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Educational Article

LEAPS Update

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Normally, I use this space for educational content or a topic that I think is timely as it pertains to the action in the market. While we're going to certainly touch of timely developments in the market today, there were enough developments related to the plays we're following in the LEAPS column, that I think it warrants a mid-week update. Sure, on any normal day, I could have accomplished this in the Market Monitor. But technology issues kept me sidelined for most of the day, eliminating that opportunity.

So what happened that got my attention for a mid-week update? We've got a number of Portfolio plays that have been opened in recent weeks and a number of Watch List plays as well. And they're all bullish. If you think I haven't been sitting on pins and needles about trying to be long-term bullish when the overall market has continued south, you've got another think coming. The play that has caused me the most consternation is the DJX Call play, as I got suckered into moving that one onto the Portfolio back on February 25th on that big intraday reversal. Technically, I still think is was the right play, but the timing of the entry was downright lousy. My fault.

So let's look at the big picture. We got a pretty solid midday reversal today, with the all three of the big indices (SPX, OEX and DOW) fulfilling their bearish price targets from the Head & Shoulders formations Steve Price has been talking about. There is still some room to the downside PnF price targets in some of the major indices, but we're getting awfully close. Bullish percent readings are pretty low across the board, although there is still some room to the downside. The early selloff in the market propelled the VIX through the 41 level, but that was it, as the fear index got a nice reversal back down at the end of the day. No panic, just an orderly selloff and a solid bounce. The NASDAQ Composite got its own very solid bounce off the 1260 level, holding above those mid-October lows. Even the Dow Transports managed to close in the green after hitting a new multi-year low earlier in the session. I wouldn't call this a key reversal day or be so bold as to call it "A Bottom", but there are some bullish undercurrents at play that we need to pay attention to. This should be a real warning to the bears, as their risk just went up measurably today, despite the continued uncertainty in the global arena.

I have it on good authority that Steve will be addressing the issue of achieved and yet-to-be-achieved targets in the broad market in his Market Wrap tonight. So for further details on that topic, be sure to check out his prose!

With a rather bullish backdrop, let's take a look through the current list of plays, as there are some significant developments.


QCOM - I think it's clear that we entered this play a bit too early, as the stock has been stuck in the $33-36 area for nearly a month now. But despite missing out on an optimal entry, I think we're in good shape. In sharp contrast to the rest of the market, QCOM has not been losing ground these past couple weeks, solidifying that $33-34 support. I would still favor entries into the play on rebounds from the lower end of its range, as its recent relative strength should translate into outperformance to the upside when the market does turn up.

DJX - As mentioned above, it would have been difficult to get much worse of an entry point into the DJX play. And the past few weeks have been frustrating, watching as the market has continued to deteriorate towards the area where we ideally would like to have entered the play. The rebound from just above $74 today looks like a solid bullish entry into this play and I'm going to do something a bit unconventional today. Because I'm still concerned about the likelihood of a full retest of the October lows, I'm going to look for a rebound from the vicinity of $72 to establish a SECOND position in the play. That way, if our $74.50 stop on the current position gets clipped on a closing basis, we'll have an action plan in place to get right back in if the conditions are right. Just to be clear though, I am NOT changing the stop on the current Portfolio position, as that would set a very bad precedent. If filled on the second position, we'll use a stop of $69.50

MSFT - After finally getting a dip down to the ascending trendline (then just above $23) at the end of February, we logged MSFT into the Portfolio. To my chagrin, Mr. Softee proceeded to drift lower with the rest of the market, taking out that trendline and falling as low as $22.55 this morning. But the stock came screaming back this afternoon, ending very near where we initially entered the play. I like today's rebound back over $23 for new positions, although more conservative traders may want to wait for a move back over the long-term ascending trendline and the 3-week descending trendline, which converge in the $23.40-23.50 area.

