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trading strategy, top stock pick
Begin Part 2 of 2
SUBSCRIBER QUESTIONS
Q: How do you know when a stock or index will use the 10 day MVA or 18 day MVA? Especially in this strong run up? Do you play the 10 and see if it holds? Or do you go for the 18 day?
A: The stronger the move to the upside, the more a stock uses its 10 day MVA as near term support. As we teach in the online seminars, what we often see in a rally is that a stock breaks out of a pattern, and then tests the move, usually back to the pivot point or 18 day MVA, and then it starts to run up, testing either the 10 day MVA or the 18 day MVA when it does pullback. We often see a stock hold the 10 day MVA on the close while testing the 18 day MVA intraday. Still, it depends upon the stock. QLGC tends to hold the 10 day MVA as it did on this move higher. The neat thing is, we don't have to guess at it. Stocks tend to make 4 runs or bounces up off of the short term moving averages when making a strong run before they pullback for a further consolidation, usually to the next support level and that is often the 50 day MVA. We can see the first move, let it come back to that level, and then pick them up on the bounce. That is the beauty of stocks: they give you more than one chance to buy. That is why we cringe when we hear those mutual fund managers say you have to stay invested all the time so you don't miss that first 20% move in the indexes. Well, if you followed that advice, you would have riddent the Nasdaq down 70% in order to catch a smaller 25% upside move.
TEAM TRADES
We had sold some calls on BORL positions we owned at a cost of less than 12.50 when the stock appeared to be topping last week. The stock had approached resistance at 14 and pulled off of the high. We sold then the next session when the stock could not take out its high of the previous session. Maybe we should have waited as the stock made another 25 cent gain, but picking the exact top and bottom is usually a fool's errand. The November calls still had a lot of life in them and we could get a good gain even if we were called out. The beauty: even if BORL did not fall fast and we got called out, the stock looked as if it was ready to fall and we could pick it up again near 12 to 12.50 for another call sale.
Well, the stock kept looking as if it was going to fall, but it did not fall far enough for us; it also kept bouncing back up and with the stock looking as if it would come back a bit further, we did not want to buy back the calls for what we sold them and be flat on the covered call as the stock fell. So, we let the position get called out on us, getting to keep the money on the calls we sold and getting some capital gain on the difference of the price we paid for he stock versus the price at which we will be called out (12.50). A nice return for a week, and we will look to do it again. The name of the game on these is cash flow, and we did not have the stock but for a couple of weeks. This is a great strategy to get your confidence back, and you can do it with most any stock that you have purchased whether you bought it with the intent of doing this or not.
THE PLAYS:
Note for reading plays: A "prior high" refers to the high at the start of a base.
Removed and on a watchlist: CHBS, KLAC, AMCC, ACV, TXN, EDS, CMOS, IKN, MU, PG, ADM, KLIC, GMST, ABI, MSCI.
All prices are current as of the close of trading Friday.
Best Plays:
1) CHKP: A nice test of the recent run.
2) VRST: Back at support on very low volume.
3) MRVL: Breaking out!
4) KOPN: Ready to move up in the handle.
5) INFA: At support on low volume in the wedge.
6) QLGC: Nice pattern at support, and volume is low.
7) BRCD: Good-looking lateral consolidation.
8) SLE: Up in the handle on stronger volume.
9) OAKT: A nice pullback.
10) DNA: Ditto
11) RDRT: Almost back at support in the flag.
Please click on the new link to see charts for all stocks on the report.
Index plays: The SOX can pull back to the 18 day MVA intraday for the continued put play; that was our initial target on the put play (500).
NEW PLAYS: Note: Deltas, due to options expiration Friday, are unavailable at the time of this writing.
We are looking at some former leading tech stocks (along with BRCD and QLGC, already on the report) as they are showing good patterns. This is something we are going to do from now on even though they are not at their highs.
