Towards the end of last week the S&P was pushing towards a major support area in the 650-665 area as reiterated in my daily commentary. As most of you know, everything has been hurt the past nine months, but especially the financials. The last few days of last week we saw some increase in the volume in certain financial stocks as it seemed as everyone was throwing in the towel on them. Watching for a pickup in volume and what I like to call a waterfall or free fall in the price of a stock can often be an alert that at least a short term bottom is near.
Of course one of the problems is that often you’re not quite sure from where. Below are the charts from both the BKX and AXP for the past few months. Notice the volume bars on AXP from mid February. No huge spikes, but definitely an increase for a couple of weeks. As you can see in the first AXP chart, it had fallen from the 40 in just the past 6 months. Often times major whole numbers such as 20, 10, etc will act somewhat as support points. Of course, it’s not unusual for the stocks to undercut those prices slightly, to pick off all the stops people have placed just below, a lesson that all new traders soon learn.
The heavier than usual selling of the financials, including AXP, along with the $10/ share psychological level aligned with a major support area in the market converged to give what I like to call a reasonable expectation of a successful trade. However, as I suggested to some friends I trade with, the safer play was to buy AXP under $10 and to write some July 10 calls against at least part of our position for $2.50. That way, in case we were wrong, we had downside protection to $7.50 on AXP or maybe higher, depending on what % you wrote against, and if it went up and we got called away we still made 25% on your money in 4 months as long as the stock was still above $10 and we’d see what happened on the stock we didn’t write against. So far it has worked perfectly. The stock has rebounded 30% in a week so we’re up that much on the stock we didn’t write against and feel pretty good about even the rest that we did write against. It’s always easy after the fact to look back and say, I wish I hadn’t written the calls against any of it, but I like to remind everyone of the Rule of 72. A 25% return in 4 months is not bad in any market and a 30% gain in a week is fantastic. I’ll gladly take either these days.