Security Trader Comments So Far This Week
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I've posted his weekly summary from last Sunday first followed by Wed, Tues, Mon.
Weekly Commentary for June 10, 2001......
****In general, this weekly commentary is limited to a discussion on Market Risk Analysis (see link at the top of this page) and the use of Point & Figure Analysis in measuring current risk levels. The discussion is geared toward the longer-term market outlook. *****
Market Risk………
Week 2 for the wake-up call........continued deterioration in the short term indicators. The wake-up call suggests that you should review your holdings (longs), set stop-loss points, sell calls against longs, consider locking in some profits OR at least wait for pullbacks as it relates to new purchases.
IF you think of the short term indicators as legs to a stool........the legs have started to wobble a bit here even though the stool is still standing. That's what these indicators are about, they give you a heads up on the market when they go to a sell signal. These short term indicators are reversing from VERY lofty levels here as well.
We mentioned earlier this year that a bottom to this market would likely be a long drawn out process where there are a lot of false starts, pullbacks, rallies....yada yada. Many market participants are used to V-bottoms where the market pulls back and then rallies straight up never looking back.. The reality is that we have had many attempted V-Bottoms in the Tech stocks for the past 14 months and the only one that has held for any length of time is the Bear Rally that started in April of 2001. The most recent rally has taken many TECH indices above their 50 day moving averages while remaining below their 200 day moving averages which is often the REAL stickler for Bear rallies. Nonetheless, the markets remain quite volatile which keeps the premiums on options relatively richly priced. The point of this is that as the paint dries, there is good opportunity for those who care to put together a covered call program. In a nut-shell, this is where you buy high quality, fundamentally and technically sound companies and then sell the calls against your stock each month. Obviously the best time to sell the calls is as the stocks / indices rally to their respective resistance levels. Below is an example which we illustrated back in April.....in shows the mechanics of how it works and during periods of uncertainty / consolidation, they are a good program that warrant consideration for a least a portion of your investing activity.
This is a re-print of some of our weekly comments in early April.
Lets say that we buy Hewlett Packard, its trading at / near 52 week lows. Fundamentally, its a franchise stock that's not going away...its got a 19 price to earnings ratio. Technically, although it has not established a bottom on this leg down its at / near a major support zone on its weekly chart. So, longer term its a stock that would fit very nicely into most long-term portfolios. Lets say you buy 500 shares of HWP at Fridays close of $28.75.....total outlay is $14,375. At the same time you sell someone the right to buy your HWP stock from you at $30 on the 3rd Friday of April. This is done by selling the April 30 calls which are trading at $1.15. By doing this you get $575 credited back to your account which gives you a net cost in your HWP stock of $13,800 or $27.60 per share.
Two possible outcomes.....
Scenario #1......on the third Friday of April HWP is trading above $30. Your HWP stock is called away from you at $30 and $15,000 (500 * 30) is credited to your account. Your net return for the 2 weeks is $1200 or 8.7%. This is caculated as follows is proceeds / (initial cost - options sold) or (500 * 30) / ((500 * 28.75) - 575)
Scenario #2......on the third Friday of April HWP is trading below $30. You keep your HWP stock and when the third Friday comes and goes, you sell the options on it again which in effect reduces your basis in the HWP stock each time you sell the options.
Obviously, if you trying to tip-toe into the market and not necessarily concerned about catching the EXACT bottom or missing the bottom for that matter, you can see that this is an effective method of dipping into the market. Not only is this a strategy to use for tip-toeing into a very volatile market, its a strategy that many use to make a stagnant portfolio a portfolio that is throwing off a very nice monthly return. Now, common sense says that if we do indeed have an L-shaped bottom to this market, this is a strategy that simply cannot be beat. Its a strategy that works best in markets that are in a trading range to slightly upward trending.
In Summary.....all the short term indicators have reversed to SELL signals from very lofty levels.....its a heads up to take an inventory of positions, set stop-loss points, lock in some profits or sell calls against positions. A covered call program is something that warrants you attention for at least a piece of your investment dollars. When implementing such a program, concentrate on using franchise stocks (stocks that are THE leaders in the industry) that have a solid base and have solid fundamentals.
Wednesday June 13, 2001, 7:35PM EST
NEW setups will be posted a bit later.
