Market Musings

SBUX struck me today as a wonderful example of a high probability setup. Today’s action created a very bullish candle (a bullish engulfing pattern), after hitting a new 5 month low in the morning, then bouncing off it’s 200 day moving average. There are also numerous fibonacci supports that the stock bounced off of, such as the .618 retracement from the January 20 low to the May 8 high. To top it off, it has formed a Gartley buy pattern.

Does this mean it will go up? Of course not. But it does seem like a high probability to me, and I’ll be looking to play it from the long side on Tuesday.

Click here to view the chart:

Disclaimer: Remember, there is always a risk of loss when trading. Please consult with your broker or financial advisor before entering into any trades.

I don’t usually make intraday posts, but since I will be out later this morning, I wanted to get this in. As I stated on my last post, I would be looking to play SBUX from the long side today. So, I’ve been watching it, waiting for a buy signal on my intraday charts. As of 8:10 PST, I haven’t gotten a buy signal, and don’t see anything developing. In fact, looking at the intraday charts, it won’t be very easy to generate a buy signal this morning. Unless it has a major reversal, and can move above 34, any bounce to resistance would look like an opportunity for a short. A close below 33.10 would make yesterdays assessment suspect.

YAHOO met analysts expectations, but there were other problems. You can read the story here

Hindsight is always 20/20. However, there are some precautions to take when earnings season rolls along. For one, always know when stocks you own are releasing their earnings. You can get this information from YHOO (a little irony) at: Yahoo biz . This way you can decide whether or not you wish to hold the stock at this volatile time.

A sophisticated strategy is to put on an options spread, when earnings are due to be delivered the week of options expiration. The price of the options can never reflect the true volatility when the announcement, that disappoints or surprises, comes out.

For example, one strategy is to buy the strangle. In the case of YHOO, the July 35 calls, and the July 30 puts could have been bought for a total of .60, or $60 plus comissions per spread. This way, a surprise in either direction would be profitable. In this case, the 35 calls went to 0, but the 30 puts went to 4.60 (with the stock 25.40). That’s a profit of $400 per spread, with a risk of only $60. Nice risk reward ratio, generating almost a 700% profit in one day.

You may think, “how can I know that YHOO might react like this to earnings news?” Just look at its’ chart. In April it went up 2.20, in January it dropped almost 5, and in July 05, it dropped 4.30 on earnings news. That history makes this stock a good candidate for an play earnings with options.

Another strategy could have been to buy the July 32.50 straddle, but I’ll get into straddles another time.

I don’t know if it’s me, or if Chairman Bernenke makes no sense. (see somewhat related article in the Washington Post) Did anyone hear him talking today? It sounded to me like he said that the oil futures indicated that oil prices should stabilize and be flat for the next few years. I only have a BA in economics, but I can’t comprehend how the futures can tell him that. Yes, as we go out into the future, the oil prices invert and go down, which indicates to me that traders expect some of the war premium to disappear. In a volatile market like oil, where conditions change day to day, this assertion sounds ludicrous to me.

He also stated that option traders indicate the price can be 20 higher or lower in the next few years, which seems to contradict his previous assertion. Once again I wonder how he can glean that information. Having been an options trader for 11 years on the CBOE, I can say with certainty that options can’t give us that kind of information. Then what amazes me is the congressmen taking what he says as fact and running with it.

A recent Washington Post article dicussed the cachet of Whole Foods Market. Now let’s examine it’s stock from an Elliott Wave standpoint. See Chart After hitting a high of 79.9 on 12/28/05, WFMI has sunk as low as 54.66, about a 33% drop. It’s currently hovering near those lows, and looks to me like it should even take out those lows from Jul. 18. However, if my analysis is correct, WFMI should be entering the final stages of its downward correction (Wave v of 5 of C) , and should rally nicely from these lows. I see clusters of Fibonacci support between 53.3 an 54. A move to these levels followed by a sharp move up, should confirm this analysis.

What’s in store for the Q’s is probably more choppiness. With todays bearish candlestick, I’m looking for some downside in the near term. It looks to me like we’ve completed an A-B-C flat correction on the intraday chart (for the NQ futures) and are ready to begin the next wave down.

On the daily chart of the QQQQ, there is a bearish engulfing pattern, and a potentially bearish CCI pattern. A down day should confirm it. My Elliott Wave count is somewhat inconclusive. I have labeled it wave 4, though I would have expected wave 4 to approach the 38.4 to 39 area. None the less, the indicators seem to be pointing downward. The 36.20 area has been support the last 3 days, so once that gives way, I would look for some more downward action.

Alternatively, a reversal moving above 37 would indicate that we are still in wave 4 up, and I would look for a move to the target areas mentioned earlier (38.4-39). In this choppy environment, I’ll be taking profits failry quickly.

QQQQ has closed above the 37 level, which as I stated in the last post, should indicate that wave 4 is still in force. To reiterate, I would now expect a minimum .382 retracement of wave 3, which should bring us to 38.35. It’s also common to see a retracement to iv, the lesser degree fourth wave, which is around 39, so these two numbers are reasonable Elliott Wave and Fibonacci targets.

The QQQQ never even aproached the 36.20 level mentioned previously, so a short was never triggered. Good thing. This is a good example of a case where combining price action with chart patterns is prudent, and a lesson I have learned from Gio and Jean Yus in their trading room.  The 36.20 level provided solid intraday support for 3 days. Though we had a negative candlestick Thurday, and other indicators suggesting more downside, price never broke down. In fact, with Fridays gap up opening, the intraday charts were in buy mode for most of the day, and never even approached 36.20, let alone break this level.

After some earnings disappointment, WFMI traded down over 4 after the close and finished around 53.45, right on the Fibonacci support I pointed out in the last post. Does this mean to go out and buy it here? Wish it were that easy. After a major bad announcement, stocks rarely (but not never) bounce right back. In fact, I wouldn’t even be looking to buy this stock so soon, other than the fact that my preferred Elliott Wave count indicates that we should be nearing a tradeable low, and it is right on some possible support.
This level 53 may hold, and it may not. If not, the next major Fib support I see is around 49.75. It looks to me like that level shouldn’t be penetrated, but due to the dynamic nature of markets, we will examine this freshly should it occur.

Disclaimer 

The QQQQ managed to eek out a high of 37.32, yesterday, brushing against the resistance of the 34 EMA (exponential moving average), then closing right near its open, forming a classic doji sell setup, which was confirmed by today’s open. It has also issued a CCI zero line reject sell signal today. (Note the green cci indicator pointing down after slightly penetrating the zero line.) Barring a stunning reversal today, it looks like the NASDAQ market has whipped back down. We’ll see how it handles the support at the 36.20 level. If it can gain some momentum here, it should take out that level pretty easily. (added 11:36 PST with QQQQ 36.34) However, I wouldn’t be surprised by a bounce off that level or close to it. If so, there is a possible head and shoulder top setting up on the 30 minute intraday chart.

Moving back to the Elliott Wave Analysis, it’s possible that Wave 4 that I had spoken about in my previous posts is over, and we should be moving down to new lows, however we still haven’t reached the minimum objectives of 38.35. I’m looking at an alternate count (See chart here.) which says we are in wave iii of 5 down, in which case we are headed for new lows in a big way.

Disclaimer