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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 top stocks for 2010 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.
Company Profile
Our Success Trading Group members scored another winning trade this week by trading in and out of Consolidated Edison (Ticker: ED). We like ED for a new position at its current price.
Our Success Trading Group scored 52 Wins in 52 Weeks and has closed over 370 winning trades with 95% winners on our Main Trade Table.
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 top stocks to buy 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.
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
We really enjoy trading best stocks 2010 that are $10 and under. Often they provide the chance to enjoy high percentage gains. With that opportunity comes additional risk so we try to watch trendlines and support levels in an attempt to minimize any losses.
SBLK (Star Bulk Carriers Corp.)
Company Profile
$10 Trader closed another successful trade realizing a 27% gain in 16 days on SBLK. The stock is now dealing with the $5 level and a move up off that level could signal another potential entry.
Our Option Trading Service is for conservative traders that understand leverage principles. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.
AVP (Avon Products Inc.)
Company Profile
AVP has been in an uptrend and is approaching a resistance at about $26.75 on the daily charts. On the weekly, there appears to be a reverse head and shoulders with the neckline around the current resistance. I am watching for a break above the resistance and considering buying some in or near the money LEAPS calls with acceptable open interest.
TRA - Terra Industries, Inc. is currently trading at $30.02. The June $30.00 Calls (TRAFF) are trading at $1.85. That provides a return of about 6% if TRA is above $30.00 on expiration Friday in June.
The battleground in the stock market these days is the question of whether or not the economy will rebound this year. However, after looking at some compelling data over the past couple of weeks, we think there is a decent chance that the economy may be in the process of rebounding right now.
Okay, before the booing, the name calling, and the accusations of our views falling into the perma-bull/optimist camp starts, please open up your mind and allow me to explain.
For starters, please understand that there is a distinction between the economy being on the mend and the recession actually ending. To be clear, we are not suggesting that the recession has ended at this point. Instead we are of the mind that the end is in sight and it may be closer than most economists believe.
Let's also remember that the official pronouncements of recessions beginning and ending comes from the National Bureau of Economic Research, which uses a VERY healthy dose of hindsight to make their calls. So, since the stock market is a forward looking vehicle and the NBER calls are backward-looking, waiting for the official word that the recession has ended isn't very helpful to investors.
The general consensus is that the recession will end sometime in the second half of 2009 and the economy will begin to grow again in the first half of 2010. And the good news is that, according to my calendar, we are getting pretty close to the all-important second half of 2009.
However, in looking at a bunch of economic reports designed to be leading indicators of the economy, we find that the end of the recession could come in the early part of that "second half of 2009" window.
With a little help (well, okay - a lot of help) from the good folks at Ned Davis Research, we'd like to review five different indicators that have solid track records in terms of calling the end of a recession ahead of time: The US stock market and data on employment, consumer sentiment, housing, and manufacturing.
The Stock Market
The old joke is that the stock market has "called" nine of the last six recessions. The implication is that the market gets a little jumpy at times and will, on occasion, see things that aren't there. However, it is interesting to note that if one looks at the general consensus of economists, history shows this group has actually called zero of the last six recessions ahead of time. And perhaps this is the reason that the average investor is so good at preparing for what has already happened!
The concept of using the stock market to project the direction of the economy actually makes some sense. Most everyone knows that hot stocks of 2010 look ahead between three to nine months, depending on who you talk to. Thus, if the stock market has been falling and then turns higher, it is logical to assume that the market is then projecting better times ahead.
To put this into an indicator format, NDR uses an eight-month moving average of the S&P 500 as the signal for the economy. When the S&P has been below its 8-month moving average and then moves above it, an expansion signal is given and vice versa.
Going back to 1948, there have been 15 prior signals where the stock market has "called" an expansion in the economy and 9 of the signals occurred while the economy was actually in a recession as defined by NBER. During the 9 recessions, the market effectively got it right in terms of calling for an end to the recession 8 times out of 9.
The signals were not always perfect, but the important thing to note is that the median lead time for the bottom in the stock market calling a recovery in the economy has been about four months. So, the market appears to be calling for an end to the recession in July.
Employment
Nonfarm payrolls is one of the most important indicators used by the National Bureau of Economic Research in defining the business cycle in the U.S. And as anyone watching the market knows, it is the monthly jobs report that is the "big Kahuna" of economic data.
In looking back at recessions since 1948, NDR found that employment is more of a coincidental (to slightly lagging) indicator of the economy and that the maximum monthly job losses typically occurs two months before the economy turns upward. So, if monthly job losses peaked in January, this would suggest that the economy should be turning right now.
Consumer Sentiment
In light of the fact that the consumer accounts for two-thirds of this country's gross domestic product (GDP), it is easy to see that when consumers are happy the economy is usually in pretty good shape.
What we look for in making a call for the economy is a trough in consumer sentiment. Using the Reuters/University of Michigan Consumer Sentiment Index (which goes back to 1952) we find that a trough in this index has led economic expansions by a median of two months. And since the index bottomed in November - you get the idea.
Home Sales
Although we're sure to start an argument with this topic, sales of new homes is a very good indication of how the economy is doing. And since it is safe to say that housing has played a major role in this particular downturn, we need to be mindful of an upturn in the housing market.
While no one is going to suggest that the housing market is improving to any great degree at the moment, the data shows that things have stopped getting worse. And history suggests that a trough in new home sales has occurred a median 2.5 months before the beginning of the next expansion cycle in the economy. However, it is important to note that this data tends to be volatile and the range of lead times is between two and nine months.
The good news is that so far at least, sales of new homes appears to have bottomed in January - so, we'll be watching this one closely for signs of improvement.
Manufacturing
Since this might qualify as hard core economic data that has been proved to induce drowsiness, we'll cut to the chase. The ISM Manufacturing Composite Index measures manufacturing activity and has bottomed a median 2.5 months before the end of recessions. And unless manufacturing collapses from here, we can say that this index bottomed in December. Thus, this indicator also projects a turn in the economy starting any time now.
The five indicators we chose to highlight this weekend are not the only ones singing a happy tune at the present time. Thus, the data suggests that the economy may turn around sooner than most economists and investors think; which, of course, is a good thing for the stock market.
So, what could change this rosy scenario? In short, a new low in the indicators would definitely be bad. Therefore, we will need to watch new home sales and the nonfarm payrolls data in particular very closely. As long as the current lows hold, then a rebound in the economy may not be far off and we will argue that there is no need to retest the March lows in the stock market.
However, if the data starts to sink, stocks are likely to follow.
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