Last week was an exciting week as 3 members were is some stage of the $100 Roll process. $DEO did officially complete the $100 Roll but I am leaving in for now with a tight trailing stop.
The Fab 5 update
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Monthly Archives: April 2012
Looking for Bottoms – a look at Westport Innovations
Stocks that are in a pullback have a variety of terms applied to the price action, like “Knife Catch”. No matter how you define it, the process has one common goal: to find a bottom for price to find a new long entry.
In order to find a bottom, you must have a variety of elements within the stock chart that help increase the probability that the bottoming process is in its final stages – I refer to this as the “stakes in the ground” process.
For a current example of a stock that is in this process, I bring you the Daily chart of $WPRT (Westport Innovations):
In reviewing the chart above, you can see several things of importance:
- The pullback from 50 has been significant in a short amount of time (with volume confirming)
- 50 day moving average way above and rolling over
- RSI is bottoming near the oversold level of 30
- The Stochastics are also trying to bottom
- Price is sitting on top of the 200 day moving average
- Price hovers just above a key Horizontal Support line
Look to the Left
I use a lot of different themes within my Blog and here are some in no particular order:
- The RSI Buy
- Look Both Ways
- Perspective
- Various subjects that deal with timeframes and chart types
What I would like to highlight today is the Look to the Left concept – and why it is important (regardless of YOUR timeframe). For example, let’s look at an hourly chart of NRG (NRG Energy):
Price bottomed near the 14.25 level and is bouncing with a close at 15.40 to end the week. A nice play for those that took this within this timeframe. However, let’s pull out to the Monthly timeframe to get a really good feel for where the stock has come from – the “Look to the Left” view:
Has burned a lot of “energy” just to get back to October 2008 prices. If you are playing the current bounce, then well done. Just be sure to always take a peek to the left to see what those with other timeframes are looking at.
Have a good week.
What do YOU see?
Saying goodbye to RAX
For a trader that utilizes options frequently, there are situations that occur that can cause frustration. Some examples are:
- You own a Straddle and the stock goes sideways until expiration.
- You sell premium that seems so “safe” yet you find yourself fretting over the position and counting the days until expiration, with fingers crossed.
- You own a long position and sell calls against (covered) only to see it run past the short call strike – thus capping your return. Pullback please !!!
There are of course many more scenarios that can be put in this list, but I want to highlight the last one. I had a long position in RAX (Rackspace) and had put on what is called an April 50/55 Collar (short an upside call and buy a downside put). My goal was simple, to protect against a downside move in a way that didn’t require constant management of the position.
I found myself with the price moving up through the short call strike (and beyond) thus capping the gain. Over the course of several weeks, Mr. Price gave me a few chances to “uncover” (buy back the short call) but I elected to let the position run its course.
Due to this, my long position in RAX will be called away as price exceeds the $55 strike price, and the downside put expires worthless.
The Money Flow Index
Several times a week I spend some time running a variety of scans looking for opportunities that have not made it on to my radar screen. One such scan is a Money Flow Index scan using StockFetcher. Here is the syntax:
Show stocks where Money Flow Index (15) crossed below 20.00 within the last 1 day
and Average Volume(90) is above 50000
and close is between 5 and 250
So what does all that gibberish mean? Let’s break it down. I am looking for stocks that have seen the MFI cross below the 20 level within the last day with average volume above 50,000 shares and price between $5 and $250.
Here are some of the results today:
That is NOT positive money flow but could be a good basis for a Mean Reversion trade soon. Enjoy Knife Catchers.
Source: StockFetcher
A look at Sector performance
It is a good habit to frequently look at Sector data to get a feel for how money rotation is occurring. As mentioned before, I use StockFetcher to get a quick glance for this data and here is a current view:
By using this website, you can also drill down into Industry data as well. Poke around all you want.
The Sands of Las Vegas
I have been looking for a good opportunity to review a current trade that involves the use of an Option Collar – and how it is used to protect against a downside move in a long position. Today I bring you LVS (Las Vegas Sands Corp).
I am long the stock in my swing account from last week, playing for the 60 Roll (for the stock to move through 60) from an entry of 59. Once the stock achieved the goal, and was hovering around the 61.5 level, I elected to protect the position by putting on an Option Collar.
Here is how it works:
- I sold the April 65 strike call
- I bought the April 60 strike put
This trade cost $.36 cents (a debit) to put on. Now lets fast forward to now to see where we stand with this Collar:
- The April 60 put last traded at 2.59 (where I sold)
- The April 65 call last traded at .01
So you have the Collar on, what is the plan Stan? A key point to make here is that both of these options expire this Friday. You will need to determine soon when to sell that April 60 Put to get the most value out of it if you leave the long position on (which I am).
So in summary, I am down $1 in the long position but have reaped $2.23 in net gains via selling the Put minus the original debit for the Collar. This means I have $1.23 in wiggle room before the overall trade hits breakeven.
4/18/2012 Update: The stock is seeing a nice bounce and I have done the following with the position:
- Sold 1/4 at 60.20
- Sold 1/4 at 60.06
- Sold bal at 59.7
- Bought back the Short 65 Call at .01
This trade is now closed.
The Fab 5 update
All 5 members held up well this week including new addition ORLY. Bummed that TSCO had not made it in yet, is on the candidate list posted last week. Sure had a great week, darn it. Another from the candidate list, DLTR, looks great for a run at the 100 Roll so I am looking for a weak link here (DEO taking too long, same with PPG).
The Nasdaq Summation Index
I received several questions this week regarding some of the charts I post that have to do with the McClellan Oscillator so I thought I would provide some more detailed info on one specific chart: The Nasdaq Summation Index.
Since I obtain these charts from StockCharts website, let’s start with a brief explanation and the calculation info from there:
Also from the link above, a simple view on what to look for : 
Here is a current chart on where the NASI stands at present time (just above the 200 day moving average):
There is additional information in the link above that I recommend you fully read if you are not already aware of this. One final tidbit I will highlight though is from the Conclusion part of the link:
