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us stock market, understanding the stock market
Begin Part 2 of 3
SUBSCRIBER QUESTIONS
Q: Why is the following considered bearish: Head and shoulders patterns are stated as signs of a turndown in your newsletter, but that pattern looks like a base, a surge, and a then pullback. So what is so bad about that (as long as it doesn't break support)?
A: The reason stock patterns are useful in foretelling stock movements is that they represent in a graph how investors view a stock. Understanding investor sentiment as shown in a stock chart is one of the keys in understanding stock movements. In our online seminars we discuss each signature pattern and explain what to look for and what the psychology is behind each one.
In a head and shoulders pattern there is an initial attempt to rally that pulls back. No big deal; we know stocks rally and then pullback all the time. We like to see them stacking up these little pyramids one on top of the other as they move higher, preferably with volume higher on the move up and then lower on the pullback (often the pullback is to the 18 day MVA). Back to the pattern. When it makes the next move, it makes a higher high. Nothing wrong with that. On the pullback, however, it undercuts the uptrend and falls back down to the point where it tested lower on the prior bounce.
That is a problem or at least the start of a potential problem. The uptrend did not hold as the stock came all the way back to that prior low. That is a change of character in the move. Now if it happened after a longer uptrend and found its way back to he 50 day MVA, that is usually a good entry point if volume surges on the move up off the 50 day MVA. But there is another problem. It is under two prior highs, the left shoulder and the head. Those represent overhead resistance at two higher levels. Overhead resistance is where buyers bought but the stock dropped on them. They are unhappy. They tend to bail out when the stock gets back to that point.
If volume on the move up does not surge, and if the move back up does not take out the left shoulder's high, the problem gets worse. The overhead supply has held as sellers unloaded their shares. If the stock breaks below the neckline (the low of the left shoulder and the start of the right shoulder), that shows there are no buyers anymore, and the stock is heading lower. Usually it falls to a level equal to the points between the neckline to the top of the head.
THE PLAYS: BREAKOUTS AND BIG MOVES ALL OVER THE REPORT! Almost every SSR 'regular' listed as a play on the summary last night had a great move! VAR, APPB, LLL, YUM, EXPD, DRI, GTK, LSTR, SONC, HOTT, and MGAM all made great moves!
BONUS PLAYS: WBST and GS are still in good condition.
CRUS (Cirrus Logic--$18.88; -0.70; optionable): Semiconductor.
http://biz.yahoo.com/p/c/crus.html
STATUS: In an ascending wedge, a handle of a cup formed deep in its base. It turned back down Tuesday, but has held again at its short-term MVA's (10 day & 18 day at 18.63 and 17.86). Volume was down as the stock dipped back again today (1.05 million; average 1.8 million). Good action in this pattern, and we will look for a breakout. We are looking at the recent high in the pattern, although there was an intraday spike on the initial move up that high 20.45. Target: 23. Excellent money flow and buying.
BUY POINT: 20 on volume of 2.4 million. Stop: 18.60 (7%).
POSITION: March $17.50 calls to buy (CUQ CW).
AMSY (American Management--$19.84; +0.58; optionable): Software.
http://biz.yahoo.com/p/a/amsy.html
STATUS: In a solid cup with handle which, much like many in the sector, is deep in its base. However, those types of patterns have given us some good plays, and when they set up well like AMSY has, we can look at playing the breakout. The handle has formed through January, dipping back toward the 200 day MVA (18.10), but moving back up the last week toward the handle high at 20.40. Today the stock moved up, with volume finally increasing from the very low levels we have seen recently (212,300, the average). Looks good, and we will watch for a breakout. Target: 23.
BUY POINT: 20.50 on volume of 320,000. Stop: 19.07.
POSITION: Stock and/or April $17.50 calls to buy (YAQ DW - low open interest, but plenty at the 20 strike).
PRE-ANNOUNCEMENT PLAYS FOR THIS WEEK: Looking at
BEST PLAYS:
MARKET FAVORITES BEST PLAYS: SEBL is still poised, but there is word of a possible additional public offering, and the short-term effect of that is typically negative.
1) BEAS - At key support
BEAS (Bea Systems--$18.13; -1.25; optionable): Software.
http://biz.yahoo.com/p/b/beas.html
STATUS: Failed to make its early January high on its bounce last week, again stopping well short of its 200 day MVA (22.40). It has sold back toward the 50 day (17.89), with volume spiking up to 14.9 million (average 13.3 million). It tested down to 17.69 today before managing to recover. It is weak, and if the market dips, the selling could get stronger on a breach of support. Targeting 15.
