Sunday, March 25, 2007

What Now? Short CCRT and Trade ICE

The market popped last week on the federal reserves shift to a neutral bias bringing the indices to the area where the big plunge a few weeks back began. I would say we are at a pivotal point in the market where we either move higher and continue the bull market to new highs and more new highs, or we bounce of resistance above and head lower. Economic issues are definitely suggesting a major sell off should be occurring right now, but the chart just doesn't agree. I have the DIA (Dow Jones ETF) 6 month chart above. You can see DIA is trying to move above its declining 50 dma but on lighter volume. Some of the indicators suggest lower prices while others suggest it will pop. My feeling here is that this is probably the best time to be shorting but we better not fight the tape, lets just look at a few charts that we can trade while we await some confirmation of a broad market trend.

Compucredit (CCRT) is one that I like fundamentally short and was given to me by contributor betweenthebars. They offer credit cards and other forms of lending to poor credit customers and have a business segment in sub-prime. I traded this one down on the last big sell off and now after a big bounce it looks like time to re-load puts:
A massive wall of resistance lies around $34 for CCRT including it's upper BB, 50 dma, 200 dma and a declining trend line. I'd recommend placing a stop at $34 and targeting $25.50 below.

As a follow up to the post last week about ICE. It broke $125 and sold off hard as predicted but I failed to notice another support level nearby in my previous post. There should be some support at a the low on the last substantial ICE pullback, $123.16. In fact this level held on Friday and the stock appeared to rally from this area into the close. I can see why the stock is selling off on the impression that ICE is about to get involved in a bidding war for BOT. I can also see why the stock should correct after running for so long to such expensive levels with no major correction. But this is turning out to be way too easy for the shorts. ICE needs a good explosive run to shake out shorts before the downtrend continues. I would buy the stock here hoping to sell it near its 50 dma at $140. Set a stop loss around $120 as the lower BB should keep ICE from falling too much in the short term.

Have a great week and as before I will post as soon as I fell like the market has decisively picked a direction. Disclosure: I own ICE calls and DIA puts.

Sunday, March 18, 2007

A Brief History of ICE

In November of 2005, the Intercontinental Stock Exchange went public in one of the hottest IPO's of the year and ICE was born. The initial offering price set by the lead underwriters Goldman Sachs and Morgan Stanley was $18-20. "By mid-morning, ICE shares had risen 63 per cent to Dollars 42.50." The ipo has found a steady stream of buyers since aside from a -45% correction (on mediocre volume) last Spring and the weekly money flow has stayed solidly positive until recently. ICE has had record volume in the last three weeks as it sold off through its 50 dma and previous upward channel. The weekly CCI is possibly about to give a major sell signal (by crossing zero), but the daily chart shows some divergence. If the correction last spring is any guide, expect the stock to get at least one wild swing in to the upside to shake out shorts and also expect the lower boulinger band to be the ultimate and final stop on the move down. My gut here is that ICE will hold support at $125 and bounce back up to its 50 dma or so before another big move lower. In the daily chart below you can see how any break of $125 will spell more doom and gloom for ICE. Long term support levels are only compiled from a year of data but they come in just over $100 and at $82.40 the previous high. Its a beautiful chart even though it looks like a train wreck.
In the end it really depends on the rest of the market which I think is too mixed up right now to forecast. The fed meets this week and we get housing numbers, furthermore, the charts have a look of indecision to them right now. Clearly there is a new downward trend solidly in place but the market may still want to swing around a bit as equities move into a state of equilibrium and continue moving in the path of least resistance. I will post a follow up later in the week, and/or the moment things start to become more clear to me about the near term direction of the market. In the meantime I recommend keeping a close eye on all investments. Be sure to set and honor your stops.

Sunday, March 11, 2007

One Hell of An Options Expiration

This may be one of the most volatile weeks the markets have seen in a long time. With all the crazy events of the past few weeks the VIX has skyrocketed. That goes hand in hand with alot of puts being bought, many more than usual. And stocks fell hard. On Friday all these March options will expire. Then you also have the sub prime insanity. Many many holders of puts in NFI, NEW, FMT, LEND and CCRT will have profits to take somehow. In addition the broader markets have been much more volatile lately. And now after an almost 50% retracement of the initial decline the markets could potentially fall very far just to retest the recent lows. If this drop did begin to happen then all the put sellers would have to cover themselves somehow. By shorting the stock or else preventing it from falling by buying tons... So it goes both ways, I would expect the sub-primers to pop huge next week because there are no shares available to short. As for the rest of the market, lets see the second wave down to complete a simple ABC correction. Click the CME chart above, I think it would move big this week.

