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Trade of the Day: Adobe Systems (ADBE)

Start trading on a very small scale until you gain some skills and confidence


Stocks continue to build on their recent strength, and the bullish trend  in the stock market today should continue as we head into the first week of March.

Our index indicators continue to give bullish readings, unchanged from last week. Also unchanged from last week, the indexes continue to consolidate their recent strength, with all three now comfortably back above their 50-day moving averages. The Dow now needs to stay above 16,040 to maintain its primary bullish trend. The S&P 500 needs to stay above 1,815, and the Nasdaq must remain above 4,160.

Our internal indicators are reflecting the improving strength being shown by the indexes. The Advance/Decline Index and Cumulative Volume Index are bullish. The 200-day Moving Averages Index has moved well above both its 50-day and 200-day moving averages, with its 50-day average continuing to close in on its 200-day average. A cross above the 200-day average by the 50-day average would be a very strong bullish confirmation. Secondary index indicators also continue to improve. All nine major S&P sector funds are bullish in the stock market today, as are all three components of Dow Theory.

Long-term Treasury bonds (TLT) have reversed course and have been very bullish over the past week, crossing back above their 200-day moving average once again. A move above $109.50 would go a long way toward confirming a renewed bull market in bonds. TLT’s 50-day moving average crossing back above its 200-day average would also be a bullish indication. There is one caveat, however. Recent weak economic numbers may have been negatively affected by extreme weather conditions in much of the U.S. A return to normal weather could result not only in more normal economic growth, but also better-than-expected numbers when compared to recent months. Generally, strong economic growth is bearish for bonds.

With our indicators bullish and still improving, options traders should continue to lean more toward bullish positions such as buying calls. However, don’t ignore owning puts altogether. It never hurts to have some portfolio insurance in your pocket.

But today I bring you a bullish call to play the trend in the stock market today that my system, which uses a mix of technical analysis and fundamental review, identified as both undervalued (cheap) and as highly probable of making a significant move in the short-term.

Recommendation: Buy the Adobe Systems (ADBE) Apr 75 Calls  at $1.10 or lower. After entry, take profits if the stock price hits $74.90 or the option price hits $3.00. Exit if the stock price closes below $67.40 or the option price closes below $0.60.

Note: This is a relatively thinly-traded option chain, so you may need to be patient to get established at my recommended entry. Avoid buying a large number of contracts at once to prevent wild price swings; instead, enter your orders in smaller lots of five or 10 contracts.

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