Option Investor
Printer friendly version
  Jeff Bailey   3/9/02,  9:36:02 PM
Well... I need to get a life and go have some fun! Have a good weekend. Just looking at some things.

  Jeff Bailey   3/9/02,  9:33:17 PM
Applied Materials (AMAT) $53.53 ... this is neat. On my bar chart, I've had to "roll up" my retracement. Do this. Take retracement from $58.95 to $26.59. Nice fit isn't it with trading from 04/19/01 to now? Notice that 50% retracement is at $42.77, 61.8% at 46.58 and 80.9% at $52.77. If still long from the triple-top at $49, might just snug a stop up under $52.77.

Isn't it kind of interesting that 61.8% retracement is at $46.58? That's pretty close to our "percentage chart" Link and potential 4-box reversal lower to $46.93.

  Jeff Bailey   3/9/02,  9:24:44 PM
Did you know that you can look at a stock's chart based on percentage? On www.stockcharts.com you can actually change the "box size" to reflect percentage change of price. Here's a chart of Applied Materials and what I've done is set it so a 3-box reversal is equal to 9%. In essence for the chart to reverse into a column of O, it would have to reverse lower by 9% right now. Link

How can this help you? Let's say your trading discipline says, "I will not take more than 10% heat/loss in a trade."

If that's the case, then a bull that buys at $52.82 (where the green X is) would most likely have a stop just under $48.34, a 3-box pullback. We can see from the chart of AMAT, that it does have a tendency to pull back anywhere from 3-boxes (9%) to 5-boxes (15%).

A trader/investor with a 10% rule for losses, might then think... "if I wait for a 3-box pullback (9%) and enter there, then I've got some room that I can take some heat." If I wait for a 4-box reversal, then my odds may improve further on entry. Why? There are no guarantees, but if we were to enter on a 4-box pullback, then if we "add 3 more boxes of pullback" that would be 7 total. I don't see a column of 7 O's on the chart in recent months.

Try looking at the "normal" p/f chart and determine a support/resistance level, then after you do that, plug in a % number, where a 3-box reversal would be close to your comfort level for a stop.

Cool tool you can use to help in risk management and may also help you get a feel for how a stock trades on a percentage basis. Notice how the last couple of X columns have been 6 and 7 columns tall? Current column is 7 columns tall, so it might be ready to rest and perhaps pull back.

An aggressive bear with a 10% rule, also understands if he/she shorts at $52.82, then 9% loss would be up at $57.72.

  Jeff Bailey   3/9/02,  8:41:53 PM
Worldcom, Inc. (MCIT) $9.79 ... subscriber question on what I think?

This is a tough one. Current vertical count is bearish to $0 or N/A. Resistance should be forminable at the $10.50-$11 level from point/figure chart. Link

Bar chart shows 50-day MA just ahead, and this might be the near-term bull target for those "lucky" enought to have bought the bottom. Link

I've also taken retracement on MCIT from the highs of $19.21 to $6.17 and boy does it "fit" nice. 50% is at $12.69 and you can see two different times (late August and late December) where buyers were found. Also get good "fit" at 38.2% of $11.15, where buyers tried to hold support, but when she broke on 2/05/02 that was it and stock got crushed to $6.17.

From here ... $9.79, support may be found at $8.66 (19.1% retracement) and then resistance at 50-day $10.68 or 38.2% retracement of $11.15, which ties in nicely with p/f chart. If she gets near $11.15 and MACD starts rolling near zero, write some covered calls or look to lock in gains if long.

  Jeff Bailey   3/8/02,  5:14:06 PM
S&P 500 bullish % per Austin's comments from 04:54. Makes sense that commercials quite short as S&P 500 bullish % up at 74% and back at May 2001 levels. Can still go to 100% and did reach 80% back in November 1998, which ironically enough, came after a just experienced low level of bullish % at 16%. Will history repeat and 80% of stocks in SPX show a buy signal? Link

  Jeff Bailey   3/8/02,  5:07:00 PM
Questions I get hit with a lot of questions each day. Some on stocks I have not heard of or watched trade.

