Option Investor
Market Updates

Iraq Dominates the News

HAVING TROUBLE PRINTING?
Printer friendly version
If Iraq did not dominate the news, traders might already be thinking ahead to the Consumer Confidence and Existing Home Sales numbers due out tomorrow. In concordance with those economic numbers, they might be watching Lowe's (LOW), which reported today before the bell, or competitor Home Deport (HD), reporting tomorrow before the bell. They might be looking ahead to Friday's revision of the Q4 growth. Some expect an upward revision, an expectation that leads many to conclude that as bad as U.S. growth prospects might be, they're beginning to look good compared to those of Japan and Europe. Wim Duisenberg, head of the European Central Bank, said this weekend that the Eurozone's economy might not recover this year.

Iraq does dominate the news, however. Friday, U.N. Chief Weapons Inspector Hans Blix asked Iraq to destroy Al-Samoud 2 missiles by March 1, but as of this writing, Iraq has declined to assure UN inspectors that it would meet the demand. Iraqi Lt. General Hossam Mohamed Amin instead commented this weekend that Iraq was studying the order, and hoped to reach a peaceful resolution. Amin claimed that the problems with the missile's range could be explained.

Saying that the missile's range exceeded both the 93-mile limit set in 1991 and the maximum diameter set in 1994, Blix had ordered the destruction to begin Saturday. In addition, in an interview with Time Magazine, Blix reportedly labeled Iraq an organized regime that certainly would know what happened to its stocks of anthrax and VX nerve agent. Iraq presented no records of the destruction of these materials.

These developments occur while the U.S. reportedly prepares to introduce a new resolution to the U.N. Security Council. That U.S.-backed resolution may already be doomed, however, as China and France, two of five U.N. Security Council members with veto powers, said the first resolution was adequate and no second resolution was needed. France plans to introduce a separate proposal in a memorandum to the council.

U.N. Secretary-General Kofi Annan said an Iraqi refusal to obey Blix's order would force the Security Council "to make a decision." He expects Iraq to comply, but U.S. Secretary of State Colin Powell spoke in Japan Sunday and said the U.S. wants a Security Council vote after Blix reports on March 7. His statement led many to speculate that he was setting a timetable for war. Since he emphasized that the U.S. was ready to attack as soon as the order was given, those speculations may be right.

However, despite these developments, companies continue to release earnings. In Europe, supermarket owner Royal Ahold said it would restate earnings for the past two years. CNBC World reports that the biggest problems were in the U.S. Foodservice division, which includes U.S. Giant and Stop & Shop chains, and Disco, the Argentine retail division. The CEO and CFO both resigned, and the stock had lost 70% of its value in early trading. This report revives worries about accounting issues.

In the U.S., retailer Lowe's (LOW) reported earnings this morning. Expected to earn $0.33/share, up from last year's $0.28/share, LOW surprised analysts by reporting $.40/share on Q4 net earnings of $319.40. Revenue rose 17%, a figure in line with expectations. LOW guided analysts higher for full-year earnings, to $2.16-2.20 from $2.11. LOW's expansion into major U.S. metropolitan markets helped boost profits. It's perhaps important to note that same-store sales rose 4%, a number down from the same period a year ago, when same-store sales rose 7.4%.

Unlike home furnishings retailer Restoration Hardware (RSTO) and floorcovering products manufacturer Mohawk (MHK), currently on the OIN put list, Lowe's and competitor Home Depot both rose during Friday's trading. When I pulled up LOW's chart, it looked interesting from a technical standpoint, but perhaps not tradable for anyone other than scalpers. First, some background. LOW is on a P&F sell signal, with a descending triple bottom breakdown. It's below its bearish resistance line. Despite today's earnings, this P&F evidence means that going short/put on rallies should be the best policy, but is that a safe policy? Let's look at more evidence.

On the daily bar chart, LOW has been trading in a downward-sloping regression channel since mid-October. On the linked chart, the regression channel is drawn in blue. The teal-colored vertical lines show that each time LOW approaches the top of that channel as the 5(3)3 daily stochastics approach overbought levels, prices roll down toward the bottom of the channel.

LOW Daily chart:

All this looks bearish for LOW, doesn't it? It does, with a couple of important caveats that may change a potential put play's feasibility. First, LOW has been outperforming competitor HD of late. In addition, there's P&F support at 32, a level that's also near LOW's August lows. If LOW does turn down on schedule now that it's bumping up against the top of that regression channel and stochastics are looking a bit toppy, it will hit the bottom of that channel just barely south of 32 again. This gives three possible reasons for LOW to find support at that area.

Is LOW setting up for a double-bottom near 32? It's possible, although P&F evidence doesn't yet present that as a probability. Weekly 5(3)3 stochastics are beginning to cycle up, but the weekly price chart is also beginning to take on a rounding-top appearance, belying the promising look of those stochastics. In order to confirm a double bottom by pushing above 46, the peak between the two troughs, Lowe's must first stop its descent without falling much below 32. It must push up through recently violated support just above current levels. Those steps could be accomplished today if the conference call goes well, investors ignore the same-store sales figures in favor of the headline numbers, and the U.S. equity markets cooperate.

Then LOW must push above a long-term descending trendline that's now crossing just north of 40. That line is marked in red on the chart. It's not until LOW breaks through that trendline that it will have formed a higher recent high, the first step in any continued upward move. LOW would have to climb back to 43 before it gave a new buy sign. So, even if the conference call goes badly and LOW drops down toward 32 again, where the next attempt at a bounce might be expected, the potential reward might not justify the risk, at least from Friday's closing levels. That's about a 4-point risk up to that descending trendline for a possible 4-point gain back to 32.

What about a call play? Risk/reward remains even worse here since that P&F sell signal must be factored into the play. A bullish player would be trading against the trend. That bullish player would risk a fall back down to 32-32.50 for a potential reward of a move up to 40-40.5, at which point the descending trendline might halt LOW's climb, at least temporarily. Again, that's a 4-point risk for a possible 4-point gain, with perhaps less likelihood of the gain being achieved.

The P&F target lies below 32, and it's possible that a put player could profit considerably on this stock. There's the potential that a double-bottom pattern may be setting up with an eventual target of about 48, so it's also possible that a call player could profit considerably. However, many traders prefer not to enter plays when they can make an equally plausible argument for the stock moving against them as they can for the stock moving their direction, as perhaps can be done with LOW. As I scanned charts this weekend, I noticed many instances when I could pose both a bullish and a bearish scenario for this week's behavior. Be careful trading out there early this week.

HL Camp and Company lists fair value today for the S&P 500 at -$0.16, and the site states that the value will not change during the day. The company has set their computers for program buying at $0.64 and program selling at -$1.89.

Linda Piazza

Intraday Update Archives