Market Rallies Back
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INVESTMENT HOUSE.COMTM
Informing Investors Around The World
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Weekend Newsletter for
May 21, 2006
Table Of Contents 1) MARKET SUMMARY 2) PRE-SPLIT PLAY 3) TECHNICAL PLAY 4) COVERED CALL PLAY
http://ichart.yahoo.com/v?s=^ixic”> http://ichart.yahoo.com/v?s=^dji”>
http://www.investmenthouse.com/1splitnotification.htm”>Stock Split Notices http://www.investmenthouse.com/1questions.htm”>Investing Q & As http://www.investmenthouse.com/1glossary.htm”>Glossary
1) MARKET SUMMARY > >From “The Daily” at InvestmentHouse.com
Stocks end a down week with an interesting reversal off morning selling.
– Early rally attempt fades again, but this time market rallies back, helped by expiration volume.
– Plunge of 10 year bond and precious metals even as inflation talk crescendos tells us market is worried more about a Fed overdose.
– Kinder and gentler Fed-speak to end the week puts things in better perspective.
– One more shakeout on the down leg has set up a rebound. Will it take?
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Market Summary (continued)
Friday was another Thursday in the making, i.e. an early morning bounce and then the inexorable turn lower as sellers used the bounce to move in. Classic bearish action, and after 8 consecutive downside sessions on NASDAQ we heard many mutterings from brokers and floor traders that the market uptrend was really broken. After all, the sentiment indicators were hitting more extreme levels after more than a week of continued selling, yet a Thursday bounce attempt failed as sellers took over once more.
Stocks turned negative across the board an hour into the session on volume vastly outpacing Thursday. Looked like the same old selling, and with the high volume and 8 sessions already downside, the sentiment turned sharply negative once more. It was definitely a morning requiring that mixture of fear and arrogance Kevin Costner described in ‘Bull Durham.’ It was getting dicey, but we still saw good stocks holding up even as metals, energy, and other industrials continued their fade. An hour and one-half into the session I made a comment to one of our traders that the pessimism I was hearing on the other end of the phone couldn’t get much worse. About 20 minutes later the market put in its bottom for the day.
Stocks started back up, shaky at first but then really moving at lunch. NASDAQ, SOX, SP600 turned positive, and that high volume became an ally. The commodities turned off their lows, but technology was clearly in the lead with some decent earnings news fueling some covering and upside interest. They were the most sold out, so it makes sense they took point on the rebound.
http://www.investmenthouse.com/1weekendmarketsummary.htm”>Read “The Daily” Entire Weekend Summary
Here’s a trade from “The Daily” and insights into our trading strategy:
Chart by http://www.stockcharts.com”>StockCharts.com
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http://investmenthouse.com/indexq.php?smbl=
BHI”>
BHI (Baker Hughes–$78.85; 0.00; optionable): Oil and gas service company.
http://finance.yahoo.com/q/pr?s=bhi”>Company Profile
STATUS: 50 day EMA test. Very common pattern among the leaders, and BHI
is definitely a leader. Nice late April breakout from a 13 week cup with
handle base, rallying to 88.76 on the move. It of course was hit in the
energy and related selling the past two weeks, but it slowed as it
approached its 50 day EMA (76.69), testing that level intraday Friday with
a tap and then a rebound. Strong volume on the move back up, and the
positive close is a very good indication. Strong 5 to 2 accumulation in
the base (5 up price weeks on rising volume to 2 down price weeks on
rising volume) shows plenty of buying. Nice doji Friday, and looking for
the rebound to start from here after what looks to be a successful test of
the breakout.
Volume: 5.91M Avg Volume: 3.809M
BUY POINT: $79.88 Volume=5M Target=$95.00 Stop=$76.48
POSITION: BHI JP – Oct. $80c (53 delta) &/or Stock.
http://www.investmenthouse.com/1daily1.htm”>Learn more about “The Daily” with Stock Picks! – Issued 5 Times Per Week
2) Stock Splits 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.
