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Stocks quiet in pre-market trading

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Stocks look to be relatively quiet in pre-market trading. Shares of Ciena (NASDAQ:CIEN) however are trading higher by $3.31 to $64.10 after finishing yesterdays session at $60.79.and shares of Cisco Systems (CSCO) are also being bid higher to $23.24, which is $0.37 higher than yesterday's close of $22.87.

Equity futures are showing fractional gains with S&P futures up 3 points, NASDAQ futures are higher by 19 and Dow futures are up 5 points. Bond YIELDS on the three major maturities, 5-year (FVX.X), 10-year (TNX.X) and 30-year (TYX.X) are all fractionally lower, but all remain above short-term upward trends.

Strategy Update for QCOM on PremierMarkets.com

PremierMarkets.com will continue to profile 1/2 position long in shares of QCOM as bullish, but considering the NASDAQ-100 bullish percent is currently "overbought" at 76%, were going to be a little more "realistic" with our original bullish target of $78 in the near-term and reserve the right to drop coverage on the stock should it trade near the $75 level. We will do this in the hot list should market conditions dictate such action. We will also recommend that those traders perhaps trading QCOM as we have outlined, move up their stops from the $54.75 level to $59.50.

Rolling up retracement for Qualcomm

Imagine that! We're actually beginning to have to roll up retracement brackets as stocks trade higher. Subscribers that have been with me awhile first learned this technique when we were "rolling down" retracement brackets looking for levels where market makers may be sitting in order to make markets in stocks that were declining. What that did then is what it does now. It gives us levels to be looking for support or resistance that may come into play when certain areas look void of what we might know as "pure" technical levels.

Here's a chart of Qualcomm (NASDAQ:QCOM) and this is probably very close to the levels every market maker has been trading since early April. All we did back then was attach a retracement bracket to a relative high of $89.37 from February 8th and attach it to the low of $42.75 set on April 4th.

Qualcomm Chart - last seven months

I think market makers are staring at that downward trend at and 61.8% retracement level at $71.56 and probably looking to get rid of some inventories from their market making activities near the $60.55 level. The sharp move higher above 50% retracement at $66 yesterday differs markedly from what has happened on past rallies to the $66 level and that has me thinking that while bullish traders in our currently profiled 1/2 position play of QCOM from May 16th at $63 should expect some resistance to occur at $71.56, it's also important to understand where current support should be building and what could happen if the stock were to break above the $71.56 area. Current support will probably be firming near $66. I think $66 because of how the stock traded yesterday (moving sharply higher) and how that trading differs from past encounters with the $66 level. Market makers that were selling some inventory from the $60.55 level finally encountered too many aggressive buyers and then had to "protect" against a move higher to downward trend and the $71.56 level. Support might now be found at $66 as market makers begin firming bids and replenish some inventories they had to sell yesterday as they provided liquidity for aggressive buyers. So... what's a market maker to do? How about "roll up retracement!" From the above chart, we wouldn't just expect the market makers to say, "No stock until $89.37 and my 100% retracement bracket" do you?

Qualcomm Chart with "rolled up" retracement in BLUE

I've left the pink lines of "old" retracement on the QCOM chart and now place our "rolled up" retracement on the chart in blue. I haven't reinvented the wheel and have simply attached retracement to the next relative high dating back to December 6th at $107.81. Notice how the 50% retracement level from the blue retracement bracket can now give the market makers in QCOM a level to protect against should QCOM find enough demand from the market to drive it higher and through downward trend and the $71.56 level. Also notice how the market maker also can perhaps benefit in the future with the 61.8% retracement level (blue) at $82.95. By rolling up his/her retracement level in QCOM, the market maker now has two additional level to monitor should enough demand build for the stock to drive prices higher. Before, the market maker along with you and I would have been simply wondering how to monitor and control risk. Remember this... a market maker MUST provide liquidity to the markets regardless of market environment. A market maker that is running low on inventory at this point is probably having to short the stock in order to provide liquidity. He/she isn't shorting the stock necessarily because he/she thinks it's going to go down, it's part of the market making process. However, what that shorting may do is turn the market maker into a pretty strong buyer on any pullbacks in the stock, as they look to cover any shorting done recently and begin building up inventories for a stock that might see further demand build should long-term downward trend be broken.

Review of our trading strategy in QCOM

This review may help traders with future trading not only in QCOM, but in other stocks they're currently trading. Try using the above retracement bracket techniques to establish levels where you might expect market maker activity on the buy/sell side. On Wednesday, May 16th, PremierMarkets profiled a full position bullish in QCOM on a break higher at $63. We thought a stop at $54.75 was prudent and set a bullish price target for the trade at $78. On Friday, May 18th, we decided that we didn't necessarily like the way the stock finished trading on May 17th and decided to error on the side of caution and made the decision to snug up a stop on 1/2 of the profiled position at $$64.75. The stock was trading below 50% retracement and thought a pullback to $60.55 might be a little too much heat as it related to account and trade management. If the stock did pull back to $60.55, we might want to get back on the bull bandwagon, but our trading discipline would not have allowed us to if we were still carrying a full position at $63. Long story short, we were dropped coverage of a full position at $64.75, but continued to follow the trade as 1/2 position and remained bullish QCOM. Well, that strategy didn't work out all that bad as it relates to yesterday's close at $70.99. On Friday, our analysis had the trade looking 50/50 and we wanted subscriber to at least lock in some profit in case of a pullback to $60.55, but still have a portion of their holding long, should the stock trade higher. Not once yesterday did I get discouraged that I had profiled selling 1/2 position at $64.75. I was too happy with the other 1/2 that was shooting higher above $70!

Every day I do analysis on charts that we cover at PremierMarkets.com and today I'm wondering if my bullish target for $78 may be a little too generous considering the "rolled up" retracement bracket technique we've incorporated on the above chart. Current risk in the trade is from profiled entry at $63, or roughly $8 per share and with the stock trading $71.58, a bullish trader has about $3.50 to gain (assuming stock gets above downward trend) to the $75 level or about $7 to gain if our original target were achieved.

Jeff Bailey
Senior Market Technician

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