NOTE: U.S. markets will be closed all day on Monday, Feb. 17, for Presidents’ Day. You should expect the next Trade of the Day to hit your inbox on Tuesday, Feb. 18.
My regular readers know I never want to buck the tape, or go against the action in the market, which is why I am recommending a bullish call option on Rite Aid Corporation (NYSE:RAD).
My indicators are giving bullish-to-neutral readings this week, a mild downgrade from last week’s bullish readings.
While the S&P 500 index, Dow and NASDAQ have all set a series of new all-time highs this week, market breadth, or the ratio of advancing stocks to declining stocks, is starting to fall.
This has been a sign of short-term market tops in the past, and I continue to feel that the markets are especially vulnerable right now due to the ongoing COVID-19 situation.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
As you can see in the chart of the S&P above, the index pulled back when the virus started to spook investors. But the decline was halted by its rising 50-day moving average (red line).
It then made a decisive breakout through the 3,335 level on Monday and continued on to set a new intraday record high of 3,385.09 yesterday.
Investors are clearly shrugging off the potential for the coronavirus to take a big toll on not just our health but our economy as well. I think that’s a mistake, but at the same time, we don’t want to bet against the broader market if we aren’t seeing signs of a collapse.
RAD overlaps with a sector that benefits from the virus outbreak, and recently, the stock has been making higher highs.
Watch the VIX for Signs of Fear
We’ll know when the market is getting nervous about the economic impact of COVID-19 by watching the S&P 500 Volatility Index (VIX).
Daily Chart of S&P 500 Volatility Index (VIX) — Chart Source: TradingView
As you can see in the chart of the VIX above, Wall Street’s “fear gauge” has fallen from its highs three weeks ago. However, it closed just above its 50-day moving average (red line) yesterday and currently sits in between the 50- and 200-day moving averages.
Which way the VIX moves next could tell us a lot about whether or not the current market rally can continue. If it breaks down toward the lower end of its range, the bulls are likely to remain in control.
If it breaks higher, however, and clears its 200-day moving average (blue line), that would mark another higher-low and signal that volatility could return to the market.
As of this writing, stock futures are climbing once again. The markets remain near their highs, and the VIX remains low. If we are going to try to capitalize on this rally, a cheap call option on RAD might be the best way to do it.
RAD is Pushing Higher
After a massive spike and subsequent drop in late December 2019 and early January 2020, RAD found a bottom and pushed higher, tapping resistance just below $14. As you can see below, the stock pushed above that level this week.
Daily Chart of Rite Aid Corporation (RAD) — Chart Source: TradingView
Yesterday, the stock tapped resistance at around the $15 level, which dates back to early 2019. It could struggle to overcome this level, but if it retests its support at its 50-day moving average, it could bounce back up and head higher.
I think the stock will keep making higher-highs in the short term, following its up-trending resistance.
Buy to open the Rite Aid Corporation (RAD) April 17th $16 Calls (RAD200417C00016000) at $1.70 or lower.
InvestorPlace advisor Ken Trester also 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.