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Daily Newsletter, Wednesday, 01/26/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Watch List
  5. Trader's Corner

Market Wrap

Deja Vu

Deja Vu

Market bulls felt a touch of deja vu Wednesday morning, and it caused them to swoon for a few hours. That deju vu occurred when early bullish sentiment sent indices up to Tuesday's highs, only to see indices stalling at the same place they had Tuesday. By the end of the day, however, tech bears suffered the worst of the swooning effects.

New long positions remain iffy ahead of the Iraqi election and OPEC meeting. Bears should be chary of positions, too, with at least one successful market analyst suggesting staying flat now until next week. Trading conditions remain tricky. Those bears determined to find a play might enter new positions on rollovers beneath the rising red trendline, but should be prepared to jump out if the SPX vaults higher instead. If the SPX moves down, prepare to protect profits at this week's low, the 100-dma and again at the 1140-1143 zone, with important Fibonacci retracement levels coinciding with those averages.

With techs bouncing strongly into the close, the Nasdaq's daily chart still gives bulls reasons for concern. The bounce may be technical, heading up to test last week's gap and violated head-and-shoulder neckline. Bulls in long positions should have profit-protecting plans in place for the test of those levels.

The Russell 2000 led the techs higher Wednesday. Of concern, however, is the Russell 2000's volatility after breaking above a neckline for a large inverse H&S on its weekly chart. Such volatility after an upside breakout proves worrisome. That neckline, in red on the chart below, coincides with the 19.1 percent retracement of the RUT's rally off the summer low and the 50-sma. Until the Russell 2000 moves above those resistance levels, the bounce remains suspect. Bears might watch for a rollover from below the 630 level while bulls want to see a thrust above it.

The gains made on the Dow and its sister index proved more tentative than any of the previous three, however. The TRAN produced a small-bodied candle at the top of its climb, almost a doji. The Dow did not produce a doji, but the day's trading left a long upper shadow behind.

In addition to tech-related indices, other sectors performing well included the retailers, biotechs, airlines, utilities, energy and homebuilders. The DJUSHB, the Dow Jones U.S. Home Construction Index had tacked on 2.12 percent by the end of the day.

With U.K. Central Bank member Barker bringing the U.K. housing market into focus, saying that there's a greater likelihood of housing prices declining than rising, perhaps U.S. investors had also turned to an examination of the U.S. housing market. The DJUSHB had been declining off its January 20 high, also hit as FOMC members spent last week alerting the markets that accommodative rates would not continue forever.

In that climate, the release of the Mortgage Bankers Association's usual Wednesday morning data might have begun garnering more notice than usual. For the week ending January 21, the seasonally adjusted index of mortgage applications prepared by the Mortgage Bankers Association fell 3.6 percent. The purchase index fell 2 percent, and the refinancing index dropped a heftier 5.7 percent.

These decreases occurred despite a lower rate for fixed 30-year mortgages, but occurred during a holiday-shortened week. Whether markets expected worse news or were more focused on last week's lower mortgage rates than on a decrease in mortgage activity, the strength in the homebuilders contributed to early bullish sentiment. The homebuilders climbed at the open, faltered when crude inventories were released, and then took off again, never looking back.

Also helping early sentiment was news coming out of ORCL's analyst day. ORCL's analyst day might have assumed more importance due to overnight developments in Europe. ORCL rival SAP's outlook on margins disappointed, with that disappointment at least partly responsible for erasing early gains in the DAX and damaging sentiment throughout Europe. SAP claimed that it had gained market share in the U.S., however, and ORCL investors likely wanted to know if ORCL would suffer ill effects from SAP's gained market share.

They were soon reassured. Pre-market, ORCL announced an earnings view that beat expectations for 2006, with ORCL saying that 2006's earnings would increase 22-28 percent above 2005 levels. The company set a target of 76-80 cents for 2006 when analysts had previously expected 70 cents. The outlook for 2005 matched expectations, rather than surprising to the upside, but the results cheered investors enough to help boost sentiment as markets opened. By the end of the day, however, much of that early sentiment and the early gains had been erased. ORCL closed higher by only $0.03, dropping from its opening highs throughout the day. In this tech stock, at least, investors sold into the highs.

