Proctor & Gamble – Boxed In! (PG)

Today’s trade is a no-nonsense, straightforward SPECULATIVE haymaker on PROCTOR & GAMBLE (NYSE:PG) that pays out tomorrow – if we’re right.

Why the rush?

• First, because P&G earnings will be released tomorrow, Friday, the 30^th, before the bell,

AND

• Second, because CALL options on the stock are being purchased far too fast and in too great a quantity for our liking – a potential contrarian signal.

The set-up is picture perfect for a significant fall on any disappointment.

Add to that, massive cost increases (inflation!) and very little pricing flexibility, and you have the makings for just such a disappointment.

Fundamentally, the stock carries legacy, corporate behemoth valuations – nothing really out of the ordinary – but one item did catch our eye –

In the last six months, insiders have offloaded 62.35% of their holdings, a development that is rarely – if ever – seen in corporations with market caps of this proportion ($335 billion).

The dollar amount weighs in at a staggering $570 million!

That’s a lot of cash in the bank over such a short period, and no doubt aligns comfortably with the company’s share buyback program.

Not that we’re casting aspersions or anything…

Anyway, have a look at the HOURLY chart for P&G for the last ten days –

We offer the hourly chart with a caveat.

Yes, short term trading requires we examine shorter term price patterns, but technical analysis is anything but reliable at the micro level.

The rule is thus – the longer the pattern, the more reliable it will be AND the longer the time frame that will be required to profit from it.

Conversely, the shorter the pattern, the shorter the time frame required to profit AND the less reliable it will be.

That said, consider the following –

1. Hourly price is now below its short term moving average and is descending – a good sign for us.
2. Volume pick-up at the end of yesterday’s trade (in blue) may or may not be significant.  End of day volumes are always large, relatively.  But this may also be anticipated selling from those in the know.  Hard to say.  We’ll have more clarity at today’s open.
3. RSI is sub-waterline (in green) and MACD will confirm shortly, meaning swing traders and technicians trading on an hourly-basis will be adding to their shorts imminently.

Now look at the five-minute action –

Again, we warn that micro-technicals are not long term reliable, and even over a 48 hour period like the one we’re now examining, could prove fruitless.  The trade is speculative.  The tools are imperfect.

That said –

1. Price has now lost hold of the five-minute moving averages and is in free-fall (in red).
2. If the decline continues, all salient MAs will be rolled over and unfurling by noon today – a great development for we shorts.
3. We had advance warning this might be the case from the (mild) divergence against price apparent on the RSI from last Friday (in green).  It bespeaks a lack of buying momentum and lower prices ahead.

What remains now is to trade this sucker.

And we’re recommending like this –

A Jew and His Gold recommends you consider selling the PG July 30^th 138/140 CALL spread* for a credit of $0.77 (1.72/0.95) and buying the PG July 30^th 140/138 PUT spread** for a debit of $1.19 (2.14/0.95).  Total debit on the trade is $0.42.

[*Sell the 138 CALL and buy the 140. **Buy the 140 PUT and sell the 138.]

Rationale: In essence, you’re laying down $0.42 to walk clean with $1.58 – a gain of 376% in 36 hours – if it works.

Your risk is $2.42 (difference between the CALL strikes plus initial debit).

Breakeven on the trade arrives at $138.58, a mere $0.18 (one tenth of one percent) below the current price level of $138.76.

And full profits are realized on a decline of just $0.76 (half of one percent).

Take on multiple units, if you please.

And pray to the Al-mighty that you find favor in His eyes.

Many happy returns,

Matt McAbby 

Follow @HughLOHaynew