Trade of the Day: United Continental (UAL)

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My index indicators are giving slightly negative readings, but next week should be bullish as we close out the month of May and enter into June.

We remain in an extremely narrow trading range that has had the market in a chokehold for several months. However, when the market eventually breaks out of its range, the move is likely to be explosive. Part of the reason we tend to see such significant moves following months of range-bound trading is that when the market trades in a channel, traders tend to sit on the sidelines holding cash and then rush in when a new trend begins to emerge.

The caveat is that, right now, it’s essentially a coin toss as to whether that big move will be to the upside or the downside.

On the positive side, from a technical point of view, the market has some upward momentum and appears to want to break out above resistance. On the down side, along with my indicators that are showing negative readings, the Dow Jones Transportation Average (DJT) continues to deteriorate and has broken down to a new low for 2015. Furthermore, June has historically been one of the worst-performing months for the market.

At this point, while the very short-term picture is bullish, it’s too soon to tell where the market will go in the intermediate or longer term, and it’s possible that the market could just stay in this trading range for a while longer.

In the commodities sector, oil has broken below support and looks to be rolling over, but I still think oil will make a move higher in the long term. The only thing that might hamper that is if we see a real market crash, as oil would likely fall with the broader market.

Gold continues to hang in there, and I expect to see the SPDR Gold Trust (ETF) (GLD) remain above the $110 level, as it, too, is mired in a trading range similar to the broader market. Gold is actually performing relatively well when we consider what the U.S. dollar has been doing.

With the end of May being slightly bullish, options traders should continue to buy some call positions. However, a change of sentiment can happen rapidly, and my indicators are telling me that holding some put positions is also prudent. Here’s one such trade on the beaten-down airline sector.

Buy the United Continental Holdings Inc (UAL) July 50 Puts (UAL150717P00050000) at $1.50 or lower. After entry, take profits if the stock price hits $48.20 or the option price hits $3.80. Exit if the stock price closes above $56.20. These are regular monthly options that expire on July 17.

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