Market Summary (continued)
Microsoft missed on the bottom line and the top line and was gapped lower. As noted Thursday night, MSFT was one of the reasons for the tech move with its renewal of its business given Bing and its new operating system on schedule for August to replace the pathetic Vista. MSFT rallied sharply ahead of its results as investors almost feverishly anticipated its revival. That revival needs some CPR or at least a bit more time for the new operating system to hit the market and spur, hopefully for tech, a new upgrade cycle.
There was other less than rosy news. UK GDP was lousy at -0.8% in Q2, twice the expected -0.4%. DeBeers announced that diamond sales were down the most in 30 years. Thirty years. That is back in the 1970's. More amazing parallels to the past. It repeats again and again, and unfortunately, comparisons to the 1970's are never, ever good unless it is preceded by words such as 'unlike the 1970's' or 'in complete contrast to the 1970's'. I recall that in the late 1970's and the turn into the 1980's investment class gemstones, those that make what you buy in the stores look like paste, lost value for the first time ever. That really put the fear into the ultra-rich that used those as a last safe haven. Yes, parallels to the 1970's are never good indications.This bad news was offset by some decent news. German business confidence rose again in July after a quick June dip. EU manufacturing 'improved' as it fell less than estimates. Many are interpreting this as a turnaround in Europe though as we argued the past few months, stabilization is not a recovery. Indeed we have seen this stabilization now for months. Hitting bottom does not mean a turn. If the same fiscal and monetary mistakes are made again then 'stabilization' can give way to another downside leg.
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Here's a trade from "The Daily" and insights into our trading strategy:
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Company Profile
After a great run through early June, many of the steel stocks topped out and needed a rest. AKS made us some great money on that run higher, and thus when it was correcting back it went on a watch list so we could play it again when the money returned. From that June peak to early July it set up what is called an ABCD pattern, this one a bullish version. Just when it looked as if AKS was heading lower it held at prior support from a prior peak and the 50 day EMA, and made the D point.
We put it on the report at that point and the next day AKS gapped higher on rising volume. That was our buy point and we moved in with some stock positions at $17.24 and some September $15 strike call options at $3.60. When a stock sets up this kind of pattern when you see the move higher you move in because if you don't you often miss out on the advance.
Sure enough AKS gapped higher for a second session, adding 8.4%. Nice. On 7-16 AKS added more upside, rallying another 5.9%. The next session AKS was at it again, but after moving over the C point in the pattern it stalled and closed flat on the best gain of the move. We were a little bit concerned about that reversal on volume, but the stock was working well, and you need to let these patterns work. On Monday 7-20 AKS gapped higher and kissed the A point in the pattern. That is your initial target in an ABCD pattern and we are programmed to take part of our gain off the table when it hits that level. Thus we sold half of our stock position for $20.95, banking 21.5% on our stock positions. We sold half our option position for $6.30, netting $2.70 or 75%. Not bad for 5 sessions in the play.
AKS tested back after that move, falling 4.7% the next session and another 4% the next. It held, however, at near support at the 18 day EMA, and started to bounce Thursday. Do we forget about AKS at this point? No way. After the move to the A point, if the stock tests near support, holds, and then starts back up, we buy into more upside positions for the breakout over the A point. That gives us a good risk/reward entry point because if it breaks the A point it can start returning us 3:1 or 4:1 on our option positions, i.e. the big money. If it doesn't pan out then we stop out without losing much. That is how you really make money in the market, i.e. picking good entry points that give you plenty of upside while giving you a good stop loss point so you can have a play work for you without it cutting you out of the play with a stop just before it makes a big move.
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2) STOCK SPLIT PLAY
Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays: 1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
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Here's a post-split play and our current analysis.
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Company Profile
After Hours: $19.22
EARNINGS: 07/20/2009
STATUS: Reverse head and shoulders. WFT has formed this short 4 week patter after WFT sold off from the June peak. Strong March to June run needed a break to consolidate, and this current pattern is doing just that. The reverse head and shoulders pattern often forms at the bottom of a selloff. The past week WFT held at the 50 day EMA (18.81) as it formed the right side shoulder of the base. Nice orderly action and looking for a break higher this week to give us the entry point.
Volume: 11.912M Avg Volume: 15.242M
BUY POINT: $19.55 Volume=20M Target=$23.91 Stop=$17.97
POSITION: WFT KJ - Nov. $19c (57 delta) &/or Stock
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