Trade of the Day: H&R Block (HRB)

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My indicators have turned bullish, which is what one would expect after seeing a 5% move higher in the S&P 500 over the last week. While I will admit that the extreme bearishness that remains in the market is a contrary sign that supports a bullish breakout, I’m skeptical about a sustained move to the upside. That’s why it is my opinion that we’re still in “bear mode.”

What’s really happening is kind of a rolling bear market, in which the bearishness is moving from one sector to another. For example, it was the biotechs that were hit most recently, and it’s anybody’s guess where the hammer will strike next.

To talk about a bear market after a week-long rally might sound like I’ve got it wrong — but, essentially, things are moving according to the plan within the market’s new trading range.

We had an extremely bearish run followed by a significant one-day reversal last Friday that allowed the market to bounce off of the August bottom. But sharp rallies like this are usually not a good sign for the market. We’re basically seeing a lot of short-covering, particularly in the energy and materials sectors.

Last week, I mentioned that if the market traded decisively above 2,000 on the S&P, I would be inclined to take a more bullish view. While it’s true that the S&P did move slightly above that level, to me, that is not a meaningful move. The market is simply bumping up against the top of its current trading range.

I think the market will probably run out of gas and retreat here…but if it doesn’t, we can expect it to peter out around 2,040 on the S&P. There is a lot of overhead resistance at 2,050, as that level previously represented support for the tight trading range that persisted during the first half of the year.

The market is now sitting at the top of its new trading range, so the most likely scenario is that it will move lower again to touch support around the 1,870 level.

Bullish or bearish, my approach is that I am always looking for the best chances of winning. Probability is my biggest factor, and I rely on the software I built to tell me that probability. Today’s high-probability play involves H&R Block Inc (HRB).

Buy to open the HRB Jan (2016) 32 Puts (HRB160115P00032000) at $1.00 or lower. After entry, take profits if the stock price hits $32.90 or the option price hits $1.80. Exit if the stock price closes above $36.70.

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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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/trade-of-the-day-hr-block-hrb/.

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