Earnings reports from TXN Tuesday afternoon and from SBC Communications (SBC), Eli Lilly (LLY), Altria Group (M0), and Eastman Kodak (EK) also sent those stocks higher in pre-market trading, boosting sentiment, while disappointments from Piper Jaffray Cos. (PJC), E Trade Group (ET), Diebold (DBD), AVX Corp. (AVX) and GlobalSantaFe (GSF) weighed against pre-market sentiment. Curiously, with the exception of GSF, almost all those stocks, both early sentiment leaders and early sentiment losers, closed off their highs of the day, and many in negative territory.

The morning stall that created such deja vu for bulls occurred ahead of the release of crude inventories. The release of crude inventories returned to their usual schedule this week, but with a cold snap hitting the Northeast, talk about a potential strike in Nigeria and Iraqi elections to be held this weekend, the release was anything but routine.

When the Department of Energy and American Petroleum Institute (API) released figures, that industry group characterized 2004's demand for oil in the U.S. as growing at its fastest pace in five years. Of particular interest was demand for on-highway diesel fuel as growing demand for that type fuel signals economic growth. Demand for that type of fuel soared seven percent.

The API's chief economist noted that current gasoline inventory levels appeared sufficient for summer needs, but the API also noted gasoline inventories dropping 5.4 million barrels for the reporting week. The Department of Energy had reported gasoline inventories down only 2.3 million barrels, with the usual disparity in their numbers. API reported crude inventories lower by 3.7 million barrels while the DOE claimed that crude inventories climbed by 3.4 million barrels. The API said distillate stocks declined 4.2 million barrels while the DOE noted a tamer decline of 2.3 million barrels.

Crude prices jumped immediately after the announcement, causing equities to falter, but then crude began its long slide off the high of the day. Many indices moved to new morning highs before slipping again. By the middle of the afternoon, however, when the OPEC minister assured the world that OPEC did not intend immediate production cuts, equity indices stopped moving in tandem. All rose, but the Russell 2000 and tech-related indices soared into the close, throwing the whole "technical bounce" theory into disarray.

Bulls experiencing deja vu might have been dizzied in the morning, but the afternoon's swift climb dizzied tech bears. The bifurcation in indices dizzied all. The SPX made a minimal new high before dropping slightly into the close; the TRAN almost made a new high, but the OEX and Dow never came close to new highs of the day.

Despite the gains in many indices, many market watchers remain unconvinced that the bounce is real. Reasons exist for caution. Intraday charts abound with chart formations that signal emotion-based trading and unhealthy climbs: broadening formations, diamonds, rising wedges. It was time for technical bounces in many indices and they arrived right on schedule. Now they have to prove they'll stick around long enough to do more than relieve oversold pressure.

One article title this evening trumpets the two-day gain on the indices. Those buying into this rally should be careful of experiencing another case of deja vu if the indices should behave as they did after the two-day gains posted January 14 and 18. Remain suspicious. Watch the levels pinpointed above. Be quick to take profits if offered. If conservative, consider remaining flat until next week and trying out paper trades using that indicator you always wanted to investigate.

After-hours developments included a disappointment on Verisign's sales (VRSN), but as this report was prepared, the company had raised guidance for the year during the conference call. JDS Uniphase's (JDSU) loss widened, but LSI Logic's (LSI) loss was less than expected and RealNetworks' (RNWK) narrowed from the year-ago period. Starbucks (SBUX) noted strong holiday sales, with profits better than expected. In after-hours trade, VRSN was last at $26.00, down from the $29.28 close; JDSU was last at $2.25, down from the $2.45 close; LSI was last at $5.45, up from the $5.35 close; RNWK was last at $6.04, up from the $5.95 close; and SBUX was last at $53.75, down from the $55.34 close.

Earnings tomorrow include those from Amgen (AMGN), Beazer Homes (BZH), Broadcom (BRCM), Caterpillar (CAT), Colgate-Palmolive (CL), Gateway (GTW), Guidant (GDT), Lockheed Martin (LMT), Microsoft (MSFT), Nokia (NOK), Phelps Dodge (PD), Reebok (RBK), SanDisk (SNDK), Sears (S), Seibel Systems (SEBL) and Verizon (VZ), among others. MSFT reports after the close.

The initial claims release returns to Thursday morning this week. Other Thursday releases include December's Help-Wanted Index at 10:00, the Natural Gas Inventories number at 10:30 and Money Supply at 4:30.

