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Daily Newsletter, Monday, 01/31/2005

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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

Higher Highs, Higher Lows

Market Wrap
  01-31-2005   High Low Volume Adv/Dcl
DJIA 10489.94 62.74 10510.19 10428.76 2.07 bln 2197/ 657
NASDAQ 2062.41 26.58 2063.18 2053.47 1.83.bln 2192/ 845
S&P 100 564.88 3.93 565.78 560.95 Totals 4389/1502
S&P 500 1181.27 9.91 1182.07 1171.36    
SOX 403.96 4.50 407.24 400.06    
RUS 2000 624.02 11.02 624.31 613.00    
DJ TRANS 3598.48 52.54 3600.74 3545.80    
VIX 12.82 -0.42 13.63 12.79    
VXO (VIX-O) 12.37 -0.96 12.97 12.30    
VXN 18.43 -0.15 18.85 18.26    
Total Volume 3,901M          
Total UpVol 3,020M          
Total DnVol 830M          
Total Adv 4389          
Total Dcl 1502          
52wk Highs 310          
52wk Lows 36          
TRIN 0.88          
PUT/CALL 0.77          

Higher Highs, Higher Lows

The indices gapped higher this morning and spent the day trading sideways on lighter-than-average volume. The markets seemed set to cheer the successful Iraq elections and number of positive economic data and corporate developments.

The bloom began to fade just past midday, but the action was muted overall, with an upward surge in the last half hour restoring the indices to the middle of their intraday range.

Daily Dow Chart


 

The Dow added 62.74 points to close at 10489.94, hitting a higher high at 10510 and bouncing from a higher low of 10429. Last week's high was challenged but not broken, while the higher low advanced the daily cycle oscillators as they continued to build what appears to be a rolling bottom. Above 10510-10525, key resistance is at 10570-10580. A close above that level will confirm the new daily cycle upphase and set up the Dow for a retest of 10630-40 resistance.

Daily S&P 500 Chart


The SPX rose 9.91 to 1181.27, decisively breaking last week's high and leaving off with a bullish kiss on the daily cycle Macd. The 1189 level that acted as a magnet earlier this month looms large as upside resistance, but any strength tomorrow will have a very strong likelihood of moving the daily cycle to a confirmed upphase targeting 1189. If today represented a break above descending bull wedge resistance, then a move above 1189 will target 1195 as next resistance on the way to an implied wedge target up at the opening January 3rd high. The first sign of trouble for bulls would be a closing break of 1170.

Daily Nasdaq Chart


 

The Nasdaq gapped up and stayed above Friday's high, adding 26.61 points or 1.31% to close at 2062.4, the leader of the equity indices. This was a clean break above descending bull wedge resistance and would be a perfect bullish signal except for the lighter than average exchange volume. A bull wedge breakout is confirmed by an expansion, not contraction in volume, and today's 1.73B shares was lower than the average 1.91B. Nevertheless, price action and the cycle setup is bullish in the daily timeframe, and should so remain above the 2020-2030 level. 2070-80 is a confluence resistance zone, with immediate support at the session low of 2053.

Weekly TNX Chart


 

Ten year treasury yields broke below 4.14% support today, printing an inside day ahead of the Fed's FOMC meeting scheduled to commence tomorrow at 2:30PM. The FOMC announcement will be made at 2:15PM on Wednesday, but the Fed Funds futures have already priced in an anticipated target rate of 2.5%, which would represent a 25 bp increase from the Fed. The ten year treasury remained soft in the wake of last Thursday and Friday's strong gains, with the ten year yield (TNX) bouncing from the lower rising pennant support line. With this 2 month pennant approaching an apex no wider than 10 basis points and the daily oscillators drifting, we can hope for a directional move to give the chart some direction soon. The pennant is generally a continuation pattern, in which case we'd look for an upside break, but it's safest to simply let the market decide- a move above 4.26% or below 4.12% should be directional. For the day, TNX lost .6 bps to close at 4.132%.

Weekly chart of Crude oil


 

Over the weekend, millions of Iraqi voters cast their ballots. Interim Prime Minister Allawi vowed to work to unite the country's competing ethnic and religious factions. The strong turnout cost insurgents heavily, as Zarqawi had "declared war" on the elections and stated that voters were "infidels". Nevertheless, voter turnout was weaker in areas populated by Sunni Arabs, where the insurgency is strongest. Shiite voter turnout was stronger, and the true test of the election will be whether the anticipated Shiite win is leveraged to the benefit of all factions, or whether it serves only to further divide the country. Allawi's comments were encouraging and in the right direction.

