A Revolting Development for Buyers
closed the week with a bad taste in their mouth after starting out the
week with a very nice bounce. It brings to mind the phrase from the old 1950s
"Life of Riley" TV show. What a revolting development this has turned out to be.
So much promise of a Q2 earnings bounce and so little follow through. While the
bulls were hoping for a rebound to take us back to the mid-May highs that hope
was dashed when that rebound failed at 10400 and what we got was a retest of the
instead. This left little to cheer about into the long holiday weekend.
Fortune Brands - FO - close: 90.51 chg: +1.71 stop: 86.95
We Like It:
CALL AUG 85.00 FO-HQ OI= 0 current ask $6.60
Picked on July 03 at $ 90.51
Noble Energy - NBL - close: 77.62 chg: +1.97 stop: 73.99
Why We Like It:
BUY CALL AUG 75.00 NBL-HO OI= 468 current ask $4.60
Picked on July xx at $ xx.xx <-- see TRIGGER
Sunoco Inc - SUN - close: 117.87 chg: +4.19 stop: 112.45
Why We Like It:
BUY CALL AUG 115.00 SUN-HC OI=414 current ask $7.10
Picked on July 03 at $117.87
Chubb Corp - CB - close: 85.44 change: -0.17 stop: 82.99 *new*
Insurance stock CB continues to slowly churn sideways within its slow six-week drift higher. For the most part CB continues to look bullish. The challenge is the prolonged loss of momentum, which is throwing off the oscillators. Option players have a right to be concerned because this slow crawl higher will eat up any time premium. Due to CB's lack of upward mobility we are not suggesting new bullish plays at this time. We are also going to raise our stop loss to $82.99, keeping it under the simple 50-dma. The Point & Figure chart is still bullish and points to a $109 target. We are targeting a move into the $89.50-90.00 range but at the current rate of ascension CB will not get there before its July 26th earnings report. We will plan to exit ahead of the report.
Picked on June 10 at $ 85.05
Rockwell Collins - COL - close: 47.24 chg: -0.44 stop: 46.49
Our strategy with COL has been a simple one. Investors have consistently bought the dips to its rising 100-dma. We waited for COL to pull back to its 100-dma and bought the dip. We did see an immediate rebound but now we're growing a little concerned that the rebound has not seen any follow through. Traders holding positions can double-check their stops to make sure they're comfortable with them. Our stop is relatively tight at $46.49. We would not suggest new bullish positions at this time. Wait for COL to breakout above its short-term trend of lower highs, which would probably be in the $48.25 region.
Picked on June 27 at $ 46.75
Cummins Inc - CMI - close: 74.76 change: +0.15 stop: 70.95
We remain bullish on CMI. The stock's breakout past the $72-73 region in addition to its simple 200-dma also coincided with a breakout through resistance on its Point & Figure chart. Speaking of the P&F chart CMI's points to a $101.00 target. Traders looking for a new play might want to consider a bounce from the $74 level but we would confirm market direction in the major indices first (a.k.a. if the DJIA and SPX are sinking, don't open new bullish plays here). We would definitely look for a bounce here first because the technical oscillators are looking a bit tired. Our target is the $77.50-80.00 range. We plan to exit ahead of CMI's July 21st (unconfirmed) earnings report.
BUY CALL AUG 70.00 CMI-HN OI= 0 current ask $6.30
Picked on June 19 at $ 74.03
Coventry Hlth Care - CVH - cls: 70.60 chg: -0.15 stop: 68.49
The health insurance stocks have been pillars of strength in this market for a while now. We've had our eye on a possible bullish play in CVH for weeks as it consolidates sideways after an impressive October '04 through April '05 run. Currently shares of CVH are testing resistance in the $72.00-72.50 region and we are suggesting that readers use a trigger to catch the next breakout and probably the next leg higher. Our suggested entry point is $72.75. We're targeting a move into the $77.50-80.00 range but we plan to exit ahead of CVH's early August (unconfirmed) earnings report. In the news on Friday CVH reaffirmed its positive Q2 outlook.
BUY CALL AUG 65.00 CVH-HM OI= 91 current ask $6.80
Picked on June xx at $ xx.xx <-- see TRIGGER
Fording Candn Coal - FDG - cls: 93.60 chg: +1.40 stop: 88.49
So far so good. Shares of coal producer FDG have broken through several layers of resistance in the past couple of weeks. Traders were there to buy the dip back toward the $90.00 level and its simple 100-dma. We see the bounce as another entry point for bullish plays. Currently the P&F chart points to a $118.00 target. We are targeting a move into the $97.00-100.00 range.