 
 




New Plays

New Option Plays

New Option Plays
Call Options Plays
Put Options Plays
IVGNNKE

New Calls

Invitrogen - IVGN - close: 69.10 chg: +1.67 stop: 66.00

Company Description:
We provide products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. Our life science technologies improve and accelerate all areas of research, drug discovery, and commercial bioproduction. (source: company website)

Why We Like It:
IVGN has been a frequent guest on our watch lists over the past few weeks as the stock consolidates the December breakout over resistance at $65.00 and the top of the gap down from July. Now after about six weeks of consolidating sideways shares of IVGN look ready to breakout over the $70.00 mark. The stock has already been out performing its peers in the biotech sector for the last few months and one can see a rising channel on its daily chart. The P&F chart also shows a breakout over resistance in its trend of lower highs and points to an $81 target. We want to use a TRIGGER at $70.05 to capture a breakout over resistance and target a move to the $75.00 level, which happens to coincide with the median analyst target for IVGN. The one big challenge with this play is that IVGN is due to report earnings sometime between February 17th and February 23rd. Thus far the exact details have not been provided.

Suggested Options:
We plan to close this play ahead of IVGN's mid to late February earnings report so we're only suggesting the February or March calls.

BUY CALL FEB 70 IUV-BN OI= 1478 current ask $1.95
BUY CALL FEB 75 IUV-BO OI= 823 current ask $0.60

BUY CALL MAR 70 IUV-CN OI= 11 current ask $3.10
BUY CALL MAR 75 IUV-CO OI= 10 current ask $1.75


Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/17/05 (unconfirmed)
Average Daily Volume = 800 thousand

New Puts

Nike Inc - NKE - close: 85.15 chg: -0.74 stop: 87.01

Company Description:
Nike, Inc. based in Beaverton, Oregon is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Wholly owned Nike subsidiaries include Converse Inc., which designs, markets and distributes athletic footwear, apparel and accessories; Bauer NIKE Hockey Inc., a leading designer and distributor of hockey equipment; Cole Haan, which designs, markets, and distributes fine dress and casual shoes and accessories; and Hurley International LLC, which designs, markets and distributes action sports and youth lifestyle footwear, apparel and accessories.
(source: company press release)

Why We Like It:
We like NKE as a bearish candidate because the stock is breaking down. Shares climbed consistently from August through mid-December in what looks like a rising channel. Yet the rally peaked in December after NKE turned in a strong earnings report. Since then the stock has been suffering under a trend of lower highs as investors rotate out of shares. There breakdown under $90 in early January and the failed rally at the same level two weeks ago combined with the drop under its rising 50-dma all spell out that the trend appears to have changed for NKE. Shares tested round-number support at the $85 level today and NKE has not participated in the two-day market bounce. We want to use a trigger at $84.65 to open the play. We'll target a drop to round-number support and the 200-dma near $80.00.

Suggested Options:
We're going to suggest the March and April puts.

BUY PUT MAR 85 NKE-OQ OI= 124 current ask $2.65
BUY PUT MAR 80 NKE-OP OI= 105 current ask $1.00

BUY PUT APR 85 NKE-PQ OI= 991 current ask $3.20
BUY PUT APR 80 NKE-PP OI= 837 current ask $1.40


Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 1.1 million

Black & Decker - BDK - close: 79.47 chg: -3.89 stop: 82.49

Company Description:
Black & Decker is a leading global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology- based fastening systems.
(source: company press release)

Why We Like It:
"Sell the news". Traders have heard that maxim before. It's a common occurrence when investors sell a stock on a news event even if the result is positive. BDK reported earnings this morning that was better thane expected by beating estimates by four cents. Unfortunately, it looks like investors are taking profits after a very strong Q3 and Q4 run up sparked by disappointing gross margins in the latest earnings report. Technically BDK looks long-term overbought and today's drop under the 100-dma and round-number support at $80.00 on five times the normal volume looks like an entry point to short it. If you look at the weekly chart (provided below) you can see the big red candlestick at the top of the pattern. This is a bearish engulfing candle and at the top of the pattern represents a bearish reversal. The Point & Figure chart has reversed its bullish pattern into a sell signal pointing to $68. We're only going to target the $75 level as the exponential 200-dma rises up to meet BDK.

Suggested Options:
We are going to suggest the February and March puts.

BUY PUT FEB 80 BDK-NP OI= 1472 current ask $2.75
BUY PUT FEB 75 BDK-NO OI= 820 current ask $1.20

BUY PUT MAR 80 BDK-OP OI= 33 current ask $3.40


Picked on January 26 at $ 79.47
Change since picked: + 0.00
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 659 thousand


Watch List

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