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BREAKOUTS


Is A Morgan Stanley Pullback Due?

09/06/12 08:17:21 AM
by Donald W. Pendergast, Jr.

Since putting in a double bottom this summer, Morgan Stanley shares have rebounded nicely; is a pullback due now that Fibonacci resistance has manifested?

Security:   MS
Position:   N/A

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.




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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