Telling Tuesday

March 6, 2007

303

I'm very happy today!

I just realized what was bothering me about the markets – everyone was agreeing with me…. Usually I'm the only guy saying the market will go up and, as we discussed in the 2/25 weekly wrap-up, when the WSJ told us way back on 2/20 that "the markets are moving into a sweet spot" I said "I hate to hear that kind of talk, it’s often the sign of a top when everyone starts telling you how great the markets are."

I'm not a contrarian by nature but I am usually ahead of the curve, when the curve catches up to us it's often time to change trains (that sentence is sponsored by Metaphor Mixers, Inc.). So today I'm feeling much better about my bullish sentiment as only 29% of the bloggers polled agree with me. That's my comfort zone!

The question asked by Birinyi in the poll is "What is your outlook on the S&P 500 for the next 30 days?" and the answer given by 42% of the bloggers is that this 5% correction is just a start and we have 30 more days of pain and suffering ahead of us. The poll was sent Thursday and responses came over the weekend so if you think you've been getting a lot of negative reinforcement this week – you'd be right.

When I see data like this and I see the put/call ratio at the highest level it's been at in 2 years (by a 20% margin) and I see the VIX 100% higher than it was last week, I can only think of one thing – CHEAP CALLS!

So Asia is up, Europe is up blah, blah, blah, here's yesterday's exact same levels:

Dow 12,200 needs to be retaken. Remember – If we are coming back, we have 600 points ahead of us and you won’t miss out if you don’t catch the first 100!
- Transports were what I called on to lead us back and we must make 2,850 but it will be meaningless unless oil gets back under control.
S&P 1,400 is the obvious line but 1,368 is the 5% rule there, below that and we go short again.
NYSE is actually holding up very well with 8,900 functioning as it’s danger zone 9,000 must be retaken and I’m looking for 9,200 today as a turn signal.
The Nasdaq drop only looks bad because it had such a big pop this month – throw that spike out as an aberration and 2,388 is our 2.5% rule. I said on Friday that the Nasdaq drop isn’t real until you see 2,300 fall..
- The SOX are in a similar situation, 470 is the median line of the consolidation we’ve been in since mid-November. 5% above that is 493 (Monday’s high) and 5% below it is 446, a level we haven’t seen since early November!
The Russell also looks bad because they just had a big run but they are still up 10% from last summer’s lows and won’t face any real danger until 750. Doesn’t this chart make you think that this may be a lot of fuss over nothing?

David Fry put up a chart lover's bonanza over at Seeking Alpha, they are bearish charts but think about them from a bullish perspective as they all have upper ranges that would confirm a nice turn around.

Chartmaster Tom is back too and he's seeing that rising oil price I'm concerned about as well. I was going to get into it this morning but I've gotten sidetracked but the NYMEX barrel count is now more under control, which means there is room for major league shenanigans… An oil rally will wreck the market rally!!!

Now let's find some winners!

Oh yeah, oil will bounce to at least $60.50, a good test (see ZMan's daily comments) and gold will bounce ($650) and miners will bounce (look for Thursdays level) and the dollar will bounce despite Greenspan being let back out of his cage and crying recession again (now saying 1/3 probability).

On to some picks!

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Just to be very, very clear – if we don't make my levels (and I don't think we will) these are essentially day-trade bounces, I'm picking up strong but beaten down shares that have fallen more than they should and seem ripe for a pop.

All these momentum plays assume we open up about 100 points, break through 12,150 and keep going. Our sell zone is about 12,200 but if we break through that we can set our trailing stops and hope for a 200+ point day. Don't panic buy, there could be a pullback (see the Nikkei day chart), even during a 200 point gain!

We do not chase these, we buy the ones that we can and wave goodbye to the rest. Until you cover, these are day trades, which means we set a .20 trailing stop at most and we only get in if there's real momentum and get out if we are uncovered and the momentum turns:

QQQQ made a nice doji yesterday as volume tapered off to half of last week's peak. Look for the very rare "abandoned baby" pattern to form in the candle chart of the Qs (it will gap up at the open and finish the day at or above yesterday's high) to signal a real reversal which could have all those shorts covering for the rest of the week. If you look down at the weekly chart of the Qs, you will see this pattern formed at July's drop, leading to a HUGE rally. The 3/31 $43s (UQCQ) are just .65 but are likely to open at .85-90 but I like them for a gamble, especially if we get the opportunity to sell the 3/16 $43s (QQQCQ) for $1.15 or better, locking in a nice profit and giving us good upside potential if we finish around the 50 dma at expiration.

