Market Starts the Week at Support
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Weekend Newsletter for
June 26, 2005
Table Of Contents 1) MARKET SUMMARY 2) POST-SPLIT PLAY 3) TECHNICAL PLAY 4) COVERED CALL PLAY
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1) MARKET SUMMARY > >From “The Daily” at InvestmentHouse.com
Stocks take another hit as oil and protectionism talk remain strong.
– Stocks cannot get comfortable with new issues, sell for second day.
– Volume up, but not until late rebalancing trades hit.
– New home sales surge over prior month after that month is written lower.
– Durable goods orders, at least aircraft orders, surge.
– Market starts the week at support but still in turmoil on trade and oil prices, and has to deal with a Fed meeting as well.
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Market Summary (continued)
Stocks still could not wrap their arms around the potential trade war climate swirling after the Senate swooped down on Snow and Greenspan like a flock of seagulls on a dead fish. There is a bill set for vote on some 27.5% trade tariffs, and the senate is acting as if it is aching to pass it. The administration has said in the past it would veto such measures, but it and Snow did not do themselves any favors in the way they laid down under the fire of the senators. Once more the administration has failed to take a firm stand and has left the financial markets basically twisting in the wind while all of this works through the system. The market hates uncertainty, and this is a pretty big uncertainty for stocks.
It is not necessarily a new issue. There has been talk of tariffs and ways to heel China with respect to software, music and movie pirating, but again the administration has maintained it would not sanction such measures and would work in other ways to bring China around. China is no bastion of freedom or fairness at all, and the fight right now is how best to accomplish what everyone thinks are worthy and necessary goals. As usual it is a choice between the carrot and the stick. Frankly, with China’s hundreds of billions in cash right now we would be much better off using the carrot. We may not like what China does within its borders and with its influence on other communist countries, but to achieve our goals we really need some serious thought to how we proceed as opposed to a lot of fiery rhetoric that historically results in China closing its communications and setting us back several years. There is that old saying about keeping your enemies closer than your friends.
Be that as it may, the market does not like the prospects, and given the vacuum of information or direction from the administration it is doing the usual, i.e. assuming the worst. That took stocks down for a second straight session, popping some near support levels as they went. By the close the indices were at some important support levels that they need to hold in the coming week. Volume was running lower until the Russell rebalance orders hit late in the session. That ballooned the trade to the highest levels in several months, even surpassing the recent expiration volume. Good to see volume was lower heading into the rebalance, but the price losses are still serious.
In short, after a really nice consolidation and break higher as the market got comfortable with the Fed and future rate hikes the board was shuffled with the trade issue. It did not help that oil moved up to $60/bbl; with the rest of the world showing a definite lack of economic strength and the US not exactly blowing the doors down after the initial recovery, higher oil is just not good for the economy and thus stocks. Stocks were at key resistance points with NASDAQ at 2100 and the SP500 back near its highs over the past 7 months. With a new issue on the table, one with some nasty historical ramifications, investors started unloading shares Thursday and the selling continued Friday though on lower trade before the rebalancing on the close sent volume soaring. It was no one day selling affair, and now stocks are in a hole to start a new week, one with a Fed rate meeting. Given the inability to recover we were paring positions that were struggling, preserving gain as we played a bit of defense.
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
http://www.investmenthouse.com/cc/bbbbsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
BBBB”>
BBBB (Blackboard–$21.81; +0.62; optionable): Enterprise software for the education industry.
http://finance.yahoo.com/q/pr?s=bbbb”>Company Profile
After Hours: $21.68
STATUS: Cup w/handle. A new issue in June 2004, BBBB has formed a nice 11 month base, its first real base after a quick double bottom following its IPO. Solid 11 to 7 accumulation during that long base (11 up price weeks on rising volume to 7 down price weeks on rising volume) has set up the stock for the breakout. Money flow is surging higher ahead of the price, paving the way higher for the price to follow with the breakout. Nice first base, good money flow, and ready for a breakout to a new all-time high. Love that because there is no overhead supply to sell into the breakout move.
Volume: 1.33M Avg Volume: 236.658K
BUY POINT: $21.94 Volume=355K Target=$25.35 Stop=$20.85
POSITION: BPU JD – Oc. $20c (73 delta) &/or Stock.
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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.
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.
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Here’s a post-split play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
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http://investmenthouse.com/quote/stkquote.php3?smbl=
PDS”>
PDS (Precision Drilling–$40.14; -0.01; optionable): Oil and gas equipment.
http://finance.yahoo.com/q/pr?s=pds”>Company Profile
STATUS: Test breakout. Still a very nice pullback, showing another nice, tight doji over the 18 day EMA (39.80) Friday on low, low volume. Another leading stock that is going about its own business and ignoring the market selling as it sets up for its next move higher. Looks ready. To recap: Coming off of its late May split and breakout from a 13 week trading range between 34 and 39, holding the 10 and 18 day EMA (40.50, 39.80) on the close as it does. It has moved to an all-time high on this breakout and is consolidating the move. A pair of nice, tight dojis the past two sessions on lower volume. It is setting up for the next break higher. Just need to see the volume as it turns higher and continues the breakout move.
Volume: 291.4K Avg Volume: 547.489K
BUY POINT: $40.72 Volume=825K Target=$45.82 Stop=$39.62
POSITION: PDS IH – Sept. $40c (55 delta) &/or Stock.
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
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Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/dosm.gif” width=”360″ height=”208″ border=”1″>
3) TECHNICAL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
DO”>
DO (Diamond Offshore)
http://finance.yahoo.com/q/pr?s=do”>Company Profile
Energy has been a leader in the market in 2005 once more, but it is not just a matter of buying a handful of energy stocks and letting the gains pile up. During April and May when oil prices were lower the energy stocks sagged, forming new bases that set up the next moves. It was not time to buy because they were still selling, but we kept watching, and in early June those stocks were ready to make their breakouts. Diamond Offshore is a leading drilling company and it had set up a super 10 week cup with handle base. On 6-9-05 is shot higher on volume. It started to add to that breakout the next session and that is when we stepped in. We like options as well as stock, and we were looking at both on this play. As the stock was trading near $51, we liked the September $50 strike call options as they had a solid delta (60; that means the option moves 60 cents for every $1 the stock moves) and would give us good bang for our buck as DO rallied. The price was $4.70 per option, a bit steep, but this was a mover and that jacks up the volatility a bit and thus the option price. DO did not sit on its gain. The next session it was up another 60 cents and then popped higher $2.28 the following session. It then needed a bit of a breather and moved laterally for 5 sessions. We did not panic; the volume was lower and DO was holding its gains. On 6-23-05 it surged once more, rallying over $2 on the high. That hit our interim target point and we took some excellent 80% option gain (sold half of our calls for $8.50) and 11% stock gain. With the strength of the stock and the energy sector we decided to let part of the position run to work for us. This way we have banked some nice gain and still have a strong stock ready to work higher for us.
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
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4) COVERED CALL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
ACI”>
ACI – Arch Coal Inc. is currently trading at $54.58. The August $55 Calls (ACIHK) are trading at $2.75. That provides a return of about 6% if ACI is above $55 on expiration Friday in August.
http://finance.yahoo.com/q/pr?s=aci”>Company Profile
http://www.investmenthouse.com/1coveredcalls1.htm”>Learn more about our Covered Call Tables – 8 Tables Updated 5 Times Per Week
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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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