us stock market, trend trading stock

- Market cannot finish the consolidation before distribution again sets in.
- Everything is coming in threes of late, and it is not lucky threes.
- Stocks face an important test heading into expiration week.
- Fed-speak turns to page two of the script.
- Still some great stocks setting up more upside, but have to gear up for some downside as well.

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

Chart by StockCharts.com

Company Profile
Something to always watch for in a leading stock is the point at which sales growth starts to peak. SBUX started to experience this in 2006, but it made a recovery with the market in the fall. Then it gapped lower in November when it announced earnings that showed further slowing. It trended lower and fell through the 200 day MA in January. Now some pundits were touting the stock ahead of its earnings in early February including Cramer. Problem is, when sales start to peak the growth cycle is over and the stock will struggle. Take a look at Dell.

We were thus looking to play SBUX to the downside when it gave us the opportunity. It did so in late January as it rebounded to test its break below the 200 day MA. It gapped toward the 200 day on 1/30/07 and then reversed. The next session it gapped higher but then faded on low volume. We entered the play with some March $35 strike put options at $1.40 as the stock was trading just below $35; the options gave us a good delta for a reasonable price. Since we were not looking for a long play here given SBUX was set up to fall we liked the March expiration. SBUX reported earnings and gapped higher; we watched carefully and it did not break the 200 day MA. Indeed it reversed intraday and closed lower on strong volume. It continued lower the next three sessions, falling $0.74. Doesn't seem like a lot, but we were playing the next leg lower, and this was a great start. It took a breather from the selling the next session, but then was down again Thursday (-0.25) and again Friday (-0.46). That took SBUX to our initial target at $32.92. We sold some of the puts for $4.50, banking a 53% gain in 8 sessions. We kept some positions because when a stock starts selling due to a sales peak the drops can be precipitous. This way, however, we banked a strong gain and can ride the rest of the position for even more gains.

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 and our current analysis.

Chart by StockCharts.com

Company Profile
Earnings: Announced in January
STATUS: Test breakout. INFY broke out from a 9 week ascending base in January and has moved steadily up the 10 day EMA (59.02). Last week it broke higher on Wednesday on reports of strong growth in India (INFY is an Indian company). It tested that move to end the week, holding the 10 day EMA on the Friday low on much lower, below average volume. Excellent strength and ready to add some positions as it holds this near support and rebounds on rising trade once more.
Volume: 920.72K Avg Volume: 1.748M
BUY POINT: $59.78 Volume=1.8M Target=$68.75 Stop=$58.11
POSITION: IUN GL - July $60c (55 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.