Long/Short Portfolio


Stocks to Watch 3/17

March 17, 2013 (9:00 pm)

As we head into a new week, the Euro is gapping down due to the Cyprus bailout news. It’s hard to imagine that the small island nation of Cyprus is the reason the Euro starts breaking down. Since the upside momentum has been so strong over the past few weeks, we expect any dip to be bought. Not until we see a small correction followed by a failed re-test of the highs do we expect the market to correct in the intermediate term. We’ve “called” the top a couple of times already this year. We won’t make that mistake again. While we watch these cracks form in the market, we’ll be watching for signs of a topping pattern. While we can’t conclusively call that this is the start of a correction, you never know. It just may be, and we’re watching closely. In the meantime, here are some stocks we’re watching.

STOCKS WE’RE WATCHING

American International Group. AIG has formed a five-month rising wedge and recently had a false breakout. The shares are again testing the lower trend line. A break below will likely be followed by a re-test of the bottom trend line before filling the $3 target move down. This is one we’re still watching, without any current trades.

AIG

Apple. Shares of AAPL are at an interesting and potentially very significant inflection point. On Friday, the shares gapped above the descending trend line that has acted as resistance all year. That’s a very bullish signal. On the other hand, it’s still within a shorter-term pattern that looks an awful lot like a bear flag. We shouldn’t be surprised that AAPL is giving us mixed signals. In order to protect against an upside move due to any number of potential catalysts in the next few weeks, we began accumulating October call options. We’re looking to add more on a decisive breakout of the bear flag.

AAPL Breakout

The longer-term view of the descending trend line (along with a number of others) are illustrated below. The green trend line towards the right is the same trend line we showed above. The next significant line of resistance is $455. A re-test of the $430 level (where the green trend line will be to open this week’s trading) could also be a bullish sign if it’s able to successfully re-test and bounce off that support.

AAPL Trend Lines

Boeing. Shares of BA have seen a massive bull run over the past two weeks. It has seen almost ten days in a row of closing above its upper Bollinger Band. The upside target from a symmetrical triangle breakout was $84, which was successfully exceeded. Further, it’s $10 above its 50 DMA and sitting at an 81 RSI on the daily chart. These are all approaching very extreme levels. We entered slightly in-the-money bearish April puts on Friday.

BA

Bank of America. Shares of BAC have formed a bearish rising wedge, with a series of gaps below its current level. It’s also sitting at an hourly RSI that has typically preceded near-term retracements. We entered a small bearish position for a quick swing trade with the expectation of a near-term pull back.

BAC

Blackberry. BBRY broke out of its symmetrical triangle and has (so far) successfully re-tested the upper trend line. We entered bullish April calls under the expectation of a major bull run in the coming weeks (the triangle has a target price of approximately $21. A fall below $14.50 will negate our expectation and is where we’ll unwind the trade.

BBRY

Here’s a nearer-term illustration of the BBRY symmetrical triangle. You can see the successful re-test of the upper trend line. Unfortunately, the re-test wasn’t as strong as we hoped. We’re closely watching this one to see if this was simply a false breakout before reversing. However, we’ll stick with our current expectation until proven wrong.

BBRY Near-Term

Las Vegas Sands. LVS bounced off the $48 level two weeks ago, which represents very long-term support. It has since formed a symmetrical triangle with a target of $60. We took a small position in bullish April calls with the expectation that it continues up towards our target.

LVS

Starwood Hotels. Shares of HOT bounced (I didn’t say it was a clean bounce, but a bounce nonetheless) off very significant support over the past couple of weeks. It has since formed a fairly well-defined cup and handle pattern. That’s an extremely bullish price pattern. We took a bullish position in the shares under the assumption that it breaks out of this pattern.

HOT C&H

Here’s a nearer-term view. Along with the cup and handle formation, HOT is also forming an ascending triangle. A break above $63.40 will confirm the successful breakout of both the cup and handle pattern and the ascending triangle. A break below $62 will negate our thesis.

