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Honeywell Price And Volume Breakout

07/23/12 08:59:21 AM
by Donald W. Pendergast, Jr.

Shares of Honeywell International leaped higher on Wednesday, July 18, with a massive volume increase to boot.

Security:   HON
Position:   N/A

With Honeywell International (HON) at bullish 16-week and 34-week price cycles pushing the .OEX higher, it makes sense to look for component stocks within this "biggest of the big" large-cap index that are either making new highs and/or are manifesting substantial price/volume breakouts to the upside. Here's a look at an .OEX component that has definitely embarked on a bullish breakout -- with big volume. See Figures 1 and 2.

FIGURE 1: HON, DAILY. Screening your stock database for large caps making substantial price/volume breakouts can be an effective method of locating attractive covered-call trading candidates.
Graphic provided by: MetaStock.
HON staged a noticeably bullish breakout during Wednesday's trading session; the stock closed up by 6.67% on the day, with daily trading volume more than 100% higher than its 50-day moving average of volume. Certainly, the big institutions see the potential for substantial gain in HON and are willing to plow large sums of cash into acquiring this stock now. Technically, the stock is in very good condition:

1. Its long-term money flow has been overwhelmingly net positive for the past seven and a half months (based on the 100-day Chaikin money flow histogram [CMF][100]).

2. The stock is now trading above its 50-day exponential moving average (EMA), a key intermediate-term trend delineator.

3. HON's major price cycles are in decidedly bullish mode now -- its 21-month, 52-week, 26-week, 67-day, and 18-day cycles are all moving upward and Wednesday's sharp break higher was simply HON's way of getting back in gear with these powerful cyclical forces.

4. HON also pays a nice 2.17% dividend and has excellent options liquidity. Given all of these technicals, it appears that HON is an excellent, low-risk covered-call (CC) play right now.

FIGURE 2: LARGE-CAPS. The two large-cap components in the .OEX making major price/volume breakouts on Wednesday, July 18, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
HON could be played in any number of ways, but two of the simplest and most direct approaches would be to either trade it as a swing trade or to be more conservative and play this breakout using a covered-call strategy. The swing trade version is the simplest -- just set a buy-stop order and enter on a break above Wednesday's high of 58.50, using a two- to three-bar trailing stop of the daily lows as your exit trigger; a daily close below the trail takes you out of the trade, no questions asked. Given the wide range bar on Wednesday, perhaps relying on a two-bar trail would be better risk management.

For CC traders, why not check out the August '12 $55.00 calls? They are in-the-money (ITM) calls with a delta of 0.80, daily time decay of $2.00 and healthy open interest of 2,563 contracts. They expire at the end of trading on August 18, 2012, and time decay will really start to kick in during the final two weeks of the options lifespan. Since the August $55.00 call is ITM, you have a reasonably good cushion should HON decide to do some back-and-fill work before resuming its anticipated upward cyclical trajectory in the next few weeks. As far as managing the position, why not run a 20- or 21-day EMA as your trailing stop on the entire position until final closeout? You'll either:

A. Have the stock called away at expiration and have a net profit on the entire position, or

B. Lose some money on the stock but keep all of the call option premiums if HON closes out of the money on August 18, 2012, or

C. Have the stock close below the trailing stop, thus causing you to liquidate the entire position at either a minor profit or loss.

Those are the three likely outcomes for this short-term CC play. If, however, there were a black swan event that caused a completely unexpected plunge in HON's share price, that would be another story; it's not likely to happen, but you still need to be aware of the possibility for strange things to happen in the stock market every so often, and usually when you are not expecting it.

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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