The market voted too, with crude oil continuing lower for most of the session on the good news from Iraq. It reversed higher in the last hour of the session, however, with the financial press attributing the surge to stronger than anticipated economic growth in the anticipated US GDP revision following the Statistics Canada announcement (see below). The daily downtrend remains unchallenged, with March crude oil futures trading both sides of the 50 day EMA, but today's print engulfed Friday's negative candle in for a key outside reversal day, with the 48.20 settlement above Friday's high. Next resistance is between 49-50, which bulls will need to see broken in order to overcome the daily cycle downphase that kicked off last week. For the day, crude oil rose 2.16% to close the daytime session at 48.20.

It was a busy news day today, with a number of economic reports and developments as well as corporate news and results.

The markets received the December Personal income and Personal spending data at 8:30 this morning. The Commerce Department announced that US Personal incomes rose a record 3.7% in December, exceeding estimates of 3.4%. 3.1 of that 3.7% resulted from the one time 32B dividend from MSFT- ex-dividend, the increase was .6% for the month. Consumer spending rose .8%, meeting expectations. Consumer spending on durable goods rose 4.3%, while nondurables spending rose .6% and on services, .4%. The Personal Consumption Expenditure price index (PCE) fell .1%, while the core PCE (ex-food and energy) was unchanged.

At 10AM, the Commerce Department reported an increase in New Home Sales of .1% in December, bringing the seasonally adjusted annual rate to 1.098M from the downwardly revised 1.097M rate in November and missing expectations of 1.18M. The inventory of unsold homes rose for sale 2.6% to 432K or a 4.8 month supply, the highest level in 31 years.

Also at 10AM, the Chicago Purchasing Managers Index rose to 62.4%, exceeding estimates of 59.6% following December's 61.9% reading.

Later in the session, a surprise announcement from Statistics Canada revealed that it had mistakenly undercounted the value of US exports to Canada by approximately 1B for the month of November. This data is apparently used in the computation of the US GDP for Q4, and, according to RBS Greenwich Capital, would have resulted in the understating of the US GDP by roughly .2% to 3.3%.

In corporate news, SBC announced this morning that it will purchase AT&T for approximately 16B, comprised of 14.7B in SBC stock and a special dividend of 1.04B to be paid by AT&T to its shareholders on closing. AT&T shareholders will receive .78 SBC shares for each AT&T share which, combined with the special dividend, values AT&T without premium to its closing price on Friday. By reuniting the its former parent with the Baby Bell, SBC will move from regional telco to international telecom giant. Analysts speculated that MCI will become the next potential takeover target as the #2 long distance provider. SBC closed higher by .93% at 23.84, while AT&T lost 2.44% to close at 19.23. MCI rose .84% to close at 28.88.

In other merger news, MetLife (MET) announced that it will acquire Travelers Life & Annuity from Citigroup for 11.5B in cash and stock 1B-3B in MET stock will be paid to C, with the remainder in cash to be raised via a debt or convertible security deal, or via asset sales. MET expects its EPS to rise between 4%-6% in 2006 as a result of the deal. UBS applauded the transaction for C, with analyst Glenn Schorr telling clients, " "We think the deal will be well received as selling (Travelers) is additive to Citi's return on equity, pretax margins and overall growth an simplifies the Citi story." MET closed lower by .58% at 39.71, while C added 1.47% to close at 49.09.

Tyson Foods (TSN) missed expectations, reporting a "difficult" quarter . The chicken and beef producer announced Q1 net income of 48M or 14 cents per share, down 16% from its 2003 Q1 57B or 16 cent profit. Revenue declined 500M to 6.45B. Expectations were for 25 cents EPS on revenue of 6.69B. TSN lost 3.27% to close at 17.17.

Exxon Mobil (XOM) announced a record quarter, earning 8.42B or $1.3 per share in Q4 2004 on revenue of 83.4B, up from $1.01 on revenue of 65.95B in Q4 2003. These results blew away estimates of $1.07 per share. The company cited high prices for crude oil and natural gas. Oil and gas driller RIG warned that Q4 results will be lower than Q3's, however, based on idling deepwater rigs and costs to repair damaged rigs. Analysts are expecting earnings of 9 cents per share on revenue of 665M when the company reports on February 15. Back in Q3, the company had expected earnings at 8 cents on revenue of 651.8M. XOM rose .70% to close at 51.63 while RIG gained .92% to close at 43.91.