The same trick is available on the other indices:

DIA 3/31 $122s (BQQCR) for $2.25, selling the 3/31 $123s (BQQCS) for $2.75 or better.
IWM 3/31 $77s (IQQCY) for $1.90, selling the 3/16 $77s (IOWCY) for $1.75 or better
SPY 3/31 $140s (RQQCJ) for $1.80, selling the 3/31 $141s (RQQCK) for the same of better.

Here are some stocks that may work too:

GOOG:

June $540s (GOPFX) for $3.50, sell at $5 ($450), stop at $3.25.
- By the way, when I say sell, I mean, of course 1/2 with a 20% of the profit trailing stop on the rest (new members see strategy section). Prior to hitting our target, there should be a .50 trailing stop at all times. This goes (proportional to the amound) for all our plays.
Apr $500s (GOPDO) for $3, sell at $4.50 ($450), stop at $2.50.
Jan $600s (YVDAT) for $11, sell at $14 ($450), stop at $9
- I like this one because it should hold up well through earnings (4/30?) and any $30 pop can net you a better than 50% gain. Google has had a $30 pop in 8 of the past 12 months.

EBAY Apr $32.50s (XBADZ) for $1.10, sell at $1.40 ($31.25), stop at $1
- there is now way this should pull back if we're really rallying
ATI Apr $100s (ATIDT) for $4, sell at $6 ($99), stop at $3.50
GG July $27.50s (GGGY) for $1.75, sell at $2.25 ($26), stop at $1.50

It's time to look at UNH leaps, the bad news is finally final with a $1.5Bn charge for options shenanigans. The 50 dma is $53 so if they hold that on today's news AND the markets stay up, then the Jan $55s at $5 are a nice deal. Apr $55s can be sold for $1.30 (nice return!) but I'll put a sell-stop at $1 and hope to do better.

I'm going to bet $650 that NEW doesn't die (more in the Challenge Virtual Portfolio). This is a total craps roll on the Jan '09 $20s for .65 but these contracts were worth $3,500 on Friday and this is a company that, although now under investigation, did earn over $300M last year, possibly making the $253M market cap a tad low (or at least an attractive takover unless their book is the worst EVER).

Batesum suggested APKT and they are a good little company that shouldn't go much lower. A conservative play is to buy the stock for $15 and sell the Aug $17.50s for $1.55 (but you can afford to wait with a sell-stop at $1.40) for a nice 10% off and room to gain 22% more before you get called away.

Tom posted a great chart on AAPL, which calms my fears for my July calls as this is one of my favorite consolidation patterns, one that squashes the premiums prior to an explosive breakout. I have the July $90s at $6.70, unfortunately I paid $9.45 for them…

We tried this once before and no one can say I'm not a glutton for punishment but the AMZN Jan $40s are just $4.05 and the premiums are great on shorter calls we can sell. (suggested by Scott).

JNPR is a great call by FTP as it's been severly beaten down near the 200 dma at $17 and is a very nice grower. It will be bouncing back in the morning so close calls are unbuyable but the Jan $20s are just $2.25 and you can look to sell Apr $22.50s for perhaps .50 if we get a nice run.

John pointed to ICE and that may be just right as they are bouncing off the 50 dma after having fallen close to 20% since the beginning of last week. Apr $155s are $6 but will be higher at the open and were selling for $11 last week but I would half out by $9 as that was their last plateau.

ZMan and Denver say BQI ($3.10) is going to make a U-turn from here. It's a heck of a falling knife pattern and it just sold off big into huge volume but you've got to go with your gut and my gut says ZMan know his picks (conditional on oil holding $60). Rather than buy the stock, I'm going to give the July $5s a shot for .20, spending the same $300 I would spend to buy 100 shares of the stock on a gamble.

Momoneyplz reminded me of STX, one of my favorites from last year. I don't think it's ready yet but the pre-market disagrees with me by .70 so we try to grab the Sept $27.50s for $2 or less and look to sell Aprils if this thing tops out.

Let's not forget our pals at FXI (per Sqroot), the Jan $100s are $8 and that's a 'mon back if the market recovers.

These are momentum plays so don't be greedy. When you can lock in a 20% profit with additional upside potential with no capital at risk you do it – gambling to make 40 or 50% at that point is counter productive. The key is to pick up the index that is slowest out of the gate and keep a very itchy trigger finger on the cover – remember: When in doubt, sell half!

Have fun today – take the rally with a grain and a half of salt if we don't punch through our levels….