VRTS (Veritas--$38.90; +0.67; optionable): Software.
http://biz.yahoo.com/p/v/vrts.html
STATUS: We are looking for VRTS to lead again, a tech stock that has come back strong, making a nice pattern although very deep in its base. After a solid move Tuesday VRTS pulled laterally, holding comfortably over its 10 day MVA (36.39). Volume has steadily decreased since Tuesday's move (8.8 million Friday; average 15.2 million), which is solid action. Looking for VRTS to hold support and breakout again. On the breakout we will look at buying stock for the outright gain and also potentially selling calls after the run for income production. After the run to the target at 50, if it shows topping at that natural resistance point we will look at selling the December $40 calls. They are currently selling for $3.40. On a move up to $50, they would at least be $12, a 30% return. The cool thing: if it is topping, we sell the calls, it falls back to support, we buy the calls back at a much lower price, and then let it run up again and do it all over. One of our favorite consistent money makers, and really good for getting back into the action.
BUY POINT: 40.02 on volume of 22 million. Stop: 37.22 (7%). Targeting the 200 day MVA at 50.94.
POSITION: Stock on the buy point. Calls to sell on topping: December $40 calls (VIV AH).
http://www.investmenthouse.com/ct/vrts.html
SEBL (Seibel Systems--$25.00; -0.29; optionable): Software
http://biz.yahoo.com/p/s/sebl.html
STATUS: Another old friend that is deep in its base, but showing some very playable moves and forming up nice patterns that make great plays. SEBL has risen from near 12 since early October, taking out its 50 day MVA (21.53) a couple of weeks ago. It made a nice run that peaked at 26.41, pulling back on lower volume the last couple of sessions. It is holding its 10 day MVA (23.43), showing a doji Friday as volume continued to decrease (11.9 million; average 16.3 million). Good action, and if we get a bit more pullback we will look for SEBL to hold the 10 day, and give us a move in a Nasdaq rally. Targeting the 30 initially, with the longer term target the 200 day MVA, currently at 35.
BUY POINT: Breakout: 26.53 on volume of 24 million. Stop: 24.67 (7%).
POSITION: Stock and/or January $22.50 calls to buy (SGQ AX - check delta, etc. with your broker as unavailable at the time of writing).
http://www.investmenthouse.com/ct/sebl.html
CHKP (Check Point Software Tech--$39.36; -0.92; optionable ( )): Security Software
http://biz.yahoo.com/p/c/chkp.html
STATUS: After the fine run up since the first of this month, CHKP topped at 43 and now is offering potential new entry points as it pulls back on decreasing volume (down to 7.5 million Friday; avg. 9.6 million). The stock showed 2 consecutive dojis by the end of the week, Friday's low of 38.76, filling the gap up from 38.69 and holding above the 10 day MVA (37.52). Looks ripe to move back up if the techs are ready. On that move, we will eye a target at the 200 day MVA, currently at 50.
BUY POINT: Aggressive: 40.50 on rising volume in a rally. Stop 37.67 (7%). Break of resistance: Over 43 on average or higher volume. Stop: 40.08 (7%)
POSITION: Stock and/or January $40 calls to buy (KEQ AH). Deltas unavailable.
http://www.investmenthouse.com/ct/chkp.html
Continued new plays:
VRST (Verisity--$13.87; -0.09; no options): Software
http://biz.yahoo.com/p/v/vrst.html
STATUS: This stock is in a 6-month base with highs near 20, reached on a strong breakout just after it was issued in late March. Technically VRST is still in a downtrend, having made a nice run up from the September low (6.34) which ended at the down trendline (connecting the May, June, July and November highs). From there VRST has formed a handle on overall steadily decreasing volume, which was down to very low levels Friday at 19,500 (avg. 179,000). Now approaching support at the 10 day MVA (13.39), we are looking for support there, a level that can be strongly reinforced by a lateral consolidation throughout the whole of August, followed by a breakout. Target: 18-20. Money flow and buying are excellent.
BUY POINT: Breakout: 15.08 on volume of 269,000 or higher. Stop: 14.02 (7%)
POSITION: Stock.
http://www.investmenthouse.com/ct/vrst.html
MRVL (Marvell Technology--$32.80; +4.02; optionable): Semiconductor
http://biz.yahoo.com/p/m/mrvl.html
STATUS: Broke out of a cup with handle Friday, but remains within our 5% limit for buying on a breakout. Besides, volume was very strong at 5 million (avg. 1.7 million), and news was out after the bell on the company's strong earnings, suggesting this move can be followed up with another strong move on the breakout. Highs at the start of this most recent base (the stock is inside a much larger, 15-month base) are at 35, and our target is at 38. MRVL shows huge money flow, and relative strength is breaking out ahead of price. Buying looks good as well.
