The Dow Jones Industrial Average (DJI) is sitting almost exactly on top of its horizontal daily 200-day moving average. Which way will the pendulum swing next — bullish or bearish? No one can say with any certainty.
When the Dow is facing this kind of dilemma, sometimes a stock will get caught in the same conundrum. One of those stocks is Texas Instruments (NYSE:TXN), which is currently trading at $31.79 and looking like it’s on the verge of a breakout to the upside.
TXN is one of the biggest computer chipmakers out there. And after a slowdown in IT spending, things may be starting to improve. The company, which has clients such as Apple (NASDAQ:AAPL) and Motorola (NYSE:MMI), said that its inventory lately has been consistent with the demand of its product, which points to increased demand.
Technically speaking, the stock gained over 2% on a bearish Friday and was halted by its horizontal 200-day moving average. The Dow is basically right at the same area on its chart.
If TXN can get over and hold the 200-day moving average just like the Dow, it would trigger a breakout to the upside, which can construed as a bullish sign. Here’s how to make a short-term play for quick returns on an upward move.
The trade: Buy the TXN Dec 32 Calls for $1.20 or less.
The strategy: The long call strategy is relatively straightforward. The trade profits when the stock rises and the call premium increases as the TXN option moves more and more into-the-money. Maximum profit is unlimited because TXN can continue to rise and the maximum loss is $1.20 if TXN finishes below $32 at December expiration.
A nice trigger for this trade idea is if the stock can trade above $32. This would be above the 200-day moving average and above Friday’s high. A sensible target for TXN would be the $34 area, where it might face some resistance.
Consider exiting the trade if the stock trades below $29.60, which is the most recent pivot low. A more conservative or tighter area to consider exiting the trade would be $30.75, which is just below Friday’s low.