The major indexes recouped more than half of last week's losses on summer-like volume as the National Hurricane Center's recent forecast for Tropical Storm Ernesto had the storm's path tracking north/northeast and steering clear of oil and gas platforms in the Gulf of Mexico.
Energy futures fell sharply and overshadowed several merger announcements in the sector.
On Friday, October Natural Gas futures (ng06v) surged higher by $0.2046/btu, or +11.00% to settle at $7.34 as trader's contemplated last year's weekend arrival of Hurricane Katrina, which had the Nov05 contract jumping 19% the following Monday, but plunged more than $0.29/btu, or 14% today.
Exacerbating today's declines for natural gas prices is Tuesday's expiration of the September contract (ng06u) as traders rushed to sell rather than take delivery with winter still a couple of months away.
October Crude Oil futures (cl06v) were also weak and fell back near psychological and technical support of $70/bbl to settle down $1.90, or -2.62% at $70.61.
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BP (NYSE:BP) $68.30 -0.01% said it restored production in the western portion of its Prudhoe Bay, Alaska, field to more than 200,000 barrels of oil a day.
As if weather patterns aren't enough to keep oil trader's on their toes, some traders are concerned about the possibility that Iran, the world's fourth-biggest oil producer, may block oil exports if it suffers sanctions by the United Nations over its nuclear program. The U.N. set an August 31 deadline for Iran to halt its nuclear program, but Tehran said Tuesday that it wants to negotiate further.
The United States said Iran's response fell far short of U.N. Security Council demands it halt uranium enrichment, which can be used in the development of nuclear weapons.
Industry analysts remain uncertain as to the likelihood that Iran would cut off its oil exports, or that the West would take any actions that would force Tehran to retaliate in such a way.
Wachovia analyst Jason Schenker said, "We (the United States) don't want them to cut their oil exports, and they don't want to cut their exports," and added that oil could very well trade in the $60-$65 range in 2007, assuming economic growth continues to taper off.
Tropical Storm Ernesto - 5-day Cone / Projected Path
Friday's update from the National Hurricane Center had Ernesto headed northwesterly, but Sunday morning's forecast had the storm headed right for the southern top of Florida. When Sunday's electronic trade opened, energy futures gapped sharply lower.
I can only imagine that into Friday's close, a trader short natural gas was likely pressed to cover as he/she contemplated the possibility that natural gas prices could gap higher by 19% as witnessed on Monday, August 29, 2005, while a speculative bull felt deflated Sunday evening as Ernesto's path and natural gas futures deviated from plan.
U.S. Market Watch - 08/28/06 Close (04:20 PM EDT)
The Natural Gas Index (XNG.X) 435.65 -0.71% traded weak, but not nearly as weak as the commodity and closed just under its 21-day SMA (436.00).
Merger-related news had Kinder Morgan (NYSE:KMI) $104.27 +2.52% agreeing to be bought by a group of investors for $107.50 a share, a 27% premium to the closing price on May 26, the day before the investor group made its $100 a share proposal to take the company private.
Additional merger news in the energy sector had Woodside, an Australian petroleum firm, saying it will make a $1.2 billion, or $23 a share, bid for Energy Partners (NYSE:EPL) $24.14 +31.19% if that company's shareholders vote down a pending deal with Stone Energy (NYSE:SGY) $44.35 -6.80%.
Refiner Giant Industries (NYSE:GI) $82.22 +14.42% bucked today's weakness among many refiners after Western Refining (NYSE:WNR) $25.14 -3.27% offered to pay $83.00 a share in cash for its shares. Western said it would also assume $275 million of Giant's debt.
The CBOE Internet Index (INX.X) got a boost after Google (NASDAQ:GOOG) $380.95 +2.06% and eBay (NASDAQ:EBAY) $25.79 +1.93% said Google will exclusively display test ads on eBay's auction Web sites outside the U.S. and introduce "click-to-call" Web-site technology to quickly connect online consumers with advertisers.
The Semiconductor HOLDRs (AMEX:SMH) $33.24 +1.43% closed at its highest level since 07/03/06 ($33.34) with Intel (NASDAQ:INTC) $19.38 +2.53% and NIVIDIA (NASDAQ:NVDA) $27.39 +3.43% benefiting from an upgrade by Chris Caso at Friedman, Billings, Ramsey & Company.
Mr. Caso raised his rating on Intel to "outperform" from "market perform" saying channel checks in Asia suggest microprocessor demand is stabilizing and inventories are showing signs of improvement.
