By Greg Jensen
On Tuesday, the equity indexes ventured into new 52-week high territory, only to be greeted coldly by sellers midday. By the time the final bell rang, bears won a 10-8 round on all three judges’ scorecards as the Dow, NASDAQ, and S&P got knocked down to minus numbers for the day.
Tuesday’s advance got stiff-armed after President and Chief Executive Officer of the Federal Reserve Bank of Atlanta, Dennis P. Lockhart, told the Latin American Chamber of Commerce and World Affairs Council of Atlanta that “monetary policy is not a panacea.” Put in plain English, QE3 is no longer a sure thing in September, despite Wall Street pricing it in since August’s FOMC meeting.
Although equities suffered a mild setback Tuesday, the technical picture remains positive for stocks in the immediate term. It is not uncommon for the indexes to attempt new-high breakaways multiple times before succeeding. Tuesday’s attempt was the first real effort to peep out beyond April’s high-water mark.
It’s especially encouraging that OptionsANIMAL’s sector checks show that large-cap growth stocks are better positioned for gains than their value oriented cousins. When growth trumps value, usually it’s a sign the Street plans on taking prices higher. Investors might be able to take advantage of the budding trend with an exchange-traded-fund such as PowerShares QQQ (QQQ).
The ETF mimics the performance of the NASDAQ 100 index on a daily basis and is littered with large-cap growth monsters like Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Google Inc. (GOOG). Investors could simply plop a few dollars into the fund and wait for the breakout, but, of course, managing risk with a stop loss order in the $65-$67 neighborhood in the event things turn sour.
If ETFs aren’t your thing, consider trading QQQ constituents; for example, Google Inc. (GOOG). The search giant is powering the Internet subsector higher while racing to 52-week highs. Shares appear to be on the path to challenging 2007’s all-time high of $747.24. However, momentum in the stock price has waned a touch and, maybe, GOOG is in the initial phase of step B of an A-C-B technical stock pattern.
In a nutshell, A is the first leg of the move, up or down. For Google, it began at $560 in late June and may have ended with June 20th’s closing price of $677.14. Part B will be marked by sideways or slightly down movement, maybe to support in the area of $650-$640. Normally, the B-intermission is a brief pause relative to length of move A. Once C ignites, its run up will mirror A in both dollar amount and time. So, the third phase of A-B-C should add approximately another $117 to Google’s share price and take about two months. Another $100 from where Google closed on Tuesday, August 21, 2012, puts the stock slightly above its all-time high sometime around the first of the year. It’s nice when it all adds up so cleanly.
Since GOOG’s price is out-of-bounds for too many, retail investors might consider call options that expire Jan 18, 2013 or building a bull call spread to profit from the potential C stage. To create the bull call spread for January 2013, option investors would buy call options and sell an equal number of call options at a higher strike price.
For example, the January 670 Call options can be had for around $43, and the January 700 calls sold for $29ish. The spread execution works like this, every 670 call at $43 costs $4,300 (plus commission, fees…). Then, every 700 sold call at $29 brings in $2,900, creating a debit of $1,400 (43 – 29 = 14 x 100 = $1,400) which is the maximum loss per bought and sold call.
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