BUY CALL AUG 90.00 FDG-HR OI= 43 current ask $7.65
Picked on June 19 at $ 90.30
Rio Tinto - RTP - close: 122.98 chg: +1.06 stop: 119.99
We remain bullish on RTP. The stock's pull back toward the $122 level can be used as a new bullish entry point. This happens to coincide with technical support (broken resistance) at the 40 and 50-dma's. There is additional support below with the 200-dma near the $120.00 level. Plus, the P&F chart is bullish and points to a $154 target. Our target is the $129.50-130.00 range since the $130 level is the next level of major resistance. We plan to exit ahead of RTP's early August earnings report.
BUY CALL AUG 120.00 RTP-HD OI= 0 current ask $6.70
Picked on June 27 at $123.33
SLM Corp - SLM - close: 50.25 change: -0.55 stop: 48.95
We initially added SLM on its bullish technical breakout over round-number resistance at the $50.00 level. The stock had been consolidating under the $49.50-50.00 region for weeks and had broken its trend of lower highs as well. We certainly didn't expect to see SLM struggle this much with the $51-52 region following the breakout but then again the broader market hasn't been very cooperative either. We remain bullish on the stock and would still consider new positions with SLM above the $50.00 mark. However, at this time we would probably watch for a dip to and a bounce from the $50 level before initiating new plays. The P&F chart is bullish and points to an $89 target but we are only targeting a move $54.50-55.00 range. The company just confirmed that it will report earnings on July 21st and we will plan to exit ahead of the report.
BUY CALL AUG 45.00 SLM-HI OI=325 current ask $5.80
Picked on June 20 at $ 50.92
Molson Coors - TAP - close: 61.59 chg: -0.41 stop: 59.49
So far so good. TAP appears to have built a new bottom or base pattern over the last several weeks and the recent breakout over the $61.00 level looked like a bullish entry point for short-term longs. We suggested that readers buy calls and target a move to the $64.00-65.00 range but to also be aware that the 50-dma would probably act as short-term resistance. Thus far TAP is following the script. The rally stalled at the 50-dma but Friday's pull back or profit taking was pretty mild. Traders bought the dip at the $61.00 level and shares were bouncing higher into the weekend. Readers can choose to go long at current levels of hope for a possible dip back toward the $60.00-60.50 region and buy a bounce from there instead. We plan to exit ahead of TAP's late July earnings report.
BUY CALL AUG 60.00 TAP-HL OI= 83 current ask $3.30
Picked on June 29 at $ 61.38
Wellpoint Inc - WLP - close: 69.82 chg: +0.18 stop: 65.90
WLP is another health insurance stock that is trading at or near its all-time high. To be completely honest we've been disappointed with WLP's performance over the last few weeks. The breakout over resistance in the 68.00-68.30 region has been following with a slow, rocky, churning consolidation higher. This has made the technical oscillators useless. The P&F chart, which cuts out a lot of this noise, remains bullish and points to an $87 target. We're going to keep the play active but we do plan on exiting ahead of WLP's late July earnings report. Our target is the $74.00-75.00 range.
BUY CALL AUG 65.00 WLP-HM OI= 13 current ask $6.20
Picked on June 05 at $ 68.40
Ambac Fincl. - ABK - close: 70.26 chg: +0.50 stop: 71.51
Hmm... ABK is struggling to let go of support near the $70.00 level. On Thursday the decline looked like a new bearish entry point but we would not open new plays with ABK above the $70 mark. Instead look for a new decline under $69.65. The P&F chart continues to look bearish with a $63 target. Our target is the $64.50-65.00 range but we plan to exit before ABK's late July earnings report.
BUY PUT AUG 75.00 ABK-TO OI=853 current ask $5.30
Picked on June 26 at $ 69.62
ESCO Tech. - ESE - close: 99.60 chg: -1.20 stop: 101.65 *new*
Good news! Our aggressive higher-risk put play in ESE is starting to look better. The stock was unable to breakout over its three-week trend of lower highs. Friday's breakdown under round-number, psychological support/resistance at the $100.00 mark is a good sign. Shares even dipped under the $99 level, which could have been used as a new entry point. We are going to lower our stop loss to $101.65. We continue to suggest that readers look for a decline under $99.00 or $98.00 before opening new put positions. Our target is the $92.00-90.00 range. We plan to exit before ESE's August earnings report.
