Below are some past "bonus" directional trades to give you a feel for what we cover.
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Sunday, January 11, 2009
Here is an update on our recommended longer-term bullish directional trades on
individual big-cap stocks. These trades are targeted to
make 150% to 300% return in 6 to 9 months.
Here is a summary of the methodology behind this strategy, updated and
refined as of 1/11/09: a) Identify financially strong, big-cap companies
that trade at least 500k shares daily and that
have been growing nicely over the last 3 to 5 years. (Big-cap
companies have market capitalizations of greater than $10B) We use Value Line
to find these companies, which is a well respected
resource for fundamental analysis, www.valueline.com.
We run a screen on the Big-cap Value Line database for stocks that have a
timeliness ranking of 1, 2, 3 and 4; (Value Line Big-Cap edition follows
1800 stocks and they rank stocks 1 through 5, where 1 is the best.) and with
a financial health ranking of A++, A+, A,
and B++, which represents the top 40% of the range for financial health. (they
rank financial health A++ to C)
screen generated a list of 650 Big-cap stocks. b) Run a scan on these
650 stocks to find the ones that were beaten down by the Oct 2008 crash; we do
this by scanning for stocks that have the 100 day SMA below the 200 day SMA,
and the 50 day SMA is below the 100 day SMA; this scan filters out the defensive stocks
that did well during the crash as these
were already bid up because investors tend to rotate into defensive names during uncertain
times - names like Colgate-Palmolive, Procter & Gamble, Wal-Mart and Johnson
& Johnson. This scan knocks the list down to 150 stocks; c) Visually analyze each chart and select the
ones where the stock grew nicely over the last 3 to 5 years and then cratered during
the Oct 2008 crash; d) filter out the stocks that don't offer January
2010 options - because we plan to mostly open longer-term, Jan 2010 options; (after
steps c and d we are down to 120 stocks) e) Find out when earnings
will be announced and make a determination if we should wait until the next
earnings announcement, where many are in January '09, or do we pull the
trigger and open the trade when the technical indicators tell us to. We now have a list of
120 high quality, big-cap companies that have.....i) solid balance sheets
with a lot of cash; ii) are fundamentally strong, at least on a relative
basis, where revenue and earnings grew nicely
for the last 3 to 5 years; iii) the Value Line analyst believes the company
will continue to grow revenue and earnings; iv) the stock reflected this
growth by growing nicely over the last 3 to 5 years; and v) the stock took a 40% to 50% haircut during the
Oct 2008 crash. f) We now run a "10/30 bullish crossover scan" in our technical
analysis package and scan this list of 120 stocks a few times each week to identify the
ones that are technically breaking-out to the upside. (fundamental analysis tells us if the company is
solid with growing sales and earnings; technical analysis tells us when to get in and when
to get out)
When the 10/30 bullish crossover scan identifies a stock that is beginning
to show a technical bullish break-out, we will view it with additional
indicators such as support/resistance, ADX, MACD, Elliott Wave, 5/35 & 10/70 oscillators and
Accumulation/Distribution to make a determination if the stock is truly
breaking-out, or if it is still consolidating and building a base.
h) If the additional indicators confirm that the stock is breaking-out
and that there is a high probability that the upward trend is sustainable,
we'll build a directional, bullish option trade in our options analysis
package where the trade will take advantage of an upward trending stock and
one that can handle a gradual drop in volatility.
(as the market recovers, implied volatility, VIX, will deflate, called
volatility crush, and this usually negatively impacts our profits; thus, we need to build
trades that can neutralize a volatility crush).
We plan to run our break-out scan on this list of 120 companies a few times per week, and as companies are identified and are
beginning to break-out to the upside, we'll build bullish directional
trades and send them out to our subscribers. Below is a summary of the
companies that have come out of our scan and that we've taken a closer look at.
Bullish trade on Honeywell International - HON (updated January 11,
Status: One option is NOT to wait for its next earnings
announcement on January 30th and immediately open a bullish trade and plan on holding it for
the next 6 to 9 months, due to the fact that all technical triggers have been hit. A more
conservative plan is to wait until earnings are released. Do you feel
lucky? The MCTO team is leaning towards opening this trade during the
week of Jan 12th to take advantage of the recent pull back.
