Trade of the Day: CSX Corp. (CSX)

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I can’t say that I was surprised by the steep decline we saw this past week, as things have lined up pretty much as I expected after the market broke down through its very narrow seven-month trading range. The break puts the indices in dangerous territory, and the question now is what will happen from here.

We’re currently in the middle of a typical short-covering rally that tends to come after a significant downdraft, but my indicators remain bearish. I expect we’ll get more rallying action over the next week, but not much, and then we’ll see the downside action resume.

Additionally, while next week has a bullish bias because it’s the beginning of the month, September is historically one of the worst months of the year for the stock market. Furthermore, market lows are usually made in October, so we’ll continue to skew our trades to the downside while holding select bullish plays.

While I am not keen to see the market suffer, purely from a trading standpoint, I love bearish environments, as they give investors many more opportunities to make profitable trades. Do your best not to fear this market, as there’s still a lot of money to be made.

Like last week, I would recommend buying puts into this rally, and the market should ultimately move lower. Here’s one of the highest-probability opportunities I see right now.

Buy to open the CSX Corporation (CSX) Oct 27 Puts (CSX151016P00027000) at $1.00 or lower. After entry, take profits if the stock price hits $25.50 or the option price hits $2.10. Exit if the stock price closes above $28.50.

If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid. Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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