Trade of the Day: SolarWinds (SWI)

by Ken Trester | January 17, 2014 9:17 am

Stocks are continuing their bullish trend, though we are seeing a slight divergence among the major indexes. Our index indicators are giving bullish readings, unchanged from last week, but being extremely selective about the best stocks to buy remains key.

While the Dow has struggled over the past couple weeks, the S&P 500 continues to trade near all-time highs, and the Nasdaq has continued its uptrend pretty much unabated. Most importantly, all three indexes remain comfortably above their 50-day moving average support levels. Until those supports are broken, the bull market is intact. For the Dow, its 50-day moving average is at 16,110, for the S&P 500, 1,805, and for the Nasdaq, 4,060.

Our internal indicators reflect the movement in the S&P 500 and Nasdaq more than they do the Dow. The Advance/Decline Index and Cumulative Volume Index are bullish. And the 200-day Moving Averages Index has not only remained above its 50-day moving average, it is improving. However, both its price and 50-day average remain below the index’s 200-day moving average. Seven of nine S&P sector funds are bullish, unchanged from last week.

Long-term Treasury bonds (TLT[1]) are gaining momentum, and have now found support at $103.90. But before getting too excited and thinking that lower interest rates are about to become a longer-term trend (interest rates move the opposite direction of bond prices), TLT made a similar move a few months ago only to fall back into a downtrend. Most likely, TLT will continue to move in a trading range between $106 and $102.

With our indicators continuing in bullish mode, options traders should continue to look take bullish positions such as buying calls buy carefully weighing which are the best stocks to buy. But be sure to keep some puts in your portfolio, as earnings season is underway and negative surprises are being dealt with harshly – as evidenced by the massacre Best Buy (BBY[2]) saw Thursday.

Fortunately, knowing the best stocks to buy is just as important as knowing which to play on the short side, and the system I use recommended that my Power Options Weekly members take a position in BBY put options that yielded us a 400% return in less than a week. That’s the power of options, especially in volatile stocks.

One of the most volatile sectors out there is solar[3].  In fact, 30% or 40% daily moves in solar names is par for the course, which can make them very profitable for options trades. My system has uncovered a new bullish opportunity in SolarWinds (SWI[4]).

Buy the SWI March 45 Call options at $1.45 or lower. After entry, take profits if the stock price hits $45.20 or the option price hits $3.30. Exit if the stock price closes below $39.00 or the option price closes below 90 cents.

Using cheap options is a great proxy for playing the best stocks to buy; in this case, you can participate in SWI’s potential move up for $145 if you buy a single call options – and that’s the most you stand to lose. But, again, I always recommend exiting a position if the stock or option close below the sell signal prices I listed above so that you can cap your losses at about the 30% to 40% range.

InvestorPlace advisor Ken Trester[5] brings you Power Options Weekly[6], which delivers 5 new options trades to you each Friday. It’s the perfect ‘bridge’ between investing in ordinary stocks and the turbocharged world of options trading. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95[7].

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