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The Wednesday Structured Trade: Juniper Searches for a Bottom, W.W. Grainger Shorts Get More Fodder


There may still be some time before the fundamentals and technicals line up for Juniper, but the risk/reward is already compelling; meanwhile GWW "exhaustion" signals grow louder.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.

Sometimes the best tactic to navigate the market is simply to stay away from it. Right now just may be one of those times. Equities are being pulled by performance-chasing and end-of-year seasonality on one hand, and on the other hand by the ongoing mess in Europe where, pardon the skepticism, absolutely nothing was accomplished last week, but for putting some lipstick on the PIIGS. I hear the arguments that the failed German bond auction put the fear of God into governments and has set them on the path toward fiscal responsibility. What is happening right now in Italy with regard to the austerity measures that need to be ratified by the Congress suggests something altogether different. So with this kind of macro backdrop, venturing into new positions appears to be a gratuitous search for trouble. Nevertheless, I won't duck throwing out a couple of ideas to revisit once the bigger picture settles down.

On the long side I am finding myself gravitating (again) toward Juniper Networks (JNPR). I bought the stock pretty much at the top and I have been fighting to stay in it by buying and selling put options. It has been an exercise in frustration, not to mention highly unprofitable, but there are technical signs that the worst might finally be over. I won't go over the fundamentals much because this is a well-known and well-researched name. Suffice to say that the slide from $45 to $19 has been caused in great part by the seemingly endless confusion surrounding telecom carriers' budgets, and a revived effort by Cisco Systems (CSCO) to go after those competitors who have been eating its lunch for the last few years. For now there is no greater clarity on the budget issues, except to say that sooner than later most of the carriers are going to have to deal with the fact that their 4G/LTE networks need attention, and that the increase in data traffic is not going to slow down anytime soon.

The technicals, using DeMark analysis, is what gives me optimism for an approaching change in trend. This past Friday the stock completed a weekly TD Sequential Countdown, and the monthly chart has the stock on the 8tj bar of a TD Buy Setup, while still above TDST support. Another longer-term indicator, the weekly TD Megaphone, also argued for a change in trend back in September when the stock traded around $17, and the stock successfully put in a price flip a couple of weeks later. However, the price has since weakened and a close below $17.26 would put into question the validity of that signal. In sum, Juniper may have some more bottom searching to do and may not be ready yet to ramp meaningfully higher; however with downside risk to the $12-$14 area, and no reason to doubt that the stock can work back to the high $30s once the fundamental ducks line up, the $5-down versus $15-20 up risk/reward looks pretty attractive. I am already involved by being long the January 2013 $15 calls, which trade at implied volatilities just about equal to realized volatility and also match up with the timeframe I have in mind. But July calls trade 10 points cheap to realized volatility and might make better candidates as the long side of a diagonal call spread (where you buy the July's and sell a higher strike, shorter duration call against it).

As an aside, it is also worth noting that on a weekly basis Cisco has qualified a break of the TDST Level Up line at $17.99, and remains only on bar 2 of the TD sequential countdown. Next resistance sits at $20.36, but by all indications Cisco could have a ways to go on the upside. I am straight long the stock with some January 2013 put options increasingly out of the money. And of course, a rising Cisco might help lift the boats of its competitors as well.

Hard to believe that I could not find much of anything truly interesting on the short side, but it is what it is. However, in last week's edition of The Wednesday Structured Trade I highlighted bearish DeMark setups on multiple time frames for W.W. Grainger (GWW), and on Thursday I buzzed that I had put on the long side of the trade I discussed (buying the April 135 and 185 puts). The next important level for this week sits at $176.34: a close below that price would register a price flip for both the weekly TD Sequential Countdown and the weekly TD Megaphone. Upside risk level remains around $201.

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Positions in JNPR, CSCO, and GWW
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