BUY PUT AUG 100.00 ESE-TT OI=10 current ask $5.00
Picked on June 26 at $ 97.80
KLA-Tencor - KLAC - close: 43.60 chg: -0.08 stop: 45.76
KLAC isn't moving very fast but it is moving the right direction. We added KLAC as a put candidate this past week after the stock broke down under support at the $44.00 level and its 200-dma. The stock has continued to sink and now the SOX semiconductor index could help lead KLAC lower now that the SOX has broken down under support at the 420 level. The next obstacle for the bears is KLAC's 50-dma currently at 43.40. We are targeting a decline to the $40.50-40.00 range. The biggest risk we see in this play would be overly positive earnings reports from other semiconductor companies. The biggest one to watch out for is Intel's (INTC) on July 19th. We plan to exit KLAC before its own late July earnings report.
BUY PUT AUG 45.00 KCQ-TI OI=1647 current ask $2.75
Picked on June 29 at $ 43.88
AmerisourceBergen - ABC - close: 69.35 change: +0.20 stop: 65.57
Target achieved. ABC continued to rally on Friday morning and hit an intraday high of $69.74, which is more than enough for our $69.50 target. The stock looks a little short-term overbought and is facing round-number, psychological resistance at the $70.00 mark. Yet more aggressive traders may want to consider letting the stock run as ABC was bouncing higher on Friday afternoon. We are following our game plan and closing the play.
Picked on June 13 at $ 65.57
Ashland Inc - ASH - close: 60.15 chg: -11.72 stop: 67.95
Do you remember the headline on Wednesday regarding ASH completing the sale of its stake of an oil refinery to Marathon Oil (MRO) for $3.7 billion. The actual transfer of assets for that transaction took place on Friday and the share price of ASH was readjusted for the change. Looking at the daily chart you'll see a gap down and a 16 percent decline. Oddly enough we don't see any huge changes in the stock's calls or put prices. We're going to call this a busted play where we have been stopped out for a loss but you'd better check with your broker on how they're handling this change regarding the option values.
Picked on June 16 at $ 70.05
Recent Traders Corner articles on candlestick charting established a common theme: candlestick and candlestick formations possess colorful names. Multiple candlestick reversal formations certainly fit that theme. They feature names such as evening star, rising three methods, and three black crows.
Those names sometimes prevent an intuitive understanding of candlestick formations, but most reversal signals build on basic and easily understood ideas. A doji represents indecision; a harami, a possible slackening of a trend's strength; and an engulfing pattern, a renewal of buying strength after a downtrend or of selling strength after an uptrend. Many multiple-candlestick reversal signals build on those basic ideas. For those who want a review of the previous articles in the series on candlestick formations can find those Traders Corner articles in the June 11, 18, and 25 editions of the weekend OptionInvestor newsletters.
The doji often serves as the second candle in the three-candlestick formations known as evening-star and morning-star formations. Two weekends ago, the article on the doji briefly described these formations. They can sometimes also feature a small-bodied candle as the second candle. (Note: Charts were searched for examples of reversal signals, so will not reflect current values for indices or stocks.)
Annotated Weekly Chart of the TRAN:
The morning-star formation serves as the bullish version of the evening-star formation. In the bullish morning-star version, a doji or small-bodied candle follows a red candle after a downtrend. A long white candle completes the three-candle formation. In the optimum setup, the doji or small-bodied candle will form below the candles that precede and follow it.
Some multiple-candle reversal signals appear to be non-classic variations on the evening or morning-star formations. For example, a tri-star bullish reversal pattern consists of three doji. Two take the place of the long red and white candles, and the middle doji gaps below the first and third. Another difference lies in the candles that precede the tri-star formation. In a long downtrend, the real bodies of the candles will have grown smaller before the tri-star's formation. In a morning-star formation, the preceding action often produces long red candles.
The ladder-bottom formation also resembles a morning-star formation in many respects.
Annotated Daily Chart of LEH:
With the exception of the requirements for the three red candles, this formation could be considered a morning-star formation. Traders could recognize it as a reversal signal even if the ladder bottom name or variation were not known. That's going to be true of many of the multiple-candle reversal signals discussed in this article.
Although a bit of a stretch, the unique three rivers bottom formation might be seen as either a morning-star or harami variation. A small-bodied candle follows a long red candle, with the real body of the second candle forming within the real body of the long red candle. The second candle has a lower shadow stretching down to a new low. The third day's trading produces a white candle, but not a tall white candle as in the typical morning-star formation. The white candle is a small-bodied white candle with a close below that of the second day.
