Autodesk Inc. (ADSK)
(1/9/08)

While I think it's likely we'll see a near-term recovery in ADSK, the longer-term wave patterns suggest the better money should be made to the downside.  Like LVS and GRMN, this will ideally be a case where a little patience will be well rewarded.

The monthly chart for ADSK shows a 5-wave bull pattern running all the way back to 1999, that can be counted as having completed in December.  Even with the stock's 17% drop from December 24, very little of the bull run has been corrected.  As the weekly chart suggests, we count the decline as Wave 1 within a far larger Wave (A) correction that should ultimately retrace back towards the 29.56 low of July 2006, the site of the previous Wave (4).  Wave 1 down is an impulse pattern, and countable as such, and there is evidence that it should be complete.  If so, then the stock will rally near-term to retrace some of the decline.  The resistance areas I've drawn between 46-48 represent the .382, .50. and .618 retracements, so if the stock does bounce near-term, then these would be the most probable retracement levels.  While I'm not necessarily recommending it, one could day trade the Wave 2 recovery to make some fast cash, but that's your choice.  The idealized model would see the stock rally in Wave 2 towards resistance, and then correct sharply in Wave 3 of (A), which is where I think the better money would ultimately be made.  If the decline plays out under this model, Wave 3 would terminate between 37-34, the stock would bounce again in Wave 4, and then resume the decline to complete Wave (A) between 31-29.  As for an entry, we would use a break below 44, but only if the Wave 2 bounce comes first.  As I said, there's evidence of completion, but we still can't rule out another test of support just below 43.  Entries become a little trickier if we don't get the recovery rally first.  A removal of support at 42 is another possible entry, keeping in mind that the next key support becomes 40.39, which is the bottom part of the diagonal triangle that ended the August-December advance, and a natural support area.  If successfully taken out, the 37 area becomes the next target, which should also be considered a short-term support level.  

As an options play, we're looking at the April 2008 $42.50 Put (symbol ADQPV), which is currently selling for $2.60, though of course the pricing will change depending on when the entry target is hit.  As with all but the deepest in the money Puts, the Delta is modest at 0.36, but implied volatility is making up the difference.  

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