|Although Morgan Stanley's (MS) stock prices in the $70-plus range may not be seen again for a long time, the shares are still well suited for short-term traders and swing traders. Here's a closer look.|
|FIGURE 1: MS, DAILY. If MS makes a pullback to its 21-day EMA, traders may wish to enter a long trade on a break above the stock's most recent high. The stock is due to make a significant cycle peak within the next 10 to 17 days.|
|Graphic provided by: MetaStock.|
|Morgan Stanley shares enjoyed terrific rallies in the 1990s and then again from late 2002 to June 2007. Each massive rally was followed by a truly incredible plunge, with the drop in share prices from late 2007 to late 2008 of mind-shattering proportions -- that is, if you believe a 90% drop in a major large-cap stock qualifies for such a descriptive term. See Figure 1.|
MS is up by more than 30% from its major July 23, 2012, low (which was the second low in a confirmed double-bottom pattern) and really does look like it may be able to stay above the recent three-month-long consolidation pattern it had been trapped in (see the blue shaded rectangle on chart), especially since its 34-period Chaikin money flow histogram (CMF)(34) is still in bullish territory.
However, the stock has just hit a key Fibonacci confluence zone formed by the 38% retracement of one major swing and the 62% retracement of a slightly lesser swing (pink horizontal line on chart) in the 15.50-15.60 area. The price cycles in MS are generally bullish and are similar to those seen in the .OEX's nominal 40- and 80-day cycles, so there is a strong probability that MS will also attempt to surge higher one more time in September, likely making a multicycle high sometime in mid- to late September. See Figure 2.
|FIGURE 2: LARGE-CAP STOCKS. A list of large-cap stocks that are outperforming the .OEX over the past 13 weeks.|
|Graphic provided by: MetaStock.|
|Graphic provided by: MetaStock Explorer.|
|The big picture chart pattern we see here in Figure 1 is also known as a triple-top buy. Technically, the recent break higher is a success, but there is also a very strong chance that MS will pull back toward its 21-day exponential moving average (EMA), which is currently at 14.65. A pullback to this EMA, followed by a quick reversal, would be the tipoff that MS intends to make a strong move now, with its dominant price cycles paving the way for another $2 to $3 gain by the latter half of September. |
While it might be tempting to latch onto a covered-call play in MS now, it's actually riskier than just going the all-stock route, unless you use deep in-the-money calls that aren't going to make you all that much money anyway, despite being less risky than out-of-the-money or at-the-money call options. Remember, the best time to put on covered-call trades is when the broad market starts on a new, confirmed uptrend after a major correction and not at the tail end of a three-month-plus rally that may be over within two weeks.
|One way to play MS here is as follows:|
Wait for a pullback and then place a buy-stop order just above Tuesday's high of 15.61. If filled, trail a two-bar trail of the daily lows until the trade finally stops out. If you get a fast move higher (more than $1 in one session) right out the gate, consider taking partial profits and letting the rest of the trade run until the final stopout. Risk no more than 2% of your account equity on such a trade and be cautious if the trade is still open by the third week of this month, as that's when MS is most vulnerable to a significant correction. Its key 40-day and 80-day cycles will be turning lower by then, and you definitely want to be out of the stock market pool before the lightning strikes.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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