Trade of the Day: Take-Two Interactive Software (TTWO)

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Our index indicators are giving bullish readings. This implies that momentum remains to the upside, but the major indexes remain overbought. So although we are in a favorable time of the year for stocks, a quick stock pullback cannot be ruled out. If a stock pullback does develop, 50-day moving average support will come into play. For the Dow Industrials, that support is currently at 17,180, for the S&P 500, 1990, and for the Nasdaq, 4545.

Our internal indicators remain bullish. The 200-day Moving Averages Index is level 3 bullish (level 1 is the highest), and the Advance/Decline Index and Cumulative Volume Index are both level 1 bullish. Eight of the nine major S&P sector funds are in primary bullish trends. The lagging industry continues to be energy, thanks to collapsing oil prices, but the fund looks to have made a bottom and has been in a nice recovery rally for the past month. And volatility indexes are stabilizing.

iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) continue to make a “rolling bounce,” and TLT has remains above its 50-day moving average. If stock indexes pull back, TLT could be a beneficiary of that. TLT remains bullish by staying above $118.50.

SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) (junk bonds) continue to weaken and JNK remains in a bearish trend. One reason for this is many junk bonds are in the energy sector, so as oil prices weaken, default worries increase.

PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) (the dollar) has flattened over the past couple weeks following a strong rally that began in July. Given the state of the global economy, with the U.S. being about the only bright spot, chances are good that UUP continues its rally. UUP remains bullish above $22.85.

A strong dollar generally means weak commodity prices, and that is the case right now. Copper (CU), gold (GLD) and oil (USO) are all bearish. In fact, USO has broken below key long-term support and is plunging toward multi-year lows. Thus far, oil prices have not followed oil stocks into a possible recovery phase. But GLD continues the recovery it began earlier this month, a sign that some traders could be expecting at least a temporary reversal in stocks.

With momentum in the major stock indexes possibly slowing and a stock pullback as a potential, options traders should continue to look for an equal number of bullish and bearish positions. And with gold drifting higher and volatility indexes stabilizing, caution remains key when taking new positions.

These week, I have a call option in Take-Two Interactive Software, Inc. (NASDAQ:TTWO) that my system rates with a very high probability of resulting in profit based on the undervalued nature of option and the bullish technical signals the chart is flashing. But, as noted above, this market could turn, so keep your positions small and pay careful attention to the stock-based stop loss.

Buy the TTWO Jan 28 Calls at 90 cents or lower (TTWO closed Thursday at $26.90). After entry, take profits if the stock price hits $28.80 or the option price hits $1.90. Exit if TTWO closes below $25.90.

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