Monthly Cash Machine Newsletter, Tuesday, 02/15/2005 01:22:08 AM ET
On the "Watch" List - MMM
HAVING TROUBLE PRINTING?
Readers who participated in the bearish position in 3M Company (NYSE:MMM) walked a tightrope for most of the session Monday as the issue traded within a few cents of the sold (call) strike at $85. Despite the rising share value, the cost to exit the spread was $0.45 per contract at market close, which actually yielded a small profit in the overall position (less commission costs).
From a technical standpoint, the stock's failure to breach the recent resistance level near $85 left some traders with a "glimmer of hope" for the near-term. Their optimism didn't long though, as the company announced after the bell that it raised its quarterly dividend to $0.42 cents per share. The dividend will be paid on 3/12 to stockholders of record as of 2/25.
The increased dividend does not bode well for those who remained in the play as the stock will likely move above $85 Tuesday morning. In addition, any sustained buying pressure will vault MMM into a previous trading range near $86-$88. The next "key" signal (for exit or adjustment) will be the outcome of the short-term rising wedge pattern, which is relatively tough to predict until heavy volume confirms the new direction. As the experts at stockcharts.com say:
"The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish."
With the potential for a strong break to the upside, aggressive traders should have a closing strategy in place before the market opens. Keep in mind, the position does not begin to lose money until the stock moves above $85.50 and with only four days remaining until the option expiration date, the premium in the sold call ($85) will be relatively small. This time-value "erosion" should work to an option seller's advantage, providing additional margin for bullish activity before a realized loss is incurred. With any luck, the stock will lose momentum and possibly "peg the strike" on Friday, when February options expire.