Yesterday’s weakness should not have come as any surprise if you’ve been following along here. And it may be just the beginning of a larger decline.
The VXX idea from two days ago will kick in if the weakness continues, but as I suggested yesterday, let’s be prepared to pick up good ideas on weakness.
Today’s idea has a bullish pattern and good call options to profit from it.
CME Group (CME) tried to move higher last week with the market, but the
market stalled. So did CME.
However, CME has not sold off with the market.
In addition, notice in the chart below how the flag from the recent highs stopped at the prior all-time highs that it had recently exceeded.
This suggests that its bullish technical trend is intact.
If the market experiences a major decline, the $195 level is not likely to hold, but if the market consolidates or rallies, CME should lead higher.
The last two days have had very small ranges, and as a result, they set up the opportunity for a very tight stop trade.
The highs of the last 2 days are just over $199, but there is a clear resistance level at $200 so use the $200 level as a trigger for an entry.
In other words, buy over $200, but don’t pay more than 201, because…
The tight stop is under $197.
The trend in CME is strong, and 210 would be a good first target.
If you’re trading the stock, then taking some profits and moving a stop to no loss makes sense at this point.
This stock is one that could rally for a surprisingly long time in a bull market, so if you’re trading the stock, this could be a good longer-term entry.
However, there is also an interesting shorter-term play in the options.
The Sept. 200/210 call spread would likely yield about a 50% gain should CME rally to 210 in the next 30 days.
The calls are not a long-term trade, so after 210 is hit or 30 days passes, you should be quick to wind down the position on any weakness.
On the other hand, if the market surprises to the upside, then 215 or 220 is a real possibility, and in that case, your call spread could yield 100-200%.
However, don’t get greedy, this isn’t a home run trade. It’s a good opportunity to risk a 20-30% loss in exchange for a 50-100% gain, with an outside chance to double that.
Rick Nartarian, Chief Investment Officer
The American Investor Daily