March 2, 2008 – Preparing for a volatile week

Look out below. It could be a crazy week ahead. I did pick up a few longs and exit a few shorts on the major friday selloffs. I certainly don’t think we are done going down. And I think we should see major monday selloff. The news flow turned ridiculously negative since Wednesday. Amazing how fast things change. UBS is estimating total credit market losses to $600 Billion. Insane. Do we really think the $2-4 billion cash infusion with ABK and MBI will be enough? The Fed is just now is recognizing inflation. Whew.
I am not quite sure what to say, other than, “batten down the hatches”, and look for short opportunities.
As I look at the chart: SPY
There are a few things I am really looking at with this chart.

The previous low of the consolidation of two weeks ago. 131.73. I think we may see a gap down low in which I want to buy into on monday morning, this is not to open new long positions, but rather to cover shorts. However, if it breaks below the 61.8% fib level (130.88). I have to be a seller. I think we will see another 40pt down move from there. I believe we will retest the 125.85 lows, and eventually break below that too. I will ride this down to 119 on the SPY. I believe the fundamentals and the technicals are pointing to this. It should be pretty scary for all fully invested, long only investors.
Ideally I would like to see a gap down open into the 130.88-131.73 levels. And then a retracement newly revamped secondary downtrend line. As this point I would reload my shorts and exit a few short term longs.
I have been figuring how to play this over the past few weeks. DSX is how I chose to play this weekly chart of the Dow Transports. My research and backtesting data points to a retest of a Wave 4 low. 3345. That would be quite astounding. We would need to see fuel accelerate in price, global growth slow, the US consumer tank. It is possible. I will be working under this assumption until the chart breaks above the major downtrend line.

DSX – Which way do you think I am leaning on this one?

ENR – I like this short, but the down move on lower volume has me wondering if this down move is sustainable. The DMI with the asending “Red” line, bearish , is interesting.

ATI – This thing is a disaster for the longs. Fortunately I am short. Unfortunately, I sold 2 of my 3 long positions for a modest profit on friday. And I have taken all of my initial risk off the table. Friday was bad news for the stock. It broke support @ 80, then broke 10,20, and 50 day MA support. This thing is going down hard. I will hold on to my short, and reload short on rallies. This is the picture of a broken stock.

MSFT – This is my long play. I already made a round trip on this play earlier, selling half of my stock position @ 29. The remaining position was hedged with a diagonal calendar covered call (Mar30/May35).
This trade – Buy July 20c (with very little Extrinsic value), and sell Apr 27.5 with only Extrinsic Value for a price of 6.40 to 6.50. This brings the buy price of MSFT to 26.50, with a max of 6.50 of risk. I then plan to sell the 27.5 calls again in May and June and collect that premium too. I put 7 spreads on. A 2 unit position.
Frankly, I am not sure about this one. Other than I am willing to buy into this desperation (1 billion $ EU ruling and arbitrage selling (buyers of YHOO and selling of MSFT). I think the downside is being priced in. Also, in markets usually like a stable earnings flow with little debt, and lots of cash offers a price floor with this turbulent market.
Here are the fundamentals I am looking at:
ROE – 47.6% vs 6.9% Industry
EPS – 1.76 vs .51 Industry
Trailing PE of 15.47,
Quarterly (YoY) earnings growth 79.2%
And a very strong earnings report in December with strong guidance.
The chart looks terrible, but I do see support @ 26.75, which gives me an edge on this trade.

UST – It remains a great sideways trade. I have a full 5% allocation of this trade in one of my accts. My only regret is that I don’t have it in each of my 4 accts. 19 days until expiration. Anything can happen, but I really like this tabacco stock for a sideways trade.
I have the Mar/Apr 55p and 55c calendars on at about .57. There is still a 2:1 reward to risk left in this trade. I am up about 50% on my initial risk, and I have taken off a few positions to bank some profit.

Trades so far on Monday: Made more by 10:30 than 3 days of teaching, crazy, eh?
SDS – Bought @ 64.50, sold @ 64.81
DFR – Bought @ 3.10, sold @ 3.54
MRVL – Bought 4 units of Apr/May 10p for .16 and .15
WEN – sold last Mar 22.5p for .35 I don’t like owning front month options.
Other shorts I am reviewing:
KLAC
PFG
VLO
ATK
When all way said and done, I was conservative, perhaps too much so. But I traded well none the less. The portfolio was up 1.2% on a few established trades, day trades, and new trades.