Market Commentary

Profiling a put play in QLogic

Here's a stock that perhaps goes hand-in-hand with my 09:00 EST update from this morning and will better help traders how to set up a potential bearish trade for their account. It's not all that surprising that we've seen a bit of a snap back rally this morning in stocks, but the question is how much before a downward move were to continue. This morning I laid out the possibility that we could see a 150 move higher in the NASDAQ-100 from the 1,700 level in coming sessions as it related to our point and figure chart. A trader that is trying to line up some trades is looking bullish on a very short-term basis, but much like a good chess player, they're also lining up some potential short trades should the NASDAQ-100 rally according to this morning's outlined scenario and then the possibility of the NASDAQ-100 to eventually fall to the 1,450 level from the head and shoulders pattern from the bar chart and a potential bearish price objective from the point and figure chart. Here's a trade that I'd be looking at and PremierMarkets.com will add this stock to our profiled bearish play list that we need to be getting ready to take some action on.

QLogic Corporation - $1 Box

I like the potential set-up for a short in shares of QLGC and would love to see the NASDAQ-100 rally about 150 points or so and see QLGC rally right along with it to the $58 level or so. The current bearish count comes in at about $37. To me, QLGC technicals fit very nicely with a scenario for the NASDAQ-100 to put in a short-term rally on its point/figure chart. I also think the bearish price objective of QLGC fits nicely with a bearish price objective of 1,450 on the NASDAQ-100.

A trader that can understand and try to correlate moves in an index and stock often times finds themselves trading with more confidence. By letting shares of QLGC rally a bit and remove as much risk from a bearish trade the better. I also think that by trying to set up a bearish trade now and begin monitoring its progress, a trader gets a better feel for how one of their trading scenarios is playing out.

I also believe this and this is VERY important! We do NOT want to bet the farm on a trade. Yes, there are a lot of things that point to lower stock prices in the bar charts and the point/figure charts, but near a market bottom (if we truly are near one) eventually a bearish trade will go against you.

I'm going to point to a couple of bearish trades that PremierMarkets.com has profiled recently as a prime example. Any success we've had with bearish trades lately has been very short- term trading. A current play we're following in EBAY has been fractionally in our favor and fractionally against us. There is some strength still being seen in areas I feel should be falling apart if we have another leg lower still to come.

What I'd be doing on the short side right now is trying to trade 1/2 position only in some stocks that have some bearish price objectives that are favorable for trading short, but just start out with a 1/2 position. Once we start getting some success from those bearish trades, then start adding to them. For example... a trader might implement a 1/2 position short in shares of QLGC on a rally near $57 on the above chart (correlate with upside in NASDAQ-100 should it reverse to 1,850 levels). A trader would then place a stop at the $63 level on the 1/2 position short in QLGC. His target would be the bearish price objective near $37 (or correlate with NASDAQ-100 near 1,450). Once the trade is implemented it must be monitored and if things begin to go to plan and we see another sell signal occur, that's when a trade could add to his/her position as the first 1/2 begins to get profitable and his scenario begins to unfold according to plan.

Hopefully you see how the market action of the NASDAQ-100 and scenario there could be carried over to a trade set up in shares of QLGC. I also think this is how a market maker in shares of QLGC is trying to begin managing his/her account inventory in the stock.

Jeff Bailey
Senior Market Technician
www.premiermarkets.com