Option Investor
New Plays

Failed Rally Entry Point

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Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.

Check out these stocks: TYC's failed rally under resistance at $25.00 looks like a bearish entry point.
FCX also has a failed rally under resistance at $30.00, which looks like a bearish entry point.
JNPR has a failed rally under $19.50.
HIG's failed rally is worse with a strong trend of lower highs. If I had more time I would have added HIG as a short with a stop loss at $21.50 and a target of $16.50 (maybe a secondary target even lower).

---------------------- NEW BEARISH Plays ----------------------

Petrobras - PBR - close: 24.21 change: +1.71 stop: 25.65

Why We Like It:
I am very long-term bullish on PBR and the oil industry in general. If you want to buy and hold PBR for years then the mid 20s is probably great. Yet short-term the trend is still bearish. I know PBR out performed the market today but the sharp sell-off at the close looks like a potential entry point for aggressive traders to capitalize on a retest of the recent lows. We're suggesting bearish positions now with a stop loss above today's high. Our target to exit is $20.25 at which point we would strongly consider switching directions and buying the stock with a tight stop loss. I offer at least one caveat. If crude oil is trading above $67.00 tomorrow morning before the stock market opens I would not open bearish positions on PBR.

Annotated chart:

Picked on October 29 at $24.21
Change since picked: + 0.00
Earnings Date 11/10/08 (unconfirmed)
Average Daily Volume: 31 million


Ultra(Long)Russell2000 - UWM - close: 21.33 chg: +0.25 stop: 23.01

Why We Like It:
It's probably not a very popular belief but I'm not totally convinced by the recent rally. There are a lot of folks who really want to believe the bottom is in. After such a painful year I don't blame them. However, the charts are telling me we could see another retest of the lows (again). We're going to suggest a tight stop on this so if we're wrong, we know we're wrong quickly. The plan here is to open bearish positions on the UWM, which is the double-long of the Russell 2000 (RUT) small cap index, which should move twice as fast as the RUT. We're suggesting a stop loss above today's high. Our target is $18.05. If you look at the numbers this isn't the greatest risk-reward ratio but a stop loss any tighter risks being stopped too early. I'm setting a secondary target of $16.25 but I would take most of the position off the table at $18.05.

Annotated chart:

Picked on October 29 at $21.33
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 4.2 million


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