Weekend Newsletter for April 17, 2005
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Weekend Newsletter for
April 17, 2005
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
Still diving with no attempt to rebound.
– Stocks dive lower with not attempt to rebound.
– Economic data continues to disappoint: NY regional PMI, Michigan sentiment flagging.
– Can the Fed see the error of its ways and pull a 1998?
– Something ready to jump out from behind the wood pile or is this another summer soft patch?
– The floodgates open and stocks fall through on heavy volume.
– Some upside speculation late Friday but for now that is all it is.
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After SP500 broke the 200 day SMA just before lunch some shorts started to cover. The break below the 200 day SMA hastened the selling but just as quickly the indices recovered those losses and SP500 retook the 200 day SMA. The shorts ran out of gas, however, and there were no longer term buyers stepping up to keep the move going. With 1.5 hrs left the indices peaked for the afternoon and started lower. SP500 fell back through the 200 day SMA and the selling accelerated into the bell, closing on the lows and a downside tick. Very weak technical action as no one wanted to step in ahead of the weekend.
About the only thing working upside was healthcare, primarily the pharmaceuticals after LLY won its patent case. Those rode higher, but the good news for that sector was offset by IBM’s poor earnings showing and more weak economic data. Fears of a slowing economy finally hit the general market after over three months of selling and prior signs the economy was slowing. Tuesday’s FOMC minutes triggered some misplaced euphoria and it did not take long for investors to figure out the Fed was still quite serious about rate hikes. With the signs of slowing the market was not buying what the Fed was selling.
Heavy volume showed further dumping of stocks with IBM adding 279M shares to the NYSE scorecard, over 5 times its average trading volume. It was also expiration, so higher volume is the norm. It was much, much stronger, however, with NASDAQ showing the highest trade since early January when the 2005 selling started. If you toss out the March 18 volume when SP500 was re-weighted, NYSE volume was the highest since the July 2002 first bottom in the double bottom base that year that ended the long downtrend. That tells us the downside action is starting to get to levels where you could start to consider them a bit extreme.
All major indices sold with vigor though the large cap techs and chips were the weakest. Again, healthcare was about all that worked thanks to LLY and the general defensive stance the market is taking. Heavy 3+:1 negative volume showed the vast majority of the market was heading south. Those are high numbers on top of the 2+:1 negative Thursday breadth, but when the downside breadth reaches 5:1 as it did back in 2002, then you can start to figure it is getting pretty much to the limits. This was hard selling, but without some outside influence this leg is not done.
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/tktxsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
TKTX”>
TKTX (Transkaryotic Therapies, Inc.)
Even in a weak market there are leaders that not only outperform the market but make us great money as well. We were watching TKTX because of its sector (biotechnology) and its pattern (a nice cup with handle base formed this year). Biotechs have quietly formed accumulation bases (net buyers), and when we saw TKTX break higher on 4-7-05 on stronger volume we moved in. We bought stock and option positions, buying July $25 strike call options. That gave us plenty of time before expiration and with a 65 delta, they would give us good movement as the stock moved. The breakout held and TKTX made a steady climb from 25.15 where we bought up to 28. It then took a breather. We did not panic, but let it ease back to the 10 day EMA on lighter volume. That is when it made its real move. Friday it exploded higher on tremendous volume, shooting through our initial target just over 30. We took half of the 20% stock gain and half of the 53% option gain, letting the rest run for us. The key in this market is finding strong patterns in the right sectors, and TKTX filled the bill to a T.
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.
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. Here’s a pre-split play to watch and our current analysis.
http://www.investmenthouse.com/1stocksplits1.htm” target=”_top”>http://www.investmenthouse.com/images2/cnbc.gif” width=”39″ height=”31″ border=”0″ alt=”CNBC Interview”>
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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/stzsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
STZ”>
STZ (Constellation Brands–$55.55; -1.45; optionable): Wineries and distilleries. Splits 2:1 on 5-16-05.
http://finance.yahoo.com/q/pr?s=stz”>Company Profile
After Hours: $56
STATUS: Breakout test. STZ made us a nice quick gain on the split announcement as it gapped higher and ran some. We took that gain but said we would let it make the test and fill the gap and then be ready to play this strong leading stock on its pre-split run. It ended the week selling back with the rest of the market, but volume faded as it made the pullback to fill the gap as it tests the 18 day EMA (55.04). It is not quite there, so we are looking for it to complete the test and then rebound to give us the entry point. It has the added advantage of being a ‘vice’ stock in an economy that is perceived to be slowing. That will help give it an added boost.
Volume: 911.4K Avg Volume: 626.454K
BUY POINT: $56.24 Volume=940K Target=$63 Stop=$54.98
POSITION: STZ GK – July $55c (60 delta) &/or Stock.
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/oihsm.gif” width=”360″ height=”208″ border=”1″>
3) TECHNICAL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
OIH”>
OIH (Oil Service Holders)
http://finance.yahoo.com/q/pr?s=oih”>Company Profile
When the market gets weak you can make some hefty gains to the downside in a hurry. You have to look for the sectors under pressure and find those stocks within the sector that have set up for the fall. The entire energy sector is under pressure so we did the easy thing: we played an index. In this case the OIH, the ETF for oil services companies. The ETF had double topped in March and early April, then broke lower to the 50 day EMA. We saw it breach 50 day EMA on Wednesday, and then it rallied back Thursday intraday to test that break below key support. When it failed that test we moved in; that is the old ‘kiss goodbye’ where a stock moves back up to tap at support it broke but cannot make it through. When it stalled we moved in with some May $95 strike put options. We liked the play because it was close to a slightly in the money strike, giving us a reasonable price for the option along with a nice -65 delta. That would give us good movement on the way down and the lower option price would give us a good leveraged gain. Well, OIH fell back Thursday to close at the session low and then sold hard again Friday after a modest gap higher. It hit our initial target and we pocketed a nice 35% gain in less than a session. Downside moves are the most powerful, and when you know what to look for you can profit handsomely in a hurry.
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=
MEE”>
MEE – Massey Energy Co. is currently trading at $35.47. The May $35 Calls (MEEEG) are trading at $2.60. That provides a return of about 6% if MEE is above $35 on expiration Friday in May.
http://finance.yahoo.com/q/pr?s=mee”>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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