HOT Triangle

MARKET OUTLOOK

SPY Trend Lines. The SPY (S&P500 ETF) tested the middle trend line below. That has proven to be fairly significant support during a majority of the rally. If the Cyprus bailout “crisis” proves to be a bearish catalyst for the market, we expect additional significant support at the $152 level.

SPY

SPY Rising Wedge. That $152 level is also significant for another reason. It defines the top trend line of the four-year rising wedge that has formed on the SPY since the bottom of the financial crisis. What we are seeing in the markets could very well be a false breakout of this wedge. If that is the case, we could see a devastating correction in the coming year. A break below the $147 level could initiate a severe correction. That’s just something to be mindful of at the current time. We wouldn’t necessarily advise positioning for this outcome, though. As Art Cashin says in one of our favorite quotes: “don’t plan on the end of the world, because it only happens once.”

SPY Rising Wedge

BONUS! As a bonus chart, we included an illustration of a concept that Jesse Stine has mentioned several times. His thesis is that the Dow Jones Industrial Average sees a significant correction any time it gets to a level between 900 and 1200 points above its weekly 34 moving average. See the chart below. The Dow is currently 1,100 points above its 34 MA. Coincidence?

34 WMA


Stocks to Watch

February 25, 2013 (6:00 pm)

We’ll discuss our views on the broader markets in a post to follow this one. In the meantime, let’s get to some specific stocks.

Apple. Honestly, we don’t have much to say here. But we know many of our readers are long-time Apple investors. The shares are nearing oversold conditions, but have some room to the downside before hitting a near-term RSI level (17-20) that typically precedes a rebound. Further, the shares are sitting between two significant trend lines and don’t have firm support until the $435 level (it’s previous low and blue trend line).

AAPL Trend Lines

Boeing. Shares of BA were firmly rejected at the upper trend line of a symmetrical triangle it’s been forming over the past two months. It is now sitting in no-man’s land, equidistant from the top and bottom trend lines and almost exactly at neutral RSI. That said, it’s Chaikin Oscillator is nearing oversold levels. We don’t have an advantage trading the shares here, so we’ll be watching how the triangle develops over the coming days.

BA

Broadcom. Shares of BRCM formed a well-defined rising wedge over the past four months. The shares broke down four weeks ago, and have since re-tested (and been rejected at) the bottom trend line. Further, the RSI and Chi-Osc are relatively high and provide plenty of room to the downside. The wedge has a target move of $4, so the implied target price is $31. However, it has some support at the $32 level, which will be important to watch. We may jump in on the short side (or with puts) on a near-term rebound.

BRCM

Berkshire Hathaway. Shares of BRK.B have formed a sort of rising broadening wedge. The wedge consists of two fairly well-defined trend lines that have formed over the past six weeks. The shares are sitting squarely at the lower trend line just as the RSI and Chi-Osc are hitting/nearing oversold conditions. This is a very likely candidate for a bounce here.

BRKB

Netflix. NFLX has both beaten us up and provided very lucrative profits for us over the past four months. The momentum is so strong in this one that you need to tread carefully. At this point, the shares look to have formed a well-defined rising wedge since its earnings announcement gap up. It did so on declining RSI, forming negative divergence. We took advantage of the initial uptrend ($175 calls) and made a 46% profit intra-day. A very successful trade. On the other hand, we got bearish too early with $175 puts and lost 17.5% over the course of two weeks. Overall, we made 27.4% between the two trades. At this point, the shares are coming off overbought conditions (RSI and Chi-Osc) as they break down from the rising wedge. The target move is roughly $35, implying a target price of $155. We’ll be looking to enter a bearish trade during the next bounce.

NFLX

Blackberry. Speaking of momentum stocks, let’s take a look at BBRY. The shares more than doubled in just a few weeks earlier this year. They’ve since formed a symmetrical triangle, which looks an awful lot like a bull flag. However, since this is a momentum stock, and the momentum is waning, the supply/demand of shares is beginning to favor the bears. The triangle has broken slightly to the downside. We’re not ready to call it a true breakdown yet, but are watching it closely. The triangle has an implied move of $6, which will be a lucrative opportunity if you can catch it.

