StockZone aka. Stozone - My stock trading diary

New thoughts

2009-05-02T10:03:00.001-07:00

- Is the housing market really at a bottom?

- Assuming 2003 was the lowest interest rate - ARMs will reset in 3 years 5 years and 7 years. We have seen the resets for the 3 and 5 year ARMs. Why isn't anyone talking about the 7 year resets?

Blockbuster - no late fees is really not such a good thing

2005-02-15T21:45:00.000-08:00

Blockbuster recently announced it's "No more late fees" campaign with much fanfare. As a consumer it does sound nice, but as a strategy for the company it's just terrible.

A consumer point of view
As a consumer, I went to Blockbuster to rent movies, and to return movies. Often, I would rent another movie when I returned one. These round-trips used to make me rent more movies than I currently do. Blockbuster's loss.

The easy road - (What Google can teach Blockbuster and many other companies)

Blockbuster took the easiest, least innovative approach to fight Netflix - lower cost. With the host of stores they have, they could have come up with much more creative and attractive ways to get customers. I have a few ideas on how Blockbuster could better use what they have:

"No more late fees" - but only for the online subscriber. The promotion cost of this campaign, just to get new people to sign up would be really low. For instance, whenever someone tries to turn in a movie late, ask them if they would like to sign up for the 15-day trial and their late fee would be waived. People are very likely to sign up.
Cheap rentals for the online subscriber - $1 instead of $4 if you want to just get a movie without having to wait for it. ("This movie is only $1 if you sign up for our online rental trial")
Returns - Movies that you rent online - either return them in-store or post them. Savings from reduced postage since the store can mail everything to the warehouse.
Also, if Blockbuster spends a little money on their supply chain, they could scan the returned item in-store, consider it returned and dispatch the next movie - something that Netflix can't do and would be attractive to customers - something they can use to fight Netflix. If more customers return in-store than return by mail, then there are even more savings for Blockbuster.
Special stores - turn a quarter of the stores into warehouse-like stores from where only online subscribers can go and rent. This would also be the place where you can return movies and where all the other stores mail returns.
Spend money on IT and supply chaining the stores so that it is much better connected (rather than make outrageous offers for Hollywood)

Really what Blockbuster can learn from Google is that one can be a late entrant to any market and still be successful as long as one is innovative ( gmail maps suggest)

A break, earnings season, stock trades - and such

2005-02-11T20:17:00.000-08:00

I've been busy at work and haven't had time and the enrgy to write as much as I would have wanted to. I made a few stock buys and some option trades.

Stock trades
CNXS - CNS Inc - It's a small cap company with solid earnings growth and a great chart pattern right now. I bought the stock at 15.9

CUTR - Cutera Inc - Bought at 17.82 Again a small cap company, IPO'd in the last year with excellent earnings growth and a great chart pattren just breaking out of a base.

Earnings Season and options
Earnings season is a great time to make option trades. So far all my option trades have been "directional" meaning I expect the stock to move in a particular way. Earnings season is a great time to make "bi-directional" stock trades. Also at a time like this where the direction of the market is unpredictable, and still volatility is low, earnings season brings out the subdued volatility in a stock. Also front month options are very cheap especially for stocks that haven't moved in a while. So I have been scanning the earnings calendar and looking for interesting stocks which could either miss or hit earnings. Some interesting trades that I made right before earnings using small bets - LAVA APCC LLL XMSR ISIL NTE A few of them moved and a few of them didn't. It is a strategy I'll explore further.
Ex. if the stock is at $15, buy one $17.5 call and one $12.5 put, the expectation being that the stock will move well on earnings news, irrespective of what the earnings are.

I need some more research on companies which are more likely to react to earnings news or companies that are more likely to have an earnings surprise. I'll monitor Starmine a little closer. If anyone has any other interesting ideas on this, please let me know.

What are my options?
So far my directional option trades haven't done very well, stocks have done well. Some of these bidirectional trades have done well. I'm still debating on whether options are really thing thing for me or if I should stick to stocks...

Stock trading contest

2005-01-17T16:56:00.000-08:00

This is a stock trading contest with fake money that I have entered:
http://si1.streetinsider.com/index.cfm?linkto_tab_id=179

Try doing some trades there to see how you do with fake money vs what you would do with real money. It might provide some surprising insights about yourself.

