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us stock market, trend trading stock
Begin Part 2 of 3
SUBSCRIBER QUESTIONS
Q: When the market is positive and moving up, there have been any number of days when it opens with a fast upsurge or a gap open. Because of the strong open, there may be one or more (sometimes many) of the plays hit their buy targets in the first 5-30 minutes of the open. Of course, during that time it is often hard to gauge the market and certainly near impossible to tell if it is "opening enthusiasm'" or real buying power that is moving the stocks. What do you do in such cases?
A: This is a great question and one of the most difficult parts of investing. One thing we always, always try to instill (and it took awhile to learn) is not to get impatient. You see a stock hit the buy point early and start to run higher. The urge is to avoid missing out and you jump in. Then the move dies out or it runs higher only to come back down and test before taking off again. The worse case scenario: the market gaps higher and then reverses on you and continues to fall.
A rule of thumb we have is avoiding jumping in during the first half hour unless there are some very compelling reasons to get in on particular moves (e.g., company ups its own earnings estimates in a strong market). Sometimes that goes for the first hour. There are a few reasons for this. During the opening half hour, market makers and specialists are trying to determine the price for a stock and its options. They may want to accumulate some more shares and push prices lower. They may want to get rid of shares so they push it higher. I don't like to be a guinea pig in setting the day's prices.
Another concern is the gap higher and then the crash lower. We always prefer a softer open, building as the session wears on. In choppy markets such as this one a gap open is not something to chase. Further, even if it does not lead to a reversal and a close lower, we almost always get a test of the buy points during the first couple of hours. That gives us a chance to look at the move higher, see the test, and see the stock start moving up from there. Looking at the overall market we can then get a sense of the strength of the move and we can also take a look at the volume thus far. That does not mean we have to wait around checking every five minutes, we can let a half hour go by, check with the broker, and if the market is still coming back, we can wait. We already know the buy point, support, resistance, volume, etc., so we can find out where the stock is now, the high, the low, the volume, and we have a pretty good idea of what is going on. There is also the alert service where we take a hard look at what the market is doing early before we start issuing alerts.
By waiting we will miss a few trades because they will run away from us. Still, we prefer to take as much chance out of the trading as possible because playing the percentages usually means a pullback is coming to test a move. That is the first entry point where we often take a partial position (half or our intended position on the play). Then we check in before the close and look to see if the move is looking the way we want, i.e., holding the buy point and moving toward the upper end of the range on strong volume.
THE PLAYS: Good moves on a couple of put plays, THC and APPB. LLL continued to show great upside strength, triggering an alert as it hit the initial target.
BONUS PLAYS:
Upside:
SAM (Boston Beer Co--$16.52; 0.00; optionable):
http://biz.yahoo.com/p/s/sam.html
STATUS: SAM brewed up a smooth run from lows at 10 in September to a high at 18.16 at the end of the year, before hopping back to test its 50 day MVA (15.51). It barley undercut that support as it formed a small double bottom, popping back over the center with a nice move to start this month and form a small cup (mug?). It has now gently flowed back into a nice little handle consolidation, showing five consecutive doji or loose doji patterns as it tapped the 18 day MVA (16.23) on low volume (Friday 12,600; average 59,400). Looking good for a solid move back up and breakout. Target: 20.
BUY POINT: Aggressive: Over 17 on above average volume. Stop: 15.90 (7%). Breakout: 17.34 on volume of 90,000. Stop: 16.13 (7%).
POSITION: Stock and/or June $15 calls to buy (SAM FC - under 100 open interest).
FHCC (First Health Group--$25.83; +0.32; optionable): Insurance Brokers.
http://biz.yahoo.com/p/f/fhcc.html
STATUS: FHCC has battled back over its down trendline (connecting August through December highs) after making triple bottoms at 22 each of the last three months. It took out the highs in that triple bottom, and has now leveled out into a handle-type consolidation just over its 200 day MVA (25.56). A pretty good pattern at this point, with the consolidation holding the 200 day (18 day at 25.21 tapped at the low Friday) on steady, low volume (up to 865,400 Friday; average 1.07 million). Looking for a breakout, targeting 30.
BUY POINT: 26.35 on volume of 1.5 million. Stop: 24.51 (7%; 50 day at 24.66).
POSITION: Stock and/or July $22.50 calls to buy (FHQ GX - low open interest).
