Tuesday, July 31, 2007

Deat Cat Bounce Over.

Today was another sad day for the bulls as the markets clearly resumed their fast downtrend taking out the recent lows. Here are the intraday charts for future reference. Congrats to those who took my advice on the AHM puts, the stock closed around 1$ today from around 18$ just a month ago when I mentioned it. In fact, the collapse of this mortgage company was part of the reason why the market fell so hard this afternoon. More on that here. Now is the time to take profits if you have not. My new favorite short is DECK.

Sunday, July 29, 2007

Short the LBOs? (Leveraged Buyouts: DCX, TXU)

I was reading The Kingsland Report yesterday, as I do everyday, when he got me thinking about these recent private equity deals as possible shorts. I know it sounds crazy but the market is beginning to doubt the future of these buyouts with the target's stock prices falling well below the buyout price. Now many in the arbitration world see this as a boon for them, they buy the stock and get the difference when the deal goes through. And I assume they incur little risk by hedging themselves to be safe (with puts). As the credit market has become crowded with debt to be sold for these deals the appetite for debt/risk has fallen dramatically. This goes back to the worries many had months ago about the housing market woes and sub-prime problems spilling over into other areas of the economy. Well they did, in a big way. It has become increasingly possible that these deals may fall apart altogether which, in and of its self, would crash this market, among other reasons why the market may crash on Monday. Now for a few charts.

Diamler Chrysler recently announced they would have to postpone the sale of their Chrysler unit to Cerberus Capital because banks were having trouble financing their 10B$ portion of the 12B$ deal. Honestly I don't know exactly what this means for the DCX stock, but I do see a perfect head and shoulders top on the chart with an 80$ price objective. The August 85$ puts are trading for only $1.50 so if the stock does go to 80$ they will have a cash value of 5$, this gives the trade a nice risk to reward ratio in my view (possible 233% profit).

I thought the TXU deal, the biggest LBO in history, was done months ago. But as it turns out some greedy investors think that they can get more for their company and the banks must be praying that they get their way. This deal must be facing a number of hurdles in getting it financed and on Friday someone bought 10,000 January 2008 TXU 65$ puts for 2$. Thats a 2M$ bet that TXU will be below 63$ by January 2008 and the deal was priced at 69.25$. If 65.10$ breaks I can see TXU heading to its next support area around 62.50$ or maybe its 200 dma (61.50$) in no time.

Another one I noticed some heavy put buying in was HET. This deal must be a shoe in for the arbitration investors since HET is such a profitable fast growing company as opposed to TXU or Chrysler. But for whatever reason (which could be part of an arb hedge), investors bought 15,174 August 80$ puts around .40 Friday. Take a look at the HET chart, it is trading well below the 90$ offer and recently began to slip further. If even one of these deals falls apart you can bet the stock will crater and the other LBO stocks will probably tank in sympathy, keep an eye on the headlines.

I'll try and post more ideas later tonight. CREE continues to be a slow motion train wreck towards 20$. AHM has completely fallen apart and canceled their dividend, expect bankruptcy soon. CCRT, well I hope you got some puts in that one. IMB same story. I'm thinking Sprint (S) 20$ puts might be a good trade on Monday also. Also, Indigo had the great idea of doing polls each week to encourage feedback so please vote in the poll on the right. We are very curious what our readers think about this current market action. Good luck tomorrow, and please be safe (honor your stops!!!).

Friday, July 27, 2007

Its a top, but is it THE top?

Today it looked like the market was going to take somewhat of a breather until about half an hour before the market closed and Bam! That was the fastest, hardest end of day sell off I've ever seen and it resulted in all the indexes closing at their lowest levels of the day and the week. The daily charts are all now broken badly and many stocks look like death.

Thursday, July 26, 2007

Intraday Index Charts (nasty day in the market)

Today I really wanted to see what the intra day charts looked like back in February when the market had it's largest drop of 2007. Today felt almost identical to that day and in fact the pattern was very much the same with the fastest declines occurring around 2pm EST (when margin calls begin) and the bottom being reached about 30 min later. Today became the second worst day of 2007 but markets closed much higher than the lows of the day. For future reference or whatever else you might want to use these intraday charts for, here they are. Is this the end of the 5 year bull market or just a correction? Please vote in the poll on the right!

"Dow 14,000 we hardly knew ye..."

Wednesday, July 25, 2007

No, it's not a Top

Just to show you that we here at Stock Geometry don't always agree, let me say, "No, I don't think this is a Top, for a variety of reasons".

Just for starters, I happen to think that if you're going to start calling broad market tops you really ought to be looking at broad market charts. There are plenty of stocks out there that have suffered severe reversals lately, but a quick look at the DJIA, SPY, or QQQQ charts doesn't show anything quite so severe. Among these only the SPY is trading at its own 50dma.