BUY POINT: Buy point was 31.63, making the stock a buy up to 33.21 on the breakout. Stop from here: 30.50 (7%).
POSITION: Stock and/or December $30 calls to buy (UVM LF); next month out is February. Deltas unavailable.
http://www.investmenthouse.com/ct/mrvl.html
MXIM (Maxim Integrated Prods--$54.10; -0.04; optionable): Semiconductor
http://biz.yahoo.com/p/m/mxim.html
STATUS: In a cup base of 5 months (prior high at 58.40) and is trying to form a handle. With volume dropping off to low levels the last 2 days of the week in the neophyte handle, MXIM has shown 2 consecutive dojis with lows tapping the 10 day MVA, lower support. It needs to consolidate 3 or so more days this week, and if it does we will look for a move up from the range of this support level, for a breakout over the November (handle) high at 56.95. Volume was down to 3.3 million (avg. 5.8 million). MXIM shows excellent money flow and high relative strength. Target: 68
BUY POINT: Breakout: 57.08 on volume of 8.7 million or higher. Stop: 53.08 (7%); 10 day MVA is at 52.87.
POSITION: Stock and/or December $55 calls to buy (XIQ LK). Deltas unavailable.
http://www.investmenthouse.com/ct/mxim.html
KOPN (Kopin--$15.10; +0.40; optionable): Electronics
http://biz.yahoo.com/p/k/kopn.html
STATUS: KOPN is another chip stock in a cup pattern that is trying to form a handle. Currently holding support at the 10 day MVA (at 14.74), the stock was up slightly Friday with volume breaking above average to 1.5 million (avg. 1.2 million). KOPN threw a huge volume spike Wednesday on news of a stock offering, but intraday recovered back over the support level after dropping below the 18 day MVA (14 at the time). Money flow is strong, and we look for a breakout over the November highs at 15.90. Target: initial, 19
BUY POINT: Breakout: 16.03 on volume of 1.8 million. Stop: 14.91 (7%); 18 day MVA is at 14.16.
POSITION: Stock and/or December $15 calls to buy (KQO LC).
http://www.investmenthouse.com/ct/kopn.html
CONTINUED PLAYS:
WEDGES, PENNANTS, and FLYING PLATEAUS (AND FLAGS): These are some of our favorite patterns as the moves can be explosive. In this market, however, we need to see the move on the breakout on strong volume.
INFA (Informatica--$11.79; -0.05; optionable): Software
http://biz.yahoo.com/p/i/infa.html
STATUS: Consolidating in a test of the breakout, having formed an ascending wedge-type pattern above support of its 10 day MVA (11.42). Volume dropped back sharply and well below average to 327,100 (avg. 1.36 million) with INFA showing a doji just above the moving average. On a move back up from here, look for a breakout from the pattern for a move up to the initial target at the 200 day MVA (15.72). Money flow and buying look great.
BUY POINT: Aggressive: Over 12 on 1 million or higher volume. Stop: 11.21 (7%); 18 day MVA is at 10.60.
POSITION: Stock and/or December $10 calls to buy (UYF LB), or March $7.50 calls to buy (UYF CU).
http://www.investmenthouse.com/ct/infa.html
AVNT (Avant--$10.48; -0.27; optionable): Software
http://biz.yahoo.com/p/a/avnt.html
STATUS: Remains in the ascending wedge pattern though we got a little slip below the 10 day MVA (which is at 10.69). Volume was high though down at 663,000 (avg. 469,000) as the stock sold down from the high at 11.80, but was actually up back over the moving average in after hours trading. That's a positive sign, so we are watching this one for a breakout. The 200 day MVA is at 13.28; a strong move out of what can be an explosive pattern could give the stock energy to break that resistance. Strong money flow and buying. Target: 15
BUY POINT: Breakout: 12.28 on volume of 633,000 or higher. Stop: 11.42 (7%). Break of resistance (200 day MVA): Over 13.28 on above average volume.