There's a $1000 prize money for first prize too :)

Also this is sort of a short term trading contest so probably an area for momentum investing.

Trade: Sold DRS Bought RIMG

2005-01-10T20:50:00.000-08:00

DRS was my biggest holding. It seems to be in the middle of a breakdown, although the trendlines are still holding up. I sold 50 shares @38.23 out of 200 that I have. It has found some support at the trendline and the 2nd Fibonacci retracement level from it. THere have also been some defense cuts announced and that could affect defense companies even though I think DRS earnings will hold up reasonably well. I plan to sell the rest of the shares on up days or if it breaches it's trendline.

I have also bought 50 shares of RIMG @16.09 which showed up on my volume surge screen. It is a micro cap company with only 9 million outstanding shares. Institutional ownership is at 50% with some good names like Royce and Kern having big stakes. The company definitely seems undervalued right now compared to it's growth rate. Also it has a strong balance sheet with about $5 in cash/share. Technically the stock is coming out of a consolidation and has had some big volume days to break out of a key resistance level at 15.00 I expect to hold this for the mid-long term as long as earnings growth continues.

DRS chart

Portfolio updates and thoughts for next year

2005-01-02T23:33:00.000-08:00

New trades
Over the past few weeks, I have made a few more trades. This is the summary:

RHAT call: The stock dropped after earnings. I sold the $15 call @1.3 while it still had some time value. The initial buy indicators turned negative so I am out of the position now.
ZONS: Sold the shares @5.4 at a loss. The stock was going nowhere after the initial big spikes and I didn't want to risk a big drop.
MFLO: Bought at 15.26 Moldflow is a small cap company with excellent earnings momentum and a great balance sheet. It recently broke out of a long term sideways chart and broke past critical "overhead resistance" around $14. I expect to hold this for mid to long term as long as the earnings and price trend is positive. The company also has just one analyst and around 70% institutional ownership. Also it is much more reasonably priced in terms of it's price ratios compared to both ADSK and DASTY which are listed as it's competitors on Yahoo, which then makes it a potential takeover target especially if it hits revenues close to $100 million. Also the profit margins are on a rise which provides further potential upside
FBR: 1 June @22.5 call for 0.55 The stock just broke above it's 200-day MA and is finding support there even though the 200-day trend is downward. The 50-day MA is on an uptrend to catch up with the 200-day. Potential smaller IPOs and M&A activity should help the stock. Potential first resistance at 21 second resistance at 24. Support at 19.00 Volatility is low from looking at the Bollinger bands.
FDRY: 2 March @17.50 call for $0.20 50-200 day crossover and MACD ROC and momentum indicators are positive. Volatility increase on the upside should help the option. There's potential resistance at around $16.00 so this would be my exit point.
ISSX: 4 February @30 call for $0.2 The stock has made a pullback after breaking out of it's cup-with-handle pattern This position is also expecting that the stock will break to the upside and this increased volatility will cause the option price to increase

Reflections
Over the last few months, I am seeing that most of my option trades are playing out terribly but the stocks are doing reasonably well (IDC AUO UNFI XXIA are some recent profitable ones; DRS FDS are some old profitable ones with small losses on ZONS and on old SSFT and VITA positions). I believe the reason this is because I have tried buying options similar to stocks on breakouts, and I pay a steep price because of the volatility spikes. In the new trades above, I have tried to buy stocks when they are in consolidation after their breakouts.

Coming months
I am fairly bullish on the market in the coming months. The technicals are very good and a lot of tech companies are showing up on my "value" screens so it might be a good year for NASDAQ. Looking at the charts, if the market breaks above 2200, there is a possibility of the NASDAQ hitting 2500 sometime during the year

Earnings and retail season
This earnings and retail reports coming out in January should provide some good opportunities for trading straddles. I'll experiment with small bets on this to learn if it works as well.

Trades: AUO UNFI NIKU

2004-12-18T12:10:00.000-08:00

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

2004-12-13T10:00:00.000-08:00

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

2004-12-07T07:09:00.000-08:00

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

2004-12-06T23:50:00.000-08:00

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

2004-12-05T21:45:00.000-08:00

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

2004-12-01T19:43:00.000-08:00

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:

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
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.
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.
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

Some very interesting comments..

