AT&T, Inc. (T)
(1/22/07)

Two factors have us considering AT&T for a short play.  One is the current and extremely low Put/Call ratio of 0.01, indicating complacency reigns supreme in the stock.  Ultimately, there's only one direction the ratio can move from here, and it should be associated with selling.  The other factor is the possibility that a full ABC zigzag retracement in the stock has occurred since its 2005 low, and that a sizeable correction could therefore be in the cards.  

The monthly chart displays the primary wave trends I just discussed, and 5-wave patterns do appear complete for both the (A) and (C) legs, including equivalence of length.  Also, the subdivisions of Wave (C) count best as completed with a top at 36.21, a high made on December 29.  If we're correct, then it means one of two possible outcomes: the start of a Primary Wave ( C ) decline, or an X wave decline if the recovery pattern from 2005 develops as a double zigzag.  In either case, and if we can count Wave (C) as complete, then there should be at least some near-term downside in the stock.  Were an X wave decline to develop, it would be mostly corrective, so that would be the tip-off.  The main risk for the short play is whether Wave (C) in fact topped.  The 36.21 high put it right in between the 38.2% and 50% retracements of its Wave ( A ) decline (at 33 and 38, respectively), and while the rally from the January 8 low of 33.21 looks fully corrective, we can't discount another move up.  One positive for a short is that the excessively low Put/Call ratio, which shows buy interest to be already quite extreme, has moderated the extent of the recovery from January 8.  The other risk factor is that the pullback from 36.21 might only be a fourth wave.  If so, the downside would be limited.  Taking these risks into account, and considering the potential if a top is in, we'd suggest a violation of 35 as an entry.  Since a move above 36.21 indicates another high remaining, you may then want to set your stop a little above this to limit risk.  The first key downside retracement would be at the 33 area, and if the stock stages a recovery, then more likely the pullback was a fourth wave.  More ideally, the decline would move towards lower Fibonacci support at 31.66 or 30.75.  We'll also have to monitor the developments if in fact the harder Primary Wave ( B ) top was made, as it would indicate Wave ( C ) would get much below these levels.  

For the option play (and I think this would be a good way to play it) you can consider the July 2007 $35 Put (symbol TSG), currently selling for $1.75 with the Delta at 0.46.  

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