GDW (Golden West Financial--$64.12; -0.01; optionable): Savings & Loans.
http://biz.yahoo.com/p/g/gdw.html
STATUS: GDW has made a solid run back up from its November lows at 47.50, forming the right side of double bottom which dates back to the beginning of 2001. The stock dipped back below its 18 day MVA (currently 62.73) to start this month, but quickly rebounded and is now back at the recent highs. GDW has pulled laterally this week, with four consecutive dojis or loose dojis, tapping the 10 day (63.35) at its intraday lows. Volume shot up Friday, coming in very strong at 1.22 million (average 807,100). We could see a bit of drift back here toward the 18 day, and that would be fine as that would form a better handle if it holds that support and volume is light on the drift. However, it is not bad at all right now, and GDW could make a move out of the pattern after Friday's volume spike. Target: 74. High relative strength.
BUY POINT: 65 on volume of 1.2 million. Stop: 60.45.
POSITION: Stock and/or May $60 calls to buy (GDW EL).
Downside:
ROAD (Roadway Express--$35.50; -1.35; optionable): Trucking.
http://biz.yahoo.com/p/r/road.html
STATUS: ROAD made a nice run since September, running from 22 up to a high over 41. However, it made two runs at 41, and after the second attempt dropped back through its up trendline. It caught itself just below its 50 day MVA (36.54), but the move up showed decreasing volume, and it failed just below 39. Friday it again gave up the 50 day, falling through it on sharply higher volume of 247,600 (average 192,000). We can look at a continued strong drop from here for a put play, although we could get a test of the broken support and a 'kiss goodbye,' one of our favorite entry points. Target: 30 (some former highs and the 200 day MVA).
BUY POINT: After a test of the 50 day, a drop back through 35.50 on continued strong volume. From here: A drop through 35 on continued strong volume.
POSITION: April $40 or June $40 or $45 puts to buy (EJQ PH or EJQ RI - April available Monday; check deltas, etc. for either as unavailable at the time of writing).
ONE (Bank One--$35.95; -0.85; optionable):
http://biz.yahoo.com/p/o/one.html
STATUS: ONE is showing a lot of weakness. After the September drop it battled back to reach its 2001 highs (40) at the end of the year, but could not break through. A subsequent attempt to move up died well short of the mark, and it broke down through its 200 day and 50 day MVA's (36.29 and 37.05, respectively). After finding support at 34, ONE moved back up, but again there was not much behind the move, and it died at the 50 day, falling back Friday on sharply higher volume (4.32 million; average 2.93 million). It is heading down, and we will look for ONE to move down to a target of 32 initially on the way to 30 on a put play.
BUY POINT: A drop through 35.50 on continued strong volume.
POSITION: April $40 or May $42.50 puts to buy (ONE PH or ONE QV - April available Monday, and for either check deltas, etc. as unavailable at the time of writing).
ANSI - Dropped on lower volume, not quite down to the buy point. Could see a bit of a test back toward the 50 day MVA first.
JILL - Bounced back up on heavy volume toward the buy point. That is what we want.
MSM - Hanging in there.
DRIV - Edging down, but could test back up a little before falling more.
GS - Dropped back again on strong volume after a test of the 200 day.
WBST - Might be at the end of this run after Friday's 'hanging man' doji.
SEE - Still strong, but we are prepared for a pullback after Friday's gap up to a doji.
JCP - Hard fall back this week after testing the 200 day.
PRE-ANNOUNCEMENT PLAYS FOR THIS WEEK: Looking at RARE on Tuesday and DIAN on Thursday.
NEW PRE-ANNOUNCEMENT PLAYS:
SLM (USA Education--$92.51; +0.22; optionable): Researching a new date, and we are looking now at a board meeting that our research shows will be in early April.
http://biz.yahoo.com/p/s/slm.html
BACKGROUND: Last announced a 7:2 split on 11-21-97 at $38. There are enough shares for a 3:2 split.
STATUS: The last two years SLM has made its steady way up from the $30 range, and is due for a split. In early January it reached down to test its 200 day MVA (then 78, now 80), and made a good recovery, forming and breaking out of a small cup. After testing that breakout it made another strong move up last week, and this week it has rested, forming a nice, lateral consolidation on lower volume. Friday it showed a second consecutive loose doji, comfortably over the previous high (91.36) and the 10 day MVA (91.08). We could see a bit more consolidation that would see SLM drawing closer to its 10 day, but this is shaping up for a continuation of its run. Target: 105.
