Family Dollar Stores (FDO, $31.28, down $0.65) has been in a strong uptrend lately after breaking out above its 20, 50, and 100-day moving averages. After building a solid base in the mid to upper $20’s, the stock broke through $30 earlier this month and has held this level since.

I profiled a trade in Family Dollar back at the beginning of the year that was profitable for 40% in just six days. We played the February 30 calls when the stock was under $27 and got out of them when the stock traded above $28 a week later.

Usually when a stock is making new highs (which FDO is currently doing) it will consolidate for a few weeks before making an assault on newer highs. Retail has been picking up as of late but Family Dollar has been doing well for several quarters.

I think we can capture some of that momentum with the April 32.50 calls (FDODZ, $1.20, down $0.30). The calls traded as high as $1.55 shortly after the open this morning but faded with the rest of the market. I think the stock will still hold $30 but Wednesday will be a test. What I would like to see on Wednesday morning is a lower open for the stock which should allow us to get into the trade for $1.00-$1.10. If not, don’t pay over $1.25 for the call options.

I like this trade for a week or so and if we can get in for around a $1.00, we will set stop losses at 50 cents and a target of $2.00 for the exit. We may only get to a $1.50 or so initially if the stock moves slightly higher and the company is set to report earnings on April 8th. Hopefully, we can get a rally before then but this might be one trade that could do well if left open through the company’s earnings announcement.

This is what I am watching for at the open on Wednesday. I would like to see the market hold its own tomorrow and then get a rally on Thursday and Friday. Watch to see if the S&P can hold 800 and for the Dow…7,600. If we can hold these levels or even move higher then I think we have a good shot of the market moving up.

Rick Rouse