Sunderman and Rhodes: Bearish Bets

10/24/2003 12:00 am EST


Richard Rhodes

Founder, Rhodes Capital Management

For those who understand the risks of betting on the downside, we offer the following bearish trading ideas. Richard Rhodes offers two ETFs and two tech stocks that he feels are vulnerable. Joseph Sunderman sees downside risk in one high tech and one biotech issue.

"The latest rally was narrowly-based, and this is part and parcel of a topping pattern we believe will carry prices lower into mid-December," says technician Richard Rhodes, editor of The Rhodes Report. "We expect the Dow and S&P 500 to decline on the order of 10%; while the small- and mid-cap sectors could drop 15% to 20%. We are in the minority in our opinion, but we like how uncrowded the room is at present. Our ETF portfolio has been structured to take advantage of the impending decline with short positions in the Dow Diamonds (DIA ASE). Our initial downside target is the $94, and once broken, we see a move to $88.50. We also hold a short position in the NASDAQ 100 Qs (QQQ ASE). In our opinion, prices continue within the throes of a terminal topping pattern. Our first target is $32.60, followed by a decline to $29. In our trading strategy, we have taken short positions in two tech issues-- Linear Technology (LLTC NASDAQ) and Magma Design (LAVA NASDAQ). Our initial target for Linear is $37. From there, we expect a drop to $33.50. For Magma, a long and drawn out topping process has developed. Our initial target is $18, followed by a decline to the $16 level."

Adds Joe Sunderman,  analyst at Schaeffer Investment Research, "The shares of Amgen (AMGN NASDAQ) were in a monster uptrend from October 2002 through September 2003. Recently, the shares stalled in the 70 area. While the shares have been struggling, options players have picked up their level of optimism. The November 65 call has seen open interest shoot through the roof. Even though AMGN reported better-than-expected results, we believe that the bar is set too high. Traders should target a move to 52, which would be approximately a 50% retracement from its low in July 2002 and its recent high. A stop-loss should be placed on a trade above 64. Xilinx (XLNX NADAQ) reported second-quarter earnings that beat the consensus estimate by a penny per share. Despite the seemingly good news, the stock has not reacted well. Even though the stock is struggling technically, sentiment on the shares appears to be growing more positive as calls are being bought at a faster rate than puts. What's more, short interest is 26% below April's level, which reduces the likelihood of a short squeeze. The shares have an additional obstacle at the 30 level, the site of peak call open interest in the November series. Traders should target a move to 25.80 with a stop-loss on a trade above 31."

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