DJIA Rebalance Trade – 13 September 2013

It’s common knowledge at this point that the Dow will welcome 3 new members and delete 3 current members this coming Friday September 20th.

We think there is the possibility of a good risk/reward trade to be had in one of the names.  While we think there is a strong possibility of demand outstripping supply in each of the names to be added this week, we especially like the chart structure of Goldman Sachs.

goldman sachs

We recognize that GS has just rallied back to the uptrend line after breaking it to the downside (which is normally a great sell setup)… However, the rally has taken us all the way back through the uptrend line.  Further, the potential buying of indexers as we approach its inclusion in the Dow should spur the stock back up through its current 52 week high at $169.69.  If that move happens, we think there is a strong possibility of a test of the January 2011 high around $175.

goldman sachs

 How to play

There are a number of ways to play this opportunity:

  1. Play it straight up — Buy the shares as best you can tomorrow (Monday) morning and place a hard stop below the most recent swing low (around $152).
  2. Stalk the trade — Look for a better entry via a pullback in the next couple of days… if and when you get it and enter, hard stop rules still apply.
  3. Option the trade — Play 1 or 2 via call option.  The October 165’s went out offered at $4.40/contract on Friday.  That means buying the 165s would cost $440.00 per contract (assuming you can get that price).  The good thing about taking the trade that way is you guarantee your loss if the stock falls will be no more than $440 (excluding transaction costs).
  4. The especially aggressive might consider a paired trade… selling short perhaps BAC to buy GS.

These are just a few of the MANY ways to take this play.  We think there is a great chance that the stock lifts so watch this one closely.

Disclosures:

  1. We neither have nor will have a position in GS or BAC.  We don’t play single shares, so no worries about front running here.
  2. Many years ago, we were employed by GS.
  3. We are not an investment advisor.  If you trade based on fundamentals, then by all means feel free to employ your your fundamental screens and complete your due diligence… this idea is about timing.

 

Tell your peeps...