BBRY Breakdown

SodaStream. Shares of SODA have broken down from a symmetrical triangle. Like BBRY, this symmetrical triangle happened after a sustained rally, making it look like a bull flag. This may be what BBRY looks like if it breakdown down. The target move of the SODA triangle is roughly $8, implying a target share price of $42. However, there looks to be some support at the $44 level. Further, the shares are nearing oversold territory. Therefore, the risk/reward characteristics may not support a trade with the current set-up.

SODA Breakdown


A Review of Our Recent Trades

February 6, 2013 (12:30 pm)

We’ve been reviewing our recent trades and thought this would be a good opportunity to lay out our current record and discuss areas where (1) we have successfully improved our strategy and (2) areas where we need to continue improving.

Long/Short Portfolio. This portfolio attempts to take advantage of clear-cut, actionable chart patterns and technical indicators across a number of stocks that we closely follow. This is a lower risk portfolio that invests only in common stock (not options or other derivatives). The portfolio is down slightly (1.8% based on current prices) largely due to 2 trades: being short NFLX heading into earnings and being long Apple heading into earnings. These two trades account for a negative 4.9% impact on the portfolio.

So what went wrong here? In these two cases, it wasn’t the lack of a stop loss (both stocks saw a significant gap). Our failure had to do with holding too large a position in stocks just prior to a significant, price-moving event. Going forward, we will substantially decrease positions heading into price-moving events (product introductions, earnings releases, etc.).

Multi-Strategy Portfolio. This portfolio is positioned similarly to the Long/Short Portfolio; however, we replace common stock positions with options and derivatives in order to leverage near-term opportunities. This is a higher-risk portfolio that invests based on near- and intermediate-term expectations and may experience significant draw downs from time to time in order to achieve outsized returns over the longer-term.

The Multi-Strategy Portfolio is currently down 38.3% (based on current prices). This is, of course, not how we wanted to start off. In reviewing our trades, we found a number of key areas for improvement. The first is a similar story to the L/S Portfolio, in that our 40% allocation of Apple calls heading into earnings became quickly and significantly impaired after earnings.

Aside from decreasing allocations heading into price-moving events, we also need to take profits earlier. During our recent trades, we’ve been doing this more successfully. Our first few trades were simply held for far too long, turning a trade into a (bad) investment. We purchased puts on BRK/B and LVS on January 3, and they were profitable initially. We held on to them (without a specific exit in mind) and took a serious hit for it. We were simply waiting for the correction in price, which never came. Going forward, we will have specific exits in mind (both the price where we plan to sell as well as a stop loss). Placing stops is more difficult for options, but we will have a price associated with the underlying shares that mandate specific exits.

We have decided to grade each position’s entry and exit using a +/- system. This will have the effect of forcing us to consider exit expectations before we even enter a trade.

Outside of the Apple holdings, however, this portfolio is up 7.8%. And excluding the Apple holdings along with the BRK/B and LVS busted trades, we’d have a 17.3% gain (we don’t pat ourselves on the back for this, but thought it was interesting to note).

On a more positive note, we had two fantastic trades this week. The first was entering a SPY put on Friday afternoon, which we sold for a 59% profit on Monday. The next was a NFLX call entered on Monday morning that we sold for a 46% profit that same afternoon.

SPY Portfolio. We don’t have much to say about our SPY portfolio. Clearly we took our bearish positions too early in January. That said, we didn’t take a significant hit because of it. The SPY climbed almost 9% in the six weeks heading into January. We took our initial bearish positions around the $146 level, and the SPY continued up. But it only climbed an additional 3.5%. We took an opportunistic exit during the steep sell-off on Monday before re-entering the trade the next day on a dramatic rebound.

An interesting side note is that these back-to-back reversals tend to signal an impending change in trend. When you see multiple reversals back-to-back after a sustained rally, it means that the bulls and bears have reached an equilibrium. The bulls no longer have full control. That’s why we re-entered a number of short positions yesterday (and long VXX, a proxy for market volatility).

We welcome any thoughts and feedback.


