Trade of the Day: Coca-Cola (KO)

Risk-on is back in style, and here’s the right call option to take advantage

   

Trade of the Day: Coca-Cola (KO)

Stock momentum increased last week. While things might slow over the coming week, signs point to the bullish trend remaining intact.

Our index indicators continue to give bullish readings as the Dow Industrials and S&P 500 closed the holiday-shortened week at record highs. Even though caution should be the watchword this week, as we just exited one of the most historically bullish calendar periods of the year (the first week of July), the bull market should easily remain intact, with the indexes remaining above their 50-day moving averages. By the numbers, those averages are at 16,730 for the Dow, 1,925 for the S&P 500 and 4,285 for the Nasdaq. And, more importantly, the averages continue to trend higher.

Our internal indicators support a continued bullishness in the indexes, as the 200-day Moving Averages Index, Cumulative Volume Index and Advance/Decline Index remain bullish. Eight of nine S&P sector funds are bullish, down from nine of nine last week, as the interest-rate-sensitive utilities sector has fallen below its 50-day moving average. And volatility indexes are plunging to record lows.

Paying the price for the momentum in stock markets was Treasury bonds (TLT), as money moved toward risk-off positions. TLT again has fallen below its 50-day moving average, and this fall looks ominous. TLT has also fallen below its most recent lows, and its rally a week ago failed to overtake its recent highs, setting it up in a bearish “lower highs, lower lows” trading pattern. Support is available at $109.70 with its 200-day moving average. A failure there would set off a bearish trend that could take several months to correct, if it corrects at all. Keep in mind that at the beginning of this year many believed that interest rates had nowhere to go but up — and that belief may be coming true now.

Commodities also benefited from the new feel-good investing momentum, as copper (CU) rocketed higher and gold (GLD) held its own. Oil (USO) pulled back but remains in a primary bullish trend. Strength in commodities is generally a result of an outlook for higher inflation or increased economic growth, both of which remain debatable. More likely, commodities are currently receiving money fleeing the Treasury market.

With stock momentum increasing again and money moving out of Treasuries, risk-on looks to be back in play, which is a reversal from a week ago. Options traders should follow suit by taking a higher percentage of bullish positions than bearish. But continue to hold puts, as the current sentiment reversal could very easily reverse again.

Here’s a bullish trade that will allow you to take advantage of the current environment. Buy the Coca-Cola (KO) Aug 42 Calls at $0.85 or lower (KO closed Thursday at $42.23). After entry, take profits if the stock price hits $43.20 or the option price hits $1.60. Exit if the stock price closes below $41.40.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/07/trade-of-the-day-coca-cola-ko-momentum/.

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