POSITION: Stock and/or January $10 calls to buy (NVQ AB).
http://www.investmenthouse.com/ct/avnt.html
QLGC (Qlogic--$46.66; -1.11; optionable): Storage
http://biz.yahoo.com/p/q/qlgc.html
STATUS: QLGC is in a large double bottom since January (highs 100, with the all-time high from November at 130). The middle of the pattern, from late June, is at 66.16. From its lows at 18 in early October, QLGC has climbed steadily back, taking out its 200 day MVA (41.86) as it climbs along its 10 day (45.88). The climb has been steady and strong, with the 18 day MVA (91.62) recently crossing the 200 day. The stock hit a high of 49.16 twice recently and has pulled back a bit the last few sessions, showing decreasing volume as it tightens up over the 10 day. Looking nice in something of a small ascending wedge, showing a loose doji Friday on volume of 7.99 million (average 10.55 million). We are looking for a strong move back up and over the upper resistance for a breakout from the pattern. Showing strong money flow. Target: 59.
BUY POINT: Breakout: 49.28 on volume of 14 million or higher. Stop: 45.84 (7%).
POSITION: Stock and/or January $45 calls to buy (QLC AI).
http://www.investmenthouse.com/ct/qlgc.html
MSCC (Microsemi--$36.12; -1.88; optionable): Semiconductor
http://biz.yahoo.com/p/m/mscc.html
STATUS: MSCC was back down in the ascending wedge and Friday closed just under the 18 day MVA and the up trendline that is supporting the pattern, but did bounce up from the low of 35.45 that tested other support at the 35 level. Volume was up to 886,900 (avg. 1.2 million), but is still below average, so we are going to watch for a quick move back over the trendline and eventual breakout. Money flow looks good and relative strength is high. Target: 41
BUY POINT: Aggressive: 37.25 (over the 10 day MVA at 37.19). Breakout: 40.23 on volume of 1.6 million or higher. Stop: 39.95 (7%).
POSITION: Stock and/or December or March $35 or $37.50 calls to buy (QMS LG or LU, or QMS CG or CU). Deltas unavailable.
http://www.investmenthouse.com/ct/mscc.html
BASING/TRADING RANGES:
A covered call play:
BRCD (Brocade--$29.47; -0.51; optionable): Computer Peripherals
http://biz.yahoo.com/p/b/brcd.html
STATUS: Looks very good in this lateral consolidation above the 10 day MVA (26.19) after a great move up off the October low. It has moved up the 18 day MVA, and is now testing that move on very low volume just like it should (volume down to 10.1 million; avg. 16 million). It showed a good doji just above the 10 day MVA. We are looking for our breakout over the November closing high at 30.64, at which point we will look at buying stock, one of the purposes for which will be selling calls on it once the breakout move tops out. At that point we will look at selling $30 or $35 calls. There is resistance at 35 in the form of the 200 day MVA, so that may be where it stops the move stalls a bit for a call sale. On the breakout, the December $30 are selling now for $3.50 with an estimated delta of .50, with the delta improving at the breakout point. At the breakout point the calls would be selling for at least $4.85 (probably better) and we anticipate a $5 or better move from there, and that would put the options around $7-8, or a 14% or better return. First resistance at 35, Target: 38
BUY POINT: Breakout: 30.75 on volume of 24 million or higher. Stop: 29.92 (7%)
POSITION: Stock on the buy point. Calls to sell on topping: December $30 calls to sell (UBF LF). Please check with your broker for deltas.
http://www.investmenthouse.com/ct/brcd.html
SLE (Sara Lee--$22.62; +0.47; optionable): Food & Beverage
http://biz.yahoo.com/p/s/sle.html
STATUS: SLE made a move up in the handle to the 10-month cup base with volume rising nicely to 2.3 million (avg. 2.1 million). The stock needs to take out the November high of 23.35, upper resistance in the handle, for the breakout, and certainly looks promising on this move. This nice-looking pattern is part of a much larger base that began in 1998 (highs just over 31). SLE shows excellent money flow; and buying is positive and improving. Target: 28
BUY POINT: 23.48 on volume of 3.2 million or better. Stop: 21.84 (7%); 50 day MVA is at 21.70.
