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us stock market, top stock pick
Begin Part 2 of 2
SUBSCRIBER QUESTIONS
Q: I have lost some of the gains because there is not much advice (certainly not in simple terms) on when to sell. Can there be more information that would include some selling guidelines?
A: This is a question we get about every other month. It is difficult to give specific exit points because there are so many entry points to a play depending upon what type of investor you are, i.e., aggressive or conservative. We have hard and fast rules on new positions where we don't let a stock position fall more than 8% from where we bought it. On options we like to cut out at 25% down and always sell if we get down 50% on a position. On long term holds, violations of the 50 day and 200 day moving averages are significant shifts in character, but a violation of the 200 day moving average is usually way too late to sell a position if you follow the 8% rule. That is on the downside. Don't get caught nursing a new position that drops more than 8%. That way you don't take the big hit.
On the upside it is hard for us to say 'take profits now' because we don't know where entry points were made. We do note support points that have been holding on the move up. If that point is broken that means a change of character and that usually gets us out of positions. The more conservative investors should watch trendlines. When a stock is riding an up trendline, if that trendline is broken and the stock cannot recover in the next session, that is a signal to exit. Why? Because the move we were riding has been broken. You can also watch short term moving averages. If a stock rides up the 18 day moving average, bouncing up off of it and moving higher but then crashes through it on higher volume, that is a change in character and signals an exit point for the conservative investor. With option plays we prefer to be much more conservative.
When to sell also depends on market conditions and the type of play. In this market (as seen in the letter from the subscriber above), it is better to take money off the table at the first sign of trouble. When the market is better, we can let a stock run more, though with options we still have the time considerations and prefer to sell on the peaks after a good run. On a breakout from a cup with handle pattern, stocks can race ahead and then come back to test the move. With stock purchases on these patterns we can let them come back and then blast off from the test, keeping our 8% sell rule in place. We do this because in a bull market, a cup with handle breakout can give huge returns if we let the stock run for us. As long as it maintains good price/volume action (up on stronger, down on lower) we let it ride. If you play options on a breakout, give yourself time if you are going to let it come back on the test of the breakout. Otherwise, if we get a big move on the breakout (15% to 20%), we often take profits when the move slows and try to pick the play up again on a test of the breakout.
TEAM TRADES
AMCC: AMCC has a lot going for it. It has been hanging on well when many stocks were getting pounded, and then it was announced it was being added to the S&P 500 after the close on Friday. This is one of the stocks we were keying on to take positions to catch the move up when funds added it to their portfolio Friday, plus we think it is well-positioned to move higher because of its earnings potential and the breakout of the double bottom pattern.
It was selling down all day, but at about 11:30 CT is started forming an ascending wedge pattern. The high in the pattern was at 76.25, and we were looking to jump on board when it broke that level. It did that at 1:45 CT on what, at the time, was a very large volume spike. Looked as if institutions were starting to buy, so we jumped in with some February $70 calls. They were trading in a pretty thin spread (16 by 16.62) and we wanted some, so we put in a limit at 16.62 and we were filled right away. We were using the technique described Thursday night, so we bought just 5 contracts. In that technique, we enter with a partial position and if it falls, we average in at a lower price. We had confidence in AMCC with the institutions having to buy it.
Well, the stock shot up right after we bought, jumping up to 78.25. We were profitable by about 75 cents, but that was not the score here. We were looking for a move into the close with another $4 to $5 upside. Then the Nasdaq rolled over in that viscous selling, and AMCC was not spared. It was rocked down to 70.50. The options held their value fairly well, however, falling to about 13 on the low. We were watching because we wanted to average in. It first bounced at 73.50 and we were thinking of putting an order in, but the Nasdaq was getting pounded. Patience often pays off, so we waited. With twenty minutes to go it bounced up; that was along the lines of what we were thinking might happen on the S&P play as we knew institutions had to start buying. The options were trading at 13 by 13.62. The stock bounced to 71.50 right off and the options moved to 13.38 by 14. We put in a limit order at the ask. The stock moved up to 72, but then fell back and we were filled. The stock then exploded up to 76 before it fell back to just over 75 to close. The options closed at 15.13 by 15.88. Our basis is 15.31. If we get a good move in AMCC over the next few days we are in a great position to bank some good cash with this method.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS:
All prices reflect prices at the close on Friday
Best Plays:
1) MOND: Breaking out and still a buy.