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Listen to Stock Split Report Editor Jon Johnson’sstock split interview on CNBC-TV [ http://www.investmenthouse2.com/cntdir.asp?name=JonJohnson-B” target=”_new”>Broadband | http://www.investmenthouse2.com/cntdir.asp?name=JonJohnson-D” target=”_new”>Dial-up ]
Here’s a pre-split play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/clbsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/indexq.php?smbl=
CLB”>
CLB (Core Labs–$56.80; 0.00; no options): Oil and gas service company. Splits 2:1 on 7-10-06.
http://finance.yahoo.com/q/pr?s=clb”>Company Profile
STATUS: Test 50 day EMA. Broke out from a 3 month ascending base to start April and rallied nicely up the 10 day EMA (60.19). After that run it needed a rest and the market selling and weakness in energy gave it good opportunity to work off some froth. The selling volume was not huge, indicating no heavy selling on the pullback to the 50 day EMA (55.83). Friday a nice doji at that level that reached down to the 50 day SMA (54.48) on the low and rebounded for a positive close on some rising, solid volume. Spent a week making this test and now looks set to rebound toward the prior highs, giving us a nice pre-split run.
Volume: 234.5K Avg Volume: 213.117K
BUY POINT: $57.48 Volume=300K Target=$68.95 Stop=$54.45
POSITION: – Stock (no option chain).
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
http://www.investmenthouse.com/a/StockSplitReport.html”>Details Here.
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Chart by http://www.stockcharts.com”>StockCharts.com
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3) TECHNICAL PLAYhttp://investmenthouse.com/indexq.php?smbl=
CHRW”>
CHRW (CH Robinson Worldwide)
http://finance.yahoo.com/q/pr?s=chrw”>Company Profile
When the market is giving out lemons you figure out how to make lemonade. Our motto is to take what the market gives, and after a choppy Q1 that saw stocks and the indices advance to post-crash highs but on questionable volume, we were looking around for downside plays while the market made its correction. We look for stocks that have set up topping patterns after runs higher as they have a lot of froth to be removed, and it can be pretty easy pickings when it happens.
CHRW is a strong stock, but it made a lower volume high in early April and then gapped lower. It tried to hang on but then tanked below the 50 day EMA. After that move we were looking for the rebound to test and then when that failed we would move in. A failed test confirms the breakdown and you can enter a downside play with more confidence. CHRW recovered the 50 day EMA but it did not last. We saw it heading back that way and on May 15 it fell back through. That second breach of the 50 day EMA in a short period shows weakness. We moved into the play with some June $45 put options, buying them for $1.30. The stock was at 46.25 and the $50 puts cost too much money to make us any solid return on the play. Thus we went with the lower cost $45 strikes even though the delta was lower; if CHRW made the move we thought it would (back down to the April low at 44) these options would make us some nice money even with the lower delta.
The stock rebounded some off its low that day, but gapped lower the following session. It made one last attempt to test the 50 day EMA, gapping higher Wednesday. That failed and it rolled over intraday. From there it was just a matter of letting it fall Thursday and Friday. Friday it hit our target and undercut it slightly. We saw it try to bounce; there was a bit of support from that April low. We took the gain when the stock was at 43.80, selling our options for $2.20. That is a 69% gain in 5 sessions. It pays to look both ways in the market, taking advantage of what it is handing out for free instead of fighting the tide. In other words, when it started to sell after the run there was opportunity knocking. You just don’t want to get greedy and that is why we closed out most of our downside plays on Friday after this steep but fast market decline
http://www.investmenthouse.com/1tech1.htm”>Learn more about our Technical Traders Report – Issued 5 Times Per Week Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/rrcsm.gif” width=”360″ height=”208″ border=”1″>
4) COVERED CALL PLAYhttp://investmenthouse.com/indexq.php?smbl=
RRC”>
RRC – Range Resources Corp. is currently trading at $25.18. The June $25 Calls (RRCFE) are trading at $1.30. That provides a return of about 5% if RRC is above $25 on expiration Friday in June.
http://finance.yahoo.com/q/pr?s=rrc”>Company Profile
http://www.investmenthouse.com/1coveredcalls1.htm”>Learn more about our Covered Call Tables – 8 Tables Updated 5 Times Per Week
* * * SCOTTRADE * * *
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP., or Split Ventures, Ltd. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on the related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites.
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