Please understand how hard it can be to try and give somebody guidance on a moments notice regarding a stock.

For instance. Siebel Systems (SEBL) $36.01. Link would not have been a stock I was looking to short. If I had seen the trade at $33, I would most likely have alerted bulls that this was a stock to be looking bullish as the stock traded ABOVE trend.

It is so hard for me (my personality, past experiences) to try and tell an investor/trader to "hang in there, she'll pull back, the bullish % charts are overbought."

Over the years, I've become what some might call an "on/off" trader/investor. Either I like a stock as bullish or bearish, or I have no opinion because I just don't have a good feel for the stock.

As it relates to SEBL, all I know is that I wouldn't feel comfortable holding the position short right now. Yes, the bullish percent are high, but they're high for a reason. Bullishness. I've learned to never underestimate the power of a move (up or down).

In my Microsoft (MSFT) profile of short/put from $58, that stock was trading BELOW trend, had a bearish vertical count, and risk could be easily monitored or removed from the account on a trade at $63.

SEBL may have been similar, with the exception being that the stock was ABOVE trend, thus perhaps technically stronger than MSFT.

It's a tough job to try and advise anyone that I don't really know. What's your risk profile? What's your financial standing? How much "heat" can you take?

We could well see a pullback to $33 in SEBL. That would be a normal little pullback. But with a stock trading above trend and with a bullish vertical count of $53, where do we call it quits? This is why we MUST have a stop determined PRIOR to initiating a trade.

When I first started investing and then brokering for a living, I made some terrible mistakes. I would buy a stock and have no clue on what price to be looking for gain, or any clue on where a stop should be placed. Heck, I don't think I even knew what a stop was when I first started investing.

After a couple of good thumpings, I learned. Stocks don't go up forever, stocks don't go down forever. Stocks/sectors can do crazy things when they are in favor or out of favor.

My "defining moment" for the use of stops came years ago, but was solidified in a short position I held for myself and clients back in 1998 with Amazon.com (AMZN). It was also when I first started using the point/figure charting system. Long story short, was that I had recommended to several clients that they short AMZN at $22.50, that the stock was severely overvalued and was set to fall. Fall it did for about 2 days. Then the stock split 2:1 and I found myself in the middle of a triangle pattern. About two weeks later, that turned to a bullish triangle.

Fortunately, I set a stop at $25.05 on all positions except one, where that client was just as certain as I that the stock was overvalued. The stock eventually traded my stop.

I didn't sleep very well for about 3 week's as AMZN continued higher $30, $35 and finally my client gave in as the stock had now eroded the previous years gains in other investments we had been able to accumulate.

When I set a stop on a stock, that stop is set at a level that I don't think the stock should trade, based on the scenario outlined.

I have said before that I personally don't use stops on options trades, but this is because I veiw them as "only the amount of money I would risk to the stop in the underlying stock to begin with" and that I don't overleverage.

The only time I will "leverage" on an option trade is when I'm "averageing up" in the trade and have some profit to work off of. Only when I get a profit going am I willing to take on more risk.

I'm a patient trader and investor. I've also mentioned that during the great bull run in the semiconductors back in 1999, I never bought 1 single share of Intel (INTC). But I traded the living heck out of LSI, AMAT, GSNX, ADI, KLIC and others. I traded them when I had a good trade setup.

Recently I profiled a bullish trade in shares of Rational Software (RATL) $19.57 +1.18 at current levels. You can see why from the p/f chart Link Doesn't it look pretty darned close to that of SEBL Link

It's probably not a coincidence that both of these company's are software manufacturers in the e-business area.

PeopleSoft (PSFT) Link.

All three SEBL, RATL and PSFT are trading above trend, have bullish vertical counts and are on "buy signals."

According to Dorsey/Wright and Associates, the software sector (not the index, but a broad sampling of software-related stocks) are "bull confirmed" at 44%.

  Austin Passamonte   3/8/02,  4:54:02 PM
This just in: "Austin, Not that you hadn't figured this out already, but the Commercial players made a big move this week.

