Trades: AUO UNFI NIKU

I have been a combination of busy and lazy to write about trades this week. Here's a summary:

AUO: Bought AUO @13.10 (IRA)
UNFI: Bought UNFI @27.85 (Scottrade)
NIKU: Bought NIKU @18.83 (MB Trading)

I have already written about AUO and UNFI. NIKU recently showed up on my volume surge screen and it was just breaking out of a cup-with-handle pattern. This kind of volume breakout usually signals short term strength in the stock. Also the stock broke out on a good earnings report, which is also a good sign.

I sold some of the losers in my portfolio SSFT and VITA to free up cash, for tax losses and to offset gains.

All the recent option trades Long: CSCO RHAT Short: JOSB MIK are moving opposite of my expected direction:

• CSCO and RHAT technicals are still strong.
• Weekly ROC for MIK has crossed above 0. MACD and Momentum indicators are still below 0. Weekly up volume has been below average so the up weeks are not be strong
• JOSB is still weak but closed up for the week in what appears to be a short term bounce.
• ERTS from my earlier put trade has turned totally opposite. It's hard to understand why there were recent upgrades on ERTS. The stock might have formed a climax top (3 continuous days of gaps up) although from some angles it looks like a breakout. I wont chase this stock anymore and hold my "near worthless" options till earnings. TTWO recently missed expectations despite the fact that it had the hit GTA-3 game and I expect ERTS to do the same.

Energy and oil stocks seem to be in the middle of a technical breakdown. I have an eye on XLE SPDR Energy select ETF put options.

Trade: Call: CSCO Put: JOSB

Long:
CSCO: Usually considered conservative in it's guidance, CSCO has provided long term guidance of earnings growth at higher end of 10-15% with current estimates at 12%. In the coming quarters, we might expect CSCO to beat estimates. Technically the stock has overcome resistance at the 50-day MA and now that is acting like a support level

Short:
JOSB: Jos A Bank Clothiers Seems to have broken down technically. The 200-day MA which acted as support earlier is now showing resistance. I am also recently seeing a lot of their ads on CNBC, something that'll eat into their profits. They are relying heavily on holiday sales and if that doesn't meet expectations, there is a good chance of a breakdown. From the news, people have apparently been waiting for a drop in apparel prices

Trades:
CSCO: July $17.50 Call @2.85 CSCO was at 19.16
JOSB: July $25 Put @3.70 JOSB was at 24.8



JOSB chart


CSCO chart

Trade: Call: RHAT Put: MIK

I did my first two trades at MBTrading today:

RHAT was at 16.43 bought June Call RCVFC $15.00 @3.60
MIK was at 27.66 bought June Put MIKRF $30 @3.60

Quick update and plans

My account at mbtrading.com is now open. My plan is to trade options on that account. Hopefully the low commissions will help me manage my losses and take profits better compared to what I'm doing with my Scottrade account. Here's a summary of my planned strategy that I'll come back and refer to and see how much I stuck with it:

• Mostly I will try to maintain a balanced long-short kind of portfolio, with an equal split between calls and puts.
• I will normally buy in-the-money options 3 to 6 months away and hold them for 2-6 weeks.
  
• I'll select my trades based mostly on my favourite medium term technical indicators: Momentum, ROC and MACD buying on crossovers. I'll screen my stocks based on some simple technical parameters I have setup on StockFetcher. I'll select trades based on fundamentals as well as other technicals.
• Occasionally I'll also pick up trading ideas from my MSN stock screens
  

StockFetcher screens:
Calls:
Show stocks where average Volume(90) is above 50000
and weekly MACD histogram(12,26) crossed above 0
and weekly momentum(12) crossed above 0
and close is between 5 and 250
and stock is optionable

Puts:
Show stocks where average Volume(90) is above 50000
and weekly MACD histogram(12,26) crossed below 0
and weekly momentum(12) crossed below 0
and close is between 5 and 250
and stock is optionable

Trades that are on my radar:

Calls: CSCO RHAT Puts : MIK BOL

Organic growth stock: United National Foods

I'ts hard to say whether America is obsessed with food or if it's yet another national pastime, but it's definitely on people's minds. Although I haven't really traced back a history of food, there were definitely some events that you can think about. the fast food restaurant, the drive throughs, the donuts, the pepsi-coke wars, the eat-healthy drive, vegeterianism, the raw vergetable diet, the South Beach and the Atkins diets.

The era of Atkins is slowing and maybe eventually coming to an end, what with all the talk about crazy cows and feverish chicken. With this in mind, I believe that organic foods are poised for take off in a big way. Digging through, though not in very much detail, I have found three public companies to play the organis food market.

• UNFI: United National Foods Inc
• WFMI : Whole Foods Market
• OATS : Wild Oats Markets Inc
  

Of the three, I am possibly going to start a long-term position in UNFI. This is a major supplier of organic foods to many grocery chains including Whole Foods. The "organic" revenue growth of the company, the continued increase in EPS and a recent initiaion of a stock buyback, even when the company stock is at a near high are the reasons for my optimism. Technically, the stock has broken out of a downtrend and forming new highs after a breakout on 11/30-2004. It held to support at the 200-day MA 11/9/2004 after trading under it from 7/29 to 8/30

Since this is a long-term position I wont mess too much with the retraction levels and such. I'll stay put in the position on a quarter by quarter basis as long as the revenues are increasing. I'll sell if the stock has a climax top or a major technical breakdown.

Two new buys: LCD monitor and AUO

Princeton LCD monitor over the Thanksgiving weekend
AU Optronics Jan $15 call @0.35 AUO was trading at $13.11 at that time

AUO is one of the major LCD manufacturers and a supplier to DELL. It was on my watchlist and it successfully held support at 12.00. The MACD, ROC and Momentum indicators are positive.

The reason I bought the option and not the stock is that I am expecting resistance at the 14.2-14.4 level and that is when I plan to sell the option. Also the time value of the option will be quite high at that time. On retracement to around the 13.3 level, if it holds support, I'll buy both the stock and the option. On the other hand if it breaks above 14.4 on very good volume, I'll hold on to the options. since the next resistance is at slightly under 17.00

Fundamentally, LCDs should also be one of the hottest things on shopping lists this season. Typically with products like these, the buying cycle goes like this:

1. Initially, prices are very high, only a few "early adapters" are the ones buying the product. The company has low volumes and high profit margins. And at the same time, it's ironing out it's manfacturing inefficiencies
   
2. Then prices start falling moderately and volume picks up. The company meanwhile is manufacturing efficiently but not in very high volumes. The demand is high enough that price levels are sustained. This is the most profitable phase for the company.
3. The third phase is when production has been ramped up causing the demand levels to come down suddenly. The excess inventory forces sharp drop in prices. However, this drop is not enough to bring up the demand. In essence this is the deflationary mode. People are just waiting for the prices to fall further, causing the prices to fall further. This is the worst phase for the company.
4. Finally, prices drop to a level where demand picks up and the rate at which the price falls stays low. This is a point where every decrease in price will lead to a higher number of units sold. This is an inflexion point. This is also the point where a new product (Like LCD TVs) might be in the "early adapter phase and the cycle will start over.

With 19" LCD monitors, prices have fallen from $1200-$900 and $900- $750 during phase 1 and 2. The fall from $750 to $500 has been the worst. Again at the $450 and below levels, volume should pick up with price decreases.

The next growth phase in the company should come from LCD TVs which the early adapters are already buying. The falling dollar is a big question mark for the company though..


AUO support holds at 12.00