I'm going to try and hit several birds with one stone in my bullish tone on Oxford Health. One "bird" is a pattern I like to see that I call the "break out" gap. This is a bar chart pattern I've seen over the years that often times leads to a much longer- term bullish move. the characteristics are that of a stock building a large base and then one day, all heck breaks loose to the upside and the stock "breaks away" from the base (usually gaps higher) on BIG volume. To me, it's a sudden "realization" by bulls and bears that things have changed for the better. In yesterday's "market monitor" I commented on this "break out" gap in shares of Oxford Health (NYSE:OHP).
Oxford Health Plans Chart - Daily Interval
Often times the "breakout gap" is a sudden realization of bullishness. The BIG volume is from those shorts that have lost technical leverage in their short, couple with bullish news on the stock. Yesterday's gap from $29.24 to $32.00 (+9%) and today's 8.5% current gain will eventually find some profit taking. Institutions will most likely begin looking to buy the stock on any near-term weakness as they build their positions. Over time we may then see what I call the "break away gap." This would come after a more prolonged upward trend and further good news and realization of how bullish the stock and underlying fundamental are. Eventually a third stage or "exhaustion gap" can occur. This is often times created by the investor that watched a stock several month prior gap higher out of a base, but just didn't believe the move, but the last bit of good news has the late bull buying a top or the last end of the bull run. This "exhaustion" gap and heavy volume is often when the early bull finally sells, and realized their longer-term gain.
Now I'll throw a stone at the "second bird." I get some e-mails from subscribers that don't/can't watch the market on an hourly if even daily basis. I've lost track of what I call "boring stocks" that I've talked about in the past that made for excellent option trading. Some that come to mind are Nike (NYSE:NKE) when the stock was breaking above the $45 level in July. I was also bullish on shares of Cendant (NYSE:CD) in mid- November near $15 when the stock was looking bullish. I was even bullish shares of Office Depot (NYSE:ODP) prior to the terrorist attacks of September 11th, and bullish the first day of trading on September 17th (the first day of trading after terrorist attacks.)
This second stone that I throw is an affectionate stone. In my opinion, an option trader that has to watch every second of the market probably shouldn't be trading options or else they are over leveraging and therefore "have" to monitor things very closely.
Just as I've lost track of "boring" stocks like NKE, ODP, CD, IP, GT and now OHP that I've talked bullish about in the past, I've lost track of the number of times I've said this.
ONLY buy in option contracts what you would buy in stock! Let's say I'm willing to buy 100 shares of OHP, place a stop under the $29 level and let her rip with the bullish longer-term target of $56 from the point and figure chart. If I buy at $35 and risk a stop to $29 I'd be risking $600. Is it crazy to instead risk that $340 and buy 1 OHP August $35 call (OHPHG) for $3.40, set an upside alert at $50 and call it good?
So what if I lose $340 (I'm not happy) as I would have already been willing to risk $600 to my stop in the underlying stock.
While some subscribers may "say" they want to trade option in "boring" stocks, I'm not so sure about that. If they did, they may not be saying, "those point and figure charts are hard to understand and I can't set up my trades properly and define precise action points."
While I like to use both bar charts and point and figure charts in my analysis (small picture and big picture) an option trader that can't look/monitor the markets on an hourly basis may be well served to incorporate point and figure charting into their trading plan.
Cendant Corporation Chart - $0.50 and $1 box
I'm still waiting for a 3-box reversal on Cendant (NYSE:CD). That triple-top buy signal on the move at $15 when relative strength also reversed higher vs. the S&P 500 was powerful wasn't it? Heck... I had a measly bullish target of $17.50-$18 to bearish resistance when I profiled it. One subscriber "sold too soon" in an option and was euphoric! That's fantastic, but that trader does like to trade and get in and out and book quick profits. Nothing wrong with that. An options trader that can't watch the markets can still benefit from OptionInvestor.com, learn from our commentary and play some "boring stocks" like Cendant (CD). All you've got to do is NOT over leverage and buy some time and give the trade a chance to work.