EDGE TRADER

Tuesday, February 28, 2006

Digital River


Used the weakness on the day today to make an entry to DRIV. We'll see how it works out in the next few days.

FLOW



Action in FLOW continued to be strong today; I am very interested, but have not yet stepped in. Especially encouraging was the strength today in the face of the US equities sell-off.

Bellwether GOOGle

Is GOOGle a bellwether for the market? In a sense, yes, since a relatively mild warning from the CFO on future growth (reminder: CFO's are sometimes cautious people don't like to over-promise - this is the type of CFO I'd want working for my company) has sent the market tumbling. It may not close this way but I saw a -100 Dow earlier. The other sense of a bellwether (the performance if this stock dictates future direction of US equities) I don't buy for GOOGle. I don't really feel the overall performance of GOOGle is any way tied to the overall strength of the US economy; GOOG makes money (and lots of it) in the shadowy world of internet advertising. I would venture to say that the average investor does not understand how they make their money, and how they will grow their business. I am not smart enough to, and that is why I don't own Google. There are plenty of sectors in the economy which are completely unaffected by how much advertising growth the execs at Google are willing to stick their necks out and say they foresee.

So as a trader with a very large cash position entering the day today, I've used this wonderful market-given opportunity (politically correct for panic) to go shopping. I'm now close to fully invested. I may cash out of some positions before the close, rotate into others, or leave some cash to sleep with tonight, but a -100 Dow in my book must be treated as an opportunity any day that I am lucky enough to have ready cash and see one on the ticker. Hope the day is treating everyone else as good as it is treating me today.

Developing watchlist for the week

tonight. Ran through a few of my usual sources and came up with these stocks and 5 or 6 others to add to my watchlist for the week. I am liking the looks of these for one reason or another as noted in my posts. Don't own any of these yet, but I may buy one or more over the next few days.

FLOW



Flag developing; volume trend over next few days will be key.

Monday, February 27, 2006

LLL - L-3


Ascending triangle with breakout yesterday; also a breakout from 6 month peak.

Digitas DTAS



Nice looking ascending triangle?

DRIV - Digital River



A nice looking party to join?

BEAS



A breakout to new highs - a stock brought down in mid February by the market's doldrums that could be ready to run?

Strong Open

Equities posted a pretty strong open this morning. I am a little cautious about getting my feet wet first day back from vacation.

Here's a chart of a stock I was following before vacation

PEIX, which seems to be developing into a nice pattern. Of concern is the dropoff in volume, so it will be worth watching for that reason.

Sunday, February 26, 2006

Back

Returned from vacation yesterday and I'm looking forward to an exciting week in the market.

Thursday, February 16, 2006

AAPL Max Pain

Here is a link to the AAPL current max pain point. As I stated in my post last week, AAPL has moved to its Max Pain point. At the time I posted earlier, that was 72.50, since then max pain on the open options interest has changed to roughly $70. It often pays to align your trades with the market makers!

Wednesday, February 15, 2006

Ben Bernanke

Took the day off yesterday (blogging, not trading). Today I am pretty much on the sidelines waiting for Ben Bernanke's comments at 2 pm. I won't be trading today until after 2 pm, and even then probably not. I do have some long positions in place that I will leave for now, but I am pretty much sitting tight until the smoke clears. And I am sure I won't be alone.

Monday, February 13, 2006

Is today the day?

I think not. I have been watching AAPL like a hawk waiting for the day it makes its run out of the basement. After the strength near the close on Friday (I closed profitable momentum trade that afternoon) - I thought we might run up today.

But my caution appears to be the right move; it's rolled back down to the low 65's. Fading the open is a play that would have worked in AAPL 5 out of the past 6 days, which is food for thought for tomorrow.

But the gyrations are a little scary for me - the most likely outcome is just handing the market maker your predetermined stop loss (whether you are long or short) thanks to the severe intraday volatility. I like my money too much to hand it over like that, so I will only open trades in that stock under the best of circumstances (Friday was just too easy to resist).

Pacific Ethanol - PEIX Chart of interest


This stock showed up on my review of Barrons two weeks ago; making a breakout today over a mention in CBSMarketwatch (I think). Now this is a highly speculative play; read here. The gist of this stock is the positive technical indicators and the possibility that ethanol continues to be a "story" that institutional money wants to give a chance. This stock won't be profitable for a long while, but you might see a number of funds wanting to buy a piece of it on speculation, and the price momentum increasing because of it. I got in with a small speculative piece in the high 16's. And I mean small, since I almost never buy stocks with no current earnings.

