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us stock market, trend trading stock
Begin Part 2 of 3
TOMORROW
Given the close once again right at session lows, the momentum is down, and barring change, that leads to early weakness. If one is looking for a bounce or trying to get a bit more out of some short term puts, that is not a bad thing. There have been two heavy selling days on all three major indexes, and indeed the small and mi-cap indexes have been pulverized as well. Thus, a bounce is likely.
Other reasons: MU and its statement about chip inventory looking better. MU was rising on the news after hours, and it was contagious with other semiconductors. This may work to break some of these stocks over resistance and make them upside plays. If it cannot, then we can surely anticipate some more selling from our perspective as this is the best news these stocks have had in a while; if it does not move them they are doomed to fall some more.
How sharp a bounce? On the Dow and S&P 500, we are not that wild about playing against the trend and capturing some upside. It can be done, but the Dow could turn back down in a wide range (9500 to 9650); playing a bounce down without a solid line of resistance is a bit trickier. What we are planning on doing with the Dow is letting it rally and then show us it is rolling over. We might even be able to let it close and take positions the next morning; there is a lot of downside room here. The S&P looks a bit clearer with 1150 being a clear barrier. Aggressive traders can play a move up; the rest of us can catch it when it rolls over.
Of course, we could always get a breakout on strong volume, and man are we ready for that. At this time, however, it is showing absolutely no attributes of a sustained move. The Nasdaq is showing signs of selling less and less, but that is not a breakout. The SOX is actually forming a potentially bullish pattern (as it also works on a bearish pattern), and that is at least a move to the upside that can be played when and if it occurs. The Dow, S&P 500, and Nasdaq do not have such patterns right now. Thus we have to look at each bounce with skepticism.
If we do get a relief bounce we will keep an eye on volumes in the chips and other key stocks. On the up days the pre-splits tend to run well and the already bullish patterns perform well. We don't like to go chasing the stocks in poor patterns even if they can give good bounces; they are highly volatile and you can get on the wrong side too easily. On the up moves we stick with the stocks that have more than just the potential to jump on the up days; again, we look for something that gives the edge, e.g., a good pattern, pre-split momentum and the like. Then we look for the trend plays to give us new entry points; as the trend is down, that means we look for the put plays to set up again at resistance and then play the trend back down.
At some point there will be a rally. It could start explosively as bear market rallies do. At that point we move out of short positions. We won't let them turn sharply against us. A good way to gauge this is to watch for breaks above resistance; those are changes in character even if it is short term. The trend plays are more forgiving. We have seen the market try to rally, but on lower volume that fails at the resistance points. Then the selling starts again and it can rescue you from a trade that was moving against you. That is why we like entering when resistance holds; we can then use that as our exit point if the trade starts against us. It is clear and black and white. If the stock or index breaks that resistance, that is no longer our play that we wanted and we should be out. Same with breaks below support; the support becomes our sell point if the stock turns back up and breaks back through. If it cannot, that is the reload to the downside point.
Support and Resistance Levels
Nasdaq: Closed at 1830.23.
Resistance: 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1122.14.
Resistance: 1175 is potential resistance. Then 1215 and 1265.
Support: 1085 to 1100.
Dow: Closed at 9487.00.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
Support: 9350. Then 9000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-20-01
Trade Balance, January (8:30): -$33.0B versus -$33.0B prior.
Treasury Budget, February (2:00): -$44.0B versus -$41.7B prior.
FOMC Announcement (2:15): 50 basis point cut in Fed Funds and Discount Rate.
3-21-01
CPI, February (8:30): 0.3% actual versus 0.2% expected and 0.6% prior.
Core CPI, February (8:30): 0.3% actual versus 0.3% expected.
3-22-01
Initial Claims, 3/17 (8:30): 368K versus 375K prior.
Leading Indicators, February (10:00): -0.2% versus 0.8% prior.
SUBSCRIBER QUESTIONS
Q: Can you take us through a shorting of a stock? Any one would do such
as your put selections. Also, how would you do this on line, or is it strictly by broker only? Thanks.
A: Lots of interest in puts as we saw last night, and rightfully so. We usually do not short stocks per se which is borrowing and then selling shares of a stock you do not own. You then buy it back at a lower price and pocket the difference with what you sold it for. We have done it, but the liability is unlimited if the stock starts to rise.
Buying puts is the same as buying calls. You can do it with a broker or you can do it online. It is the same principle: you are buying puts to open a position. We place limit orders to buy the put at a price we want to pay for the option (index options are very liquid so we usually try to shave the spread). We have been covering several of these in the Team Trades, but basically we play either a move down after a stock hits resistance or breaks support on high volume. These are the reverse scenarios of a bounce up off of support or a breakout above resistance when we are playing stocks to the upside.
TEAM TRADES
DJX: The Dow was still looking weak, and one of our primary plays today was a put on the DJX that tracks the Dow. We were looking at a break below 95 to enter, but that does not mean we won't take another entry point if we see it intraday. That is just part of adjusting a play as the day unfolds. We will explain what we mean.
