Stocks Try To Set Up Another Rebound
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INVESTMENT HOUSE.COMTM
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Weekend Newsletter for
June 11, 2006
Table Of Contents 1) MARKET SUMMARY 2) POST-SPLIT PLAY 3) TECHNICAL PLAY 4) COVERED CALL PLAY
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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
Summer Friday doldrums stalls early bounce, takes stocks lower on the close.
– Market unable to push Thursday rebound into the weekend.
– Bernanke orders study to improve ‘dialogue’ with markets. Shutting up would help.
– Companies buying back stock as investors take money from domestic and foreign markets: bullish signal?
– Stocks try to set up another rebound, but face growing obstacles in Fed and options scandal in addition to the same problems dogging the market this year and last.
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Market Summary (continued)
Futures held their upside bias through the morning trade gap report that saw the gap narrow but import prices rise (as oil rose during the month). Those prices were cited as another sign of inflation, but frankly, prices have failed to show an advance that comes remotely close to matching the hype. Instead investors appeared to favor the positive TXN comments regarding the future, pushing chips and stocks generally higher pre-market. Indeed, the chip sector received an upgrade across the board based upon purportedly the lowest inventory level since 2004.
That got stocks higher out of the gate, continuing the Thursday rebound from that big dip lower during the morning. That got SP500 back up to the 200 day SMA just after the first hour, but that was the extent of it. The market faded through lunch, tried an early afternoon bounce, then tailed off in the last hour to close with losses that were very even across the board (roughly -0.5%). That completed another ugly shellacking for the market with SP500 down 35 points for the week, NASDAQ off 85 points, and DJ30 down 355 points.
Once more the market could not hold an early gain, starting high only to close low, something it managed three out of the five sessions for the week. The other two sessions saw reversals and that helped keep SP500 and NASDAQ roughly in their ranges of the past three weeks after that initial May meltdown. Indeed, the big reversal Thursday indicates that the indices want to try another rebound as they did 2.5 weeks back when they reversed sharply intraday as well. Overall, however, the range shifted slightly lower; Thursday saw a deeper intraday low, but the indices also experienced lower closing prices as well. Even as it tries to set up another rebound, it is losing ground, closing below key support levels breached earlier in the week (the up trendline for NASDAQ, the 200 day SMA for SP500). SP600 remained a ‘bright’ spot, undercutting its 200 day SMA Thursday, but recovering and then holding that level Friday. Wow.
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/kfxsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/indexq.php?smbl=
KFX”>
KFX (KFX Inc.)
http://finance.yahoo.com/q/pr?s=kfx”>Company Profile
When the market slips into selling, whether just a correction in an ongoing run or something more, you have to look for a way to make money with the current predominant trend. With energy prices high we know that some chemical companies are suffering, having to pay high prices for some key ingredients. KFX caught our attention as it made a test of its May break below its 200 day SMA, consummating a head and shoulders pattern. We let it bounce back from this initial breakdown, watching it bounce up to the 18 day EMA on low volume two weeks back. Those low volume rebounds show a lack of conviction in the buyers and set up the next run lower.
Sure enough on Monday KFX tried to move higher but then the move gave way. We moved in with some July $15 put options, slightly in the money and showing a nice 55 delta and a good price at $1.55. After that reversal at near resistance, KFX was ready to sell further in its new downtrend; they often set up and then use the 10 or 18 day EMA as resistance to the upside. The stock tanked hard and we let it run. Thursday when the market collapsed lower early we figured the fear level had peaked near term. Just about that time KFX hit our initial target to the downside at 12. We sold our options for $2.85, banking a nice 83% gain in less than a week. When the market sells, the action happens fast. It can also correct back to the upside fast. That is why we take gains on these hard drops, wait for the stock to set back up at resistance, and then move in again when it fails. When the market turns, you have to adjust to take what the market is giving.
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).
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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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 post-split play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/txusm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/indexq.php?smbl=
TXU”>
TXU (TXU Corp.–$57.89; +0.54; optionable): Electric utilities.
http://finance.yahoo.com/q/pr?s=txu”>Company Profile
STATUS: Test breakout. TXU formed a large double bottom, breaking higher with a strong surge in early May on a strong earnings report. The move took it out of its 7 month base, taking it to 58 on the high. It came back to form a handle in the May selling, then broke higher to end that month and to start June. The past two weeks it has tested, coming back to the 18 day EMA (56.80) on low volume. The breakout took TXU to a new all-time high, and the test is setting up the next move higher, giving us an entry. We want to see the stock turn back up on rising volume to show us the resumption of the move is on, and that is when we move in. Another stock that is in the right sector for a weaker market.
Volume: 2.996M Avg Volume: 4.318M
BUY POINT: $58.75 Volume=5.5M Target=$69.96 Stop=$56.65
POSITION: TXF JY – Oct. $57.50c (53 delta) &/or Stock.
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=
AYE”>
AYE (Allegheny Energy–$36.90; +0.49; optionable): Electric utilities.
http://finance.yahoo.com/q/pr?s=aye”>Company Profile
STATUS: Ascending base. Showing some excellent action to end the week, trying to make the breakout from its 20 week base that has bounced up the 50 day EMA (35.44) along the way. Big move Friday up to 37.90 but it could not hold $1 of the move. Solid 4 to 2 accumulation (4 up price weeks on rising volume to 2 down price weeks on rising volume) shows buying during the base, and the price/volume action last week indicates it is ready to make its next move toward a 4 year high. Strong money flow is leading. This is one of the top stocks in its sector, and this sector is starting to perform well in the weaker overall market.
Volume: 1.388M Avg Volume: 780.377K
BUY POINT: $37.21 Volume=1.4M Target=$44.65 Stop=$35.92
POSITION: AYE JG – Oct. $35c (71 delta) &/or Stock.
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/indexq.php?smbl=
BUCY”>
BUCY – Bucyrus International Inc. is currently trading at $45.03. The July $45 Calls (HBUGI) are trading at $3.70. That provides a return of about 9% if BUCY is above $45 on expiration Friday in July.
http://finance.yahoo.com/q/pr?s=bucy”>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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