Momentum Traders and Taking Profits: Part II

 |  Includes: AAPL, CMG, NFLX, PCLN
by: Taxing Wall Street

A few months ago, I wrote an article about momentum traders and taking profits. In the article I called a temporary top that could have saved a lot of traders a lot of money (the charts are through yahoo finance, and updated daily, please note the date of the article). Once again, it is time to take profits. Many high P/E, overvalued yet quality companies have made recent parabolic moves that need to be examined. For the record, I am long all of the stocks that I recommend either taking profits or using a covered call strategy in order to generate some income / protection.

Chipotle Mexican Grill (NYSE:CMG) is one of my favorite companies and definitely my favorite fast food restaurant. Many analysts are skeptical about the company's short and long term growth stories. The short term worries are due to higher commodity costs compressing margins. The longer term costs involve irresponsible growth (often compared to the Boston Market fiasco) and international expansion. I think both of these are good arguments for some restaurants, but not for CMG. What it will lose in margins, it will make up for in volume. It will also expand at a reasonable rate-- with currently 1010 stores in the United States while planning to open another 120 this year. Also, this might sound like a reach, but I promise it is not. Chipotle Mexican Grill can open many stores near universities and make a killing. I went to school at UMD and the line was out the door about 7 hours a day. Studies have shown that in college, many people develop habits that stick for the rest of their life.

This is a one year chart of Chipotle against the ten day moving average. It is having trouble breaking 280 today, and is around 19 points above the ten day moving average. I recommend either trimming your position or looking to sell an upside call against your stock. At 2:30, April 5th, you can get $5.5 for the April 280 option that expires next week. The stock is currently at 277.60. This allows for another 3% upside by next Friday.

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Chart forChipotle Mexican Grill, Inc. (<a href='' title='Chipotle Mexican Grill, Inc.'>CMG</a>)
The second stock that I will be looking at is Netflix (NASDAQ:NFLX). I originally was very bearish on NFLX because I didn't like the way the conference calls were constructed. I found it troubling that the CFO left after selling the bulk of his position, and-- due to the lack of current content-- I thought the subscriber base momentum could slow. However, I actually heard a bad bearish argument on the stock that made me turn bullish. A short seller was on Fast Money listing all of the negatives (or potential negatives) about NFLX. This short seller said that he had talked to people on the inside of Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) and "these insiders" could not figure out how NFLX can make money at $8.99 a month. Then, I realized the barriers to entry are huge, because Amazon and Google cannot shell out money for content without a subscriber base and no one will subscribe without a large amount of content. People criticize NFLX lack of content as a huge problem, but, as a customer, I feel you get more than what you pay for.

Below is a 1 year chart of NFLX against the 10 day moving average. NFLX did not trade very well today, forming a doji reversal pattern on the candlestick charts, and failed to finish at a new all time high after breaking it intra-day. If you don't want to take profits, I recommend selling the April 250 call for $4. By reading this article, you will notice that I could have gotten you 40 points after I recognized a strong support level at 200.

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Chart forNetflix, Inc. (<a href='' title='Netflix, Inc.'>NFLX</a>)

Another stock I will mention is (NASDAQ:PCLN), which I am still VERY bullish on. However, it has made a huge upside move in the last two weeks and I feel this would be a good point to take some off the table and look to get in at a lower price. PCLN is up 14 percent in the last two weeks and still has room to run. It is currently trading around 28 times forward earnings, with at least a 33 percent growth rate. With the weak dollar, and the company's ownership of (the major European online travel site) it promises to have a very good quarter. However, profits need to be taken sometime, and if you are a trader, now is a good time.

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Chart Incorporated (<a href='' title='Priceline Group Inc.'>PCLN</a>)
I will talk about a recent laggard, Apple (NASDAQ:AAPL). After getting bombarded with a flurry of bad news, half true rumors and downright lies, it is time to buy AAPL. I don't look at valuation as a key metric for owning a stock, however, what the heck is going on here? After Tuesday's close, AAPL is trading at 11.7 times forward earnings and is expected to grow at 41% this year. In the words of Karen Finnerman, "the valuation is compelling", even to a fundamental retard like me. The company created a product out of thin air, the IPAD, that magically created an extra 18 billion in unexpected revenue. Can anyone name the last company AAPL's size that did that? Probably not, because there is only one company in the world that is currently bigger.

Then there is always the Steve Jobs health concern. If you believe in the Steve Jobs story then it is safe to assume that you think he is one of the greatest CEOs of all time. If god forbid something happens to him, do you think a man this brilliant does not have contingencies in place? We all hope you get well soon, Mr. Jobs.

Technically, AAPL appears to be weak because it has been making lower highs and lower lows. With any other stock, this would concern me. However, AAPL, by most metrics, trades poorly all the time. The downside volume is always considerably higher than the up days, and usually AAPL makes its sharp upside moves in a short period of time followed by a period of consolidation. Below is a chart of APPL which was able to bounce off of the 100 day moving average intra-day for the second day in a row. BUY AAPL.

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Chart forApple Inc. (<a href='' title='Apple Inc.'>AAPL</a>)

I hope this helps everyone. Good luck trading.

Disclosure: I am long AAPL, PCLN, CMG, NFLX.