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- Promise of future rate cuts cannot trump harsh reality as relief rally rolls over.
- Improvement in the issues that brought about the economic downturn, but the intervening 4 months from their onset is the problem.
- With financial deals showing up in the hopper midweek there is potential for more on Monday, the traditional day of merger, and market needs the financials to start their recovery.

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

Chart by StockCharts.com

Company Profile
During the market selling over the past couple of months we have played the downside, but we have not in any way given up on solid leaders that can still make us money to the upside. Indeed, during market selling you can easily spot those stocks that have the support, those that hold their gains and use the selling to consolidate and set up for the next break higher. When the pressure relents they tend to spring higher for quick gains.

CMED has made us some great money all through 2007, and to end the year it had set up a new base to consolidate the September to October run. We watched it on into December and got really interested when it set up a reverse head and shoulders pattern after using the 90 day SMA as support in late November. We put it on the report on 12-22-07 and then watched for the pattern to complete and CMED to show us a new breakout that we could buy into.

It worked laterally for a week, coming back to test the 50 day EMA, and then on New Year's Eve it bounced higher on rising average volume, clearing the prior high. Not bad action for a low volume session. We moved in with some stock positions at $44.28 and some March $45 strike call options at $4.20. The day after New Year's it surged $2.47 on the best volume in a month; that pre-holiday volume bump was an accurate indication. It added $2.64 the next session on even better trade. After such a strong move it took a breather the next couple of sessions, getting a bit wild on 1-7-08 as it reached way down intraday but raced back up. That showed us there were still buyers moving in and taking advantage of the lower price intraday. It bounced right back up the next session but started to backslide. That hit our initial target and we took part of the gain, selling some stock for $50.50 (a 14% gain) and part of the options for $7.90 (an 88% gain).

We took the gain maybe a bit early as it was up sharply again Thursday another 2 sticks. Of course we left some to work for us just for this reason but we didn't expect it to recover so quickly. In any event, this play shows the importance of keeping track of leaders as they form up new bases; even in a weak overall market they can still make us great money. The funny thing about this play was that we bought into it on a typically quiet day, but CMED was not quiet. That tipped its hand that it was ready to make the break from its base and make us some nice money once more.

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).

We play pre-split plays as short-term plays. We get in when the technical indicators show us things look right, grab as much as we can, and get out, always being conscious of resistance and support. These stocks are highly volatile at this time, and can turn on you quickly. Don't let good profits disappear. Watch for turns, especially when a stock trades in a wide range and finishes off its high. That is a sign these stocks often give you that they are running out of steam. We usually get out and ask questions later. We can always get back in. We like to play in the money calls, preferably two strike prices in the money as this usually gives us a greater delta (the percent an option will mover versus the stock's movement). We prefer deltas of 75 or better. This means if the stock moves 1 point, the option should move three-fourths of that point. That means up or down.

Remember, wait to see the stock start to move up. Don't just blindly make a play and don't try to guess tops and bottoms. We can look at indicators to give us a clue as to what will happen, but we need the stock to confirm it for us.

Here's a pre-split play and our current analysis.

Chart by StockCharts.com

Company Profile
EARNINGS: 2-26-08
STATUS: Breakout test. Nice surge in mid-December off a reverse head and shoulders base. This is the first base to form after KWK broke out in October from a much larger 2.25 year consolidation. Nice surge up to a new high, then some selling back of the gain to start the new year. Unlike many stocks, however, KWK held near support at the 18 day EMA (58.19) last week, working laterally on very low volume. After this test finishes we are looking for a break higher to give us the buy on KWK's next leg higher.
Volume: 838.8K Avg Volume: 1.003M
BUY POINT: $60.11 Volume=1.5M Target=$69.31 Stop=$57.39
POSITION: KWK CL - Mar. $60c (50 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.