From a technical standpoint, I've been focusing lately on patterns like this that held their earnings pennant nicely through the recent ugliness in the markets. SBUX was another play like this for me; today it rolled down to support, but the earnings flag still seems to be intact. The key reaction will be tomorrow in that stock.

Thursday, February 09, 2006

Closed 2 quick plays

In VPHM and CRDN a few minutes ago. I think I'll ride in cash until lunchtime to see where this market goes...

Premarket


I'm sorting through the rubble for some values this morning. I'm not feeling a ton of confidence yet that the market isn't going to whipsaw down again after the opening...

Wednesday, February 08, 2006

Day Trading

in this market is difficult; sector selection from the available plays coming up on my screens seems to be key. Tech is one sector I am staying away from right now (apart from my interest in it). I am doing well with an intraday play in BOOM right now, and am just starting to work on researching some potential swing plays, possibly in the energy sector which got pounded lower between yesterday and today...

Starbucks Chart



To contrast; here's another stock with a more healthy looking earnings flag, showing progressively higher lows in the midst of an ugly trading market the past few days.

PEIX Follow up



Volume was way down yesterday, but the downside breakout from the triangle formation isn't positive from a technical standpoint. Wouldn't be surprised to see this one break lower today.

This will be on my watchlist today.

Knife Cathcher's Hell 2


My post yesterday about AAPL generated some interest so I thought I'd post today's observations. AAPL did start out with a nice upwards move which abruptly reversed itself around 11 am. I was watching my screen and didn't see an up bar for over an hour.

The positive is that one could have made a few bucks today by fading the open and covering. But today's action was much more reassurring than yesterday's with some support seeming to take hold at 67. The action in the afternoon of today's session was miserable and it seems to be a positive to me that AAPL held in the black to the close.

I took some heat for my factual error in the last post; yes, options expiration is next Friday, not this Friday as I originally had stated (I've got a vacation coming up and as a result my sense of time is a little messed up this month - I'm not perfect). But to me the gist seems intact; max pain is still just above 72 and there are only 9 trading days left until then. The big volume was still in the Feb 06 70 calls (which traded down .25 today). I'm not saying we'll see 72 by next Friday, but in general, I like the idea of aligning my trades with the best interests of the market makers. That being said, gaming max pain doesn't always work, and I don't think the action in AAPL can be attributed to market maker manipulation, it's just one thing to think about. In reality, I think this and several other negative things hit at the same time. It seems clear that one or more funds is unraveling a very large position.

Regardless, I can say pretty confidently that AAPL is a dangerous place right now for shorts or longs until the tape shows a new trend developing...

Tuesday, February 07, 2006

AAPL Day 2

AAPL makes a nice run up this am; the question is whether it is sustainable or not. Peak price was about 69.30; it's rolled back quite a bit on a steady downward track since then. I still think about the strong market motivation to move towards max pain, but traders are definitely panicking again.

Looking at the intraday chart, the market makers are angry in this stock, refusing to let the momentum players keep their stops in place.

Some support is showing now around the 68 level.

Monday, February 06, 2006

Knife Catcher's Hell



The trading story of the day was clearly in AAPL today. Knife catching was a highly unprofitable business today in this stock. Shorting on the other hand, was quite nice. This is an ugly looking security right now. The uptick around 3:30 might be confused with support; in reality it is pretty much just the shorts covering prior to close so they can sleep easy.

This is the chart of a complete selling crescendo in a momo stock. Probably lots of sector rotation out to materials and energy going on right now. I am also sure, judging by the volume, that the algorithmic traders were running full tilt today, and there was a lot of money made there.

The individual buy the dippers contributed an awful lot of money as the market makers hunted down stops like crazy.

The biggest thing on my mind with AAPL is the fact that options max pain is in the low 70's. I wouldn't be surprised to see a big time bounce in this stock in time for Friday's session (options expiration). Here's why:

Now suppose I was a market maker with unlimited resources and a lot of put options in my pocket? What would I do a few days before opts ex? Take the stock down big time, sell my puts for a BIG BIG profit (for example the most heavily traded put in the Feb-06 chain was the 65 put, up 237% today). Then use profits to buy Feb-06 in the money calls at a deep discount (most heavily traded Feb-06 call was the 70 call which traded down 61%). Then let the market rise to the max pain price to limit options payouts. Now the holes in this discussion are NOBODY has the resources to do what happened today; the best you as a market maker can do is hope to trigger something. The other hole is that if I were the market maker in this scenario, I'd be buying the ITM calls such as the 62.50 and 65, not the 70 calls. But the surprising thing is that the 70 calls traded for a full $1.35, which seems to suggest the options market expects a jump in AAPL (67.30+1.35=68.65). One would expect these options to be virtually worthless with the stock nearly 3 points off the strike price 4 days prior to expiration.

