Stocks to Watch (Part 3)

January 14, 2013 (6:00 pm)

We made some trades in our Long/Short and Multi-Strategy Portfolio’s during today’s trading session. We’ll explain those trades here, along with some other charts we’re watching.

Boeing: We got back into a BA short position today at $76.62. We previously shorted the first break of the rising wedge, and were surprised by the quick reversal off the $73.50 level. We held the short position expecting it to be a re-test of the lower trend line. On a subsequent breakdown, we covered our short position at a small gain. The chart pattern became too messy for our initial thesis.

However, this morning it ran back up to that lower trend line where it again faced resistance. We entered a new bearish position here expecting the resistance to hold. We will cover the position if the shares again re-take the rising wedge and have a stop at $77.12 ($0.50 above our initial position).


Bank of America: We took a bearish position in BAC as it broke through an 8-week rising channel. It may be forming a symmetrical triangle here as it consolidates at lower levels, which is a bearish indication. We will continue to hold this position unless it is able to retake its 50 DMA on volume.


Chipotle: We took a bearish position in Chipotle as it broke down from a multi-week rising wedge. It has since rebounded slightly and has re-tested the lower trend line twice. It failed both times. We expect lower prices from here.


Google: We covered our short and put positions in Google late this afternoon. We initially took these positions after it formed a clear negative divergence with RSI as it tested the upper trend line of a multi-week rising wedge. We took profits today in the put positions (26% gain) and short positions (3% gain) only three days after we got into the positions. The shares are becomming oversold just as they’re now reaching the lower trend line. They will likely find support there in the near-term.


Netflix: We took a short position in Netflix this afternoon as it reached the upper trend line of a multi-week rising wedge. It did so as it approached overbought conditions. One potential outcome is a false breakout to the upside as it jumps into overbought territory before falling back into (and eventually below) the wedge. Another outcome is consolidation within the wedge until earnings. Of course, the last option is for the shares to lose the lower support line. We are fine holding our short positions through any of these three eventualities and expect lower prices in the intermediate-term.


Nike: We entered a long position in NKE this afternoon. It has formed an ascending triangle and broke out this morning. One thing we’re watching for is confirmation of this breakout. We placed a stop at $52.72 ($0.50 below our opening price) in case this turns out to be a false breakout.


Research in Motion: RIMM has formed a fairly substantial ascending triangle and broke out on Friday. A 100% measured move would have brought the shares to $14.50, which would have been a huge move. It raced past that measured move, and we believe it is overextended here. We shorted the shares at $14.89 as it hit extreme overbought conditions. It should retrace at least 50% of its recent move.


VIX (Market Volatility): A few important findings in the VIX chart. First, market volatility is approaching the lowest RSI levels seen over the past year (orange). It moved down so quickly that it almost jumped below its lower Bollinger Band. Second, it has formed a long-term trend line (blue). Each of the past two instances where it touched this trend line over the past year, the SPY saw a 2 point decline within the following week. Just something to keep an eye on.


Conclusion: Our outlook remains bearish on the markets through the intermediate term. A majority of the charts we review have a bearish bias, either due to bearish chart patterns or overbought technical indicators. We will continue to keep in mind that the Fed is pumping liquidity into the system. However, a significant pullback is due within the next few weeks. We don’t expect a re-test of the November lows, but do expect to fill the gap created on the positive outcome of the financial crisis. Let us know your thoughts in the comments.