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Friday, June 5, 2009

Stocks Cannot Hold Modest Gains

After a string of upside weeks, we finally had a down week. There's nothing wrong with that. After 30% gains and more, getting a little downside is no problem at all. In fact, it's healthy. We're going to make some money from the downside, and thus the downside becomes a positive. We always take whatever the market gives, whether it's upside or downside, we're going to take it. And with the market primed to give us downside, that is exactly what we want to look for. We like to look for those easy setups where we can just walk up and pick the money up off the ground. If we can do that, that's great. We did that with the Potash, the POT play this week; the money was there on the ground, we stepped up and picked it up. Got to love that.

As for Friday, it was really what we expected and what we wanted. We had that big down day on Wednesday -- it's expiration week -- and sometimes you get the big moves mid-week, and that's what we had. Friday was rather calm. It was up, at first, as we thought it would be, and then it came back. We didn't really know if it was going to come back Friday or not. As top stocks market went ahead and declined that gave us a chance to move in and get into some downside positions, to position ourselves for next week. We got a little Amazon, we got a little Apple, we got some of the Q's (QQQQ) to the downside to get ready for more of the downside move. We were getting in position for what we think will be a down Monday as the downside resumes. We also have some continuing upside plays with some pulling back, some continuing higher. CME was down Friday, but it was a great mover for us this week. As a matter of fact, this week we had a bunch of good moves that went to the upside, even when the market was going down. We had Potash. We had CME. We had Amazon to the downside; nothing wrong with going with the market direction. That was nice. We doubled up on some more of Amazon puts Friday. We took some Priceline gain off the table as retail was having some issues. Digital River gave us some more gains. That's the way we do it. We let them go up, we take some gains as they go up, taking money off the table as key moves are made. But we still get bigger gains, because we're leaving some on the table as we go. As long as the stock remains in its trend, whether it's up or down or sideways, we can make money by just letting some of the position run for free after we bank some nice gain on strong surges. That's what we've been doing, and it pays off; we had a good week that way.

As for Friday in specific, we had a lot of economic data. We had the CPI. It was basically in line, but the core was hotter (no food and energy), and it was hotter at 0.3% versus the 0.2% expected. We had the New York PMI. It was much better at -4.55. Still contracting, as is all the economic data, but it was a lot better than the -14 prior, and the -12 expected and showing that little bit of improvement. Again, slowing on the way down, slowing the fall into the abyss. Indeed, it no longer looks like we're going to fall in the abyss. Just the ditch. That can hurt too, but not as bad as never finding the bottom.

CME (CME Group, Inc.)
Company Profile
Once more the market was seeing if anyone was watching. The action was toppy with many top stocks for 2010 rolling over for a needed correction, but the market was again laying some money on the ground to the upside and seeing if anyone was going to take it. We have made some great money on CME and it is one of those top stocks of 2010 that is a 'watch,' i.e. it is on our short list of top stocks for 2010 that we always look at no matter what. Why? Because it can run like a deer to the upside or fall like a rock, ripping off big chunks of real estate when it does. When it sets up, get ready.

We just played CME off of the 50 day EMA, and thus were watching as it tested that surge. Ironically, on Monday it showed a perfect doji at the 10 day EMA, the set up we love. We SHOULD have been anticipating this after the action to end the prior week and been ready to enter when we saw the doji Monday, but sometimes, just sometimes, the market is very generous: it laid the money on the ground and it gave us a second chance to pick it up.

We put CME on the report Monday night. Tuesday CME gapped higher and did not come back to test much at all on the session. That didn't give us much to work with, but we did like that the stock was holding over the 200 day SMA in the last hour. We moved in with options given the stock price (near $250). We bought June $250 strike call options for $16.20 when we saw that CME was going to hold the 200 day SMA and on strong volume into the close. Given the gap and the less than optimal entry point, that was important for continued upside as it showed enough strength on the break to continue the move.

It was. CME blasted higher another $15.60 on Wednesday, building some excellent gain into our options. Thursday CME surged higher again, gapping out of the gates and running toward $300. It started to stall after another big surge, putting the 3-day move at over $50. For any stock showing three strong, outsized gains back to back, it is time to take some money off the table. We sold some of our options for $37.20, netting $21/option or 126% gain in less than three days. Did I mention CME runs like a deer? Very nice way to end a week in a down market, and all we did was take what the market was giving.

We also had some other great plays for the week. Once more we ran to the POT, or Potash, picking it up as it completed a test of its late April break higher. It moved laterally for a week, tested the 10 day EMA on an intraday move and started to bounce. That was our signal to get in and we jumped in with some stock and September $95 Strike call options at $11.50. We also sold some May puts for $2.80. POT blasted higher again, surging 13% through Thursday. We sold some of our options for $18, banking a 56% gain. We sold some top stocks for an 11.5% gain, and on Friday those puts we sold expired worthless and we kept the entire $2.80 per share. We tripled up on POT and our cup overflowed. Better than the pot, eh?

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 best stocks 2010 from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stocks 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.

IDXX (Idexx Labs--$40.80; -0.21; optionable): Diagnostic substances
Company Profile
After Hours: $40.80
EARNINGS: 07/24/2009
STATUS: Test 200 day SMA. Broke out of a rolling trading range in late March and rallied nicely on into early May. It paused some at the 200 day SMA (39.61) on the way up, then bolted to 44 before fading back last week. It held over the 200 day and indeed closed just over the 18 day EMA Wednesday to Friday. Sitting right on top of the late April lateral move below the 200 day, a level that also matches the mid-October lows. Looking for that support to hold this week on some more testing and then for IDXX to rebound and continue the breakout move. Very nice.
Volume: 463.325K Avg Volume: 575.965K
BUY POINT: $41.65 Volume=700K Target=$47.55 Stop=$39.39
POSITION: UID GH - July $40c (54 delta) &/or Stock

MON (Monsanto--$89.95; -0.08; optionable): Ag chemicals
Company Profile
After Hours: $89.95
EARNINGS: 06/24/2009
STATUS: Test breakout. MON was on the report recently, but it gapped away and required us to be patient and wait to see how it reacted to the gap. MON has held the gap, now moving laterally, testing the late March peak on the lows and rebounding. Very solid action as ag top stocks 2010 were stronger all week (see POT). Likely to continue testing laterally for a few sessions, and when it finishes and makes the break higher we move in. Nice higher high after the November low shows plenty of support for MON. Just spent $97 for a gallon of the super concentrated Round Up. Don't they know there is a recession going on? Doesn't seem to matter, huh?
Volume: 6.211M Avg Volume: 6.853M
BUY POINT: $91.04 Volume=8M Target=$103.45 Stop=$87.21
POSITION: MON GU - July $90c (52 delta) &/or Stock

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