Going to add a couple more stocks to the ones that we follow each and every day (daily drop down). We are trying to limit the comments on the 'daily' stock charts to an 'as needed' basis. This is for a few reasons, which will help YOU in your trading: 1) Its imperative to view the related sector / index chart (ie: XCI for computers, SOXX for semiconductors, or in general use the NDX for tech stocks) of the stock you are trading and we give FULL commentary on those charts each and every day. 2) There are leaders and laggards in every sector, therefore, if you are not viewing the sector chart to see what the general market is doing...you may as well be DRIVING BLIND. 3) Many members use the 'daily chart' to trade options around the stocks action and are mostly interested in support / resis & potential measurements if a trend is taking place....as opposed to unneccesary daily commentary on the jigs and jags 4) In the 'setups' dropdown we always have a few VERY objective setups to trade which indicate our TILT on the general market and how to trade the setup. Thanks for your support.
Addition to previous days comments.....Most indices closed right at the attempted reversal lows from Yesterday....which means the major indices (INDU, NDX, SOXX, OEX, SPX etc) are sitting on critical supports, below todays lows and most indices will go into a downtrend. In simple terms, this means the support between the highs and lower highs would be violated, therefore, giving us lower lows and that is how all trends are determined.
XAU (Gold / Silver) - Still looks like it wants to rally here....very tight bunch of sticks coming off support.
TYX (Treasury Yield) - Check this chart out...when the yield goes down, bond prices go UP...when bond prices go up, that means money going back to bonds. Yield chart is a rising wedge breakdown and very close to a head & shoulder breakdown.
Tuesday June 12, 2001, 9:45PM EST
I posted a setup (MRCY) that is a bit out of the ordinary, however, it deserves your attention. Read the comments on the chart, the strategy described on the chart is an excellent strategy to employ on stocks that have consolidated into what is usually an explosive pattern. LOW volatility in a stock almost always leads to HIGH volatilty and MRCY is getting tightly wound here. There are no other setups for tomorrow, todays rally ruined most possible setups.
Got the bounce off supports as mentioned as a heads up for today......not sure its enough for the markets to recover this time, nonetheless, its a bounce at support and must be given a day or so of respect.
The bounce in most indices came at their 50 day moving average, the quality of this bounce is what we will be interested in.
BKX (Bank Index) - Rising wedge breakdown and bouncing off 50 day MA.
BTK (Biotech Index) - Rising wedge breakdown and bouncing off 50 day MA.
DRG (Drug Index) - Channel breakdown and near 50 day MA.
TECHS (IIX, NDX, XCI, SOXX) - all bouncing off 50 day MA supports.
INDU, OEX, SPX - all bouncing off 50 day MA supports.
XAU (Gold / Silver) - last 4 sticks showing good setup for scalpers / potential rally of 50MA.
Monday June 11, 2001, 10:45PM EST
2 NEW setups...EBAY and EXTR, both shorts.
Wanted to make some comments regarding trends which may be helpful to all. As mentioned just below here, should the supports not provide enough umph for the markets to recover this time and we break supports, a downtrend will begin. Downtrends have been more orderly than rallies, therefore, I wanted to re-educate you on what NORMALLY happens in most trends. The first move or wave is usually fast and furious, this is followed up by profit taking (shorts covering positions and bargain hunting longs) which rallies back to / near the point of breakdown. This leads into the second move or wave which is less violent but stronger and longer as the shorts become more confident and the bargain hunters step back.
As mentioned on Sunday, we have lower highs established in most indices and the supports between these lower highs becomes the key support...a violation of that support signals a change of trend (Ie downtrend, lower highs and lower lows). Many indices are either sitting on or near their 50 day moving average at todays close, therefore, a bounce is quite possible tomorrow. Again, until there is violation of supports mentioned on Sunday, we are still consolidating and NOT yet in a trend. Once a REAL trend is established, we will be able to be more aggresive with our setups. Objectively, this is the second test of the 50 day MA and its coming after putting in lower highs = early signs of weakness. If you pull up a few of the stocks that we follow daily (daily drop down) you will see many stocks in H&S patterns (VRSN, SEBL, IDTI, BRCM, BSC, LEH etc). |
