This morning, I’m recommending a bullish call option on Amarin Corporation plc (NASDAQ:AMRN), the biopharmaceutical company.
My indicators are giving strong sell signals this week, a downgrade from last week’s bearish-to-neutral readings. I was somewhat surprised by the current reading, as the S&P 500 is trading at almost exactly the same level it was last Friday. Now, I know it seems strange to recommend a bullish trade, but hear me out.
As you can see in the chart of the S&P below, it’s been a wild ride lately. The index gapped higher on Friday morning and went on to close above its 50-day moving average (red line).
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
It gave up a lot of those gains on Monday before gapping lower and closing below the 2,900 level on Tuesday. Since then, the index has been grinding higher and is once again above its 50-day moving average.
This brings me back to my indicators. I was surprised to see those sell signals because, in my view, the market is holding up a lot better than I expected given all of the back-and-forth on the trade situation.
According to the most recent survey by the American Association of Individual Investors (AAII), only 20.3% of respondents were bullish, which was well below the long-term average of 38%.
35.7% are neutral, which I think makes sense, but a whopping 44% of investors are bearish. That’s significantly higher than the historical average of 30.5%.
I like to look at this survey as a contrarian indicator. In other words, I want to do the opposite of what the crowd is doing. And right now, the crowd is too bearish.
Confirming With the VIX
I’m getting confirmation of that stance from the CBOE S&P 500 Volatility Index (VIX), which never got into its resistance zone in the 21-25 range.
Daily Chart of CBOE S&P 500 Volatility Index (VIX) — Chart Source: TradingView
As you can see in the chart above, the VIX only briefly traded above the 21 level and has since fallen back below the 17 level and its 50-day moving average. With yesterday’s rally and today’s jump higher, I would expect the VIX to fall further and potentially close below its 200-day moving average as well.
Remember, the VIX is known as the market’s “fear gauge.” When the market rises, the VIX typically falls. Sometimes, if the VIX rises with the market, it can be a sign that a drop is coming. But that’s not what’s happening right now.
And until it rises back above the 17 level again, I don’t think we need to be worried about a big drop in the market.
Bouncing off Support at $14
As you can see in the chart below, AMRN gapped lower in August, and it established support at the $14 level. It gradually moved to fill in the gap through August and September, but after hitting resistance just under the $18 level — which is close to the bottom of its August gap — it dropped back to support at $14.
Daily Chart of Amarin Corporation plc (AMRN) — Chart Source: TradingView
This successful retest of support tells me the stock won’t head lower for the time being. If the market does turn to the upside as volatility falls, investors will be looking for bargains, and I think AMRN qualifies. I’m expecting it to push back toward the bottom of the August gap, which should give us a chance to collect a profit on a bullish call option.
Buy to open the Amarin Corporation plc (AMRN) Dec. 20th $18 Calls (AMRN191220C00018000) at $1.60 or lower.
To receive further updates on this trade, as well as an alert when it’s time to take profits, sign up for a risk-free trial of Power Options Weekly today.
InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. 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.
