Pattern breakouts, up or down, can be powerful events for driving momentum into stock prices. But a technical failure to move in the anticipated direction out of a monitored pattern(s) can also produce equally strong price reactions and profit results worth considering for positioning. That is, if we allow ourselves that option, pardon the pun.
One of the keys to participation in this kind of situation comes from within. The tough part is the opportunity may very well require a trader to acknowledge being on the wrong side initially, despite his or her best efforts. Nobody likes admitting being wrong, well I know I don’t, but I’m a stubborn ol’ Taurus so I’m typically just “early.”
Joking aside, having the flexibility to let go of an existing bias in favor of the increased likelihood that a stock is on the verge of a new technical-based reality, while any P & L damage can be minimized and reversed without requiring the use of any TARP money, is an important skill to acquire.
The basis for today’s piece is courtesy of the world’s largest steel and iron ore producer, CVD Rio (VALE). This morning with futures pointing for an out-the-gate bout of profit-taking of about 1% in the likes of the SP-500 (SPY), shares of VALE had more than a couple reasons to flex some its heavily-weighted muscle to the downside.
This morning the company announced a profit miss of four cents on earnings of $0.70 per share while also coming up well short of Street revenue estimates of $10.82B with actual sales of $9.83B. As well and potentially good for hindering VALE bulls, base metal prices were under pressure following today’s weak GDP and personal consumption data. 
Figure 1: CVD Rio (VALE) Daily Chart
A second factor weighing in: the technical picture leading up to today’s earnings release didn’t look so hot, all things considered. Looking above to VALE’s stock chart, I’ve annotated more than a few bearish technicals worthy of keeping any potential optimism at bay. At the same time, I came up mostly empty-handed for the bulls, other than a weekly chart W4 (not shown), according to ProfitSource.
Nonetheless and despite the preponderance of bearish supports, in early trade Friday morning bears in VALE established more of a featherweight performance versus a heavyweight style decision with minor fractional losses merely matching the broader market’s own opening pressure.
Within the first thirty minutes and shares actually up on the day fractionally and outperforming the market’s bout of still underwater bargain-hunting—net, net I can’t help but think—well, if I allow myself that freedom or flexibility, that a bullish pattern break is at work. 
Figure 2: CVD Rio (VALE) September Straddle
For more directionally neutral-minded traders more intent on seeing just movement, up or down, as likely in the near future, a long straddle may be worth considering. Checking call and put prices this morning and the option to participate in such a strategy is fairly cheap versus both statistical and implied range values for the past one-plus months.
Shown above is a one lot September at-the-money 28 straddle. The volatility spread is currently priced just above 36% IV and within 13% of one-year trading range lows. At the same time, premiums are trading theoretically at a slight discount to 10 and 20-SVs and 17% below the long-term 100-SV.
Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
