"Trifecta" is a term that comes to mind as we see Dow components IBM (NYSE:IBM) $83.88 -5.76%, AT&T (NYSE:T) $13.43 -6.86% and SBC Communications (NYSE:SBC) $33.88 -4.93% help erase all of yesterday's bullish gains in the Dow Industrials.
One could say "trifecta" as all three stocks share commonality in that three letters make up their company's names. There's also commonality between AT&T and SBC Communications as they are both telecom stocks and that group continues to exhibit weakness.
While the selling seems to be near-term overdone, subscribers that played a bearish trade I profiled a last week in Verizon (NYSE:VZ) $41.87 -4.62% have started locking in gains on their puts from levels just below $46 and perhaps looking for more bear food in the telecom sector.
This morning in the 09:00 Update I referred subscribers to perhaps review an older article I had written on retracement and how a trader can use that tool to help identify levels of support and resistance. Then this morning we also discussed how retracement along with trend can be used to assess risk and perhaps identify what type of reasonable time period (based on trend) to be looking to buy.
Let's try and practice what we preach and set up a bearish trade in shares of SBC Communications (SBC) using the techniques discussed.
SBC Communications Chart - Daily Interval
While SBC is listed on the NYSE and not as subject to manipulation from market makers like NASDAQ stocks are, the stock has traded rather nicely with "fitted" retracement as outlined above. Bears are looking to play the downward trend, which I've extended to the right of the chart and ends right on July option expiration near $33.
Telecom stocks are very weak and lack sponsorship from the bulls. This has a bear licking his/her chops and ready to dine. But a bear also has to assess risk to resistance levels and trend. As you can see, SBC is rather "far" from trend as the stock has dropped rather precipitously in the past four sessions. It becomes obvious that the best place to have recently shorted would have been at/near the $39.39 level.
In earlier commentary today, we talked about the North American Telecom Index and just how vulnerable that index looked to the $517 level and perhaps even as low as $435 at its lower retracement.
Those technicals also show up in SBC communications when one begins tying in some correlation between SBC and the XTC.X. While SBC has moved quite a bit lower in recent session, a bearish trader can still establish 1/2 position in the SBC July $35 puts (SBCSG) as profiled in the market monitor. As discussed, the 1/2 position gives the bear exposure to the trade just in case the stock get "crushed" to the $30.50 level of retracement as the telecom sector seems to be void of buyers.
The retracement bracket above might actually have a bull that is thinking of buying SBC believing the stock might actually get "cheaper" in the coming weeks and therefore have the bull pulling his/her buy order and waiting things out. Many bulls have learned in recent months that catching falling knives has created some rather deep wounds that may take months or years to heal.
In trading, that type of scenario is call "bear food."
By taking just 1/2 position at current levels, this allow a bear to still control his/her risk in the trade should a short-term rally take hold. Then should a rally take place back near the $36.94 level and downward trend, a bear could reassess things, but still have the July timetable and trend working in his/her favor. Then if 50% retracement and downward trend look to be holding and the stock were to roll over from there, the bear could then round out to a half position and once again target the $30.50-$27 level as a target.
We will note the point and figure chart's bearish vertical count is currently to $26. This ties in pretty close with the resulting 100% retracement level from "fitted retracement."