Option Investor
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Bond YIELDS lower and so are equity futures

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Bond YIELDS are lower this morning across the three major maturities we follow on a daily basis. The 30-year YIELD (TYX.X) has dropped to and eight session low and has me thinking that we're starting to see some allocation back into the long end of the bond market. Currently S&P futures are down 12 points, NASDAQ futures are lower by 42 points and Dow futures are off 85 points.

Stocks we're currently watching


Bethlehem Steel (NYSE:BS): Shares of BS have risen from the ashes in recent weeks, but those ashes might still have some fire left in them. I like what I see as it relates to pattern recognition on the 60-minute chart and risk reward looks favorable. Today I'd be looking long the stock on a break above $3.50 and follow with a stop just below the 50-period MA at $3.35. Bullish target is $3.95. Follow the hot list to see if we put the stock in play.

Lone Star Tech (NYSE:LSS): We traded call options on LSS just over a week ago for a nice gain after we noticed that steel related stocks and oil service had drawn renewed interest. Yesterday the stock pulled right back below a recent entry point. The weekly bar chart shows a triple top forming at the $55 level and this may have had some profit takers and overly zealous shorts selling in the past two sessions. The bullish vertical count from our point and figure charts indicate a potential long- term bullish price objective of $73. If the stock gets above that triple top on the bar chart, perhaps one can imagine how LSS could achieve that bullish target of $73. LSS looks actionable on a break above $50.08 and a trailing stop at $45. With a stop at $45 we're not looking for $54, but will be looking for a more reasonable target of $64. Follow the hot list to see if we put the stock in play.

Merrill Lynch (NYSE:MER): Here's another stock that we day traded for a nice profit on April 26th. We originally liked the stock due to favorable supply/demand characteristics and felt support would be firm near $61. We day traded the stock as we felt there may be some consolidation yet to occur before that stock REALLY began to move. Yesterday, shares of MER jumped 6.34% and once again broke above its 200-day MA. Yesterday we were looking long, but the stock gapped higher on us. Bullish price objective on the stock from our vertical count on point and figure chart remains $97 and if the stock pulls back anywhere close to $65, we might just have to play the June $65 calls (MERFM). If the broader market look bullish at the open, then we may still buy the calls, but perhaps just 1/2 position. Would follow any trades with a stop just below $60 on the stock and would be targeting the $73 level short-term and $79 longer-term. Follow the hot list to see if we put the stock in play.

Bearish Play

Exxon Mobil (NYSE:XOM): XOM is a stock I identified two day's ago as a potential short, but I lost track of the stock yesterday as we were busy getting long some four-lettered NASDAQ stocks. Yesterday shares of XOM fell 2.59% and I think I was right that the stock is ripe to fall if not at least pull back further. Today I'll be looking to short or put the stock on a trade above $88 and follow with a stop just above $90. Bearish price objective short-term is the 200-day MA at $85, but a longer term price objective of $82 is not ruled out. Follow the hot list to see if we put the stock in play.

NASDAQ-100 Index Tracking Stock (QQQ)- My favorite security to play to the bullish or bearish side to help hedge an account that has been getting long. You never know when you'll need a hedge and we'll be looking to the QQQ to help us in a market decline. We currently have a trade going in the May 45 put (QQQQS) on the QQQs and will perhaps add to it on a break below $46. My stop would be $50 and our target would be as long as we need it or the $42 level. Follow the hot list to see if we put the stock in play.

Managing risk, tick by tick

The information below is about risk management and account management. For subscribers just interesting in trading and not looking for education on these topics then you won't be interested in the following. On Tuesday at 04:30 EST I went back over all the stocks we recently covered and put together action plans for in April. That was a lesson in how to review what you did the prior month, learn from the trades and perhaps begin building a more rewarding trading account. Now lets look at how we might do the same on a daily basis and see how it might influence our trading. The following is a list of current open positions we are following on PremierMarkets.com.

Print Screen from QCharts Portfolio Manager

Yesterday morning when the markets opened for trading, you can almost imagine what our then current open positions looked like. Imagine if you will that we only had open positions dating down to the 05/01/2001 entry and the DD July 45 Calls. The above is a print out at 11:47 PM EST on May 2,2001, but its fairly close to what I was seeing (up until 05/01/01 entries). I've highlighted in red a glaring entry that now looks like a 66% decline in our QQQ hedge play. That's exactly what I saw yesterday morning (or close to it) and what that told me was that I was WRONG on 04/26/01 to buy that hedge. No, it wasn't wrong to think prudent account management when we were holding a bunch of long positions (some of them have been closed). So far, I haven't needed that QQQ put "insurance."

Well... I'm a fairly "meat and potato" type of trader. If I was down somewhere in the neighborhood of 60% as it relates to a bearish trade in the QQQs, what might I be looking to do? How about adding some positions in stocks to the portfolio since the QQQs obviously moved higher! Now notice the two entries dated for 05/02/01. Hey! Those are bullish positions in four-lettered NASDAQ stocks. Now, I hope you don't think these were just added for the sake of adding them as long positions. They were added based on observations we've made recently and different dynamics we felt were currently at hand. We also used many of the trading techniques talked about on a daily basis in PremierMarkets.com.

One observation that a trader should be making is this (or at least questioning). How can a portfolio have 6 positions in it with one of them down a whopping 66%, but the "Total" still be showing a positive 1.45%? The answer is trade size and what dollar amount that position is as it relates to the total capital exposed. In my commentary I repeatedly use the terms "full position" or "half position." It has nothing to do with my confidence in the trade. If I didn't have any confidence in the trade then I wouldn't be putting the trade in play. It DOES HAVE EVERYTHING TO DO WITH ACCOUNT MANAGEMENT and how much capital I currently feel comfortable exposing in the current market environment. The QQQ trade was placed with 1/2 position in mind and as a hedge to help lessen a blow if the market were to experience a decline. While there's no guarantee that the QQQs will decline if our 5 bullish positions do so, perhaps the probabilities weigh in favor of a decline.

By setting up a system that you can monitor individual position performance and overall account performance, a trader may be better able to understand what is taking place in the markets. The BOTTOM LINE for any trader is the overall account. To be continued at 09:30 EST Update.

Jeff Bailey
Senior Market Technician

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