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Stocks surged on Wednesday with the Dow Industrials (INDU) 10,384.64 +1.29% jumping triple-digits after billionaire Kirk Kerkorian wanted to "substantially" add to his General Motors (NYSE:GM) stake. Shares of General Motors (GM), which have fallen more than 30% the past year, surged $5.03 per share to close the regular session at $32.80. A spectacular 18% gain.
Reynolds American - RAI - cls: 80.24 chg: +0.66 stop: 77.95
Why We Like It:
BUY CALL JUN 80.00 RAI-FP OI=2947 current ask $2.60
Picked on May xx at $ xx.xx <-- see TRIGGER
Avalonbay - AVB - close: 72.35 change: +0.53 stop: 68.49 *new*
A big bounce in the Dow helped boost shares of AVB above the $72.00 level. AVB continues to show strength with a slow and steady climb higher. We see no changes in our strategy although we are raising the stop loss from 67.49 to 68.49.
Picked on April 24 at $ 70.05
Chubb Corp - CB - close: 84.80 chg: +2.23 stop: 79.49 *new*
Wow! CB soared to a 2.7 percent gain on strong volume today. A big day for the Dow and strong earnings news from insurer Cigna (CI) attributed to the positive session. We are raising the stop loss to $79.49. Short-term or conservative players might want to consider taking a little money off the table here. CB is a little overbought and we should expect a dip toward the $83 region before further gains. Then again CB closed near its highs for the day which is normally a bullish sign for tomorrow. Our target remains the $88-90 range.
Picked on May 01 at $ 81.78
Golden West Fincl - GDW - close: 64.46 chg: +0.61 stop: 59.95
The four-day winning streak for the Dow Industrials has been very beneficial for the banking stocks. Today's session could be very important as well. Both the BIX and BKX bank indices broke through technical resistance at their 200-dma's. Both also appear to be on the verge of breaking through the tops of their descending channels. This all bodes well for GDW, which closed at a new relative high. Our target remains at the $66.50 level.
Picked on April 26 at $ 62.55
Invitrogen - IVGN - close: 75.74 change: +0.54 stop: 71.49
IVGN continues to look positive and closed above round-number, psychological resistance at the $75.00 level for the second day in a row. We see no change from our previous update on 05/03/05.
Picked on May 03 at $ 75.51
Eli Lilly - LLY - close: 60.26 change: +0.51 stop: 57.49
LLY's gain today has triggered the play. Our entry point to buy calls was at $60.15. This is a new six-month high for LLY as it breaks out over resistance at the $60.00 mark. There are no changes in strategy from our previous update on 05/03/05.
Picked on May 04 at $ 60.15
Nucor - NUE - close: 52.70 chg: +1.55 stop: 49.95
We are rally tempted to go long here. NUE's three-percent rally pushed the stock above its 10-dma and above its six-week trendline of resistance. Yet in spite of the bounce we're going to sit on the sidelines and wait for the breakout over stronger resistance at the $55.00 level. Our entry point is $55.05. More aggressive players might want to consider bullish positions now after today's move and its new MACD buy signal.
Picked on April xx at $ xx.xx <-- see TRIGGER
Adobe Systems - ADBE - close: 57.55 chg: +0.26 stop: 60.01 *new*
The good news here is that for the most part ADBE did not participate in today's market rally. Instead we can see a small double-top if we look at the intraday chart. ADBE failed to breakout over the $58.20 level twice during Wednesday's session. Of course this only matters for very short-term intraday traders but it's still a bearish signal for the rest of us. We are lowering the stop loss to $60.01.
Picked on April 26 at $ 59.12
CDW Corp - CDWC - close: 55.50 chg: +0.71 stop: 58.01
CDWC did manage to bounce with today's market rally but we see no change in strategy or from our previous update on 05/01/05.
Picked on April 24 at $ 55.68
Infosys Tech. - INFY - close: 59.55 chg: +1.54 stop: 60.26*new*
Buckle your seat belt and double-check your stop loss. Yesterday we said today was an important session because both the NASDAQ and the GSO software index were testing short-term resistance levels. The bounce in the software index wasn't that impressive but the NASDAQ rallied right to its resistance level and looks poised to breakout. Likewise shares of INFY rallied right to resistance near the $60.00 mark and also looks poised to breakout. The new buy signal in INFY's MACD indicator doesn't help matters if you're bearish. More conservative traders may want to exit early to avoid further losses. We're going to adjust our stop loss to $60.26. If INFY continues to rally we want to be taken out quickly. Traders can always reconsider new plays if the stock reverses at its 200-dma.
Picked on April 26 at $ 58.24
Lehman Brothers - LEH - close: 90.50 chg: +2.60 stop: 94.05
No surprises here. A big day for the Dow and the banking stocks helped push the XBD broker-dealer index to an even bigger bounce of +3.6 percent. LEH added almost three percent but failed to close above its 100-dma. Shares remain in its new three-week down trend and we're not going to worry until LEH trades above the $92 level.
