us stock market, trend trading stock

- Stocks continue the upside reversal on the open, then reverse for a significant loss.
- Investors likely getting too hopeful this bounce is something more than a bounce.
- Big data week ahead as investors look to Fed to see if it is going to continue to 'do what is necessary.'

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

Chart by StockCharts.com

Company Profile
Even in a weak market you can find the upside jewels ready to move higher. During a period of market weakness we were on the lookout for stocks showing relative strength, i.e. holding up well as the rest of the market sold. One of those was CPHD, a company in the security and detection business; kind of recession proof. It had set up a nice 9 week cup with handle base and was poised to make the breakout. We put it on the report on 1/07/08 as volume jumped and it moved off near support at the 18 day EMA that acted as the support for the handle shakeout.

CPHD hesitated for a couple of sessions and then blasted off on 1/10. We moved in that session with some stock positions at $28.64 and some March $25 strike call options at $5.40 per option. CPHD posted a $2.70 gain that session, a nice 10% move, closing at $29.50. It added another $1.33 the next session and $1.22 the next before it needed a breather. It spent the next four sessions taking a lower volume breather, coming back to near support at the 10 day EMA. When a stock does that after a strong breakout we don't sweat it as long as it shows that lower trade. Tuesday it started upside again but it gapped lower to the 18 day EMA first. We didn't panic and let it move higher. It added another point the next session and then gapped higher Thursday. We were anticipating another gap in the market on Friday, and sure enough it did. CPHD gapped higher as well and we were ready to take some gain at that point given the market had rebounded but was already showing some signs of wearing out. We sold some stock positions for $32.45, a nice 13.3% gain. We sold some of the call options for $7.80, a 44% gain. It finished the session lower, but held the 10 day EMA and it remains in good position to continue the breakout and make us some more money on our remaining positions.

DIA: As the vicious second leg lower in the selloff grew long in the tooth we started looking to turn back and play the upside relief bounce that was shaping up. When we saw the market sell off Tuesday and rebound close to positive it looked to be getting close, particularly with VIX surpassing last August's high, new lows spiking to 1100 on NYSE, and surging bearish sentiment. So, we put more upside rebound plays on the report, one being DIA.

The next morning when the market gapped lower again and fear was high we moved in to buy on the upside as many were selling. With the DIA we like to buy options as they give us the most bang for the buck in the market moves. We bought some March $121 strike calls for $4.80 when the index was at $118.12. It was a good move; the market reversed and DIA closed at $122.78 that session. It added another $0.73 on Thursday but it started to stall at near resistance at the 10 day EMA. We saw that and banked part of our position, selling the calls for $7.50, a nice 56% gain in an overnight trade. We kept part of the position alive, however, because with the strength of the reversal we felt it could still move higher.

The next session the market did just that, gapping higher ahead of the weekend. We were watching closely, however, because it was Friday and after a sharp rebound there could be some profit taking. After that gap higher above the 10 day EMA by DIA, it started to weaken. This was near resistance and with options you are time limited. We had some more gain built into the options so we decided to bank the rest of the gain, selling them for $7.65, banking another 59%. The market reversed and DIA ended lower on the session. Now we are looking to play it the other way if this test of near resistance stalls it out. This kind of market requires you to take advantage of this kind of action when it shows itself because the long, steady upside we enjoyed in the bull run is over for now.

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: 2-1-08
STATUS: Head and shoulders. A post-split stock that is really struggling. Rallied with the market last week, moving to the 18 day EMA (50.31) on the Friday high but fading back off that level as the market sold back. CMI broke lower from its 6 month head and shoulders the first week of January, crashing through the 200 day SMA (55.33) and tumbling lower. The rebound has tested near resistance, and looking for CMI to make its own rollover here. A move to the target lands a 41%ish gain.
Volume: 4.563M Avg Volume: 3.67M
BUY POINT: $47.54 Volume=4.5M Target=$42.15 Stop=$48.32
POSITION: CDM OJ - Mar. $50p (-45 delta)

Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
Details Here.