The big boys have not been more than -7% or -8% net-short all year and this week they moved to -10.5% while the Small specs went from 38 to 45% net-long. This is the largest divergence I've seen in awhile. Take care, Russ Moore"

Our good friend Russ factors the COT data as it breaks and found something interesting here. Looks like we're not the only ones skeptical of a sustained rally... the S&P 500 commercials are shorting the bejabbers out of this thing too. I'm buying May option contract puts each time the markets spike higher and VIX drops and will hold into the future with a bit more confidence now than I had before.

  Austin Passamonte   3/8/02,  3:45:50 PM
Appears that the masses are now loading up on long calls/short puts as the VIX continues drifting lower even as the Dow is off session highs by -100 points. In other words, the VIX was higher then than now, an anomoly only explained by a majority of traders buying this dip in expectation of the next run higher ahead.

Food for thought!

  Jeff Bailey   3/8/02,  3:33:36 PM
General Electric (GE) $40.49 -1.09% ... bad tick at $45. Stock just not able to find buyers still and may give hint that the bullish % data are indeed weighing on the minds of fund managers. Market may have factored in the recent good news and stocks just tired.

With cash freeing up from bond market, we then must identify strong relative strength stocks and look for good entries at support.

GE is important observation at this point on "buying the breakout" as stock just couldn't "break out." May have to recoil to get enough "energy" for the move.

This may be the case for other stocks too.

In yesterday's market monitor, I did mention that a trader should be taking some profits off the table in Caterpillar (CAT) from $52 as stock a bit extending at $58. Yes, stock is trading $59 today, but trader got a good profit and selling partial position keeps some powder dry and available if stocks do pull back to some attractive entry points.

  Austin Passamonte   3/8/02,  3:24:23 PM
On a short-term basis for trading, today has been a piece of cake. Short the first lower high after what appears could be an exhuastion gap/blowoff top open today and let time take over from there.

Since then the Dow has coughed up over -100 index points and hourly charts suggest there's more to go. I'm sitting on 10+ S&P index points to the good, but why cover now? We'll trust 1/3 of those current gains on a stop and wager that hourly charts in full-bear roll might give us some more greenies between here & 4:15pm EST!

  Eric Utley   3/8/02,  3:08:24 PM
A huge, huge week in the bond market is about to come to a close. We've seen the yield of the 10-year go from under 5% to 5.3% in the space of five days. HUGE!

The sell-off in Treasuries has been fueled by the growing expectations for inflation based on the strong economic data recently. As it relates to stocks, inflation isn't such a bad thing early in the cycle. Obviously firming prices are welcome by corporate America. From retail to tech, margins have been under pressure for quite some time now because of slack demand and overcapacity. So a bit of firmness in prices would help margins, thus boosting profitability.

The problem I see potentially arising with the market's expectations for inflation is a rise in borrowing costs too quickly. A sharp rise in corporate and consumer (mortgages) borrowing costs, I think, would pressure the economic recovery.

The market agrees with me to a small extent today, noting the weakness in housing and mortgage stocks. Take a look at Freddie (NYSE:FRE) and Fannie (NYSE:FNM). While you're at it, take note of what's going down in the S&Ls: Wamu (NYSE:WM) and Golden West (NYSE:GDW). In housing, look at Beazer (NYSE:BZH) and Centex (NYSE:CTX).

It's too early to draw any meaningful conclusions from what we're seeing today, but I think the sharp rise in rates is to be monitored. This development, mind you, has nothing to do with a short-term trader. So don't let it influence any short-term decisions you may or may not have made recently.

  Jeff Bailey   3/8/02,  2:46:40 PM
Siebel Systems (SEBL) $36.47 +6.7% ... if short, must assess risk to $39.06 from retracement. Stock trades above trend on p/f chart so must be careful. I don't like to be short these stocks with longer-term bullish vertical counts. It can keep bulls interested and buying the stock against me. I would look to move to the sidelines if short.

