• Daily Game Plan – Consolidation

    by  • December 19, 2012 2:12 pm • Broad Market Analysis, Bryan Sapp’s Daily Game Plan, Charts to Watch • 0 Comments

    MARKET CHECK

    After yesterday’s big move higher, markets are currently flat for the most part today.  Today’s open looked like we could potentially have another move higher, but that small gap up was met with responsive selling, and we remain near the bottom of the daily range at present levels.  Currently, the Russell 2000 is leading, up about 0.5%, while the S&P 500 is a relative laggard, down 0.3% on the day.  After yesterday’s bond swoon, the fixed-income assets have found a bid today and are up about 0.5%.  With the exception of crude oil, major weakness continues across most commodity markets.

     

    CHART OF THE DAY

    Smith & Wesson Holding Corporation (SWHC) – After the recent school shootings in Connecticut, guns and gun makers have been at the forefront of daily news, controversy, and solicited potential legislation.  As you can probably imagine, the widespread cries for new gun control laws have had a serious impact on stocks in this sector.  While this headline risk does exist, it’s my belief that the fear is a little overblown at present time.

    After rallying over 150% since January 1, shares of SWHC have imploded over the past two weeks, down about 20%.  However, the equity remains a major outperformer for the year, and it looks as if this could be a decent entry for a long position.  Looking at a longer-term chart of the equity, you’ll notice that the 8 level has been significant numerous times over the past few years.  Additionally, peak put open interest in the January options series resides at the 8-strike.  Those short these options could support the stock at that strike.  Lastly, SWHC is extremely oversold and option sentiment has reached an extreme.  The current front three months’ open interest has the highest ratio of puts versus calls as seen at any time over the past 52 weeks.  These newly-initiated bearish plays could act as a headwind toward SWHC should the option holders capitulate on their positions.  This is not a high probability setup, but the risk/reward tradeoff is extremely favorable.  A close below the 8 level would be a sign to exit the position, while a quick rally back to the 11 level seems very possible.

    courtesy of stockcharts.com

     

    WHAT I’M EXPECTING

    Continued choppy markets for the rest of the day, and potentially tomorrow as well.  We remain at the top of the recent range, and 1440 on the S&P 500 looks like it will continue to act as support.  Today’s consolidation is a win for the bulls, assuming the lows in place hold into the close.  Continue to buy dips on pullbacks, and only take your best short setups as they arise.

    About

    Bryan Sapp is a Senior Trading Analyst at Schaeffer’s Investment Research, where he has specialized in volatility-based options trading since early 2010. With Bryan at the helm, Schaeffer’s Volatility Trader generated a 2012 portfolio return of 70% for subscribers. This real-time option recommendation service exclusively trades short-term straddles. Prior to joining the research team at Schaeffer’s, Bryan honed his skills as a speculator by trading his own account, and playing poker professionally to pay his way through college. Bryan attended the University of Louisville, where he received his Bachelors in Economics and an MBA with an Entrepreneurship focus.

    http://www.schaeffersresearch.com/

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