Option Investor
Market Updates

Stock futures hanging on to gains

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Stock futures are showing modest gains this morning with S&P 500 futures up 2 points, NASDAQ futures are higher by 24 and Dow futures are up 3 points. Fair value for the S&P 500 today is $3.22. Computers are set for buying at $5.06 and set for selling at $1.48.

Did you feel the surge?

Yesterday traders should have been able to sense the immense release of pressure when the Dow Industrials first traded the 11,000 level and then broke above its last downward trend at 11,025. Within 30-minutes the Morgan Stanley Cyclical Index (CYC.X) also broke above its last long-term downward trend at the 552 level and traded strong into the close as institutions scrambled to put money to work. Both of these technical events taking place within 30-minutes of each other tells me that the bear is fading and now the bull is strengthening. If yesterday's trading was a "head fake," it was one that will go down in the history books. The markets will not go up every day from here on out, but a message has been served to the bears that they will no longer be able to simply short every stock in the market place without meeting formidable buy side pressure at support. Yesterday's action at critical resistance levels and breaking of some long-term downward trends will have institutions (that have been waiting for a pullback) eager to buy stocks that are breaking out of bases or pulling back to support. I suggest that every subscriber be looking to do the same. I've talked to a few investors that are currently sitting in cash. Some feel the markets have moved too far ahead of them. It's my belief that there are billions of dollars in institutional accounts thinking the same thing right this moment. They're hoping like heck that we get a pullback, but can no longer sit and hope as they are now more pressed than ever to put money to work.

One way for a trader "overcome" this fear is to begin placing a portion of your capital into the markets. An options trader sitting on an entire allocation of cash, might simply place 5% of that cash into a 2 or 3-month expiration call option. That way you've got a small amount of cash exposed to the market, but at least you have some exposure to the bullish side should a pullback not occur. As you follow that trade, if at any point you find yourself saying "I wish I had bought more," then find a similar security with the exact type of technicals and place another 5% bet.

When I first became an investment broker in the fall of 1994, I was scared to death to risk client's money. When the Dow Industrials traded the 4,000 level in February of 1995 the "market was too extended." By July of 1995, the Dow Industrials hadn't gotten any cheaper when they were trading 4,700. Have some confidence in yourself and draw from what you may have learned in past commentaries. If you think a specific stock has run too far ahead, ask yourself this. Should I short it? If your answer is "no way in heck am I going to short something at $69 when it has a bullish price objective of $97," then you may not be thinking objectively.

Final note

Your frame of mind is very important. Never run a trade if you have doubts. The above commentary is very different from what I've ever written before. Anyone that can provide previous commentary from PremierMarkets.com, IndexSkybox.com or OptionInvestor.com that ever once resembled such bullishness please let me know. I truly feel based on observations I've been writing about since September and October of 2000, that a new bull market was confirmed yesterday for many stocks in the Dow Industrials and many of the deep cyclicals. You can't just "manipulate" stocks like AA, CAT, DD, EK, GE, IP and MMM. If you wish you had bought any one of these stocks at their 52-week lows then wish no further. Take a look at Hewlett Packard (NYSE:HWP). If you feel that HWP has gotten away from you at $26.74, think about the trader/investor that bought the stock on July 14, 2000 at $68.09. Somebody bought it as it traded there.

The triple-top buy and spread-triple top has been occurring!

Attendees of this spring's OptionInvestor Expo learned how to recognize various point and figure chart formations and put to use the "power of probabilities." Yesterday, traders had some opportunities to put the triple-top and spread-triple top formations to work. Yesterday, shares of Qualcomm (NASDAQ:QCOM) and Merrill Lynch (NYSE:MER) triggered the triple-top and spread- triple top respectively. I'd suggest traders and investors follow progress from here. If they progress favorably from current levels, I'd suggest looking for other similar patterns and look to build upon any success.

Professor Earl Davis from Purdue University assigned probabilities to various chart formations found in point and figure charts based on historical averages. In his study, the triple top formation was profitable 87.9% of the time for an average gain of 28.7% in a 6.8 month time span. The spread triple top formation was profitable 85.7% of the time for an average gain of 22.9% in a 7.7 month span of time.

