Trade of the Day: General Motors (GM)

A bullish bet on GM should get you started to shift your options allocation

   

Stocks returned to bullish territory over the past week. But many traders remain less than convinced.

By the numbers, the bullish trend will remain in place as long as the Dow is above 14,400, the S&P 500 above 1545, and the Nasdaq above 3215. Those numbers represent the index’s 50-day moving averages, and were close to being broken last week. In fact, the Nasdaq did fall below its 50-day average only to recover, a pattern mirrored by most speculative indexes and sectors.

Our internal indicators are reflecting the recovery made by the indexes. Last week the 200-day Moving Averages Index had fallen below not only its 50-day moving average but its 200-day average as well. It has now recovered its 200-day average but not quite the 50-day. Also, the Cumulative Volume Index has moved back above its 50-day average. Meanwhile, the Advance/Decline Index has moved to new high ground. Interestingly, while we often mention the predictive power the 200-day Moving Averages Index has had in the past, it has been the Advance/Decline Index that has been the most accurate of the indicators during this current bull run.

As for the market’s safety indicators, the U.S. dollar and U.S. Treasuries  have stalled somewhat following recent shows of strength. But both remain in bullish trends, an indication that not everyone is convinced that stocks are the place to be right now. The US Dollar Index Bullish ETF (NYSE:UUP) will remain bullish by staying above $22.38, and TLT is bullish above $120.20. The 20+ Year Treasury Bond ETF‘s (NYSE:TLT) number represents its 200-day moving average, as its 50-day average has yet to confirm the index’s move, so Treasuries may be susceptible to a pullback here, especially if stocks continue to rally.

With our indicators returning to bullish territory, options traders should lean slightly more toward the bullish camp. But don’t be quick to abandon the bearish positions last week’s indicators called for. The move back to bullish territory has been swift and sudden, and a reversal could happen just as swiftly and suddenly.

One of the best ways to start trending toward a more bullish allocation is with General Motors (NYSE:GM) calls.

Recommendation: Buy GM June 31 call options at $1.20 or lower. After entry, take profits if the stock price hits $32.90  or the option price reaches $2.60. Exit if the stock price closes below $29.60 or if the option price falls to 70 cents.

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