Equity futures are looking higher this morning and it's looking like Friday's late "short-covering rally" is going to continue this morning. I say "short-covering rally" because Friday's late comeback in the NASDAQ and other broad indices seemed to be fueled by commentary from Bear Sterns' Analysts regarding the likelihood of a 50-basis point rate cut. This morning S&P 500 futures are higher by 7 points, NASDAQ futures are up 42 and Dow futures are up 25 points. Fair value for today is $2.84 with buy programs set at $4.70 and selling set at $1.08.
Interesting pattern developing in Adobe Systems.
Friday evening I was looking at charts until midnight and one stock we had talked about earlier in the week, Adobe Systems (NASDAQ:ADBE) along with how to use a retracement bracket to establish a trading range, looks to be in the very early stages of a reverse head and shoulders pattern on its 60-minute chart.
Adobe Systems Chart - 60-minute interval
On Thursday, the NASDAQ was selling off, but one reader felt "something was up" after he/she bought puts on Adobe Systems (ADBE). On the surface, the trade made sense! The stock was in a terrible downtrend and the NASDAQ Composite (COMPX) was getting drilled to the downside. But when we used the retracement technique we've been talking about the past week, all of a sudden we realized that the $30.75 level (in Thursday's 01:30 update) might be a level where market makers were lurking. While it is way too early to say that ADBE is setting up a reverse head and shoulders pattern (head just formed) we are at least aware of this potential pattern. If you weren't as alert as the reader who realized his/her "mistake" on Thursday wasn't you're alert now. If you've got a stock or two that have been acting the same, check them with the retracement technique we've been using. If you're on the "other side" of this trade (long or calls) you want to see this stock meander above the $35 level, then progress up near $41. At that point you'd expect a pullback near $35, see some consolidation at that level, then turn higher and break through the $41 level at which we've attached the "label" neckline. As I said, "there's still a lot of things that need to happen." Now do this. Once again, pretend you're a market maker. If you don't think the market maker who trades tens of thousands of shares of this stock per day doesn't see what we're seeing you might be wrong. Now imagine that you're short 100,000 shares at $35 in your inventory. What are you looking to do in the near future? After you detail that plan, then look at the other side of the trade. Imagine you're long 100,000 shares at $35. What would you be looking at doing? If I were long 100,000 shares at $35 I wouldn't be too eager to sell right now. I'd watch this morning's open closely and see if I couldn't make a "bear" sweat it out and perhaps get him/her to chase this thing to $37.50 or even $41, then let him/her have it! At the same time, I need to control my risk and if I start seeing some weakness near $35 or the 50-period MA I can cut and run, then look to be a buyer near $29 depending on market conditions.
After a while, you'll start doing this with every stock you trade. Not a believer? What about the stock that started all this retracement stuff? What about JDS Uniphase (NASDAQ:JDSU)?
JDS Uniphase Chart - 60-minute interval.
The only change I've made here is to move the retracement bracket to the right so you can see the levels on the chart in a somewhat readable fashion. While I can't show the entire retracement bracket on the chart, it just so happens that the "result" at 0% retracement is at $0.34. This doesn't mean that JDSU is going to $0.34, but it does help us control our risk and try to sniff out where buyers and sellers may be lurking. Just like we did with ADBE. Pretend you are both long and short 100,000 shares of JDSU at $38.50 and trade the stock from here!