Cummins (CMI) - Get Report stock recently fell to a 52-week low in the wake of disappointing earnings news in late October. The chart reveals, however, that it might be time for this stock to move higher.
In addition to making the 52-week low, the stock has seen an interesting development during the past month. The typical daily breadth of trading has narrowed considerably as the new low was reached. Previously, 2- to 3-point daily ranges were not unusual, but since mid-November, the daily range has only been about 1/2 point. This by itself could be a signal of a coming price move. Volume confirms this. Small breadth often is followed by large breadth, and low volume often is followed by high volume.
Confirming the likely bullish move was a piercing line pattern near the middle of the month, followed quickly by a confirming bullish harami. Expect the stock price to move higher and back above the support at about $106 established in September.
With this likely bullish move in mind, take a look at selling the December 98 put option. It closed on Nov. 23 with a bid of 2.35. Adding $9 for trading costs, this put can be sold for a net of $226. As long as the stock's price remains in consolidation, the put will lose value rapidly; if the price rises as predicted, this short put will be a profitable trade. Because uncovered puts have the same market risk as covered calls, this trade is easily managed even if the price does not behave as predicted.
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