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GDP revised lower to 5.6%

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This morning revised first-quarter Gross Domestic Product shows the U.S economy grew at a revised 5.6% annual rate, marginally slower than the 5.8% estimated a month ago. Economists were looking for the revised number to be 5.8%.

Today's final Q1 GDP number shows the best performance since the second quarter of 2000, when the slowdown in the stock market began. The economy grew 1.7% in the 4th quarter and 1.2% in all of 2001.

Goldman Sachs lowers rating on chip equipment stocks

Goldman Sachs is lowering its rating on the chip equipment sector to "market weight" from "market overweight," and downgraded each stock in its universe, citing recent stock outperformance despite intermediate-term fundamental concerns. Analyst James Covello said he feels "more comfortable on the sidelines" until the end- demand outlook becomes clearer.

Stock futures lower

Stock futures are lower this morning as S&P futures trade down 2 points at 1,095. NASDAQ futures are lower by 18 points at 1,271.50, while Dow futures are down 27 points at 10,193.

Fair value for the S&P 500 today is $0.22. That price will not change during the session. HL Camp & Company has their computers set for program buying at $1.72 and set for selling at $-0.64. Fair value for the NASDAQ-100 today is $2.20.

I wouldn't want to be short at $32

I will say nothing more than "I wouldn't want to be short shares of Intel (NASDAQ:INTC) $29.39 -0.67% if the stock trades $32."

In yesterday's 01:00 update we talked about the "inchworm" scenario and how a market moves. We thought the biotech's and the software stocks were trying to "anchor" themselves and that a tech rally might be at hand. With the Biotech Index (BTK.X) gaining 7.4% by session's end, that has me thinking we were onto something.

Last night, I began trying to "tackle" the semiconductor sector and try to identify some "key" stocks for traders to be monitoring. A couple of weeks ago we looked at the point and figure charts of Intel (INTC) and Applied Materials (NASDAQ:AMAT) $25.57 -2.25%. Both stocks are up about 15% from the time they both successfully tested their bullish support trends on their point and figure charts.

Now I see that both Intel (INTC) and Applied Materials (AMAT) have POTENTIAL reverse head and shoulders patterns developing on their bar charts. For the bar chartist, these can be potentially powerful bullish patterns if/when the necklines are broken to the upside.

I'm going to focus on Intel (INTC) for now. There is some talk that Intel may lower its cap-ex budgets near-term and whether it is true or not, I'm going to simply error on the side of caution and uncertainty and therefore look to INTC near-term for signs of bullishness that could have the Semiconductor Index (SOX.X) finding a spark that would get the "head" of our inchworm stretching forward.

Intel Chart - Daily Interval

I've tried to diagram in the chart above the upward trend that bulls are most likely currently playing. At the same time, the dashed red line is the trend that bears are playing. These two trend then create a rather MASSIVE wedge that defines the playing field where bulls and bears will do battle. If one of these trends are to be broken, the move in the direction of the break could be spectacular.

I've also diagramed out what looks to be a potential reverse head and shoulders pattern forming. This is not "conventional" where one would expect the reverse head and shoulders pattern to form. Most technicians note the pattern at the longer-term bottom of a cycle. However, with almost daily events creating market uncertainty (economic data, Middle East tensions, currency, terrorism, you name it) the current market environment is perfect for both head and shoulders and reverse head and shoulders patterns to be forming.

Before a bear "ignores" this pattern, then we will point out the head and shoulder pattern that developed earlier this year. The $31.50 level is just about "identical" as the neckline isn't it? To me, this $31.50 level become a major level that traders should monitor and understand (bullish or bearish).

MACD. This can become the trader's best source of information in the future regarding DIVERGENCE. This is where the trader will look for DIVERGENCE from the past, or SIMILARITY as it relates to past trading. In the past, MACD has rolled lower from these levels and followed stock price action.

The DIVERGENCE most likely would be found if INTC breaks above the $31.50 level, which would then have MACD kicking higher. All of a sudden you get DIVERGENCE and bullishness prevails to the upside.

So why $32?

Let's now revisit the point and figure chart of Intel (INTC). Our last "visit" came on May 3rd in the 01:00 Update "Are the semiconductors done?" when the stock was trading $26. In that very update, we mentioned that "the line in the sand was drawn" and that both Intel and Applied Materials (AMAT) were just nearing their bullish support trends and that before a bear stuck a fork in either of these stocks on the thought that "they were done," that the bear needed to understand and observe the trend from these institutionally viewed charts.

