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Begin Part 2 of 2
A: How I deal with tests usually depends upon the market. If it is choppy as it was before 9-11 and immediately thereafter, I am quick to take a 20% (or very close thereto if the stock appears to be topping) on any stock move. Now that breakouts are holding up better and are giving successful tests I will often let the stock test the move and then add positions when it does test and then start back up on what appears to be good volume. With CBR it was bought when it spiked up on good volume but could not hold to the close. It then shot up right to the target three sessions later on massive volume. It closed at the high so there was no reason to think it would reverse. Well, it gapped down the next session and fell, but volume was light. Looked as if it was going to test the move, but I decided to hang on. It rode all the way down to the buy point, bounced, and then tested lower intraday below the buy point and blasted up last week.
I could have sold that first big rally and thought about it as the stock ran 19% from the entry point. I did not, however, and when it started back on lower volume, I let it go for the test because I liked the big volume move. I quite often, however, will sell half my position on a 20% move such as that. I am not adverse to taking a 20% gain in a hurry on a stock position. I also could have raised my stop loss point to maintain some gain but chose not to. We are going to address that in another subscriber question this week: the pitfalls of stop losses.
When I decided to ride out the test, the important thing was to be patient: if the price/volume action was good, I would let it test the pivot. That means it will sometimes trade intraday below my buy point; as long as it closed above that level, however, I will let it work for me. That is exactly what CBR did. I did not but should have bought more positions the next session when it started higher on a small gain on very high volume: a successful test. It then blasted up Friday but could not take out the prior high at 10.88. Today it closed lower but in the top half of the range on lower volume. It looks good, but I may sell half my position if it tests 10.88 again and does not break through.
Good moves from the little ones: LNOP and MFLO broke out! KANAD also made its move, and for puts, QCOM and PCS dropped nicely. A stock to watch (current upside positions) for a possible continued fall: TUNE on strong volume dropped below the 18 day MVA. It bounced back to close at its 10 day MVA, but has sold off for 2 days on rising, heavy volume. Like that it held the 18 day MVA and reversed; it did this in early December as well but recovered. Volume, however, is escalating.
THE PLAYS:
Best Plays:
1) ASIA: Room to run on this cup with handle breakout.
2) PLCM: Broke major support on strong volume.
3) BAC: Bounced from the 50 day MVA on higher volume.
4) SUPG: Still a good handle.
5) PRSF: A low-volume pullback to support in the ascending wedge.
6) AUDC: Holding support in its test, on low volume.
7) TTN: Heading down and nearing the buy point for the put play.
New:
A covered call play:
EMLX (Emulex--$44.35; -0.14; optionable): Computer Hardware: Peripherals
http://biz.yahoo.com/p/e/emlx.html
STATUS: After bouncing from the 18 day MVA 4 days ago, EMLX may be topping out after hitting the January high at 45.50 started a move down Monday. It hit a low of 43.15 and bounced, but volume was up pretty sharply (9 million; avg. 9.4 million), and the stock can drop to a test of 40 at the range of the 18 day MVA. On that move we can look at selling January or February calls. January $40 are selling for $5.60 at the close, and should be up to around $8.70 once the stock hits support.
BUY POINT: Aggressive: 44 on preferably rising volume (9.5 million or higher). Below support: 43 on continued rising volume.
POSITION: February $40 calls to sell (UMQ BH).
http://www.investmenthouse.com/ct/emlx.html
ASIA (Asiainfo Holdings--$20.70; +1.61; optionable): Internet Software
http://biz.yahoo.com/p/a/asia.html
STATUS: Breaking out of a cup with handle base that is 6 months long. Volume was huge Monday as ASIA broke the strongest resistance level in the handle (at the 20 range; the actual handle high is out at 21.25, the December high), gapping up on the open and heading up from there. Look for a continued move, with the stock remaining a buy on this move up to 21.24 . Volume clocked in at 1.4 million (avg. 245,000). The company announced today a software deal signed with Shanxi Mobile. Target: 24
BUY POINT: Over 20.70 on continued strong volume. Stop: 19.34 (7%)
POSITION: Stock and/or February (low open interests) or April of $17.50 calls to buy (EUJ BW or DW).
http://www.investmenthouse.com/ct/asia.html
Put:
PLCM (Polycom--$34.11; -3.43; optionable): Telecom
http://biz.yahoo.com/p/p/plcm.html
STATUS: In a sloppy kind of head and shoulders, and just broke the 50 day MVA at 34.36 on today's closing price with volume sharply higher and strong at 3.1 million (avg. 2.5 million). The stock was down despite today's announcement that 4th quarter earnings are expected to come in above expectations. Be that as it may, the break of support on heavy volume is not a good sign, and on continued selling the stock can drop as far as 28. Today's move had it below the October highs; potential support at 30.
