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All,
I turned into a bear this week <G>. I was stopped out of AOL,
BBY, INTC, and my CPQ LEAP calls leaving me with DELL, SMOD, and WLA
stock positions and over 60% cash again. All the indices I watch
broke through the bottom of their intermediate or long term channels
and all the short term trends are down. The Dow Jones Industrial
Average (DJIA), for example, broke through the bottom of an up trend
that had been in place for almost four years. This sets the stage for
a potential drop to around the 7140 level which was the early 97
highs.
Having said this, I'm not really a bear and I'm not predicting a
bear market (my predictions usually aren't very good anyway <G>). I'm
just a trend follower and to me the intermediate term trend has
signaled a switch to the down side. That means that I'll tighten the
stops on my open positions, move them up whenever I can and all my new
positions will be short positions until I'm convinced that the
intermediate term trend has switched back up. That may not take too
long since market drops are typically sharp and fast.
I had a lot of work to do last night and this morning since it's
been a long time since I had a short position. I hope I haven't
forgotten how to do it <G>. My thinking was that the former high
flyers that have high price/earnings, high price/sales, and little
profits will suffer the most. I looked a several and narrowed my list
to AMZN, CATP, TLAB, WCOM, and XCIT. I also decided that since the
overall market bias is always up, I'd limit my short exposure to put
options and keep a large cash cushion for eventual long positions.
Therefore, option prices were part of the equation for my final
selection in that I liked AMZN's chart best for a short position, but
finally decided on WorldCom Inc. (WCOM) instead because its put
options were much more reasonably priced.
WCOM at 46 3/4 is in a sharp Short Term Down Trend Channel
(STDTC) with the top at 51 and the bottom at 44 3/4. The Support and
Resistance indicators are both dropping and the CMO is negative and
falling. It hit an all time high of 57.875 on 7/21/98 and started
pulling back from there. This week the down trend accelerated on
increased volume and Thursday it broke through the bottom of an
Intermediate Term Up Trend Channel that had been in effect since the
first of the year. Yesterday it fell even more on higher volume.
It's still in a Long Term Up Trend Channel (LTUTC) with the bottom at
37 3/8. I like this stock for the long term and think that there is
an excellent chance that the LTUTC will hold. However, I also believe
that there is an equally good chance that the LTUTC bottom will be
tested so that will be my target for the short position. WCOM
certainly meets my former high flyer criteria with a price.earnings of
233.8 and a price/sales of 5.68. I don't intend to hold this position
very long, but also don't want to lose a lot of time value each day so
I compromised and looked at the December put options. Since I'm
expecting a sharp drop to under 40, I decided on the Out of The Money
(OTM) Dec 40 Put options ( LDQXH - Bid 1.375, asked 1.625). Going
this far OTM gives me much greater leverage at increased risk.
However, the amount at risk for 1000 shares is small compared to the
amount at risk shorting the same number of shares and the reward for a
large move is essentially the same. The problems come if we don't get
the large move <G>. I'll open a position Monday. I'll set my initial
stop at 51 1/4 just above the top of the STUTC and move it down as
soon as I can which should be several times a week considering the
steepness of the channel. I constructed the channel from the 8/20/98
high to Fridays low using a Standard Deviation Channel with the
deviation set to 1.3. I'll move the right end point to the right
every time WCOM sets a new low. My target is 38. If WCOM reaches
that target within the next three weeks the options should double in
value.
Jim
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