BUY POINT: A move below 17.50 on continued strong volume.
POSITION: March $20 puts to buy (BUC ND).
PRE-ANNOUNCEMENT BEST PLAYS
1) EXPD - Strong move up
2) RARE - Still poised in a nice pattern
3) YUM - Breakout!
4) BRL - Still weak
5) AROW - Making its way up in the pattern
6) WLP - Strong rebound
EXPD ($60.57; +0.90): Air delivery & freight. Working on a date.
http://biz.yahoo.com/p/e/expd.html
BACKGROUND: Last announced a 2:1 split on 5-6-99 at a stock price of $62.50. The company has sufficient shares for a 2:1 split.
STATUS: EXPD is again showing strength. Today it hit the breakout point with the volume we were looking for (541,100; average 386,500), but pulled back from its high of 61.21 to close below the prior high in the pattern (60.80). EXPD had broken out from a pennant handle to a cup pattern in early January, but the move failed and the stock pulled back, but held on strong at the lows in the former pennant, and as it moved it found support at the 18 day MVA (58.46) as it formed an ascending wedge. Looking for more from here on the breakout move. Excellent relative strength. Target: 69.
BUY POINT: Looking for it to hold 60 and make a move back over 61 on continued strong volume. Stop: 56.82.
POSITION: Stock and/or May $55 calls to buy (URP EK).
RARE (Rare Hospitality--$26.72; -0.18; optionable): Restaurants. Forecast to announce a split on 2-19-02 with earnings. The company has not confirmed the date.
http://biz.yahoo.com/p/r/rare.html
BACKGROUND: Last announced a 3:2 split on 7-26-00 in conjunction with earnings. The stock price was 29.50. The annual shareholder meeting was on 5-14-01 at which time authorized shares were increased. The company has sufficient shares for a 2:1 split.
STATUS: RARE has a made the break over the highs in its handle (26.90, excluding an intraday spike up to 27.50), but has not made a run on the move as yet. Volume has been very strong, slightly down today to 457,100 (average 241,300) as RARE showed a tight doji to close. Still looks good, and is poised to make a run from here. The cup extends back to May, with highs near 28.50, and that is within a larger base with highs in February at 32. Target: 32
BUY POINT: 27.10 on volume of 350,000 or higher. Stop: 25.11 (7%). Over the high: 27.60 on volume of 350,000 or better. Stop: 25.67 (7%).
POSITION: Stock and/or May $22.50 calls to buy (QRH EX).
YUM (Tricon Global--$55.80; +1.50; optionable): Forecast to announce a split on 2-6-02 after the market closes in conjunction with earnings.
http://biz.yahoo.com/p/y/yum.html
BACKGROUND: Based upon our research it does not appear that YUM has ever split its stock. The annual shareholder meeting was on 5-17-01 at which time no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: Solid breakout move today! We have been watching YUM as a best play, ready for it to breakout, and Wednesday it made a strong move in that direction with big volume. Today it completed the deal, surging on continued strong volume (up to 1.27 million; average 769,400) over the handle high (54.57) in its double bottom with handle pattern. Good sales news helped (and of course that new quesadilla out just in time for the Super Bowl got investors hot), and YUM is still a buy on this move up to 57.30. Target: 62. The stock is in a very large base dating back to early 1999 with highs at 70.
BUY POINT: A buy up to 57.30 on continued strong volume. Stop: 51.90-53.29.
POSITION: Stock and/or April $50 or $55 calls to buy (YUM DJ or YUM DK).
BRL (Barr Labs--$73.00; -0.15; optionable): Generic Drugs.
http://biz.yahoo.com/p/b/brl.html
STATUS: Still looks weak, as the move back up off of Wednesday's intraday low of 70.45 could not get past the 200 day MVA (73.84). BRL tapped at that level today, but pulled back to close with a doji, as volume decreased again to 640,400 (average 844,000). After hitting the buy point (which was on a move below 71.50) yesterday and reversing with the market, we were not convinced that the put play would not work, and that feeling is strengthened with today's action and the look of the chart. Still looking for the stock to stall at this resistance and head back to the target of 65 or even the November lows of 59-62. Again we will watch the possible support from prior price levels at 70.
BUY POINT: From here or after another failed attempt at the 200 day, a drop through 72.50 on increased, above average volume.
POSITION: March $65 puts to say (BRL OM).
