A Technical Cloud Hangs Over Cintas

by John Kmiecik | January 14, 2013 8:38 am

Many traders look for recognizable patterns on charts to try and formulate an outlook for what will happen next. You’ve heard the saying “Past performance isn’t indicative of future behavior,” but if you are a technical trader, it’s what you heavily rely on.

Here is a trade idea that can profit if history repeats itself:

Cintas (NASDAQ:CTAS — $42.58): Long Puts

The trade: Buy the February 42.5 puts for 80 cents or less.

The strategy: The long put is an option strategy that benefits from a bearish movement. The trade can profit if the stock falls and the put premium increases as the option moves farther and farther in-the-money. Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is 80 cents, or whatever was paid if CTAS finishes at or above $42.50 at February expiration. Breakeven is $41.70 based on a cost of 80 cents at expiration.

The rationale: Business services specialist Cintas (NASDAQ:CTAS[1]) reported earnings just before Christmas and did fairly well. The stock then proceeded to move lower after the report, as investors acted as if they were expecting more. But this trade idea is really based on the charts.

Click to Enlarge
Cintas has been trading in a channel since the beginning of November. It has previous price levels acting as resistance that it has been unable to get past several times. On the support side, CTAS has bounced and reversed off the 200-day simple moving average. Right now, the stock is at the resistance level just below $43 and has the potential to fall back down to the 200-day SMA.

A bearish sign for the stock would be if it trades below Friday’s low of $42.30. Watch for a possible quick pop to the downside.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. CTAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTAS

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