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Trade of the Day: Ford Motor Company (F)

My analysis calls for an equal mix of puts and calls, and here's one bullish bet to get you started.

   

Stocks pulled into July 4 on a positive note. But warning signs are lurking beneath the surface.

While our index indicators are giving bullish readings, an upgrade over last week’s bullish to neutral, the readings are hardly definitive, as the price action more resembles the indexes continuing to wrestle with their 50-day moving averages rather than trouncing them. For the bullish readings to hold the Dow needs to stay above 14,970, the S&P 500 above 1612, and the Nadsdaq above 3390.

Indicative of the tepid bullishness of the indexes, our internal indicators are giving bearish to neutral readings. Most troublesome among these readings is the 200-day Moving Averages Index, which remains below its own 50-day and 200-day moving averages and firmly in bearish territory. The shorter-term 40-day Moving Averages Index is also bearish. The Advance/Decline Index and Cumulative Volume Index are barely bullish. And only two of nine S&P sector funds are bullish, which is two less than a week ago.

One area of relief for stocks is interest rates look to have put the brakes on from their recent rise. U.S. Treasury bonds (TLT) bounced off the key support at $108 we mentioned last week, but the bounce has hardly been robust, especially considering that several Fed officials have since said their remarks concerning QE tapering had been misinterpreted. Right now it looks like bonds and interest rates are adjusting to a new level. That can be a good thing if the process goes slowly and smoothly, giving stocks time to also adjust.

Given that the Fed has stated that employment growth is its most important marker, today’s employment report is sure to draw a lot of attention. But Friday is also part of a four-day weekend for many traders, so market liquidity is going to be low. That in turn could cause larger-than-normal price swings in stocks and bonds if the report misses expectations. So be sure to use limit orders when you are entering options positions on Friday.

With our indicators continuing to give mixed signals, options players should look for an equal number of bullish and bearish positions. Buy more puts than calls, but offset that bearish bias with conservative bullish plays such as put credit spreads. And keep in mind that summer generally brings less trading volume and thus wider price swings, so use vigilance when entering positions.

One of the ways you can help avoid price volatility is to stick with options that have a relatively higher open interest. There’s been a lot of talk of the bullish prospects of Ford Motor Co. (F) and other American auto makers, and fresh off the most-American holiday there is, F looks bullish in these mixed waters. And its option chain boasts some very impressive volume, which can help soften price swings.

Buy the F Aug 17th expiration 17 Calls at 40 cents or lower. After entry, take profits if the stock price hits $17.60 or the option price hits $1.00. Exit if the stock price closes below $15.80 or the option price closes below 20 cents. Note: There are also F Aug weekly options that expire on Aug. 2; be sure you are purchasing the standard monthly F calls that expire on Aug. 17.

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