Today it appears that AAPL was the battleground for players who trade on a whole different level than the average individual investor. But it is a good case study to think about the various things affecting stock trading in a security you might have bought and sold today.

Interesting article on Alogrithmic Trading

here. In my opinion, the best traders understand algo trading and are able to exploit its strategies. Of course it is difficult to understand since there is little public information regarding so called "black boxes". The game changes every day...

I'm watching the order flow of AAPL today and those algos are running in overdrive today.

Sunday, February 05, 2006

Pacific Ethanol



A bull pennant forming in PEIX, a California based ethanol producer. The event driving the flag's development was Bush's comments in the State of the Union address seeking regarding ethanol fuels.

A review of SEC documents reveals what appears to be a highly speculative play; future growth of this company seems to rely on a complicated plan involving debt and equity capital to build ethanol plants. I generally don't trade in companies with no earnings (a hold back to my tech bubble crash experiences). But an interesting case of Technical Analysis, which signals a buy here, and Fundamental, which signals extreme caution. The one bright spot is the progressively higher lows seen despite a soft trading week.

Valero



Added VLO to my portfolio near the close Friday.

Buying energy during pullbacks is a play that was profitable last spring/summer. Looking at the chart, buying during a big pullback has proved to be profitable and Friday's candlestick is a doji. I am not a big candlestick-er, but this type of energy swing play has worked well in the past. Energy and materials are in favor in the sector rotation right now, which generally helps.

Friday, February 03, 2006

Opening Bell

looking ugly this morning thanks to Amazon's dissapointing Q4....

PWEI: Chart of interest

Thursday, February 02, 2006

Starbucks - SBUX closed out



I find myself playing exits very defensively these days. I closed SBUX today. I entered the position on the -200 Dow day. On a swing play, I generally set a tight stop on a portion of a position and a looser stop on the remainder. This prevents me from being fully taken out of a position on a temporary downswing. Note of course, that generally this is a mental stop, since I prefer not to display this info to market makers. I typically only use stop orders in rapidly rising markets or if I need to be away from my trading terminal.

SBUX may have a continued bull run here, depending on how the earnings flag develops. But I really don't trust this market, so I'd rather leave a small gain on the table by selling. I can always re-buy later if need be, when the post earnings trend more clearly establishes itself. I would expect an inflow of money here since SBUX has been one of the bright spots in an otherwise dissapointing earnings season.

Netflix Chart



I mentioned in an earlier post that I was contemplating going long NFLX again. It seems a bit too early, but I am interested again at these prices. Should the support level of 26 hold it might be a worthy trade. Unfortunately, the upside appears to be limited to 4 points with no foreseeable events or news to serve as a catalyst to spark any breakthrough above 30. Still, even 2 points for a swing trade on a purchase in the 26's is a nice return.

DRIV- Digital River

Closed out my position in DRIV for a quick momentum trade. Nothing dramatic; roughly 1% return. I was an owner of DRIV for about 23 minutes today. The tape tells the tale; it looks as if the majority of shorts were able to trade out of the position prior to today. Those that were left either had covered this morning (accounting for the brief run-up) or are capitalized well enough that they can hold tight. As I mentioned in my prior post, shorting this one at the peak of the opening range would have been a nice play that could be covered sometime between now and lunchtime (to beat out the 1pm margin calls). I personally shy away from using leverage, so I left that idea on the table.

Wednesday, February 01, 2006

DRIV - Digital River



My scan of blogs turned up this particular stock, which announced better than expected earnings and positive guidance. The Bull Trader was the one who clued me in; he was not the originator of this info either; track his site to the source.

I wouldn't ordinarily write about something covered elsewhere, but this is a pretty interesting story, mainly due to the low float and high short interest. Short interest data is reported mid month. Turns out as of 1/10 the short interest was 7+ million shares on a 34 million float.

Looking in depth at the chart, you see pretty low trading volume in the timeframe between 1/10 and today. There's no guarantee of a short squeeze here (very, very good traders could have gotten out from under that position by now). A few interesting items of note here: 1) Price declines from 1/19 to 1/24, which would be virtually impossible if someone was buying like mad to get out from under a large short position, so probably no covering occurred here 2) Big spike in volume today seems to indicate a rush to cover at least a portion of that 7 million. Most of that volume came after 1:30pm.

The big question is how much is still out there and who's holding it.

The time to short might be at the peak if and when a squeeze does occur tomorrow. But I'll be watching the pre-market volume on this one as well. I turned a few nice trades in NFLX on a short squeeze recently; it would be great to start February with another one.