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When to close a hedge

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Today on PremierMarkets.com we feel that traders that may have an account holding the same securities that we've profiled in recent weeks close out their QQQ May 45 puts (QQQQS) at current levels. On April 26th, PremierMarkets.com profiled a QQQQS put when these options were offered at $2.95 and as we profiled other bullish positions, we then felt a further hedge was needed and profiled another QQQQS position at $1.35 on 05/03/01. With option expiration on Friday, several days ago we felt that our hedge might need to be closed out near current levels as it relates to account management. So far, this "hedge" has been just what we thought it might be, but it did not provide the type of action we felt it would in the length of time it has taken for the trade to unfold. At the same time, the stocks we were looking to hedge have actually moved higher than previously profiled, so currently there doesn't seem to be a reason to hedge. If nothing else, currently we are seeing the weakness we felt would fall upon the NASDAQ and the NASDAQ-100 occur, and the strength we felt would take place in some of our "old economy" stocks seems to be holding up. Based on these observations and the way our profiled account would be trading, we feel it is time to "sell the QQQ insurance" and now monitor our profiled short in the Semiconductor HOLDRs (SMH) as enough to keep us hedged should a bear market resume.

NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute interval

I've highlighted both areas where we felt it necessary to profile puts in the QQQs as we felt a pullback to the $43.38 level could provide risk to our current profiled long strategies in WMT, ABX, DD and FRNT. While the QQQs have declined below our hedge points, it took longer than anticipated. With the QQQQS bidding $1.60 we felt that the $0.54 intrinsic value and the remaining time premium of $1.06 was not worth the risk with the Fed meeting tomorrow on interest rates. A move higher in the QQQ from here could destroy current price in these puts. With the 200-pd MA on 60-minute chart so near, we might get a technical bounce too. Dropping the QQQ hedge here. Would consider rolling out to June and a short-term rally, but current performance of bullish positions are doing well enough, we would view the QQQ as a trade and not needed as a hedge.

Jeff Bailey
Senior Market Technician

Telecom Index

We may not be in for a massive wave of selling, but if the building catches on fire, I'd like to know where the exits are.

Nasdaq Telecommunications Index 60-Minute Chart

The Nasdaq Telecommunications Index (IXTCX.X) has done a good job of holding above the 38.2% retracement level at $340, but any further selling could test that level. The 200-pma has moved up to help reinforce support, but time will tell. The area between 340 and 316 contains a lot of congestion, and 316 should be the level to watch if selling picks up. A drop to 277 would erase any of the progress made it April.

AT&T Daily Chart

AT&T (NYSE:T) has been trading in a descending triangle starting with a high of $25, and a low of $20. Support has held twice at $20, but each successive rally has been weaker. As we approach the halfway point of the triangle, something will eventually have to give. If a stock doesn't break out of a triangle by the time it is three quarters of the way to its apex, the pattern tends to lose its potency. AT&T has about three months left to make a decision. The 200-dma might try to speed up the process. While prices were bouncing around, the 200-dma has swooped down to $24. As it continues to fall, prices are still going to be squeezed until something gives.

Jeff Canavan
Assistant Analyst
www.premiermarkets.com

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