Profit From Severe Selling Pressure in TGT?

Dear Reader,

When I’m sorting through a group of stocks to identify which ones may be strong candidates to be added to my ‘Sell List’, I have a handful of technical indicators that I will use to help me filter down to the best looking bearish setups.

Just this morning, one stock popped up on my screen that met many of my criteria and warranted being added to the ‘Sell List’.

The stock that caught my attention was Target Corp. symbol: (TGT).

When I saw TGT’s stock chart, there were a number of things from a ‘technical perspective’ that I like to see. The stock is clearly in a long-term downtrend and meets many of my technical ‘Sell’ signal indicators. However, at any given time there could be hundreds of stocks that satisfy just these basic criteria.

Well, since this stock meets many of my more base-level technical mile-markers, I need to have some additional tools in my tool kit to help me parse through all the signals to separate ‘the best from the rest’. So, you may be asking, “What sets this stock apart from the rest of the bunch?”.

This is the right question! And the answer is that the stock is not only in an unquestioned downtrend, but TGT also has confirmed negative momentum in the selling pressure underwriting the stock’s move.

Let’s check out the technical breakdown of TGT stock in the chart below and I’ll tell you what in this chart has me so excited!

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Looking more closely at the chart, we can clearly see that TGT stock is in a definitive downtrend (circled). But what is so exciting about this chart is what’s shown in the lower portion of the chart, the ‘On Balance Volume’ line.

On Balance Volume measures volume flow with a single Easy-to-Read Line. Volume flow precedes price movement and helps sustain the price uptrend. When a stock closes up, volume is added to the line. When a stock closes down, volume is subtracted from the line. A cumulative total of these additions and subtractions form the OBV line.

Once I identify a stock, like TGT, with a clear downtrend, I will check the stock’s OBV chart to seek confirmation of the stock’s trend.

You can see in TGT’s OBV chart, the stock’s OBV line is clearly trending down which signifies that the stock’s selling pressure is exceeding its buying pressure which validates TGT’s ‘Sell’ signal. As long as the OBV line continues to trend downward, this provides pressure to keep to stock’s share price falling.

How I Would Look to Trade It

Since we have now confirmed the strength of TGT ‘Sell’ signal by getting confirmation from the OBV chart, now we will want to look for a potential trade to place.

I want to look to trade TGT’s trend and have the opportunity to capture some profits by placing an options trade on the stock.

Below is a Put Option Debit spread for TGT that I found just this morning that would allow me to gain some exposure to the stock’s significant bearish trend but also have some upside protection built in as well. Let me tell you how this works.

Once I place a Put Option Debit spread, it has the ability to profit if the underlying stock/ETF is either down, flat, or even up a bit at option expiration.

Below is a snapshot of my Put Option Debit Spread Calculator that shows the profit potential and downside protection analysis for my trade. This example examines a range of a 7.5% decrease to a 7.5% increase in TGT share price at option expiration.

Looking at the trade analysis, the calculator shows that this one single trade, that would cost you only $658 to enter, has the ability to profit 52.0%.

The calculator reveals that if TGT, at option expiration, were to decrease, remain flat, or even increase by as much as 5.0%, this low-cost trade would be set up to make a 52.0% return!

This Put Option Debit Spread strategy has been one of my absolute favorites to trade over the years and remains so today. The key behind it all is that by enabling your ability to profit if a stock is down, flat, or even up a bit gives you a much higher probability that your trade will end up a winner.

The Hughes Optioneering Team is here to help you identify high-probability trades just like this one.

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