בס״ד

This Building Stock is Termite Ridden and Due to Collapse… And 20% and 369% Winnings! (BMCH, BJ, USO/XLE)

Posted on December 10, 2020

We’ve got another stock on the brink of a mighty tumble today, but before we get there, we’ve a couple that require your attention.

The first is our BJ initiative, the details of which can be found here.

In short, we have an open synthetic short at 45 (long PUT/short CALL) expiring next Friday, December 18th, an open STOP buy order at $45.01 and a debit on the trade of $5.80.

And…

And we’re urging you to shut her down.

The long PUT goes for $7.00 even, and we say take it.

The short 45 CALL will cost you a nickel to repurchase.  Do it, and toss the protective STOP buy order.

Total win is $1.15 on $5.80 spent.  That’s 20%.  And it’s just fine.

Our USO/XLE pairing was set back on April 27th in a letter called Shooting Oil in a Barrel, where we took advantage of a once-in-a-lifetime pricing anomaly to get in big on the NYMEX-based crude ETF, USO.

It was a short XLE CALL spread set against a long USO CALL that we subsequently turned into an all out bullish bet when we repurchased the short CALL here.

And today?

We’re sitting on the long XLE January 15th 45 CALL and the long USO December 16th (2022) 3 CALL, which today carry values of $0.34 and $1.16, respectively.

And we say, sell ‘em.

Your final take on the trade is $1.50 on $0.32 spent.

That’s 369%.

And that, too, is the work of the Almighty.

And now for this week’s initiative.

We’re trading BMC Stock Holdings (NASDAQ:BMCH) today, retailers of wood and wood products for the building trades.

The stock has a reasonable fundamental profile (P/E is 23.90, P/B is 2.81, Dividend Yield is zippo), but technically it looks very weak.

Here’s the daily chart –

Technically, we have a number of key indications to highlight.

  1. First, price is now riding major support at 46. It’s done so for six straight sessions
  2. Any break below that level would also sunder the short-term, tan colored MA, also at 46.
  3. Rising sharply is the bottom edge of a three month trend channel (in blue) that would also be breached on any break lower.
  4. As for downside support thereafter, we have a rising 137 day MA that aligns with the bottom edge of major trend support at roughly 37 (also in blue). Below that, there’s a massive gap to be filled to 32.
  5. And it’s because of the action on the RSI and MACD fronts that we’re anticipating all of the above.  From overbought in late August (circled, in red), both RSI and MACD have diverged strongly lower against price, with RSI now resting on her all-important waterline.  MACD could be several days from reaching that point if the action continues to stagnate or move lower.  At that point, technical selling would be weighty.

Have a look now at the weekly chart, which also presents weakness –

A few points here –

  • To begin, a weekly bearish engulfing pattern (in blue) is crystal clear and threatening.
  • The distance the stock has climbed against its extended growth trajectory – represented by the long term weekly moving averages – is stark and unrealistic (in black).
  • And finally, RSI is declining, while
  • MACD rolls over (in green).

All of which points to an intermediate top – and the trade outlined hereunder…

A Jew and His Gold recommends you consider a synthetic short sale, by selling the BMCH January 15th 45 CALL for $2.75 and buying the BMCH January 15th 45 PUT for $2.60.  Set a STOP buy order for the stock at $50.35.  Total credit on the transaction is $0.15.

Rationale: with downside imminent, we believe the synthetic short is the best way to go.  It’s cheap (offering a small credit), and it’s protected by the STOP buy order at $50.35.

Our maximum loss for the trade is $5.20 (the difference between the short CALL and our STOP, less the initial credit).

Maximum gain is unlimited.

We’ve set the STOP slightly higher than the recent all-time high at 50.26, to allow for some play.  Feel free to adjust this to your own taste for risk.  Just remember, though, that any STOP purchase should lead to an immediate entry of a STOP sell at the same price to keep the trade square.

Until it’s closed, the trade should always have an open STOP order.

Breakeven for the trade comes at $45.15.

With the stock now at $46.39, that would entail a decline of 2.6% over the next five weeks.

Many happy returns and a freiliche Chanuka to all our wonderful readers!

Matt McAbby

 

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