In Monday's 11:00 EST Update, we were monitoring the airline stocks and the hotel/motel stocks. One chart we thought interesting was that of Cendant (NYSE:CD). Subscribers may have set some alerts at the $13.24 and $14.83 levels to alert them to a potential break in the stock. Today we got it, to the upside at $14.83!
This action flies in the face of reason. Especially after Monday's plane crash when many hotel/motel and travel related stocks were getting whacked to the downside. Today's a new day and the MARKET doesn't seem to care too much about Friday's events as it relates to Cendant (NYSE:CD).
Cendant Corporation Chart - $1 and $0.50 box
Shares of CD have traded as high as $14.95 today, after triggering our upside alert at $14.83 from retracement (see Monday's 11:00 EST Update). Now we're looking at a point and figure chart, which takes out much of the market noise that comes from day-to-day trading. What we see is the potential for a triple-top buy signal to occur at the $15 level.
I like the stock long for a bullish trade, but this one may be more appropriate for those traders that like a more "gradual" moving stock. I've built a bit of a timeline on the chart to show a triple-top buy signal that occurred back on March 30th. It took a couple of months for the stock to gain nearly 31% to the $19 level if a trader had bought the stock on the triple-top buy signal on March 30th.
Options traders love the point and figure charts, because it help them determine what month of option expiration they should consider when making and option trading decision.
They also like the Purdue University Study by Professor Earl Davis to help ascertain the probabilities of success in a trade. Professor Davis' study noted that the triple-top buy signal was profitable 87.9% of the time, for an average gain of 28.7% over an average 6.8 months time period. It's interesting that a trader having bought shares of CD on March 30th at $14.50 and then sold on the sell signal on September 7th at $18 would have gained roughly 24% in a 5-month time frame. That would have simply been based off of the buy and then the sell signal.
Relative Strength of CD vs. S&P 500 -
In point/figure terminology, we'd describe the relative strength chart of Cendant (CD) as "relative strength sell, but in column of X's." In more normal lingo, we'd say that relative strength of CD longer-term is negative, but near-term relative strength is strengthening.
In my book, this a good looking set of technicals for a trader just looking to get involved in the market. Ideally, the stock would be setting up a triple top buy signal above its bullish support trend and relative strength would be reversing into a column of X's and be on a "buy signal."
What makes sense in the trade to me, is that things are improving, even though recent market news was negative. This is DIVERGENCE I like to look for.
Just like when we were seeing the bullish percent charts begin improving and hinting of bullishness back in late September and early August when there was so much bad economic data in the market place. That DIVERGENCE has recently been disclosed with the NASDAQ up some 30% from its low.
Could that same type of DIVERGENCE be presenting itself in shares of Cendant? I think so. At least I'm willing to stick with something that has been working for us.
At a minimum, I'd be looking at the Cendant Jan02 $15 calls (CDAC) offered $1.35. The Feb02 $15 calls (CDBC) are offered $1.65.
A trader that is "just too uncertain" could implement a February "straddle" and add a Feb02 $15 put (CDNC) offered at $1.65.
I'll add this "straddle" to our options strategies list of trades we've been following.