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Weekend Newsletter for
April 1, 2007
Table Of Contents
1) MARKET SUMMARY
2) STOCK SPLIT PLAY
3) TECHNICAL PLAY
4) COVERED CALL PLAY
Stock Split Notices Investing Q & As Glossary
1) MARKET SUMMARY
> >From "The Daily" at InvestmentHouse.com
Feds undercut a rally attempt, but stocks manage to rebound to flat.
- End of quarter pushed energy, weakened techs. Can the market revert to pre-Wednesday?
- New tariff raises the fear of more to come and retaliation, but it sure sounds like Japan bashing in the 1980's.
- Chicago PMI surges back, spending and income remain strong while oil and gasoline continue their ascent.
- Indices still at a crossroads in the rally and importantly, still in a correction.
Market Summary (continued)
It could have been a really bad week for the market and we had some issues that confronted stocks that were really beyond the scope of the usual market action. It all hit on Wednesday after we had a nice pullback underway. Fed Chairman Bernanke did not please the market with his comments to Congress regarding inflation. Indeed, he said that inflation was still a problem for the economy and the Fed's main concern moving forward. His testimony was part of the issues that helped bring things lower Wednesday, but the market also gapped lower that day, as other issues in addition to the Fed undermine confidence (isn't that always the case when the Fed is active?). Investors have to deal with the Iran/UK problem where the servicemen are being held hostage, in turn helping push oil steadily higher all week. That started undermining strength in the market subsequent to the rebound and the follow through, turning an orderly test into more sharp, volatile selling.
The market did manage to catch itself. It wasn't just a plunge into oblivion after Bernanke came out and oil prices surged. Stocks finished out the week testing lower, but then rebounded as the sessions went on to close. The market started to sell off after the handle that was forming after the follow-through two Wednesdays back, but the handle is still holding up. All the indices are not equal right now, however, as the S&P 500 and the S&P 600 are still in decent shape, the small caps in excellent shape. NASDAQ and SOX, well, they're trying to abdicate their leadership once more. They were trying to take the lead as this last rally started.
We have seen that before; we saw it back in 2006 when that rally started. NASDAQ shot out front, but could not sustain the lead and left it up to energy, metals and materials on the S&P 500 and the S&P 600 to lead the market while the techs were happy to tag along. They tried again at the start of 2007, but abdicated that lead after just a week. Now after jumping out in front in the rally off the lows with chips surging and NASDAQ providing the follow through, they are fading once more. The irony is NASDAQ provided that follow through session two weeks back and is now the index that is in more trouble than SP500 or SP600.
Read "The Daily" Entire Weekend Summary
Here's a trade from "The Daily" and insights into our trading strategy:
Chart by StockCharts.com
TRW (TRW Automotive Holdings Corp.)
Company Profile
Sometimes strong moves come from unexpected quarters. That is why we always scan the market looking for leaders regardless of the sector of the economy. That means leaving preconceived notions in the briefcase when looking for stocks. While we may believe a sector or stock is not going anywhere, the market has the last word.
Thus when we were looking at the market in early March we saw the automotive parts makers showing some relative strength even to the energy stocks. TRW was one such stock, coming back to test the February breakout, easing back to near support at the 18 day EMA, showing a doji on the candlestick chart. After a pullback that often indicates the test is over.
When we saw that we put it on the report on 3-1-07. Three sessions later it surged higher on stronger volume and we moved in, buying some stock positions at $30.55 and some July $30 strike call options at $2.85. With a 62 delta (meaning they move roughly $0.62 for every dollar stock price move) they would give us good gains if the stock ran as anticipated. Given the size of the runs TRW puts together, we were looking for about 5 points on this next surge.
