Trade of the Day: Cigna (CI)

by Ken Trester | July 18, 2014 9:14 am

Our index indicators are giving bullish readings, unchanged from a week ago, as stocks march steadily higher even after Thursday’s selling pressure. Economic numbers are both up and down, which could impact profits down the road, but traders remain focused on interest rates. Also, the Fed is still giving traders what they want. Until that changes, stocks will continue to carry the least risk of financial assets. The bull market remains intact with the Dow Industrials staying above 16,820, the S&P 500 above 1,940 and the Nasdaq above 4,330.

Our internal indicators are mostly bullish, but may also be warning of an impending pullback in stocks. The 200-day Moving Averages Index remains below its 50-day moving average, while the Cumulative Volume Index and Advance/Decline Index remain bullish but have pulled back from their recent highs. Seven of nine S&P sector funds are bullish, one less than last week. Also, volatility indexes are bouncing off of recent record lows. Volatile environments are when options trades tend to do best.

Treasury bonds (TLT[1]) continue to rebound as well. Barely two weeks ago, TLT was showing signs of breaking down, but those fears have moved to the back burner thanks to mixed economic numbers, Fed comments regarding interest rates and renewed geopolitical concerns. TLT remains in its primary bullish trend by staying above $112.20.

Commodities are painting a mixed picture, with copper pulling back from its sharp run-up a few weeks ago. Given the magnitude of that run-up, more weakness should be expected. Gold is seeing increased volatility but remains in a recovery uptrend, while oil rebounded Thursday following a recent pullback that dragged it below its 50-day moving average. Overall, commodities are painting a picture of general uncertainty as geopolitical concerns come back into play.

With stock indexes still bullish, momentum lagging and money moving back into Treasuries, options traders should try to lighten up on bullish positions and add to bearish positions. However, don’t go overboard in either direction, as rising volatility indexes point to increasing uncertainty in the markets.

My in-depth scans have surfaced a bullish bet in U.S. insurer Cigna (CI[2]). While my analysis focuses on the technical aspects of the market and individual stocks – and CI rates highly in all of the chief factors I research – it also reports earnings on July 31, which may be a bullish catalyst for it. Cigna had an 18% positive surprise last quarter, and analyst estimates have stayed steady in recent weeks.

Buy the Cigna (CI) Oct 105 Call options at 88 cents or lower (Cigna closed Thursday at $94.50). After entry, take profits if the stock price hits $99.40 or the option price hits $2.10. Exit if the stock price closes below $92.00.

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