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.

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!!!).

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.

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..."

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.

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?

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.

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.

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

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

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.

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.

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.

IBKR Earnings

The time has come for IBKR to show wallstreet that they are worthy and why anyone should care. Only three weeks after Interactive Brokers went public they will be releasing earnings at the market close tomorrow (Tuesday 5/29). As many investors and traders know, the first earnings report is crucial for the early success of an IPO. I think it is a very bullish sign that IBKR will be coming out with their announcement so quickly after going public and check out the page they set up for the report and conference call. They know what is at stake here and IBKR appears poised to wow.
The chart is starting to take shape (maybe a diamond bottom?) and some of the technical indicators are coming into existence. The RSI below 20 suggests IBKR is extremely oversold, the slow stochastic just gave a buy signal, the 10 day moving average just turned up and the price action looks healthy. IBKR appears to have solid support around $26 but it really all depends on earnings. I like the June 30 calls ahead of earnings because they aren't too expensive with an implied volatility around 40% and buying the stock doesn't seem like a bad idea either.

As my regular readers know well, IBKR invokes thoughts of another stock I can't seem to ever get off my mind. And like IBKR this stock seems to have a low risk entry as of Friday's close:
After a solid breakout on rising volume ICE has pulled back to support near 140. The chart is starting to look like a healthy cup n' handle continuation so I like this pullback as an opportunity to go long or add ICE. I would be happy buying ICE between $140 and $145 if there is an opportunity but my stop would be set at 139.99, in other words it better not go there. I think the previous high is reasonable in 2-3 months but lets get past 153.36 first. By the way, the implied volatility on ICE options has really retreated, they are the cheapest they have been in months...

Semi Shorts and a RIMM Breakout

I'm gonna try to make this week's post short and simple. All three of these stocks will trade with the nasdaq to a large extent. In the event of a strong QQQQ (nasdaq), RIMM just broke out of a long term consolidation. The weekly chart below suggests that RIMM is in the early stages of a big move upwards:
By the way, RIMM is 35 in the ibd 100 and investors business daily (ibd) just recommended RIMM as a buy.

The semiconductor stocks have been struggling for months but recently broke out. I think this breakout may fail as the sector has some real fundamental problems, mainly oversupply. VSEA is probably the strongest semiconductor stock right now and number 28 in the ibd 100. However, it recently rolled off a peak to below the midpoint of its bollinger bands (see below) which has spelled doom for the stock in the past (an many other stocks). I would keep a tight stop on the stock, but expect it to hit the first and possibly the second of the two targets seen in the chart below, especially in the case that the QQQQ sells off:

No matter what the nasdaq does WFR looks finished. I am going to try and stay away from the fundamentals as reasons to trade from now on, but lets just say that the polysilicon seller is running into a major oversupply of their product in 2008, not good. I already suggested WFR might be a short, but now that it is working I think it is a great example of what is going on in the the semiconductor sector. WFR appears to have just completed a long term reversal:
WFR is now 74 in the ibd 100, a dramatic fall from the top ten recently.

Disclosure: I own WFR June 55 puts.
Note: You are responsible for your own investment decisions, this is in no way intended to be a recommendation.

A few nice charts and... IBKR

Looking over various stocks that I try to keep an eye on tonight, I've seen a couple really great looking charts. The commodity exchanges for example, look pretty solid, eg. ICE, BOT, CME.
Above I have what appears to be CME doing a reversal. It previously broke down out of a long term symetric triangle which led it into death spiral, the bull seemed dead. But after Friday's move CMEs chart looks fantastic, I like everything about the story the action and the options. ICE looks great too.

Another one I like it HYTM, which appears to be in the early stages of a ~36 week cycle. In the weekly chart below you can see a clear pattern in which HYTM makes a major low about every 36 weeks. In the past this low is followed by a powerful upside swing to the approximately the upper bollinger band which currently lies around $10. This is a long term move, but in the past the initial stage was the fastest. I will be prepared for some big swing or else set tight stops. They reported earnings last week.

