us stock market, trade stock

- GE, IBM prevent early selloff, but cannot turn the tide.
- Leading indicators remains weak while consumer sentiment bumps higher.
- Stimulus proposal stimulating the usual debate.
- Hard to stay long this market outside the relief moves as even defensive sectors come under pressure.
- Earnings start in earnest and may trigger the rebound, either by good news or bad.

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

Chart by StockCharts.com

Company Profile
As the market rebounded a couple of weeks back after the start of its second leg lower in this major selloff, we looked for stocks that were leaders but had broken down. Those stocks still have a lot of downside to give up, and when the selling becomes entrenched they will shed the gains quickly.

A scan of the market turned up GRA, a chemical company that had enjoyed a decent share of the run higher by the chemicals sector. It sold hard to start 2008, bounced to near resistance at the 10 day EMA, and was faltering.

It broke lower on 1-15-08 and we put it on the report as a downside play. The next session it continued the selling hard from the 10 day EMA and we moved in at $19.80 with some February $20 strike put options at $2.05. The way GRA was falling we could easily make a $2 run downside on this play and bank a gain in the 40% to 50% range. We were comfortable with the relatively short term February options because as noted above, when the selling takes hold like this, the downside flies by.

GRA closed at $18.79 that first day we were in the play. The next session it dove lower another $2.29. It was already at our target price and with the market getting a bit panicky, a situation that could cause it to reverse quickly, we decided to bank half of the gain. The options were bidding $3.60 and we were taken out at that price, banking a nice 75% gain on an overnight trade. Given the strength of the selling we decided it was worth hanging onto the other half of the options for more downside, but we knew we would have to be ready to take gains if the market started to bottom.

On Friday GRA opened a bit higher as the market tried to rebound, but that early bounce in the market was not the cathartic plunge we discussed in the Thursday night report, and thus we felt the market was still vulnerable to another rollover. Sure enough, it did and GRA sold as well, dropping almost another dollar on the intraday low after the President's stimulus speech. When it and the market started to bottom we felt it was time to take the rest of the position off the table. The options were bidding $4.50 and we were taken out, banking a 119% on the rest of the options. Sure enough, after such a tail kicking GRA closed the Friday session up $1, ready to bounce to test that harsh selloff. If it sets up again we will look at it one more time.

We also enjoyed a one-day turn on some PCLN puts where PCLN had sold off but then rebounded to resistance. We bought some February $95 strike put options for $7.30 on Wednesday as PCLN fell from that resistance. The stock was at $98.45. It closed at $95.43 that session. The next morning PCLN fell off the cliff, tumbling all the way down to the early November gap level. That was our play: we were banking on PCLN filling that gap in this market weakness. When it hit that level and started to bounce we were ready to bank the gain. We sold the options for $11.40, banking a solid 56% or $410/contract. It bounced Friday, but we are eyeing another gap way down in early August, and after PCLN stalls out here we will look for another play to take it down to that level and make us a really big gain.

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: Early February
STATUS: Test 200 day SMA. Held up very well Friday, holding the line on the selling at the 130 support. Just waiting for the market bounce to move into this stock that can sprint back up. To recap: FWLT sold off in a straight line and Wednesday it held some support in the 130 range. Broke it slightly Thursday, but breaks of support after sharp declines tend to lead to rebounds. Given the market is on the cusp of a rebound, FWLT is positioned perfectly for a bounce.
Volume: 2.789M Avg Volume: 1.852M
BUY POINT: $131.48 Volume=2.2M Target=$147.00 Stop=$127.55
POSITION: UFB EU - May $135c (54 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.