Stocks to Watch (Part 6)

January 31, 2013 (4:15 pm)

Here are a variety of charts we’re watching right now. We’re working on a new format to make it easier to follow specific stocks and compare our current views vs. our previous expectations. But for the meantime, see our latest ‘Stocks to Watch’ below.

NASDAQ ETF. Let’s start with a review of the broader markets. The QQQ’s have been consolidating in a fairly tight $0.75 range since the start of the year, except for a brief (and still only potential) island top reversal. A 61.8% Fibonacci retracement would place the shares precisely where the gap began. It would make sense for multiple reasons for the QQQ’s to at least re-test this level in the coming weeks.

QQQ

NASDAQ Head & Shoulders. As we’ve discussed previously, the potential island top reversal has significant implications for the market. It may form the apex of the right shoulder of a very significant head and shoulders pattern that has been forming for the better part of a year. Further, each move up was accompanied by lower RSI levels, indicating that momentum to the upside is declining.

QQQ H&S

S&P 500. The SPY has been in a clear uptrend for ten weeks now, except for a four day sell-off during the fiscal cliff negotiations. We outline potential levels of support if the SPY does, as we expect, begin to retrace a portion of the recent rally.

SPY

S&P 500 Weekly Doji. Significantly, the SPY has formed an enormous rising wedge that is four years in the making. Currently, the shares are sitting at what could be the apex of a peak. Interestingly, if the SPY closes tomorrow near the $150 level, it will form a red “doji”. A doji is formed when shares open and close the week (since we’re looking at the weekly chart here) at the same level. It looks like a cross or plus sign. If you look at the two previous peaks, a red doji signified the top of each move up.

SPY Doji

AIG. On the individual stock front, AIG is forming a very tight rising wedge here. We saw a breakdown earlier in the year, but the shares re-took, and have been consolidating within, the wedge. A breakdown has a target move of nearly $4.00.

AIG

Amazon. Oh, AMZN. Simply put, this stock is mind boggling (or maybe mind numbing is a more accurate phrase). The valuation investors allow here is astonishing. But back to the technicals. The shares have been in a very well-defined uptrend for over ten weeks. After earnings, the shares popped back up to the highs (potentially forming a double top with a $235 price target) on a sharply lower RSI, forming negative divergence. If the shares drop below the $260 level, it would confirm the double top as well as a breakdown from the rising channel.

AMZN

Boeing. BA has become increasingly chaotic. But this afternoon we realize that it could simply be forming a descending triangle. We’re waiting to see how this plays out before jumping back in.

BA

Broadcom. We took a bearish position in BRCM on a breakdown from the large rising wedge, and covered our position as it reached oversold conditions. It will likely consolidate before continuing down in a meaningful way.

BRCM

Gold ETF. We took a bullish GLD position as it broke out of its long-term falling wedge. It has since been bouncing off the upper trend line. We’re OK holding here for the time being.

GLD

Google. Google has been forming a rising wedge (inside another rising wedge), which has been accompanied by a decline in buying momentum. We took a bearish position and expect to hold it for up to three weeks to allow the pattern to play out.

GOOG

IBM. IBM has formed a well-defined descending triangle since its earnings announcement. We expect a breakdown to “fill the gap,” as they say. We took a bearish position at the bottom trend line and have placed a stop at $204 (just above the upper trend line).

IBM

Morgan Stanley. MS has formed an ascending triangle on the 60 minute chart. We’re watching this for a potential breakout.

MS


Stocks to Watch (Part 5)

January 28, 2013 (11:30 am)

We’re updating these later than we hoped. We spent a lot of time over the past few days refining our site and were distracted from the underlying charts. Anyways… happy to be back to the fun stuff. Here are the charts we’re currently watching.

Apple. Whew. What a week for Apple. We drew out the chart below during the “parabolic” run in March of 2012, just as the shares were climbing up the (green) “bump” line. The chart illustrates a typical Bump and Run pattern. It was just something we were keeping an eye on, and it’s hard to believe that it came through to fruition. What happens is this. A stock is steadily climbing up the (blue) “run” line, before experiencing a dramatic rally (the bump). After spending some time climbing up the green bump line, they shares fall back to the blue run line. Subsequently, you’ll most often see shares retrace the entire rally and fall back to where they initially began the parabolic aspect of the rally. It can be argued that the bump began either before or after the post-earnings gap in late January – so either $425 or $440. The shares have since found support at that $440 level.