BUY POINT: 93.95 on volume of 970,000. Stop: 89 (18 day MVA at 89.60).
POSITION: Stock and/or July $90 calls to buy (SLM GR).
XL (XL Capital--$95.11; -1.59; optionable): Property & casualty insurance. Working on an announcement date, but are looking at a board meeting the first week in April.
http://biz.yahoo.com/p/x/xl.html
BACKGROUND: Based upon our research it does not appear that XL has ever split its stock. The company has sufficient shares for a 2:1 split.
STATUS: After recovering from the insurers' nosedive after September 11, XL pulled very gradually back over the course of the next several months, taking out its 50 day MVA (90.09) and testing near the 200 day (83.64). It started back up going into earnings this week, and on that announcement gapped up and ran Wednesday, making a nice run to a new high (98.48). XL has pulled back the last two sessions, but on sharply decreased volume (877,300 Friday; average 858,000). The stock is in the range of its October-November highs at 95, with the 10 day MVA below at 92.53. We will see where it catches support and holds on this test, and it could be right here. On a hold, we are looking for a resumption of the breakout move toward a target of 110.
BUY POINT: After showing it can hold 94-95, a move over 96.50 on increased volume. Stop: 89.84 (7%).
POSITION: Stock and/or July $90 calls to buy (XL GR).
BEST PLAYS:
MARKET FAVORITES:
1) PMCS - A downside play on a break from a pennant
2) KLAC - Holding a breakout test
PMCS (Pmc-sierra--$20.71; -0.97; optionable): Semiconductor.
http://biz.yahoo.com/p/p/pmcs.html
STATUS: PMCS has formed a pennant over the last three months, tightening in around its 50 day and 18 day MVA's (22.49 and 22.37, respectively). It again gave up the 50 day Thursday, and Friday dropped below the up trendline that defines the lower levels of its pennant. Now, with pennant patterns we can often see a 'shakeout' of weak holders with a drop like this, and that can produce a move back up in the opposite direction. However, on a continued drop below recent pattern lows, PMCS is a downside play, although we will want to see stronger selling volume (Friday down to 5.52 million; average 8.7 million). Target: 16.
BUY POINT: A drop through 20 on above average volume.
POSITION: April or May $25 puts to buy (SQL PE or SQL QP - April available Monday, and for either check broker for delta, etc. as not available at the time of writing).
KLAC (Kla-Tencor--$60.27; -1.02; optionable): Semiconductor equipment.
http://biz.yahoo.com/p/k/klac.html
STATUS: KLAC has made it back to its May-August highs, and formed a double bottom starting in early December. After dipping back last week, Wednesday KLAC broke out of the pattern on the strength of AMAT's news this week. A strong move, and KLAC managed to hold on well to end the week, pulling back slightly the last two sessions as volume dropped significantly (Friday down to 8.72 million; average 9 million). It is holding the prior pattern high at 60.30, and we will see if it KLAC can continue to hold 60 and generate another solid move if we can get some market strength. Target: 70.
BUY POINT: After holding 60, a move over 62 on increased volume. Stop: 57.75.
POSITION: Stock and/or June $60 calls to buy (KCQ FL).
CSCO - Moved down toward the put buy point.
SNPS - Hit the buy point for new or added positions.
PG - Keeps moving up on the breakout, with more volume behind it Friday.
JNPR - Continued down Friday on strong volume.
BRCM - Also continued the drop, and hit our initial target.
EXTR - Dipped below the recent lows.
IBM - Big gap down on heavy volume amid negative news.
PRE-ANNOUNCEMENT BEST PLAYS
1) DIAN - Tested the breakout at its low Friday
2) BMS - Another new high
3) RARE - Tried to bounce
DIAN (Dianon Systems--$62.15; -0.78; optionable): Forecast to announce a split with earnings on 2-21-02 before the open.
http://biz.yahoo.com/p/d/dian.html
BACKGROUND: Based upon our research it does not appear that DIAN has ever split its stock. The annual shareholder meeting was on 10-25-00 at which no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: Tested back but held. DIAN made a great move out of the pennant Tuesday, blasting up on huge volume. It has held since, hitting as high as 65 (new all-time high) and then Friday touching an intraday low of 60.77 before pulling up to close. The low was just above the 10 day MVA (60.36) and January high (59.50), and volume was up (248,400; average 263,500) as DIAN rallied back a bit to close. Showing some resilience, and we will see if it DIAN holds up here in a consolidation (which has support from the December highs at 62). The pennant formed after DIAN broke from its lateral range in December and then tested back to its 50 day MVA (then 52.50, now 56). Our target is now 72.