AROW (Arrow Financial--$29.77; +0.53; no options): Working on a date.
http://biz.yahoo.com/p/a/arow.html
BACKGROUND: Last announced a 5:4 split on 9-22-99 at a stock price of $26. The annual shareholder meeting was on 5-09-01 at which time no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: Keeping AROW right up here on the radar screen, as it has fought back and is trying to make a breakout from its large ascending wedge pattern. After its recent surge back up, it gapped back Wednesday but this time found support at the 50 day MVA (28.96), and today jumped back up from that level. Volume was not the greatest, however, coming in only at 8700 (average 11,000), and we will need to see a lot more than that to get the stock over the sturdy resistance at the top of its pattern, which has turned the stock back six times in six months. However, the higher highs make it look good as pressure builds for a move out of the pattern. It dropped back to a lower high earlier this month, but with that possible shakeout we are looking for AROW to finally do it. Need the volume. Target: 35.
BUY POINT: Over 30.25 on volume of 20,000. Stop: 28.70.
POSITION: Stock.
WLP (Wellpoint Health Networks--$126.89; +2.81; optionable): Working on a date.
http://biz.yahoo.com/p/w/wlp.html
BACKGROUND: Based upon our research it does not appear that WLP has ever split its stock. The annual shareholder meeting was on 5-8-01 at which time no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: Showing strength again. Has been somewhat erratic, falling out of its nice handle (to a cup dating back to late 2000) in December, but managing a recovery on unimpressive volume from the 50 day MVA (then 114, now 119). WLP tried a breakout last week out of a wedging consolidation, but there was not much volume and it fell back with increased intensity. That looked bad, but WLP held the 18 day MVA (122.87) and has surged back up the last two sessions on even bigger volume (today up to 1.2 million; average 515,300) as it completes a merger with Rightchoice Managed Care. With the volume surge today it could be ready to make a serious move out of this choppy handle. Target: 140.
BUY POINT: 127.33 on continued strong volume (minimum 770,000). Stop: 118.50.
POSITION: Stock and/or April $120 calls to buy (WLP DD - under 100 open interest).
PRE-SPLITS BEST PLAYS: Remember, we try to grab these as they break out of good patterns or as they start a run right before the split. Not looking for home runs, but looking for those $3 to $4 moves running into the split, watching for topping signs and potential resistance. Not huge money, but it can be very steady. We set our initial stops at the 7-8% range below the purchase price (or just below obvious support), and move them up on a move to preserve our profits.
1) SONC - Made the move and broke out
2) HOTT - Great boune
3) XRAY - Splits tomorrow, but ready to bounce
4) MGAM - Continued the move
SONC (Sonic--$38.00; +0.80; optionable): Restaurants. Splits 3:2 effective 2-9-02.
http://biz.yahoo.com/p/s/sonc.html
STATUS: This is what playing pre-splits is all about. We have several good moves on the report of late with these stocks, and SONC has made a solid move over the last two sessions, first hitting the aggressive buy point and then today making the breakout. It shot over its December high of 36.50 as volume increased to 265,700 (average 244,100). The stock had consolidated over the 50 day MVA (34-35) over most of the last month, failing on a couple of attempts to move. It finally has put one together, but we are watching carefully, as the strong move has taken SONC just over its upper channel trendline (at 37.80, connecting highs from late 2000). We have targeted 42, but as with all pre-splits, which can be quite volatile, we are ready to take profits if it shows topping signs and begins to pullback as it approaches that level.
PLAY: Aggressive: A move over 38.25, with stock and/or March $35 calls to buy (ZXQ CG). Stop: 37.
HOTT (Hot Topic--$33.62; +1.00): Apparel. Splits 3:2 effective February 6.
http://biz.yahoo.com/p/h/hott.html
STATUS: After the strong gap down and recovery at the 50 day (31.72) Tuesday, HOTT has come back with a nice bounce. Today it continued up over both the aggressive and 'safer' entry points, clearing the short-term MVA's (33.20). Volume continued to be strong on the bounce (1.16 million; average 762,000), but the stock did pull back from its intraday high of 34 to close. It is back in the lower levels of its recent range (an upweard-drifting handle to a cup), and the recent high is 34.75. We will see if it can continue up and take out that level going into next week's split.
PLAY: Watching the recent high for resistance with current positions. Aggressive: Over 34, with stock and/or March $30 calls to buy (UHO CF - low open interest).