2004-11-30T08:42:00.000-08:00

Recently I asked a senior of mine from undergrad school, who now works in the finance industry for some comments. He writes and I quote:

"
After looking at your weblog, this is what I think:

- Making notes of your daily trades and keeping records of the reasons why you entered into those trades is a really great habit. It will definitely help you in the long run. Keep on doing this even when the number of securities in your portfolio increases significantly.

- I liked the fact that most of the time, you support your technicalanalysis with some fundamental analysis about the company and overall macroeconomic analysis. keep on doing that. sometimes technical and fundamental indicators will show you different results. never get into a trade where the two indicators dont agree. in other words, dont try to give yourself a fundamental reason based on what the technical indicators are saying.

- Are you maintaining a P&L sheet also? Make sure that you maintain a record of P&L of every trade and keep a record of the txn cost also. Try to mark-to-market on a fortnightly or monthly basis. I notice that almost 80% of your trades are individual equity trades. Based on my experience, a typical individual investor pays a whole lot of money in txn costs. I'd encourage you to do your P&L from day 1 when you started trading and then see how much did you pay in txn cost.

- One important thing that I notice is that most of your investments are in equities or equity derivatives. Do you invest in other asset classes like bonds, mutual funds, index funds etc too? One should also take care of asset allocation (dividing up the portfolio into various asset classes) before doing individual security selection. In the present environment, a lot of people are getting into non-equity investments.

- I noticed that you wanted to get into currency trading and were looking for some sites. I haven't done short term currency trading but heard that oanda.com provides that. check that out.

- check out tradesports.com and hedgestreet.com. These two sites give you option to trade on certain macroeconomic trends like housing prices, fed futures rates etc.

- One suggestion is to look at index funds from firms like Barclays Global (ishares.com) or state street. They can give you an exposure to foreign markets, currencies, commodities etc. Even for US equities, its sometime better to invest in a whole sector/industry rather than investing in
individual stocks. index funds can give you that flexibility.

- most of the trades that you are doing are short term trades. try looking into some longer term trades too e.g. somebody who bought an index fund following Russell 2k at the start of this year might have made around 15% on their investment. Compare that with the net returns that you are making in short term trades and see which one is better for you.

- nearly all of your trades are expecting that a particular security will either go up or down. have you looked at the various option strategies (e.g.strangle, straddle etc)? They can help you make money even in flat markets.

you must have noticed that i am not giving you fundaes on your individual trades but more on your overall portfolio. The reason is bcoz most of the investors forget about the overall return picture and get too carried away with their individual trades. always keep an eye on what your portfolio is making after paying all the costs. thats what matters in the end and not the number of correct bets that you had.
"

These are a few of my..

2004-11-27T17:03:00.000-08:00

Here I'd like to list some of my favourite indicators

Natural indicators:

Trendlines : On a daily or weekly chart
Fibonacci retracement levels : To find long or short term support and resistance levels. These are especially important when trying to catch a stock that is on it's way up from a downtrend.

Artificial indicators:
Not in any order of preference, a weekly chart showing all three indicators.

MACD histogram
Momentum
ROC

This is of course not the criteria for selecting but more of a confirmation to see whether the entry/exit point is correct. The way that I'd use them for example is this: For a long position, I'll try to initiate a position when all three indicators turn positive and get out of the position when two of them turn negative. Similarly, for a short position, I'll get in when all three indicators turn negative and get out when two of them turn positive.

Of course these dont take volume into account so that is something I need to monitor too.

There are pros and cons of using a weekly chart. The advantage is that I can get a good idea of the mid-term trend, while not being whipsawed by the daily price ups and downs. The disadvantage is that the stock price will usually drop a lot before I get out of a long position.

Another disadvantage is that they wont work well in "flat" markets. And that is another reason not to solely use these indicators.

Stock Screeners
There are a few custom screens that I use to find interesting stocks using MSN Custom Stock Screener. I'll post some of these at a later date when I figure out how to post custom screens. These will only work with Internet Explorer.

