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Index Wrap

20 down and 10 to go

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The major indices finished lower as there seemed to be something cited as a negative, whether it be earnings growth, revenue growth, future guidance, product pipeline, you name it, which found a generally-negative reaction to some of today's earnings.

Dow component Alcoa (NYSE:AA) $29.65 -1.59% was the first of the 30 Dow components to report earnings this quarter, and since its October 7 report date, where the company reported earnings of $0.33 per share and beat Wall Street's estimates of $0.30, the stock still holds an impressive 5% gain since its October 7 close.

However, with 20 of the 30 components having reported their recent quarterly earnings, the Dow Industrials (INDU) 9,598.24 -1.53%, which fell 149 points in today's trade, is now 56-points below its October 7 close after two-third of its blue chip components suffered its largest single session point decline since earnings season kicked into high gear.

Merck (NYSE:MRK) $45.72 -6.52% plunged to a 52-week low after reporting quarterly earnings of $0.83, which was 2-cents shy of consensus estimates. With the stock falling to a 52-week low, investors seemed little impressed quarterly revenues and bottom line EPS that grew 6% versus the same quarter a year ago.

While the Dow 30 isn't necessarily indicative of the broader market, many of the stocks within the Dow are deemed bellwethers for the various industries they represent. As such, I thought I'd take some time tonight to quickly review those quarterly earnings recently reported by 20 of the 30 components, make some general observations as to the company meeting or beating analysts estimates, benchmark current quarter's earnings versus the same quarter a year ago, and look at similar year-to-year revenue (top line) and earnings (bottom line) growth and declines. Since I've been hearing that analysts are going to be revising next quarter's earnings higher for the broader market, I thought we could test those comments, so I've posted some of the average estimates in place, and over time, we can come back to tonight's Index Wrap and see if some earnings estimates are being revised up or down as analysts and market participants continue to gather more information from various macro/micro economic reports, and comments from those companies that have reported quarterly earnings, and those that have yet to report.

Dow Components - Quarterly Earnings Table

Of the 20 components having reported earnings 15 have beat EPS estimates (green), 3 have reported inline (blue) and 2 have disappointed on the bottom line. Only 2 of the components SBC and T have shown revenue declines compared to the year-ago quarter, and all be darned if both of those company's are telecom service providers.

While it would appear that revenue growth has been realized outside the telecom services space, there is still some work to be done for bottom line growth, as 12 components show improvement, while 8 of the components having reported recent quarter's earnings still have a way to go.

At the far right of the chart, I've used green arrows to highlight current analysts' estimates that look for growth at the bottom line (GE, INTC, GM, IBM, CAT, HON), red arrows where analysts aren't seeing a quarter-to-quarter increase in EPS (JNJ, MO, UTX, MMM) , and blue where analysts currently predict little quarter-to-quarter earnings acceleration or decline.

One thing a trader/investor might look to do with the above data is this, but with observations over time. SBC and T look like they've dialed up a wrong number if calling for fundamentals, but with all but three equity sectors showing declines on my U.S. Market Watch screen today, the North American Telecom Index (XTC.X) 531.60 +0.34% actually posted a 1.8-point gain in today's session. While this is a short-term observation, to me this may hint of some short-covering in the sector.

Hold on! Telecom equipment provider Lucent (NYSE:LU) $2.78 +13.4% is an XTC.X component and this once-favorite technology stock may be finding its October beaten down tech bid that the Stock Trader's Almanac discussed on its Monday calendar notes.

To the subscriber that responded to last Friday's 01:00 PM EDT intra-day update and gave me a list of "old favorites," you had mentioned CIENA Corp. (NASDAQ:CIEN) $6.27 -3.68% as a tech-stock that had once been a high flyer. CIEN sells telecom equipment, so lets stick an upside alert on CIEN at $6.65, which would mark a relative high of its current 2-week consolidation.

Getting back to the Dow components. One thing that a fundamental investor needs to be aware of when looking at quarter-to-quarter EPS (Q3 to Q4 as an example) is to account for potential seasonality. For instance, 3M (NYSE:MMM) $75.82 +0.42% traded a 52-week high on an intra-day basis today, but you will note that analysts Q4 estimates are currently at $0.74 per share. I looked back at some of MMM's past Q1, Q2, Q3 (which MMM just reported) and Q4 has consistently shows a decline to Q3 EPS, so I would have to say MMM is a stock where its finds seasonality slowing in Q4.

Again... the main reason for posting next quarter estimates at this point, is so that we can come back in a couple of weeks, revisit some of the estimates, and see if we can't get a feel for what analysts are doing with their estimates as they take in observations from broader economic reports, or various business/sector specific trends.

