There was a rather interesting trade which developed early Thursday morning last week before the NYSE open and continued to build on itself just after the NYSE commenced trading. Overnight, Cardinal Health (CAH) announced it was selling its entire 30 million share stake in CareFusion (CFN) at a price of 23.47 to Morgan Stanley. When seeing that headline, the first thought of many traders is” why is CAH selling its stake in the company?” However, the correct question to ask is “Why was Morgan Stanley buying it and what do they look to do with their $700 million stake in the company? The answer is simple for the immediate-term: buy more. Why is this? They now own a lot of shares and want to unload them so the best way they can do it is to create a picture of strength. Furthermore, if there is no major news, the overhang of a gigantic seller now leaving is quite bullish because the selling pressure is lessened. Thus Morgan has every incentive with the wind at its back at that for the stock to go north. This is why although it traded down to below 23.50 in the pre-hours, it was 24.20 by 9:30AM ET and almost 24.50 at the high of the day. From here, a day trader should note two things. First, with a high of 24.47, there will likely be a short covering pop above 24.47. Conversely, should the stock get to 23.47, Morgan Stanley has a problem on their hands as they drew a major line in the sand there so it’d likely be a short just below that level. The bottom line is not to ask “why,” but rather “what will happen next” when confronting a situation such as this one.
Markets in Asia were mixed overnight with Tokyo down 1% but Hong Kong up 0.3%. In Europe, markets were down overnight off of Wall Street’s weakness yesterday but have crept back up to trade slightly in the green. Gold has now breached the $1,300/ounce level. Oil is up over 1%. The dollar is a tinge lower against the yen, but sharply lower against the euro which is now quietly approaching the 1.35 level to the dollar. Durable goods came in better than expected this morning with new Home Sales (290K expected) data out at 10AM. Futures are sharply higher in recouping all of yesterday’s losses and more with fund manager David Tepper on CNBC declaring he was very bullish. There’s no reason for the party to stop as we approach quarter’s end so look for the gains to hold in a narrow range as many traders will likely leave a little early on an incredibly warm New York afternoon. Focus on the microcaps which closed strong yesterday in doing A-B-A2s on short covering, homebuilders off of KBH’s earnings, and any relative weakness play particularly around 10AM should the homes number be bad.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
NKE- good earnings
TIBX- good earnings
CMTL- decent earnings; announced stock buyback and cash dividend as well
SPWRA- closed near a high
MCP- closed near a high
CML- closed near a high
ROSE- closed near a high
REE- closed near a high
ENMD- closed near a high
FCX, PKI- featured on “Mad Money” last night
BIDU- closed near a high
KBH- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
FINL- terrible earnings
VICL- share offering
CVVT- closed near a low
ALNY- restructuring and cutting work force along with updating its NVS collaboration
EDU- warning on earnings guidance
PBR- issued 2.29 billion shares at 34.49
Earnings:
FRI SEP 24 BEFORE
KBH
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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