JM Smucker Will Move Lower After Thursday's Earnings Rally -- Use This Options Trade to Profit

After releasing better-than-expected earnings, JM Smucker (SJM) stock has advanced well above resistance and should make a short-term retreat. You can use stock options to profit from such a move.
By Michael Thomsett ,

J.M. Smucker (SJM) - Get Report reported better-than-expected earnings before the stock market opened Thursday.  The stock rallied 7% on the news, advancing to more than $121 from less than $114 in a single session. Even with positive earnings, however, this might have been an exaggerated move, and a correction is likely to follow. The chart shows why.

Looking back over recent months, several signals are clear. First, the previous resistance zone transformed into a new support zone, an overall bullish move. On Thursday, however, the stock's price gapped above newly established resistance. Such a move is often followed by a correcting reversal. Second, a volume spike also appeared on Thursday. Looking back over previous months, spikes seem to occur at important turning points: the large upside gap in late August, the dip below support in early October and now the big price jump on positive earnings news. Momentum, as measured by the relative strength index, has not moved out of the middle of its range yet, but a very large index move took the RSI close to the overbought line. It is noteworthy that the RSI has not moved into "overbought" territory at any time in the past six months.

Taken together, these bearish signals all predict an adjustment in price levels back into the recent range. The established range is between resistance of $117.75 and support of $111.75, so a strong correcting move would not be a surprise.

With these signals in mind, you may want to consider buying the December 120 put option. It closed on Thursday at an ask of 2.20, so it can be bought for $229 when trading costs are added. There is adequate time for this put to season into a profitable status. A move in the stock's price to less than $118 would clearly set this put option as a profitable trade.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging at TheStreet.com, Michael Thomsett also blogs at theCBOE Options Huband several other sites. He is author of 11 options books and has been trading options for 35 years.  Thomsett Publishing Website

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