Trade: CFC April $25 Put @0.65

2004-11-26T11:03:00.000-08:00

Bought CFC April $25 put @0.65 I expect to hold this till expiration if the downtrend is strong. Else I might trade near support-resistance levels, CFC was at 32.05 when I bought the option

Bought this today instead of the July put as I saw a relatively "cheap" quote. Also if there is any possible market weakness on Monday then CFC might be caught in it.

I'll possibly still buy the July options if the stock moves as expected; I might sell the April put near support and buy the July near resistance. Possibly not before Feb/March.

CFC long term chart

Double trouble: CFC

2004-11-26T01:21:00.004-08:00

I am considering a put position in Countrywide Financial. The company stock dived for the first time in a very long time. I think that this is the end of the refinance boom due to rising interest rates and this scenario will hurt CFC. Also with the dollar hitting new lows everyday, the possibility of a "faster than expected" interest rate hike remains high. The earnings growth for CFC which started in 2001 will decelerate in this scenario.

The second business that CFC is in - insurance. Spitzer had been suing other companies and he will eventually come to CFC.

The trade that I'm considering is a July put. That'll be good time for Spitzer as well as Greenspan to make their intentions clear.

Resistance:

Around 33.11 (the curent 200-day MA)
34.35 : The high price of the gap-down on 10/20/2004

Support:

Around $28 (May low/base support area)

Trade: XXIA

2004-11-24T07:46:00.000-08:00

Bought 100 XXIA @14.10 Mental stop loss @12.8 in my IRA
2 XXIA December call @0.4 in anticipation of a major breakout. Hold till expiration

I am not sure what the tax rules are but if let's say that sometime the stock goes to 14.8 and I sell a call in my IRA. Then it closes at 14.9 and I let my brokerage calls expire worthless.. how will I be taxed? If anyone knows..

I am definitely going to pay more than I made to the tax man and his cronies (H&R block types)

Let the trades begin

2004-11-23T23:47:00.000-08:00

I opened an IRA yesterday and am ready to do some trading there. XXIA showed up on my volume surge screen and it staged a nice breakout today. The first breakout was after it reported earnings. The three week consolidation after that is good for the second breakout. What I like about stocks that breakout on good earnings is that the upgrades soon follow and really there's nothing to stop the momentum for at least a quarter.

I'll buy it tommorrow. I have a mental stop loss at around $12.8.

XXIA formed a cup-with-handle pattern and had a breakout

Contrary to contrary opinion

2004-11-22T22:00:00.000-08:00

Has anyone noticed how lots of "TV people" on CNBC are talking about contrarian indicators pointing one way or another? Contrarian indicators, in my opinion, work best when no one is paying attention to them, that is the essence of "contrary". When everyone is talking about the contrary, it then becomes public opinion and really a true contrarian would take the opposite of the view expressed by the "TV contrarians"

I guess the bursting bubble has made these contrarian indicators too popular and we now need either new indicators or possibly change our view of what really is contrary. Also, contrarian indicators rarely work in a trend. We are in a trend not at an extremity.

Two wrongs don't make a right. However, as a contrarian contrarian, one cannot not observe the negation of positivity on TV (yeah I don't know if it makes sense either)

Trade: Bought QQQ March 2005 $36 Put @0.80

2004-11-22T07:53:00.000-08:00

I have done the first trade from the last post. Now I have to wait for the support levels to be hit.

March 2005 36 Put @0.80

The QQQ at that time was @38.6

Trading cubes(QQQ)

2004-11-21T14:51:00.000-08:00

Like I had written before, I am convinced the market is in an uptrend. The QQQ hit a new high on Thursday even though the NASDAQ still hasn't cleared that mark. Since the QQQ consists of the top 100 companies of the NASDAQ and it is slightly outperforming the index, it's a good sign. This brings us to the point where there should be a minor correction/consolidation. This is, in my opinion, the perfect setting for trend-trading. And I'll start doing just that on the QQQs, possibly starting Monday.