In fact, of the broad market indicators only IWM is significantly below its 50dma. In my opinion these charts are showing us only a slight "move to quality". I wouldn't even use the term "flight to quality" here. This move hasn't been anywhere near so profound as that.

Quite frankly, these 4 charts are not telling me we've seen a top. As Brian Shannon of Alpha Trends likes to say, "The markets are innocent until proven guilty". And these charts are not guilty, by far.

In terms of market fundamentals it may be time to review a few things that chartists just love to ignore.

One of my favorite reads is Pimco's "Featured Market Commentary", usually written by Bill Gross monthly. I don't always agree with his conclusions either, but he is wealthy and he got there on his own. He controls a lot of other peoples money too, and besides that he's a reasonably good writer. It was in his February publication that he made it crystal clear to me why it is that the stock markets have been unstoppable for the last several years.

He said to the effect that, "Petro-dollars and the dollars from our trade deficit with China continue to be recycled back into our markets, without regard for price". That situation certainly hasn't changed since February. In fact, with the slow devaluation of the dollar, it's probably fair to say that an even larger total number of dollars are now being recycled back into the markets, still without any regard for price. I'm sure Bill Gross would love to be managing Chinas trade surplus. The rest of us should be thankful that he is not.

And there are other sources of dollars that are regularly invested, without regard for price. Huge numbers of dollars are regularly deducted from most people's paychecks and are then paid into various pension funds, mutual funds, or 401-k plans. Almost all of this money too is one hundred percent invested the moment it is received.

And finally, there is plenty of discretionary money available to be invested. When CD's and term deposits are paying only a few percent per year, it is hard to leave that money aside, particularly when many blue chip stocks pay that much as a dividend. This is particularly true at a time when the true rate of inflation is so very hard to judge.

And as for the the situation in the real estate markets, lets keep in mind that many of the former speculators have just had their favorite game taken away from them, and not all of them got caught with real estate inventory. Those with cash are now looking at the stock market as being "the only game in town".

And so the cash keeps rolling into the markets, without regard for price. Thank you Bill Gross, for a great quote.

Tuesday, July 24, 2007

Is this the top?

Hey all, I've been traveling and busy with some other projects so sorry I couldn't get around to posting on Sunday as usual. I think the other contributors have been on vacation lately too and why not! Its summer, time to kick back and catch some rays. But also I haven't been seeing many great setups lately and the market has been making all sorts of wild moves. This is by far the toughest market I have seen to trade. Fundamentally, it makes sense to me that this market should have crashed back in February as it almost did, but then like magic, the market reversed higher. Now, the credit/housing problems have really started to effect other areas of the economy and I would say again, the market should crash. Its as if the bulls have played dumb just to make sure that, in fact, a collapsing housing market would be bad for the stock market before giving up on this five year bull market. Miraculously, this market has charged ahead squeezing the shorts, leading to new all time highs in the the Dow Jones Industrials and S&P 500 while the Nasdaq has made new 6 year highs even as economic growth is the slowest it has been in four years. The bears have brains too big for their own good and the bulls played dumb squeezing the heck out of them hungry bears. Now the markets are in this state where everyone is scared, the shell shocked bears and the bulls who pressed their luck seem to all be confused about the direction. Is this the top of the market, who knows? At everyone moment the market seems like it is about to roll over and die, it plows higher like god himself is invested.

These times have reminded me to stick to my roots, to the chart, the only thing we can be certain of as traders. Letting go of personal bias about the market, even if this bias may be based on sound financial information (fundamentals) has been the hardest part of making money in the market for me. The chart never lies. A stock goes up because demand out weighs supply and buyers are willing to pay higher prices. The same stock will go down because sellers are more aggressive than the under-demanding buyers. Our job as traders to is sniff out the supply and demand by looking at the chart in anticipation of future price action. Now more than ever is is important to listen to the charts and accept whatever it is the market is telling us. I think Brian over at Alpha Trends and Trader Mike (see links to the right) are some of the best technical traders on the web for the broad market indexes and I suggest reading their blogs for broad market trends. What I hope to provide here are ideas about some individual stock charts since this has always been my strength. I will tell stories sometimes about the company's business prospects, but my best picks have always been chart plays. Let me just say that right now I see a heck of alot of charts breaking badly, even leaders like ICE. Is this the top, I don't know, but a ton of previously strong stocks are starting to look topped.

Take a look at CAT, whom until last Friday was the second biggest gainer in the Dow Jones Industrials for 2007. The stock had been a leader, in part, due to their healthy "global" growth business. But sure enough the housing slump caused them to miss expectations by a wide margin and predict hard days ahead. Enough with the stories, this stock is done. It broke it's 50 dma badly on record volume before a dead cat bounce (no pun intended) which has set up a sweet shorting opportunity. And by the size of the last two day's volume I'd say plenty are doing just that. I will be buying some CAT august $80 puts.