2) CB: Getting ready for a move back up.
3) TMO: Ready to move up on this volume surge.
4) MIL: Getting ready for a handle breakout.
5) KEI: Trying to break out of a double bottom on good news.
6) CYTC: Looking for a moving average bounce play.
7) BEC: Ready for a breakout on a volume surge.
BREAKING OUT:
Continuing Pennant Play:
MOND (Robert G. Mondavi--$54.13; +1.88; no options): Food and beverage
http://biz.yahoo.com/p/m/mond.html
STATUS: Broke out from the pennant on good volume (128,400; avg. 61,181). Remains a buy on continued strong volume. Excellent money flow and high relative strength.
BUY POINT: A buy up to 55.26 on the breakout, on continued strong volume.
POSITION: Stock.
TESTS OF THE BREAKOUT: Lots of stocks 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.
Continued Plays:
AVE (Aventis--$84.25; 0.00; optionable (AVE)): Drug
http://biz.yahoo.com/p/a/ave.html
STATUS: Tried to extend the breakout, opening at 86.63, but couldn't hold on, dropping back to close at the breakout closing high. Volume remained high but declined at 356,000 (avg. 150,409). Look for a test of the buy point of 80.07 on a pullback as volume drops further, for a new buying opportunity. High money flow and relative strength.
BUY POINT: On a move back up after a pullback to the 80-81 range, on strong volume.
POSITION: Stock and/or April $75 calls to buy (AVE DO).
PFGC (Performance Food Group--$51.25; no options): Food Wholesale
http://biz.yahoo.com/p/p/pfgc.html
STATUS: Pulled back from the new all-time closing high reached Wednesday, closing at support (10 day MVA) on still strong volume of 398,800 (avg. 145,000). The stock can try a turn back up from here, but the high volume suggests a continued pullback to the 18 day MVA (49.44). Continues to show excellent buying.
BUY POINT: Aggressive: On a bounce from here, or from the 49 level, on continued strong volume.
POSITION: Stock.
MRCY (Mercury Computer Systems--$46.44; -2.56; optionable (QYR)): Telecom equipment
http://biz.yahoo.com/p/m/mrcy.html
STATUS: Pulled back from the Wednesday surge, with volume continuing to rise into Friday (314,700; avg. 191,000). The stock will likely pull back to the 10 day MVA (45), which is reinforced by other prices at that level from the previous two weeks.
BUY POINT: Aggressive: On a move up from 45 on continued strong volume.
POSITION: Stock and/or February $40 calls to buy (QYR BH).
MAPS (Mapinfo Corp--$47.25; -3.94; no options): Computer software
http://biz.yahoo.com/p/m/maps.html
STATUS: Pulling back from the 51.88 closing high hit Wednesday, hit after the stock took off after the breakout test. Volume was lower but remained well above average (366,500; avg. 193,227), suggesting a further pullback to the 10 day MVA (45.22). We'd like a hold at the breakout high of 46.69, but that is less likely than a hold at 45.
BUY POINT: On a move back up from 45, on continued strong volume.
POSITION: Aggressive: Stock.
MMM (Minnesota Mining & Mfg--$120.50; -1.44; optionable (MMM)): Conglomerates
http://biz.yahoo.com/p/m/mmm.html
STATUS: Kept moving from the 10 day MVA support level to reach a new all-time closing high of 121.94 Thursday on a successful test of the breakout. Pulled back from there Friday along with volume (1.37 million; avg. 2 million). Look for a test of the breakout high of 119, or the 10 day MVA (116.41) on an more extended pullback. Continued strong money flow and high relative strength.
BUY POINT: Up from here on continued rising volume.
