Market Hangs Onto Gains

The bulls cannot complain about the action as SP500 and NASDAQ held their gains right up to the Friday bell. Both are bumping at next resistance, but instead of turning right back down in a dive as they would have done, oh say, anytime over the past seven months, they held the gains, all of them, into the weekend. They were not huge absolute numbers with NASDAQ scoring 5 points, DJ30 54 points and SP500 6 points, but then again they were huge in that 162 points on NASDAQ and 678 points on DJ30 for the week did not draw the fire of short sellers. It is just a week of gains off the lows, but this is a notable character change heading into a new week, and in this stock market we know what can happen: anything.

Friday had its bad news and good news, or good news and bad news depending upon whether you are long or short the market. The Bad: Berkshire Hathaway credit downgraded to AA+. China says it wants guarantees from the US that the couple of trillion dollars in US Treasuries it holds will remain solid. Imports were down again as consumers continue to lay off the imports, something history shows we do in recessions. No surprise there, especially compared to China seeking guarantees. As Hawkeye said to Hot Lips Houlihan in the television's 'MASH' when she asked what kind of guarantees the nurses could get with respect to potential repeated violations, 'what kind of guarantee do you want?'

The Good: China wanted a guarantee on one hand and on the other its premier offered it would adopt additional stimulus. Earlier he pulled a Geithner and did not follow through with the much heralded announcement of more stimulus to come. He does it Friday after slapping some at the US. Don't think China is gaming the markets a bit? More good. Fund outflows from US mutual funds totaled $8.4B for the week. Money leaves the market at the bottom. We have been putting it in and we are already taking gain off the table on this run. It always happens this way and is thus good news bigger picture and smaller picture for us right now.

ISIL (Intersil Holdings)
Company Profile
Once again the semiconductor stocks are out in the early lead as they were in December off of the November lows. As a group they did not make the breakout due to the January fade and then the overall market tank in February. Even in that selling, and indeed whenever there is a selloff, we watch what stocks hold their own and continue setting up good bases. As we wrote at the time, these top stocks will jump quickly when the market bounces back. Remember back to October 2002 as well: semiconductor stocks led the move off the lows, the first group to rally sharply at the end of that bear market. Even more reason to keep an eye out for these stocks.

There were many chips to choose from and we bought several last week. They were not, however, the household names that most are familiar with. We were watching ISIL once again as it continued its trend higher, yes higher, off of the December low. It rallied in early February off its up trendline and bumped into the top of its channel. It sold back as the market sold that month, but it simply faded to the bottom of its channel and then bumped along laterally over that level as the market sold off hard. A leader off the lows, great relative strength, holding its pattern during the market dive, tightening its range.

Naturally that caught our eye and we put the play in the report again on 3-5-09, waiting for ISIL to show a break higher and give us another run toward the top of the range, maybe farther. ISIL remained in its very tight lateral move for two more sessions, and then on Tuesday it jumped off the lower trendline. We jumped in with some stock positions at $10.48 and some April $10 strike call options at $1.20.

ISIL finished the day at $10.84 then added another 5.35% to $11.42 the next. Thursday ISIL blasted through the upper trendline of its channel, surging to $12.16 on the high and closing at $12.05, up another 5.52%. Three strong days higher, breaking through the top of its channel, a 14+% gain in hand. After a channel break a stock will often come back to test that move. So, we sold half our stock position at $11.99 for a 14.4% gain. We sold half our option position at $2.1 for a 75% gain.

Friday ISIL gapped a hair higher, edged a bit higher, but then started to sell, undercutting the Thursday close. That is a classic sign a leg higher is going to take a breather. If we had not sold some positions late Thursday we would have sold them on that signal. Now we are looking for ISIL to continue the test of this break out of its channel. If it cannot hold we will sell some more positions and bank the gain. If it does hold we will let our positions continue higher as ISIL will have new ground to plow as it makes more new highs off of this breakout as it has changed its pattern.

RIMM (Research in Motion--$40.18; -1.28; optionable): PDA's
Company Profile
After Hours: $40.90
EARNINGS: 04/02/2009
STATUS: Double bottom w/handle. After surging in January and early February, RIMM tanked back to the December lows. Over the past three weeks it has put in something of a double bottom at the December low, rallying to start last week then taking a breather Friday. RIMM broke higher Wednesday and basically held the gain to end the week, moving laterally. Looking for RIMM to take another couple of days of lateral movement and then make the break higher to play catch up with the other large cap techs.
Volume: 17.364M Avg Volume: 22.534M
BUY POINT: $41.55 Volume=28M Target=$48.85 Stop=$38.88
POSITION: RUP FH - June $40c (59 delta) &/or Stock

DRIV (Digital River, Inc.)
Company Profile
Not only chips but internet top stocks are showing strength and new leadership. DRIV is also a leader off the November lows, setting up a very explosive pattern we are seeing with many stocks. DRIV made a series of higher lows off the November low below a constant top. It bounces off those lows and bumps the top, fades some but makes a higher low, rebounds and again bumps at those same tops. It is getting squeezed like a watermelon seed between your fingers. When the pressure gets high enough it shoots higher.

We put DRIV on the report on 3/10/09 as it tested the 50 day EMA, making what looked to be another higher low in its 13 week pattern. The next day it gapped higher on strong volume. We moved in with best stock at $26.55 and some April $22.50 call options at $4.90. We used the deeper in the money options to get better movement on the breakout move as we were using nearer term expiration options (April). DRIV closed at $27.43 that session. The next session it added another 2.52% and then Thursday anoter 5.30%.

That left us in the same position with ISIL, i.e. three sessions higher over 15%. A good time to lock in some gain before an anticipated and usual test of the breakout, so we sold half our stock position for $29.38, a 10.6% gain. We sold some options for $7.20, a 47% gain. Now we wait for the test and if it holds we will look to add positions as it bounces up off of that breakout point.