Trade of the Day: Quintiles Transnational Holdings (Q)

Our index indicators are giving bullish readings, unchanged from a week ago. But that does not tell the whole story for stocks. As we noted last Friday,  the Dow dipped below its 50-day moving average, and it was joined by the S&P 500 and Nasdaq on Monday.

But since then, all three have rebounded sharply back above their 50-day averages. This kind of volatility, while pleasant on the upside, is not a sign of a confident and stable market environment. Sharp reversals in stocks can happen at any time. For now, the Dow remains bullish above 17,420, the S&P 500 above 2020, and the Nasdaq above 4,635.

Of our internal indicators, the 200-day Moving Averages Index is confirming the idea that increased volatility may not have run its course by remaining level 1 bearish. But on the positive side, the Cumulative Volume Index and Advance/Decline Indexes are mirroring the stock indexes by falling and then rebounding back to level 1 bullish. Seven of the nine major S&P sector funds are in primary bullish trends, unchanged from a week ago. Materials joining energy continue to be the laggards. And volatility indexes are moving sharply lower.

Another sign that some calm might be returning to the markets is seen in Treasury bonds (TLT), which have pulled back the past couple days. But as is the case with the stock indexes, TLT’s move has been unusually sharp. While we hesitate to call the recent surges by stocks and decline in TLT a dead cat bounce, which would imply more stock selling lies ahead, “short covering” most certainly is playing a part. That will run its course in due time. For now TLT can be viewed as “safe haven” money, and it remains bullish, as does the dollar (UUP).

The main driver behind current market volatility continues to be the decline of oil (USO). Such a decline would usually be seen as overall bullish for stocks, but some beneath-the-surface factors might be entering play here. Russia’s economy and currency are heavily tied to oil, and memories of the ruble collapse in 1998 and the market mayhem it caused is resurfacing in traders’ minds. Also on their minds is that some large banks and brokerages are heavy players in North American oil shale production, and those institutions might be slipping into the same over-leveraged financial condition they were in just prior to the real estate collapse a few years ago.

While momentum in the major stock indexes continues to lean to the bullish side, potential trouble still lies beneath the surface. Options traders should evenly weight bullish and bearish positions, and also use caution when entering those positions, i.e., perhaps take smaller positions than you normally would. This is where my proprietary analysis performs best because it allows me to trade without emotion.

The options program I’ve developed over the past 40 years uses multiple regression analysis and other statistical tools to unearth the few stocks that are building momentum and poised to make a quick burst. My programs look most closely at relative strength, support, resistance levels, volatility and key indicators telling me which stocks are ready to break out.

From there, once I discover the key, high-momentum stocks, I then search for the handful of options that meet my two vital criteria: They must be underpriced (which reduces your risk), and they must give you a good probability of profit.

Today, I’ve got a trade that meets all of my standards in a medical laboratories and research company with a $7 billion market cap that you may have never heard of before. North Carolina based Quintiles Transnational Holdings Inc (NYSE:Q) does research for the biopharmaceutical industry on a contract basis, and my mix of technical and fundamental analysis shows it’s set to move up in the short term. 

Buy the Q Feb 65 Calls at 80 cents or lower (Q closed Thursday at $59.40). After entry, take profits if the stock price hits $63.70 or the option price hits $2.20. Exit if the stock price closes below $57.30.

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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.

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