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Freshness In Produce And Stock Watchlists

06/20/12 08:11:34 AM
by Billy Williams

Stock watchlists are like produce: You need to keep them fresh by constantly looking for new trade opportunities, like these three stocks.

Security:   FDS, NMS, MLNX
Position:   Hold

While the market is still in correction, bad news continues to pile on as the fears of Europe's debt woes mount. Worse, the true strength of the US economy remains in doubt. That said, the SPX quickly gave up the gains it made yesterday on lower volume (Figure 1) and the balance of the future direction of the overall market hangs in the air on the close of today's trading day.

The bears still have a chokehold on price and as a result, they control the current trend, which is biased to the downside. Combine that with lackluster summer trading cycle that seasonally dries up trading volume, and then it is likely that there will be little strength to break the market out of the current downward slide.

FIGURE 1: SPX. The SPX is still in a correction, with price going back and forth but biased to the downside. Bears have control but the market is dynamic, and things could change quickly and the bulls could gain the upper hand.
Graphic provided by:
Still, it's important to look for new opportunities on both the short and long sides of a trade. Like produce, stock watchlists need be kept fresh with new leads for tomorrow's opportunities.

For shorts, FactSet Research Systems (FDS) suffered a major bearish breakaway gap that destroyed the upward trajectory that FDS found itself in. Resistance was found at around $106 and FDS fell apart, but the opportunity lies in the pullback from the bearish breakaway gap that occurred on June 12, 2012.

Once price pulls back, then a strong case can be made for taking a bearish position as the larger market is in decline and stocks tend to move in tandem with the larger market. Look for a pullback in price and then short the position with put options and ride the downward momentum.

FIGURE 2: MLNX. After a huge bullish breakaway gap, MLNX has been consolidating its gains for the last couple of months. If the market turns back to the upside, this could be a great stock go long with.
Graphic provided by:
Nationstar Mortgage Holdings (NSM) suffered a similar fate that makes it a good target for shorting. Price faltered on June 12, 2012, which could reveal cracks in its foundation as Berkshire Hathaway failed to make a bid for the NSM's mortgage servicing portfolio that had a price tag of $2.4 billion. Wait for price to start making lower highs and lower lows in its price action and the short on the pullback.

For longs, Mellanox Technologies (MLNX) has a combination of fundamental and technical factors that make it a good stock to put on your watchlist (Figure 2). An Israel-based company that specializes in high-speed transmissions from systems to servers, MNLX is also a leader in cloud technology. MLNX blew through its earnings estimates by more than double by coming in at 113% along with year-over-year sales revenue of 61% and projections for sales revenue set at 110%, but the following year's projections have come in at an anemic 14%.

Technically, after experiencing a huge bullish breakaway gap on massive trade volume on April 19, 2012, MNLX has spent the last couple of months consolidating its gains and forming a base pattern. Now, price has reached its former price high and could make a strong attempt to go higher.

Wait for the market to come out of its current correction and confirm that it is in a bullish trend and then look to buy MLNX on a breakout or a pullback.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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