Market Summary (continued)
Friday was what is called an inside day. That is where the indices trade between the prior session's high and low. Neither the buyers nor the sellers had enough strength to push the market higher or lower. That is about as noncommittal a day as you can get. Heading into a three-day weekend and with the indices trading in what looks to be a new trading range, that is not surprising.
As for the news on Friday, there were some positives and negatives. The positives: same store sales were better than expected. They are still falling, just not as much as anticipated. That is the same story sales have told the past three months, so whether this is really a positive is problematical. In addition to sales, the Fed announced that, for the first time since September 2008 when the crisis started, banks were borrowing less from the Fed's emergency facilities. Good news is it shows the credit situation is improving.
As for the negatives, British Airways said that it does not see any green shoots in any of its markets. In fact, it says that things are worse in Asia, the region many are looking at to pull the world out of recession, than anywhere else in the world. Asia rose faster than any place in the world when it came to GDP growth, so you would expect the relative crash to be stronger in Asia. That makes sense, but it does not bode well for the world economic recovery.
Read "The Daily" Entire Weekend Summary
Here's a trade from "The Daily" and insights into our trading strategy:
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FSLR (First Solar, Inc.)
Company Profile
Gaps often leave great set ups for further moves upside or downside. Many say that all gaps have to be filled; often they are, but not always right away. A smart trader can make great money watching how stocks react to their gaps.
FSLR gapped higher to end April on unexpectedly good earnings. Many would give up on the stock as a potential way to make money, having thought the move was over. It was, for the time being. We kept watching because on the move FSLR gapped through a key level, the November peak. When a stock gaps through a key level you often get a chance for a big play . . . up or down.
FSLR made the gap and did not look back, continuing to run up through $200 to $207. That is a key level from 2008 when it bottomed there a couple of times. That often leads to a test after a run higher. We kept watching and FSLR did come back to test, holding right at the gap up point. Indeed the 18 day EMA, often used as support on breakout tests, had risen to that level; two layers of support.
We put it on the report as it tested. When we see this kind of test we look for the stock to hold the support. That is the first indication we have an upside play setting up. Then we look for a higher close off of that test. When we see that we move in right in during the last hour when we see the stock is going to make that higher close. Or we can get in early the next session.
We did not catch FSLR at the close so we moved in the next session. Given the price of the stock we were looking at options on this play. FSLR was trading between $185 and $190 and its options are somewhat pricey so we were looking to buy some near money options. We picked up the July $185 strike call options and sold some $185 put options. We bought the call options at $21.20. FSLR closed the session at $189.70, up $4.80. The next session FSLR gapped higher and surged $12.70 to $205, almost matching the surge off the gap. While we are looking for more gain on the play, after three strong sessions in a market that was selling near term we decided to bank some gain. We could sell a few of our positions for $31, and in a day we never did turn down a 42% gain. So we sold part of the position, but kept a good chunk for a continued move higher. FSLR tested Thursday and Friday, fading toward near support at the 10 day EMA on low volume. We are looking for FSLR to hold there and explode on through the 200 day SMA. Indeed we are looking at picking up some more positions as FSLR surges again.
We had other good plays on the week, including SCHN as we continue playing commodities during the inflation rally. We bought into SCHN on Monday as it came off a test of the February peak. We picked up some stock at $49.54 and some August $45 call options at $9.60 as it bounced off that test. SCHN surged up through Wednesday, matching the breakout high, hitting $55.92 on the session high. When we saw it hit that level and stall we saw a nice 4 day surge running out of gas. We sold part of our position for $55.45, banking 11.9%. We sold part of our options for $13.70, banking 42%. Not bad for less than a week, and as SCHN tests and holds near support at the 10 day EMA we will look for another opportunity upside if it can hold and make the next surge higher.
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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CTRP (Ctrip.com International--$37.04; +0.69; optionable): Chinese travel
Company Profile
After Hours: $37.01
EARNINGS: 05/11/2009
STATUS: Flag. China today announced it anticipated 8% growth this year. A survey was conducted asking citizens what they would do with the money if the economy started expanding again; buy clothes and travel was the response. So, CTRP is a logical candidate to take advantage of that. It gapped higher two weeks back on a strong earnings report, taking it out of a play we had on at that time. It has since proved it can hold the gap, trading in a tight lateral range. Thursday it tested back to the 10 day EMA (36.23) and held. Friday CTRP bounced up off that level. If it continues higher this week we will look for a higher close Tuesday on some decent volume to cue us for the buy.
Volume: 898.301K Avg Volume: 1.439M
BUY POINT: $37.88 Volume=2M Target=$44.88 Stop=$35.77
POSITION: QCT IG - Sept. $35c (65 delta) &/or Stock
XME (S&P Metals & Mining ETF--$34.70; -0.25; optionable)
Company Profile
After Hours: $34.90
STATUS: Pennant. This metals ETF is forming a 4 week pennant after the early May breakout from a long 6 month base that basically covers the entire bottom since the market stopped selling off. Metals are part of the China growth story as well as the inflation story we have been harping on. XME is making a higher low at the 200 day SMA (34.61), and those higher lows often precede the break higher. Nice strong volume on the upside sessions show accumulation. Ready to move in on a bounce off of this higher low.
Volume: 2.625M Avg Volume: 2.414M
BUY POINT: $35.39 Volume=3.5M Target=$42.88 Stop=$33.11
POSITION: EXF II - Sept. $35c (53 delta) &/or Stock
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