Would be monitoring the GSTI Software Index (GSO.X) 169 +4.12% as "last hope" for short in SEBL. Potential resistance at rounding 200-day and 50-day, but we've seen some breaks of these technicals in other stocks and even the NASDAQ Composite today. Link

  Jeff Bailey   3/8/02,  12:43:18 PM
Siebel Systems (SEBL) $36.12 +5.6% ... after giving double-top buy at $33, stock has edged higher. Obvious stop at $27. Current vertical count is longer-term bullish to $53. Stock looks strong and trades above upward trend. Link

I have retracment on bar chart from $54.97 to $13.33 and this puts 38.2% at $29.23, 50% at $34.15 and 61.8% at $39. Those not willing to risk move to $27, most likely playing with stop below the 50-day MA of $32.91. Link

  Austin Passamonte   3/8/02,  12:42:21 PM
Shorting these intraday rallies is still working fine for small but high-odds gains this afternoon. We must remain cognizant of Friday pattern for upside explosions in the final two hours of trading over the past few weeks. But with all D/60/30 minute chart signals in bearish setup right now while lower-highs continue to post today I wouldn't be so sure of the pattern repeating this time around.

  Jeff Bailey   3/8/02,  12:28:02 PM
Gemstar-TV Guide (GMST) $21.93 ... profiled this as a May "strangle" back on February 21 in the May $20 call (QLFED) and May $15 put (QLFQC). Call showing 91% gain, while put showing 67% loss, for net gain of 19.5%. May have some near-term upside to that triple-bottom of $25. Link

It's technicals like this right now in other stocks that may have stocks making slower moves on a near-term basis. Options trader may be better served to be buying some time in calls/puts they are looking to trade.

  Jeff Bailey   3/8/02,  12:20:31 PM
Dow Breadth now more mixed, but decidedly positive. 23 up, 7 down. Weakness in Aloca (AA) -1.2% and Merck (MRK) -1.02%.

Strength American Express (AXP) +3.6%, Intel (INTC) +3.09%, Hewlett Packard (HWP) +3%, Microsoft (MSFT) +3% and IBM +3%. Lots of Dow technology showing some gains, but not seeing anything with very good entry points for bulls right now.

  Jeff Bailey   3/8/02,  12:12:14 PM
SanDisk (SNDK) $21.47 +2.64% ... I have retracmet from $29.64 to $9.01, and that puts 38.2% at $16.89 (just below trigger from bullish triangle), 50% at $19.23 (now becomes a support level) and 61.8% at 21.75 (currently acting like resistance) and then $25.69 up at 80.9%. Link

Short-term trader should be looking at taking some profits here, as overhead supply back from June-Aug is near-term resistance. With NASDAQ-100 Bullish % at 70% and more "overbought" looking to pay ourselves for good trade. Link

  Jeff Bailey   3/8/02,  11:43:55 AM
Chiron Corp. (CHIR) $47.50 -1.63% ... Only news I see is that Avonex expanded label could hurt CHIR drug. Technicals show stock trading at bearish resistance, so need to be careful for bull/bear here. Link

CHIR chart has been "sloppy." Note the triple-bottom sell at $48 is current rally point. May be dealing with overhead supply right now and may take some time to eat through. Stock could pull back to support at $44.

  Austin Passamonte   3/8/02,  11:24:59 AM
Instead of buying the dips this morning I've been shorting the pops every time 10/5/1 minute charts go overbought and fail from there. The first two attempts were stopped out at par and slight loss respectively, but now we're tacking on some gains for the day and may just catch a decent downside move into the close. Or a subsequent rally... I'm happy to scalp either way!

  Jeff Bailey   3/8/02,  10:34:10 AM
Microsoft (MSFT) $64.44 +2.75% ... glad we stopped out of short at $63. Near-term resistance now looks to be $67 level. (Bad ticks on p/f chart, high trade has been $64.56). Link

Not glad I profiled as short, but was best risk/reward short I could find while bullish % charts were in columns of O's.

  Jeff Bailey   3/8/02,  10:31:05 AM
May be monitoring in unison any type of alerts on the SPX at 1,180 and any alert on General Electric (GE) at $42.

For SPX Link 1,180 would be spread-triple top. With bullish % "overbought" then using GE as feel for aggressiveness by MARKET (bulls buying, shorts covering).

