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Trade of the Day: Royal Dutch Shell (RDS.A)

Until the market changes, I'm keeping a bullish bent


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This market is really quite extraordinary. Yes, Monday the S&P closed with fractional losses, but think back a few weeks. People were speculating whether the S&P 500 would reach 1600, and now it’s pushing 1700.

I’ve been bullish for months and I still don’t feel as if I’ve recommended enough bullish positions. It’s one of those extraordinary situations where the short sellers continue to get squeezed and prices are jumping faster than you can recommend new positions.

I’m not forecasting a crash tomorrow or anything, but this won’t last forever. It has a lot of the markings of a blowoff top—and by that I mean stocks will get squeezed to the point where every short seller has to cough up his or her short positions by buying them back, and then without any more marginal buyers left, stocks sink. Right now I think that it’s almost impossible to know where we are in that process, but markets always pull back at least to the 20-day average, and certainly the 50-day average, and later the 200-day average. In this environment, the S&P hasn’t pulled back to its 20-day average since April. When it does—and it almost has to do, since no market defies gravity forever—then the pullback would be at least to the 1620 area. And if it pulls back to 1620 this week, and even closes below 1615 by the end of the week, then we might see a pullback all the way back to the 1500s.

But while the sun is shining on markets, one way to take advantage of  bullish sentiment is to put your money behind cyclical names that are just now coming into favor. As 24/7 Trader contributor Serge Berger noted yesterday, several energy stocks have very positive technical setups, and in this space, a rising tide lifts all boats.

So what better way to get exposure to the area than with Royal Dutch Shell (RDS.A), one of the largest companies in the world? Shares have been stuck at the $65-$70 area for three years, but I suspect that they will get going to a new high at some point in the next three months.

Recommendation: Buy the RDS.A. July $70 calls (currently trading around 65 cents) for a $1.25 target.

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Want to learn how to rein in your subjective side to capture more profits? Jon Markman is hosting a free 30-minute webinar this Wednesday at 4:30 PM Eastern: Trade Against Your Gut: When Instinct is Your Worst Enemy.

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