Traders that think technology stocks have gotten away from them today are probably looking at 60-minute charts. When you look at a point and figure chart of the Morgan Stanley High-Tech 35 Index (MSH.X), this index looks like it is just starting to show some strength out of a base. What's interesting here is how this index has acted in the past off of similar buy signals, and how the recent sell signals have given bearish traders very little follow through. Could it be that this index is just getting ready for a major lift off like that found in April? Many of the market internals from the bullish percent charts are similar to the April time frame, and this index is worth considering for a bullish options trade.
Morgan Stanley High-Tech 35 - $4 and $5 box scale
I would have preferred to show the above chart on a straight $5 box scale, but by the time I had it all dressed up, it was too late to go back and change things. Heck, what's $1 on a $560 price index anyway? Institutions could care less. What I'm looking at here is an index that remains below bearish resistance. Immediately that has me only thinking 1/2 to 1/4 position of normal trade size (smart traders think in terms of dollars invested, not just shares traded). If you're normal option investment is $2,000, then scale it back to $1,000 or $500 at this point. You can always add to it as bullishness unfolds.
The first thing I look at is what took place in April (red 4) and the buy signal that followed at $520 (1/4 position long?). Then the follow through at $565 (another 1/4 position long?). Notice the long columns of X's that came after those buy signals? That may be what this index is in for in the coming weeks.
Then I'm looking at the sell signals this index began giving back in May (red 5). Note that the first sell signals did see the index whip back and forth, but eventually they paid some nice reward for the bearish trader. Recently however the past three sell signals have not paid much reward to the bear. This tells me that there was a shift taking place in supply/demand and demand has started outstripping supply. Not just for the index which is a measure of the 35-stocks, but the stocks themselves. Nonetheless, today's buy signal at $560 can be taken as a bullish signal and the lack of success by bears at $525 should have this index finding support on the pullbacks.
What would you do with Planar Systems?
This morning I received an e-mail from a subscriber that was holding some Planar Systems long at $28. I had written this stock up as a potential bullish trade on July 12th (09:00 EST) just before the opening of trading. That day, shares of PLNR jumped at the open from $26.73 and finished the day at $28.51. So... what now? Here's what I'd be looking to do and might be something that comes in handy with stocks that other traders hold that have had a nice little run in recent weeks (or future weeks).
Planar Systems Chart - last 9 months
The point and figure chart of Planar Systems (NASDA:PLNR) indicates a long-term bullish price objective of $55, but the stock does look to be in the upper end of what a market maker probably has as his/her trading range. Since the stock is up near this end of the range, I'd be looking to try and sell some call premium and the August $30's were bid $1.75 earlier in the day. If I wish I had sold the recent top at $32, the $30-strike plus the $1.75 premium gets me close. At the same time, this would allow the bullish holder of PLNR to work his cost basis down in the stock to $26.25 ($28-$1.75=$26.25). A trader that wants to protect his position further is assessing risk to 61.8% retracement of $24.78 and then deciding from there. Regardless, a trader that holds the stock bullish at $27-$28 has a gain of roughly 7% and now is the time to be thinking of how to profit. Not when the stock is below your entry price. If the stock doesn't interest you anymore or you're uncertain about its future, then take your profit and move on.
When I highlighted PLNR originally, this stock interested me because the technicals were quite bullish. Perhaps investors/traders are finding some other stocks with the same technicals that PLNR had on July 11th and 12th. Why not roll from PLNR into those stocks? If a trader can consistently expose himself to 7-10% gains, they can build a nice account.
Another option! What if a stock holder of PLNR thinks the stock could see $55 longer-term, but doesn't want to tie the cash up in the underlying stock short-term? It perhaps makes sense to sell the underlying stock right here, then turn to the options market and some options further out in time. Expose less capital, but still have the upside potential. I think that's why they call them "options."