Drugmaker Wyeth (WYE) reported a loss for Q4 of 1.76B or $1.32 per share, down from a profit of 335M or 25 cents per share in Q4 2003, in which the company had incurred significant restructuring charges. In the current quarter, the company cited costs of 4.5B associated with its recalled fen-phen diet drugs (Pondimin and Redux). Excluding these items, WYE earned 861M or 64 cents per share, missing expectations by 3 cents. WYE got slammed for 7.79% to close at 39.63.

Dow Corning (GLW) announced adjusted Q4 earnings of 74.8M, up 88% from 39.7 in Q4 2003. These results exclude restructuring costs associated with the company's June 2004 emergence from Chapter 11 bankruptcy. Sales were higher by 13% at 876.7M for the quarter. GLW gained 1.86% to close at 10.94.

Hilton Hotels (HLT) announced Q4 earnings of 65M or 16 cents on revenue of 1.05B, down from 67M or 17 cents in Q4 2003. Revenue was higher by 7.3%, meeting analyst expectations. Excluding non-recurring items, HLT earned 18 cents, beating expectations of 16 cents per share. HLT lost 1.98% to close at 22.25.

New York A-G Elliot Spitzer announced that insurance broker MMC has agreed to a settlement in the amount of 850M in connection with charges that it accepted payoffs from insurers in return for business referrals. Spitzer specified that the company will also issue a public apology for its "unlawful" and "shameful" behavior, and will publicly promise to adopt administrative reforms. CEO Michael Cherkasky hastened to add that private litigation won't be ended by this settlement, stating that "We hope our corporate clients will see this offer and see a fair and fulsome opportunity and choose to opt into this agreement, but we're not going to suggest that this will end all litigation." MMC rose 4.54% to close at 32.50.

Later in the afternoon, the treasury reported that it intends to borrow a record 147B in the 1st quarter of 2005, exceeding analyst estimates of 136B.

Tomorrow is scheduled to be another heavy news day, with Auto and Truck sales to be released throughout the session and Construction Spending for December to be released with the January ISM Index at 10AM. Despite the high anxiety that dominated today's intraday session, the fact remained that the indices printed higher highs and higher lows over Friday's levels. With the daily cycle as oversold as it's been and beginning to tick up, that's enough to have traders looking for the next 2-3 week upphase to kick off. Barring a close south of Friday's lows, there's reason to expect an admittedly corrective upphase from here. I say corrective because the weekly cycles (not shown) are just at the outset of their own downphases, and so even a strong daily cycle bounce within them should have trouble beneath the January highs. With earnings still coming fast and furious and a full slate of economic data due, including the FOMC announcement and the President's State of Union address, anything can happen- but so long as the indices continue to print higher lows, the daily cycle bias should continue its so-far slow move back to the upside.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
AHC None

New Calls

Amerada Hess - AHC - close: 86.65 chg: +2.10 stop: 82.00

Company Description:
Amerada Hess, headquartered in New York, is a global integrated energy company engaged in the exploration for and the production, purchase, transportation and sale of crude oil and natural gas, as well as the production and sale of refined petroleum products. (source: company website)

Why We Like It:
Oil stocks continue to be areas of strength in the market and the OSX oil services index is trading near all-time highs. Meanwhile crude oil prices rose more than two percent on Monday as traders bought the dip to $46.00 and its 50-dma. We like AHC because shares are breaking out over its four-month trendline of resistance formed by its lower highs. Plus, its P&F chart shows a new triple-top breakout buy signal with a $103 target. We want to use the move over $86 as an entry point and target a move to its October highs near $94.

Suggested Options:
We are going to suggest the March and May calls.

BUY CALL MAR 85 AHC-CQ OI= 208 current ask $4.10
BUY CALL MAR 90 AHC-CR OI= 327 current ask $1.65

BUY CALL MAY 85 AHC-EQ OI=1066 current ask $6.00
BUY CALL MAY 90 AHC-ER OI= 488 current ask $3.50


 

Picked on January 31 at $ 86.65
Change since picked: + 0.00
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million

New Puts

None


Play Updates

Play Updates and & Comments

Call Plays

Goldman Sachs - GS

Another day of big mergers and acquisitions helped fuel a strong 2.38 percent rally in the XBD broker-dealer index. GS, already in breakout mode, only added 1.6 percent. The stock looks strong here but if you're patient look for a pull back toward the $106.00-106.50 level and buy a bounce. We are going to raise our stop loss to $103.99.

KB Home - KBH

Homebuilders dipped sharply this morning on some lagging economic news but traders quickly bought the dip. The DJUSHB index bounced from support at the 800 level and KBH bounced from support near $105 and its 21-dma. This looks like a new bullish entry point in KBH.