The DJX opened right at 97.20 and then fell to 95.40 and bounced right at the first half hour. That put the brakes on any put buy at that point because it had hit close to our buy point and bounced higher. It then spent the next hour rising and fighting its way back to right where it opened near 97.20. That always catches our attention when we check the markets because a double top is an intraday pattern that has frequently led to selling in the indexes in this weak market. It bounced down from that level and we decided to get aggressive as the index has broken support and is in a hard recent downtrend. It was before the break below 95, but felt that it was worth at least a partial position.
We were looking at the May 102 puts to get the better delta. We did not catch the top perfectly; we like to see the move, and waited a bit to see if it was going to continue down. It did so we attempted to pick up some of the options. When the DJX was right at 96.60, the options were trading around 6.2 by 6.7. The DJX trades at a wider spread than say the QQQ, but they are still pretty liquid. We put in a limit order at 6.6, not much of a shave, but the Dow was falling and we had been getting lucky on good fills. Did not want to push it. The fill came and the DJX went down to 95.50 and bounced again. That had us concerned, but not really as the trend was down. It rallied and then sold back to 95.40 and bounced. A double bottom that could rise, but still not devastating. It did bounce up to 96.60 and fell from there. That happened in the last two hours and received a call from the broker that it was falling again (learned from the QQQ play). We tried to get some more positions as we felt this would be the killer on the session: the double bottom was failing below session highs, so we tried for more. Got too aggressive on the spread and missed them. Foolish as we felt the fall would be severe. It continued to sell and when it broke below 95 (the next buy point), we were on it with more puts as that was the support level before the session and intraday. We are looking to ride these down more than a day or two, but we could get a bounce in the interim as noted in the summary. Thus we might take some profits in the morning in the first selling part of the session.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
All prices reflect prices at the close on Wednesday.
NOTE: Stop losses are plotted at one-quarter to one-half point below pivot points.
Best Plays: GADZ has had a fantastic run, and other stocks on the report continue to show that kind of promise to the upside: ESCM, STZ, SLOT, CHBS, BKLY, HSIC, and LOW. The market is still offering opportunities to make money on downside plays as well; check out IVGN, CAH, ADBE, and some of the indexes, after possible moves up to resistance if the market gives a bounce.
Best Plays:
1) STZ: Getting ready for a break higher.
2) SFD: Ready to break out of its short base. A new play.
3) CHBS: Still looks good in its tight consolidation.
4) BKLY: Looks ready to move up to a breakout.
5) HSIC: Watch this volume surge and move up.
6) Puts: CAH, IVGN, ADBE,
Semiconductor stocks: Most chips rose on stronger volume today, and are currently fighting between a bearish and bullish pattern. We have pulled some of the best-looking patterns in the sector for moves either to the upside if the market can rally, or, to the downside on a failure to break resistance:
NVLS (Novellus Systems Inc--$41.13; +0.82; optionable (NLQ)):
http://biz.yahoo.com/p/n/nvls.html
STATUS: Formerly covered as a double-bottom with handle, NVLS is fighting with its 50 day MVA (41.97) and a bunch of overhead supply, the intraday high of 43.38 reaching over much of it to test the short term moving averages. Volume surged higher above average to 14.7 million (avg. 6.6 million) as the stock pulled back down below the 50 day. In a market rally, we will look for a strong move back up over the intraday high, which will also break NVLS back over the down trendline (connects Sept/Jan/Feb highs). Otherwise, the stock has potential downside to 35 for a possible put play, if it cannot break back over the 50 day MVA in another Nasdaq sell-off.
BUY POINT: Upside aggressive: Over 42 (50 day MVA) on continued strong volume. Safer: Over the 200 day MVA (45.47) on continued strong volume. Downside: On a move below 40 on continued strong volume.
POSITION: Upside aggressive: Stock and/or June $35 calls to buy (NLQ FG). Safer: Stock and/or June $40 calls to buy (NLQ FH). Put: May $50 puts to buy (NLQ QJ).
http://www.investmenthouse.com/ct/nvls.html
AMAT (Applied Materials--$44.88; +2.07; optionable (ANQ)):
http://biz.yahoo.com/p/a/amat.html
STATUS: Has been moving in a range, rolling a bit between 40-42 at its lows and 52 at the highs. The stock fell back Tuesday from an attempted move back over the 50 day MVA (46.41), but caught support at 43 and made an attempt back up today. The stock tapped near the 50 day at its high of 46.38 with great volume (27.9 million; average 21.2 million), but pulled back down to close. We will see if the stock can make a strong break back over the 50 day to ride up to the 52 range. If the market cracks back down, we can look at playing the stock back down from a failed move on the 50 day.
BUY POINT: Upside: A move over the 50 day in a rally on continued strong volume. Downside: A drop back in a weak market after a failed move on the 50 day, looking for strong volume on the selling.