The rapidly growing and leading commodity exchange ICE had a failed cup n handle breakout last week, but watch for earnings :

Here's an island top on AAPL:

Partially in response to an earnings miss by Google, the rapidly growing Chinese internet giant BIDU is dropping fast:

Even my favorite solar stock in this red hot sector has taken a hit:
Now some of these stocks have reported earnings while others are due to report in the next few weeks (check for yourself, I know WFR, AAPL and BIDU are after the close Wednesday, ICE is Thursday morning). And these reports have the potential to outweigh any selling or chart breakdown, just look what happened to AMZN. The stock broke down today (below it's 50 dma) just before posting record blowout earnings after the close and the stock made new all time highs in the after hours trading. In addition, these stocks are leaders for a reason and it is typically unwise to bet against them. However, they are good barometers as to the overall strength and health of the market, the market's reaction to these companies earnings may be the key.

Any opinions, is this the top?

Sunday, July 15, 2007

Solar Squeeze (FSLR, JASO, LDK, SPWR, TSL)

The solar stocks have been on a rampage lately on increasing volume and many of them have massive short positions. The poster child of this rally is First Solar, ticker FSLR (see above), which recently had a big gap up and run on $1.3B in new solar panel orders. FSLR has formed what looks like a short stroke (no pun) on the daily time frame. This is a pattern you see after a big move where a stock consolidates mostly sideways for a week or so before blasting higher again. According to IBD, this pattern provides an "itty bitty opportunity to buy shares."

Since going public last fall the short interest in this stock has steadily risen. Theres no doubt that this will be a great short at some point, but lets wait for signs of a top first and until then the premature shorts will propel this stock higher as they take losses. I am very bullish on this stock above $119.85 (the all time high) which is conveniently just below $120 so this may provide a pause for the inclined to buy $120 calls before they go in the money. This level would then be a nice price to set a stop or for a longer term hold or a trailing 8% stop might be effective given the 8% range in the short stroke.

I'll leave it up to the readers to check out the charts of the other solar stocks like JASO, TSL, LDK and SPWR, but they all look very similar. They are exploding higher as the short interest grows. One stock that for the most part has not joined along that is in this sector is WFR. I have been bearish on WFR for a couple of months now but the chart is starting look good again after a few months of consolidation and base building. If WFR can manage to close above $67.50 things could get interesting. Based on a rough measured rule $85 seem like a good target once WFR starts making new all time highs.

On a few other notes, ICE broke out and looks like an awesome buy at pretty much any price as it marches towards my $210 target. In fact Investors Business Daily recommended ICE as a buy in the weekend edition of the paper. SWKS has earnings after the close on Wednesday and I will probably take some profits (but not all) ahead of that announcement even though I am still very bullish on the stock. AHM might be finding some support at $14 but who knows, that stock is a train wreck. I am also interested in IMB as another mortgage company short (like AHM and PHM). IMB seems to have more downside potential than the other mortgage stocks and the chart is begging to be shorted. Finally, Brian over at Alpha Trends had some interesting short squeeze ideas over the weekend. Check them out.

And don't forget that July options expire on Friday, so deal with your July's if you haven't yet!

Disclosure: I own ICE calls, SWKS calls, AHM puts and IMB puts.

Sunday, July 08, 2007

ICE Cup n' Handle

ICE looks ready to break out of a 4 month cup n' handle early next week after ICE said that they "decided over the weekend it wasn't worth trying to pay more for the CBOT (BOT) given the Merc's (CME) edge and its increased offer." Fears of a bidding war (which turned out to be warranted) ended a huge rally in ICE last winter and effectively formed a perfect looking pattern. I think ICE will breakout easy and the volume will confirm but if you want to be conservative I'd wait for $162.50 to be surpassed (don't be surprised if ICE gaps up there). Based on the measured rule for this pattern the target is $210.

Another chart I came across this weekend was what looks like a rising wedge in the Semiconductor Holders ETF with ticker SMH. This fund is comprised of the leading semiconductor companies and lately it has been outperforming. However, the rising wedge is typically considered bearish and based on Bulkowski's statistics it leads to a downward breakout 69% of the time. This pattern must breakout out up or down next week as the wedge will come to a point by then. See Bulkowski's site for more info.

And now a few other noteworthy points on previously mentioned stocks. As I suspected, CCRT did breakdown nicely last week on strong volume and looks to continue lower. If you missed the breakdown, CCRT looks like it may do a throwback so you may be able to enter shorts around $34.50. SWKS scheduled their 3Q earnings release for July 18th, recall I am expecting positive results based on the chart breakout, recent results and the iPhone. AHM shorts still look good. I think profit taking on JASO would be prudent here. WFR continues to trade in a channel about it's 50 dma. Finally, a significant correction in DECK must be near with it's weekly RSI at 92.42, thats the highest (most overbought) I have ever seen.

