The Day that Was - December 14th 2007

Posted: December 15, 2007 at 12:10 am by Chuck

As John Murphy (renowned technical analyst) said in his nightly commentary, "don’t count on Santa Claus" for a year end rally. The situation unfolding within the markets continues to deteriorate. Over the weekend I will post some more thoughts on the technical’s and the events of today. But at this time the downward pressure is mounting. Those who were saying we would hit new highs this year are quickly losing their chances, for both the days remaining grows shorter and for the technical indications that the market is indeed rolling over.

A reader wanted a chart analysis of Priceline (PCLN). And the chart is shown below. Some notes on PCLN:.

PCLN has 38.3 Million shares outstanding, and currently has 7.2 Million shares being held short. This is a very high ratio
On November 29th Credit Suise issued concerns about Priceline’s margins.
On December 10 Fidelity Investments (FMR LLC, mutual funds) cut its exposure in PCLN from 15% down to 9.7%
On November 28th Rose Ronald, CIO of Priceline sold $2,334,450 of stock.

The low share float on Priceline is what makes it move quickly and many low float stocks quickly run up on momentum, this is one of them. Over the past 4 months, while the price of PCLN has been rising, the money flow has been declining. A divergence which is a leading indicator to a shift coming. If you want to trade PCLN on the long side (which we would NOT do) then you would buy when the price breaks over $121.00.

To play on the short side you enter a short position on the move below $109.00. There is already a substantial short interest piling on top of PCLN right now as many traders see the same technical divergence and that it is also over valued in a declining market. The chart action suggests that PCLN will not break to new highs unless there is some kind of positive news between now and their next earnings report on February 12, 2008 to trigger the shorts to cover.

For us, we see this as a potential fast moving downward short play if it fails $109.00. A play on a break above $121.00 on the long side is possible but any pullback to below $115 would be a signal to ‘get out’

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Comments

2 Responses to “The Day that Was - December 14th 2007”

Dave on December 15th, 2007 12:03 pm

Thanks for the chart, Chuck.

Interesting. I also use the CMF, but don’t seem to rely on it to the same extent that you did for this chart. I was looking more at the “accumulation/distribution” which is rising, OBV which is rising, 50 day moving average which is rising. I am concerned that the MACD crossed over to the downside. So based on the declining CMF and the black downward arrows, you would have initially sold your shares at $80? I am not sure how to use this CMF. Using the CMF would have left a boatload of money on the table. Come to think about it, I am not sure there would have been an entry point on this stock had I used it. I probably would have made nothing? I guess I need to do some more research on this area.
Question - Look at the PCLN trendline. Why has earnings and stock price been so strong if the consumer is in the toilet? I mean, they sell airline tickets, hotels and rental cars. If my pocket book were pinched the first thing I would cut back on would be discretionary items such as vacations. Wouldn’t this stock be one of the first to hit the skids if there were any signs of a recession?
And thanks, I will buy above $120. I could never short this thing.
Chuck on December 15th, 2007 9:13 pm

Dave,

The arrown I placed on the CMF line are not buy/sell trigger point. I point them there only to draw attention to the down ward trend on the CMF.

CMF is usefull only for obtaining a longer term view of how strong or weak a trend is becomming, that’s all. For buy/sell PCLN would use support/resistance levels. On the chart I provided you with a buy point for going long, and a sell short point for shorting the stock.

The lower the share float the more difficult it is to gauge price movement vs A/D. Low float stocks move with a puff of air, and fall just as hard with a puff from the other direction. Watch out!