Option Investor
Market Updates

Major indexes back in the green

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Weaker than forecasted weekly jobless data and a weaker than forecasted April factory orders report which showed orders falling 2.9% compared to economist's forecast for a 1.8% decline and a March rise of 2.2% hasn't been enough to keep the major indexes in the red.

Bolstered by improving internals on the advance/decline line, the very broad NYSE Composite (NYA.X) 5,579 +0.37% has edged above yesterday's highs with advancers now outnumbering decliners by an 18 to 13 margin. At the 11:00 AM EST mark, decliners outnumber advancer at 15:14. Leadership at the "head" is found with 383 stocks trading new 52-week highs compared to 0 stocks trading new low.

The also very broad NASDAQ Composite (COMPX) 1,636.06 +0.08% has managed to eek out a 1-point gain with just over 1.3 billion shares trading hands. Here too, breadth was even at 13:13 at the 11:00 mark, but has been building bullish with advancers now outnumbering decliners at 17:13. 224 stocks have mustered a new 52-week high compared to 4 stocks hitting new lows.

Sector action has the Biotechnology Index (BTK.X) 480.44 +3.5% leading the sector winner's list at this hour, with component Protein Design Labs (NASDAQ:PDLI) $17.16 +9.16% jumping on what looks to be pure momentum as I can't find any news to explain today's trade in the stock. As noted in prior comments, PDLI is set to receive a 3.5% royalty for it partner drug Avastin, which has been the recent catalyst drug for Genentech's (NYSE:DNA) $72.75 +3.2% rise from the $40.00 level.

I've started looking through the list of the Biotechnology Index (BTK.X) components and found what looks to be a favorable risk/reward trade setup for momentum bulls looking for some biotechnology exposure in shares of Human Genome Sciences (NASDAQ:HGSI) $16.01 +5.88%, which I profiled in this morning's market monitor on a trade at $16.00.

Human Genome Sciences (HGSI) - $0.50 box

One thing I think every bull needs to be cognizant of in new bullish trades is the assessment of risk/reward on a longer-term basis. If a stock doesn't have a lot of room to a bullish vertical count target, then it could be that it just isn't going to attract a lot of new bullish capital, and may also have the stock fully short covered. With the bullish % at higher levels, we KNOW that market risk is high. Still... bulls can look to play the MOMENTUM while it lasts, but risk/reward better at least present itself as being favorable for to better improve the odds that market participants will be attracted to the stock you're trading.

Options trader have the "advantage" over stock traders when it comes to mitigating risk in a bullish trade, as long as the options trader does NOT over leverage the trade. How many underlying shares of HGSI might YOU be interested in if you were to risk $1.50 to a stop at $14.00? If you're willing to risk $300.00, then by golly just buy 2 options contract with that $300.00 and a couple of months time and let the trade unfold as it may. Take care of the risk FIRST, then look for the rewards later as your trade scenario unfolds.

Jeff Bailey

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