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Adobe Gearing Up For Another Run?

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Patterns suggest a move may be ahead.

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Here are some trades I'm watching and why:

Adobe Systems (ADBE): This company has already come a long way off its March lows, but the constructive pattern of accumulation and price appreciation followed by sideways consolidation suggests that the stock may be gearing up for another run toward the mid 40's.

In the most recent quarter the stock reported a 60% year-over-year EPS jump on a 37% increase in revenues. In a tepid environment, this growth looks promising. However, with a 2009 estimate of $2.13, which would only be 12% annual growth, slowing from the 18% in 2008, the stock is hardly cheap, selling at a premium of 18 times this amount. Technically, however, the stock may be offering up a trade on its next break above resistance, which would be over $40.58 on high volume. Traders can place a stop below $39.00 for protection.

Advanced Micro Devices (AMD): Something odd is going on at AMD and no, not just because the stock has ticked higher for the first time in what seems like decades. The stock actually looks to have put in a solid multi-month bottom and last week saw a high volume accumulation day where it added over 9% on no news other than litigation chatter. Since then the stock has faded in a very constructive manner as volume has been drying up.

This suggests that a bulk of new owners are holding, while short time players or trapped longs from years gone by are take the opportunity to exit. The bottoming pattern is quite attractive to me and I am waiting for a move over the $7.10 area on high volume to initiate a position. Whichever day this takes place, I will place a stop at day low to ensure that the break is real and not just a head fake.

DryShips (DRYS): This stock has been on a stealth move since breaking its trend on April 15th and has since added 30%. It was only a matter of time before the companies that physically ship all the base commodities between foreign countries started gaining some respect from the investing public.

After a very strong run since 2006, the stock saw close to a 60% retracement, which isn't abnormal after a monster run such as DRYS had. The company is estimated to earn $18.84 in 2008, which would be 97% growth over 2007. This gives the stock a forward P/E of less than 5. While growth is set to slow significantly in 2009, on all accounts the stock looks very cheap, as do all other dry bulk shipping stocks. The stock broke a significant resistance level last week above $88.50 and now looks to need a few days to digest the recent move. This is a stock I would add on weakness in small quantities with a very long leash, à la stop point far below. The trick with these stocks is to find the appropriate size and stop level so you can stay in during the erratic swings that I feel will definitely ensue.

E-House China (EJ). As we head closer to the Summer Olympics, I continue to be intrigued by small China names. We have seen these stocks move in waves and strong pops and drops are not uncommon as trades move from one hot issue to the next. This time, however, it looks as if there is a strong bid underneath and real accumulation is taking place. My thought on this is that smart money is stepping in ahead of a pre-Olympic run over the next several weeks, leading up to the August launch.

While E-House is a China real estate play, it, ironically, won't be so much about what it does as it will be fundamentals, meaning traders won't be concerned about whether or not EJ will benefit directly from the Olympics. Rather, they will bid it up in sympathy of a broader move due to its attractive growth and valuation. The company recently earned .29 on 50MM and is set to earn .87 in 2008 and 1.18 in 2009. This quarterly growth is very impressive and selling at 18 times a future growth rate of 58%, makes the stock look incredibly cheap. Like DRYS, I will be looking to add EJ on weakness with a stop below the 50 day moving average. I am looking for a multi-week move here and will peel off into strength.

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Position in DRYS.

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