POSITION: Stock and/or April $115 calls to buy (MMM DC).
BMET (Biomet Inc--$39.69; -1.75; optionable (BIQ)): Health services
http://biz.yahoo.com/p/b/bmet.html
STATUS: Pulling back to test the breakout from its trading range. Price pulled back below the buy point of 40.01, the low tapping close to support at the 10 day MVA (38.98) on lower, below average volume (1 million). We will see if the stock can make a quick bounce back up from the moving average on rising volume.
BUY POINT: Aggressive: On a bounce from 39 on average or better volume.
POSITION: Aggressive: Stock and/or April $35 calls to buy (BIQ DH).
BOUNCE PLAYS: These plays are fast plays after a pullback to support.
Continued Play:
CB (Chubb Corp--$86.50; -1.31; optionable (CB)): Insurance
http://biz.yahoo.com/p/c/cb.html
STATUS: Pulled back from the Wednesday high of 89 (CB hit an earlier December high of 90.25) as volume dropped back as well (467,500; avg. 862,000). The stock may hold at support at 86.50 since it hit that price three times recently, though the 10 day MVA is at 85.86 on a continued pullback. The stock is ranging up and down off the 50 day MVA. CB shows high money flow and relative strength, and shows improving buying.
BUY POINT: Aggressive: On a move up from here, or on a bounce from 85.86, on stronger volume.
POSITION: Stock and/or April $85 calls to buy (CB DQ).
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.
Wedges:
New Play:
IVGN (Invitrogen Corporation--$86.38; +0.25; optionable (IUV)):
http://biz.yahoo.com/p/i/ivgn.html
STATUS: In an ascending wedge. A Thursday breakout attempt was cut short Friday by low volume, which dropped back to 646,000 (avg. 1.1 million) as the stock showed a doji. IVGN can turn back down in the pattern, as the doji suggests, to the 10 day MVA (81.48), before the stock can break out over the pattern high of 87.44. Strong money flow and high relative strength.
BUY POINT: 87.57, on volume of 1.5 million or better. Remains a buy on the breakout up to 91.95.
POSITION: Stock and/or February $80 calls to buy (IUV BP).
Continued Plays:
ORCL (Oracle Corporation--$29.06; -2.00; optionable (ORQ)): Software
http://biz.yahoo.com/p/o/orcl.html
STATUS: Selling a bit farther down that we would like in its ascending wedge pattern, but the stock closed at a support level (50 day MVA simple). Volume was just higher at 31.6 million (avg. 44 million), but still below average. Look for a quick bounce back up for the stock to resume the pattern.
BUY POINT: Aggressive: On a bounce back from here on continued rising volume. Breakout: 33.13, on volume in the range of 59 million.
POSITION: Aggressive: Stock and/or March $25 calls to buy (ORQ CE). Breakout: Stock and/or February or March $30 calls to buy (ORQ BF or CF).
MEL (Mellon Financial Corp--$49.19; -1.94; optionable (MEL)): Banking
http://biz.yahoo.com/p/m/mel.html
STATUS: Broke through the up trendline that was supporting the dips in the ascending wedge pattern, but managed to close at the 20 day MVA where it found support last pullback. Volume shot above average to 2.5 million (avg. 1.8 million) on the move. MEL is still holding above a longer-term up trendline at 48 (from October), so we will see if the stock can turn things around.
BUY POINT: Aggressive: On a bounce back from here or from 48, on continued strong volume.
POSITION: Aggressive: Stock and/or March $45 calls to buy (MEL CI).
Pennant:
New Play:
TMO (Thermo Electron Corp--$29.75; +0.35; optionable (TMO)): Conglomerates
http://biz.yahoo.com/p/t/tmo.html
STATUS: In a pennant above the 50 day MVA (28.56). Volume surged Friday (1.8 million; avg. 937,500) as the stock moved up slightly. We are looking for a breakout move as a follow-through on the strong volume. Pattern high is 31.17. TMO has great money flow, high relative strength, and good buying.
