The Dow’s Puppets: TIE & ERS

Titanium Metals is breaking down.

It’s not hard to forget last Monday’s big drop in the Dow, and until the opening bell I have no clue where the market will lead us. Every index is showing weakness right at the supports. It seems there is a lot of volatility at these points as the market struggles to try to keep the index above the water, so it’s hard to tell if we’ll get a green or red day.

For that reason, I’ll be focusing on trading in the direction of the market. In an effort to keep things simple, I’ll be using Titanium Metals (TIE) and Empire Resources (ERS).

Titanium Metals (TIE)
Currently TIE is attempting to narrow the consolidating channel, but until that happens keep an eye on $35. I actually thought TIE would split at $70 in May, but it went off to the ninties making me feel like a fool. Well, now it’s below $70 (split-adjusted) for the fourth time since split, and I’m thinking TIE just might break down. Still, the volume shows this stock to be stubborn and strong; but you have to admit, there were a lot of late people who joined the party up in the $90s, so let’s see if they don’t quit yet. I’ll play it by this mode:

• IF (TIE crosses from < $35) THEN (buy LONG at $35.00, sell >$36.00)
• IF (TIE crosses from > $35) THEN (sell SHORT at $35.00, cover < $34.00)

Based on the overall market situations, I’m more inclined to short TIE, but any change of direction in the markets will mean I would need to switch.

Empire Resources (ERS)- this is one buy-and-hold stock you must stay away from. ERS was a classic overhyped and overbought stock; you might even call this one an Icarus. Yet, there has been no big change in fundamentals so the selling has really gotten out of hand. The only way I will play this stock at this point is to go LONG on a day trade. Shorting these fast falling stocks is a bit dangerous, since a spike here and there is almost inevitable. So, even though this stock may continue to slide, be alert for those occasional spikes and buy long for a short period.

Other plays:

• Britesmile (BSML)- was up 51% after hours Friday, extending the stocks push to over 100% gain in about 5 days. I wish I could short it tomorrow, but it’s under $5 so my broker won’t even let me. Anyway, I’ll keep an eye for an extended rally in the first hour, if it’s not there then it’s off the watch list.

• Taketwo Interactive (TTWO)- This stock is a mess, and a bunch of downgrades over the weekend will hurt this stock more. I wanted to short this stock at $16.00, so based on all my research from that sentiment, I still feel a medium term short over $13.00 is good. I don’t really play Play Stations and XBoxes, but it’s so obvious that the Grand Theft Auto trend is dead. Everyone wanted that game, but now it’s just a normal game. In fact, I went to the game store last week and I saw they have a new Grand Theft Auto game out, but the marketing campaign was so weak that not many people knew about it.

I just noticed that the Motley Fool Rule Breaker portfolio got smashed, really smashed since April. I really enjoy this newsletter’s picks, but I haven’t bought on any of their recommendations in a while, in fact I actually shorted their last recommendation, Suntech Power (STP)… I wish hadn’t covered so soon.

Anyway, this portfolio was performing at a jaw-dropping 33% around April, but during the Bernanke era the portfolio has now dropped to 8% versus the S&P’s 5%.

Here’s the picks from the last 3 months and their performance since recommendation:

• June- SunTech Power (STP): -19.78%
• June- Protein Design Labs (PDLI): -5.34%
• May- InterMunce (ITMN): -11.09%
• May- American Science Engineering (ASEI): -37.81%
• April- Powershares WilderHill Clean Energy (PBW): -3.54%
• April- Headwaters (HW): -32.13%

In defense though, the spirit of the “Rule Breaker” stocks is that they pick companies that are innovative and possibly the “next thing.” So, sometimes its a make or break deal. If you hold on long enough, you have a good chance of getting on a future market leading company before the herd. For example…

Best Pick: Vertex Pharamaceuticals (VRTX): +205%, picked February 2005!

Anyway, I’ve occassionally checked on the discussion boards and I’ve noticed there are not many people complaining about how bad these stocks have been. I give them a lot of props for hanging tight and sticking with the long run. Still, you have to think that if a respected newsletter like TMF is getting hammered, I’m pretty sure the majority of the “buy-and-hold” crowd are getting hit hard too. (If you are heavily invested in a “buy-and-hold” stock, I would recommend some sort of hedge, like buying puts in the stock or in the index) I believe those that are hanging on for the market to get back on track are the ones who are keeping this market together. With that in mind, I’ll be checking on the sentiment of the investor community at TMF, and when they start getting impatient, then I know we have a problem.

Nasdaq to $2050?

S&P 500: Support at $1250
This is the second time this month that the S&P 500 has bounced of approx. 1250.

