Wednesday marked the biggest post-Christmas rally for U.S. stocks ever amid strong retail sales indications, surging oil prices and positive headlines from the White House. The DJIA jumped 1,086.25 points, or 4.98%, posting its largest single-day point gain in its history, while the S&P 500 and Nasdaq recorded their best days since March 2009. Santa’s trip to Wall Street is not coming easy, however, with futures pointing to a significant decline for the three major U.S. stock indexes ahead of the open.
Let’s consider Ctrip.com International (Ticker: CTRPWealth Strength IndexCTRP is Moderately Flat and trending Down):
The VantagePoint platform recently indicated upside momentum.
Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average on December 26th. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the GREEN position on the same day. This indicator measures strength and weakness for a 48-hour period, in this case, strength. The move to the GREEN position further makes the case for a potentially bullish scenario. We also have the predicted high and low above yesterday’s actual high and low indicating further strength. I want to play the VP bullish indication.
If you are strictly a stock trader, simply buying CTRPWealth Strength IndexCTRP is Moderately Flat and trending Down in the $28.25 area is a prudent move. You are anticipating a move to the upside. It is always a good idea to enter a sell-stop order to mitigate potential losses. Placing that sell-stop in the $27.50 area will achieve that goal.
For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.
Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation. First, you want to identify your target strike. To do this, you need three pieces of information: current underlying price, the date of the options expiration that you want to use and the implied volatility for that expiration. For CTRPWealth Strength IndexCTRP is Moderately Flat and trending Down that yields a target strike of approximately $30.50. You can consider purchasing the January 4th weekly expiration 29/30.5 call spread for $0.40. The most you risk is the premium you pay and the most you can gain is the width of the spread less any premium paid. Max risk = $0.40, max reward = $1.10. This yields a risk to reward ratio of 2.75:1.
Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.