My initial concerns about the IBKR ipo being over supplied and over priced turned out to be true. All of those that bought the ipo at 30 and those buyers since from 33 to 27.50 can't be happy. They doubled the size of the offering and the price went higher, it was pretty counter intuitive and now we see the consequences unfolding in the open market. Who knows how far IBKR will fall, but it has definitely picked up some downwards momentum:
My guess is that IBKR will at least test the middle of the initially suggested ipo price range. When I was informed by IB about the auction they said the expected range was $22.50-27.50 so I put in a bid at $25 which never got filled since it finalized at $30 and opened at $33 on the first day. There is very little to go on in expecting a support level, obviously there isn't much chart history, but I think we should be expecting it to bounce just was fast as it has dropped. One thing is for sure, IBKR is extremely over sold right now.

Disclosure: I own May HYTM 7.50 Calls

IBKR is Born (Interactive Brokers IPO)

I normally like to annotate charts but this 10 month ICE daily above is a piece of art. After some consolidation and a healthy pullback this stock looks poised to blast higher. As the long time readers know I have a fascination with ICE and it has been interesting to watch it grow into being an extremely well behaved trading stock. But tonight I wanted to bring it up as an example of what a great IPO can do in the early years.

After a bullish yet erratic initial six months following the IPO (which happened to be on the day before my birthday, Nov 2005) the chart began to take shape. On the weekly below you can see how the stock has been able to develop a more clearly defined trend and pick up momentum. Also note how the volume has increased while the weekly candles have become smaller(less volatility). Just click on the chart below:

From a fundamental standpoint the Intercontinental Exchange and Interactive Brokers don't have all that much in common They are both in the business of options, a rapidly growing investment vehicle, however ICE is a commodity contract exchange while IBKR is an online equities broker. Their IPOs were somewhat different too, ICE offered up only 16 M shares and jumped substantially from the open on its first day of trading, although it closed far from the high of the day. IBKR on the other hand:

"The automated global options market maker and broker, rose 4% to 31.30 after hitting 34.25 intraday. Interactive Brokers raised $1.18 bil in its IPO, the biggest so far in '07. The offering was first planned for 20 mil shares at $23-$27 each. But Interactive Brokers (NasdaqGS:IBKR - News) ended up selling 40 mil shares at $30.01 each, at the high end of its revised range." -ibd

I use Interactive Brokers and aside from a few minor complaints I am pleased with them. They have a great trading interface which is software based and enables programmed trading without too much effort. As a broker they are great because they have very low commissions and I can chat with technical support with little delay about any sort of problem. What really makes me really bullish on the stock (after it finds support) is the fact that they only do 20% of the US options volume. With their platform so much more advanced for automated options trading I could see this market share increase dramatically and further the US options market is growing anyways. They have a great mission statement:

"Create technology to provide liquidity on better terms. Compete on price, speed, size, diversity of global products and advanced trading tools."
You can read more about Interactive Brokers here, its really a great story.

At any rate, they sold a ton of shares in a auction offering. So for now I would guess it needs to find some sort of equilibrium before beginning a good run, but you never know with IPOs. You can bet I will be watching this one, hoping to get some cheap shares soon and eagerly awaiting options on IBKR. The first day of a beautiful thing?:
By the way, all this new supply of online brokerage shares makes me want to short the other, lower quality brokers, ie. Ameritrade (AMTD). I guess that stock is trying to run on pin action or something, but I'm itching to buy some puts. I'll tell you about my experience with Ameritrade on another day, but most people know what I'm talking about.

WFR is Getting Diced

Reasons to sell WFR:

• broke it's 50 dma for the first time in 6 months on its highest volume ever
• CCI gave a sell signal on this move (fell below 0)
  
• stock has a huge following from momentum traders that may want to exit
• sentiment has changed, WFR was downgraded Friday, earnings did not please
• WFR is falling in the IBD 100, now 39 from 14 last week
  

Take a look at what happened last time WFR broke it's 50 dma after a long uptrend and the CCI crossed over, this occurred last year:

IOTN is in play again after Cramer pumped it 25% in the after hours by speculating that a big contract is on the horizon. Um yeah, like I haven't heard that a thousand times. Monday morning might be a great opportunity to get some 7.50 puts. Just a thought.

