• on January 19th, 2016

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

Southern Company, $SO, went through a nearly year long bottoming process in 2015. Focusing on the movement since August it had built an ascending triangle against resistance at 46.50 until it broke to the upside just before Christmas. Since then it has consolidated the break out in a tight range between 46.50 and 47.50.

The target on the break of the triangle is a move to 51. That would put it back at the higher resistance from December 2014 and February 2015, but below the peak that started 2015. Despite the current consolidation, the Bollinger Bands® squeezing suggest a break is imminent. The RSI is bullish and the MACD flat after a short pullback, suggesting that break would be to the upside.

There is resistance at 47.50 and 47.75 before 48.60 and 49 followed by 49.65 and 50.40 then 51 and 52.25. Support lower comes at 46.50 and 45.85 followed by 45.30 and 44.30. Short interest is low at 2.3% and the company is expected to report earnings on February 3rd. The stock will also go ex-dividend February 11th paying 54 cents, or at a rate of 4.60%.

The options chains show monthly expirations, with the February chain covering the earnings date. All of the Put open interest is below the price while the Call open interest is spread from 44 to 49. The size on the call side is bigger by a factor of 2. March expiry is just opening, and moving out to May sees the majority of open interest above and on the call side at the 50 Strike.

Southern Company, Ticker: $SO

Trade Idea 1: Buy the stock on a move over 47.50 with a stop at 46.50.
A straight stock trade.

Trade Idea 2: Buy the stock with a February 47/44 Put Spread selling a May 49 Covered Call (15 cents for the collar).
Adds a collar for protection through earnings.

Trade Idea 3: Buy the February 47/49 Call Spread (80 cents).
A defined risk trade, with a 2.5:1 reward to risk ratio.

Trade Idea 4: Buy the February 47/49 Call Spread and sell the February 45 Put (39 cents).

Adds leverage to the controlled risk trade.

Trade Idea 5: Buy the February 47/49 1×2 Call Spread and sell the February 45 Put (19 cents).
More leverage and a possible maximum 10.5:1 reward to risk ratio.

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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, closed the January options expiration and the worst two week start to a year ever, yet with equity markets looking like they are not done falling yet.

Elsewhere Gold is biased higher in its downtrend while Crude Oil consolidates in its downtrend. The US Dollar Index continues to move sideways but with an upward bias while US Treasuries are biased higher. The Shanghai Composite and Emerging Markets are biased to the downside with the Chinese market possibly ready to consolidate.

Volatility looks to remain elevated and with an upward bias keeping the bias lower for the equity index ETF’s SPY, IWM and QQQ. Their charts agree and look better to the downside on both the daily and weekly timeframes. The IWM crossed into a bear market and looks the worst. The QQQ is down over 15% but still holding best over the August and September lows, while the SPY has held the closest to its all-time high but is precariously perched heading into the week. 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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