Weekend Newsletter for April 10, 2005
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Weekend Newsletter for
April 10, 2005
Table Of Contents 1) MARKET SUMMARY 2) PRE-ANNOUNCEMENT 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
Stocks turn back after low volume bounce with a low volume fade.
– Stocks fade into the weekend on the same low volume that got them there.
– Oil price rise part dollar, part demand. Does that make it different this time?
– Dollar starting to rise despite administration desire to keep it low.
– Stocks rally modestly ahead of earnings but initial results getting no respect.
– Earnings swing to full speed just as indices reach near term peak.
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It was Friday and that means a weekend, and after a four day bounce in this market, that meant a pullback. Stocks feinted north at the open on some middling futures action, holding positive for the first half hour. There were some good earnings (STZ), some positive guidance (ELX), and some negative guidance (LAB, WEBM), but stocks were ready to rise anyway. Perhaps the continued decline in oil ($53.32/bbl, -0.79) was having its impact, but if that was the driver behind last week’s move, it was not that great a power as volume was extremely weak the entire move.
Whatever the culprit, it did not last long. Stocks turned over after the first half hour and started on a session long trend lower. The reality of the session was stocks had rallied four straight days on low volume, had reached resistance levels, and were ready for some selling ahead of the weekend. Stocks sold all day, and by the close had given back the Wednesday and Thursday moves. Small caps were the downside leaders with a pretty nasty break down from the 50 day EMA. SOX was the relative strength leader as it held steady but could not hold a move above its 50 day MA.
Volume remained low, finishing with the lowest volume of the week. Pretty apparent that the sellers were not surging back in to feast on a low volume relief bounce. Breadth was pretty darn ugly, however, at better than 2:1 on both exchanges. SP500 had just 66 advances versus 426 declines, DJ30 had 28 decliners. The scenario was the same throughout the market. Coming off a peak after a week long rebound, that kind of breadth is atypical. Lots of smaller oil and gas stocks, steel stocks, and cyclical stocks contributed to the weak showing, but the big names were there as well. This kind of heavy negative breadth off a top is almost as bad as a volume surge on the selling.
Almost. Volume was very low as stocks rolled back some of the gains. The general rule is that low volume rises or falls don’t have much significance because they show just a small part of the market participating. It would only take a few more buyers or sellers to dramatically change the result of a low volume move. The move higher was on low volume, and it was a steady, sustained advance that seemed to have nothing to get in its way. Friday the selling was steady and sustained as well. Stocks can sell off a low volume gain on low volume just as easy as with higher volume. It may not show the return of share dumping, just a continuation of the low volume consolidation work continuing.
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/gmesm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
GME”>
GME (Gamestop–$21.78; -0.21; optionable): Electronic games stores.
http://finance.yahoo.com/q/pr?s=gme”>Company Profile
STATUS: Test breakout. You could call this a 19 week cup with handle base or a breakout test. Either way it is a nice base with a strong breakout and good test the past two weeks to the 18 day EMA (21.64). Solid action, using the market selling to make a low volume test of the high volume break higher in late March when it announced strong Q4 results and then guided higher for Q1. Strong 7 to 4 accumulation in the base (7 up price weeks on rising volume to 4 down price weeks on rising volume) shows a lot of buyers, setting up the breakout. Nice pullback to test the break higher, holding at the 18 day EMA last week. Looking for strong volume to propel it higher once more and continue the breakout move. That is where we step in and take positions.
Volume: 261.5K Avg Volume: 424.454K
BUY POINT: $22.22 Volume=450K Target=$25.48 Stop=$21.55
POSITION: GME GD – July $20c (79 delta) &/or Stock.
http://www.investmenthouse.com/1daily1.htm”>Learn more about “The Daily” with Stock Picks! – Issued 5 Times Per Week
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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.
Pre-announcements are where we put in the long hours of research, chase down leads and rumors, and pump our contacts for information in order to determine if a split is in the works and to pinpoint an announcement date. Pinpointing the date is our primary goal as this allows us many more options in how we play a split. As we primarily focus on leadership stocks in good technical patterns, if we see the stock make the breakout we will get in earlier and ride the wave of speculation up to or through the announcement. Pinpointing a date and time also allows us to open positions immediately prior to an announcement, minimizing our exposure time to the market whims. We employ this strategy regularly in a number of situations. When we have ridden a stock for a few days, a week, a few weeks, up to the forecast announcement, we often have a lot of profit built in. After all, these are leaders and they attract attention moving into earnings, shareholder meetings, etc. We often sell some positions (all or a partial), lock in the profit, and take positions with higher strike call options near the current stock price at a cheaper cost if the stock is not overextended, i.e., has done all of its running before the forecast announcement. This way we bank some profit from the early run, and take some of that profit to play the actual split. Even if the board pulls a fast one on us and does not announce, we still have profit in the bank. This method also works well when the market is choppy, and we do not want to hold positions long. We can often buy right before the announcement and then sell when we feel the split announcement has run its course and the stock starts to pull back. Narrowing the predicted date and time of the split gives us these options.
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Here’s a pre-announcement play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/stzsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
STZ”>
STZ (Constellation Brands, Inc.)
http://finance.yahoo.com/q/pr?s=stz”>Company Profile
STZ is a market leader, and it was set up in a nice little consolidation just before earnings and a stock split announcement we had forecast. We really love playing stock split pre-announcements because they are almost invariably leadership stocks. When one has formed a nice pattern ahead of the date, that makes it all the better. STZ formed a short 7 week cup pattern over the 50 day EMA, and was coming up off the 50 day last week as it moved toward earnings. We picked it up Thursday when it started a nice move off the 18 day EMA. By the close it had built us a small gain, but we were looking for the real move on the announcement after hours. We were leveraging our gain by using July $50 strike call options. We purchased them for $5.80 on Thursday when STZ started its good move. The delta was 72, giving us some really good upside opportunity when the move came. Sure enough STZ announced the split and solid earnings after hours. The next session it jumped higher, gapping up and running over 59 on the high, a $5 move. That was just under our target, but when the move started to stall we were not going to be greedy. We closed the position and banked a nice 55% gain in less than a complete session. Yes, we do love playing stock splits.
http://www.investmenthouse.com/1stocksplits1.htm”>Learn more about our Stock Split Report – Issued 5 Times Per Week
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Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/cernsm.gif” width=”360″ height=”208″ border=”1″>
3) TECHNICAL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
CERN”>
CERN (Cerner Corp.)
http://finance.yahoo.com/q/pr?s=cern”>Company Profile
CERN is in the healthcare information business, and with the market a big defensive the healthcare sectors are performing a bit better. CERN had formed a nice 12 week ascending triangle base, tightening up toward the end of March. We put the play on the report as it tightened up the pattern, noting that breakouts from these bases could be explosive. We saw a good volume jump on March 24 as CERN moved higher off the 50 day EMA. We moved into the position with some June $50 strike call options. They cost us $5.10 with a 74 delta. We like them because they were a bit in the money (not paying too much premium) and had a great delta that would give us a good move as the stock rallied. We did not have to wait too long for the breakout as CERN blasted off on April 5 and then soared even higher the following session. It blew through our target and we sold the options for $8.90, a nice 74% gain in less than two weeks. CERN has a lot going for it: solid sector, nice pattern, good accumulation. Those are powerful characteristics for any play.
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=
GRMN”>
GRMN – Garmin Ltd. is currently trading at $45.8. The May $45 Calls (GQREI) are trading at $3.10. That provides a return of about 5% if GRMN is above $45 on expiration Friday in May.
http://finance.yahoo.com/q/pr?s=grmn”>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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