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Sunday, June 12, 2005
Market Recap
The markets were mixed Friday with the DOW staging a nice comeback towards the end of the day, helped by GM which was up $2.70 on over 2X average volume. This helped the DOW in a big way and as a result, the DOW closed up 9 points. Both the NASDAQ and S&P were down on the day, 13 points and 2 points respectively. The markets finished flat for the week as the summer season kicked off with school letting out and many traders starting an early vacation. We could very well see a lack of volume for the summer months as this is the start of the normal seasonal slow period for trading volume. Expect this light volume until after Labor Day. If the market can just hold its own and base for two or three months, it would be very technically sound going into the fall. Then we should see heavier volume and buying conviction, causing a breakout of the base and a run-up towards the end of the year. This would also coincide with the hopeful end of interest rate hikes as everyone is expecting the Fed to conclude its increases sometime in the fall.
Thoughts on GOOG
STHQ has a trading position in GOOG of 5%, like all of the rest of our positions. I feel so strongly about this stock that I would like to add to our position making GOOG 10% of our portfolio, but the question is when should we add? GOOG is going to be a very tricky stock to trade in the next 6 weeks and is of course highly speculative so if we add, it will not be without risk. Before I continue, I would like to state my disclosure on GOOG. I have been fixated on GOOG since I added it to the bulletin after earnings last quarter. I have benefited from the run-up from $228 by owning plenty of call options for June, July, and September of which I have already sold my June calls for a hefty profit. The following is what I expect to happen with GOOG shares over the next 6 weeks, keep in mind; this is only a theory and is my opinion only.
Options Expiration Friday
I think GOOG will close between $280 and $290 Friday this week as Friday is Options Expiration day. The reason I believe this will happen is because I have checked open interest on the June puts and calls. The majority of puts are at $280 and the majority of calls are at $290. In order for these to expire worthless, the stock must close somewhere above $280 and below $290. When an option expires worthless, it is to the advantage of the option writer (seller). They have already collected the premium and it is theirs to keep if the option expires worthless. Most of the options writers are professionals. Most amateurs that play options will buy them, not sell them. They pay the premium to the seller at the time of the purchase. For this reason, there is a lot of money on the line, depending on GOOG's closing price on Friday. The professionals want those options to expire worthless and I think that they have the power to manipulate the price enough to make that happen.
If you remember last month I had said that I did not think that GOOG would take off until the Monday following options expiration in May. Sure enough, that Monday GOOG blasted off and never looked back. There are no guarantees that history will repeat itself but this same action, if repeated, will cause a nice base to form on GOOG's chart over the next 5 trading days. Then it will be cleared for take off, with a possible move up out of this base after the expiration as GOOG will no longer be controlled by the put/call action.
End of Quarter Window Dressing
June is the end of quarter reporting for all mutual funds. Most mutual funds want to show that they own the strongest stocks in the market and the ones that have been winners in the quarter. Never mind when they bought or what they paid, they just want to show that they own the stock. It is called window dressing and it happens all the time. Because of this theory, GOOG could run up into the end of quarter due to mutual funds wanting to look good by owning this big winner this quarter. If this theory is correct, we could see it challenge or surpass its recent 52 week high again by the end of June.
July is the Risky Month
July is a bit trickier and here is why I think GOOG is a gamble either way come 1 July. All that end of quarter window dressing from June could get sold by the mutual funds and some mutual funds who legitimately owned it the whole quarter may want to lock in profits. This could cause a sell off in the first week of July. But, GOOG also reports earnings in late July; the stock could run up prior to those earnings, if those earnings are as good as they are expected to be. I expect GOOG to run-up prior to July expiration and the earnings announcement. The real gamble is earnings. Do we hold through them or do we sell? Three possible outcomes from the GOOG earnings are: 1.) There could be a blowout and the stock could gap up $20 or more like it did last quarter, 2.) If it should run up prior, it could be just the opposite this time and they could sell the news, or 3.) Earnings could be less than expected and the stock get crushed with a major gap down. Let's face it; GOOG is already priced for perfection. One slip up and it is all over but the crying for anyone long. I personally think that earnings will be great so the # 3 scenario is far fetched but anything is possible. It is a toss up between scenario's 1 and 2. If you own GOOG and you hold through earnings, please realize the risk. I will know better as we get closer to earnings how I will position myself but it is too early to make that call right now.
Nobody Owns It
I realize that not many STHQ members own shares of GOOG. Most of our members like to play the lower priced stocks, after all that is how we got started. I personally would like to play them also because they move much faster than the pricier stocks. However, I have not been able to find many of these lower priced stocks with good looking charts. The ones that do move up fail miserably and are very risky as a result. Keep in mind that with those lower priced stocks, although they move quicker, they also move quicker to the down side if they fail. This market has not produced many solid charts in the lower priced stocks. I will continue to look for these plays but, until I find solid charts, I will not trade these stocks and put our members' portfolios at risk.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
Thank you all for voting.
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