GE at $42, we're now alert to. Can correlate a potential "pivot" point between SPX and GE. Link

  Jeff Bailey   3/8/02,  10:24:34 AM
Biogen (BGEN) $51.64 -8% ... stock down on competing MS drug receiving FDA approval). Salomon Smith Barney says buy below $50. Link

I say, stay away... long or short.

  Austin Passamonte   3/8/02,  10:22:57 AM
On a short-term basis I had expected to play the upside this morning on an intraday basis as outlined in last night's Swing Trade Gameplan. But the warning to avoid gap-open moves outside those clear bullish wedges applies to me first & foremost, so I'm still waiting for the next brief-term entry to play within today.

I'll be flat all upside plays at the closing bell and continue to build May option contract puts for posterity sake. What scalps in between may arise I do not yet know, but will when we see 'em!

  Austin Passamonte   3/8/02,  10:19:21 AM
Depending on our interpretation of gaps in a market, today's big holes between Thur close and Fri open are either breakaway gaps that will never fill, continuation gaps that mean this current move is only halfway thru its range or exhaustion gaps signalling the top is near.

Different traders can make a case for each, but with many market readings at several year's overbought extreme and a VIX at 22 I'll continue adding to my distant-month put holdings.

May contracts in some of the grossly oversold sectors with weekly/daily chart signals now pinned in overbought extreme are a good place to begin. This time I'm going to diversify a bit across the HOLDRs and iShare sectors for lower capital outlay and greater percentage gain pop when the VIX releases from these basement levels and price action retraces ahead.

  Jeff Bailey   3/8/02,  10:19:12 AM
CBOE Internet Index (INX.X) 127 +4% ... looks to have some room to 200-day MA at 138 and may have YHOO jumping higher still. Link

using "spread-triple top" in sector for bullish thoughts on YHOO.

  Jeff Bailey   3/8/02,  10:17:30 AM
Yahoo Inc. (YHOO) $18.80 +4.9% .. day-trader may want to take a look here. Stop under today's low of $18.05 and target $20.

  Jeff Bailey   3/8/02,  10:13:59 AM
Albany Molecular (AMRI) $24.60 -15% ... stock down on news that Shering-Plough (SGP) has filed for over-the-counter sales of Claritin. AMRI receives royalties from a competing drug, Allegra. Link

  Jeff Bailey   3/8/02,  10:11:35 AM
Drug Index (DRG.X) 386 inching red here. Most likely due to SGP.

  Jeff Bailey   3/8/02,  10:07:23 AM
Schering Plough (SGP) $34.13 -5.08% ... downgraded by Merrill Lynch to "near-term neutral" from "buy". Link

Looks short/put with stop just above $40.

  Jeff Bailey   3/8/02,  10:02:10 AM
Sector Weakness found in Gold/Silver (XAU.X) -2.4%, Oil Service (OSX.X) -1.8% and marginal weakness in Nat. Gas Index (XNG.X) -0.15%.

  Jeff Bailey   3/8/02,  9:59:51 AM
Research In Motion (RIMM) $28.60 +2.25% ... keeps inching higher from bullish triangle. Would move stop up under yesterday's low of $27.40, or to break-even of $27 for now. Link

  Jeff Bailey   3/8/02,  9:53:59 AM
Peregrin Pharma (PPHM) $2.80 +4.08% ... would raise stop to break-even here. Stock up about 10% in last two days since mentioned here in market monitor at $2.50. Still targeting $3.00 near-term. Link

Was mentioned for aggressive bulls only and view much like an option.

  Jeff Bailey   3/8/02,  9:51:10 AM
Dow Industrials edging just above the 10,600 level and today's trade at 10,650 gives double-top. That "bullish triangle" now looking powerful from 10,050. Vertical count still bullish to 11,000. Looking for Dow stocks like GE that are still in base where a "buy signal" can unleash some upside action from a potentially powerful p/f pattern for high probabilities. Link

  Jeff Bailey   3/8/02,  9:43:49 AM
Dow Breadth decidedly positive with 30 up, 0 down.