Picked on April 29 at $ 89.45
Marriot - MAR - close: 62.10 chg: +1.23 stop: 65.01
We warned readers yesterday that MAR was oversold and due for a bounce. With the major averages strongly in the green MAR was still slow to follow and didn't really rally until the late afternoon. We expect the $63.00 region to act as short-term resistance.
Picked on April 28 at $ 63.37
PACCAR Inc - PCAR - close: 67.12 change: +1.39 stop: 70.01
No change from our previous update on 05/03/05. However, if PCAR trades above the $68.00 level we might consider exiting early.
Picked on April 27 at $ 66.45
Parker Hannifin - PH - close: 61.61 change: +1.52 stop: 62.01
PH outpaced the market bounce today with a 2.5 percent bounce of its own. Yet the stock remains under strong resistance at the $62.00 level. This is another important test of this six-week old resistance level. We would expect that if the major averages produce any kind of follow through on today's rally that PH will be able to breakout and thus we'll be stopped out. If you squint your eyes a bit when you look at the chart is almost looks like an inverse or bullish head-and-shoulders pattern. A breakout over $62 would be the neckline and thus project a $65-66 price target. We're not suggesting new bearish plays at this time.
Picked on April 28 at $ 59.08
Websense - WBSN - close: 52.64 chg: +0.53 stop: 49.49
WBSN's lack of participation in today's very broad market rally has our spider-sense tingling. We're going to exit early since there are other stocks that are on the move we could play.
Picked on April 27 at $ 52.85
Strayer Education - STRA - cls: 84.61 chg: -18.80 stop: 107.25
Wow! When we labeled this play as "exciting" last night we didn't know how exciting. Unfortunately, we never got to open any positions. We suspected there was some concern over STRA's earnings report but we certainly didn't expect an 18 percent drop! The company reported earnings this morning before the bell and beat estimates by a penny. Yet management issued an earnings warning for the second quarter. STRA gapped down to open at $85.50 and then sold off to hit $77.24 before bouncing back in the afternoon. Our strategy was to buy puts if STRA traded below $101.95 but to not open positions if STRA gapped open below the $100 level. Now just imagine if you had been holding a bullish position over STRA's earnings. This is a great example of why we do not hold over an earnings report. We are closing this play unopened.
Picked on May xx at $ xx.xx <-- see TRIGGER
OIN SUBSCRIBER QUESTION:
The recent market low was characterized by these technical considerations:
1. A key retracement of a prior move, up or down.
2. High bearish sentiment suggests a bottom, high bullish sentiment, a top. I look for at least ONE day where my call to put indicator is at an extreme; this is a "leading" indicator and such extremes most often occur 1-5 days before a bottom or top. The S&P low to date (for the current move) occurred on the 3rd trading day after heavy equities put volume, relative to calls, giving a contrary suggestion that a bottom was close at had.
3. Look for an oversold or overbought extreme to also suggest that the trend could reverse.
4. A low or high touches an extreme suggested by a 21-day moving average envelope line. One set at a percentage (e.g., 3%) that tends to "contain" most trading in the indexes.
5. If average (10-day) volume is rising, while prices are bottoming or going sideways for a time, this is a plus, showing accumulation of stock.
A sixth factor so to speak is a CONVERGENCE of patterns or indicators. Having made a key retracement by itself is not usually enough to suggest the market is set to reverse. Traders showing a very bearish outlook on some particular day is not enough in isolation. However, these elements coupled with an oversold reading in an indicator like the RSI or Stochastics and coupled with a retreat to my lower envelope line can be quite significant.
In the S&P 100 (OEX) chart below, the most recent up trend is measured from a beginning at the blue up arrow and ends at the blue down arrow. Here, only the "maximum" (for an uptrend) 62 and 66% retracements are seen at the blue dashed level lines.
The last low has a yellow circle and is where both the 2/3rds retracement is completed, but also where my lower envelope line is touched. What determined that this lower line was 2.5% under the 21-day moving average. The envelope lines that contain most of the trading in the S&P indexes ranges from 2.5 to 3% usually. The low prior to the most recent bottom was 2.5% and I assumed that the next low would be the same and it was. Simple in this case.
The second indicator, shown above, that of the 13 (a Fibonacci number as will be discussed below) day RSI or Relative Strength Index, shows that an oversold extreme here occurred in the same time frame as OEX reaching its 66% retracement; AND, just after the bearish "sentiment" extreme seen at the bottom of the chart above.
If you had trusted (not always to do!) these confluences of technical aspects pointing to a possible bottom, buying calls at the 66% retracement has turned out to be a quite profitable trade.
The origins of a useful "retracement" theory came from someone who lived in the middle ages and was studying the population growth of rabbits. Yep, rabbits! Leonardo Fibonacci was an Italian mathematician who was doing such work in the early 1200s.
