I believe the stock market has changed for the better in the past few weeks. Fundamentals are still bearish, but the economic news has been a little better. Most importantly, the technicals have improved. This a bull market again. Let me show you why…

I’ll start with a chart of small-caps. Below is the iShares Russell 2000 ETF (NYSE: IWM). The blue rectangle shows a 10-month trading range. The upside breakout occurred coincided with a “buy” signal from my Income Trader Volatility (ITV) indicator, which is shown at the bottom of the chart. (For more on this award-winning indicator, click here.)

Small-caps are important because they lead the market both up and down. They are the most aggressive stocks, the ones investors buy for growth and sell at the first sign of the trouble. The breakout from a 10-month trading range is likely to be the beginning of a big move.

The trading range is an example of a pattern technical analysts call a “big base.” This pattern has worked well for predicting major market moves since the 1920s, for every market from commodities to foreign stock markets. Essentially, a big base provides the foundation for a large move. 

#-ad_banner-#With the foundation for a large move in place, it’s important to consider which stocks could be the biggest winners. After all, we want to beat the overall market, right? Testing has shown that the biggest winners of the past six months are likely to be market leaders over the next six months, so I took a look at which index has been the best performer over the past months. 

The chart below, from StockCharts.com, shows that the NASDAQ 100 index is our winner.

So, that’s where I went looking for this week’s featured trade for my premium newsletter, Income Trader. 

The Data Is Lined Up Behind This Electronics Maker
Analog Devices (Nasdaq: ADI) manufactures analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) used in electronic equipment. These technologies are used to convert, condition and process real-world phenomena — such as light, sound, temperature, motion and pressure — into electrical signals. Its customers include Apple, Boeing and a number of other defense contractors, along with carmakers and chip manufacturers. 

ADI is a buy based on the technicals shown in the chart below. It’s a more complex chart than I usually use, so I’ll explain it.

The blue rectangle again highlights a big base, this one about eight months wide. I added Bollinger Bands to the price frame, as well as the Bollinger BandWidth indicator, which is the blue line in the bottom panel. The stochastic indicator, a measure of momentum, is in the center. The two green arrows show indicator action that is similar to the current pattern.

ADI is breaking out of a big base, and the price is at the upper Bollinger Band. Momentum (the stochastic) is bullish. The Bollinger band pattern indicates volatility is likely to expand, confirming the base seen on the chart. The price pattern, volatility (as measured with Bollinger Bands), and momentum all point to potential gains in the stock.

The stock is currently trading around $88.55, about 7% below analysts’ consensus estimate, which is about $95. But if you account for the stock’s growth rate, I believe ADI’s fair value is a little lower than that.

A stock’s fair value would be the price where the P/E ratio equals the EPS growth rate. Analysts expect ADI to grow earnings at about 18.2% a year. The consensus earnings estimate for this year is $4.62 per share. Based on those estimates, I believe the fair value of ADI is about $84.

I have a great deal of confidence in the earnings estimate because ADI has exceeded analysts’ expectations for 12 consecutive quarters. The last time earnings came in below expectations was the first quarter of 2013.

All of this means that a trader would be relatively safe in thinking that ADI won’t be selling under $80 any time soon. And that’s where my time-proven system comes in. 

How You Can Win Almost Every Time
What many investors don’t know is that this pricing also sets up a high-probability, high-income opportunity in Analog Devices in short-term options that expire before the next earnings announcement. Rather than buying the stock and hoping for the best, or shorting and hoping for an earnings disappointment, this surprisingly simple options trade allows us to take a greater gain in a shorter time.

The strategy I’m using for this trade, selling put options, is the same one my Income Trader readers and I have been using to make thousands of dollars in extra income each month. In this case, if ADI stays above $80 into the end of November, you could earn an easy 2.5%. This may not sound like much, but the short timeframe means that it works out to an annualized return of over 21%. 

And what happens in case of a drop in price could be even better. If our pick is trading under the expected price when your options expire in a month, you get to essentially buy the stock at an even greater discount (a full 10% less), leaving you with a solid stock at a price you could never get by waiting for price drops. This means the worst that could happen is that you’re left with an incredible, growth-ready stock at an unbeatable price. 

If you’re still unsure, let me give you one more assurance that this is as close to risk-free as options trading gets. All of my recommended trades are assessed by my award-winning ITV system. This system has allowed my subscribers and I to achieve a spectacular trading record: Since 2013, over 93 percent of the trades I’ve recommended have been winners. 

If you’re interested in learning how you can generate a track record like this, I’ve put together a webinar explaining exactly how the ITV works, as well as more info on how my Income Trader subscribers and I are taking control of our portfolios to generate thousands of dollars in extra income.