The scenario that I have in mind is as follows:

QQQ will retract to the 37.5 level and try to establish support there. That represents the first Fibonacci retracement from the high of this year. This is also close to the previous resistance levels from mid-February, April and July. This is also the support level expected from the trendline formed by the recent advance from mid-August.
If support holds @37.5 , then it'll advance again to a new high. If this happens I'll figure out the next resistance level. If support fails, then the next level of support is at 36.4, next at 35.7.Any fall below 36.4 will ring my alarm bells and a break below 35.7 would signal a definite reversal since it would have broken the up-trend line and also failed two support levels.

I have two trades in mind:

Buy March QQQ puts @36 on Monday, Nov 22nd. This'll limit losses in case the first resistance doesn't hold.
March/April QQQ calls : Will wait for the retractment to the first support level @37.5 and buy calls with a strike = $40 at the first sign of reversal.

Click on the charts to see bigger more readable versions with the support/resistance levels.

QQQ 1 year chart

QQQ 2 year chart

Some basic bedtime reading material on the subject of technical analysis:
http://www.stockcharts.com/education/TAindex.html
http://en.wikipedia.org/wiki/Technical_analysis

PS: I read recently a news-story that the QQQ name is being changed to QQQQ. So basically they changed the name from three-Q to ???? , whoever came up with THAT bright idea.. :)
PS1: If you still dont get it, read aloud.

On your march..

2004-11-18T01:45:00.000-08:00

More stocks on watch that are forming interesting patterns

RMBS : Nice breakout. Watching for the retractment to 18-19 level
AUO : Watching for 14.2(resistance) or 12.0 or 11.5 (two support levels)
SCH : 9.6-9.8
FDRY : No price target currently. More later.

More charts and stuff later. Drop me a note if you have opinions on which of these three is a better bet.

Also waiting for the end of the week for the options cycle to expire.

ERTS update

2004-11-16T21:30:00.000-08:00

A few points reevaluating my EA trade. This is a position trade in anticipation of an event. So here are some more thoughts

EA made a 3.5% jump today yesterday at slightly above average volume. This was, I guess in response to the news that EA is going to acquire DICE the maker of the Battlefield 1942 series (which by the way is a great game) . The stock is just hovering around the 200-day MA and closed barely above it before dropping back under it again today.
Reevaluating the stock after the put dropped to 0.8 today I realized that the reasons I bought the put still hold. There's intense competition coming from Halo2, GTA3, Metal Gear Solid3 and Half-Life2, which I believe will be the blockbuster games for the end of year. These same games will eat into EA revenues despite the fact that EA dropped the price on some of it's games. I still believe EA will miss on the holiday sales number when it reports its next earnings.
In the past year, there have been around 5 high volume drops in the stock price but none of them broke the 200-day average. The stock has recovered all those times. This time, however, it looks like the 200-day MA is providing stiff resistance looking at the 1 year chart.

Patience, my dear

2004-11-13T13:06:00.000-08:00

One of the things I am starting to appreciate is that you have to trade differently in different market conditions. In an uptrending market, the idea should be to buy on pullbacks and hold on advances. On the other hand in downtrending markets, the idea should be to sell on advances and definitely NOT HOLD on pullbacks. Essentially it means that if the market is trending downward, then if the stock wasn't sold off initially when the trendlines were broken, then the first advance should be sold. Of course the tricky part of the equation is to figure out whether the market is in an uptrend or a downtrend; something that I am kind of learning as I go along!!

I've been talking about about technical trades, support and resistance levels. Charles Schwab recently has shown strength and formed some very interesting trendlines. I also recently figured out how to post images so here goes.. You can click and open the chart in a new window for a more readable version

A,B : Two differently drawn "long term" downtrend lines broke and formed support levels. The B downtrend was broken with very good up volume. The A downtrend also broke on above average volume but not very good compared to B
C: Short term downtrend lines were broken on above average volume
X: Support levels were formed during these volatile, violent movements
Y: Higher trending intermediate term resistance levels are being formed. Higher trending resistance levels will possibly act as support levels in the future if the stock breaks above it.
Z: The stock is still trying to find it's short term support levels in order to establish a solid upward trend. A good first guess would be the earlier first resistance level during C, which is between 9.6 and 9.8. A good second guess would be between 9.2 and 9.4
The stock has also broken above it's 200-day MA and should find support there.. which I think will coincide with the above two levels depending on how the stock moves in the next week.

