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TRADING SYSTEMS Has A Wide Range Breakout

06/04/10 11:32:16 AM
by Donald W. Pendergast, Jr. shares took off like a rocket on Thursday, issuing a fresh Raff MarketSpace stock system buy signal.

Security:   CRM
Position:   Buy

Having risen by about 350% since making a major low in November 2008, shares of (CRM) have been enmeshed in a remarkably strong uptrend. Today's wide-range gap higher out of a well-defined triple-top buy pattern looks very bullish; in fact, the presence of a new Raff buy signal makes the stock all the more attractive for long-term bulls. However, there is also the possibility that the break higher is actually an exhaustion gap, one that may be giving traders and investors an early warning of an impending period of consolidation or trend reversal. Figure 1 is the daily chart for CRM.

FIGURE 1: CRM, DAILY. Bullish pattern breakouts always need to be viewed in the big-picture context; the 2009 to 2010 broad market bull rally is already dead, and the existence of possible exhaustion gaps like the one pictured means that bulls need to use extra caution if planning to engage the long side of this market for some time to come.
Graphic provided by: MetaStock.
Graphic provided by: Raff MarketSpace Stock System advisor from MetaSto.
The bullish gapup breakout from the triple-top buy pattern (loosely defined as three adjacent swing highs that all terminate at the same approximate price level, thus creating a resistance barrier, which, if overcome with sufficient force, normally leads to a bullish follow-through of some degree, as in this case). Points 1 and 2 are a bit too close for comfort to rate this pattern with more regard, but it still qualifies as a tradable pattern. The wide-volume breakout bar is also very impressive, especially since it gapped higher from the pattern. That gap higher, however, is some cause for concern, especially coming in the wake of an 18-plus month bull run in the stock because it could very well be an exhaustion gap.

Exhaustion gaps typically mark the last final round of "irrational exuberance" in a given market, so we should keep a close eye out on the market as a whole because there are a number of similar patterns peppering the broad market landscape as of today. That the broad markets are no longer in a bull market (the devastating technical breakdowns since mid- to late April of this year bearing witness that the 2009-10 bull is dead) is also of concern here; bear market rallies are the ultimate sucker play, drawing in those traders and investors who think that the recent market carnage is offering them another chance to average down the cost of their existing long stock positions. But then the bear decides to pull the rug out, causing a new round of frantic selling that drives the market to new lows. Just remember this, if nothing else: in bear markets, the surprises always occur on the downside (even on otherwise bullish news). If you were trading during the mid-2000 to early 2003 period, you know what I'm talking about. So use some extra caution going forward, no matter what bullish spin you may be hearing on the financial cable networks, chatrooms, or mutual fund websites.

In addition, the MACD histogram (top of chart) is still in a bullish mode, so there is another plus for the permabulls in CRM shares. Given the iffy nature of this overall picture, I've come up with yet another way out-of-the-money, short-term put sale opportunity for those who are prepared to play CRM with a bullish bias.

FIGURE 2: CRM. Looks like an easy double-nickel, what do you think? When selling puts, always go far enough out-of-the-money to make use of strong support barriers (swing lows, trendlines, moving averages, Fibonacci levels, and so on) during times when volatility levels are high.
Graphic provided by: Thinkorswim.
On Tuesday, June 1, 2010, CRM made a minor swing low, the one just before the breakout. The low there is at $84.31, well below Thursday's close of $95.20. That's the lower support level, with the triple-top breakout line near $90.30 being the primary support level for this particular put sale. With two nice support barriers in place, we have two-stage protection against a sharp CRM daily reversal, allowing us to sell a June CRM $80 put option for about $0.55 ($55 before commissions) or better. With only 14 days until June option expiry, this trade looks very low risk on every front -- powerful protective support barriers, fast time decay, minuscule deltas, and a minimal risk of an implied volatility spike.

Managing the trade should be second nature to you by now -- if the put doubles in price to $1.00 to $1.10, just buy it back for a modest loss, lick your wounds, and wait for the next option bus to come along. If CRM goes higher or just meanders sideways for the next two weeks, just keep an eye on the two previously mentioned support levels, being sure to act quickly if you see that top line broken on a wide range with heavy volume. And by no means let the option run if there is any risk at all of CRM closing below that $80 strike price at expiry, not unless you want to be assigned a nice fat long position in a stock that may already be falling like a ton of drilling mud to the ocean floor. Just a word to the wise in this treacherous, unpredictable bear market.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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