us stock market, trend trading stock

- Stocks post a relief bounce to end a week that saw return of some distribution to start the fall season.
- The great debate continues: economic growth ahead or a slowdown to recession.
- Stocks holding up as fall starts, but real direction for the season has yet to show itself.

Here's a trade from "The Daily" and insights into our trading strategy:

Chart by StockCharts.com

Company Profile
You have to take what the market is giving you, and to start September you always have to be cautious with respect to the upside, particularly after a low volume late summer rally. Thus, we were watching for downside plays to make us money. When you look for downside you look for sectors that are falling out of favor. Energy pretty much is the poster child for that strategy.

BP tanked in May and June, then rebounded but only to form a bearish head and shoulders base in July and August. In late August it broke lower from that pattern, but then it quickly bounced to test the 'neckline', the point of breakdown. When it did that we put it on the report on 8-31-06. The next day it started to sell lower and we moved in with some October $70 put options at $2.90 each. The -58 delta was good enough to give us a nice gain on the run lower on the breakdown from the bear pattern. We calculated ahead of time that a move to the target would land us a gain in the 40% range. As downside plays tend to work very quickly, this was a solid return.

Well the next session, Tuesday following Labor Day, CVX reported its big find in the lower tertiary way out in the Gulf and all energy stocks surged, BP included. We did not view this as a change in the trend, and sure enough BP gapped lower the next day losing 1.67 compared to the 60 cents it gained on the CVX news. It gapped lower again Thursday, and already it was at and indeed past our target. We sold some options at $4.30, banking a pretty fast 48%. On Friday BP gapped higher but then sold back close to flat. We decided to take the rest of the gain off the table and see how BP responds to the gaps. It may come back to test and fill those gaps, giving us another downside play.

Learn more about "The Daily" with Stock Picks! - Issued 5 Times Per Week

Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:

1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).

For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.

Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.

Here's a post-split play to watch and our current analysis.

Chart by StockCharts.com

Company Profile
STATUS: Cup w/handle. You go to the website and you still cannot find any information on that creek that has the cold water in it. CWTR is working on a handle at the 10 day EMA (26.96) to its 4 month cup base. After gapping higher the third week of August on strong same store sales it rallied to 28 and last week started the comeback to shakeout the short term profit takers and set up the next run higher. May take a couple more sessions at the 10 day EMA to finish the shakeout, so we are going to be patient and let it set up and show the next break higher. We are calling this one a post-split, but it is rapidly approaching its prior split prices. Thus, if it gives us a nice entry point we can view it as getting a jump start on a pre-announcement play.
Volume: 838.136K Avg Volume: 1.517M
BUY POINT: $28.25 Volume=2.3M Target=$33.95 Stop=$26.75
POSITION: UCJ AE - Jan. $25c (66 delta) &/or Stock

Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
Details Here.