A Fantastic Buying Opportunity

 | Aug 27, 2014 | 11:40 AM EDT  | Comments
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Stock quotes in this article:

spy

,

FB

,

sdrl

,

do

We are due for a down day. We really are, after moving 4% in only 10 days on the SPDR S&P 500 ETF (SPY) with very little recoil. A couple of downgrades in big momentum names could help us get there. Facebook (FB) saw a downgrade this morning and has yet to bounce. It is time to step aside from that name and see how the next two days play out. Yes, it has only been one day, actually one morning, but at least it shows some hesitation from dip buyers. I don't expect more than a 2%-3% dip, but the time here feels right. A short here in the SPY with yesterday's high as a stop is a great risk-reward, in my view. I'm going with the SPY $200 puts, which expire next week.

 While SeaDrill (SDRL) tries to bounce here, I'm more interested in buying a position in Diamond Offshore (DO). The news hasn't been good for the sector, but this daily chart presents a fantastic buying opportunity. The falling wedge here is actually tilted bullish. There is no way I would want to buy while in the wedge, but yesterday we broke free and pushed to the upside. Of course, we all want to catch the first day, but not in this case. In this case, I want the confirmation of the next morning -- and we are seeing it right here. The chart will be strongest over $45, but I will buy here, with a stop at $42.90. Given those parameters, one could certainly select $43 or $44 calls here as well. The upside initial target is $47. Over $47 and we have the gap fill potential to $49.

 

Diamond Offshore (DO)
Source: StockCharts.com

 

As far as SeaDrill goes, it will be an interesting watch here today. The chart is muddled, with $36 as short-term support and $37.70 as resistance. Any close above $37 after disappointing earnings and a tepid outlook is a win for the bulls, in my view. If I were long, I'd be willing to give the stock to just above $35. The damage has been done for now, but the stock is holding up fairly well after this disappointing report.

 

SeaDrill (SDRL)
Source: StockCharts.com

 

I view Transocean (RIG) very similar to Diamond Offshore, and would consider splitting a long position between DO and RIG using the low from August 25 as an alert with a stop about $0.10 to $0.20 below those levels. For now, I like the pattern on DO better, as RIG has more overhead resistance in terms of price.

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