I will enter an option trade since I am quite convinced that this is on an uptrend. I will wait for the first pullback to around the 9.6-9.8 level and buy:

Either out of the money June 2005 @12.5 calls
Or in the money June 2005 @7.5 calls for around $2.4-2.6

Charles Schwab

So essentially waiting is what I'm going to do which is kind of hard when you're waiting for a pullback on a good trade. All you need is just a little patience..

Bought: ZONS @5.84

2004-11-10T08:16:00.000-08:00

This is one of those chart patterns that I just can't resist. This is definitely an impulsive trade that showed up on one of my volume surge screens.

Even after it's quick advance, the stock seems to be richly undervalued, and has very low institutional ownership, leaving ample room to go up. Broadly speaking, it's a retailer which sells technology products to companies. The reason it's attractive is because it is showing good price strength, is profitable and undervalued

Also the price is now above $5 a very important level for the stock to show up on the institutional screen.

One the flip side, the stock has had a history of going dormant and declining slowly for extended time periods. I would consider this a short to medium term trade.

If the first round of buying has been from some institutions, we should see support at around 5 to 5.5

Game over? ERTS : Bought Put 40 March 2005 @1.05

2004-11-07T13:27:00.000-08:00

Even though I think the market to be in a bullish phase right now, I am ready to make a bearish bet on ERTS. Even though Electronic Arts is a great company, has some superb games and has shown incredible growth in the past,I'll write down why I think ERTS stock has topped for the intermediate term

There just aren't any compulsive games coming out. The craze last year and the year before was definitely for games. As a casual gamer, there were some games that I paid $50 for. Today I can't find any game that is persuasive enough for me to cough up that kind of money. Maybe a few like Halo2, GTA-3 and Half Life2, but anyway those are not ERTS games

Christmas is round the corner and there are a host of other gadgets that people can think of. If someone is a hardcore gamer, they have most likely played all the games this year that they wanted to. They have owned their XBOX or PS2 for a while now and possibly got either the console or a lot of games as gifts. For the casual gamer, if they didn't already buy it at $50, they probably bought their copy of "Allied Assault" or "GTA-Vice City" at a significant discount anyway. Possibly the same people got IPODs last year or bought one this year (Apple stock hasn't been soarin' for nothin'). What do you think a thoughtful gift-giver might decide to gift- another $50 game this year or a $50 gift certificate to itunes? A PS2 or an IPOD mini?
The new XBOX and PS2 consoles should be coming out not too far in the future. ERTS possibly has to spend a lot of money and time developing new games for those consoles rather than for the existing consoles expecting of course that the new games will be a league better than existing ones. Most new games coming this out will be slight variations of existing ones. I expect R&D expenses at ERTS to be up for the year.
ERTS missed expectations and guided lower in it's most recent quarter. December sales I think will be more disappointing than the company anticipates because of lower holiday sales.
Also the stock has 99% institutional ownership. When these institutions start unloading, it's going to be ugly. Also the short ratio is at only 4.3 days, not enough for any meaningful short covering to propel the stock higher.
Technically the stock has formed a classic topping pattern. The trendlines both longterm and shortterm have broken support lines and are now forming clear resistance lines. The downtrend over the from 1st July to now looks quite solid. It has broken support lines twice and this is the first time it's forming a downtrend. The stock had found support at around $48 earlier and now this same level is acting like resistance.
Right now if the stock doesn't break forcefully above the 200-day MA then the next support is at $44. If it manages to break below this level then there's a lot of possible downside.
Intraday supports also seem to be breaking and turning into resistance levels

I will watch the stock in the next few days for more confirmation from it's intraday price movements. I have initiated an out-of-the money "put" position strike price $40 @1.05 for March 2005. March is the earliest when the holiday results become available. Whether I hold on till expiration depends on the pattern that the stock shows over the coming few days/weeks.

Since one of my goals is not to have more than 10% of trading money in options, at this point, the only reason I'm initiating a put is because I want to limit the loss potential that short selling has. I also prefer staying off a margin account and trade with cash only for now.