Also, CREE formed a perfect reversal candlestick Friday on no news, in fact it was quite bizarre. But it looks ready to resume it's trip to zero.

Disclosure: I own WFR June 55 puts and CREE May 20 puts

No Post Tonight

I've been busy with taxes and a myriad of other things so I don't have a post lined up for tonight. I just want to remind everyone that it is options expiration this Friday, so keep that in mind. I will try and post a few plays for the expiration either Monday or Tuesday. You can also seek me out on the othernet during the day, my user name is pythagoruz. In the meantime, one of my new favorite bloggers Jim Kingsland had a great post on the broader market this weekend. You should check it out.

Update: The market is acting pretty irrational right now and the charts aren't giving me many nice setups. I just cant bring myself to participate in the market right now, in fact it sounds like many traders are getting chopped up. I'm hoping by the end of Wednesday things will clear up and I can find some good setups for Thursday, I will post if and when that happens. -py

Nice Recovery, but Volume Please

On price action the broad market has staged a powerful rally from the March lows. Many market watchers are calling for a resumption of the uptrend and new highs, based on the swiftness of the recovery and the tendency of this market to "shrug off" (ignore) cracks forming in the US economy, a collapsing housing market and a "foreclosure tsunami" (sub-prime and more recently alt-A lending meltdown). It all smells like a roast, the amateur shorts are getting their clocks cleaned on this rally from the lows, the newbie funds are getting suckered into buying this rally and joe schmoe is being told that the glitch is now over, "time to buy again". Call me a conspiracy theorist if you want, but I don't buy this rally. The chartist in me says, ok well the chart is pretty bullish aside from the volume. On the DIA (dow jones) weekly chart this run looks like a text book bear flag on the linearly declining weekly volume, but one cannot deny the strongly upward price action:
On the other hand my gut continues to tell me this market is toasted and in for a long and potentially steep decline. I especially like shorts in the banking sector, companies like DSL, FED, CCRT, COF, BKUNA and even the higher tier firms like GS, MS and BSC. Also, retail is set to do a major face plant soon, I like GES, COH, CHS and NKE among other shorts. If you feel the itch to get long, betweenthebars found a great one in the silver miner SLW and I think he also recommends the health care company CELG. The biotechnology sector has been a strong performer lately and we may be in the midst of a baby boomer health care rally. IMCL, GILD and MRK have nice charts in that area. But I would be very defensive in nature on any long since in my view little stands in the way of another "glitch" day.

BOT Update

What looked too good to be true last weekend really was. BOT reversed out of gapfill mode around mid day on Monday and has driffed higher since. But $190 has proven to be resistance albeit weak, so I would exit any remaining short positions in BOT there. I should have been more clear about a stop last weekend, which should have been set at the top of the gap, $185. I made the mistake of not setting the stop myself and am still holding. I think there is still a decent chance of BOT heading back below $185 at which point I would want to be very short. Targets on short positions are circled in blue. Please click on the chart above.

Beautiful BOT gapfill in progress

Fundamentals aside, this is a chart I would want to be heavily short right now. BOT closed Friday at is low of the day, which sets the upper end of a range of prices that BOT has never traded at before. The announcement by ICE a few weeks ago of their interest in merging with BOT sent the shares to new highs leaving behind a $20 gap from $165 to $185. Had this not occurred during a market meltdown and more importantly a CME and ICE meltdown the BOT gap may have held, but selling ensued and BOT has been filling the gap on high volume ever since $185 broke last Thursday. Kudos to ChicagoStock for bringing this trade to my attention and calling the $185 break early last week. I would expect BOT to reach the previous $176.89 high in no time, but maybe pause there as the range of never traded prices would be filled. The 50 dma should be at least tested (at $173.74 now) and eventually the compete gap filled (~$167). The only risk here is that a full scale bidding war ensues with ICE and CME raising their offers. I wouldn't expect this to happen but if it did you can bet both CME and ICE shares would sell off pretty hard and in both cases the offers are for almost all stock. In other words BOT should trade somewhat with ICE and CME. In fact, until recently BOT shares traded proportionally with CME as that merger was thought to be a done deal, although they have diverged as of late.

Disclosure: I own BOT puts.