Two to Watch

This article originally appeared on RealMoney.com on Sept. 3, 2014 at 12:26 p.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.

Fades don't come easily these days. We have seen big turns from green to heavy red in a few momentum names this morning, including Splunk  (SPLK) , Twitter  (TWTR)  and FireEye  (FEYE) , so a change of character worth noting. But calling tops in anything has been tough. There's no reward for calling a top. Sure you could get a maximum profit, but you will be taking the maximum risk. A day like today, however, should encourage a few more folks to start looking lower.

Admittedly, I did make a similar call with my short in the iShares 20+ Year Treasury Bond ETF  (TLT)  last week, but that was based on a trading pattern rather than trying to call a top. Fortunately, it has worked well, as TLT has retraced from above $119 to the mid $116s, giving me the chance to liquidate 80% of my short position. It should be noted, though, that I did get dinged with the dividend there, so the overall gain was a 20 basis points lower.

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I have my eye on Sturm Ruger  (RGR)  and Royal Caribbean Cruises  (RCL) , but (and it is a big but) I want to see how both names close since they've been fading a bit with the market.

Sturm Ruger is trying to turn higher after a disastrous end to the month of August.

Momentum is pushing above 50, as shown by the relative strength, while volume is picking up as well. A close over $51.50 makes the October $52.50-$55 call spread look like an attractive risk-reward in the $0.90 or less range. A push to $53.50 or $54 is certainly on the table, but this will be tough if we continue to fade.

Royal Caribbean Cruises has a fantastic cup-and-handle pattern targeting $68. The key will be the stock holding $64, although any close under $65 today is going to be a bit troublesome as a bearish candlestick pattern is likely to print. My guess is that a shooting star could develop. If we see that, then I'll wait.

Overall, this is very strong with the breakout today, so if Royal Caribbean bulls can avoid a close under $65, a setup is in place for an October $65-$70 call spread for $1.70 or less. If I were long the stock, I would be using a close under $63 as a stop; the call spread provides a similar amount of capital at risk, although the risk-reward profile is not the same. The call spread has a lower probability of success but has a much smaller risk level. When a market is trading at or near highs, those are the profiles I am more inclined to pursue.

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At the time of publication, Tim Collins was short TLT.

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