I remind everyone that I am not a guru, I am a student. I don't blindly recommend this system, I am merely theorizing that it should produce good results, and I am about to test that. Like me, many of you have 10K or so accounts for options trading. My account is a discretionary account. Losing the money completely would not hurt me in a significant way. I want to get your input on each trade. Please ask all the questions you may have.
I will start by looking at some candidates. I am looking for stocks that jump or drop more than 5% in one day with at least 2x the normal volume. I will then look at the reasons for the move and see if they meet a good fundamental reason for the move. The "catalyst" should be preferably a long-term one. After selecting a candidate, I will enter a trade and show here the order fill confirmation. Hopefully together, we will learn what may go right and what may go wrong.
All orders will be placed as limit orders and the will all have a stop-loss order, should the trend reverse unexpectedly. I will place at least 5 trades, with a limit of $2,000 a piece. I intend to make it a diversified portfolio, avoiding stocks in the same sector as existing trades, unless they are expected to go in opposite direction (one bullish and one bearish). I will take my time waiting for the right opportunity. My belief is that when the opportunity shows, it will be quite obvious. Patience is a great virtue.
Here is a list of stocks that trigger my system in the last 5 trading days:
http://finance.yahoo.com/q/cq?d=e&s=AAPL%2bAL%2bBIIB%2bCREE%2bCSCO%2bDELL%2bET%2bKG%2bKG%2bMYG%2bPXD%2bRSH%2bSKS
Let's look at each one of these stories individually
AAPL, AL, BIIB, CREE, CSCO, DELL, ET, KG, KG, MYG, PXD, RSH, SKS
AAPL - Apple Computer, reported earnings a month ago, beating the street by a wide margin, earning $0.37. Estimate were for $0.31:
http://finance.yahoo.com/q/h?s=AAPL&t=2005-07-13
Yesterday, AAPL jumped to a fresh new all-time high due a great opening of the iTunes music store in Japan (>1 million songs in 3 days). In addition, it has been rumored that Google may be making a deal with Apple to provide an iTunes page in its site. Further, while Apple seems to be growing market share in its computer business, Dell has been struggling with revenue expectations.
This story has been evolving for more that 2 years now, and it is a good one. As you know, I already have a position on AAPL, so I am going to pass on this one. I also am more interested in stock with a brand new, exciting catalyst.
AL - both Alcan and Alcoa were upgraded this week. Again, I am looking for more than just an upgrade. I am interested in a strong catalyst. Increased demand for certain commodities in China suggests that AL and AA may have good years to come. Fundamentally, AA is the "best of breed" with a lower PE and a higher market price, but it was not AA who jumped in high volume. My criterion for a good catalyst to meet the jump was only met partially. We will keep looking.
BIIB - A report said that the previously halted anti-multiple Sclerosis drug Tysabri may continue development. The news that the drug may have been responsible for fatalities in Feb, caused the price of BIIB and its partner ELAN to lose significant market cap. While the stock price of Elan remains under $10, BIIB reached prices not seen since the Feb debacle. The Elliott wave chart, however, does not seem to reveal an end of the downtrend or a significant bottom. I am forced to pass on this one too.
CREE – The stock has fallen after reporting lower than expected earnings. However, the significant catalyst is the resignation of the companies CFO at a time when the company is issuing a warning about current quarter forecast from 29 to 22 cents per share. Also, CREE is in the semiconductor industry, facing competition from giants such as Intel, Texas instruments and Applied Materials. Despite its history of good earnings, their growth has come to a standstill, so I do not anticipate renewed investor interest for a while.
A significant drop to toward the year's lows may suggest that a new bottom will be formed. Currently at 23, CREE may go to the low teens this year. My Elliott wave analysis using RET seems to confirm my expectations.
Note that the expectations for the B wave of the zigzag appear to have been met when the stock formed a double top at $31 early this month, after reaching a short-term high in mid June, both the highest likely price target and the farthest likely time to reach it. Wave B of a longer term flat is likely to reach somewhere between $19 and $9.
Here is the proposed trade that I will enter on Monday Aug. 15th.
Note that the number of contracts is an odd one. This is because I intend to keep each position cost below $2,000. But let's not jump too quickly on the trade. After a day of like Friday, CREE is likely to bounce back somewhat on Monday, and entering the trade too early may cost us profits. Here is what to do:
1. Looking at the chart below, expect a 38.2% retracement of the fall from the highs of the day before earnings. In this case, CREE could bounce back to $25. Don't place a contingency order, wait until you are sure that the bounce will not exceed $25. You can use the Stochastics as a trigger.
2. If the bounce is stronger than that and exceeds the 50% retracement level, in this case $25.5, do NOT enter the trade. There will be other opportunities.
3. If the stock resumes its descent after hitting $25, that is the time to enter the position, and place a stop-loss if the stock exceeds the $61.8% retracement level (in this case $26).
4. The worse that could happen in that CREE continues its way down on monday without much of a bounce. In that case, I look at the other candidates in my list or others that may show up in the next few days.
CSCO - Even though Cisco's fiscal fourth-quarter sales and profit were in line with Wall Street's expectations, the stock began falling in late trading Tuesday immediately after Chief Executive John Chambers in a conference call forecast first-quarter sales will rise 10%. Analysts on average expected sales to rise 11%, based on a survey by Thomson First Call.
http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7B807568C5%2D096B%2D4BF8%2DB418%2D4BC85F64BD5A%7D
This report does not strike me like a strong enough catalyst to have a significant impact on CSCO shares on the long-term, and a turn around is likely to occur, eventually. It seems to me that the CREE story is more interesting as a trade.
DELL - The company actually beat the street in earnings, but came shy or revenue expectations, causing the stock to fall. Without any other mayor catalysts, it is better to expect a bounce in the weeks ahead, not a continued decline. AAPL is the best of breed in DELL's sector currently, so we just avoid DELL as a trade in either direction.
ET - E*Trade jumped in merger news, which I just avoid.
KG - had good earnings. This is a generic pharma company with good earnings to report. There is no strong catalyst for me here.
MYG - merger news.
PXD - not a strong catalyst.
RSH - jumped on news of a $500 million share buy back. This is usually a good sign that RSH may have bottomed. However, when I think of RSH I don't think of growth, and there is no catalyst to change that.
SKS - merger news.
RRGB - The catalyst for this company is very strongly bearish: The CEO has been forced out. This catalyst is likely to influence the stock performance for months to come: How long before they find a new CEO? how long before the new CEO establishes his/her vision for the company? I expect that the uncertainty will last.
The Elliott wave forecast calls for continued decline in the stock price:
I propose a trade but will do it if and when the stock prices bounces a back somewhat. If the strong decline of friday is retraced more than 50% and reaches 61.8% (keep watching the 60 min stochastics oscillator), we will avoid the trade. If the stock bounces only 38.2% to 50% and then begins to decline, we will enter the trade.
Here is the proposed trade. The strike price of the trade may change if the bounce reaches $50.
Now let's get started. I propose we watch those 2 stocks in the days ahead and wait for the proper time as suggested above. Here is the account with no trades in it and the amount to trade with being nearly $11K. I will be posting all confirmations and the account balance and positions from time to time. Enjoy the ride!
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