We’ve open a bearish trade on ETrade Financial (ETFC).
Using the Technical Opportunity Screener from Profit Scanner, we’ve identified a “bearish engulfing” pattern on ETFC. The bearish engulfing pattern was completed on Sept. 17, when prices opened below the prior close.
Based on the pattern, we expect the stock to drop to a target price range of $24-23.
Since then, Profit Scanner has shown several other bearish developments on ETFC’s chart, including a short-term bearish cross of the 21-day moving average and a bearish turn in momentum (Sept. 22), along with a long-term bearish cross of the 50-week moving average and a significant gap down (Sept. 18).
The decision by the Fed to leave the target overnight rate alone was a bad thing for brokers and other financial firms. The yield spread continues to tighten as the curve flattens. This is particularly bad for ETFC, which may be looking forward to lower profits and likely new bearish guidance before earnings are reported next month.
Part of ETFC’s problem includes issues with debt and bad assets on its balance sheets. Left over from the financial crisis, these problems have been a drag on the stock, making it an underperformer compared to its peers during downtrends. The confirmed bearish engulfing pattern makes for an attractive entry opportunity at this point, with a downside target near $23-24 per share. To profit from that move, we suggest the following:
‘Buy to open’ the ETFC October 26 Puts (ETFC151016P00026000) for a maximum price of $1.10.
We don’t have a target for the options, as we’ll be watching the underlying ETFC stock to give us the signal when to exit and take profits. We also don’t usually use stop losses as, again, we monitor the stock’s technical analysis for any reversal of the bearish pattern.
(You can learn more about identifying price patterns – like bearish engulfing patterns – and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.)
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
