Market Extended or Starting Next Leg?

Market Summary (continued)

The big news of the morning, the jobs report, was in line, and with the whisper at -700K and more that was something of a win. Sort of. Modestly higher futures ahead of the number remained modestly higher afterwards as a quick spike fizzled and the status quo resumed. The jobs report was not as bad as expected, and while that can propel the market higher at times, after the kind of run stocks have put in off the March low, it takes more than a not as bad as feared economic report to send stocks rampaging again. Thus there was no new big surge Friday similar to the Thursday upside juggernaut. RIMM's earnings got the large cap tech juices flowing along with once again the semiconductors, and steel stocks as well as retail were up again, and okay, so was GS. Basically the leaders were leading again. But outside of those . . . there was not the same hoopla as on Thursday.

Stocks opened upside and after a short spurt the sellers took a shot. We all knew they would given the run higher and the weak jobs report. Sellers are probing for their opportunity and they sent out a recon team early in the session. The ISM Services was less than expected and below February and stocks slid lower, but then bounced along in a range until lunch. Must have been a 3-martini lunch because stocks were jovial the rest of the day, rallying to the session high as lunch ended, then to new session highs mid-afternoon. With that kind of recovery the sellers took another shot. A few minutes into the last hour we saw the same kind of selling seen in the prior closing hours last week. Stocks sold steadily, but when they hit the lunchtime high they reversed and bounced in the last half hour to yet new session highs.

AAPL (Apple, Inc.)
Company Profile
After trading in a nice channel for almost five months and giving us upside and downside plays in its $20 range, AAPL started to show a character change mid-March. As it approached the high in the range we were readying for a downside play again, but we were also aware that AAPL had made 4 prior cycles in the pattern and after that many rolls up and down a pattern tends to break down. Thus we were also watching the upside to see if AAPL made a breakout.

When it approached the top of the range at $103 it paused and moved laterally for three days. That was the first sign things were different. In prior visits AAPL touched the top of the pattern and then turned and ran like a scalded dog. This time it paused, and on the fourth day it broke through the top of the range. Now we could have bought in on that move, but when a range is broken, particularly a well established range such as this one, a stock typically comes back to test the move, i.e. after the initial burst it fades back to touch the top of the range. AAPL did just that, working laterally a couple of days, moving to $110 on this high. It then faded back, falling to the 10 day EMA on 3-30 (Monday), showing a doji on the candlestick chart. When testing a breakout, a strong stock will often use the 10 day EMA as support. In this instance the 10 day was at $103.90, just over the top of the trading range so it was perfect for a test of the breakout.

We put AAPL on the report that night. The next session AAPL started back up on a bit higher volume. We bought into the position with some stock positions at $106.54 and some May $105 strike call options at $8.50, looking to play the options on that first strong run higher following the breakout test. The 200 day SMA was up at $120, and we were looking to play a move up to that as our initial target.

AAPL closed off the session high Tuesday, but it jumped $3.57 to start the new quarter. It added $4.02 the next session, clearing the key October/November peaks. That opened the door for a run toward the 200 day SMA. On Friday AAPL was at it again, gapping higher and running to $115.99 on the high. It was dilemma time: a strong three day run heading into the weekend but not quite to the 200 day SMA that had moved down to $118.78. We split the difference. Sold a third of the stock at $115 for a 7.9% gain and sold half the options at $14.45, banking $5.95 per option or 70%. Not a bad take for less than four days in the play.

Playing established trends or patterns is one of the best ways to make money in any market. Being able to recognize WHEN A CHANGE is coming, however, is the key to KEEPING what you have made on a trend and then making money on the new move. If we had blindly shorted or bought puts on AAPL when it touched the top of its range again we would have lost money. Instead we recognized where it was in its life cycle and were ready to play it EITHER WAY it moved. As it is we caught what looks to be the start of a new phase in AAPL after a 6 month base.

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.

MYGN (Myriad Genetics--$43.58; -0.06; optionable): Diagnostic substances
Company Profile
After Hours: $43.80
EARNINGS: 02/03/2009
STATUS: Breakout test. MYGN surged higher to start the last week of March and then split. After splitting it has come back to test the move, holding over the 18 day EMA (42.79) and showing a nice tight doji Friday. Testing the breakout from something of a short 6 week cup that used the 50 day EMA (40.53) as support. Looking for MYGN to complete its test this week and give us a buy point as it breaks back to the upside.
Volume: 1.2M Avg Volume: 1.823M
BUY POINT: $44.32 Volume=2.5M Target=$50.94 Stop=$42.66
POSITION: GSQ HV - Aug. $42.50c (62 delta) &/or Stock

SCHN (Schnitzer Steel--$35.58; -2.25; optionable): Steel and iron mining
Company Profile
After Hours: $35.58
EARNINGS: 04/02/2009
STATUS: Double bottom w/handle. SCHN broke sharply higher Thursday on strong volume, making the breakout from its 9 week double bottom with handle base. Excellent breakout but then Thursday it gapped lower, holding the 50 day SMA on the low (33.95) and rebounding to cut the loss. A hiccup in a very good pattern for a very good stock and it is going to give us a good entry point. Looking for a bounce right back up to give us the buy.
Volume: 986.374K Avg Volume: 752.764K
BUY POINT: $35.89 Volume=1.1M Target=$44.94 Stop=$33.57
POSITION: SQQ HG - Aug. $35c (63 delta) &/or Stock