Well, I thought I'd post the 30 Dow components and some of their fundamental data that has been reported.

I still firmly believe the MARKET sniffs out bullish and bearish fundamentals before they are disclosed by a company, which eventually will impact the price action of a major market average.

Case in point is a past bullish profile I made in shares of Merck (NYSE:MRK) $45.72 -6.52% from $57 and then again at $58 as the stock gave a spread-triple top buy signal at $58. The stock traded as high as $60 (before the Medco spinoff), but somehow sniffed things out, MRK eventually gave a triple-bottom sell signal at $51, and may now be on its way to achieving that bearish count of $39.

Enough on individual stocks, but its these individual stocks, that one-by-one make up the various sectors and indices you and I will trade.

Let's take a quick look at the pivot matrix, and we saw some tests and violations of WEEKLY S1s today, and these were levels where I was looking for pullback bullish entries earlier in the week, so I've got some work/analysis to perform. The Dow Diamonds (AMEX:DIA) $96.21 -1.42% saw trade at its WEEKLY S2 of $96.07 before edging back up by its close and would immediately have me assessing further potential downside to the MONTHLY Pivot of $94.18.

Pivot Analysis Matrix

Before I start on the matrix, it should be noted that for the Dow Industrials (INDU), SPX and OEX, today's HIGH posted for the DAILY is the recorded level of opening trade, but was really never traded as we had a pretty notable gap lower open, where that first 5-minute high was pretty much the high of the day in actual trade. As such, SHORTER-TERM traders using the DAILY levels, will want to use the DIA as a INDU replacement and the SPY as an SPX replacement on the DAILY levels.

With that said, I've highlighted in BLUE for the DAILY levels, those levels, if traded, I think would be earliest sign of strength after today's declines.

The BIX.X and NDX.X highs for today accurately depict today's session high. As aggressively traded as the NDX/QQQ is, this morning's opening bar high in the QQQ of $34.93, found selling 50-minutes later at $34.93 again, and this intra-day observation shows some determination, or still incomplete sell orders from the open were at this level.

For the QQQ I've "dashed pink" the $34.20 level. In after-hours trade, I received a downside alert I had set at this level, I alerted traders in the Market Monitor, and profiled that short- term bears close out my profiled from late yesterday bearish trade at the $34.23 level, or at least lower profit stops to $34.56. Last tick on the QQQ is $34.25 and while after-hours trade is no indication for the next day, it has been my belief, based on observation, that when a level in the matrix is traded, it can "turn on" a computer to then buy or sell the level traded. I've also "dashed pink" tomorrow's DAILY S1 of $34.16. This is a level that I think a BULL does NOT want to see violated tomorrow. My thinking EARLY in the session is that there may be some jittery BULLS that see another gap down session (if we open at $34.25, it will be a gap down from the 04:15 PM EDT close of $34.57) and $34.16 would be the fudge room to the downside for any computer buying to try and show enough muster to have the QQQ firm early. Remember how the QQQ may have overdone things to the upside when it tested WEEKLY R1 yesterday? My "overdone on the downside" on a NEAR-TERM basis would be QQQ $34.16.

The BIX.X's correlative DAILY S2 and WEEKLY S1 near 320 are considered sector support, that I think major index BULLS (INDU, SPX, OEX, NDX) need to see support tomorrow in the BIX at 320. If the BIX.X violates to the Downside, the WEEKLY S2 and MONTHLY Pivot levels for the major indices are in play!

I want to start with the QQQ tonight, as its chart shows some DIVERGENCE from the other major indices in its Stochastics oscillator, which at this point would be strikingly similar to September 10, 11 and 12. This may be an IMPORTANT observation tonight, as a trader would continue to look for SIMILARITY and history to repeat itself, but if it DOES NOT, then may be a signal that something has changed!!!!!

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals

I see very similar oscillator setup near-term as we saw back on September 10, 11 and 12, when the QQQ pulled into its 21-day SMA, and one of our "cloned trends." I went back and reread the September 10 Index Trader Wrap, and wanted to see what we were thinking in the QQQ that night. Here's the link to that wrap. http://members.OptionInvestor.com/Itrader/marketwrap/iw_091003_1.ASP

Take note too that the QQQ, on September 10, closed at $33.26, and at that time had close 1 penny below its WEEKLY S1 of $33.27. The next day, September 11, the QQQ opened at $33.27, fell to $33.01, then closed at $33.63. The next day, September 12, the QQQ opened $33.34, traded a low of $33.05, and closed $33.83. Over the course of the following 4 sessions, the QQQ eventually traded a new 52-week high.

