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When we first started profiling shares of AOL Time Warner (NYSE:AOL) we didn't know that the company might be a potential bidder for AT&T's (NYSE:T) broadband unit. Recent events now have AOL as one of the contenders interested in T's broadband assets and this looks to have the market a little bearish on shares of AOL. The uncertainty now becomes, how much will they potentially pay and how much debt might they assume. Whenever I have a profit in a stock, and there's uncertainty about potential near-term bearishness, I look to move to the sidelines.

AOL Time Warner Chart -

I'd rather move to the sidelines with a gain, than risk those gains to uncertainty of a potential deal with AT&T's broadband unit where I don't know how much it could cost or what types of terms could be agreed upon. Again... we don't know if AOL is going to actually make an offer for the broadband assets, but would just rather exit the trade with a gain, than wait to find out and perhaps suffer further negative reaction.

While AOL is a "media/internet" stock, one reason I liked the stock as bullish on OptionInvestor.com at $35.20 on November 7th in the "market monitor" was that the Internet Index (INX.X) was breaking new ground higher. Today, the INX.X is up 1%, while AOL is down 1.7%. Now I have some DIVERGENCE that alerts me to potential near-term negativity and that's another reason to raise some cash in the account and exit with a gain.

Once we get some type of confirming news on a potential deal for AT&T's broadband division, we can always come back and reassess the stock at that time.

Try to envision your trades

Today, on several of the premierinvestor.net sites, you may have seen some comments or trade profiles regarding a bearish trade on shares of Intel (NASDAQ:INTC). Here's how I envision future potential trading of the stock based on the point and figure chart. This is based on past observations made regarding the Semiconductor Bullish Percent (BPSEMI) from Dorsey/Wright and Associates that shows their bullish percent at 71.2% bullish and above the "overbought" 70% level.

Intel Chart - $1 and $0.50 box

The current bearish price objective for INTC is $5. Personally, I don't think INTC is going to trade $5. That column of X's from $19.50-$31 is a major "low pole warning" and signals a longer- term change in posture toward the stock to the bullish side.

THEREFORE!!!!! A trader is looking at a short/put play in shares of INTC as SHORT-TERM! With the NASDAQ-100 bullish percent ($BPNDX) now at 74% and the Semiconductor bullish percent at 71% from Dorsey/Wright, I want to try and identify a big cap tech stock/semiconductor stock that has rallied to resistance.

As you can see, the point/figure chart of INTC fits that description almost to a "t." You can see the columns of X that have been reversed at the $32 level 4 different times. Somebody (the MARKET) is selling at that level.

By looking at the recent rally from $19.50 to $31, I think INTC might pull back a few bucks. I've outlined how I think INTC might trade in the coming sessions. I'm not looking for a home run, but if the stock were to trade $26-$27 in the next few session, then a trader short/put near $30.57, with a stop just above yesterday's high of $35.59 might be a happy camper.

What we're trying to do here is use the "overbought" condition of the NASDAQ-100 (market) and Semiconductor group (sector) to identify a short-term traded in a stock that has rallied to resistance where we've got some hint from history that sellers have been nearby.

One negative

Lets face it. One negative of a short in INTC is that relative strength is now on a "buy signal" vs. the S&P 500. This is a negative for a LONGER-TERM short and even a short-term short right now. However, it is hard to find any semiconductor stock that isn't showing strong relative strength vs. the SPX.

This RS strength along with the "low pole" warning is hint that there is a shift in sentiment toward the stock. This has us NOT LOOKING for a "home run" but simply looking for a pullback to profit from. If a short-term pullback turns into a lengthy decline then that's fine too, but not what I'm looking for.

Bond YIELDS continue to unwind higher

For the fourth straight session, we're seeing some "meaningful" selling in the longer-end of the bond market. Yesterday, the 10- year YIELD closed just above the 4.70% level and is on the move gain today at 4.841%.

Stocks have really yet to respond to yesterday's break above downward trend, but you get the feeling that perhaps stocks moved ahead of the bond YIELD rise. However, the cash being generated from the sale of bonds may well be paying for those recent stock purchases or being slated for future stock purchases.

As mentioned earlier in today's 11:00 EST update on OptionInvestor.com, our Dow Portfolio is seeing the bulk of gains $115 now, while the upper 15 stocks have lost $173 today (based on last night's close). As this relates to the "inchworm" analogy, the inchworm is starting to arch his back so to speak.

We want to continue to monitor this interesting dynamic. For a bullish move higher you look for the "lower-end" to begin anchoring itself, and then find a move higher by those "upper- end" stocks on a surge higher.

For a downward move, the "upper end" would anchor, and we'd see a push back lower by those in the "lower end." Just try to picture how an inchworm moves and I think you'll get the picture.

Jeff Bailey
Senior Market Technician
Option Investor

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