| Momentum Pushing ABT Higher |
Dear Reader,
Yesterday, we looked at a Monthly Price Chart of ABIOMED, Inc. noting that the stock's 1-Month Price is trading above the 10-Month SMA.
For today's Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for Abbott Laboratories stock symbol: ABT.
Before breaking down ABT's MACD chart let's first review what products and services the company offers.
Abbott Laboratories discovers, develops, manufactures, and sells health care products worldwide. Its Established Pharmaceutical Products segment offers generic pharmaceuticals for the treatment of pancreatic exocrine insufficiency; irritable bowel syndrome or biliary spasm; intrahepatic cholestasis or depressive symptom; gynecological disorder; hormone replacement therapy; dyslipidemia; hypertension; hypothyroidism; meniere's disease and vestibular vertigo; pain, fever, and inflammation. |
MACD Indicator confirms Price Momentum
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The ABT daily price chart below shows that ABT 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.
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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.
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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.
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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 initial price target for ABT stock is 109.60 per share.
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97.8% Profit Potential for ABT Option
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Now, since ABT stock's 12/26 Day MACD line is trading 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 an ABT 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 ABT 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 ABT option example, we used the 1% Rule to select the ABT 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. |
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| | Afraid of Market Volatility Rocking Your IRA? |
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| Chuck Hughes isn't afraid market volatility, he welcomes it. Chuck's used to turbulence. His years as a pilot gave him the the ability to weather even the worst storms. He has a tested and proven secret strategy that thrives during turbulent market conditions. For more information click here. |
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| | Trade with Higher Accuracy
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When you use the 1% Rule to select an ABT in-the-money option strike price, ABT stock only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if ABT stock is flat at 101.53 at option expiration, it will only result in a 4.2% loss for the ABT option compared to a 100% loss for an at-the-money or out-of-the-money call option.
Using the 1% Rule to select an option strike price will result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for ABT on 7/30/2020 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if ABT stock increases 5.0% at option expiration to 106.61 (circled), the call option would make 46.8% before commission.
If ABT stock increases 10.0% at option expiration to 111.68 (circled), the call option would make 97.8% before commission and outperform the stock return nearly 10 to 1.
And if ABT stock increases to our initial price target of 109.60 at option expiration the call option would make 76.9% 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. |
Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.
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| Today Chuck is offering you a very special deal.
As a Trade of the Day subscriber, if you sign up and become a member of The Chuck Hughes Inner Circle Trading Service today, he will give you special discount.
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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