BUY POINT: Aggressive: 34 on continued strong volume.
POSITION: February $40 puts to buy (QHD NH)
http://www.investmenthouse.com/ct/plcm.html
New from the weekend: Many of our plays saw pullbacks on lower volume today.
Financials have been expected to perform well ever since the view that the economy would improve became more pervasive. Problem was, they were not doing it. Thursday and Friday things started to fit together as the transports rallied as well. We are looking for recent patterns to form up better now.
GS (Goldman Sachs--$95.75; -1.00; optionable): Investment Banking
http://biz.yahoo.com/p/g/gs.html
STATUS: Currently in a cup-type base (has the v-bottom from September) of 7 months, that is inside a bigger 16-month base. GS broke out of an ascending wedge/double handle Friday that had formed just above mid-range in the right side but pulled back to a test of 95 (near the December high) Monday with volume dropping back to 3.1 million (avg. 3 million). Look for a hold at the 95 range in this test (which has come a bit earlier than we would like), though GS can drop back to the up trendline (short term, connecting the December lows) at 92.58, the 18 day MVA. Money flow and relative strength high. Target: 113.
BUY POINT: Gapped up and over our aggressive buy point at 96.85. New buy point from here: Over 97.25 on rising volume. Stop: 90.44 (7%). From the 18 day MVA: Aggressive: 94 on rising volume (3 million or higher). Stop: 87.42 (7%)
POSITION: Stock and/or February $90 calls to buy (GS BR).
http://www.investmenthouse.com/ct/gs.html
BAC (Bank of America--$63.11; -0.76; optionable): Banks
http://biz.yahoo.com/p/b/bac.html
STATUS: In a volatile handle to an 18-week double bottom, which has held support at the 50 day MVA since the first of December. The stock looked ready Friday to move out of the handle on the rising, strong volume and move up from the 18 day MVA, but instead gapped lower on the opening price. Still looks good as it held the 50 day MVA (62.05) for a bounce on rising volume of 5.4 million (avg. 5.3 million), though the gap lower wasn't what we expected. It closed above the 18 day, however, so continue to look for the breakout. Money flow is at good levels. Target: 78
BUY POINT: Aggressive: 64.25 on continued rising volume. Stop: 59.75 (7%). Breakout: 65.12 on volume of 8 million or higher. Stop: 60.56 (7%)
POSITION: Stock and/or February $60 calls to buy (BAC BL).
http://www.investmenthouse.com/ct/bac.html
SUPG (Supergen--$13.95; -0.05; optionable): Drugs
http://biz.yahoo.com/p/s/supg.html
STATUS: Still holding support at the 18 day MVA in the handle to its 7-month cup, showing a tight doji on a sudden drop in volume to low levels (112,400; avg. 171,000). The lower volume is likely the reason SUPG couldn't hold the high at 14.52 (hit aggressive buy point at 14.30), but is positive for the small loss and hold at support. Continue to look for a move up to breakout; the stock threw a volume spike Friday. Strong money flow and buying. Target: 18.
BUY POINT: Breakout: 15.13 on volume of 260,000 or higher. Stop: 14.07 (7%)
POSITION: Stock and/or February or $12.50 (UOG BV; low open interests, good delta) or April $12.50 calls to buy (UOG DV, current delta 0.69).
