Long/Short Portfolio

Stocks to Watch (Part 4)

January 21, 2013 (7:00 pm)

We’ll be watching a few charts as the week kicks off tomorrow. Generally, we remain bearish on the markets. The SPY and QQQ’s leaped above their upper Bollinger Bands and became overbought. Volatility has plummeted. We expect that the most likely outcome is a trend reversal coinciding with earnings. A majority of stocks that we’re watching have a bearish tilt, and have seen significant rallies into earnings. Expectations are high heading into earnings. That is not a bull’s friend.

American International Group: We just caught on to this one. Too late to participate in the first move, but this one likely has more room to run (on the downside). The shares formed a well-defined rising wedge over the last 11 weeks and recently broke down. The shares re-test the lower trend line and failed at that resistance. The target price is around $33. We’ll see if we can get a good bearish entry this week.


Broadcom: We participated in the move down in BRCM before it lept above the upper trend line of its rising wedge. It looks like we saw a false breakout on Friday, and the shares have since fallen back within the pattern. That’s a bearish signal. We’ll keep a close eye on this one.


Berkshire Hathaway: We entered into a bearish put position in BRK.B in early January. It has slowly and steadily moved up on declining volume. The RSI has been overbought. The Chi-Osc is at levels that have tended to precede near-term sell-offs (red vertical lines), and it leaped above its upper Bollinger Band two weeks ago with no retracement. In the past, the shares have sustained these types of rallies for two or three weeks before retracing a significant portion of the move. We’re patiently waiting for a reversal. As always, if we see evidence to the contrary, we will not hesitate to close our position for a loss.


General Electric: We started reviewing GE’s charts over the weekend. It has been forming a very substantial symmetrical triangle and the shares broke out on Thursday (with follow through on Friday). The implied price target of this move is $3, which could bring the shares up to $24.25. We’ll be watching for an entry this week.


Gold ETF: As we tweeted on Saturday, GLD has been forming a picture perfect falling wedge and has since broken out. After re-testing the upper trend line, the shares rallied and have formed a bull flag. We expect it to continue up and are holding our positions.


Netflix: We entered bearish NFLX positions last week. Its rising wedge broke down and failed on a subsequent re-test of the lower trend line. We remain bearish and plan on holding our positions.


Don’t hesitate to reach out with any questions or comments.

Review of Our Recent Trades

January 17, 2013 (8:30 pm)

See below for a quick round-up of the stocks we’ve been trading this week. We’ll update our views on the market tomorrow. As for Apple, we’ve explained that $500 is the likeliest closing price tomorrow given the number of calls above $500 and puts at and below that level. So, for now, let’s review our trades…

Boeing: We’ve made a couple of quick trades in Boeing over the past few trading sessions. We took our first position after news came out that there could be problems with the Dreamliner. The shares bounced off the lower trend line, and we took a short position as it later fell through it. We missed a great opportunity to get out when it continued to plummet, but were able to get out at a nominal gain the next day. We took another position as it struggled to re-take the wedge and capitalized on the strong negative sentiment in the pre-market when their premier plane had further problems. The chart is very messy now, and we will stay away from BA until there is some clarity.


Broadcom: We took a position in BRCM as it briefly touched the upper trend line and neared overbought territory. After a subsequent re-test, the shares began to fall. The shares struggled to breakdown through the green trend line it has formed since the start of the year, so we covered our shorts there.


Chipotle: We took a short position in CMG as it broke down from a multi-week rising wedge. The shares quickly re-tested the lower trend line on two occasions before reversing in a big way after failing to live up to its pre-earnings hype. We covered our short position in the pre-market before the shares began recovering.


Gold ETF: GLD broke out of an intermediate-term falling wedge, and we took a long position when it did so. The shares successfully re-tested the top trend line twice before reversing upwards. This is an intermediate-term holding for us.


Google: We took a short position in GOOG as it reached the upper trend line of a rising wedge and formed clear negative divergence on the RSI. We covered our position as it hit the bottom trend line and entered oversold territory. We’re looking for another entry (long or short), but see no clear pattern at this time. We may enter a long/short position here by going long Apple and short Google into earnings. While Google has run strongly into its upcoming report, Apple has done the opposite. If both company’s come in near expectations, we expect those trends to reverse.


Starwood Hotels: We took an initial position in HOT as it hit the upper trend line of its rising channel and entered overbought territory. We expected a quicker drop than we were given. As the shares tested the lower trend line, we covered our position. Our thesis failed, and it was unclear whether that trend line would hold or not.


Looking at HOT’s longer-term chart below, it’s clear that the $59 level is fairly significant support/resistance and the shares have been consolidating above that level. Don’t fight the trend…


Netflix: NFLX finally broke down from a rising wedge that it has been forming for almost three months now. We took a short position as it reached the upper trend line on overbought conditions. It has since broken down and we expect lower prices from here.