  Jeff Bailey   3/8/02,  9:41:50 AM
Motorola (MOT) $14.53 ... stock not yet open for trading. Bear Sterns hosted a call with MOT last night, Bear Stearn's says that operating margins are likely to be down in Q1 due to lower volumes; believes Jan/Feb was very weak for handset industry, supported by Intel's (INTC) cautious comments on flash memory; sees quarter being very back-end loaded for MOT Link and other cell players like NOK Link and ERICYLink .

  Austin Passamonte   3/8/02,  9:37:16 AM
We watched plenty of days in the recent past where SPX barely broke a ten-point range for the session. It's about to open that much higher off Thursday's close. From methodical markets to wild volatility...

  Jeff Bailey   3/8/02,  9:35:16 AM
Darden Restaurants (DRI) $42.35 ... downgraded by JP Morgan to "long-term buy" from "buy" based on valuation. Firm remains positive on DRI's fundamentals.

Wow! Link

  Austin Passamonte   3/8/02,  9:35:01 AM
It's a new baby bull!!! Or so the momentum players think while futures traders lick their chops at shorting into this gap-open move on already extended markets. Which side will prevail? Don't know and won't take sides right now. I'll wait until all chart signals align in short-term agreement, take that entry and go from there. Which way is unknown right now as we remain in full reactionary mode, the easiest way to grab small chunks of profit from intraday moves.

  Jeff Bailey   3/8/02,  9:31:51 AM
Krispy Kreme Doughnut (KKD) $39.55 ... stock trading $39.27 in pre-market after reporting earnings of $0.14 a share, penny better than estimates.

Seeing lots of charts like KKD where stock rallies to bearish resistance trend, and inches above by a box or two. Tough trades. Many are also coming with the stock trading right up at a rounding 50-day MA. Link

Relative strength on KKD just too strong right now. Tempting short/put based on regular p/f chart, but RS chart still shows strength vs. S&P 500. Link

  Jeff Bailey   3/8/02,  9:25:58 AM
Cash coming out of Treasuries as 10-year YIELD jumps to 5.287%. Equity bulls may want to see a close above the 12/17/01 close of 5.274%. Support for YIELD (resistance for price) should now be firming at 5.0%. Link

Bar chart Link

  Jeff Bailey   3/8/02,  9:20:31 AM
General Electric (GE) $40.95 ... on my list for bullish candidate, but must trade $42. Link

  Austin Passamonte   3/8/02,  9:08:24 AM
Yesterday we noted that April option contracts for INTC are skewed heavily toward the bullish side, to a lesser extent the March contracts as well. My great buddy "The Devil" (aka Jeff B) advocated a post last night archived for posterity that this may be a tough sign to interpret. Actually, it is not.

When analyzing put/call open interest on a stock we do not care why the options were bought or sold. The intention for cause has zero to do with market affect now that they are open.

For example, massive call option open interest appreciates in value if INTC pops above $35. What happens next? Holders of those calls dump them into the INTC option pit at the CBOE. Market Makers who were short those calls bought common stock/QQQ/SPDRS to hedge the trade. Now when they unwind the short options they simultaneously dump the stocks/shares short, which presses the market down.

Institutions short massive amounts of calls on buy/writes usually don't let option buyers exercise the stock but if they do or don't, results are the same. Huge volume of the underlying stock changes hands in a sales-type transaction and the effect is singular: lower stock prices no matter what.

This is how stocks tend to get "pinned" at expiration... call options closed push prices down, put options sold push prices up. A disparity in either does not assure which way a stock's price will go, but it does clearly point out a ceiling, floor and paths of least resistance either way!

  Austin Passamonte   3/8/02,  8:58:33 AM
Great Morning!

Looks like markets LOVED the unmployment data at 8:30pm and are poised to pop the markets higher on a gap-up move at the bell. I for one will not be chasing hyper-inflated call option prices off the bell, but we'll see what happens later in the session. Keep in mind that opening prints of cash index price mean nothing: options are priced at the currnet futures level and that is the point at which call buyers will enter right off the bell.


Market Monitor Archives