XRAY (Dentsply--$49.45; -0.10; optionable): Medical instruments. Splits 3:2 effective February 1.
http://biz.yahoo.com/p/x/xray.html
STATUS: Has made a pullback to the 50 day MVA (48.85), but got support there today as a big spike of volume came in to hold it at support (534,800; average 259,000). It tapped support at its low, pulling up to close with a doji. Nice action at major support, which typically indicates a bounce. However, the stock is on tap to split Friday, but with the nice pullback to support and the volume spike, we will look for XRAY to make a post-split move, carefully watching the move and ready to exit if we get a show of weakness after an initial move. Target: Recent highs at 52 will get our attention first for a quick couple of points. If it can clear that high, we will look at 55.
PLAY: 50.20 (post-split 33.47) on continued strong volume (10 day MVA at 50.12), with stock and/or April $50 calls to buy (XEQ DJ - check options tomorrow post-split for the new symbol and strike).
MGAM (Multimedia Games--$38.60; +1.60; no options): Gaming. Splits 3:2 on February 12.
http://biz.yahoo.com/p/m/mgam.html
STATUS: Another pre-split that is making a nice bounce. Volume surged today as MGAM tested back toward the 50 day (34.34, intraday low at 34.90), but ran back up for a gain. The intraday high hit 39.54, with the high (from January) at 39.99. The move is solid, taking it back over its short term down trendline (had been showing something of a descending wedge. For new positions we will need to see a new high. Target on that move: 44.
PLAY: 40.09, with stock.
CONTINUING CANDIDATES BEST PLAYS:
1) APPB - Broke out!
2) GNSS - Still could make the move down
3) BBBY - Showing something here
4) TGIC - Needs volume to break out
5) DHR - Could pull back again before making the move
6) JCI - Good breakout
APPB (Applebee's--$37.65; +1.20; optionable): Restaurant.
http://biz.yahoo.com/p/a/appb.html
STATUS: Yet another restaurant doing well, and the breakout we were looking for today happened. APPB continued its strong move (volume down to 803,000; average 441,000), breaking over the left-side high (36.89) of its small double bottom (six-week) after having taken out the center Wednesday. Targeting 42, and still a buy on this move up to 38.73.
BUY POINT: Still a buy up to 38.73, with continued strong volume. Stop: 35-36.
PLAY: Stock and/or May $35 calls to buy (AQB EG).
GNSS (Genesis Microchip--$60.47; +2.77; optionable):
http://biz.yahoo.com/p/g/gnss.html
STATUS: Made yet another attempt at the 50 day MVA (60.02), managing to clear it but on volume that continued to decreased, coming in Thursday at 3.02 million (average 2.8 million). GNSS hit the buy point on the put, but still does not look like it will make a strong upside move, and we are still looking at a continued put play down to a target of 50. We can look at new or additional positions with a resumption of selling on increased volume.
BUY POINT: A drop through 55 on continued strong volume.
POSITION: March $70 puts to buy (QFE ON).
BBBY (Bed, Bath & Beyond--$34.58; +0.90; optionable):
http://biz.yahoo.com/p/b/bbby.html
BACKGROUND: Last announced a 2:1 split on 7-13-00 with a board meeting. The stock price of $39. The shareholder meeting was on 6-28-01 at which time authorized shares were increased. The company has sufficient shares for a 2:1 split.
STATUS: BBBY is back on the radar after managing to quickly recover back over its 50 day MVA (32.25). It has formed a shallow double bottom since early December, and today volume surged to 3.7 million (average 3.5 million) and the stock make a move toward the pattern highs (center is 34.95, left-side 35.70). Looking for a move over the pattern center, and targeting 41.
BUY POINT: 35.05 on volume of 5 million. Stop: 32.60 (7%).
POSITION: Stock and/or ay $32.50 calls to buy (BHQ EZ).
TGIC (Triad Guaranty--$39.70; +0.70; optionable):
http://biz.yahoo.com/p/t/tgic.html
BACKGROUND: Last announced a 2:1 split on 9-18-97 at a stock price of $28.25. The annual shareholder meeting was on 5-10-01 at which time no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: A cup with handle since August (highs bounced down from 40 three time in June-August), and now TGIC continues to move in its somewhat choppy handle. It tapped down to the 50 day MVA (36.92) Wednesday before reversing with the market, and today continued up toward the handle high (39.84). However, volume is low, and went down further today (25,000; average 41,100). Overall TGIC has shown good price/volume action, but on a breakout we are going to have to see much more to take positions. Target: 47.
BUY POINT: 40.26 on volume of 60,000. Stop: 37.44.
POSITION: Stock only.
End Part 2 of 3
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us stock market
understanding the stock market
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