Building the next Fab 5

This basket of stocks has been on hiatus as it has been incredibly difficult to find 5 candidates that meet all of my current criteria. With this in mind, I have modified my screen in hopes that it will open up the candidate list a bit more. Here are the current results that meet the criteria (1-16):

This is a basic screen:

  • Price over $90
  • Average Volume over 300K
  • Stocks only

I am going to put one of the candidate criteria as an exception so that I can give some of these worthy candidates a shot (the “no price print over $100 in the past 52 weeks will now be something I will use optionally).

I will put together a candidate list throughout the day Friday, and will look to put together a final team of 5 for entry on Monday.

Let the Cat out of the bag

The Weekly chart of $CAT (Caterpillar Inc) shows that price is at a critical point here as it hovers on this Horizontal Support line:

The RSI is near 30 which normally signals an oversold condition – Dip Buyers typically show up in droves. I have been patient with this one, waiting for it to show me that it truly wants to bottom – or fall through this support line.

Either way, I am ready for this cat to get out of the bag.

Description above courtesy of Phrases.org.uk

My options trade in Facebook

The day finally arrived for option trading in $FB today. I have spent some significant time over the past week in preparation for putting on a trade but settled for a traditional Risk Reversal trade.

Here is the breakdown on my trade I posted on twitter this morning:

  • Short the June 30 Call
  • Long the June 30 Put

At the time I put this trade on, price was in the $29.50 range. The trade cost me $.45 (a debit). The June 30 Put was and is still currently in the money. I continued to watch the volume throughout the day, over all the offered months, and was truly amazed to see it hit over 300K option contracts traded. For one day. Wow.

Here is how the June options finished the day:

The Measured Move in JC Penney

I received a question this week regarding the “measured move” chart pattern and so I thought I would keep an eye out for a good example. I previously did a post on a measured move in $CBS here.

It did not take me long to see one this morning during my chart reviews. I bring you the Weekly chart in $JCP showing 2 black parallel lines of equal length:

If history does rhyme, you should see a nice $20 bounce to $45 a share.

Perspective

As someone who spends a great deal of time doing chart reviews, I often  see more than one potential pattern within a stock chart. I am sure the same holds for others that do Technical Analysis.

A few questions arise that need answering when this happens:

  • How does one makes sense of these multiple perspectives?
  • Which one should be given a priority over others?
  • What happens when two patterns reinforce each other?

For an example, I bring you $AGG (iShares Barclays Aggregate Bond Fund) with 2 different views:

The important thing to remember here is the above 2 representations of the Daily chart are both viable patterns to trade from – and there may be other patterns that others may see using other components like Fibonacci for example.

 

Strategy adjustments

The above courtesy of Dictionary.com gives us the definition of Strategy. The relevant one for this post is #4:

a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result

I have been building a new position in $FFIV this week and found myself disappointed today with my strategy execution, putting the trade on backwards in terms of how I normally execute it. Must have been the Colorado mountain air, lol.

So, now what? I certainly had several options to choose from. Here are a few:

  • Do nothing. Live with the 1/2 long position and manage it accordingly. Nothing wrong with doing this.
  • Sell June puts to finish off the trade (usually what I do, but I normally do this as a first step). Best to do this on a RED day for the underlying.
  • Sell June calls, thus making it a covered call trade. Best to do on a GREEN day for the underlying.

Making an adjustment to trade execution is not easy, especially when some of the trade is already on. After some consideration and review, I elected to go with selling the June 110 Calls for $2.78. Why this choice? Well the main rationale here is that I don’t like selling puts on a RED day for the underlying. By selling the calls, this is what I get:

  • Capped gain at 112.78 for the overall position through June expiration
  • The $2.78 in premium collected gives me downside protection below my initial entry ($109) to 106.22

One additional thing to note here. I do have a trail stop on the long stock position so one scenario is that the stop is taken out and I am left with a short June 110 call. Other scenarios to consider:

  • Stock can just go sideways and the premium decays on the short call
  • Stock can move up and potentailly cause the underlying to be called away
  • I can turn it into a Collar by using the premium collected to buy a downside June put

If you wonder what I am doing at times, hopefully this helps understand some of my thought processes.

Playing the Gap Fill in EMC Corp

Now that we have the $NTAP earnings behind us, I wanted to look at others in the sector/industry for opportunity. The two stocks I have been watching today are $FFIV and $EMC. I have already started a 1/2 position in $FFIV at 109.

For $EMC I have been watching the $24 level and the small gap down to 23.64 that is within reach. Since it is likely that the Bears would want to fill the gap, given it is so close, I wanted to come up with a trade that lets me get in now – and not worry about the gap fill, overshoot, undershoot etc.

So this is what my plan is:

  • Sell the June 24 Put for .78 cents
  • Buy the June 25 Call for .39 cents

I have sold the puts already and will ease in to buying the calls once the gap fill players show their play.

Looking long term with JP Morgan

The month of May has not been kind to $JPM as it wrestles with an apparent bad “hedge” in their London CIO. At some point however, the stock price will find a floor so in preparation for that I have been looking on some longer term trade possibilities.

Earlier on twitter I posted one such idea:

The breakdown for this trade is as follows:

  • You go short the March 2013 $34 strike Call for a $4.20 credit
  • You go long the January 2014 $32 strike Call for a $6.60 debit

The net to this trade is a $2.40 debit. However, the January Call that you own is currently ITM (In The Money). To further enhance this trade, you could sell OTM (Out of the Money) Puts each week and/or month. An example would be to short the June $30 Put for $.45 cents. With a steady plan to do this, you could easily cover the above debit long before 2014.

 

The Fab 5 update

Last week was a rough showing for the Fab 5 as all of the members hit a trail stop and the positions were closed at some point during the week. Two of the members – $DEO & $ORLY – had already completed the $100 Roll process however bringing the total since inception to 14 stocks.

Summary of the action:

  • $DEO was closed on 5/15/2012 and the May 100 Puts were sold on 5/18/2012. The May 105 Calls expired worthless.
  • $ORLY was closed on 5/17/2012. The May 100 Puts were sold on 5/17/2012 as well. The May 105 Calls expired worthless.
  • $SXCI had not completed the $100 Roll. It hit a trail stop on 5/22/2012. There was no collar on this position.
  • $DLTR hit a trail stop on 5/14/2012. Sold the May 100 Put for 2.60 on 5/15/2012 and let the May 105 Call expire.
  • $AGN hit a trail stop on 5/17/2012 as price fell through the 100 day moving average. The profits from the Collar unwind on 5/2/2012 makes the trade positive overall.

Also noted on twitter during this past weekend that there were no viable candidates from the stock scan efforts. As of today, this still remains the case so being patient here in building a new Fab 5 list.

Change the Lens – the series

In order to truly understand all the differing perspectives of the market in a particular stock, it is important to take the time to look at several different timeframes of a chart. You need to change out the lens to get a broader view at times, but sometimes you need super granular focus as well.

To help illustrate this, I bring you the Weekly chart in $OSK:

This chart shows a defined range that has formed since December 2011 with the Bollinger Bands now starting to squeeze. Note the size of the 2 Volume at Price (VaP) bars in the range. Now let’s pull out to the Yearly chart to see what this action in 2012 can be summed up as:

All this volume at price action, just to form a silly Spinning Top candle.

It is fine for shorter term traders to play this $9 range, just be sure to remember what the long term traders see – and how they may trade based on their timeframe.