Trade of the Day: Applied Materials (AMAT)

by Ken Trester | March 21, 2014 8:16 am

Major stock market indexes have returned to their previous bullish trend following last week’s tough sledding, and our indicators point to that a continuation of that trend. Our index indicators are giving bullish readings, an upgrade from last week’s bullish to neutral. The Dow has now made a successful recovery back above its 50-day moving average, and all three major indexes are once again in sync with our primary bullish trend readings. That trend will remain in place as long as the Dow stays above 16,160, the S&P 500 above 1,835, and the Nasdaq above 4,225.

Our 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index internal indicators continue to confirm the bullishness of the indexes by giving bullish signals of their own. All nine S&P sector funds are also bullish, as are the Dow Transports and Dow Utilities, providing a “Dow Theory” bullish signal. The bullishness appears warranted, given the lessening of geopolitical tensions and improving economic numbers in the U.S.

Those improvements, along with recent hawkish comments made by new Fed Chair Janet Yellen, are showing up in long-term Treasury bond prices (TLT), which again failed to break out of their trading range. TLT has pulled back below its 200-day moving average, but will remain in an intermediate bullish trend by staying above $106.60. Even if TLT drifts lower, it has stabilized immensely from late last year when we saw signs that it might break down completely. This stabilization lends to a perception of interest rates stabilizing around current levels, which is beneficial to both stocks and the economy.

While the economy might be showing signs of improvement, according to the commodities markets, it is not about to break out with a sudden show of strength. After a rally attempt earlier this year, copper prices, which are viewed by many as an indicator of economic strength, have plunged back into bearish territory. Gold has been rallying for a variety of reasons, but has stalled over the past week as the geopolitical news improved.

With our indicators returning to bullish territory, options traders should move back toward focusing on bullish positions such as buying calls. But continue to buy and hold a few puts. It never hurts to have some portfolio insurance in your pocket.

For today, to get some upside exposure to the stock market, we’ve got a chip maker: Applied Materials (AMAT[1]).

Buy the AMAT Jul 21 Calls $0.95 or lower. After entry, take profits if the stock price hits $21.70 or the option price hits $1.70. Exit if the stock price closes below $19.50 or the option price closes below $0.70.

Remember, if a profit target is hit intra-day, exit and take profits immediately. If the option closes at or below the stock-based or options-based sell signal price, exit the trade the next morning at the open.

Additionally, if an option has neither closed at or below the sell signal price nor hit the target within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

InvestorPlace advisor Ken Trester[2] brings you Power Options Weekly[3], which delivers 5 new options trades to you each Friday. It’s the perfect ‘bridge’ between investing in ordinary stocks and the turbocharged world of options trading. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95[4].


  1. AMAT:
  2. Ken Trester:
  3. Power Options Weekly:
  4. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95:

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