Option Investor
Market Updates

NASDAQ trying to hold short-term trend

Printer friendly version

If I only knew then what I know now. That's a theme traders should use to their advantage every day. It's now two hours since our last update on VRSN and we're watching the NASDAQ Composite closely here.

NASDAQ Composite Index Chart - 60-minute interval.

The COMPX is still holding our upward trend (A), but a break below this morning's low of 2,581 could get things going to the downside. For that to happen you need stocks in this index to trade lower. Remember that the NASDAQ is made up of sectors and those sectors are made up of stocks. Monitoring all three will give traders the confidence they need to make sure they are on the right side of the trade.

GSTI Software Index Chart - 60-minute interval.

There are quite a few software stocks that trade on the NASDAQ and the GSO.X gives traders an index to monitor. Notice how our downward trend (C ) has been acting as resistance and our short- term upward trend (A) has been broken. Trend (B) would now be our next trend where we'd watch for support. Short-term traders will be watching the 50-period MA (thin blue) at 283. This index looks lower currently and should have some market makers in the NASDAQ less aggressive in building inventories today, with the idea that cheaper prices might be available in the future. A move above 300 could have bullish traders in the group getting active in their buying.

VeriSign Chart - 60-minute interval.

This morning, shares of VRSN were highlighted as the "Trade of the Day" on OI, but traders that looked at the NASDAQ's lower open should have held off on bullish trades, especially when the stock broke our short-term upward trend (A). Those traders that read the 11:30 EST update and shorted the stock near $80.75 have a small profit, but a profit nonetheless. If the NASDAQ were to break our upward trend to the downside, I'd think shares of VRSN would play a role in that break. Short-term traders are still targeting the 50-period MA on the VRSN chart near $75.

Looking at both sides

I like to look at every trade from the bullish and bearish side and pick out action points of where I think I will see further weakness or strength. I like to first look at the broader indexes, then different sectors and finally a stock. Traders that do like VRSN as a bullish play would probably want the GSO.X to trade above the 300 level and then see VRSN "get back on upward trend" (A) and be targeting downward trend (C). Traders will note the distinct similarity between VRSN and the NASDAQ Composite chart and use this to their advantage. It's not a big surprise that VRSN or the NASDAQ is trading in line with each other. The market makers know this all too well and use it to their advantage. Readers of these comments should understand this and use it in their trading. If I see a stock that mirrors a broader market index, I'll use that similarity in my trading. Index traders can actually use a stock like VRSN as a "leading indicator" to set up bullish/bearish trades in the GSO.X. For those index traders, the GSO.X does offer options that trade on the CBOE. The root for call and put options is GSO.

Good comments from readers!

Now is a great time to address "buying time" as I received several comments from readers regarding a call play I had talked about earlier in January in shares of WCOM, T and SBC. While I talked about the January calls, several readers wanted to know why I didn't like calls that spanned a couple months further out. Well... everyone loved talking about International Paper (IP) since October (I'm kidding) that I felt my constantly following WCOM, T and SBC might meet the same euphoria, so I only mentioned the January calls as we could close those trades on a quicker time frame. I agree with readers that buying the February or March contracts could have allowed more time for the trade and potentially bigger profits. I will also point out though, which nobody really addressed, was that "risk" was potentially higher in the February or March contract. "Why?" you might ask. One portion of risk I look at in an option is the amount of time my capital is exposed to risk. When I close a trade my capital is taken from the market and no longer exposed to risk (the market is risk). This is important to understand, even though it makes obvious sense. I would also point out the association between risk/reward. The overriding point of the e-mail I got was that I was limiting my upside by picking the January call. I would agree with that, but I was also limiting my risk as it relates to the amount of time my capital was exposed. I don't suggest that traders only buy options one-month out. If you feel that it may take a couple of months for the stock to reach a potential you have in mind, and then play that time period. Great comments! Keep them coming!

Jeff Bailey
Staff Analyst

Intraday Update Archives