Variations of the evening-star formation occur, too. Two crows is one example.
Annotated 60-Minute Chart of TWP:
Other formations build on harami or engulfing candle formations. After a downtrend, the bullish concealing baby swallow formation consists of four candles, all red. The third candle of the formation gaps below the previous two long red, shadowless candles, pierces the body of the second candle and falls back. The last candle of the four engulfs the third candle's small body and upper shadow. Those who don't recognize the concealing baby swallow pattern would still likely recognize the engulfing pattern of the last two candles as a potential reversal signal.
The three outside up formation consists of three candles, and it's built on an engulfing pattern, too.
Annotated Daily Chart of CPST:
This variation provides extra confirmation of the bullishness of the engulfing candle pattern. The three outside down pattern serves as the bearish variation of this engulfing candle pattern. After a climb, a tall candle engulfs a small-bodied candle. The third day produces a red candle that closes lower than the second day's candle. Both variations would be recognized as reversal signals even if the particulars of the variations weren't known.
The bullish three inside up formation consists of a two-candle harami followed by a white candle that closes higher than the second day's close. For those familiar with inside-day patterns, this would be a familiar long signal.
A three inside down formation serves as the bearish variation of this three-candle formation. This harami and confirming third candle occurs at the top of a climb.
Annotated Five-Minute Chart of LF:
This article makes the point that many of the multiple-candle signals prove to be specialized versions or slight variations on already known two- and three-candle formations. These variations illustrate again that it's important not to get hung up on the colorful names attributed to candlestick formations. Understanding the doji, harami and engulfing patterns allow traders to pinpoint most of these other reversal signals, too.
A few patterns cannot be described as variations of doji, harami or engulfing patterns, but instead are distinctive patterns of their own. The bearish advance block pattern comprises one of these, but even this pattern offers bearish hints to those who might not have known the name or recognized the pattern. After an uptrend, trading produces three white candles, each opening within the body of the previous day's candle and each closing higher than the other. Yet each of the three shows progressive signs of weakness. Each day's body might be smaller than the previous day's, for example, and the second and third day might produce long upper shadows.
Traders might also recognize the bearishness of the three black crows and identical three crows reversal signals, too, although neither of them is built on a doji, engulfing candle or harami. Each occurs after an uptrend. The three black crows pattern requires three red candles with each open within the body of the previous red candle and with each close below the previous close. The identical formation requires three red candles. Each candle opens at the close of the prior candle, rather than inside that candle, and then closes lower than the prior candle.
The three white soldiers pattern serves as the bullish version of a three black crows pattern. After a downtrend, trading produces three white candles, the second and third opening within the body of the previous candle and each closing higher than the previous candle.
Some bullish reversal signals prove more difficult to link to any other pattern or recognize intuitively as bullish signals. Examples include the stick sandwich and three stars in the south patterns. Don't worry too much about these patterns, however. A several-hours search of daily and intraday charts turned up only one stick sandwich and no three stars patterns. With the goal of providing as comprehensive a list of multiple-candle reversal signals as possible, their descriptions will be provided, however. In the strictest sense, the stick sandwich formation is built on an engulfing pattern, but nothing about the pattern appears bullish on first glance. After a decline, a long white candle opens within the body of a long red candle but closes above it. Then, the third day opens higher than the second day's open, but then produces a long red candle that closes back near the first day's close. Candlestick enthusiasts reason that the pattern shows that prices might be bottoming, establishing a support level near the close of the first and third candles. It could also be considered a consolidation pattern.
The three stars in the south pattern includes three red candles, each with lower closes than the previous day's candle. On the first day, prices reached to a new low but bounced off that new low. On the second and third days, each day's low is higher than the previous day's low.
Since some of these formations prove relatively
rare, charts didn't offer
examples of all, and this article would have proven too long for the newsletter
if they had. The point wasn't to give an exhaustive illustration of rare
candlestick formations with the goal of persuading readers to memorize multiple
small variations. The goal was to suggest that, despite the strange names, most
of these patterns would be easily recognized by those familiar with the basic
doji, harami and engulfing patterns. Those who want more details and
to memorize each particular of each variation might find information in Steve
Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES, Greg Morris' CANDLESTICK
CHARTING EXPLAINED and various online sites.
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other
plays and content by the Option Investor staff.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
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