Call it Investor INTELligence (INTC, CAE)

With the close of 2014, we wrote a letter called A New Year’s War Wish, in which we extolled the killing ability virtues of a Canadian aerospace and defense company’s technology.

The company is called CAE Inc. and it also trades on New York under a very creative ticker – CAE.

amazing

In that letter, we wrote that war was good for arms makers and that CAE was poised for a very sharp breakout, of which we wanted to take advantage.

And what happened?

Take a look at her chart for the last six months –

cae127

Technically, we see a pop that should carry the stock much higher in the coming months. We’ve broken above all-time highs set (in Canadian Dollars) roughly a year ago (red circle). We have both the daily and weekly RSI and MACD indicators trending above their respective ‘waterlines’ (daily, in blue), a full-on bullish development. And both daily and weekly moving averages are trending higher and are on the cusp of unfurling (weekly is not shown).

All told, a promising picture.

So why are we bailing out?

Well, for starters, a gain of over 10% in just four trading sessions is likely unsustainable and might generate some knee-jerk short-selling. But even if the buying continues, we haven’t seen the volume surge that we’d like, and that, too, gives us pause.

In the interim, there’s nothing wrong with taking a healthy gain off the table when it’s on offer.

Right, Rufus?

haynew

The details of the trade were as follows –

We recommended you purchase the CAE June 12 CALLs (available only on the Canadian Options Exchange in Montreal), then trading for $3.50.

And today those same CALLs are fetching $4.05, a $0.55 gain on $3.50 spent, or nearly 16% in exactly four weeks. That’s 160% annualized for those who play those games, and it seems a good bet to us to grab it here.

Thanks to fellow Normandian Matt McAbby for the tip on CAE. The old codger reached way back into his Canadian past to find us that animal, and we’re grateful to him for it. We also hope he’ll share some of the jackpot he claims he struck with the effort.

Eureka!

overyet

Oil.

We’re all keeping an eye on crude for signs of stabilization and recovery, though it’s still unclear when that will happen – or if it hasn’t already. Most bank economists are looking for $60 a barrel for crude as the year wears on, but we’re not going to make any predictions now. What is clear is that new drilling is all but over for the time being, as a great many existing wells and almost all new prospects have become unprofitable as the price of crude grinds lower.

And at $45 currently, we have a situation where rig counts both domestic and global have plummeted. Forget about additional production at these levels. The only gains we’ll see in coming months from the energy sector will be layoffs.

taketh

But that, too, will eventually be bullish for crude, as it implies shortages, at some juncture. We can’t say with any certainty that we’re there yet – that the market has already discounted the worst for crude – but the fact that oil producers haven’t fallen to the same degree as the commodity itself leads us to believe that traders have already sold what’s going to be sold for the time being. And unless we see signs of a protracted downturn economically in either the U.S. or China, the next move for oil will be higher.

China, by the by, is the nation that likely benefits most from cheap oil and gas (along with Japan). As importers, and with relatively no significant domestic O&G industry of their own, lower costs for these commodities go straight to their bottom line.

Our Trade for the Week

 

Assuming that we get the aforementioned long-awaited stability in oil, the market should gain traction, and it’s on that premise that we’re setting today’s trade. It’s not an oil trade. Rather, it’s based on tech being in the lead as the market eventually does catch its breath and turn higher.

We’re going back to the big name, old-line tech companies for this one, to chip maker Intel (NASDAQ:INTC), whose stock looks prepped for a full-scale blast higher after several months in the cool room.

Have a look here –

intc

Intel struck its latest highs in early December after a two-year ascent that added 100% to the price of the shares.

Since then, we see a flag pattern emerging with a current breakout level of $37.80 (in red). Should the shares dip below the bottom band of the flag, of course we’ll have to reassess the trade, but as flag patterns are generally understood to be continuation formations, it’s more likely we’ll get a burst toward the old highs and a subsequent push on $40.

We note, too, that the flag pattern afforded needed time to both RSI and MACD indictors to cool dramatically (in blue). They’re now hovering around their mid-way ‘waterlines’, offering the stock significant headspace before worries of any ‘overbought’ condition have to be considered.

The trade we’re considering looks like this –

First, because we see the breakout as imminent, we want to purchase near term CALLs. Near term is three months, in our view, a time horizon that will allow for some to and fro action in the stock if our assessment of an immediate broader market surge is errant.

We’re also going to purchase the 38-strike, as that’s the top end of the flag, beyond which we expect to see a significant rise.

That gives us the INTC April 38s.

At the same time, we’re going to reduce our costs and hedge the trade with the sale of a bullish PUT spread, also using the same expiry, by selling the April 32s and buying the 29s.

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Options Trader Elite recommends you consider 1) closing out your long CAE CALLs, as detailed above, and 2) buying the INTC April 38 CALL for $0.55. At the same time, sell the INTC April 32 PUT for $0.40 and buy the April 29 PUT for $0.15. Total debit for the trade is $0.40.

Maximum loss on the trade is $340. Maximum gain is unlimited.

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Options Trader Elite recommends you consider 1) closing out your long CAE CALLs, as detailed above, and 2) buying the INTC April 38 CALL for $0.55. At the same time, sell the INTC April 32 PUT for $0.40 and buy the April 29 PUT for $0.15. Total debit for the trade is $0.40.

Maximum loss on the trade is $340. Maximum gain is unlimited.

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With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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