ICEy Hot

(No this isn't a commercial for the Ben-Gay alternative. It's about our first change to the list.)

I hope everyone has had a good weekend. Are we getting our heads on straight for the coming week? It is a tough time to know what to do in the markets at the moment. In addition to the commencement of the unpredictable earnings season, we seem to be getting quite a dose of mixed signals between the SPX and Dow holding up nicely(even if at resistance) with potential support from the Transports, while the Nasdaq took back most of the promising strength it showed two weeks ago. Much worse is the SOX index at a two month low and in an intermediate term downtrend. It may find support on the backside of the old downtrending resistance line, but if it takes out the 445/450 area in a meaningful way, that will be a very bad sign.
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Let me again urge you to watch Peter Reznicek's weekly ShadowTrader video. You can find it in the center column at redoption.com.
I also encourage you to visit the home page for BigTrends.com. There you will find four regular columns for which you can read through the archives. Their Weekly Outlook is always worth reading, if a bit heavy in indicator talk. I received my free membership email today for their Daily Trend Watch which focuses on different subjects from day today. The one I received is not yet posted on their site, but will surely be there by tomorrow, Monday. It is a good discussion of earnings expectations and reactions. Meanwhile, the most current topic is Using the Right Tools at the Right Time. In it they explore the application of different indicators in different environments including a focus on the MACD and Stochastic like we use with the Investools set. The application of the teaching in that article to today's environment might be that we could start looking a little more strongly at the Stochastic as our strong trend seems to be flattening out and we're looking more range-bound.
I know that it is very frustrating that there's always something new to consider which may refute our technical indicators and whatever combination we may use for buy/sell signals. But when it comes down to it, there is not "right" or "wrong" set of indicators or signals. The undisputed common denominator between any and all successful traders can no doubt be that they have rules with regard to money management, position sizing and controlling risk for the times that they are wrong.
We've talked about a trading plan and rules lately. I myself have wrestled with this one and get the sense that many of the members of our group are doing without them. I would agree that it is very difficult for a new trader to establish a plan or approach they're comfortable with, particularly with little knowledge of the market, much less which strategies they like. But there is no question that everyone, especially the new trader, should have rules for handling their money and managing the risk in any trade. PLEASE! If you have no other rules for the time being, at the very least, make rules regarding money management and position sizing.
On the Investools site now there is a section on the top right corner of the Online Home page that shows a scrolling, clickable list of the 10 mistakes new investors should avoid. There is a reason we hear these same tidbits over and over. Make the effort to put something in place.
The challenge will not only be to put some kind of rules in place, but even more so, to follow them.
I bought a LEAP many months ago on JLG. I won't go into the details of the trade, but since I had so much time in the option and the company had such strong fundamentals, I ignored the clear technical breaking down of the stock and watched the option lose all of its value. ALL of it. My rules told me clearly to get out of it, but I didn't follow them. So now I have been looking at this worthless option in my portfolio for months as a reminder. Thank God it finally expired!
Here is another good article from IBD which discusses cutting losses short and letting winners run. Investing Success Doesn't Require Perfection.

OKAY. Enough of that. I have mentioned wanting to reshape our list a bit. Starting most obviously with the stocks that no longer match up to the Investools recommended minimum number of an F/E of 3.25, ISE is one that is looking pretty weak. Though still clinging to a 3.25, the forward looking Estimates score of 3 is the weaker of the two and we would rather see that score be the higher of the two. But more than anything, it is the chart that is most unappealing, particularly in the face of great strength of its group.


Even through the dialy look at the chart with the Investools study set, it doesn't look good at all. Three red arrows with the stock bounding down off a declining MA and it is once again pushing the pivotal support level which, if broken, would confirm the double top pattern. If it does break 45, this would call for a move down to 35. I must say, though, that I am a touch hesitant to cut this one loose because there are positive things to see here.
At the last earnings announcement, the stock gapped up strongly with high volume. Though it did immediately pullback almost 20%, the rally into the second top shows quite higher volume than the sell-offs surrounding it. With earnings coming out again on Feb. 5, that could be the catalyst for the next leg up. So continue to keep an eye on this one at home.

Just to give some perspective of what the industry group is doing, check out this index.


In the meeting last week we walked through the process to find a replacement for ISE and agreed that ICE was a good choice. Remember, in searching for something to represent this group, I want to keep dealing with stocks scoring 3.25 or higher and trading somewhere around 1 millions shares a day or higher for purposes of liquidity, a tight options chain, and more reliable technical analysis.
Look at this comparison of relative performance among top scoring and top performing stocks in this group over the past 3 months as the XBD index put in two new higher highs. ISE underperformed the pack while ICE has clearly outperformed by a mile.

I should mention that for the year ICE is up about 150%, by far the biggest gainer of the bunch. Here is the weekly chart of ICE since it's IPO in late '05.

Looking at the daily chart with the Investools set, it looks like we're pulling back a bit to digest some of these major gains. We want to be very careful to not be the last people to arrive at the party and leave unhappily. I would look for support right around 115 at the MA and the potential horizontal support from the old high. If that is broken, it would be a likely end to the long term trend, for a while at least.
What I find really interesting is that this last leg of the upward push comes after a relatively uneventful earnings announcement that was followed by a couple down days.


We looked at the F/E scores at the meeting and found them to be to our liking. The one shocker was the PEG of around 5, WAY higher than the ceiling of 2 we're looking out for. But Jim helped me realize that this was using the trailing P/E with earnings on the past year. Looking at the Earnings of the current year 2007 we find that Price(126.91)/2007 Earnings eastimes(3.36)=P/E(37.77). So we divide that by 5 year annual growth estimate of 24% and we get a much more digestible PEG of 1.57.
The P/E of 38 is still at premium to the group(23), but that is the price for being in a leading stock.
This stock has its next earnings announcement on Feb. 06, the day after ISE. I sure hope I don't wind up with egg on my face to see ISE take off and ICE fumble. ;-)