POSITION: Stock and/or January $20 calls to buy (SLE AD).
http://www.investmenthouse.com/ct/sle.html
YUM (Tricon Global--$50.46; -0.54; optionable): Restaurants
http://biz.yahoo.com/p/y/yum.html
STATUS: In a large base, now forming the handle on a gradual pullback to the 18 day MVA (50.02) on below average volume, which was down Friday to 496,900 (avg. 779,181). With that, the stock pulled back below the 10 day MVA, so we will look for the hold of support at 50, the 18 day further reinforced by some mid-to-late October prices at that level. Strong money flow and buying is looking good. Target: 63
BUY POINT: 52.53 on volume of 1.1 million or higher. Stop: 48.85 (7%)
POSITION: Stock and/or January $45 or $50 calls to buy (YUM AI or AJ). Deltas unavailable.
http://www.investmenthouse.com/ct/yum.html
PHTN (Photon Dynamics--$34.25; +0.53; optionable): Semiconductor
http://biz.yahoo.com/p/p/phtn.html
STATUS: PHTN is in the 14-week cup with handle base, and in the handle has now formed a small ascending wedge. Volume is decreasing quickly and steadily, down Friday to 59,100 (avg. 279,454), and that is good action. The stock tapped lower at 33.16 (the 10 day MVA is at 32.69), then moved up and closed at the high, so looks ready to move once volume rolls in. We will look for the breakout over Tuesday's high at 35.04. PHTN shows improving money flow and buying, and high relative strength. Target: 42
BUY POINT: 35.17 on volume of 423,000 or higher. Stop: 32.71 (7%); just above the 10 day MVA.
POSITION: Stock and/or January $30 calls to buy (PDU AF). Deltas unavailable.
http://www.investmenthouse.com/ct/phtn.html
OAKT (Oak Tech--$10.75; -0.05; optionable): Semiconductor
http://biz.yahoo.com/p/o/oakt.html
STATUS: OAKT is deep in a 14-month base, off the lows at the 4.60 level. Currently in a saucer base, the stock has pulled back the last 2 days with consecutive dojis and price pullbacks, and volume has followed suit and ended the week at 659,000 (avg. 755,000). The action looks good since Wednesday despite the ranging character of this handle part of the base (the stock has tapped twice at the 11.50 range and pulled back twice and currently is in the second dip). We continue to look for a hold at the 10 day for a strong move up and breakout over the resistance. Money flow and buying are excellent. Initial target: 14
BUY POINT: 11.62 on volume in the range of 1.1 million. Stop: 10.81 (7%)
POSITION: Stock and/or January $10 calls to buy (KAU AB).
http://www.investmenthouse.com/ct/oakt.html
RDRT (Read-Rite--$5.54; +0.03; optionable): Hardware
http://biz.yahoo.com/p/r/rdrt.html
STATUS: Still pulling back in the flag/descending lateral pattern, Friday closing with a shooting star doji above the 18 day MVA, support at 5.33 where we want the stock to catch support. Volume continued to decrease from Wednesday's spike up to 1.7 million (down Friday to 847,600; avg. 830,000). RDRT is now below the 200 day MVA (5.73), but the stock dipped below another major support level (the 50 day MVA) before breaking out of this same pattern back in October. Money flow and buying look good. Target: 8.50
BUY POINT: Aggressive: Over 5.87 (the 200 day MVA) on rising volume. Breakout: 6.21 on volume of 1.1 million or higher. Stop: 5.78 (7%)
POSITION: Stock and/or January $5 calls to buy (RDQ AA).
http://www.investmenthouse.com/ct/rdrt.html
DNA (Genentech--$55.29; -0.16; optionable): Biotechnology
http://biz.yahoo.com/p/d/dna.html
STATUS: DNA is in a 24-week base, and forming another, better-looking handle, as price pulls back toward support at the 10 day MVA (54.18) on steadily falling and well-below average volume, which was down to 1 million Friday (avg. 2.1 million). The stock was in a sloppy handle before selling back to the 18 day MVA seven days ago, then moved back up to resistance just over 56. We will see if this new, healthier pullback from that resistance can result in the breakout. Money flow and buying look good. Target: 68
BUY POINT: Aggressive: After a low volume test of 54 that holds, a move back over 55 on above average volume. Stop: 51.15 (7%). Breakout: 57.13 on volume of 3 million or higher. Stop: 53.13 (7%) or 52.50 (below price support at 53).
POSITION: Stock and/or December or March $50 calls to buy (DNA LJ or AJ).
http://www.investmenthouse.com/ct/dna.html
Good Investing!
Jon L. Johnson and your Technical Traders Report Team
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP. or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners in Online Investment Services, LP. or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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