ADBE - If you need any proof that Technical Analysis is as much art as science, you need look no further than our ADBE play. I initially drew the wrong trendline, using it as the support level at which to target new entries. That trendline started at the intraday low on October 16th, catching a number of intraday lows in December and January. Using that as my key, I took the bait on February 28th and entered the play just before the latest downdraft. The break of that trendline sent me back to the drawing board, ending up with the trendline shown on the chart below.

See how the stock rebounded from the site of that trendline, just as it crossed through the 200-dma? Looks like a solid entry point to me, and today's rebound back near the $27.50 level (and back above the initial trendline confirms it. If still looking for an entry into the play, today may have been it, and I would recommend using dips into the $26.50-27.00 area to get on board.

Watch List:

BEAS - Here's an example where excessive patience appears to have gotten in the way of a choice entry. I kept waiting for a test of the $8.50-9.00 support area before logging an entry into the play and it looks like I missed it. On three consecutive days last week, BEAS traded down to $9.15, and it has looked really strong this week, closing back at $10 today. I may be throwing caution to the wind, but with the stock bouncing before the rest of the market and weekly Stochastics turning up, I'm going to initiate a Portfolio position in BEAS as of the close tonight. Initial stops will still be set rather liberally at $7.50, just below the bullish support line on the PnF chart. See the weekend edition for further details.

NVDA - This play would test the patience of Job! While I still like it's relative strength, the fact that weekly Stochastics have already traveled into overbought territory is enough to keep me from chasing it higher. It may turn out to be the big one that got away, and if it is, I'm willing to let it go. Traders that don't want to exercise that level of patience can use repeated rebounds from the $12 level to enter the play, but keep in mind that the best level for a technical stop is down at $9.50. For now, our official entry target remains in the $10-11 area.

AA - One of only 3 DOW stocks still on a PnF Buy signal, AA is as close to major support as I think it's going to get, without breaking it. I recently revised the entry target down to the $18.00-18.50 area, and I think today's rebound certainly qualifies. Volume was still on the light side, and there's a lot of technical work to be done before AA will be considered truly bullish, but in terms of risk and reward, new entries taken here look favorable. The LEAPS portfolio will take an entry into the play as of tonight's closing price of $18.87. Stops are going to be tight at $17.50, as a trade at that level would put AA on a PnF Sell signal, negating the current bullish target of $44. Our initial target on the play (market permitting) will be the bearish resistance line of $27.

EMC - Looking for excitement from our EMC play is a bit like looking for business ethics from the likes of Ken Lay, Dennis Kozlowski and Bernie Ebbers. It might be there somewhere, but it sure is hard to find. But there's no arguing with the bullish trend in shares of EMC, which are still well above the December lows. Our target for entry into the play was a dip into the $6.50-7.00 area, followed by a rebound. I think you'd have to call today's trading action a successful fulfillment of that goal, as EMC dropped as low as $6.54 before rebounding to close at the high of the day. Here again, the Portfolio will log a new position, with full details to come over the weekend. Initial stops will be set at $5.50.

NEM - The war hasn't even gotten here yet, and investors are already dumping both gold and gold shares. Easy guys, we're not in a hurry! You can take your time. In all seriousness, I didn't expect the $25 level in NEM to crack until the war started. The long-term ascending trendline for the stock is just below $24, so we're looking to target shoot new entries on a decline AND BOUNCE from this area AFTER the start of hostilities. See the operative words? Entries are only going to be recommended on a rebound from that trendline after the war starts. This is definitely an aggressive play, based on my belief that the stock will continue to benefit from the secular bull market in gold, especially once investors figure out that the recent runup in the price of gold is NOT about Iraq. Be patient on this one, as I think we'll be well rewarded in the end.

I know today's discussion doesn't rise to the normal level of interesting commentary I try to save for this column. But hopefully, you found this mid-week update of value. If you'd like to see things like this in the future, drop me an email with "Mid-week Update" in the Subject line. I don't want to leave anyone out of the fun, so if you didn't like the mid-week update, feel free to send me an email as well, putting "Waste of Time" in the subject line. Don't worry, I can take the criticism! GRIN

See you in the weekend edition!


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