As always, please remember that you are responsible for your own trades and investments. This blog is not intended to be financial advice but rather some thoughts that I or the other contributors have on the market. Trading stocks and especially options can lead to catastrophic loss of capital, please be safe.

Disclosure: I own SWKS calls, AHM puts and DECK puts.

Sunday, July 01, 2007

Bullish On SWKS & A Few Bearish Charts

I came across SWKS in a less than typical way this weekend. Scanning the front page of reddit I saw this article in which the author dissects an iPhone. In particular, I noticed that one of the chips in the image seen above was made by Sky Works, a small cap public company I had briefly heard about. And so this got me checking out the company and the chart, etc, etc.

I did a quick search to see if this information (that their chip was in the newly released iPhone) was widely know and published. In fact this article was the only one that came up, and it is from last December. To quote them:

"We are highly encouraged by what we believe is an Apple win for many reasons," Acree wrote in a note to investors. "First, at about $2 per front-end module, this new customer could contribute meaningful upside. Second, we believe Apple's decision to use SkyWorks over competing module suppliers is a material technology endorsement that should be acknowledged by investors."

So it appears there was no solid evidence, albeit confident speculation, that a SWKS chip might appear in the iPhone until now. I was hoping that I could get this post out before there was a headline about it on yahoo, but this Sunday afternoon the news appeared. More on the "iPhone effect" here. When this rumor broke last fall the stock hit a high of 7.97 which it has been unable to break since and more recently the stock has hovered below resistance at $7.50. Take a look at the long term chart here and the 6 month chart below:

The technicals look strong on this stock with the 50 dma providing support just below at 7.13 (a good place for a stop loss) and is rising while above the 200 dma. The tight Boulinger Bands suggest a big move soon and the RSI says it can move up for a while before becoming overbought. Any close above $7.50 would be a nice breakout and above $8 a big breakout. But considering the iPhone news and strong chart I like it on any move above Friday's high of $7.52 intra day. The depth of the most recent base suggests a target around $9.50 which is close enough to $10 to aim there. If we view the longer term weekly chart as an inverted head and shoulders pattern then the breakout price is $8 with a target of about $12, so lets be mindful of 8$ resistance and get to $10 first.

I don't feel like playing analyst today, but a quick glance at their fundamentals suggests that the company is growing and strong. The stock surged following their 2Q results (last quarter) in which they earned .08 versus .01 the year before, meeting analyst expectations. Revenue was up 5% and they projected earnings of .08 to .11 per share for the current quarter. If we guess they make somewhere in the ballpark of .40 eps this year that would give them a current PE of about 18, which is cheap these days. I couldn't find a date for their 3Q earnings release, but based on their last report I would think it will be in late July.

And now for a few bearish charts, lets start with the good ole' S&P 500:

Ok, so its not the end of the world for the broad market, but we sure are looking closer to a longer term downtrend maybe to the 200 dma (a 5% correction). Many will say "well, we are in a neutral market because the S&P looks range bound" and it certainly looks range bound. But if we look at the highs an lows closely we see that in fact the index has made a lower low and a lower high albeit only slightly. Furthermore, the S&P has failed to regain it's 50 dma on several attempts (you know how I feel about a broken 50 dma) and it just seems like there are sellers lying in wait to distribute into any meaningful rally, for example on Friday. I expect last week's lows to be broken now that the second quarter is over and it was a great one for fund managers. They now have some profits to take after they wowed their investors in the 2nd Q (April-June).

I don't want to say a whole lot about this one other than that AHM has no support below from the past 3 years and the stock is in free fall. The stock spent Friday consolidating after they scrapped their yearly guidance citing a surge in mortgage delinquencies and offered no new guidance to console investors. There was also an analyst downgrade to underperform. I can imagine the next major catalyst to move the stock lower will be the cancellation of their dividend.

Also, I have been watching CCRT in the wake of the weak financial sector. I am surprised the stock has been able to hold up so well given their strategy of providing credit to poor credit customers. See my post on CCRT for more on that. But from a technical standpoint it seems to be set up for a nice breakdown soon. If it breaks it's 200 dma at $34.50 the next stop is $33 on the way down to the prior lows near $25. I haven't forgotten about that hedge fund called Second Curve that apparently has a large interest in CCRT and has been heavily invested in sub-prime companies (details here). In other words, another fund that could implode. Pure speculation on my part here. Here's the chart I'm looking at.

Disclosure: I own AHM July $17.50 puts