Buying the dip (but carefully)
Last week’s market weakness, though minor, is reflected in the current weekly trend picture, which shows shorter-term trends as dominant – and currently down – for most non-commodity indices and sectors. While it’s always possible that this could turn out to be more than just a short-term top, the still intact intermediate-term uptrend and sentiment indicators like the put/call ratio continue to suggest that probabilities favor higher prices ahead.
That said, there’s still plenty of room for further downside action in the short term, and any number of possible news events that could provide a good excuse for such action – just one of which being this week’s U.S. elections. Near-term support levels that I’m watching are around 1350 and 1320 on the S&P 500; 11,900 and 11,700 on the DJIA; and 2300 and 2260-2270 on the Nasdaq.
New positions
Chevron (CVX) – Last Monday I sold some November 65 puts on CVX when the stock briefly traded down toward the 66 level, triggering my limit order. CVX closed the week at about 69, a new all-time high:
While the stock is certainly performing well, I do take note that it’s trading at the top of its long-term linear regression trend channel (which could suggest that it’s somewhat extended) and – with the move above its July/August highs – is now showing an intermediate-term negative divergence on the price oscillator I follow. Continued upside strength from here would negate these concerns.
Molson Coors Brewing (TAP) – Last Tuesday I sold some November 70 calls against my long position in TAP as it traded up over 4 dollars on some good earnings news:
I tried buying the calls back for a quick profit later that day when a sharp intraday sell off temporarily erased almost 3/4 of the day’s gain, but by the time I had noticed what was happening the stock price was already staging a sharp recovery and my limit order never triggered. I may still buy them back on a bit more weakness, as the stock – which has been very choppy lately – does look like it may move higher over the intermediate term, perhaps to the 75-77 level.
Walgreen (WAG) – Last Wednesday I sold some November 40 puts on WAG as it fell below 42, retesting its lows of a few weeks ago:
The stock is short-term “oversold” on the price oscillator I follow, as well as nearing long-term support at the 40 level.
Wal-Mart Stores (WMT) – Last Thursday I sold some November 47.5 puts on WMT as the stock opened lower after the company predicted flat November sales:
After under performing for several years, WMT has been showing some upside strength recently. Technically the stock is trading near the bottom of its long-term trend channel and isn’t far from long-term support at the 45-47 level. Fundamentally it seems to be a decent value here, and – as always – I have no problem owning the stock at these levels if it’s put to me.
Whole Foods Market (WFMI) – On Friday I opportunistically sold some November 45 puts on WFMI as the stock plummeted by over 20% after the company warned of slower sales growth in 2007:
The stock is now both short- and intermediate-term “oversold” on the price oscillator I follow, below its long-term linear regression trendline, and near long-term support at the 40-45 price range. A bounce from these levels wouldn’t be unexpected, but the potential for a continued sell-off also can’t be discounted. Fundamentally – which is of concern if I end up being put the stock – the stock (although still not “cheap”) appears at least to be fairly reasonably priced around these levels.
Watchlists
New (and recently re-added) additions to the “upside strength” list include Avery Dennison (AVY), Biogen Idec (BIIB), Bunge (BG), China Telecom (CHA), Conagra (CAG), DaimlerChrysler AG (DCX), Dominion Resources (D), Deutsche Telecom (DT), Manulife Financial (MFC), Marsh & McLennan (MMC), Molson Coors Brewing (TAP)*, SPX Corp. (SPW), and SK Telecom (SKM).
New and re-added additions to the “oversold” list include Archer Daniels Midland (ADM), Furniture Brands (FBN), Pier 1 Imports (PIR), Sanofi-Aventis (SNY), United Health Services (UHS), and Whole Foods Market (WFMI)*.
* I currently own shares and/or have an options position on this stock.
