Chess Links

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Plenty of excellent sites out there include more macro commentary in their links, namely Downtown Josh Brown and Abnormal Returns. I thought I’d share a “Traders Only” collection. Here are the traders that I have been reading today (click on links):

• “The Goat,” @gtotoy with his excellent daily read on the $SPY
• The @HCPG crew always on their game
• Joe’s rock solid morning overview
• Maribeth’s actionable daily watchlist and charts
• Position Trader’s chart of the day and other analysis
• Vic’s intraday market stats
• Vj is always giving original analysis. Check him out.

There are plenty of other key sources that I check everyday, so be sure to look on the right hand side of your screen for my “Recommended Links.”

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MARKET WRAP UP 01/11/11

With the date being 1/11/11, it is only appropriate that many market players perceive the price action as being too bizarre to trade aggressively. After seeing some intraday volatility, the bulls held on to close the S&P 500 up 0.37% to 1274. Indeed, while the pockets of momentum are seemingly becoming tighter, the broad market is holding up astonishingly well. Seeing as the market will usually do that which frustrates the greatest amount of participants, it only makes sense that we drip higher on a daily basis, as most everyone freely admits that we are extended and due for a mild correction.

While an imminent correction seems like the obvious scenario, some areas of the market have already pulled back in the past week to what should be strong support zones. Moreover, they moved off of these key areas today, namely the emerging markets and coal sector. Thus, the best strategy continues to be one of trading the best individual setups, while respecting the short-term key resistance and support zones on the S&P, at 1276 and 1262 respectively.

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[youtube:http://www.youtube.com/watch?v=nbZEkFLXh9Y 550 412]

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Enough whining by traders on the Twitter stream about supposedly how manipulated this market is, which is basically just a thinly disguised veil for how wrong many have been in fighting this tape the past few months anyway.

Instead, a better approach is to tune out the noise and pay attention to this broad market range that we have been trading in since the beginning of 2011. Be on watch for a break in either direction.

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MARKET WRAP UP 01/10/11

After another morning gap down, the spirited dip-buyers arrived once again, as the S&P 500 closed down just 0.14% to 1269. We continue to see the 1262 area act as a key support zone, with 1276 above serving as resistance. Overall, today was a rather slow day of trading, with not much momentum of which to speak. Despite AAPL printing all-time highs (Disclosure–I am long AAPL), it was tough to get excited about aggressively buying or shorting any areas of the market in particular.

The AA earnings tonight kicks off another round of nightly news over the next few weeks. That old phrase of “buy the rumor, sell the news,” is sure to be tossed around. Indeed, many stocks have seen a tremendous run up over the past few months. Of course, the reason as to why they have marched higher is something with which the financial news media is perpetually fascinated. From my vantage point, the importance of the underlying reasons for stocks moving higher is significantly outweighed by the actual price action and volume. After all, the big funds ultimately control the direction of the market. Whether they view a given earnings report as a catalyst to sell, or an excuse to take profits on even a pretty good report, is irrelevant to me.

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Many traders often improvise their strategy on how to navigate earnings season. So long as you develop a style of risk management that you are comfortable with, there is nothing wrong with taking a case by case approach. However, for the purposes of this post, I thought I would detail my strategy for a certain stock, of which I currently have no position.

We all know that AA (Alcoa or pocket aces) reports earnings after the bell today to kick off the season. So, let’s take a look at whether it is worth holding, buying, shorting, or leaving alone leading up to it.

On the weekly chart above, quite simply we can see the tremendous run that the stock has had off the summer double-bottom. Moreover, Alcoa is now quickly running into a well-defined area of resistance from January, 2010, just above. Thus, in the short-term (days, a few weeks), the risk/reward does not justify allocating fresh capital to the long side here, regardless of the actual earnings.

Now, as far as whether to hold an existing position into earnings, I believe that the stock is much more susceptible to a gap down than a gap higher due to the distinct possibility of aggressive profit-taking on any, and I mean any, slight disappointment in the earnings report. So, I do not think holding a sizable position through earnings is a good choice.

The next option is to position yourself for Alcoa to pullback after tonight. While this strategy makes sense for a few technical reasons, a few of which I outlined above, the fact remains that the stock is still in a very powerful and steep uptrend. Overbought can become even more so during a powerful uptrend. Although extended here, just because a stock is not a good buy does not make it a great short.

The above analysis leads me to conclude that your best bet is to fold pocket AA into tonight’s earnings report and take a pass on playing it, save perhaps a few exotic options strategies for advanced options traders. Earnings season for conservative swing traders is not a particularly fun time. We are dealing with more external variables than usual with a direct effect on price action and volume. Taking a pass on earnings plays is not a sign of trepidation. Rather, is a perfectly acceptable risk management strategy for traders who want to have staying power in this business.

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I originally posted this video for members inside 12631, which is a premium service affiliated with The PPT, last Tuesday, January 4, 2011. Click here for more details.

In addition to what I say in the video (my notes have been copied and pasted into the body of this post below the video), the basic idea I present is to not get too caught up in buying a stock solely because it is a takeover play. You will want to be sure the price action is still in your favor, as well as a myriad of broad market factors I outline in the video. Otherwise, you are left holding a perennial takeover candidate that is “always a bridesmaid, never a bride.”

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[youtube:http://www.youtube.com/watch?v=okUnzqDDqeE 550 412]

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ANATOMY OF A TAKEOVER PLAY

1. Where Are We in the Cycle?

–> Easy Money/Cheap Borrowing Costs For Private Equity Firms

–> Firms Have High Levels of Cash re: M&A

–> Confidence Coming Back After Bear Market to do Deals–Recall 2008

Leads to…

2.  Which Sectors are Seeing the Most M&A Action?

–> Energy Sector Has Seen Deals Over the Past 18 Months

–> Technology Names are Perennial Targets/Sector Always Active

–> Financials Now Look to Be on Radar as Well (re: “The Fly”)

3. GOLDEN RULE FOR TAKEOVER PLAYS:

–> THOU SHALT OBEY THE “SISKEL TEST”–Gene Siskel (Siskel & Ebert)

—> Film Satires/Slapstick Comedies (e.g. “The Naked Gun” “Hot Shots”)

—> Would You Still Find the Joke Funny if You Had Not Seen the Film Being Spoofed?

—> Applied to Stocks: If Firm was Not Takeover Target, Would You Still Have Bought?

4. Examples: $ATHR, $BRCD, $HAIN, $NUAN

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