Max pain for a few sub primes:

NEW: $12.50, currently $3.21
NFI: $20.00, currently $5.24

These are the most attractive.

Also, many of the big wall street firms post earnings this week and they will be big movers, for more on that situation check out my new favorite blog: The Kingsland Report.

Disclosure: I have CME and CCRT puts.

Wednesday, March 07, 2007

Nightmare on Wall Street

The horror, the horror.....

The ICE March 140 Puts, Two Day Chart:

Sunday, March 04, 2007

Off with their heads! GES to the Guillotine

What a difference a week makes. It looks like a combination of sub-prime implosion, rebounding energy, the end of the yen carry trade and a global market meltdown may have finally brought the end to this overextended and tired bull market. No single factor is to blame for the violent reversal but I think the spreading of sub-prime lending woes is the poster child of the end. What started off as the isolated problem of a few lenders going under has spread into a big sell off in all mortgage then banking and now all financial stocks. Of all the financial stocks you would expect the Wall Street giant Goldman Sachs (GS) to be the most immune. Well GS topped with a nasty high volume breakdown last week:

It is almost unbelievable that GS could drop from within a few percent of an all time high to 30$ lower in just a week. The scale of the technical meltdown in other leading stocks is staggering. You can see it clearly in CROX, NYX, ICE below, but open up a chart of just about any recently "great" stocks and it will be there. I want to be very clear about this action, this is no orderly pullback, no correction and no buying opportunity as the mass media portrays. In my humble opinion this is the end of the 4 year bull market and the beginning of a multi year bear phase. If you want more color on my broader view leave some comments or drop me an email.

In the past, when the market begins a large scale bear movement I have found the IBD top 100 often provides some of the best shorts. And it makes sense because these popular high growth stocks, and high priced stocks can't quickly turn sour as investors seek to lock in profits. One sector that you have heard me and betweenthebars (btb) be very bearish on is retail. Btb nailed the DDS call at 52 week highs as well as JWN. Both have subsequently fallen hard, but those as well as many other retail stocks have much further to fall. Take the IBD #2 stock for this week "Guess?" (GES).

With all the credit problems we are hearing about with the fall of the housing market you have to wonder why retail has been so strong. It would certainly appear as though it can only get worse from here especially if the US does follow through with an economic slowdown. Even if we don't go into a recession though, the psychology of a falling broad market will take retail stocks down hard. The best of them, JWN got it's head taken off on great earnings last week, the worst of them, DDS broke through major support. But GES is trying to hold out, as is common with the leaders (and it sure is a leader at #2 in the IBD 100). Furthermore, GES is expensive by any measure and currently sports the highest forward PE in the sector aside from COH. I think it goes to at least $60 before all is said and done but probably to $70 (-10) in the next few weeks. The 75$ March and April puts come to mind with the stock over $80. If you want conformation watch for 78.74 to be breached.

Here's a chart that looked similar to GES near the open on Friday. It also involves a top ranked IBD stock, in fact it is # 6 this week: ICE. It paid off huge for me and has much more expensive options (so its harder to profit from). I wouldn't chase ICE to the downside right away. It will undoubtedly test and hold its 50 dma, at least initially. But I would short the bounce. These following two charts also demonstrate what the indicators are telling you and how rapidly they can change over the course of a day.

Friday morning:

Friday after the close:

A common behavior to look for in the coming weeks is where a stock vascillates about it's 50 dma a few times. The 50 day moving average often provides very strong support as investors step in to buy the pullback. This leads to often multiple swings around the 50 dma level before the eventual plunge. The first big drop happens to start the move and the second big drop is usually this eventual giving up of the 50 dma. I will provide more examples of this behavior in the next few weeks, but keep in mind this oscillatory behavior when trading. Good luck out there. And stay short!

Ps. If you are wondering about all this sub-prime talk take a look at a few charts of these stocks: NFI, NEW, FMT, LEND, HBC and CFC. And there is going to be another big gap down in them all Monday as NEW basically said they are bankrupt last Friday.

Disclosure: I own CROX (June) and DDS (April) puts.