Bonus Idea, August 3rd, 2015: Wells Fargo
Dragonfly Capital | Aug 03, 2015 07:57AM ET
Here is your Bonus Idea with links to the full Top Ten:
Wells Fargo (NYSE:WFC) has been around forever, gobbling up smaller banks along the way. But with each successive rebranding, the the stagecoach continues to be the main symbol of the company. Now, Wells Fargo is the 6th largest bank in the world by assets and second in the US, behind only JP Morgan (NYSE:JPM).
The stock price has moved higher over time as well. It was one of the quickest banks to recover from the drop during the financial crisis, and has been making new all-time highs almost monthly since July 2013. The latest was July 23rd. This is one great trend, and you should own this as part of your portfolio long term.
Over the short term, we look for possible places to enter the stock at a great relative price and possible ways to trade in and around your position. This week presents a few from the chart. The price pulled back after making that July 23rd high, but bounced at the 20 day SMA. Friday found it falling back, after making a lower high, at the late June high level.
The momentum indicators are in bullish territory, but are pulling back, suggesting there may be short term weakness. The RSI is moving down and the MACD has crossed down. There is room for a pullback here without jeopardizing the uptrend. Outside of that, there remains a target from the break of an ascending triangle to 65.
There is support lower at 57.35 and 56 followed by 55.25. Under that, it makes a lower low and pulls the uptrend into question, but still has support at 54 and 53. Resistance higher is only at 58.10 and then the all-time high at 58.77. Short interest is less than 1%.
Looking at the options chains, the August 7 Expiry shows large open interest between the 57 and 58 strikes, relative to other strikes. This could lead to the stock holding in that range this week. The regular August monthly Expiry shows the open interest at 57.5 about double that of the next largest strikes, which are the 55 Put strike and the 60 Call strike. Further out in the September monthly Expiry, the largest open interest is at the 60 strike, with the 57.5 strike a close second.
Wells Fargo
Trade Idea 1: Buy the stock with a stop at 57.
A straight stock trade. Use 54 for the stop for a long term horizon.
Trade Idea 2: Buy the stock with a August 57/55 Put Spread (offered at 35 cents late Friday) and selling a September 11 Expiry 59 Covered Call (36 cents) to pay for it.
The Put Spread Collar gives protection to 55 through August Expiry.
Get The News You Want
Trade Idea 3: Buy the August 7 Expiry 58/57.5 Put Spread and sell the August 14 Expiry 57 Put (free).
A 1×2 Put Spread this is a net bullish trade. It will give you an entry to the stock at 56.5 next week should the price drift down and close under 57.
Trade Idea 4: Buy the September 57.5 bull Risk Reversal (9 cents).
A levered bullish trade buying the September 57.5 Call and selling the 57.5 Put that at worst has you long the stock at the current level.
Trade Idea 5: Buy the August/September 57.5 Call Calendar (51 cents).
Avoids the possible short term pullback and has longer dated exposure via the September cCalls, while looking for the large open interest at 57.5 in August to stall the stock at August Expiry.
After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, heading into the dog days of August, sees the Equity markets having weathered another storm but not showing strength to push higher yet.
Elsewhere, look for gold to consolidate or continue lower, while crude oil moves to the downside. The US dollar index looks to move sideways with an upward bias, while US Treasuries are biased to continue higher. The Shanghai Composite and Emerging Markets both are biased to the downside, but trying to consolidate.
Volatility looks to remain subdued keeping the bias higher for the equity index ETF’s ARCA:SPY, ARCA:IWM and NASDAQ:QQQ. Their charts suggest that there is potential for some weakness in the current move short term though. On the longer timeframe, the QQQ looks strong, and may be ready for new all time highs, while the SPY is on consolidation and the IWM a retrenching consolidation. Use this information as you prepare for the coming week and trad’em well.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog. Please see my Disclaimer page for my full disclaimer.
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