Looking for Hammers

MMM, TIE Close to Bottoms

Dear Bottarelli Research Member,

First and foremost, let’s hand it to Pepsi (PEP – NYSE). Leading into today’s earnings announcement, I thought the safe play was to take your profits off the table. After all, the Dow is down 170 points as I write, which is certainly not a good market environment to be long a stock going into an earnings announcement.

But despite the market weakness, PepsiCo’s second-quarter profit rose by 14% on the strength of non-carbonated drinks like Gatorade and Aquafina. On a day when everything else is squarely in the red, shares of Pepsi are up $1.14 to a new 52-week high of $62.24. Although I stand by my advice to take your profits off the table, I must applaud the remarkably strong trading today in shares of PEP.

After yesterday’s Wednesday update, I received some questions on the status of our FDX July 100 Puts (FDXST).If you recall, we entered these puts alongside the FDX July 120 Calls (FDXGD) on the eve of FedEx’s earnings announcement. Although I was disappointed with the upward movement of the calls when FDX rallied $5.00 on their strong earnings news, I maintained each position — hoping for a carry-over effect that would allow us to “leg out” of each position at the right time. On the call side, we were able to exit the July 120 calls between $1.00 and $1.40 when FDX rallied higher after their $5.00 earnings up-move. That leaves us holding the July 100 Puts (FDXST), which have traded as high as $0.10 today.

If you look at today’s FDX chart, you’ll notice the stock is down $2.16, which means that we could soon see a more attractive exit price on our puts. Based on this weakness, I’d like you to sell the FDX July 100 Puts (FDXST) at or above $0.15, good until cancelled. Depending on your call exit price, this could give you a break-even or even a slight gain on this basket play.

Looking at our other put positions, MDT is a little weaker today, which is helping push your August 50 Puts (MDT TJ) closer to our $3.10 entry price. Current bid/ask is $2.75 to $2.85. Given the extreme market weakness, this one is definitely still a hold.

Despite yesterday’s momentary upside pop, AVID is also weaker today as the stock set a new 52-week low at $32.65. This down-move has pushed your August 35 Puts (AQI TG) up to $3.20 per contract. As it stands, we’re currently mixed on this position, as some members are still in the puts and some members are out of the puts. Just to keep the record straight, let’s go ahead and use today’s weakness to take your profits if you’re still long the AVID puts. Sell the AVID August 35 Puts (AQI TG) at or above $3.20, good for the week.

Looking at our longer-term call positions, it’s easy to guess that all of them are weaker today. While I’m still comfortable with the levels of ABX and ATK, it may be time to add to our CAT November 75 Calls (CAT KO) and our CELG October 50 Calls (LQH JJ). I’ll let you know when the time is right.

It’s also a good idea to look for stocks that have sold off too much — and use the extreme weakness to enter into upside calls on the cheap. When looking to identify turn-around points like this, it’s a good idea to scan for the candlestick charting formation known as a “hammer.”

A hammer is a price pattern that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. Typically, you find hammers when a security has been declining, and the formation signals that the bulls are strengthening and the stock is attempting to determine a bottom.

I bring this up because we could have a hammer formation in Titanium Metals (TIE – NYSE).TIE is one of those metal stocks that I regularly watch — and the company has the propensity to make big moves. TIE produces titanium melted and mill products, which could be a safer play in the midst of international uncertainty. If the stock probes lower and closes higher, this could signal a near-term low in TIE. I’ll be watching this one for a possible upside play.

Also probing lower (perhaps too low) is 3M Corp (MMM – NYSE). As I mentioned in past alerts, 3M could have handed us a downside gift gap when the stock dropped based on a poor earnings outlook. Since that big drop, MMM has continued to drop down to its last major support level right under $72.00. If these levels hold, longer-term calls on MMM could be in order.

Looking at my “Bloated Tech” watch list, you’ll notice that WBMD, SNPS, and RDY are all lower today — and possibly looking to move even lower. If the bulls fail to support these current market levels, we could be in for a very weak summer. That means we’ll be over-weighting our trades to the put side, starting with these three. Until then…

Lock and load

Sincerely,