TRW added $0.30 the follow session and then got its legs, pushing higher by $0.99. As is often the case after a strong move it took a pause, but the next session was at it again with a $1.19 gain. It took a couple of days off, fading slightly, but as volume was low & it easily held above near support at the 10 day EMA, we let it run. Over the next three sessions it added $2. The move started to slow with smaller price gains, and with almost $5 built into the move since it started that told us TRW was starting to peak out on this leg. We told our subscribers to be careful if it started higher but reversed; that would be our signal to take some money off the table. On 3-27 TRW opened and surged almost $0.90 but then started to fade. With that we issued an alert to sell some positions. We sold some stock for $36, landing a 14.5% gain. We sold some options for $5.80, banking 103% ($295/contract).
TRW is making a test of the 10 day EMA right now, setting up to rally again. Strong action from a stock that makes OEM parts (original equipment) for the auto industry, an industry that supposedly won't fare well when the economy is weaker. Of course, weaker is relative. You would believe we were in meltdown from some of the hyperbole you hear on the financial stations. More like a mid-cycle slowdown, but that is another story. The point is, you look at what the market and strong stocks are telling you and you buy and sell accordingly. When you do that you don't get caught in the trap of letting your emotions steer you away from potential winners such as TRW or trap you in weakening stocks just because you made money off of them before.
Learn more about "The Daily" with Stock Picks! - Issued 5 Times Per Week
** SCOTTRADE **
2) Stock Splits
Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:
1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
Listen to Stock Split Report Editor Jon Johnson's
stock split interview on CNBC-TV [ Broadband | Dial-up ]
Here's a post-split play and our current analysis.
Chart by StockCharts.com
OII (Oceaneering Intl.--$42.12; -0.87; optionable): Deepwater drilling equipment, services
Company Profile
EARNINGS: Announced 2-21-07
STATUS: Double bottom. After a big run in early 2006 that made us some great money, OII has formed a couple of bases back to back. It made a big 'V' from July to December but could not breakout to a new high. It then fell into the current 16 week double bottom pattern. Last week OII broke above the 'hump' in the double bottom (42.91), and though volume was up, it was still below average and it could not hold the move. It ended the week holding some support near 42, still set up for the break higher. Want to see some good volume on an upside breakout as that shows the buyers are back in after the 9 months of basing (plenty of base to set the foundation for a strong run once again).
Volume: 688.4K Avg Volume: 767.503K
BUY POINT: $43.22 Volume=1.2M Target=$49.95 Stop=$41.15
POSITION: OII GH - July $40c (70 delta) &/or Stock
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
Details Here.
Chart by StockCharts.com
3) TECHNICAL PLAY
AH (Armor Holdings--$67.33; -0.53; optionable): Security products and vehicle armor systems
Company Profile
EARNINGS: Late April
STATUS: Double bottom w/handle. Excellent pattern has set up the past seven weeks, using the 50 day EMA (63.71) on the lows as support for the double bottoms, setting AH for a new breakout to an all-time high. This nice base is consolidating the late January (earnings) breakout from a larger 10 month double bottom with handle. Excellent base on base action that is setting up further upside for this market leader.
Volume: 534K Avg Volume: 592.639K
BUY POINT: $68.35 Volume=890K Target=$78.95 Stop=$66.21
POSITION: AH HN - Aug. $70c (50 delta) &/or Stock
Learn more about our Technical Traders Report - Issued 5 Times Per Week
Chart by StockCharts.com
4) COVERED CALL PLAY
SUN - Sunoco, Inc. is currently trading at $70.44. The May $70 Calls (SUNEN) are trading at $3.50. That provides a return of about 5% if SUN is above $70 on expiration Friday in May.
Company Profile
Learn more about our Covered Call Tables - 8 Tables Updated 5 Times Per Week
PREMIUM SERVICES
IH Alerts: InvestmentHouse.com's Best of The Best Plays!
Stock Split Report: Forbes.com Best of the Web
Covered Calls: 8 Tables with nightly updates - energize your portfolio!
Tech Traders: Breakouts, wedges, etc...focusing on stocks ready to move now!
The Daily: "The Daily" is a must read for all investors!
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP., or Split Ventures, Ltd. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on the related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites.
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