Thursday, January 10, 2008

New spec plays possibly worth a multi-day trade.....

Mostly reflective of the market and possibly a number of other stocks, I noticed that these two stocks had interesting island formations. My personal experience is that stocks that are A) Sold off more than 30% from their 52 week highs B) Trading at/near their 52 week lows C) Shown an Island formation at the lows (that resulted in a stock falling at least 3% intraday, but recovering and ending near the opening price of the day) and D) followed up that island formation with a strong bullish-engulfing candle (long white candle) - tend to have the potential for significant outsize gains over the next few weeks. Sometimes the reactions are very explosive, and my target would be for a significant rebound.

In Wamu's case, a minimum of 25% should maybe be targeted, FDX maybe 10%? In either case, the chart pattern shows strong buying and a major reversal on good volume and on oversold conditions. If the chart pattern closes below the bottom of the island formation, its definitely busted and you should just take a loss on the trade. I would tend to say if the stocks close below the top of the island formation that the upside is likely to disappoint, so I may set my stop-loss there.

Since you are reading this blog online, the best way to explain it is that Island-reversal formations are the Jenna Jameson of chart patterns. And by that I mean the Jenna from 10 years ago, not the old-and-busted anorexic Jenna from now. Hope that gives ya some good perspective.

PS- Sadly, my fondness for historical valuation multiples and Chili's salsa has me licking my chops over the 15% decline in EAT (within the week after i bought, of course :), nonetheless this was a long-term trade 6-18 months thats targeting $30/share. The biggest hindrance may be the fact that management blew a bunch of money on share repurchases at high prices in 2007, but restaurants are definitely looking very interesting to me... think the Darden's and Brinker's of the world have the financial wherewithal to outlast a lot of the smaller, lower-margin also-rans. (by comparison, recent LBO's of Outback Steakhouse and Applebee's both occured at >10x Ebitda, with Chili's trading for 5x trailing Ebitda, there appears to be a significant margin-of-safety even if earnings were to temporarily decline for these guys. I may look to add to this position if it declines further, although seeing some insider buying might make me a bit more bullish.

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