Dollar bear

2004-11-05T13:47:00.000-08:00

I have been thinking about this for a while and now that Bush is here for "four more years" I think even more strongly that the US dollar is now at a significant risk. I'm not really sure what I'm missing, but I don't really see currently how the total deficit is going to come down. Recently the dollar has fallen to a new low against the Euro and I think that this is just the beginning of a trend. Of course I have no formal knowledge of the complex interactions between currency, debt, interest rates, the stock market, policies and politics to come up with any argument one way or another which cannot be refuted.. In my simplistic view of the world, I like to think of a country as a company and it's currency in terms of it's stock; one can draw surprisingly close parallels between the two.

The net long term debt of of a company to the net deficit of a country
The revenue to GDP
The trade surplus to earnings
The "value" of it's currency to it's market cap or it's stock price.

When one looks at a company for valuation, one of the biggest red flags is increasing debt. Investors are usually fine with this if the company is expected in the future to use this debt to grow it's earnings at a pace faster than it's growing it's current debt, for example by building new plants or investing in R&D for new products; I believe this is the current world view of the dollar - that the current deficit will lead to higher returns later.

Since the dollar is a world currency, one of the most obvious ways for Bush to cut the deficit in half is to start printing more dollars. This is the part where the complex interactions come in. Printing more US dollars means the debt can be paid off with the newly printed dollars; however the value of the dollar decreases(company issues more shares, the debt per share decreases but so do the assets revenues and earnings per share). It means that the trousers "Made in China" are suddenly not so cheap at Walmart. Of course that'll also cause that the net imports from China to decrease.. eventually helping cut the deficit even more. But meanwhile inflation in the US has increased and the US consumer is buying less and less. On the other hand as interest rates rise, the debt(US deficit) becomes slightly more attractive since it's paying a higher rate of return(interest) which might start helping the dollar gain back ground. Actually at this point a lot of interactions become "alternate world scenarios".. somewhat like a chess game.

On the politics side of the alternate world, if Bush goes ahead with his private social security accounts, that's again something that'll bring a huge amount of money into mutual funds etc. Of course it'll help the financial companies but more importantly, all this new money into the market will helps boost the market a lot(adding to the net assets of the US). It might then become attractive again for foreign money to buy cheap US dollars, invest in the US market (causing a ripple effect in the market) and cause the market to go even higher. At the same time because of the US dollar buying, the dollar goes higher. All this depends not only on the extent of this privatization but also on the timing, both of which are political issues.

However if he keeps doing what he has been doing.. spending, which in my mind is the more plausible scenario, then there is nothing really to stop the falling dollar.

Recently there's been a lot of talk about rising oil prices. Let's take a step back from that and think in terms of the US dollar. In Nov 2003, 1 US dollar was about 1EURO . Today it's about 0.77 Euro. Oil went from about $28 to $50 during the same time. Whoa!

But wait, if we look at it again in terms of the Euro. It only went up from Euro 28 to Euro 38.5 . Suddenly that doesn't look as bad as the US prices rising, does it now? The Europeans "only" saw a 37% increase vs a 78% for the US, about half the increase the US saw. Are the US economists and financial gurus trying only to "hide away" or "hide from" what's truly out there by talking just about the oil prices on TV?

A lot of these really depends not only on the events themselves but the sequence of events. The directed graph picture in my mind right now has very few paths that lead to a stronger or sustained dollar and many more towards a weaker dollar. In the past few years we have seen the dollar bear come out of hibernation and sniffing for food. The question now is : will it attack those unsuspecting hikers?

PS: I have never really traded currency but it's probably about time. If someone has any recommendations or experiences for online trading sites with not a huge capital minimum, I'd appreciate it. Some of the European ETFs and international equity funds might add some protection so that's something I'll look at. The gold ETF is also something to explore although not really something I would like to do.
PS:I have also enabled anonymous comments so you don't have to register to leave a message.

IDC update - short covering

2004-11-02T07:27:00.000-08:00

IDC caught some air today and has staged it's first breakout. I think this is the first of a short covering rally. There were still a million shares to cover as of 8th October so this could happen a few more times.

The longer term uptrend is also becomng clearer now.

