I believe that EMC Corp (EMC) will pullback probably in connection with Ben Bernanke and the Federal Reserve's reluctance to further stimulate the economy. They may continue with "operation twist," but for the most part I believe that has already been baked into the cake. Everything is being done that can possibly be done to push capital into equities. Besides they have already gotten the effects of a stimulus without doing anything at all. It is a classic case of buy the rumor and sell the news.
If you have read some of my other articles, you have probably surmised by now that the wholesale and retail levels of the Designated Market Makers inventories are a moving target. In the case of EMC Corp, I suspect that these levels have been reset and resistance is currently at $25.00. This is a resistance level which carries all the way back to November 2007. I believe we will see a similar bounce off of this resistance to the downside price range of $23.67. I further believe EMC will advance from there to the $30.00 range, where it will once again encounter resistance. Nevertheless, I will gladly exit the trade at $26.50.
It is fairly obvious the two blocks which traded on November 29, 2011 were very significant. They have been highlighted on the chart with a red vertical line. There was some very specialized merchandising taking place in this issue from late November 2011 to late January 2012. This is where I believe, many exchange insiders were getting on the gravy train. In addition, I believe these insiders were supplied by the Designated Market maker selling short. This is why he lowered the price. He did it to cover his short positions.
Look at the two block trades which traded on January 20, 2012 at $23.25. One was for six million shares and the other was for two million shares. Check the chart to see what happened immediately afterwards. It ran to $30.00 by March which is a 29% gain in three months. I believe the blocks of June 15 are equally significant.
Beginning in February 2011 and continuing until late July 2011, EMC traded within a range where resistance was at or near $28.00 and support was at or near $25.00. Swings from the highs and lows occurred approximately ten times within that time frame. In addition, these oscillations are typically 5% to 10% moves. I suspect that bouncing to the upside, off of $22.80 in early June was in essence the commencement of that type of oscillation pattern yet again.
(click to enlarge)
On the basis of the foregoing these are my views and observations:
The Trade:
I recommend establishing a long position in EMC Corp. Open your position with only 1/4 of whatever capital you intend to commit to EMC at $23.67. Purchase the remaining 3/4 of the position at $21.78 and stop out at $20.89. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $26.57. Do not allow this position to exceed 5% of your overall portfolio. You could also write some near close to expiration puts in the hopes of having the stock put to you. If it is put to you, then the premium will reduce the cost basis of the overall position (resulting in a more profitable trade) and if not then the premium is money in your pocket.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (Particularly On A Short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EMC over the next 72 hours.
