Do you consider yourself a victim, glutton for punishment, or a master of the art we call trading? I suppose the answer to that question depends upon what side of the market you've been trading lately.
Judging by the performance of Option Investor's (OI) and Premier Investor's (PI) current plays, the maestro's of the market have been buying puts/shorting stocks.
Qualcomm (NASDAQ:QCOM) graces both the OI and PI play lists; it's a bearish play, of course. Since initiating bearish coverage on Qualcomm, both OI and PI have captured almost $7 to the downside, based upon the stock's price at the time of this writing. Shares were knocked down this morning in the wake of Merrill's downgrade of Motorola (NYSE:MOT). That downgrade was a gift for those bearish traders who entered positions at the time of OI and PI initiating coverage on the play. It's a gift because it should allow for the booking of at least partial gains at this point. Although Qualcomm is below most meaningful support and appears as if it will trade lower, discipline should dictate taking some money off the table into this weakness and letting the "house's" money ride. That way, bearish traders can remove some emotion from the trade and be better suited to deal with any future strength - that's what masters do.
In contrast to Qualcomm's weakness, shares of Medimunne (NASDAQ:MEDI), which is another short play on PI, are displaying relative strength today. That's because the AMEX Biotechnology Sector (BTK.X) is holding up relatively well despite the widespread weakness across the market. The stock is in an ascending trend and currently near the upper-end of its short- term range, with a double-top right around the $42.50 level. Picking tops is lucrative, but very, very difficult to do successfully and consistently. Therefore, bearish traders in Medimunne should be employing strict risk management in the play. The good news is that managing risk in this play is relatively easy - stops around $42.50 to $42.70. And remember to balance your convictions with discipline. In other words, if you're bearish on Medimunne and betting that way, don't ignore its price action, which at the time of this writing is bullish. I hate to tell you what to do, but don't subject yourself to unnecessary unpleasantness by not managing risk.
To digress from Medimunne's relative strength, Gemstar (NASDAQ:GMST), which is a current put/short play on OI, is another stock displaying weakness today. The stock has been in a descending trend since the beginning of August, and has yet to show any signs of stabilizing. Its pattern of lower highs and lows has been working like...well...clockwork. But the key to trading patterns such as Gemstar's is to enter put/short positions on strength then booking gains on weakness. It would be very easy for a trader to actually lose money in the Gemstar play if they entered positions on weakness, despite the fact that the stock has shed almost $10 since OI picked up coverage.
By entering bearish positions at a relative low (Read: Breakdown), bearish traders subject themselves to possible short covering rallies, which wreak havoc on emotions, in turn, clouding objectivity. If you entered new put/short positions in Gemstar on its weakness today and the stock subsequently rallied on short-covering-induced buying up to the $29 or $30 level in the coming days, what would you do to manage the position? The tragedy of that scenario is that Gemstar is probably headed lower from current levels over the next month. But, by entering bearish positions on weakness at current levels, traders are potentially subject to great pain if the stock rallies in the interim. And there's no glory in suffering, at least in the game we call trading.
Eric Utley Option Investor