BUY POINT: 31.30, on volume of 1.3 million or better.
POSITION: Stock and/or March $30 calls to buy (TMO CF).
Continued Plays:
CGP (Coastal Corp--$88.31; -1.57; optionable (CPG)): Energy: Pipelines
http://biz.yahoo.com/p/c/cgp.html
STATUS: Reached a breakout high of 90.88, but pulled back from there Friday as volume dropped back below average (710,900; avg. 991,000). The stock looks like it is trying to hold support here (above 88.25), but it can pull back to test the buy point of 85.07. The stock is being replaced on the S&P 500 by JBL, which usually means a drop in share price. We are no longer enamored with the play, and will set a stop at today's low (87.25).
BUY POINT: No new positions.
BASING/TRADING RANGES:
New Plays:
A rolling pattern:
NPSP (Nps Pharmaceuticals Inc--$48.00; +0.50; optionable (QKK)): Biotechnology
http://biz.yahoo.com/p/n/npsp.html
STATUS: Rolling between 37 and 49, the stock pulled back all day (to a low of 43.63) until getting hit with some strong buying volume at the end of the session that pushed price to the top of its intraday trading range. Volume rose to 512,400 (avg. 278,000). After three to four rolls the pattern either breaks down or breaks out. Looking for a momentum move up from here, for a possible breakout from the pattern.
BUY POINT: Aggressive: On a move up from here on continued strong volume. Breakout: Over 52.50, on continued strong volume.
POSITION: Stock. February options had insufficient open interests (too illiquid for this stock).
MIL (Millipore Corp--$63.00; +0.56; optionable (MIL)): Electronics (scientific and technical instruments)
http://biz.yahoo.com/p/m/mil.html
STATUS: Trying to move up and out of the handle of its cup base. Volume rose to 656,500 (avg. 540,000) as the stock showed a tight doji closer to the top of its trading range. Look for a move over the intraday high of 64.19. Good buying, and rising money flow and relative strength.
BUY POINT: Over 64.19, on continued rising volume.
POSITION: Stock. April $60 options had insufficient open interests.
KEI (Keithley Instruments Inc--$43.06; +5.37; optionable (KEI)): Electronics (scientific and technical instruments)
http://biz.yahoo.com/p/k/kei.html
STATUS: Moving up in the right leg of its double-bottom pattern on excellent volume (1.17 million; avg. 504,000); the stock was hit with big volume at the end of the day Friday which shot price up. The move was on the company's reiteration of 25% growth in 2001. This news could continue to propel the stock next week. Look for a continued move up toward breakout over the middle peak high of 51.25 on the momentum. That is right at the 200 day MVA (51.41). Good buying.
BUY POINT: On further upward movement on continued strong volume.
POSITION: Stock. February and April options below the $60 strike have insufficient open interests for the stock.
EDS (Electronic Data Systems--$57.75; +1.06; optionable (EDS)): Software (information technology)
http://biz.yahoo.com/p/e/eds.html
STATUS: Consolidating in a rather wild handle to an 8-month base. Volume remains below average and down Friday at 1.1 million (avg. 2.3 million) on the small move up, the stock pulling off a high of 59.13 due to the low volume. Look for a breakout over the handle high of 60 in a rally. The stock shows a high relative strength.
BUY POINT: 60.13, on volume of 3.4 million or better.
POSITION: Stock and/or March $55 calls to buy (EDS CK).
Continued Plays:
MER (Merrill Lynch & Co--$68.19; -0.12; optionable (MER)): Brokerage
http://biz.yahoo.com/p/m/mer.html
STATUS: Continued the move up in its rolling pattern (highs at 73), holding on a doji on a slight pullback Friday. Volume was lower again at 2.2 million (avg. 4.3 million). Look for a move up from support: 68.19, hit four times since August. On the low volume, that can support price until a resumed move up.
BUY POINT: Up from here on rising volume.
POSITION: Stock and/or February $65 calls to buy (MER BM).
