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Adjusting retracement on Merrill Lynch

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In today's market monitor at 10:32:21 and then again in the 11:00 EST Update, I profiled a bearish trade in Merrill Lynch (NYSE:MER) $33.15 -7.32%. With the stock breaking to a new 52- week low, traders may want to use the technique of "rolling down" their retracement brackets and beginning to identify some "key levels" that the MARKET is trading. We find some interesting correlation in the Merrill bar chart when anchoring the base of our retracement at the point and figure chart's bearish vertical count of $23.00.

Merrill Lynch Chart - Daily Interval

From the above chart, we see how MER seemingly found support at the $44.89 level back in February at 38.2% retracement. However, since the stock closed below that level back on April 24th, each level of retracement broken to the downside "magically" became a level of resistance. As each level of retracement support has been broken, the next level lower has been what looks to be a near-term level of support. As such, shorter-term traders initiating a short/put today are most likely targeting the $29.80 level near-term, with a stop just above the trending lower 50-day MA of $39.68 or 50% retracement of $40.72. A more cautious bear could have their stop just above 61.8% retracement of $36.55 or yesterday's high of $37.20 (chose one based on your tolerance for risk).

It may be interesting to note, that according to Dorsey/Wright and Associates, Merrill Lynch (MER) is classified as "Wall Street" for their sector bullish percent. In January, this group achieved the 72% level of bullish % and was "overbought" then reversed to "bear alert" status soon after at 66%. After a reversal back to "bull confirmed" status at 64% in late March, the sector turned back to "bull correction" status at 58% in early April, just about the time MER made a failed rally attempt at $56 on the above chart. Then in early June, the "Wall Street" group turned "bear confirmed" at 42% and remains "bear confirmed" currently at 12%. As such, bearish traders understand they're looking at a "Wall Street" stock where the group is more "oversold" but the bearish count of $23 still hints of some downside potential.

Just as it now appears "smart bears" were shorting the stock in the $58-$51 range and doing so since, I would expect those very bears to do some covering should the stock drop precipitously into the $23-$30 area.

Bad tick, or buy program?

Earlier today, a subscriber was evidently closely monitoring shares of Johnson & Johnson (NYSE:JNJ) $44.31 +4.16% and noticed the stock had apparently given a "bad tick" at $45.39. But then the trader noticed continued bullishness building in the stock minutes later.

I can't remember the exact date, but it was less than a month ago I noted some suspicious action in the NASDAQ-100 Trust (AMEX:QQQ) and "bad ticks" that seemingly foretold of for future price targets (up and down) that were "dictated" by the "bad ticks." This is something that can happen when a "buy/sell program" is keyed in on a stock and this may have been what took place in JNJ today.

While overlooked, and with good reason, by longer-term traders, these "bad ticks" can be the alert for a shorter-term day trader to begin setting up some trading scenarios in their efforts to scalp short-term moves.

Here's a look at the 1-minute interval chart of JNJ that I capture at around 01:37:00 PM EST. A trader that noted the "bad tick" at $45.39, when the stock was trading $44.45 might have been on the alert for a bullish move to the "bad tick" level at $45.39, which may have been some type of "buy program" being set up in the stock.

Johnson & Johnson Chart - 1-minute intervals

Intra-day trading in JNJ looks "suspicious" as it relates to the subscriber's earlier observation from 11:26:00 when the "bad tick" was generated to $45.39 (see dashed green line). I've "dashed" the bad tick (shows up as yellow on q-charts) so you can see it better. Note how the $44.60 level sure looks to have been a level of resistance on the 1-minute interval, and when broken to the upside, the stock really started to move, despite very low volume. Not a bad little $0.79/share move some 15-minute later when the stock did get above the $45.39 level only to give it all back right to the rising 200-pd MA.

I've said before that most traders use the 200-pd and 50-pd MA's on their bar charts for daily, hourly, 30-minute, etc. time intervals and prefer to try and "eliminate" the clutter of 10-pd, 20-pd and 25-pd MA's from their charts. Looks like the 200-pd may have been a closely watched level by very short-term traders today and some decent trading if a "buy program" was indeed in place.

If you're monitoring some stocks rather closely and see similar types of "suspicious" ticks, be on the alert for a short-term trade!

Jeff Bailey
Senior Market Technician
Option Investor

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