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Bifurcated and Diverging

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Two of my favorite words are "bifurcated" and "diverge" and both are very representative of the current market environment. A couple of stocks we've mentioned in recent sessions are achieving some near-term targets that subscriber should be aware of.

Qualcomm (NASDAQ:QCOM) $35.81 -8% is getting hit hard today on some "accounting concerns" from a CFRA (Center for Financial Research & Analysis) report which apparently claims that QCOM's 10-k reveals that the company recorded revenue in exchange for non-cash consideration and accepted non-cash consideration for receivables removed from its balance sheet. There is also "talk" of a potential conflict of interest between company's board of auditors, stating that Chairman of Audit Committee, COO, CFO all are former employees of Coopers & Lybrand, predecessor to QCOM's auditor, PricewaterhouseCoopers. Currently, OptionInvestor.com and premierinvestor.net can not verify the CFRA report, but does look to be impacting price action in QCOM. premierinvestor.net profiled shares of QCOM as short recently and the stock has achieved a bearish vertical count from our point/figure chart.

Qualcom Chart - $1 box

Not long ago, I was actually looking for a short-term bounce in QCOM and had identified an "inside day" to potentially trade to the upside. Fortunately, the stock broke to the DOWNSIDE of the inside day at $43.40 so the bullish trade was never initiated. We then turned more bearish on the stock and felt appropriate for traders to play the downside. As we review the point/figure chart, the original bearish vertical count has been achieved at $37, so I'd move stops to that level. We will also note the triple-bottom sell at $49, and address Professor Davis' study of probabilities that a bearish trade fro the $49 level is profitable 93.5% of the time, for an average gain of 23% in 3.4 months on average. By my calculations, 23% of $49 is $37.73 and that's pretty close to the bearish vertical count of $37. By simply lower stops to $37, a bearish trader still leaves some room for further downside, but helps protect against a rally.

On the diverging side of things, shares of HMO stock PacifiCare Health Systems (NASDAQ:PHSY) opened fractionally lower this morning at $21, then shot higher to the upper end of our retracement at $23.18 this morning, which was a near-term bullish target. In the market monitor on OptionInvestor.com we thought traders should lock in some gains, despite earnings still to be reported next Thursday. With the stock seeing selling back at retracement of $20.76, a trader that sold some strength this morning can come back into the stock at current levels.

PacifiCare Health Systems Chart - Daily Interval

Shares of PacifiCare (PHSY) have jumped sharply in the past two sessions and it sure looks like those short the stock chased things today to cover some positions. According to recent short interest reported on January 8th, roughly 49.8% of the float is/was short with a short ratio of 14.34 (days to cover based on average daily volume). My thinking at current levels of $21.27 is "if shorts were willing to cover from $20.76 to $23, then support should be firming near-term at $20.77 and shorts sit the bid and "hope" for selling. MACD still has some upward momentum and not yet as extended as that found in November's run, so still bullish here, but willing to sell strength at $23.

The HMO Index (HMO.X) is currently trading down fractionally after it too reached the upper end of retracement at $502.70. A trader that sold 1/2 or entire position near $23 can either continue to trade PHSY, or simply wait until the weekend passes with some cash in their account and look at things next week. Should we get a pullback in the HMO.X to retracement at $477, a trader may get another good stock/sector trade setup from which to trade.

Broader markets

The broader market averages are holding onto fractional gains with the Biotech Index (BTK.X) the sector standout with a 3.3% gain and Airlines (XAL.X) in the number two slot with a 2% gain. Treasuries are seeing buyers today with bond commentary mostly that traders didn't want to go home this weekend with short positions in that market. Sector weakness light, with the Disk Drive Index (DDX.X) down 1.3% at $94.78.

Qualcom (QCOM) carries a heavy weight in the NASDAQ-100 Trust (QQQ) and that trust is trading fractionally lower at $35.15 (-0.02%).

Jeff Bailey
Senior Market Technician
Option Investor

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