Let’s start off with a little bonus for subscribers today: The Semiconductor (SOX) index was once again incredibly weak yesterday and was a drag on the overall markets. Every time the S&P or Nasdaq tried to rally intraday, the SOX index failed to follow along, which had a tendency to weaken the Nasdaq and subsequently the S&P. So, what I have done is compiled a list of Semiconductor stocks that are about to break, or have just broken, to new 52-week lows. In the event the broad market and the Semiconductor index is weak again today, more active traders could consider shorting these stocks once they break to new lows. You may want to print this list out, and keep an eye on the SOX over the next couple of days. When stocks break to new 52-week lows, they often drop very hard because there is no short-term support left. Here’s the list, along with the prices that would constitute a new low:
MXIM – 32.00, NSM – 16.90, IRF – 21.25, LSCC – 6.00. Also, the following semis have not yet broken to new 52-week lows, but are close to losing big support: TXN – 21.10, MU – 18.00, MCHP – 20.58, STM – 20.02, AMAT – 13.30, KLAC – 36.40.
Thursday’s market weakness confirmed my thoughts about why Wednesday afternoon’s rally occurred. The weakness we experienced yesterday is what I actually thought would have happened on Wednesday into the close, but because Wednesday was the end of the month, we saw a short-covering rally because many hedge funds wanted to close their books by covering shorts at the end of the month.
The pullback in the markets yesterday is actually quite healthy and what I would expect to see in order for the market to digest recent gains. In fact, I would not be surprised to see a 0.318 Fibonacci retracement, which would take the S&P index down to the 860 level and would fill the gap from July 29. If that occurs, the market will probably find short term support around that level and attempt to rally back to test the highs that were set last week.
Today’s watch list:
GTW – Gateway, Inc.
Trigger = 3.70
Target = 4.50
Notes = I typically do not trade stocks under $5, but GTW is a liquid stock and the risk/reward on this setup is good. GTW showed relative strength on Thursday by holding above its support all day and rallying into the close, despite the weakness in the markets. I will be looking to buy once it trades above Thursday’s high, which also puts it above resistance of its 20 day moving average.
WEN – Wendys International, Inc.
Trigger = 35.45
Target = 33.40
Stop = 36.60
Notes = Don’t get me wrong; I like a nice greasy burger from Wendys as much as the next guy, but that doesn’t stop me from shorting a good setup. Notice how WEN rallied right up to its resistance of its 40 day MA a few days ago and quickly got slammed back down without even having enough momentum to test the break of support, the former uptrend line, that occurred on July 11. WEN also ran into resistance of its 20 day MA on the weekly chart. Looks like WEN will eventually retest the 200 MA around 33.25.
Deron’s Report Card:
The ADPT short triggered and I am currently short the stock. I have lowered the stop loss to 5.91, which is close to break-even because it did not crack as hard as I expected once it took out the 52-week low of 5.88. I don’t want to lose the money on the trade in the event it turns out to be a false breakdown, so a break even stop is a good way to guard against that, but yet still allow the opportunity to realize more potential profit on the trade.
GM was quite difficult to trade today because new auto sales numbers were released in the middle of the day at 12:56 pm (http://biz.yahoo.com/djus/020801/200208011256000761_5.html) which caused GM to have a false breakout right up to our trigger price. I was watching the stock for entry when it started running, but after I discovered it was a news-driven rally, I was reluctant to buy because when stocks run purely on news in a bear market, the moves are usually short-lived. If GM would have held its breakout price, I would have entered, but it was too quick of a move because of the news. It was really a judgment call because it could have easily kept running, but I would rather have seen GM rally on its own accord without being driven by news. So, although I did not enter the position, I am still watching it for entry above yesterday’s high because if it breaks yesterday’s high, it will break a multi-month downtrend and probably rally several points. I have not listed GM as a play for today, but I do intend to enter it if it gets back above 47 without being driven by news.
The RMBS long never triggered and the setup no longer looks good because it broke the bullish triangle consolidation support level of 5.10.
- GM long (triggered on news; did not enter per explanation above)
RMBS long (never triggered)
- ADPT short – shorted 5.75, lowered stop to 5.91, target still 5.00, open with + 0.06
Glossary and Notes:
Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.
Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday updates.
Closed P&L under Deron’s Report Card is based on the actual price I closed my trade at, not just the theoretical target or stop price listed for each stock. Open P&L is based on the closing prices of the most
recent trading day.
Remember that opening gaps that cause stocks to trigger
immediately on the open carry a higher degree of risk because the gaps often do
not hold. Use caution if trading stocks with large opening gaps.
otherwise noted, average holding time is 2 days to 2 weeks once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner