Sunday, June 24, 2007

Broken 50 Day & 10 Week Moving Averages

You'll never see me post a daily chart on here without the stock's 50 day moving average (dma) plotted (or almost equivalently the 10 week moving average on weekly charts) and there's a good reason for that. This simple indicator is the average of the previous fifty day's closing prices (or previous 10 week closing prices) and reflects the intermediate term trend. For the argument's sake let me try and define a few potentially otherwise vague terms. Any equity whose 50 dma (which should be almost identical to the 10 week average) is rising and below the current price is up trending or in a "rally." The opposite is true for any equity whose 50 dma is declining and above the current price. Take a look at the Dow Jones Industrials 2 year weekly chart and plotted 10 week average for example:

This curve tells us how the Dow Jones has been trading more recently relative to how it was trading 40-50 trading days ago (8-10 weeks ago). For healthy up trending equities it is perfectly normal for prices to stay above the average as institutional investors often buy near this price in support of the stock's uptrend giving this benchmark real value in the eyes of technical traders. So long as prices stay above this dynamic average it should continue to rise and the stock remains in an uptrend.

Back on March 20th IBD had an interesting article about the importance of these averages, I'll quote them:

"If a stock falls below one of those levels, then rallies higher, it tells you that big institutional investors are stepping into buy shares. On the other hand, a stock that falls below its 10 week or 50 day moving average and fails to rally back above that line or continues to head south, may continue to sell off."

As you can see from the Dow Jones 2 year weekly chart above and the S&P 500 daily chart below, these average have just been breached. In fact they were just breached in the last few hours of trading last Friday. Notice what happened the last time this happened circled in blue.

More from the IBD article:

"In addition to the price moves, keep an eye on the stock's volume on the day it drops below its 50 dma. If volume picks up substantially as the stock slices through one of those lines, it's a sign that banks and mutual funds are selling shares. Without the buying power and support of big investors, a stock will have a hard time bouncing back."

When it becomes obvious that these supporting averages are lost that's when the waterfall begins and a sharp move to the downside ensues. I wouldn't throw in the towel just yet on the broad market, but tomorrow is decisive. Also I wouldn't wait for the Junes lows to be broken before getting short either (as some have suggested), if it starts to look like the DIA and SPY are not going to close above their 50 day moving averages tomorrow (Monday 6/25) I would get very bearish in the intermediate term.

Generally speaking, the 50 day and 10 week moving averages provide a quantitative way to define an uptrend or a downtrend and many, many market watchers agree. At least that's what you see in the charts. When these averages break volumes spike and prices drop sharply which is all the more reason to watch closely Monday.

Now for a few individual stocks. WFR is one I have been all about shorting since it broke it's 50 dma last April on earnings. Following that move the stock has vacillated back and forth about this average but has been spending more time below as can be gleaned from the 50 dma's declining value. Click on the chart below:

To me WFR looks right at the "proper short sale point" according to William O'neil's book on short selling:

PHM is a good example of how price action looks relative to the 50 dma in a down trending stock. This stock's biggest declines come when it first slices through the supporting average or bounces off an attempt to recover the declining 50 dma, in other words, when it acts as resistance to upward progress:

Finally, if you haven't yet. Take a moment to read betweenthebars' updated post on COF below. I think that story makes sense on a number of levels and he makes a great fundamental argument for shorting the stock. Since his initial post the chart has made downward progress and frankly I think this is a great play, here's an updated chart:

On a final note, as bearish as things may seem be careful to not get into a crowded space. It seems as though many market gurus are calling for a top and a decline next week seems inevitable. When things seem certain in the market the opposite almost always happens because if everyone is on the same side there's no one left to move the market in that direction. There are good reasons to short this market right now (more reasons here), but when you have Barron's calling a market top on the front page of their weekend paper you have to be suspicious.

Disclosure: I own WFR July 60p & 55p, also COF July 80p

Sunday, June 10, 2007

Peregrine Pharmaceuticals...

Peregrine Pharmaceuticals is without a doubt one of my favorite companies to hate. I've been following the company for close to three years and I have yet to see them get any of their drug products out of Phase I testing.

What really bothers me about this is the fact that they may be sitting on the wonder drug of this century, Bavituximab, a monoclonal antibody that can detect and alert the body's immune system to "stressed cells". That wikipedia link doesn't provide near enough information. For a complete reading list I suggest the PPHM board at the Investor's Hub. The moderator there has done a yeoman's job of collecting links and information.

The concept of "stressed cells" and the cell wall inversions that they display is not new knowledge. When I first heard about this drug, way back when it was called Tarvacin, I asked my wife about this idea. She just handed me one of her medical textbooks. The textbook dated back to when she was in medical school and that was over 20 years ago. The fact that Dr. Philip Thorpe figured out how to target them is outstanding, but his initial patent is now almost three years old.

For those of you who haven't started reading that list of links from the IHub let me cut to the chase. Those "stressed cells" are an indication of viral infection, or a cancerous cell. Initial testing of the concept, in animals and humans, supports the patent and yes this drug really works. So, where is the urgency here? Peregrine isn't doing much more than repeating tests that they've already done, calling them Phase Ia, Ib tests.

Let me put this even more clearly. This drug is the kind of thing that every one of us should take, probably on a yearly basis, like on your birthday, in order to cure any virus that you may have picked up, or to kill any starting cancers. It could be a wonder drug and Peregrine Pharmaceuticals is sitting on it.

As far as the stock is concerned, well, you can see the round trip it made over the last couple of years, from $1 to $2 and back again.

The stock will occasionally run a few percent on news but overall it's been tough trading for well over a year, until the end of last month. At the end of last month we got a spike that was probably month-end window dressing by a fund with a new position. If that is the case, that spike could become a regular occurrence as that fund dresses up their books. We'll know more in a couple of weeks, at the end of the financial quarter.

Tuesday, June 05, 2007

Summer Trades

I'll be leaving for a two week vacation tomorrow so I've been looking for easy trades that require little attention. Today I want to let you in one of my favorite longs and my favorite short that fall in this category.

I've been following JASO since shortly after its IPO in February. The company makes solar panels on industrial scales in China, so you could say its a Chinese solar play. Following its IPO the stock formed a healthy two month base before breaking out in April on a surge in volume and price (20$ - 28$). Since that move the stock has been working on a second base and found good support at its 50 day moving average. I like this chart right where it is but if you want to play it safe look for a break of the line connecting recent highs on above average volume. If you look at the April breakout you can see a similar pattern and indicators to the recent chart, and so I have been buying the stock near $24.

A stock I love to hate is CREE and when I see it going nuts like it has lately I can think of little else than the ride back down. I have posted about the blessings of being short CREE in the past so I won't go into details about why CREE is fundamentally such a great short. I will however suggest that the stock's little squeeze is nearing an end with the daily RSI at 85 and the price trading far above its upper BB, the stochastics said it was overbought days ago. I think its a no brainer short up here, there is no news to justify this move, not even remotely, eps growth is still negative.

I'll be back to posting weekly when I get back, in the meantime check back for posts by betweenthebars (btb) and indigo-alien. But don't stay inside and trade all day, enjoy the summer while it lasts! -pyth

Disclosure: I own JASO stock, CREE July 25 puts and CREE Sept 22.50 puts.

Friday, June 01, 2007

Odyssey Marine Exploration Inc. (OMR)

Odyssey Marine has got to be the sorriest excuse for a public company that I have ever seen. Their financials constantly run at a loss, and their biggest source of cash is the constant sale of stock. You could be excused for thinking that this was a pharmaceutical company that can't quite get their drugs out of Phase I testing. But no, they don't make drugs. They are treasure hunters. As in, underwater treasure hunters.

Now let me tell you this, in the past I have worked as a professional diver, mostly in teaching, but I've done some commercial work too. It is the most grueling and dangerous work I've ever done, and probably the least rewarding too. I know a few guys who've signed on with treasure hunters and from what they tell me that work is even worse. If you're not underwater you're working as a dive tender, or deckhand, or cook. Or you're on-deck sifting through the days take for anything that might be valuable. A find is so rare as to be ridiculous. Talk about a "ship of fools".

To give OMR credit they did just find something, and it's apparently something big. They may have found the wreck of the Merchant Royal, one of the most fabled treasures of all time. I say "may". Obviously they are being very tight-lipped about this. Besides the fact that other explorers are looking for this treasure, there are many other groups who would love to get their hands on anything that has been found. We can ignore indignant archaeologists for now. The Spanish government in particular regularly asserts an ownership claim to any shipwreck that is found. And that is the case here. The Merchant Royal is known to have been carrying the payroll for Spain's 30,000 soldiers in Flanders, and Spain wants their coins back.

While OMR insiders are being coy about their find, and what it consists of, the one thing that they cannot ignore is their requirement to file their Form 4's, commonly known as an Insider Trade report. Since the find was made insiders have been selling. They know bloody well that they face a long legal battle to keep what they've found and with the stock trading at all time highs recently, they've been cashing in.

Frankly, aside from anything other than news driven day trading, this stock is a Strong Sell because it's going to be a long time before shareholders see two copper coins, never mind any gold or silver.