Option Investor
Play Updates

We're still looking for a dip

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Play Editor's Note: So who do you believe? Do you believe the crowd who is calling this a bottom? Are they the same crowd who has been calling a bottom for the last 2,000 points on the DJIA? Or do you believe those calling for another 20% decline? You've heard it before but this is one of the toughest markets in history if you're trying to trade it.

I was listening to some on the street interviews recently and most people responded with some sort of "I'm just trying not to think of the market or what it's doing to my portfolio" or another version of sticking their head in the sand. Long-term they are right to stick with it if they have a 30, 40 or 50-year time horizon. If you continue with that train of thought then this massive sell-off is probably a great long-term entry point to buy stocks. Of course one has to wonder if next month will be a better long-term entry point to buy stocks another 10%, 15% or 20% lower.

If you're reading this then you're obviously a more independent-minded investor who believes that actively trading the market can out perform just a "buy-and-hold" philosophy. It's certainly been done. People have made fortunes trading the market. They've also lost fortunes. If the market happens to be going your direction then things look pretty good as the huge intraday swings can produce big returns on your computer screen. If the market isn't going your way then just wait. Tomorrow it probably will.

Traditionally if we look at the size of the sell-off, the pessimism in the market, and the extreme readings on the volatility index then there is a good amount of evidence that we're near "a bottom" but maybe not "the bottom". Stocks have been unable to build on any sort of rebound attempt. Rallies are sold hard as another chance to unload. Plus, you have plenty of pundits suggesting we're far from a bottom because everyone is too quick to try and call a bottom.

This week will probably see more volatility as fund redemptions and forced selling fight with end of year window dressing for those funds with an October 31st year-end. Now throw in an FOMC rate cut that may or may not be already priced in and add to it some serious bearish breakdowns in the last couple of days and it is almost impossible to pick a direction.

At this point I'm adding both bullish and bearish plays but generally we're going to stick with the trend, which is down. This month has taught us that volatility can always get higher and stocks can go lower than you or I expect. There is nothing to suggest that trend of surprises will change.

---------------------- BULLISH Play Updates ----------------------

Broadcom - BRCM - close: 15.64 change: +0.23 stop: 14.49

BRCM continues to show relative strength. When the market opened on Friday BRCM gapped down to short-term support near $14.50 and then quickly rebounded. The stock broke through resistance near $16.00 and hit our trigger to buy the stock at $16.10. Volume was above average on the move, which is another positive sign. We would still consider new positions now but would suggest waiting for a dip near $15.00 or a new move over $16.10 again. Our target is $19.50.

Annotated chart:

Picked on October 24 at $16.10 *triggered 10/24
Change since picked: - 0.46
Earnings Date 10/21/08 (confirmed)
Average Daily Volume: 14 million


Nucor - NUE - close: 35.01 change: +1.13 stop: 24.90

NUE displayed quite a bit of relative strength on Friday. Shares dipped toward $30.00 and then rallied back to the $36.00 level intraday. Yet the high was another lower high in the stock's overall pattern. Currently we are suggesting readers buy NUE on a dip into the $28.00-26.00 zone around its 2008 lows. Nimble and more aggressive traders could try and short NUE into the $28-26 area. We are going to list an alternative entry point just in case NUE rallies higher. That entry point is $38.05 and we'd use a stop loss at $35.75 if triggered at $38.05 with a $44.50 target.

Annotated chart:

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/22/09 (unconfirmed)
Average Daily Volume: 9.7 million


Wal-Mart - WMT - close: 51.40 change: -1.36 stop: 41.95

WMT bounced around the $50-53 zone but the trend was bearish. You're probably thinking WMT may never trade near $45 again. The concept here is that one of these days we may get another horrendous, panicked sell-off and WMT sees a huge intraday spike lower. That's when we want to be triggered.

Entry point #1 is to buy a dip in the $45.00-44.00 zone. If triggered at $45.00 we will have two targets. Our first target is $49.50. Our second target is $54.00. (Note this is an adjustment. Our previous entry price was 44.50.)

Entry points #2 is to buy a breakout at $56.25. If triggered at $56.25 our stop will be $52.35. Our first target will be $59.95. Our second target will be $63.00.

Annotated chart:

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/13/08 (unconfirmed)
Average Daily Volume: 25 million

--- ---------------------- BEARISH Play Updates ----------------------

Wal-Mart - WMT - close: 51.40 change: -1.36 stop: 55.55

As we said in the WMT long update the stock just bounced around the $50-53 region but the intraday action was bearish. More conservative traders might want to tighten their stops closer to the $54.00 level. You could open new positions here if you had a tight stop loss. Our target is $48.00.

Annotated chart:

Picked on October 19 at $53.77
Change since picked: - 2.37
Earnings Date 11/13/08 (confirmed)
Average Daily Volume: 25.5 million

--- ---------------------- CLOSED PLAYS ----------------------

Intel Corp. - INTC - close: 14.28 change: -0.23 stop: 12.45

All right. I have to admit that the action in INTC doesn't look very good. We continue to see lower highs. The safer bet is to just exit right now and take a minor loss. We would keep INTC on your watch list. A dip near $13.00 is probably a bullish entry point but use a tight stop.

Annotated chart:

Picked on October 22 at $14.30 *triggered 10/22/08
Change since picked: - 0.02 /exiting early
Earnings Date 10/14/08 (confirmed)
Average Daily Volume: 74 million


Ultra QQQ ProShares - QLD - close: 28.58 chg: -1.75 stop: 27.25

Our new bullish play on the QLD was dead before it even started. The Friday morning panic had the QLD gapping open lower at $25.58, which was well below our stop loss. The play would have never opened.


Picked on October 23 at $xx.xx <-- never opened
Change since picked: + 0.00 /originally listed at 30.33
Earnings Date 00/00/00
Average Daily Volume: 31 million


Ultra(long)Russ.2000 - UWM - cls: 19.91 chg: -1.95 stop: 19.45

The UWM, another double-long ETF this time on the Russell 2000, also gapped down on Friday morning. Unfortunately, the play had already opened. Shares of the UWM opened at $18.14 on Friday. Our stop loss was at $19.45. Ouch!


Picked on October 23 at $20.65 *triggered
Change since picked: - 0.74 /stopped out 18.14 gap down exit
Earnings Date 00/00/00
Average Daily Volume: 3.3 million


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