Trade Ideas for 8/29/08

Tomorrow's the last trading day of the month, and the start of a long weekend. What will it bring? My thought is, continued strength in the major indices. Today's action in the S&P gave the edge to the bulls. Financials were so strong today—I didn't find a single one that closed in the red. As for the triangle I pointed out yesterday in the SPY, it was broken to the upside. Some texts on technical analysis claim that descending triangles favor downside. I've found that price is as likely to break down as break out of a triangle, so they are useless to me as a predictor of direction. What they do predict well is the likelihood of a significant move in some direction by a particular point in time, and that whatever direction is chosen should see continuation. (That prediction also comes with a target price, but this is really getting out of my comfort zone.) Since the market broke upward, today's move implies continued strength.

I wasn't paying a lot of attention to the general market, however. I was transfixed by the action in basic materials. For example, this morning PCU gapped up on the open, ran to our buy price, and then started a long decline. Sound to you like another stock we currently own? Especially given the timing of yesterday's post on this very scenario, I hope none of you purchased all the shares of PCU you had originally planned to at the buy price. Now, if any of you read between the lines of yesterday's post and actually shorted PCU at the open, fading the gap as it were, congratulations, and would you manage my portfolio? I myself was not that clever; I bought some PCU at 26.71, but fewer shares than originally planned. Why did I do it? Van Tharp observed that people don't trade the market; they trade their beliefs about the market. And this morning at 6:30 PT I believed in my read that basic materials was headed to its 200-day moving average. So I bought, adjusting for the additional risk of breakout failure by buying fewer shares. Let's not forget also that some stocks gap up and keep running. In the event, PCU gapped and crapped, but didn't violate the pivot low. Yeah, I could have purchased it at a more favorable price if I had waited. Speaking of which, whenever you see a sell-off as fast and as deep as today's (in all the basic materials sectors: miners, energy, precious metals), it is only a matter of time before the snap-back rally begins. Each move in a market is a move in price but also a move in time, and these need to be in balance. A sharp sudden move like this morning's disrupts that balance and is likely to be remedied by an equally sudden counter-reaction, which is what ended up happening. Andy Askey does some great work on the relationship between price and time in his blog; I encourage you to check it out. I took advantage of the counter-reaction to do a little buying myself. Here's a day trade in DGP:


I bought some DGP at a little after 12pm for 17.83, risking to the day's low, a spread of 0.17. These were the first green bars I'd since the first hour, and so I took a chance and bought the mini-breakout. I sold half just under 18—nearly a 1R return on that lot—and I still have the rest (DGP was also on my personal trade ideas list, and so this half-lot counts as a reduced-risk pullback purchase, for those keeping track). Anyway, I stick by my reading of the charts, namely that basic materials is riding a B wave rally (a.k.a sucker's rally) up to the 200-day moving average. This read remains valid: the pivot low of two days ago was untouched in all of the charts of basic materials stocks that I looked at (although it got real close in some cases) despite today's sudden sell-off. So if you own PCU and/or EGO, stay the course, but do get out if the stops are violated. It is more than possible that my read is incorrect; it has happened many times before and will again! If I do say so myself, I thought PCU and EGO fared particularly well in this sector, managing to gain on yesterday's close; this is encouraging. By the way, I misspoke in yesterday's update; the recommended stop for VISN (if you still own it) is 18.24. It's a shame that VISN was officially stopped out a couple days ago by a hair, because it is looking good to me again, and it wouldn't make a bad addition to the trade ideas list (hint, hint). I regret being so demanding of the stock; a more generous sell-stop was needed.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
EGO	8.11	7.87	-3.0%	7.29, and optionally at market on a close < 7.49	Stay the course	Chart
PCU	26.71	26.23	-1.8%	24.64	Stay the course	Chart

I personally went a little overboard buying up a number of different companies in the basic materials sector: coal, energy, gold and copper (our very own PCU) at various points in the day. At this point I'm overexposed to basic materials, and so is our portfolio. However, if you wish for additional exposure, there are many ETFs out there: XLB, XLE, DIG, KOL, GDX, GLD, SLV, CEF, DGP. The safest way to buy is on a breakout past today's high (hopefully not on a gap up at open!), risking to the pivot low of a couple days ago. You could also buy at market, but do risk less. Meanwhile on the official list for tomorrow, I have Apple from yesterday and a couple of "banks." These stand to do well in case of a rally in the S&P, and will provide our portfolio with some much-needed exposure to other sectors.

Trade Ideas for 8/29/08

Ticker	Entry	Exit A	Exit C	Chart
AAPL (Apple)	177.51	171.65	169.66	Chart
BPOP (Banco Popular)	7.67	6.99	6.71	Chart
JOSB (Jos. A Bank Clothiers)	27.01	25.86	24.99	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.