This recap of history, now becomes a test! It is my belief that a good trader continues to trade a profitable tendency, until DIVERGENCE from the past is found. It is this thought that had me alerting shorter-term bearish traders in the QQQ that the $34.20 level and WEEKLY S1 had been traded.

I think a BULL that does look long the QQQ near-term (next two days) must honor a stop under WEEKLY R2, or at least have that as a downside RISK assessment.

Today's trade saw a net loss of 1 stock to a point and figure sell signal in the NASDAQ-100 Bullish % ($BPNDX). Still "bear correction" status at 77%.

Before I move on, I also wanted to point out that the QQQ closed below its Friday's lows. I mention this as it relates to eBay (NASDAQ:EBAY) $55.20 -1.5%, holding its rising 50-day SMA of $55.10, and still above Friday's low of $53.70. Remember it was on Thursday evening of last week that EBAY reported earnings, and may not have given as bullish of guidance as some market participants were looking for. Still, at today's close, I can't figure out why EBAY is still above Friday's low and even its session close of $54.79.

Disclosure... I currently hold a bullish position in EBAY stock, and hold a BEARISH position in an EBAY $55 put. I consider this a "neutral" position, but continue to follow EBAY as a pulse stock that represents what may be considered a lofty valuation.

OK, try "burning" that QQQ chart into your mind and lets look at the S&P 500 Index (SPX.X) 1,030.36 -1.49%. I know that it closed below its WEEKLY S1. Is there anything in its chart, that would tie in with the QQQ "zone of support" from $34.20-$34.25? This too becomes a test for tomorrow, and next couple of days.

S&P 500 Index Chart - Daily Intervals

A similar "zone" of support shows up in the SPX, but here its is the MONTHLY R1 of 1,027 and WEEKLY S2 of 1,026, where I would think institutional computer programs should be set for buying... IF INSTITUTIONS BELIEVE that the recent earnings reports given in the past couple of days, AFTER the SPX set a new 52-week high, is still in play.

A trade scenario for a BULL looking for pullback entry is to BUY 1,027, STOP 1,019, MAX target a bounce back higher to 1,059. This trade scenario would be very similar to September 10-18 time table, IF history is to repeat. A STOP at 1,019 may be used to allow for any potential filling of a gap from 10/02-10/03.

Today's trade saw a net loss of 5 stocks to new point and figure sell signals in the S&P 500 Bullish % ($BPSPX) as the bullish % fell 1% to 80%. Still "bull confirmed" and would take a reversal to 76% to achieve "bull correction" status.

Now, burn that chart of the SPX in your mind, and concentrate on the MONTHLY R1 and 21-day SMA as relative benchmarks. Ask yourself "why is the OEX trading...."

S&P 100 Index (OEX.X) Chart - Daily Interval

Do you see the technical weakness in the OEX based not only as it relates to the MONTHLY R1 and today's close, but also the OEX closing below its 21-day SMA? Based on today's trade and observation of MRK -6.52% and PFE -2.79% getting hit lower, it once again becomes an observation that the DRUG stocks are having greater negative impact on the OEX.

This is IMPORTANT observation in my opinion, and near-term an OEX trader monitors MRK and PFE from time to time, but may also understand why it becomes VERY important for the financials to show strength to offset the weakness in DRUG stocks. This is also important, but maybe a slightly lesser degree for the SPX. I feel the OEX is perhaps the WEAKEST looking index right now, and if breaks much below the 510 level, it would be the major index that might signal further WEAKNESS to MONTHLY Pivot.

Again... Oscillators VERY similar to September 10, but a trader cant put food on the table based on an oscillator. It's PRICE action that matters most.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull correction" status at 79%.

I didn't notice until after today's close, but our "pulse" stock in the banks found Washington Mutual (NYSE:WM) $41.77 +3.21% bucking the broader market trend after reporting earnings today.

Dow Industrials (INDU) Chart - Daily Interval

A 150-point drubbing is not good for a BULL's psychology, and if simply thinking psychological, a close below 9,500 would only be more damaging. Other than that, the INDU along with the NDX/QQQ have been the more technically strong indices in recent months as they had always been the first to achieve new 52-week highs. As I look for strength when current weakness is found, it would be the INDU and the MONTHLY R1 to look for support. I make note in the above chart that it has been my observation that the INDU has had a tendency to trade 10-points either side of a WEEKLY pivot analysis level. 10-points because of the Dow's larger price scales than the other indices.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 83.33%.

Jeff Bailey

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