Mr. Caso cited the upcoming release of the Vista operating system from Microsoft (NASDAQ:MSFT) $25.95 +0.38% for his upgrade on NVIDIA to "outperform" from "underperform," and that the company should see more demand from personal-computer makers.
There were no major economic reports slated for Monday, but regional Fed data had the Chicago Fed Index up 0.6% in July and rising for a second-straight month despite a drop in auto production. Regional output was up 6.1% from a year earlier.
The Dallas Fed said its production index rebounded to 33.4 in August, up from a 9.4 reading in July, but largely unchanged versus over the past 6-months.
Tomorrow morning at 10:00 AM EDT we'll get a look at August consumer confidence (consensus 102.5 vs prior 106.5). Then at 02:00 PM EDT the Federal Open Market Committee (FOMC) will release the minutes from its August 8th meeting.
Good Setup for Tech Year-End Rally
On Friday, as I reviewed some of the market internals, various major market technicals and turned the page in my StockTrader's Almanac to this week's calendar, "the stars aligned" for what look(ed) to be a setup for some further weakness early this week, that would lead to some very good pullback entries, where option traders could find some lower volatilities to gather up some index call options for a very profitable year-end push.
One set of internals I noted in last week's Market Monitor at OptionInvestor.com was that for the first time since earlier this Spring, the NASDAQ's 10-day NH/NL ratio (see table at top of tonight's Market Wrap) had given a "buy signal" with a 38% reading on Friday, suggesting to me that on an intermediate-term basis, leadership was shifting more bullish.
Not that the number of new 52-week highs are growing at a rapid rate, but enough to begin outpacing the number of new 52-week lows.
In mid-July, 07/07/06 similar 10-day NH/NL readings were present for the NYSE, which was a "heads up to buy weakness" for the very broad NYSE Composite ($NYA.X).
Let's take another quick look at the very broad NYSE Composite ($NYA.X) with our high/low close retracement. This is what I would use as a "guide" and "confidence builder" for bulls to buy a potential decline in the NDX/QQQQ.
NYSE Composite ($NYA.X) - Daily Intervals
When I "turned the page" to this week's calendar for The StockTrader's Almanac, Monday's entry is "End of August murderous 6 of last 9 years, average loss last 5 days: Dow -2.9%, S&P -2.7%, NASDAQ -2.4%."
Now, I've set my QCharts cursor box to 07/07/06 on the above NYSE Comp. bar chart, where it was that day that the NYSE 10-day NH/NL ratio gave its first "buy signal," and over the course of the next 7 sessions fell roughly 300 points, or -3.6%.
While there is NO GUARANTEE that history would ever repeat itself (StockTrader's Almanac, or NASDAQ Comp showing similar trade as NYSE Composite did when its 10-day NH/NL ratio gave its first "buy signal") there's enough similarity presenting itself to be on the alert.
The "dotted blue" horizontal line at 8,388 is the 5/16/06 close for the NYSE Composite, the same day its 10-day NH/NL ratio first gave a "sell signal."
NASDAQ Composite Index (COMPX) - Daily Intervals
It would be a "tough trade" to say traders, or investors should be taking FULL positions in 4 and 5-lettered stocks at this point, but I think the "ideal" trade would be to look for some type of 3% pullback in the NASDAQ Comp (and/or NDX/QQQQ) for a bullish entry and have some CONFIDENCE for a nice sharp recovering back higher, when using a past observation from the NYSE Composite trade.
Partial bullish positions can't be criticized either at this point, with the thought that a pullback might come.
The recent spats of weakness sure haven't had much long liquidators (that is ... longs willing to relinquish their grip on recent gains).
Now let's look at the much narrower NASDAQ-100 Tracker (AMEX:QQQQ) $38.61 +0.75% and some technicals that a trader looking for a PULLBACK might relish.
NASDAQ-100 Tracker (QQQQ) - Daily Intervals
As internals look to improve for the NASDAQ, and history hints a pullback to the end of the month might present itself, I can remember the Market Wraps from mid-August and the notable gains for the QQQQ above $37.25 on August 15. A reverse head/shoulder pattern would have a VERY NICE "right shoulder" pullback at $37.25.
Conclusions: The weather can change on dime, but the internal repair and actual PRICE action for the NASDAQ suggests it should be time to focus on buying pullbacks. If history is any indications, there are some very good setups for bulls to have some confidence to be buying pullbacks and looking for some very nice gains into year's end.