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This market has been very volatile, to say the least. It has been trapped in a tight trading range since November of 2007, and is in the process of testing that November bottom right now. Fundamentals are very important. But, in this volatile market environment, technical analysis is “indispensable”.
Today, we were able to profit from the market’s volatility and made money on both the “call” side and the “put” side on two separate trades. We did this with the help of the charts (technical analysis) and would like to share what we saw in the charts with our readers.
First, the “put” trade, on a day when SP500 gained +4%!! Yesterday, we got into ESI puts:
February 23, 2009
07:35 | HappyTrading ESI ($113.30) Bought to Open ESIOB Feb 110 calls, at $6.60
Today, while the stock market was rallying, ESI (and, other education stocks) experienced heavy selling pressure, as I mentioned in our Trade Room that big funds appeared to be dumping education stocks. We were able to cash this trade out at +21% gain:
February 24, 2009
10:15 | HappyTrading ESI ($110.30) Sold to Close ESIOB Mar 110 put, at $8.00 +21%
These options traded as high as $8.05 and closed at $6.8. This morning, ESI was trading higher, as the company raised its 2009 outlook. In the recent months, while the broader market was having a hard time going anywhere, some of the education stocks, including ESI, have been making new all-time highs. So, what did we see that prompted us to make this trade? First of all, some of these education stocks have got up so much, they have begun to show signs of being overbought! Now, let’s take a look at the recent trading on ESI’s daily chart:
ESI (3-month Daily Chart)
In early February, ESI topped $130 and started trading sideways. It then took a big drop, all the way down to $115. On the chart, we see that:
1) the 10-day MA (the “red” curve) started to turn lower
Last Thursday, ESI went below $104 on very high volume (partially due to options expiration maneuvers) and,
2) the 10-day MA crossed below the 20-day MA (the “cyan” curve). This comfirmed that the top had been reached and the stock is heading lower, as the bullish formation no longer holds. (Note: a bullish formation is when the 10-day MA is above the 20-day MA, and both are above the 30-day MA)
3) Further, we see that although the stock tried to bounce, the 30-day (the “black” curve) MA now acted as a resistance.
So, when it reached the 30-day MA, it had a high probability of going back down again. And, it did so today. The company news on raising 2009 outlook was completely ignored. Fundamentally, one can “reason” that since the stock has gone up so much, the raised outlook was already built into the price. This would also help us in future trading of this stock, as the $130-$135 range is now viewed as being high.
Now, let’s take a look at the “call” trade. I wanted to share this one because at first glance, the daily chart might not be that different than the ESI chart.
This morning, as the market got stronger. We got in the GS calls. Since the market was rallying and the financials were leading the way, we wanted to pick the best companies, the strongest stocks, to play calls on:
February 24, 2009
10:50 | HappyTrading GS ($89.10) Sold to Close GSCP Mar 80 calls, at $13.60 +31%
10:24 | HappyTrading GS ($88.20) Sold to Close GSCP Mar 80 calls, at $13.00 +24%
10:11 | HappyTrading GS ($87.60) Sold to Close GSCP Mar 80 calls, at $12.50 +20%
07:31 | HappyTrading GS ($84.20) Bought to Open GSCP Feb 80 calls, at $10.40
We bought GS Feb 80 calls in the morning and took partial profits on the way up. We locked in profits as high as +31%. These options closed at its day high at $16.65. Because of the recent volatility, we were being very careful and locked in quick gains. GS met some resistance at $90, but, plowed through it as shorts started to cover at the end of the day. Let’s take a look at the chart:
GS (3-month Daily Chart)
1) Similar to ESI, we recently saw GS’s 10-day MA (the “red” curve) turn lower. However, the 10-day MA stayed above the 20-day MA (the “cyan” curve).
2) As the market rallied today, GS got above its 30-day MA (the “black” curve), signalling that the 30-day MA is still a support, and the “bullish” trend is staying intact.
The financials were so strong today, GS jumped above the resistance at $90. It could continue higher to test $100 from here. So, the two charts are similar, but, there are significant differences. GS held its “bullish” formation and the 30-day MA acted as a support, while ESI dissolved its “bullish” formation and its 30-day MA became a resistance.
To readers not familiar with technical analysis, the charts may seem like a bunch of indecipherable, random, lines. But, if you spend some time studying them, you’ll come to see that they contain so much information, including the fundamentals! You may just find the “hidden” treasures if you learn to “read between the lines”!
Good night and HappyTrading! ™
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