http://www.investmenthouse.com/ct/supg.html
CVG (Convergys--$36.66; -1.30; optionable): Business services
http://biz.yahoo.com/p/c/cvg.html
STATUS: Lost the ascending wedge after closing below the 18 day MVA that supported the pattern (36.83). The stock opened below the support, crippled by a Merrill Lynch downgrade, and dropped to test the 50 day MVA just above 34. Later in the morning the stock was added to Forbes' Platinum 400 List and it bounced back. The move up from the lows was at least positive and it may be able to recover back into its handle, but we won't consider positions until it is back over the 18 day MVA Strong money flow. Target: 46
BUY POINT: Breakout: 38.63 on volume of 856,000 or higher. Stop: 35.93 (7%)
POSITION: Stock and/or April $35 calls to buy (CVG DG).
http://www.investmenthouse.com/ct/cvg.html
EDSN (Edison Schools--$20.59; +0.05; optionable): Education services
http://biz.yahoo.com/p/e/edsn.html
STATUS: EDSN broke out Friday from a flat base pattern on a strong move over its 200 day MVA (19.94). The stock reached a high Monday at 21.68 but pulled back, managing to hold the slight gain even as volume remained strong at 1.17 million (down slightly; avg. 727,000). We want to see EDSN hold support at 20 or just higher (November high is 20.51), though it can pull back to the November closing highs range (19.55-19.65) for a test. It has already closed back below the buy point at 20.64, but the lower support is potentially firm. Target on a move back up and over 21.68 (intraday high): 25 Strong money flow.
BUY POINT: 20.60 on continued rising volume. Stop: 19.16 (7%)
POSITION: Stock and/or March $20 calls to buy (USD CD).
http://www.investmenthouse.com/ct/edsn.html
RECN (Rscs Connection--$26.41; -1.10; optionable): Business services
http://biz.yahoo.com/p/r/recn.html
STATUS: Was moving up Friday on strong volume, off the 18 day MVA as it attempted a breakout move from the 7-month cup with handle base. However, volume Monday collapsed back to 94,500 (avg. 269,000) and the stock pulled back with it, ending the move for now. The low tapped potential support at 26 (the 10 day MVA; 18 day MVA is at 25.41), so look for any of those levels to support RECN until it can move back up. Now looks like it will form an ascending wedge, not the best pattern for a handle, but we will see that it can do. At least price-volume action on today's move was good.. Target: 34. Lehman initiated coverage with a "market perform" and a target just under today's closing price (26)!
BUY POINT: 28.38 on continued strong volume (390,0000 is minimum for breakout). Stop: 26.39 (7%)
POSITION: Stock and/or February or March $25 calls to buy (QRG BE or CE; 0 open interests).
http://www.investmenthouse.com/ct/recn.html
RCOM (Register.Com--$10.70; -0.07; optionable): Internet
http://biz.yahoo.com/p/r/rcom.html
STATUS: Looked promising Friday with the heavy institutional buying that came in when the stock hit the 50 day MVA (10.28 currently). Volume Monday cratered back to 190,300 (avg. 307,000), holding RCOM still below its 18 day MVA (10.97), resistance we want the stock to break for the continued 50 day MVA bounce. RCOM showed a doji off another intraday bounce from the support. Continue to look for a move over the upper resistance, though the stock may test the 50 day again before moving up again. Excellent money flow and buying. Initial target: 14
BUY POINT: Aggressive: Over 11 on continued strong volume. Stop: 10.28 (7%)
POSITION: Stock and/or February $10 calls to buy (RAU BB).
http://www.investmenthouse.com/ct/rcom.html
ACXM (Acxiom--$18.21; -0.13; optionable): Software
http://biz.yahoo.com/p/a/acxm.html
STATUS: Testing the recent breakout over its 200 day MVA (14.01) in a handle to the 7.5-month cup base. ACXM pulled back from its opening price of 18.62 as the Friday high at 18.68 posed resistance due to the lower volume of 924,100 (avg. 1 million). Look for another test of 18, which looks like good support from late December prices, ahead of a breakout. The 18 day MVA is at 17.76. Solid money flow and buying. Target: 23
BUY POINT: 18.80 on volume of 1.5 million or better. Stop: 17.48 (7%)
POSITION: Stock and/or February $17.50 calls to buy (UQA BW)
http://www.investmenthouse.com/ct/acxm.html
Two stocks that trade on average daily volume of 100,000 or less. It is interesting that our strongest moves came from these plays today:
LNOP (Lanoptics--$8.26; +1.24; no options): Software
http://biz.yahoo.com/p/l/lnop.html
STATUS: Nice breakout from the ascending wedge as volume exploded to 209,400 (avg. 39,000). This is a good example of just how strong breakouts can be from these kinds of patterns. On the strong volume, look for LNOP to head even higher, and aggressive players can look at getting in on the move, although we will look for a pullback. The stock is beyond our 5% limit for jumping in on breakouts (8.01). Target: 9, and heading that way.