POSITION: Upside: Stock and/or July $40 calls to buy (ANQ GH). Downside: May $55 puts to buy (ANQ QK).
http://www.investmenthouse.com/ct/amat.html
VTSS (Vitesse Semiconductor--$34.13; +0.63; optionable (VQT)):
http://biz.yahoo.com/p/v/vtss.html
STATUS: After dropping back yesterday to close below its recent lows, the stock caught itself today, showing a tight doji. Volume climbed up to 10.93 million (average 6.5 million), and the stock could be an aggressive play back up toward 40 (10 day MVA 39.16), with the 18 day MVA at 42.41 and recent highs at 45. We will look at the move to see if it falters at those resistance levels, and on a strong move back in market weakness, a put play with a target back at 29.
BUY POINT: Aggressive: A bounce over 35 in a stronger Nasdaq, with continued strong volume. Downside: A move down after a bounce up that fails at resistance at 40-42.
POSITION: Aggressive: Stock and/or July $30 calls to buy (VQT GF). Downside: May $50 puts to buy (VQT QJ).
http://www.investmenthouse.com/ct/vtss.html
MU (Micron Technology--$42.01; +1.41; optionable (MU)):
http://biz.yahoo.com/p/m/mu.html
STATUS: The stock has tightened up, from February highs around 48 and a low of 34, now bouncing a bit over the support of its 50 day MVA (40.32). The stock pulled back to that level again Tuesday, bouncing back up and hitting 43.73 at its high today before pulling back to close. Volume was very strong at 12.86 million (average 8.6 million). We will look for a strong move in a decent market, back over 44, to ride toward the target at 48. We will also watch for a downside move, looking for a move through the 50 day on strong volume in a weak market, looking at a play down to 34.
BUY POINT: Aggressive: A move over 44 on continued strong volume. Downside: A move below 40 on continued strong volume.
POSITION: Aggressive: Stock and/or July $40 calls to buy (MU GH). Downside: May $50 puts to buy (MU QJ).
http://www.investmenthouse.com/ct/mu.html
BREAKOUTS: We are looking for targets on breakout 10-15% above the buy point, adjusted from the usual bull market 15-20%.
New Play (from the weekend):
GADZ (Gadzooks Inc--$23.97; -0.66; optionable (EQK)): Retail: Apparel
http://biz.yahoo.com/p/g/gadz.html
STATUS: What a phenomenal run this stock had over the last 6 days. GADZ finally pulled back today; actually, there was some profit-taking (hardly surprising), but the stock showed its great strength and battled back from a low of 22.75. Volume was higher again at 436,300 (avg. 133,681). Look for a test of the 10 day MVA (22.27) or better on a pullback. Buy point is 21.76.
BUY POINT: Pullback: On a move back up after a test of the 21.76 range (buy point).
POSITION: Pullback: Stock and/or June $20 calls to buy (EQK FD, 31 open interests).
Continued Plays:
BKLY has been moved to the Basing/Trading Ranges section.
READY TO BREAK TO A NEW HIGH (or just did):
New Play (from the weekend):
ESCM (Esc Medical Systems Ltd--$21.44; -0.19; optionable (QFC)): Wholesale Medical Equipment http://biz.yahoo.com/p/e/escm.html
STATUS: Continues to hold in a more or less lateral movement of the last three days, after a strong 3-day run up last week. The stock tested (as it did Monday) on the low the 10 day MVA (20.87) as volume dropped back to 407,500 (avg. 323,454). The stock can test the 10 day again, but we're still looking for a move up over the March high (22.38). ESCM shows huge money flow and strong buying, and relative strength has broken out ahead of price, a bullish indicator. Initial profit target: 25-26.
BUY POINT: 22.51, on continued strong volume. Stop loss: 22.51-22.26.
POSITION: Stock and/or July $20 calls to buy (QFC GD).
Continued Plays:
HI (Household Internat Inc--$55.85; -2.03; optionable (HI)): Credit Services
http://biz.yahoo.com/p/h/hi.html
STATUS: Broke the 50 day MVA (57.61) on strong volume (3 million; avg. 1.7 million) as the Dow got hammered. The stock was trying to consolidate for a move over the March high (62) and wash holding above its up trendline until Tuesday. No new positions.
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second move is where some of the biggest gains are made.
Continued Plays:
STZ (Constellation Brands Inc--$67.65; -0.47; optionable (STZ)): Food & Beverage: Wineries
http://biz.yahoo.com/p/s/stz.html
STATUS: Pulled back a bit more in its gradually declining consolidation, again reaching up toward the 70 resistance (69.77) before pulling back to close with a loose doji. The stock held at its low over the 18 day MVA (67.19), and we will look for a move back up from here over its recent breakout high (70.50). STZ is testing its recent breakout from a pennant-type pattern. Initial profit target: $81-85.
BUY POINT: Breakout: 70.63, on volume of 180,000 (124,500 today; average 139,000). Stop loss: 70.13-70.38.
POSITION: Stock and/or July $65 calls to buy (STZ GM-low open interest, but plenty at the $70 strike, STZ GN).
End Part 2 of 3
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us stock market
trend trading stock
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