http://www.youtube.com/watch?v=EHRjmfeNplQ

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As fate would have it, Morgan Stanley decided to spin off its Discover credit card operations on the cusp of one of the most vicious bear markets in several generations. Despite Discover falling off a cliff as soon as it IPO’d back in July 2007, the stock has made an impressive bearish to bullish reversal in recent years. You might say the same about most issues, but Discover has impressed me with how relatively shallow its corrections have been in both 2010 and this year. While everyone, including me, seems to be talking about the Mastercard and Visa secular bull stories in the credit card space, Discover looks as enticing a long setup as any right now.

I currently have no position, but will be giving this a careful look next week. Let’s start with the monthly chart and work our way up to the present timeframe for a complete analysis below. Note that Discover reports earnings on December 15.

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The “mad genius of poker,” Mike Caro, first pointed out Fancy Play Syndrome (FPS) as a way to describe poker players making overly complex plays which are unnecessary and more importantly unprofitable over the long run. Usually, the simple play works best, so long as it is sound strategy. It is only on the rare occasion that fancy plays, such as slow-playing pocket Aces, should be executed. While a fancy play like check-raisng the river in Texas Hold ‘Em is referred to, in slang, as “the sexy,” substance always wins out over style in time.

FPS should sound familiar to stock traders, given how many opportunities there are for overly complex trades and strategies, between equities, options, commodities, FOREX, bonds, etc. In reality, a simple approach in terms of strategy and execution is usually when we are at our best. If the setup is there, you stalk it, wait for your trigger, and gauge if the market is cooperating for your trade to work before taking it. If not, then you take a pass.

With that in mind, the real estate sector is still offering a potential inverse head and shoulders bottom spanning several months. Over the past week, the IYR has tightened up considerably, in terms of price. The major neckline is at $58, and out of this tight base I would expect that to be challenged in short order, at a minimum. I like this idea if $55.70 is conquered, which is just pennies away, and a cooperative broad market. If you want tons of beta (and risk), consider DRN. For a more tranquil trader, consider the following ideas below, only on strength.

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Courtesy of the idea machine inside the 12631 chat room, I have been noticing more and more tight chart patterns. I want to start with HPQ to specifically point to the flattish triangle, which you can see as price tightens while bumping up against well-defined resistance. Instead of becoming loose and sloppier as it fights against resistance, price seems to be getting more and more coiled. I interpret this as a sign to be on watch for a bullish breakout. This also jives with the theme of “value” stocks like mega-cap old-tech titan HPQ being more in favor going forward than “growth” momentum names like CRM.

Hat Tip to 12631 members: “Abhadauria,” “Earl,” and “Mockingjay” aka “spoiledsquid” in the iBC Blogger Network. 

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While the broad market puts in what appears to be a rather orderly day of consolidation, those high growth leaders and trader favorites since 2009 continue to deteriorate. I charted AMZN last night (as well as CIEN) as a short setup, and the online megastore is pushing down towards $190, which I believe would be a key level for the bears to break below. In addition, CRM PCLN WYNN are weak. While the bears would be out of line getting cocky here, it is tough to see the market rallying hard into 2012 with those stocks breaking down, as they are on the verge of doing so now.

On the other hand, the transportation stocks have been surging of late on very strong buy volume, as reader “EvanBFI” pointed out on my blog last night. In addition to the steady stream of rumors and headlines out of Europe that still seem to have a major impact on market moves, there is no clear nor obvious path yet. We have yet to establish any type of discernible trend for more than a few days, and the bulls have much more to prove even after rallying the prior six sessions. Just as the bears would be getting out of line in being cocky here, so too would the “Santa rally” bulls. The better bet is considering both longs and shorts, willing to go with the flow of quick market turns and managing risk effectively.

Consistent with the up-and-down nature of this market in particular, here are two short and three long trading ideas. I cannot emphasize enough how important it is to be ready for anything. I recognize you might respond, “Well, c’mon Chess, you can ALWAYS say be ready for anything in the stock market.” And you would be correct. However, when you have a V-shaped bounce like we have seen over the past six trading sessions off of a breakdown, there really is risk all the way around.

Much like when you play an undefeated football team, you cannot afford to make the same mistakes as you would against a mediocre team. Similarly, when you are facing a challenging stock market, you have to push yourself to wait for triggers on setups, respect how quickly the tide can turn, lock in gains, and cut losses quickly.

See my notes on the charts below for more details about why and where I think these plays are potential trades.

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r

The V-shaped rally off of the Thanksgiving week sell-off continues higher this morning, with the bulls wasting no time coming out of the gate sprinting. After the rally we see last week, a Monday morning gap higher has me looking to lock in some hard-fought gains for the sake of discipline. Accordingly, I locked in some more gains in FIRE at $34.20, which I had discussed many times in this tab and had bought at $31.70 inside 12631 last week. I am now entirely  out of that position again, after successfully trading it over the past few months. However, the long-term technical breakout and short squeeze potential remains intact and has me intrigued to revisit the stock once again.

The cloud-computing names are surging, in large part off of the news that SAP bought out SFSF over the weekend. These types of squeezes add to the frustration of short-sellers, given the sudden change in momentum we saw last week. Hence, the V-shaped bounce is designed to frustrate just about everyone. However, I am still focused on exercising some patience until better setups emerge, which would likely require a few days of sideways action.

Specifically, I would like to see more charts set up in the way PIR is, basing tightly above all of its daily moving averages. You can see below that a move through $13.90 would have me very interested in going long. Note that earnings are on 12/15.

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