Friday, June 14, 2013

Friday: No Trade

A tough, tough choice today between two potential bull plays with great historical odds of success and charts that look good at first glance but insufficient liquidity to support the options I need for a hedged and leveraged position.

In the end, as I bored into the chart trying to choose, I decided that neither is a good prospect, based on the price action this month.

Altogether, four breakouts to the upside on Thursday survived my initial screening. (See "Friday's Prospects" posted last night.) All four symbols confirmed their bull signals by continuing to trade today above the breakout level.

Two, however, had huge upside gaps at the Thursday open because of a take-over announcement: GCI is buying out BLC.

Regular readers will know that, at the drop of a hat or the leap of a price, I'll gladly quote Nathan Rothschild's stale dictum advising traders to buy on the cannons and sell on the trumpets. The opening gaps were trumpets, so I discarded those two stocks from my prospects list.

That left JCOM and MDP, both giving bull signals amid long-running uptrends, profitable companies with excellent returns on equity and no troublesome levels of debt, both with a solid record of profitable breakouts to the upside within their current up trends.

So what's not to like?

JCOM on May 9 opened with a 7.1% upside gap following an earnings announcement, and immediately plummeted by 15.4% and stayed near that lower level until the close. It has since recovered about half of that decline, to stand near the high set the day after the earnings debacle, $42.25. It closed above that level on Friday and is trading above it still today but without setting a higher high compared to the day before.

I would want to see more movement to the upside before opening a bull position in JCOM. The post-earnings price behavior was just too extreme to give me any confidence that Thursday's tepid breakout is a harbringer of a strong uptrend to come.

MDP's chart is, in some ways, a mirror image.

It had a huge rise on Thursday, hitting a high that stands 9.4% above the prior day's close, without any real news to explain, beyond a mention within an article published that day in Seeking Alpha. The price today, with three hours to go before the closing bell, hasn't followed though with a further rise.

The stock hit a high of $45.95 on Feb. 20 and began a decline that ended at the prior correction level, and the price has yet to challenge that high again. Is MDP in a correction or a downtrend on the daily chart? Hard to tell, but given the magnitude of Thursday's rise, I'd like to see more push to the upside and perhaps even a break above $45.95 before I'm interested.

My decision would be different if these stocks had options with sufficient open interest to meet my standards.

Options allow me to set my break-even point below the entry price, providing a cushion of profitability in case a trade goes wrong. No such cushion exists when trading shares.

The shares might still have some redeeming qualities if they tended to trade contrary to the S&P 500, which has received a great deal of bearish analysis of late. I mean, they're smaller companies, and the whole point of trading mid-caps is to gain some divergence from the big dudes.

But neither provides that benefit: The 50-day average correlation between the S&P 500 and JCOM is 0.70, and MDP, 0.88, where 1 is a perfect match with the index and -1 is perfectly contrary.

My current holdings average out to a 0.58 correlation, so neither of these would in fact couple my net standing more tightly to the blue chips.

Bottom line: I won't be opening any new bull positions today.

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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