Trade of the Day: GameStop (GME)

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My indicators are currently giving neutral to bullish readings, a minor upgrade from last week’s neutral to slightly bearish readings. However, my personal outlook is more bearish to neutral, so I’m a little contrary to my stock market indicators.

The major indices were calm on Thursday until about 2:00 p.m. ET, at which time Federal Reserve Chair Janet Yellen announced that the Federal Open Market Committee (FOMC) decided to leave interest rates unchanged. Yellen cited “uncertainty” in global markets, especially in China, as one reason for holding rates steady, but she also emphasized that the economy in the United States is doing well.

Stocks initially jumped on the news but ultimately ended in negative territory at the end of the day. The S&P 500 reached a high of 2,020.86 during Yellen’s press conference, only to give all of those gains back within the next 30 minutes of trading.

The S&P closed just below 2,000 at 1,990.20, as the 2,000 level is where significant resistance can be found. This level served as support several times in January, but it is very common for prior support levels to turn into resistance levels once the initial support is broken.

While the S&P has gained about 2% this week, the benchmark index remains in a formation that suggests to me that it’s going to break lower. Regardless of whether we see a short-term rally today or into next week and a near-term improvement in stock market indicators, it’s my opinion that the S&P 500 is going to go lower. This rally has been anticipated and priced in, so I don’t expect to see the S&P move higher by more than 50 points, as there is also major resistance at the 2,050 level.

Of course, if the index breaks above 2,000 in any meaningful way — that is, anything more than just a few nano-second blips — and it is able to hold above 2,000, my opinion may change. However, it’s important to remain defensive right now and not be lulled into a false sense of security. As we have seen recently, the stock market indicators can turn on a dime.

With that in mind, I recommend lightening up your allocation for all new positions. For example, if you normally buy 10 contracts for each option recommended, consider cutting that allocation in half. This is not the time to go all in, but I’m certainly not sitting on the sidelines, either, so let’s look at a new opportunity.

Buy the GameStop (GME) Jan 36 Put options at $1.50 or lower. After entry, take profits if the stock price hits $38.90 or the option price hits $2.80. Exit if the stock price closes above $46.00.

Remember, my usual guidelines hold: 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.

And, if the option or GME does not hit its target, or if GME does not close at or below its sell signal price within three weeks of entry, exit the position. I don’t recommend holding an option play for more than three weeks.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/stock-market-indicators/.

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