SFNT (Safenet Inc--$47.00; -2.06; no options): Software
http://biz.yahoo.com/p/s/sfnt.html
STATUS: After forming a quick (one-day) handle, SFNT tried to break out of the double-bottom pattern on a pop up Thursday, but volume was unsupportive and price dropped back Friday. The intraday low of 45.69 tested near the 10 day MVA (45.08). Look for a continued drop down to that level, then a bounce back on solid volume. Friday's volume was 33,500 (avg. 88,500). High money flow, relative strength, and good buying.
BUY POINT: Aggressive: On a bounce from 45 on stronger volume. Breakout: 50.13, on volume of 133,000 or better.
POSITION: Stock.
CYTC (Cytyc Corporation--$62.56; -2.32; optionable (YQK)): Electronics
(scientific/technical instruments)
http://biz.yahoo.com/p/c/cytc.html
STATUS: Tried to break out of the ascending wedge handle (to the cup base), closing at 64.88 Thursday (buy point is 64.63) but pulling back to close just above the 10 day MVA (61.93) Friday. Volume dropped sharply below average to 329,200 (avg. 715,000) on the move, suggesting a pop back up from the support level.
BUY POINT: Aggressive: On a bounce from the 62 level on rising volume.
POSITION: Stock and/or February $60 calls to buy (YQK BL).
AREM (Aremissoft Corporation--$42.69; -0.75; optionable (UKM)): Software
http://biz.yahoo.com/p/a/arem.html
STATUS: In a rolling pattern between 48 and 38. The stock is trying to push back up to the top of the range and reached a high of 45.75 Friday but dropped back down on lower volume (344,100; avg. 378,000). Look for a move back up from the 18 day MVA (tested on the low of 42.06) after a possible pullback to that support, watching for topping signs as the stock approaches 48. Strong buying.
BUY POINT: On a move back up from 42 on above average volume.
POSITION: Stock. February and April $40 options had insufficient open interests (too illiquid for this stock).
JPM (J.P. Morgan & Co--$165.50; -7.50; optionable (JPM)): Banking
http://biz.yahoo.com/p/j/jpm.html
STATUS: Sold back to support (10 day MVA) on strong volume (4.5 million; avg. 1.8 million). The stock is trying to break out of its double-bottom pattern and we anticipated a possible handle formation, but this drop is a little steep for a decent handle. Hence, the stock can pull back to the 18 day MVA (161.80) before heading back up.
BUY POINT: Aggressive: On a bounce back up from here, or from the 162 range, on strong volume. Breakout: 175.63, on volume of 2.5 million or better.
POSITION: Aggressive: Stock and/or March $160 or $165 calls to buy (JPM CL or CM). Breakout: Stock and/or February $175 calls to buy (JPM BO).
BEC (Beckman Coulter Inc--$41.94; +0.13; optionable (BEC)): Electronics (scientific/technical instruments)
http://biz.yahoo.com/p/b/bec.html
STATUS: Just below the breakout point of 42.01 as volume builds (almost to average levels at 334,400 by Friday). The stock is in the handle if its cup base, and moved up from a low of 40.94 that tested near support at the 10 day MVA (40.65). We like the close near the high of 42.13 on the stronger volume. Relative strength remains high.
BUY POINT: 42.01, on volume of 503,000 or better.
POSITION: Stock. February $40 options had insufficient open interests (too illiquid for this stock).
PLT (Plantronics Inc--$47.00; -2.63; optionable (PLT)): Telecom
http://biz.yahoo.com/p/p/plt.html
STATUS: Was headed up from the base of the handle in its double-bottom base, but after hitting a high of 52 Friday, the stock yanked back down to close on the 10 day MVA, on volume that broke above average (486,900; avg. 318,000). We want to see a bounce back, but the stock may first move back down to the 18 day MVA, tested on the intraday low of 46.06. Buying is strong.
BUY POINT: Aggressive: On a bounce from here, or from the 46 level, on rising volume. Breakout: 52.13, on 477,000 shares or better.
POSITION: Stock. February $45 and $50 options (PLT B-) have insufficient open interests.
Good Investing!
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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