It’s clear from the longer-term charts that NFLX has been forming a much longer rising wedge than you can see in the chart above. So we decided to include that chart below. It’s been in the forming for over six months and the shares have broken down over the past two days. There may be a re-test of that lower trend line, but we do expect significantly lower prices ahead.


Nike: NKE has formed an ascending triangle since the successful resolution of the fiscal cliff legislation. We took a long position as it broke to the upside. It has re-tested that level and began to rise over the course of today’s trading session. We’ll see where this one takes us.


Let us know if you have any thoughts or questions in the comments.

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.

The Outlook Remains Bearish

January 10, 2013 (11:00 am)

The market got a boost this morning with better than expected trade data out of China; however, it fell far short of making a decisive new high. For that reason, we’re sticking with our bearish outlook for the intermediate-term. We took profits on our near-term options in the Multi-Strategy Portfolio (we sold our HOT and SODA February puts for 30% and 7% returns, respectively) in order to push out our nearest options expiration to March. This should give us plenty of time to see our thesis prove out. While our expectation for a reversal in the broader markets remains strong, we don’t want to get into a situation where theta decay (the time value priced into the options) affects our positions. Allowing over two months for a reversal is the prudent path. We are also OK sitting in our short positions until the anticipated reversal comes to fruition.

We should note, though, that we continue to challenge our thesis. We are constantly looking for new information and analysis that disproves our thinking. If our conviction diminishes, we will not hesitate to get out of losing positions.

SPY (S&P500 Index)

The SPY formed a new high with the gap up this morning, but as we discussed above, it didn’t break decisively above the previous high set early last week. With the subsequent decline through the early morning, it’s starting to look like a double top. Interestingly, the target price of a double top reversal here is very close to the gap fill from the “fiscal cliff rally”. Whether it turns out to be a double top or not, this attempt to rally and lack of follow-through is not what bulls want to see here.


Broadcom. We took a short position in BRCM this morning as it failed to reach the upper trend line of a rising wedge it has formed since early November. You can also see buying momentum slowing, as it reached the exact same top ($35) from early January on a lower RSI. This could also be a double top in the forming.


Chipotle. To update our CMG analysis from yesterday (we took a short position as it broke below its lower trend line), the shares rallied briefly this morning. This rally brought the shares back up to the lower trend line, but it again failed at that point. This is fairly typical price action. You often see a re-test of a trend line after the shares break it to the upside or the downside.


Gold ETF. GLD is on our watch list. It has been forming a falling wedge since early November and is now reaching the upper trend line just as it enters overbought conditions. We may take a bearish position on a failure here, or conversely, a bullish position if it decisively breaks through to the upside. Either way, we’ll be watching this closely.


Google. We took a short position in GOOG this morning as it reached the upper trend line of a rising wedge it has formed. The shares created negative divergence, rising to a higher price on decreasing buying momentum.


Netflix. This is something we’re watching for now. NFLX is bouncing off the lower trend line of a well-defined rising wedge. We’re looking to take a bearish position on a breakdown.


Stocks to Watch (Part 2)

January 9, 2012 (3:20 pm)

We’re in the process of designing a more efficient way to update our thoughts on individual stocks. In the meantime, we wanted to share some charts and our expectations on price action.

Apple is forming a symmetrical triangle here. As we’ve discussed in the past, symmetrical triangles are continuation patterns, so the bias is to the downside. We may not see a major move until earnings.


Bank of America has formed a well-defined rising channel since early November. We shorted the shares as it broke the lower trend line at $11.85 this morning. The shares are becomming oversold, so we may see a small bounce or consolidation to back it out of the very low RSI, but will likely see lower prices ahead.


Berkshire Hathaway is a bit more challenging. BRKB formed a pretty clear bull flag (or a falling wedge, but both have a bullish bias), indicating higher prices ahead. To contradict that bullish bias is a potential double top around the $94 level. We’re holding our bearish positions for now, but will exit our positions if the shares rise above the $94.50 level. For now, we continue to expect a re-test of the upper trend line of the multi-week rising channel (blue line).


Chipotle has formed a rising wedge since mid-November and fell below the lower trend line this morning. We took a bearish position in the name at $295.31 and expect lower prices ahead.


Fusion-IO experienced a steep sell-off over the past week. We took a long position at $19.25 this afternoon as it reached oversold conditions on both the RSI and Chi-Osc. It is also trading well below its lower Bollinger Band. We expect the shares to eventually rebound and retrace at least 50% of the recent sell-off. There may be slightly lower prices ahead before it stabilizes and reverses, but we’re OK waiting with a small long position in the meantime.


Starwood Hotels, like many of the other stocks discussed here, also formed a rising channel since mid-November. As it tested the upper trend line on overbought conditions, we entered a bearish position. As it backed off those levels, we closed our HOT put position, but are holding onto the short positions we purchased.