The number sequence that is named after Fibonacci is where each successive number is the sum of the two previous numbers; i.e., 1, 2, 3, 5, 8, 13, 21, 34, 55, 144, etc. Any given number is 1.618 times the preceding number (approximately) and .618 times
A principle use that "fibonacci retracements" are put to is to measure countertrend retracements of prior price swings; of .382 or 38% (sometimes also 33%), .50 or 50%, and .618 or 62% (sometimes also 66%). The number 5 is in the Fibonacci sequence, and the others are ratios; .618 comes from the percent that each number is of the next higher number and .382 is the inverse of .618 (100 61.8 = 38.2). Well stick to the shorthand and round off to 38 and 62% as the important Fibonacci retracements, beside 50%. Use of these retracements is a very common practice and a popular point of reference among traders.
There is a simple pragmatic reason for this popularity and that is that buying or selling in these retracement areas often results in coming close to buying at the low and selling at the top. "Buy low, sell high" may owe something to the common retracements where "low" refers to buying after a retracement of a third to half of a prior move.
The most recent low in the S&P 500 (SPX) was an exact 66%,
The added indicator for SPX in this next chart and briefly described above, is the 10-day moving average of NYSE advancing volume. When it's rising, stock in general tends to be under accumulation and there is buying going on even on upticks which is what advancing volume represents; stock bought on a price tick higher than the preceding trade.
If the correction of an uptrend falls below a 66% retracement, I start to assume that the correction will be 100% or a "round trip" back to the origin or starting point for the rally. It also can be useful to also look at a close-only line chart as well as a bar or candlestick chart.
Such a deep retracement would be more commonly seen in a high beta or more volatile stock than would be seen in an index typically, at least on a daily chart. Retracements of this much are more common in the indices on hourly or other intraday
Just so you know that I am not just talking about downside retracements only, in a countertrend rally within a dominant downtrend (once a minor downside correction begins) look to see if a recent high represents or is CLOSE to a 38, 50, or 62% retracement as shown in the past chart of the Semiconductor Index (SOC) below.
If the (up) swing high also failed at or under a key down trendline or was a double top, etc. and was accompanied by an overbought condition, its a sure tip off to short the stock or play puts in the case of the indices.
To use retracements - what you need is some evidence that a price swing has run its course and that a counter-trend or move in the opposite is developing.
In a downtrend, the 38, 50 and 62 percentage figures are added to the most recent low, when it becomes likely or your hunch is that a minor counter-trend rally is underway; e.g., prices and volume surge. The expectation is that in a normal or typical market, prices will rebound an amount that is equal to about half of the last decline or, a little bit more, which would be 62% or a bit less than 50%; i.e., 38%.
SOME RULES OF THUMB ON RETRACEMENTS -
These guidelines mostly are related to the most common retracements, that of the fibonacci 38, 50 and 62% retracements. 1.) A strong trend will usually see only a "minimum" price retracement -- around 1/3 to 38% (sometimes only 25%). If prices start to hold around this minimal retracement area, this action may be suggesting trade entry as there may NOT be a deeper correction.
2.) A "normal" trend in stocks, indices, commodities, currencies or bonds that is one not powered by something way out of the ordinary (e.g., terrorism), will often see a retracement develop of about half or 50% of the prior move. The most common level to buy or sell is this retracement amount, with an exit if it continues on much beyond 50%; e.g., 5% more.
3.) Within the range of normal trend, there is SOMETIMES a retracement of 62% or even 2/3rds (66%). If prices hold this area, its also a good target for initiating positions in calls or puts with an exit if the retracement exceeds 66% -
4.) If a retracement exceeds one level, look for it to go to the next; e.g., if a retracement goes beyond 38%, look for it to go on and approach 50%. If it exceeds 50%, look for 62%. If a retracement exceeds 62%, or a maximum of 66%, then I begin to look for a "round trip" or a return all the way back to the prior low or high this type action suggests a retest of the low or high and is the "ultimate" retracement so to speak, of 100%.
5.) Retracements are most commonly done from the low to high, high to low and not based on the highest close to the lowest close, etc. However you can also experiment with retracements based on closing levels as they also are worth exploring as already noted above.
6.) The common retracement levels work on all time frames or chart types; e.g., hourly (or less), daily, weekly and monthly charts.
LAST BUT NOT LEAST -
In the retracement chart above, once the double bottom low was made in April-May, I went back to the original high to use in measuring retracement levels.
HOW TO APPLY RETRACEMENTS WITH A CHARTING APPLICATION
I used to chart by hand and then use my calculator, adding or subtracting the 3-5 percentage figures, once it appeared that a high and a low was in place for the trend in question. Ah, the good old days NOT!
Good Trading Success!
Today's Newsletter Notes: Market Wrap by Jeff Bailey, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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