Pulte Homes - PHM

Remember that we are planning to exit on Tuesday or Wednesday afternoon to avoid PHM's Wednesday evening earnings report.

Pixar - PIXR

Be careful here. Merrill Lynch raised its earnings estimates for PIXR this morning but the stock failed to participate in today's market bounce and that could spell bad news for the bulls.

Put Play

Apollo Group - APOL

Education stocks bounced with the major stock indices on Monday despite a negative story on the "60 Minutes" TV show over the weekend, which critiqued the industry and CECO specifically. Fortunately, technical traders will note that APOL produced a failed rally at the $80.00 mark, which could satisfy the oversold bounce we were predicting for the stock. Look for a down day tomorrow to confirm the failed rally as a new entry point.

Dropped Call

Alliance Resource - ARLP - close: 70.14 chg: +0.48 stop: 69.00

After months of support at the 50-dma ARLP broke down this morning. Early morning weakness sent ARLP to $68.05, which was more than enough to stop us out at $69.00. While traders bought the dip and pushed shares back over round-number support at $70.00 and its 50-dma the short-term trend of lower highs remains an issue.

Picked on January 10 at $ 69.80
Change since picked: + 0.34
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 115 thousand


 

Dropped Put

Black & Decker - BDK - close: 82.40 chg: +1.49 stop: 82.61

It would appear that last week's high-volume breakdown under major support at the 100-dma and the $80.00 mark was nothing more than a bear trap. Friday and Monday produced a two-day bounce and shares pushed through what should have been new resistance at $80.00 and $81.50. We have been stopped out at $82.61. We remain skeptical that this bounce has any legs until BDK trades back over $85.

Picked on January 26 at $ 79.47
Change since picked: + 2.93
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 659 thousand


 


Watch List

Watch List

SLB $68.04 +0.99 - Today's breakout over $68 looks like a new bullish entry point. The P&F chart also looks very positive.

COP $92.79 +1.80 - The new high over resistance at $92 could be used as a new bullish entry point with a $100 target.

FRO $50.75 +2.35 - The shipping/oil-tanker industry turned in a very strong day. FRO added 4.8 percent on strong volume and pushed through the $50 mark. The stock may have put in a short-term bottom.

TK $44.37 +1.02 - TK is another shipping stock on the move but we would watch for a rally through the $45 level and its 50-dma.

TTC $83.25 +2.90 - After weeks of consolidating sideways TTC is breaking out to new all-time highs.

BZH $148.50 +2.07 - Homebuilders remain strong and a move over $150 or $151 could be a bullish entry point in BZH.

CMI $77.67 +2.91 - CMI is trying to bounce and a move over $78 could be used as a bullish entry point. Conservative traders can wait for a move over $80.00.

VNO $69.14 +0.09 - We are still watching VNO as a potential short play. The lack of participation in Monday's market bounce is certainly bearish.


Trader's Corner

My Trading Business Plan

This article will be dealing with an issue that I know you have all read about many times but probably don't want to think about. You know you need to do it but probably have not. I am talking about a written Business Plan, a written Trading Plan, a written rudder to your trading ship.

We all know trading can be fun and we all know trading can be boring but it is the stressful times that take its toll on us psychologically and financially. But a well written trading plan can reduce that stress, keep you focused and on track. Without one you are like a piece of driftwood floating down a raging river that thrashes around at the whims of any current that may come along. I wonder how many would invest in a company that didn't have a business plan - a written business plan that dictates direction and mission. Probably not many so why do so many traders think that they can run their business without one?

Studies show people with written goals tend to be more successful than those with goals but not written down; traders are no exception. Your trading plan is the rudder that steers your trading in times of uncertainty. It is also the yardstick by which you can measure your success, or lack thereof, as a trader. Following your trading rules keeps you disciplined, especially if you're tempted to trade too much or find yourself off on a tangent - like I do.

But there can be a huge chasm between knowing you need a business plan and actually writing it. Hopefully this article will bridge that chasm and give you a way to at least start.

One of the best ways to start a business plan is to answer some important questions. Questions about the kind of trading you want to do and the goals you want to achieve. This will force you to think about critical issues and tie up some loose ends that can derail anyone's trading. The answers to these questions should not be short one word answers they should give enough information that anyone who reads your business plan will get a good idea as to who you are and why you trade.

1. What is the underlying reason I trade?

This is probably the most important question you can ask yourself and don?t just answer "to make money." That is like asking why you breathe. Take a while to answer this question but above all be honest. For some it will be the excitement and for others - like me - it will be for the freedom to stay at home and not have the constraints of the corporate world. Think about this one a lot.

