The market has bounced back sharply this week after two consecutive losing weeks, but I'm still not convinced we're going to be able to bypass the usual late-September and early-October slump. On the flip side, it's always better to trade what you see than it is trade what you think. So, once again we're going to play both sides with a long (bullish) as well as a short (bearish) pick.
No, it's certainly not a small cap name, but opportunity is opportunity, and we think Legg-Mason is a big opportunity. From a technical perspective there's not much to not like. LM shares have found support at a couple of key support lines recently, and the longer-term uptrend has been consistent (read 'sustainable'). Moreover, there's a ton of room for the stock to recover. From a fundamental perspective, Legg Mason doesn't look as compelling right now, though the forward-looking view paints a prettier picture. The projected P/E for next year is in the 20 range..... not great, but much better. There's a looming risk here - Legg Mason will report Q3 earnings at the end of the month. However, given they topped estimates last quarter by posting a profit of $0.35 per share, I think the risk justifies the potential reward. The plan is just to ride the uptrend as long as it lasts, whether it's four weeks or four months. I can see LM turning into a long-term trade though. By the way, the bullish trade we almost took (but didn't) was Crosstex Energy Inc. (XTXI). We'll put it on our watchlist for now, since it's got some potential.
We're not looking for a 10-bagger with this short trade; we're just trying to take advantage of what appears to be a high-odds move from Lennar Corp. shares. After LEN peaked at $17.66 on the 17th we saw a drastic pullback - the kind that invites buyers back in. We saw a bit of that last week, but there just weren't enough buyers to revive the chart. The only thing the blip did was open a window to the next leg of the downward move. So, today's a good time to get in. We suspect Lennar will find support somewhere around the $10.00 area, where a long-term support line is going to be intercepted sooner than later... as long as the downtrend lasts. The move from here to there isn't a huge percentage win, but definitely worth the effort. The
bearish possibility we want to add to our watchlist today is Chico's FAS
Inc. (CHS). It came very close to being our official short pick, but there's
some support at $12.00 that needs to be broken first.
I'm going to assume all of you have applied appropriate stop losses to any of our trade recommendations, and are out of these trades already. If not, however - and just for the sake of official closure - a few positions need to be axed.
This short trade should have been covered a couple of weeks ago after the ceiling at $44.00 was broken. If that wasn't enough to convince you, then the breakdown of the resistance level at $44.78 should have been enough. With yesterday's move to a high of $46.05 being made on tepid volume, and with today's bar already fading from its highs, I still contend there's enormous downside potential being stored up with WMS Industries shares. We just need the majority of the market to agree with me sometime in the near future, and that doesn't look like it's going to happen. It's a small loss, so no big deal - that's trading. I'm just not willing to let a small loss turn into a big one... that's bad trading.
Yes, we're finally saying goodbye to this old friend. The trade dates back to January, and if you were in since then, you'll be locking in about a 41% gain if you sell it at the current price of $27.07. The nearby chart explains the rationale for the exit - a major support line broke down last week. Though Agilent shares have rebounded modestly from last week's low of $25.95, take a look at the volume behind the bounce.... very weak indeed. Something
you don't see on the chart is a sell/short signal for Agilent that one
of our proprietary trading systems gave us last week. We don't take those
hints lightly, simply because they're right more often than not. It's time
to take the money and run.
We're not going to touch on every other position today, but I do want to highlight a handful of open trades that deserve some attention.
United Therapeutics has confirmed one of our biggest fears by finding some support around the $45.00 level. You may recall that was the worry we specifically mentioned a couple of weeks ago, as it was also where the stock found support throughout all of August and the early part of September. Looks like I wasn't crazy. Even though the volume behind yesterday's rebound was stronger than average, it's still a little soon to bail on this trade. After all, the support line hasn't reversed the downward move yet - just stalled it. It's definitely something to watch though, and a good reason to lower your stop to a break-even now that we've got some profit to protect.
This short trade's making good progress, as expected. We're now up about 15%, and there's still no real bullish pressure being applied. The reason I want to bring it up today is simply to let you know we're approaching a major support line.... the one I was targeting back on the 16th. It's currently at $20.55, but will be slightly above that level by the time FORM can reach it. I'm
still not sure if FormFactor is going to reverse there, or tumble under
that floor. Given the odds of a rebound at that line though, I'd definitely
keep my finger on the exit trigger once we get to that level.
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Legg
Mason Inc. (LM) - Long/Bullish
Lennar
Corp. (LEN) - Short/Bearish
WMS
Industries Inc. (WMS)
Agilent
Technologies Inc. (A)
United
Therapeutics Corp. (UTHR)
FormFactor
Inc. (FORM)
