Order Of Magnitude

Hartford Financial Services Group showed up on our scanner again today.  Since we've recently taken to trying to improve profits by taking smaller bearish positions in the financials, we turned this one over try and see how we could profit from HIG's further decline.  We started with a look at the Equivolume chart:

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There was a substantial move to the downside about 3 weeks ago (13 trading days).  After the move downward, there was still elevated volume at the lower price before the price popped back up.  Now the price has been butterflying lower. HIG is sporting support at around $8.25.  Next we looked at the premium charts for options:

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click for larger Call Premium chart

The January options are premium in excess of 25% of the current stock price.  Not surprising considering the 21 period average true range is $4.20 which is 45% of the current price.  We're going to be looking selling a tiny parcel of naked Jan $10 calls at around the $2.30 mark.  Stops will be set at $3.25.  If price breaks below the strong support, we'll sell a few more naked calls at whatever the bid is at the time, adjusting our stops accordingly.  If we manage to get a bidder with either transaction, we'll hold onto them until we get stopped out or the New Year rolls around.

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 There is a lot of buzz on the technical blogs that the market could be forming an 'inverse head and shoulders' pattern.  The pattern is a common signal for the reversal of a downtrend.  We don't see the desired volumes in the pattern right now, but that won't stop us from riding a bit of a wave up if the neckline is breached.  If the neckline is breached on volume, a self fulfilling prophecy will unfold as all those that are calling the bottom will buy in and force the price up.  If the neckline is breached we will be taking our profits off the table at about 75% the height of the pattern.  Here's a look at the Equivolume charts for the funds.

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Scanning again this week did not yield a single positive score.  While we don't live or die by the scanner, it would not be prudent to ignore this symptom.  That said, here's the top five negatives for the week:

• GGP
• GNW
• LVLT
• THC
• GM

General Growth Properties closed friday @ $2.07.  Considering the average true range over the last two weeks of trading days is still over $1, the volatility in this one coupled with it's super low price will keep us on the sidelines.

Genworth smashed support which was a bit above $4 and slid downward on 3 times average volume.  There may be a quick short play here.  We will short a small position if the price gets back into the $3.50 to $3.70 range.

Level 3 is again a no touch.  The price's average true range over 15 trading sessions is more than 25% of the price.

Tenet Healthcare had a bad week last week.  Their price smashed through support when they released earnings; they turned a profit, but not as much as the market expected.  As usual the market punished.  There has been a lot of downward momentum, and a little bit of a rally is in order.  If the bounce happens, we'll be looking for an entry around $2.75, taking half profits at $3.00 and closing at $3.25.  Stop placed solidly at $2.60.

General Motors is currenly sitting at major support.  If it drops below $4, we'll enter another small short.  This one is even more dangerous as it's one of the majors, and the government may get involved.  Be sure to enter your stops and stick to them.

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Interesting action was all over the market today:

The difficulty is that this counter trend rally has erradicated any positive trend scores from our system.  Previously, the Ultra Short Index Funds like: SDD, QID, SDS and SKF were the only things packing a positive trend score on our scanner.  Now with the Dow, S&P 500 and Nasdaq all pulling in gains around the 10% mark, nothing is showing up with a positive score.

On the flip side, however; after a huge market rally like we saw today, more and more attention should be paid to the negative trends.  Anything still showing negative trends on days where the market rallies like this are candidates for our short list.  Here's what we have:

• E*Trade.  Upon putting out earnings and having over twice the deficit in profits that the market predicted led E*Trade to the chopping block.  An analyst downgraded price targets, and the market pretty much moved the price to that target.  Given our recent 'avoid financial companies' policy, this one is a no touch for us.
• Advance Micro Devices.  Selling activity has been all over this semiconductor company since September.  Our plan here is to watch early morning action, and if waters are favorable, we'll initiate a small short position with a stop above $3.20.
• Las Vegas Sands.   Guess the market doesn't think a whole lot of people are going to be vacationing in Vegas in the near future.  Same plan as AMD, with a stop at $7.50
• Nabors Industries.  No surprise that this company's price tracks the price of oil.  Normally we'd buy some deep in the money puts for this one, but because of the ludacris volatility affecting the pricing of options, this one we're just going to sit on the sidelines.

Remember: This isn't advice, just our observations and our plan.

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After a week of mainly sitting on the sidelines, we ran the weekly scanner to see if any new trends have developed.  It is quite sad, that of the 4900+ Canadian and US equity instruments that feed our system, only two: QID and SDS pulled out a positive score.  Being that these instruments are Ultrashort large indexes, the news is pretty grave for anyone that thinks the market is heading higher based on the money the US Fed has been printing and shoving into the economic fire.  Looking at long term trends, however, we will share the top negative:

• FNM
• MOS
• AIG
• SIRI
• FRE
• WB
• ABK
• RIMM
• FCX
• DYN

The political chaos at the moment means we have a hard rule to not touch Financials, Insurance or any sort of Banking stocks for the time being.  That rule wipes out half the list, leaving behind Agricultural Chemicals (Mosaic), Broadcasting (Sirius), Communication (Rimm), Materials (Freeport-McMoRan) and Utilities (Dynegy).  The plan is to watch the market open on Monday, and set some aggressive price targets for entries to the downside.  If they get filled, we will rest with the comfort that stocks appear to be strongly trending in our direction.  If they don't get filled, we'll probably be safer out of the quackery.

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Even north of the 49th parallel, the news is packed with tidbits, gossip and opinions about the federal 'rescue plan' that was put together during emergency sessions this weekend.  The vote is supposed to happen on Wednesday, and nobody is sure which way it's going to go.

Stop the Housing Bailout and No Cash for Trash are both very well done web sites considering the timeframe in which they were put together.  The real question though, in the Democratic system, aren't you supposed to listen to the people?

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The SEC banned short selling on a set of stocks.  Proponents say it will stem the tide of bear attacks and naked short selling, but naked short selling was illegal a long time ago, and this action will not likely stop it.  One could argue that banning short selling to stop naked short selling is akin to stopping the sale of knives to stop stabbings.  You aren't really effecting the perpertrator. Furthermore, it is our belief, that this temporary injunction will do more harm than good.  Now liquidity is a problem, and prices will be jumping all over the place as there is no fight between bears and bulls.  The fight is now just between Bulls and Bulls that have taken too much and just want out.Sure, the market sky rocketed on the news, but if you look at todays action, you have the major indicies moving between a percent up to a percent down inside the space of an hour.  When the restriction is lifted, look forward to another wild ride. 

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Morgan Stanley moved a lot of volume over the last couple of days.

Have a look at the Equivolume:

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Looking at the October Call contracts:

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Volatile indeed, there is a lot of premium priced into those contracts.

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SL Green Realty Corp. felt pain outside of the ordinary in today's bloodbath.  The REIT holds a good deal of office space in downtown New York, and no doubt a chunk of it inhabited by the various financial companies in pain these days.  The price smashed through the support areas around $75 to $76, and did so with a great deal of force in volume.  Selling short, picking up some long term in the money puts or selling out of the money calls are all posibilities depending on the state of the market in the morning.

Support and Resistance graph since last October:

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Equivolume:

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The financials got hammered today, and smashed through support that was holding around $19.50.  The price was recently trapped in the channel between $19.50 and $23.50.  This one has the potential to head down to $17.00 again, with support at the July lows.

On the other side, candlestick chart readers will see the inverted hammer which can be a downtrend reversal depending on how tomorrow goes.  For confirmation the price can not trade below the open all day.

Tight management is the only way to trade in this environment

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