Below is a description of HON's business and prospects by a Value Line
analyst as of Oct 24, 2008. Fundamentally, the company has been doing
well before its stock sold-off during the October 2008 crash and the
analyst thinks the company will do well in 2009 and beyond.
Below is Value Line's projected price target for HON, which is between $70
and $85/share over the next 3 to 5 years. Value Line ranks HON with a
timeliness ranking of 3, which is neutral, and a safety ranking of 1.
Earnings: The next earnings report will be released on January
30, 2009. More conservative directional traders
should wait until earnings come out before opening a bullish trade.
Below is the weekly chart of HON taking us back to 2003. We can see
that HON grew nicely from 2006 through 2008, and then sold-off in mid
2008, and then took a big hit during the Oct 2008 crash. The relative
strength index (RSI) tells us that technically the stock was oversold during
the crash, but now RSI is recovering since money is flowing back into the
Below is the daily HON chart as of Jan 9, 2009 with more technical indicators.
We can see that HON has broken above 33 which represents
the high of the failed rally attempt in early November and now it hit
resistance at its 100 day SMA line (thick blue dotted line). The 10 day SMA (thin blue line)
is above the 30 day SMA (thin olive green line) and above the 50
day SMA, which is a bullish signal and it's only a matter of time when it
overtakes the 100 day line. Per the other indicators, we can see that
they are showing a lot of strength and even the 10/70 oscillator (blue
histogram overlaid on the red 5/35 histogram) is now positive which is very
For more on these technical indicators please visit the FAQ page at
Conclusion on the underlying security: We believe that HON will
rest for a short while as it continues to hit resistance at its 100 day SMA
line, (this might only last a few days) and it's only a matter of time
before this stock pushes over its 100 day line and continues to march
higher. (unless earnings are bad when they come out on Jan 30th)
Because it's hitting resistance at its 100 day line, this gives us an
opportunity over the next few days to get into this trade. For those
of you who want further assurance that this stock is ready to rally, it's
recommended to watch the stock closely to see if 1) it stays above its 50
day SMA (thin black line), which will demonstrate strength, and 2) wait for
it to close above its 100 day line, and 3) possibly wait for earnings to
come out on the 30th; once these are satisfied, immediately buy some
calls that are slightly OTM and plan on holding them for 6 to 9 months.
Recommended Option trades:
The trade below is a straight Jan10 35 call, and we only have to be correct
on the direction of the stock and not on the timing. We also show how
our profits will be affected if volatility drops an additional 20%, which it
most likely will. (the position of the risk/reward graph already takes
into account an additional 20% drop in volatility) The hit to profitability
is not that bad and acceptable where instead of losing $40 when we first
open the trade, we would lose $150. (i.e. the graph shifts over to the
left by an additional $110) We are
now able to open a straight call since volatility has dropped quite a bit
over the last 45 days.
Bullish trade on Fluor Corp. - FLR
Status: On hold as of January 11 - waiting for the stock to
break above its 100 day SMA line.
Below is a description of FLR's business and prospects by a Value Line
analyst as of Oct 3, 2008. Fundamentally, the company has been doing
very well before investors started to sell the stock off starting in
mid-2008 due to the drop in oil prices and global recession fears. As
of this writing, oil was at $100/barrel, now it's at $40. Not sure how
$40 oil will affect this company.
Below is an update that came in on 11/7/08 where FLR beat earnings consensus
Below is Value Line's projected price target for FLR, which is between
$100 and $135/share over the next 3 to 5 years. Value Line ranks FLR
with a timeliness ranking of 3, which is neutral.
Earnings: The next earnings report will be released during the
week of Feb 6th, 2009. Earnings that came in on November 6, 2008 beat estimates.
Below is the weekly chart of FLR taking us back to 2002, and we can see
that FLR's stock grew nicely during this time and then was sold off hard in the last
4 months of 2008. The relative
strength index (RSI) tells us that technically the stock was oversold, but
now it's recovering since money is flowing back into the stock.
Below is the daily FLR chart showing more technical indicators. We can see that FLR has been trending upward since the end
of November. The 10 day SMA (thin blue line) crossed above the 30 day SMA
(thin olive green line) and over
its 50 day SMA in the first week of December. It ran out of steam near its 100 day SMA (thick blue dotted line)
in the 3rd week of December and retreated back down to its 30 day SMA.