Intel Chart - $1 & $0.50 box

The "bearish signal reversed" is highest probability pattern for bullish traders. According to Professor Davis' study, the bearish signal reversed is profitable 92% of the time, for an average gain of 23.2% in 2.5 months. On INTC's chart, that pattern would unfold with a trade at $32.

Why can this be such a bullish pattern? Think of a tennis match, were supply (O) and demand (X) are matched against each other. As the game is played, supply (O) gets the upper hand for a brief amount of time and the stock price declines. But then demand (X) battle back, but not to the extent it was able to in the past. Then supply takes over again, driving price to a new relative low. Then demand battle back again, and price rises, but once again, falls short of a prior demand level, thus a lower high is created.

Just as you may have seen in a tennis match, supply (O) keeps getting the upper hand and begins "creeping" toward the net, each time forcing play.

Then, out of nowhere, you've seen it, the player that has been getting pushed farther back toward their baseline (X in our example), rips a spectacular passing shot past his/her opponent and the crowd jumps to their feet with applause and total amazement. Sometimes those shots turn out to be a pivotal turning point in a tennis match.

This is perhaps what happens between supply and demand in the bearish signal reversed. Since January (red 1), supply (O's) has slowly been putting pressure on demand (X's) and working the stock lower.

But traders that have been following Intel (INTC) since May 3rd, witnessed the sharp rebound, when on May 6th (the next trading session) INTC traded the $26 level, tested its bullish support trend and then rallied strong to the $31 level.

Can you feel the pressure building? It's there isn't it?

Between the bar chart and the point and figure chart, we get a pretty good feeling that there are probably a lot of decisions that are going to have to be made somewhere near the $31.50 and $32 level.

Right now, I can't describe what a "toss up" a trade in Intel (INTC) is.

Even the relative strength chart of Intel versus the broader S&P 500 Index (SPX.X) shows very similar attributes as the point and figure chart.

Intel versus S&P 500 Relative Strength Chart

Even in the RS chart of Intel versus the S&P 500 we see that Intel's relative strength is undergoing similar dynamics as its point and figure chart. Once supply and demand get in agreement, watch out!

One thing I've noticed over the years from RS is this. Stocks tend to go "in favor" and "out of favor" for extended period of time (12-24 months). We see that in Intel's RS chart. Since about September of 2000 (after red 9) where I've marked the chart "Bearish RS reversal." See how that long column of O's seemingly signified the MARKET was flushing the stock? Yes, it battled back a bit from that "flush" but boy did it's RS get "whacked" not long after.

Now, in November (red B) and December (red C) we see a long column of X on the RS chart. This could very well be a signal from the RS chart that the stock is starting to come back into favor. Could it be a preemptive sign of things to come longer- term?

I can feel it in my bones! Well, kind of......

It's 01:00 AM EST on Friday morning. I don't have this morning's economic data. I couldn't write all this stuff by the time I did get it anyway. Heck, recently it hasn't seemed to matter that much anyway (the economic data that is).

But I'm going to put on my bullish horns for an Intel (NASDAQ:INTC) $29.39 call options trade.

I'm drawing the line in the sand, right here, right now. If you're a bear in Intel, then sit the offer and I'll give you the up-tick!

I'm going to recommend that an options trader buy 1/2 bullish position in the Intel October $30 calls (INQJF) $3.00. Then if the stock trades $32, give them bears some "what for" and round out to a full position. The October expiration gets me far enough into Professor Davis' 2.5 month time frame.

For stock traders, same thing goes. I'd take 1/2 bullish position at $29.39, stop $25, and give them bears some "what for" and round to full position on a trade at $32. The reason I'm scaling back to 1/2 position, it that I want to give the stock room to $25. Yes, that's some "heat" from $25, but by cutting our first position entry down to 1/2, we are thereby reducing our capital exposure and can then take a little more "heat."

For those that don't mind enjoying a good tennis match, then bullish traders can wait for a trade at $32 to look long, then look for some confirmation from the relative strength chart and a "buy signal" there.

For now. Intel bears are on your own. They know the game plan and what you have to do. The bears are playing the current bearish vertical count of $22 and trying to break the bullish support trend in order to get there. But if INTC trades $32, then I think the stock should have a nice run higher.

Jeff Bailey
Senior Market Technician
Option Investor

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