A day late but here at last.
The profit taking I expected on Wednesday finally appeared in earnest today. Wednesday was a non-day as far as trading went. The markets failed to fall but also failed to sustain any rally attempts. Today looked more like a profit day. After dropping -90 shortly after the open it looked like we had an instant reversal but after trying to hit +25 in two separate attempts the Dow finally gave in to the slow bleed as sellers outnumbered buyers. The good news in my mind is the repeated bounce off 11,100. Look at this chart. After passing 11,100 Friday morning the threshold became surprising support. We tested it Friday at the close, Tuesday morning, three times Wednesday and again this morning. I was very glad to see us hold slightly above it at the close today.
We are in breakout mode on the Dow and I think we have a good chance of holding 11,100 and worst case 11,000. The decliners only narrowly edged the advancers by 250 on the combined exchanges. Yes, there were sellers but there were also buyers on any dip.
The Nasdaq is setting up for a continued breakout on the back of the Yahoo earnings. Even though Yahoo went down, (more later), the Internet sector was positive. After setting a new high on Tuesday the Nasdaq only took one day off to rest and moved up again today in spite of the Dow problems. The Nasdaq finished only four points off it's high for the day and had positive momentum at the close. We did not match Tuesday's intraday high but did set a new record close.
I was watching the very short term gainers on my live quote program at the close. It provides a list of the top 100 gainers for the last five minutes every 30 seconds. It is constantly updating as new stocks appear and old ones drop off. At the close almost all the major Internet stocks appeared as buyers jumped onboard. I think this is a good omen for Friday. The Dow and NYSE ticks both went positive at the close as well.
There were many upgrades today, positive earnings surprises and minor gains in the bond market. Sounds like a recipe for success but we had to pay the profit piper. We will not know if the toll paid today is enough until the close tomorrow but I am betting on it. I bought the close today.
Big winners included Hewlett-Packard, (HWP), who received an upgrade and a new price target of $125, gained +6.50. Apple Computer (AAPL) gained +4.13 after Robertson Stephens made bullish comments and raised it's price target to $75. General Electric, who manages earnings with the best of companies, announced earnings that BEAT the street by $.01. This is no minor feat when you consider they have over 3 bln shares outstanding. GE dropped -.94 after announcing the record earnings. Biogen announced earnings after the close that beat street estimates by +$.02 and should impact the sagging drug sector tomorrow.
The big winner (loser) today was of course Yahoo. Yahoo beat the street's estimates of $.08 last night with $.11 and hit the official whisper number. OOPS! By hitting the whisper number and having a very positive conference call it avoided the big sell off syndrome of late AND injected a hope vaccine into the entire Internet sector. HOWEVER, by only hitting the whisper number and failing to blow away estimates it suffered investor flight. The amateurs bought into the news at the open and ran the stock up to almost $175, a +7 gain from yesterdays close but the euphoria was short lived. After dropping back to $168 within minutes there was a midday rally prompted by the Nasdaq strength but the sellers finally took control and YHOO hit a low of $162 before the close. If you follow my plays and my recent commentary on Yahoo you know this was a picture perfect execution of the plan. I wrote calls at the high of the day and shorted YHOO at $172 after it rolled over. Don't get me wrong. I am not negative on Yahoo. I am just playing the trend it has established the last two earnings cycles. We got lots of hate mail when we switched from call recommendations to puts in the Tuesday newsletter but for the life of me I can't imagine why. We always recommend getting out of calls before the earnings on any stock. We have been warning of the expected drop in YHOO for at least a week. I strongly urge some readers to actually read the play descriptions and not just the options listed. This play was as good as it gets. We recommended it at $135, got an entry point on profit taking at $120 and it went to $189. It has already dropped over $10 since we changed to puts. If you did not make money on this play you need to re-evaluate your trading profile or be in mutual funds.
I met with a good friend today that just started trading options recently. He has made all the rookie mistakes AND admitted it. I think he is finally ready to start trading profitably. Down several thousand dollars of hard earned money, he finally stopped and faced the facts. I wish I could impart the facts to every new reader we get BEFORE they spend thousands of dollars getting educated. Ignorance, stupidity and impatience are very costly. Once you recognize the facts of life you can be a good trader. Some facts never change. The law of gravity for instance. You can refuse to accept it but it still exists. You can have twenty people tell you that buying July options $20 out of the money with a week to go is stupid but may disagree until you have a bunch expire worthless on you. Suddenly the light bulb goes on and you realize those $.50 options are cheap for a reason. We are here to try and educate new readers as painlessly as possible. Please reread the Top Ten Rules for Option Trading and try not to break more than two a day. All experienced traders will break them routinely. It is like driving 65 in a 55. We know the risk and are willing to take the responsibility for the eventual ticket but we push the envelope. We are still humbled routinely by bad decisions but we place the blame squarely on ourselves. Knowingly breaking the rules is one thing, ignoring the rules is another.
Summer Fridays are notorious for low volume and yawner afternoons but if 11,100 was really the bottom today we could see a good bounce as traders take positions in front of the next round of earnings next week. I can't of course guarantee the market will move up but I do not see a very big risk of it moving down tomorrow. Pick your plays carefully and sell too soon.
Have a great weekend!