BUY POINT: Riding current positions at this point and looking for the next entry after a pullback.
http://www.investmenthouse.com/ct/lnop.html
MFLO (Moldflow--$16.75; +1.85; no options): Software
http://biz.yahoo.com/p/m/mflo.html
STATUS: Breakout from the 6.5-month cup with handle as volume rose to 178,700 (avg. 63,000). The company was out today saying second quarter revenues are expected to be higher, giving impetus to the move. Buy point was 15.10, leaving the stock a buy up to 15.86, and obviously it is beyond that 5% cut-off. We will look for a test of the breakout for gaining new entry points. Excellent buying and money flow. Target: 18
BUY POINT: After a pullback to test the buy point of 15.10 (or higher).
POSITION: Stock.
http://www.investmenthouse.com/ct/mflo.html
Two very small stocks for a shorter term trade up to resistance:
PRSF (Portal Software--$2.16; -0.12; optionable):
http://biz.yahoo.com/p/p/prsf.html
STATUS: Making a nice move up in an ascending wedge that is almost 10 weeks long, though PRSF is crawling along the floor of a massive 2-year base. After a move up Friday PRSF dipped back again Monday, but continues to hold the 10 day MVA (2.07) as volume dipped back as well (1.16 million; average 1.69 million). Looking for a breakout over the pattern's high at 2.47 (from November), for a run up to the 200 day MVA at the 3.50 range. Money flow is flat but at decent levels.
BUY POINT: 2.60 on volume of 2.3 million or higher. Stop: 2.42 (7%)
POSITION: Stock; options out of the money for now.
http://www.investmenthouse.com/ct/prsf.html
EGOV (National Info Consortium--$3.65; -0.07; no options): Internet
http://biz.yahoo.com/p/e/egov.html
STATUS: In a 22-month base though off the lows near 1.00 (fall 2000). Has formed a saucer base since February and more recently within that base a cup with handle. Friday EGOV broke out of this last pattern, with big volume. Today it gapped back down, testing the move and holding its former pattern highs at 3.60. Volume was way down at 77,900 (average 91,200), so we will see if EGOV holds here and makes a move back up. Target: 5
BUY POINT: 3.85 on above average volume. Stop: 3.58 (7%).
POSITION: Stock.
http://www.investmenthouse.com/ct/egov.html
New Puts from the weekend:
PCS (Sprint--$21.28; -1.17; optionable): Telecom
http://biz.yahoo.com/p/p/pcs.html
STATUS: Made the move Monday, breaking down and out of a large descending wedge (started forming in early October). The move started down strong Friday, and today it took out its pattern lows on much stronger volume (22.3 million; average 7.22 million). The target is 17.50, with June lows as possible support at 19.21. Looking to ride the positions down, but we can see an opportunity for new or additional positions after a test of the 22 level.
BUY POINT: After a test of the 22 range, a drop back through 21.50 on continued strong volume.
POSITION: February $25 puts to buy (PCS NE).
http://www.investmenthouse.com/ct/pcs.html
CL (Colgate-Palmolive--$55.65; -0.59; optionable): Consumer non-durables
http://biz.yahoo.com/p/c/cl.html
STATUS: CL has been fighting down trendlines since October, and Friday CL broke below the 200 day MVA (56.47) on strong volume. It gapped down through our put buy point Monday, but held on for a doji as volume, though down, remained strong at 1.87 million (average 1.31 million). Looking for CL to test the 200 day, but expecting that to continue providing resistance and sending it back down. Target: 51.50
BUY POINT: Aggressive: After a failed test of the 200 day, a drop back through 55.65 on continued strong volume.