AAPL

Apple’s Falling Wedge. Continuing on with another Apple chart, we’re taking another look at the falling wedge that we outlined numerous times in the past. We hoped – and expected – that an earnings bump would break the shares to the upside. Clearly, that was wrong. We experienced a dramatic breakdown. From a strictly fundamental point of view, the shares are deeply undervalued here in our view. 10x LTM earnings is simply too low. Even if growth was completely done for Apple, we should see it trade more in line with Microsoft, which is trading at 14x LTM earnings. So with that, it wouldn’t be shocking to see the recent drama in the price action represent a false breakdown of the falling wedge. When we look back, the current $450 level may be akin to the $644 level in late March 2012 – simply a momentum trade without fundamental backing. With sentiment in the toilet and every voice on CNBC calling for the low $400’s, $300’s and some even expecting $200’s, now may be the right time to get back in (for those who aren’t already). Shares can become overextended to both the upside and the downside. We believe it has simply moved too far too fast to the downside. A relief rally should take hold, which may give fundamental buyers more comfort to get back in.

AAPL Falling Wedge

Amazon. We went short Amazon on Friday afternoon, as it hit the top trend line on overbought conditions. There should be a pull back and consolidation here.

AMZN

Broadcom. BRCM is sitting at the bottom trend line of a rising wedge, after we saw a false breakout to the upside. We expect to enter a bearish position on a breakdown.

BRCM

Berkshire Hathaway. We entered a bearish position in BRK.B a couple of weeks ago, and it has continued to rise. We’ve highlighted “overbought” Chi-Osc conditions over the past year. 7 of the last 10 times we saw these levels has led to a sell-off. Two of the remaining three instances saw at least consolidation, if not a slight pull back. The only time it continued higher was when we took a bearish position. The sell signal was triggered again late last week, so we feel comfortable holding our position. The shares gapped well above their upper Bollinger Band two weeks ago and hasn’t even consolidated since then. Further, over the last three days, we’ve seen an “evening star” form – a bearish topping pattern. It forms when a large white candlestick is followed by a black candle (that begins at a higher price, but closes below the top of the previous candle). It is followed by a red day, verifying the pattern.

BRKB

Gold ETF. GLD formed an enormous falling wedge over the past three months. We entered a bullish position when the shares broke out. A bull flag we had hopes would push the shares higher failed, and we’re again re-testing the upper trend line of the wedge. We’re still comfortable holding our position here and expect higher prices ahead.

GLD

Google. GOOG has formed a number of wedges over the past few days. First, there’s a three month rising wedge (blue). Second, the shares formed a bullish falling wedge as it broke out of the larger one. It gapped up back into the larger wedge and is now forming another bearish rising wedge. And it’s doing so with negative divergence. We entered a bearish position on Friday afternoon as it touched the top trend line.

GOOG

Netflix. Another doozy. We went short NFLX as it touched the top trend line of a multi-month rising wedge and entered overbought conditions. It has since surged higher. We took another bearish position on Friday afternoon. We believe it will fill at least some of the enormous gap that remains open, but are watching closely.

NFLX

Nike. We entered a NKE long position as it slowly broke out of an ascending triangle. On Friday, the shares hit our $55.50 price target, so we sold our position.

NKE

Research in Motion. Shares of RIMM leaped out of an ascending triangle over the past two weeks. As it surged past our expected price target of $14.50, we entered a bearish position with the expectation that it would retrace a portion of its rally. The shares, instead, continued climbing. RIMM shares trade primarily on momentum. We expect that this move will be done shortly and momentum traders will bring shares the other way. RIMM introduces its new operating system on Wednesday. We’ll wait to see what happens there. With the shares up 100% in the past three months, expectations are through the roof. We don’t expect these prices to hold.

RIMM