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NEW HIGHS-NEW LOWS


Union Pacific On Track To More Gains?

08/09/12 11:06:12 AM
by Donald W. Pendergast, Jr.

Shares of Union Pacific Corp. have rallied steadily since breaking higher from an 18-week long consolidation pattern.

Security:   UNP
Position:   N/A

Union Pacific's (UNP) share price made a lasting multicycle low along with the rest of the broad market on October 4, 2012, dropping down to $77.73 before embarking northward on what has thus far proven to be a 10-month-long bull run. The stock closed at $124.54 at the end of last week's trading action and is looking as bullish as ever, with several of its key price cycles continuing to pull this key transport issue higher and higher. Here's a closer look at this rail giant's daily stock chart now (Figures 1 and 2).

FIGURE 1: UNP, DAILY. When key price cycles in a liquid stock are rising and a bullish continuation move gets under way, it's usually to give the emerging trend move every benefit of the doubt until the move proves (by way of confirmed trend reversal) that it has clearly ended.
Graphic provided by: MetaStock.
 
Sometimes, it's not difficult to know when a major stock index or large-cap stock is approaching a major, muticycle high or low; skilled cycles technicians recognized that UNP's approach down toward the October 4, 2011, low was going to result in at least eight cycles (ranging from five days to 17 months in length) bottoming at approximately the same time. They also knew that the all-clear signal of a subsequent bullish reversal was when they witnessed the following two events:

1. A major (wide range and heavy volume) key reversal bar near the anticipated low
2. A subsequent rise above the August 31, 2011, swing high of $94.46
3. Similar bullish reversal action in the .OEX and .SPX
4. Bullish medium- and long-term money flow divergences.

Well, the cycles did bottom within a week or so of the anticipated major low and all of the above confirmations were eventually completed as well. UNP really started to rock and roll once that late August 2011 swing high was exceeded and has had a very good run since then.

The main driving cyclical force during this major rally has been the 34-week and 17-month cycles; the 34-week variant is currently in ascending mode for the second time since the October 2011 lows and is showing signs that it will continue to pull UNP up through August.

Cycle projections suggest that UNP may rise as high as $134.11 by September 1, 2012, after which a proportional retracement down toward $106.88 may occur. With the .OEX and .SPX also being driven higher by their own 34-week cycles, traders wishing to board this train in hopes of generating near-term profits may find that using a September '12 covered-call (CC) play may be one of the lowest-risk, highest-probability strategies available at this moment.


FIGURE 2: LARGE-CAP STOCKS. The large-cap stocks that the Deel new highs screen has identified as having made significant new multimonth highs.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
UNP's $120 September calls look attractive as a component of a near-term CC trade. The calls are in-the-money (ITM) and feature a delta of 0.67 and open interest contract volume of 625; daily time decay is currently $4 per day per contract -- this rate of time decay will start to increase exponentially during the last 14 days of option life. There are seven and a half weeks until this option expires, and the big idea here is to capitalize on the ongoing bullish continuation move now under way in this key transport stock, but with a bit of extra:

A. Protection if the trade doesn't work out as planned
B. Income kicker if the trade goes on to make new highs, expiring in the money (at $120.01 or above) at the close of trading on September 21, 2012.

The calls are selling for about $5.70 right now, so if you put this trade on in one unit, try to pay no more than $118.15 for the entire buy-write. Manage the trade by using UNP's 21-day exponential moving average (EMA); a daily close below it is your signal to liquidate both sides of the trade and walk away with either a small gain or loss. If UNP stays above its 21-day EMA for the entire lifespan of the trade, you simply hold the positions until the stock is called away the Monday after the call(s) expire.

Generally speaking, this looks like a no-brainer trade, especially if you are experienced with CC trading and are convinced of continued near-term bullish prospects for UNP and the .OEX and .SPX. Keep your account risks modest -- 1% to 2% of your account value is always a wise maximum amount of risk, no matter how skilled a trader you may be.



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: lineartradingsys@gmail.com

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