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.

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.

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.

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.

Nightmare on Wall Street

The horror, the horror.....

The ICE March 140 Puts, Two Day Chart:

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.