Dow Jones: Resistance at $11,000?
As I pointed out yesterday, the Dow just looks ugly. The bearish head-and-shoulder is a big sign of a downtrend. The Dow needs to be comfortably over $11,000 psychological spot. The $11,100 mark looks like a frequent reversal spot. I’m not so sure about the support.

What about Gold?

Gold too is approaching a sensitive spot at $600.00. The U.S. sell off continued into other markets, but at the time I write this (6 am NY), Gold is picking up in London. Still, a 6 month chart shows that the steady calm rise of gold since around March, has topped at $720 and has since been a rough trend down to $600… so far. We can’t forget though that gold is like a “global stock,” that reacts to global events. The dollar gaining strength this week, and a successful attack on Al Qaeda terrorist (which the headlines are calling a “step forward”), are bits of news for investors to feel safe. Feeling safe, means getting away from a gold hedge. Keep an eye on gold, it can fall pretty fast from here. But keep an eye on the news too, because a one time event can cause a one time spike.

[Some Random Trading Ideas]

• “Safe Plays for Uncertain Markets” by Business Week- I believe investors call these protective stocks.
• The demand for Copper could be in trouble. Copper has been on fire due to major demand, especially from China. But now there’s speculation that rising borrowing costs in Asia will trim this demand. [Copper stocks: PCU, CUP, NTO, WIRE]
• Steel Partners submits proposal to acquire Stratos International (STLW) for $7.50; currently, STLW is at $6.00. Get in premarket?
• Evergreen Solar (ESLR) up premarket on upgrade

Market was in terrible shape this morning! I spent the entire day looking at red. From my watch list only one stock closed green- Master Card (MA). Still, the Dow and the S&P 500 made huge comebacks, filling in the entire gap.

The majority of the day I spent watching Peru Copper (CUP). I waited for an entry point, but was to reluctant to pull the trigger. In hindsite I missed about 4 good points, either short or long. Another good performer was Titanium Metals (TIE). Whoever got in on TIE when it reach $32.00 got it at a bargain. I set a buy limit, but by then the Dow recovered and my order never filled. I’m a little disappointed that I never took advantage of a rare full reversal day like today (ie, Dow dropped more 100+, but then closed in the green) But that’s okay, I sill believe there will be more opportunities in the next few days, especially with CUP and TIE. Another stock with unusual behavior was my energy pick, Tri-Valley (TIV). In the final hour of trading the stock this stock, together with most oil related stocks, had a huge rally. The only difference was the magnitude of TIV was huge. Keep an eye on those oil stocks… they’re getting interesting, now that an Al Qaeda leader got killed, oil worries are starting to fade- Ha! This is only short term folks. I wouldn’t be surprised if we saw some kind of retaliation attack soon. Remember, an attack doesn’t have to happen, just the thought of one will send oil prices back up.

I took a “break” today from the market, so I don’t have a solid feel on particular stocks. There are a few stocks worth watching tomorrow for a trade. In the meantime, I’ll be running some stock screens looking for stocks that have shown strength (rising price backed by volume) during these inflation worry times. So far I can give you two- OpenTv (OPTV) and Baidu (BIDU).

Stock Watch

• Novellus (NVLS) – boost guidance. Up 5.3% after hours.
• Microsoft (MSFT) vs AOL and McAfee (MFE)- a battle going on for the computer security market.
• Peru Copper (CUP) – trading was halted Wednesday at 3 pm pending “news”. If its big, then stock will move big. But which way?

It’s getting pretty hot wearing this bear suit for the past few days, and it looks like I’ll be keeping it on for a while. Today’s action was very disappointing for the bulls. The “self-proclaimed bounce” was a nasty failure. The Dow was heading to triple digit gain, and every financial website had the headline “markets rebound.” Ha! The market gave up in the second half of the day.

So where are we at? Well, I have the S&P 500 and Dow showing we’re in dangerous territory. (I finally figured out how to use StockCharts.com’s annotation tool, but I have to figure out how to display them on this blog. Sorry, the charts are tiny. Try clicking on them)

Bad Sign- The Dow shows a bearish head-and-shoulder pattern has formed, and it has actually crossed over support (which happens to be just above 11,000- not surprised). All other indicators show it to be oversold at levels we haven’t seen since November. But before you conclude that we will see a big rally just as we saw in November, we have to realize that it’s different this time. Buyers and bargain hunters are reluctant to go all-in because we still have FOMC and Bernanke to deal with… until June 28.

Bad Sign Again- I don’t know what happened to this image! Sorry, I’ll redo all this when I get home. Anyway, I just wanted to point out that the S&P 500 is testing the MA 200 for a second time. This will be interesting since you have to wonder if those who bravely bought at the first test will see this support as the next resistance. In other words, we may not see that much firepower this time.

Well, just keep this in mind, trading will be rough for the next few days, that’s all I can pretty much say.