us stock market, trend trading stock

- Up and down expiration ends positive with no real fanfare.
- Fed changes its focus on the week and was talking very tough on Friday.
- Foreigners still cool on US assets for the second straight month.
- Light holiday trade into Thanksgiving may allow stocks to make an interim bounce.

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

Chart by StockCharts.com

Company Profile
You can set your watch by the way some people visit Starbucks. An addiction is a powerful force, and many people are addicted to Starbucks and its $5 coffee. As addictive as it is and as avid a fan base as it has, however, another trend you can set your watch on is the stock's decline the past year. Retailers tend to hit a saturation point, and when they are at that level growth slows and the long run in a stock is over. The stock price then adjusts lower and lower to factor in the declining sales growth. Throw in companies such as MCD that are poaching on SBUX' turn with their own brand of gourmet coffee, and you can see SBUX has problems. Interestingly, MCD was in decline years back, but after a long, long fade it rebuilt itself and is now a growth story once more. A rather tame growth story, but compared to what it was, it is surging.

We made a lot of good downside money on SBUX through the summer. We got in one last downside run in June and we pulled out because after such long runs below the 10 or 18 day EMA, a stock comes up for air. SBUX did that, and it was able to hold up for a few months on the continuing saga of its opening in China and getting those people hooked as well. That did not last, however, and it broke lower to start the month with a nasty plunge that took it out of that three month range. It bounced to start last week, getting some momentum ahead of earnings. That is what we were waiting for, i.e. a bounce ahead of earnings to let us get short with some put options.

It rallied up to near resistance toward the 10 day EMA on Tuesday and we put it on the report, anticipating it would rally to the 10 day EMA and stall, giving us an entry point ahead of earnings. Wednesday it gapped higher and rallied modestly to the 10 day EMA, and when it could not get through, we moved in, buying some December $25 strike put options for $1.60. They had a -50 delta, meaning for every $1 the stock moved, the option value would change by $0.50. Not bad bank for the buck.

Even before earnings came out SBUX started to flounder, trying to rally Thursday, but fading on the close. Volume spiked; there was some churn, i.e. high volume turnover, at the near resistance at the 10 day EMA, and that shows big money was unloading shares ahead of the earnings report. Earnings came out after hours and Starbucks disappointed by plenty. After hours it was trading down at our target. Sweet. It opened down and traded a bit lower, about 75 cents below our target. The put options were bidding $3.10. SBUX had done what we wanted, i.e. disappointed and sold off hard, giving us our gain, and after such a move there can be a relief bounce. Thus we sold the options for $3.10, banking a very nice 93% gain in less than 2 sessions. Sure enough SBUX rebounded on the session to close almost $1.45 off its low. Of course if SBUX rallies back up to its 10 day EMA and stalls again we will look to make another play on its renewed trend lower. Indeed, we anticipate SBUX will make another series of runs down from the 10 day EMA before this leg is over. That means SBUX will easily be our most prolific downside play for the year, at least in the number of times we were able to successfully take in a 50% or better gain on a downside play.

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 11-1-07
STATUS: Breakout test. Showing outstanding strength in the energy market. DRQ exploded higher to start November, propelled by some strong earnings. The move blasted it out of a 6 month base. It made a nice 10 point surge on the breakout run, and then spent the past two weeks testing that move during the market selling. It held near support at the 18 day EMA (57.27) the past week, holding the 18 day with a doji. Excellent action and looking for DRQ to hold this near support this week and then resume the breakout move once more. We are looking to buy into that move.
Volume: 776.3K Avg Volume: 531.547K
BUY POINT: $58.91 Volume=795K Target=$67.95 Stop=$56.94
POSITION: DRQ CK - Mar. $55c (63 delta, 163 OI) &/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.