BUY POINT: If it can hold over 62 in a consolidation on continued low volume, a move over 64 on above average volume. Stop: 59.61.
POSITION: Stock and/or May $60 calls to buy (UID EL).
BMS (Bemis--$53.49; +1.80; optionable): Working on a date. Earnings were 1-24-02.
http://biz.yahoo.com/p/b/bms.html
BACKGROUND: Based upon our research it does not appear that BMS has ever split its stock. The company has sufficient shares for a 2:1 split.
STATUS: Another strong move! BMS broke out Monday, gapping over the former high (52.47) and hitting 53.37, but the move stalled and BMS pulled back to close below the breakout point Thursday. However, volume was low on the selling and the stock held the 10 day MVA (51.91) on the move, so we were optimistic. Friday BMS gapped up and then continued to move, running on increased volume that was back in the heavy range we have seen of late (274,900; average 231,000). On a continuation of the move we are targeting 60. BMS has been on a steady upward trend from levels below 25 in October 2000, making a strong breakout from a reverse head and shoulders in November. Shows excellent buying and relative strength.
BUY POINT: Still a buy up to 55 on continued strong volume. Stop: 49.76-51.15 (7%; 50 day at 49.90).
POSITION: Stock and/or July $50 calls to buy (BMS GJ).
RARE (Rare Hospitality--$25.45; +0.35; optionable): Restaurants. Announced earnings ahead of original schedule.
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 is in a cup with handle dating back to May (high 28.43; all-time high at from February at 32). It has pulled steadily back in the handle over the last two weeks, finding support at its 50 day MVA (24.34). We were looking for a bounce, and after earnings Friday RARE tried, gapping up to its short-term MVA's (18 day at 25.48) and taking out our aggressive buy point on the way to an intraday high of 26.22. However, it pulled all the way back to close with a doji, as volume was level and light at 258,200 (average 262,400). Still looks good, but we will see if it can hold the current support and make a run at a breakout. We will likely need to see a breakout to get a split announcement - such a move will get it clearly in range. The handle high is 27.05 (there is an intraday spike at 27.50 made just before the handle formation). Target: 32.
BUY POINT: Breakout: 27.15 on volume of 380,000. Stop: 25.25.
POSITION: Breakout: Stock and/or May $25 calls to buy (QRH EE - low 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) BSYS - Tested back to support
2) ACS - Still looking good for another drop
BSYS (Bisys Group--$62.20; -1.16; optionable): Business software. Splits 2:1 effective 2-25-02.
http://biz.yahoo.com/p/b/bsys.html
STATUS: BSYS has pulled back from its pre-split move, which took it back over the resistance from its 50 day MVA (61.04, with its short-term down trendline at 60) and its 18 day at 61.99). After Wednesday's strong move, BSYS has dipped back, but selling volume has been low, down Friday again to 290,200 (average 572,000). It is holding right over its 18 day, which was where we were looking for it to hold to start back up on the run. We can look at new or additional positions on a bounce, watching the high (from January) at 66, as it could make another pause there before blasting to a new high. Target 70.
PLAY: Bounce - A move over 63, with stock and/or March $60 calls to buy (BQY CL - April available Monday). Stop: 59.61.
ACS (Affiliated Computer--$95.13; -0.54; optionable): Software. Splits 2:1 effective 2-25-02.
http://biz.yahoo.com/p/a/acs.html
STATUS: We were looking for ACS to make its way back up toward one of its up trendlines to find resistance that would set up another put. This week ACS has made its way back up to the trendline (which is at its recent high and just under ACS' 50 day MVA, 97). It made a low-volume move up to that level Thursday, and Friday showed a loose doji with volume up to 741,800 (average 702,300), dropping back momentarily through our downside buy point. With that action (the weak move up over the past week and now the doji are signs of a drop back), it looks like another failure on this move, and we will now watch for ACS to start back down. This could be, like a pre-split to the upside, a quick play where we grab a couple of points and move on. There is support from recent intraday lows at 88, but we could get a drop as low as the recent lows (87.50-88.50), which approach the 200 day MVA, at 85.94.
PLAY: Aggressive: A drop through 94.25 on above average volume, with April $105 puts to buy (ACS PA - check delta, etc. with your broker as unavailable at the time of writing).
End Part 2 of 3
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