Long-term or Short-term

2004-10-31T15:28:00.000-08:00

One of the reasons I started writing this was to keep track of the reasons I bought a stock and to keep some on my watchlist. By that I don't mean just the ticker symbols, but the thought process; in essence to keep track of what I thought, to make myself more accountable for what I did and to learn from my mistakes as I go. Often, I have sold my winners too soon and held my losers too long. Why is it, one wonders, that so many of us end up becoming long-term investors on losing stocks- holding on to them forever and aggressive Get-In-Get-Out traders on winning ones, when really we should be doing it the other way round?

Another thing that strikes me is something that I learnt from Peter Lynch's book "One up on Wall Street" - if a stock goes up after you bought it doesn't mean you're right and if it goes down doesn't mean you're wrong.. in fact I need to be clear on the reasons why I bought or sold a stock before I buy it. Of course this doesn't mean that I should focus only on the fundamentals or the chart patterns, but whatever it is, I need to be clear about it.

My philosophy about "ultra" long term investing is that it's good only for my 401-k plan because I know :

For a fact, unlike some companies, a mutual fund portfolio is not going to go bankrupt or go from 400 to 4
Dollar cost averaging every 2 weeks ensures I dont buy in at the wrong time.

However when I'm trying to pick individual stocks, which I'm trying to do one, because I think I can do better and two because it's something that keeps my mind(brain?) busy (Talk to sparun if you'd like to know what this can do to your longevity)

So then does that make me a short term trader by default? No not that too. By definition I guess a long term investor is someone focussed solely on fundamentals and valuations. A short term trader needs to be totally good at analyzing chart patterns and trend lines. I guess I'm trying to find that sweet spot - the golden ratio between technical and fundamental analysis.

Here's a thought experiment: Imagine two people - F and T one focussed solely on fundamentals(F) and one focussed solely on technicals(T) both very good, not perfect. Why would both get suboptimal results? What's the optimum solution?

F can usually pick out stocks when they are extremely undervalued but will either get out much before the stock peaks (P/E is too high - the stock is now overvalued) or much after(The dip is a buying opprtunity until the company announces really bad results)
One the other hand T waits for a trend to form, the confirming price-volume signals and gets in. Sometimes these trends might break and T takes a loss and gets out. However T really has to wait for a trend to take shape or risk being caught in market whipsaws. Of course once the trend has formed, T can ride it very close to the peak and get out just when the trend starts to break. The problem though is that a trend needs at least three points.

One can build a similar scenario when a stock is going down.

Hence I think a correct balance between fundamental and technical reasoning is possibly the best scenario. Potentially it could also be the worst if used in the exactly opposite way. Moving along I'm going to find out.

The Markets and a new trade: Bought: Interactive Data Corp (IDC) @19.68

2004-10-30T14:44:00.000-07:00

The market has rebounded nicely these past weeks. The volume on up days has been higher compared to the down days. Also the nasdaq seems to have found support around the 50-day moving average which so far this year seemed to be acting like a resistance.

My most recent trade this week has been Interactive Data Corp(IDC) @19.68

The company recently reported earnings and the stock reacted favourably. This is important, since it's become hard these days to second guess the direction of a stock on earnings, not to mention trying to second guess the earnings itself, which is still harder.
Stock hit a 2-year high and this is after an extended period of consolidation in a trading range between 16 and 18.
Betweem 4/12/2004 and 8/13/2004 the stock has found support at the 200-day MA. More importantly the 50-day MA has found support at the 200-day before the breakout.
The company is 60% owned by Pearson plc(PSO). There's no reason for me to think PSO will iquidate stock soon. Sep. and Oct. shares shorted were 1.52M and 1.10 M respectively. Given the average volume, a short covering should be in order. Currently the short ratio is around 10.5 days (October)
Fundamentally the company looks sound with no debt and (Book value+revenues) around $13. It has a good suite of products: FT Interactive Data, CMS BondEdge, ComStock and eSignal . They seem to be doing some interesting things with providing data to the Blackberries of the world. I've heard from people who work in finance that the Blackberry is really popular in the finance area It looks like some of these products should be and easy sell to those people.

So much for now. I'll keep an eye out for the breakout.

Quotes from Yahoo

2004-10-30T11:59:00.000-07:00

I'll try to keep this updated for the companies that I talk about. It'll be a quick check to see how they have done since last time.

Current quotes on some companies mentioned

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2004-10-29T18:26:00.000-07:00

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