It has then trended upward riding on its 30 day line which is a healthy
sign. It now is hitting resistance at its 100 day line, but sooner or
later this stock will break up through this level and continue to climb
higher. On the negative, the A/D line and 5/35 oscillator are recently
pulling back. For more on these technical indicators please
visit the FAQ page at
Conclusion on the underlying: We believe there is a good
probability that FLR will continue in an upward trajectory over the next
year once it successfully breaks up through its 100 day SMA line (thick blue
dotted). Because we are seeing the 5/35 oscillator, MACD and A/D lines
pulling back and showing some weakness, it would be best to watch this stock
and wait for it to break up through its 100 day line before jumping into a
Recommended Option trades: Current status on this trade
is to hold and watch the underlying longer. However, for those of you
who are curious about what trades could work, here are one.
Below is a Jan 2010 bull call spread that makes money
as the stock climbs to $80/share, and then after this point profits are
capped. We use a spread on this underlying stock to neutralize
volatility risk...i.e. as the stock climbs, volatility drops and impacts our
profits; so by buying a leg and selling a leg, this reduces the impact
of a volatility crush on our profits.
Bullish trade on Computer Science - CSC (Updated Jan 11, 2009)
Status: We recommend to watch this stock and as soon as it
looks like the 100 day SMA is holding as support, open a bullish trade and
plan to hold it for 6 to 9 months.
Below is a description of CSC's business by a Value Line analyst,
updated on November 21, 2008. Fundamentally, the company has been
doing well and then its stock sold-off hard during the October 2008 crash.
This analysts doesn't really like this company for a long term hold, but
investors are telling us a different story where the stock is showing a lot
Below is the analyst's projected price target for CSC, which is between
$60 and $90/share over the next 3 to 5 years. Value Line ranks CSC
with a 3 timeliness ranking of 3, which is neutral, and gives it a solid
financial strength rating of an "A", meaning that it has a strong balance
sheet and probably lots of cash.
Earnings: CSC will next release earnings during the week of Feb
9th, 2009. Earnings could be bad, so one option is to wait until after Q4 earnings
are released since the stock could go lower. However, looking the
charts below, this stock might continue to trend upward before
investors begin to worry about earnings, and by then we could be out.
Below is the weekly chart of CSC taking us back to 2003. We can see
that CSC grew slowly but surely over this time period and then sold-off
hard during the Oct 2008 crash. The relative
strength index (RSI) tells us that technically that the stock was oversold
right at the crash, but now RSI is recovering since money is flowing back
into the stock. This chart is not as nice as some of the other
since the stock did sell off late December 2007, telling us that investors
were already worried about IT spending and/or the company's ability to
execute their business plan; however, the sell-off during the Oct 2008
crash was still pretty severe, and money is definitely flowing back into
this stock, as shown below.
Below is the daily CSC chart showing more technical indicators. We can see that CSC has been trending upward strongly since the end
of November where the 10 day SMA (thin blue line) crossed above the 30 day SMA (thin olive green line),
day SMA (thin black line) and now the 100 day SMA (thick blue dotted line), which is very
bullish. Per the other indicators, we can see that they have been building strength since mid-November and they
all look strong. We now are looking to see if the 100 day SMA
holds as support if/when this stock pulls back a little; if it does,
CSC most likely will continue higher the next time it makes a move. For more on these technical indicators please visit the FAQ
Conclusion on the underlying: We recommend to watch this
stock and as soon as it looks like the 100 day SMA is holding as support,
i.e. the stock closes above the 100 day SMA a few days in a row, open a
bullish trade and plan to hold it for 6 to 9 months.
Recommended Option trades:
The trade below is a straight Jan10 37.5 call. It costs a debit of $6
to open and the most we could lose is the original debit; no
additional maintenance is required for this trade. The position of the
risk/reward graph already takes into account an additional 20% drop in
volatility, which shifts the graph over to the left and it pushes the
breakeven up from $43.16 to $43.37. (as the market recovers,
volatility deflates) The hit to profitability is not that bad and acceptable
where instead of losing $30 when we first open the trade, we would lose $151. (i.e.
the graph shifts over to the left by an additional $121) A straight call
makes more sense now since volatility has dropped quite a bit
over the last 45 days.