| Dear Reader,
Yesterday, we looked at a Monthly Chart of Bilibili, Inc., noting that the stock's 1-Month Price is trading above the 10-Month SMA signaling a bullish trend.
For today's Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Big Lots, Inc. stock symbol: BIG.
Before breaking down BIG's MACD chart let's first review what products and services the company offers.
Big Lots, Inc., through its subsidiaries, operates as a retailer in the United States. The company offers products under various merchandising categories, such as furniture category that includes upholstery, mattress, case goods, and ready-to-assemble departments; seasonal category, which comprises Christmas trim, lawn and garden, summer, and other holiday departments; soft home category that consists of fashion and utility bedding, bath, window, decorative textile, and more.
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MACD Indicator Confirms Price Momentum
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The BIG daily price chart below shows that BIG is in a price uptrend as the 12/26 day MACD line (black line) is above the 9-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart.
MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting a stock's longer term 26-Day Exponential Moving Average (EMA) from its shorter term 12-Day EMA. This creates the MACD line. |
The 9-Day EMA line functions as a buy/sell 'trigger'. When the 12/26 Day MACD line crosses above the 9-Day EMA line it indicates positive momentum and higher prices for the stock. When the 12/26 Day MACD lines crosses below the 9-Day EMA it indicates negative momentum and lower prices for the stock.
MACD is more of a leading indicator than a moving average cross over which tends to lag price movement. |
MACD Histogram Shows Acceleration of Momentum
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Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 12/26 Day MACD and the 9-Day EMA.
When a crossover initially occurs, the histogram's bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock's momentum. When the histogram's bars begin to shrink this indicates a narrowing of the gap between the 12/26 Day MACD and the 9-Day EMA and a slowing of the stock's momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon. |
As long as the 12/26 Day MACD line remains above the 9-Day EMA, the stock is more likely to keep trading at new highs in the coming days and weeks.
Our price target for BIG stock is 45.50 per share.
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| | | | 55.3% Profit Potential for BIG Option
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Now, since BIG's 12/26 Day MACD is currently well above the 9-Day EMA, this means the stock's bullish rally will likely continue. Let's use the Hughes Optioneering calculator to look at the potential returns for a BIG call option purchase.
The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat BIG price to a 12.5% increase.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following BIG option example, we used the 1% Rule to select the BIG option strike price but out of fairness to our paid option service subscribers we don't list the strike price used in the profit/loss calculation.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented above were calculated based on the current stock and option pricing for BIG on 6/3/2020.
For this specific call option, the calculator analysis below reveals if BIG stock increases 5.0% at option expiration to 40.51 (circled), the call option would make 25.1% before commission.
If BIG stock increases 10.0% at option expiration to 42.44 (circled), the call option would make 55.3% before commission and outperform the stock return more than 5 to 1.
And if BIG stock increases to our price target of 45.50 per share, the call option would make 103.1% before commission.
The leverage provided by call options allows you to maximize potential returns on bullish stocks.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
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Chuck is offering special pricing for his Weekly Option Alert Trading Service for Trade of the Day subscribers.
You can start receiving hand-picked trades from Chuck today!
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code "Optioneering VIP" to receive special pricing! |
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Wishing You the Best in Investing Success,
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| | Chuck Hughes Editor, Trade of The Day
Have any questions? Email us at dailytrade@chuckstod.com |
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