Today, PremierMarkets.com will have its eye on shares of Macrovision (NASDAQ:MVSN) and the triple top formation developing should the stock trade $58. The stock has pulled into its bullish support line (longer-term support trend on a point/figure chart) and we view a trade at $58 as a sign that demand for the stock remains in control over the longer-term and the stock has just been digesting gains after a BIG move from the $34 level back in March. A trade tomorrow at $58 would not only trigger the triple top buy signal, but then establish a preliminary bullish price objective (using the vertical count technique) of $75.

Index and HOLDRs traders should have a keen eye on the Biotechnology Index (BTK.X) and the Biotech HOLDRs (BBH). In my humble opinion, the Biotech HOLDRs (BBH) look like they could surge to the upside with a trade at $132. At $130, the BBH would trigger a triple top buy signal and a trade at $132 would trigger a spread-triple top buy signal. We'd follow any bullish trades at the $130 or $132 level with a stop at $118 and current longer- term bullish price objective is $193. While I'm not sure the BBH will trade $193 in the next three days, I do think the BBH could trade test its 200-day MA near $155 in the next week or two.

PremierMarkets.com Profiled Updates

*** - Indicates 1/4 position in common stock
** - Indicates 1/2 position in common stock
* - Indicates full position in common stock

Yesterday, PremierMarkets.com activated two bullish positions that we thought a bullish trader should look to trade bullish. On May 11th (2:30 EST), we profiled shares of Merrill Lynch (NYSE:MER) as a stock to be looking long should the stock trade $69 and trigger a spread quadruple top buy signal. We activated the play in our hot list at $69 for a full position. Current stop on coverage is $63.75 with bullish target of $97. We will adjust stop higher with time.

We also felt that traders should be looking bullish a full position in shares of Qualcomm (NASDAQ:QCOM) on a trade at $63. The technicals on QCOM looked favorable as downward trend would be broken on our bar chart and a trade at $63 would signal a triple top buy signal on the point/figure chart. With two major technical signals demand for the stock we couldn't help but oblige. Current stop recommended is $54.75 with a bullish target of $78.

Special Note

Due to subscriber request, we are trying to establish a way to educate traders and investors on account management. Trade management is key to how an account and risk is managed. Every subscriber is dealing with different amounts of capital and we are trying to be as generic as possible. YOU MUST know for yourself what dollar amount a "full position" is and therefore what a "half position" would amount to. We treat every stock or option with caution in mind and understand going in that any investment of capital is capital at risk (long or short). Our view is that security profiled as bullish can end up at zero and any security profiled as bearish can move against us an infinite amount.

Currently, those profiled trades marked as (* full positions) would make up approximately 66% of the current profiled portfolio at risk, while the profiled trade marked as (** 1/2 position) would make up approximately 12% of portfolio at risk. A subscriber could easily ascertain how their trading discipline would be doing if PremierMarkets.com profiled trades had been acted upon.

Trade size has NOTHING TO DO WITH OUR BULLISHNESS OR BEARISHNESS for a profiled security. It does however have to do with current market conditions and particular scenarios we feel were/are in play and were unfolding in the market place at time of profile. This is not a game of throwing darts. We encourage every trader (especially new subscribers) to visit the archive section of PremierMarkets.com to get a feel for the different scenarios and items we have observed over time. This will perhaps give you a much better background of why we're profiling what we're profiling, when we profiled it.

Wal-Mart Update!!!

Yesterday we made the decision to have a less bullish stance on our bullish option play in shares of Wal-Mart (NYSE:WMT) as recent earnings and conference call look to have had the MARKET shying away from the stock. We would feel fortunate if shares of WMT were to rally to the $53.50 or higher in the next two trading sessions as an opportunity to drop this trade from our profiled portfolio. We want to have subscribers focus their capital in areas that we feel offer above average risk/reward and current performance of WMT has us looking to move on. Currently, we will maintain our stop loss and drop coverage should the stock trade below $46.88, or drop coverage should the stock rally to $53.50. By making this decision now, we won't succumb to emotion at a later date and time.

Jeff Bailey
Senior Market Technician

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