Markets continue to show strength, but with sector rotation continuing to be a prominent theme.
Right now, focusing on names that have significant upside with strong technicals seems to be the best thing I can do for my portfolio. Let’s review LULU from last week’s newsletter to illustrate the power of finding a solid technical setup:
LULU closed just above the 100-Day Moving Average on Friday, and the follow-through on Monday and Tuesday was significant! The upside is still there, but I want to look for some other trending stocks that have the potential for another leveraged return.
One key sector could be the financials as earnings have started strong, and that’s certainly creating a tailwind to the financial sector as well as small caps:
As we can see, XLF is pushing to new highs on the back on the earnings fundamental input. But, until we finish up these earnings, I want to look for something else that isn’t correlated to financials.
Technology could be of interest, but we’re seeing some rotation out of technology, with yesterday’s large pullback in semiconductors:
So, what’s going to be my focus? I can stick with retail related consumer cyclicals, and one name that’s certainly caught my eye is Macy’s (M):
The stock is trading just above the recent consolidation range and looks ready for a move higher. With a breakout, this could lead to a quick upward trajectory to $17 or more. While that doesn’t sound like a big move, if it happens in the next 2.5 weeks, I can get some significant leverage using options, as the Novall1st $16 calls are trading for around $0.45 – those would increase in value by more than 100% on a move to $17, and all of the sudden, I’m seeing some real leverage out of a relatively smaller move!
That’s the great thing about options – if I can find a good technical and options setup, I can leverage it with options and generate a significant return on a relatively small move. There will be a new input from retail sales data on Thursday that could impact my trade, so the benefit of defining my risk while looking at a strong technical setup is very attractive for my trading style.
If you’d like to get a list of more ideas and setups just like this that could be of interest for trading opportunities, check out my Outlier Watch List.
And as always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.
Keith Harwood
Keith@optionhotline.com
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