Trade of the Day: DuPont (DD)

After three weeks of market strength, my indicators are giving bullish-to-neutral readings, though I personally remain closer to neutral. The S&P 500 has run up to the 2,050 level this week, but I expect it to hit significant overhead resistance in this area, which is why I think the market’s next move is going to be to the downside.

As I have mentioned before, the rallies we’re seeing are indicative of strong short-covering, and what we saw Thursday stemmed from the European Central Bank’s announcement that it will continue to print money to shore up its economy. It’s a bad sign overall, but it is bullish for stocks temporarily.

Earnings have also been neutral, as they have neither disappointed or overwhelmed Wall Street. For each stock that trades higher after announcing its earnings, just as many are trading lower.

My stance is that we’re in a rolling bear market, in which specific industries are taking a turn at the chopping block. Earlier in the month, we saw biotechs get hit, last week it was the materials sector and, right now, the hospital stocks are really collapsing. The weakness is likely to keep rolling from sector to sector, though it would take a crystal ball to guess which will be next.

That said, as we move closer to November, the picture becomes more bullish. My 40-plus years of experience tell me that investors want to own stocks between November and May. As I start to see signs of a bottoming process, I would expect investors to use any downdrafts in the next few weeks as a way to pick up bullish plays at a discount.

I would continue to hold some bearish trades to take advantage of any near-term weakness, but I’m recommending adding a bullish play  today in case the market breaks through the first layer of overhead resistance.

Buy to open the E I Du Pont De Nemours And Co (DD) Dec. 18th $60 Calls  (DD151218C00060000) at $1.40 or lower. After entry, take profits if the stock price hits $61.60 or the option price hits $2.70. Exit if the stock price closes below $58.

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.

If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid.

Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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