2. What Trading Vehicles do I Use?

Do you trade options, futures, stocks or only Exchanges Trades Funds? Why do you trade these vehicles? What advantages are there to each one and why did you pick this particular vehicle to trade? Do you trade long and short?

I trade futures intraday because of the quick execution and the liquidity but I also trade options for the leverage and the limited risk. I also trade long and short.

3. What Timeframe Do I Trade?

For me this one differs with the trading instrument. I trade futures on a 5 minute timeframe but options on a daily. Here you should also address if you hold overnight or not.

I do not hold futures overnight because of the risk but I have no problem holding options because of the limited risk.

4. Which Account Do I Use for the Different Trading Instruments?

If you trade futures or forex then you probably have a separate account from where you trade options, equities, ETF, etc. You may trade options in your IRA. Here you will list each account and why you trade the instrument within that account. This is place where you will also list the margin requirements each account has in relation to the vehicle traded.

I have an Interactive Brokers account for my futures daytrading so here is where I list IB's margin requirement for each of the futures I trade. I also have another account with a different broker that I use to trade options because IB does not allow selling options in an IRA and my main strategy in the IRA is calendar spreads.

5. What is My Money Management Plan?

Here you will list the risk you are willing to take with each trade, which in turn will determine the position size. You may need a money management plan for the each type of trading instrument you trade.

6. What do I Use to Enter a Trade and to Exit?

This is one of the most important parts of your trading plan and one of the most important to have written down. I used to have a tendency to jump from one service to another and try buying options with John Doe and then futures with Jane Smith and where did it leave me? You guessed it - with losses. If you use a service like OI then put that into your business plan and say something like, "I take the OI picks only when I see XYZ indicator give me a buy or sell to confirm." Or "I take OI picks without any other thought because they are so good at OI." Then when you run across John Doe's service and he says buy WYX option you will come back to your business plan and see that John Doe's service is not part of it. But what if you think John Doe's service looks pretty good? You have that contingency covered on question 11 - Under what circumstances do I modify this plan.

Get as specific as you can here and I assure you it will save you many headaches later on. Jumping from one strategy to another will be the death of your trading but honing your skills on one or two will put in a class that few traders reach.

7. What Kind of Records do I Need to Keep?

Do you keep all your trades on a spreadsheet or do you let you broker keep your records for you? What kind of profit/loss records do you keep? How do you determine your win/loss ratio? What do you need to keep for tax purposes?

8. What is my Morning Routine?

What do you look at to get a feel for the market in the morning? Do you take note of the overnight futures action? What news sources do you read? What economic reports are due today that could affect trading?

9. What is my Nightly Routine?

Are there any newsletters that you need to read to give me a synopsis of the day? Are there any stops that need to be adjusted? Are there any entries that need to be setup for tomorrow?

10. What are my Income goals?

What is your daily profit target? What is your monthly goal needed to reach your yearly goal? If you are not reaching these goals then what needs to change - the goals or your strategies? This is a tough one isn't it? Please see the next point on making changes.

11. Under What Circumstances do I Modify this Business Plan?

When do you make changes to this Business plan? Let's say you have specific rules on entry and exit and you find a service that looks pretty good.  Do you just trade it and see how it works? Nope, you need to write down how you test this service to see if it is really as good as you think it will be - before you put any money on the line.

What if you are not reaching your goals? What changes or modifications to the business plan need to be done?

12. What is My Disaster Recovery Plan?

What do you do if your computer crashes? What do you do if your broker's platform crashes? What do you do if you have a power outage? You don't want to be answering these questions when they happen because if you are anything like me, this will be the time when your brain turns to mush.

If you have answered these questions fully and honestly, then most of the work is done. You can leave it like this or write it out in a longer more legal form, but whichever form you decide on it will be a legal agreement with yourself, and if you break this agreement then that says a whole lot about you - doesn't it? (How is that for a guilt trip?)

For those of you who already have a trading plan, do you refer to it often and follow it consistently? Why, or why not? Have you updated your plan over time?

Finally, keeping a trading log in conjunction with following your trading plan is a must if you want to improve your results. A well-documented log helps you review your good, as well as bad trades. You'll be able to see just how closely you're following your rules, and make the necessary adjustments.

Write your plan, stick to it, and watch the positive impact on your trading. You'll wonder why you didn't do it sooner

Remember trade your (business) plan.

Today's Newsletter Notes: Market Wrap by Jonathan Levinson, Trader's Corner by Jane Fox, and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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