POSITION: February $60 puts to buy (CL NL).
http://www.investmenthouse.com/ct/cl.html
CONTINUED PLAYS:
TEST OF BREAKOUT:
AUDC (Audiocodes--$5.73; +0.10; optionable): Scientific & Technical Instr.
http://biz.yahoo.com/p/a/audc.html
STATUS: Testing the breakout from the ascending wedge, pulling back from the breakout high of 5.97 but showing strength by holding onto support of its 200 day MVA (5.52). Volume also has decreased in an orderly manner, down today to 287,300 (average 353,700) as AUDC showed a loose doji. Looking for a continued hold of support to set up a strong move over the recent high. Strong money flow, solid buying. Initial target: 7
BUY POINT: For new or additional positions, after holding the 200 day, a move back over 6 on above average volume. Stop: 5.58 (7%)
POSITION: April $5 calls to buy (XRD DA).
http://www.investmenthouse.com/ct/audc.html
DSTM (Datastream--$6.27; -0.10; optionable): Technical Systems Software
http://biz.yahoo.com/p/d/dstm.html
STATUS: Made a strong move over the 200 day MVA (5.88) in late December and has since pulled into a handle to its 6-month cup base, holding the 200 day. After a couple of sessions of moving up from that support, today DSTM rested a bit, pulling back slightly on lower volume of 49,000 (average 83,900). Looking for volume to ratchet back up and break the stock out over the December high at 6.61. Excellent money flow and buying. Target: 8
BUY POINT: 6.65 on rising volume. Stop: 6.18 (7%)
POSITION: Stock and/or February $5 calls to buy (DQK BA).
http://www.investmenthouse.com/ct/dstm.html
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.
KANAD (Kana Communications--$24.60; +3.35; no options): Internet Software
http://biz.yahoo.com/p/k/kanad.html
STATUS: Great move! After a solid move up late last week, KANAD blasted to a breakout today, moving out of its ascending wedge on huge volume (2.18 million; average 3.29 million). The move takes the stock to the range of the May-June highs, and out of the range of its recent cup pattern. Our target is 27, and we will see after the last two days of moves if we get some profit-taking. If so, we can look at positions on a move back up after it holds the 23 range.
BUY POINT: If we get a test that holds the 23-23.50 range, a move back up on continued strong volume. Stop: 21.50
POSITION: Stock.
http://www.investmenthouse.com/ct/kanad.html
BASING/TRADING RANGES:
VAST (Vastera--$16.00; -0.11; optionable): Information Technology Software
http://biz.yahoo.com/p/v/vast.html
STATUS: VAST is in an 11-month cup with handle that is inside a larger, 15-month base. After dropping back from the handle high (18.60) in December, VAST has been bouncing along its 18 day MVA (15.78), recovering today from a low of 15.30 to close. Volume was back down to 253,800 (average 274,000). Looking for a bounce up from this support that will take it back up to the handle high. VAST has strong money flow. Target: 22
BUY POINT: Aggressive: 17 on above average volume. Stop: 15.81 (7%). Breakout: 18.73 on volume of 407,000 or better. Stop: 17.42 (7%)
POSITION: Stock and/or April $15 calls to buy (AQY DC).
http://www.investmenthouse.com/ct/vast.html
Continued Puts:
QCOM (Qualcomm--$47.20; -3.21; optionable): Telecom
http://biz.yahoo.com/p/q/qcom.html
STATUS: Made the move! QCOM looked like it was ready to fall through support after Friday's action, and today it dipped hard through recent lows (volume up to 20 million; average 15.1 million). The target is 45, but we will watch carefully as we could get a move down toward 40.
BUY POINT: For new or additional positions, after a test of 49, a drop back through 47.50 on continued strong volume.
POSITION: February $55 puts to buy (AAO NK).
http://www.investmenthouse.com/ct/qcom.html
TTN (Titan Corp--$23.79; -0.78; optionable): Software
http://biz.yahoo.com/p/t/ttn.html
STATUS: Made the drop back through the buy point today, falling on increased volume of 567,200 (average 1.28 million). TTN has fallen back from double tops and has given up the 50 day MVA (24.64), but faces an up trendline connecting October-November lows at 23.30. The rising volume today was what we wanted to start down, and for new or additional positions we will look for it to take out the trendline. Target: 200 day MVA, at 20.81.
BUY POINT: Below 23.30 on rising volume of 750,000 or better.
POSITION: February $30 puts to buy (TTN NF).
http://www.investmenthouse.com/ct/ttn.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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