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Houston, we may have a problem

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Fellow cross-town and Houston rival to Enron has shares of Dynegy (NYSE:DYN) $21.35 -21.79% seeing selling today after the energy- trading company warned that earnings for 2002 were more likely to be in the range of $2.00-$2.05 a share, which is below previous company guidance for earnings per share of $2.23.

Also weighing on the share of Dynegy (DYN) is how the company is/did deal with cash flow recognition. In April of 2001, Dynegy entered into a 5-year natural gas supply contract involving 3 separate entitites that resulted in net cash flow of about $300 million and a tax benefit of about $80 million for that year. Dynegy recorded the $300 million as operating cash flow.

After consulting with the SEC, Dynegy has agreed to record the $300 million as a financing activity in its consolidated statements of cash flows. The company assured investors that its consolidated balance sheet, statement of operations and statement of changes in stockholder's equity will be unaffected. Dynegy's management further said it doesn't believe the $80 million tax benefit will be affected, either, but "will continue to assess this conclusion," according to a filing with the SEC.

Dynegy Chart - Daily Interval

Dynegy (DYN) bulls have been steady sellers today. The "MARKET hates uncertainty" and the ties to energy trading and potential accounting issues and cash flow recognition will most likely have the stock under pressure for some time. A break below the $20 level will have bulls assessing risk to a rolled lower retracement "support" at $13. We would also note that a trade at $20 would create a sell signal on the point/figure chart and have the vertical count turning to bearish at $8.00.

Sony Bulls get upside alert

While may trading monitor was blinking with downside alerts this morning as multiple sell signals and levels of support were being triggered, I also got an upside alert in shares of Sony Corporation (NYSE:SNE). In early March, Merrill Lynch made an interesting "valuation" call that Japan might be the best risk/reward investments for bulls to be considering. That had setting up a bullish trade for longer-term bulls in shares of Sony (SNY) near the $51 level and the stock hasn't disappointed.

Sony Corporation Chart - Daily Interval

Never wanting to take a brokerage firms "call" for granted, we did some testing against the chart. We thought Sony (SNE) would be a good "representative" stock for Japan and liked the longer- term outlook to match Merrill's thoughts. As such, longer-term options traders from OptionInvestor.com are liking today's action for their October $50 calls (SNEJJ) that were profiled at $7.40, while premierinvestor.net bulls are finally getting some signs of upside from April 3rd profile. A lot of work to be done, but looking for a break of recent highs at $57.10 to have the stock testing retracement at/near $61.

In the past, I have recommended to traders/investors that they consider just 1/2 positions as the stock remains below bearish resistance trend (currently at $70), which correlates nicely with fitted retracement level of 80.9%.

Jeff Bailey
Senior Market Technician
Option Investor

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