Option Investor

Daily Newsletter, Monday, 02/07/2005

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Table of Contents

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

Market Wrap

Bears Fumble

Bears Fumble

Friday's upward surge left off with most intraday cycles overbought and a correction due for this morning. That correction kicked off just after 10AM, but it was weak and took place on light volume across the indices. With little economic, corporate or geopolitical news, there was little to catalyze the markets and the action appeared to have been more the result of bulls taking a breather than bears actually stepping up to plate.

Declining volume exceeded advancing volume by a factor of 1.17:1 on the NYSE and 1.54:1 on the Nasdaq, with Amex bears leading the pack by a factor of 3.49:1. Once again, overall volume was light across the indices.

Daily Dow Chart


The Dow closed flat, losing less than half a point to close at 10715.76. Coming as it did at the top of Friday's huge bullish candle, which itself capped off a strongly bullish week, the lack of correction today was clearly bullish. The session high at 10733 is confluence resistance going back to December, above which next resistance starts just below 10800. To the downside, there's support at 10600, 10550 and 10440. Above the 10550 level, the so-far strong daily cycle upphase should continue its run.

Daily S&P 500 Chart


The SPX lost all of 1.31 points today, closing at 1201.72 after testing a low of 1199.27. As with the Dow, this is the shallowest of corrections after last week's strength. Above 1205, next resistance is at 1210, followed by the year's high. Support below is at 1195, with key support for the daily cycle at the 1188-89 confluence.


The Nasdaq led to the downside today, if a 4.7 point (.23%) loss can be considered downside. The session low came at 2075, confirming that first support level above the 2050 confluence trendline. 2100-2125 is stronger resistance and compared with the SPX, Nasdaq bulls have a great deal of work to do before even considering the year highs. Nonetheless, the daily cycle remains bullish off the January low, and should so remain above the 2050 level. With today's light volume, timid correction following last week's gains, the benefit of the doubt remains in the bulls' favor.

Daily TNX Chart


The Treasury auctioned 37B of new debt today via 3 month and 6 t-bills. The auction of 3 month bills generated a bid-to-cover ration of 2.12 at a yield of 2.48%, while the 6 month generated 2.43 bids to each offer at a yield of 2.71%. Of the 37B in new debt, 7B was taken by indirect bidders, being foreign central banks. Ten year treasury bonds opened on a weak note but firmed as the session progressed, with the ten year yield (TNX) retesting Friday's low and finishing the session -2.1 bps at 4.052%. The 4.05% level is support going back to September 2004, below which 4.0%-4.02% comes into view. 4.07% and 4.14% are now upside resistance.

Reuters reported that President Bush has proposed a 2.5T budget that the White House has characterized as the most austere budget since the Reagan era. Bush, who had inherited a budget surplus that became a record deficit in his first term, has yet to veto a spending bill. However, the budget proposed today targets items such as farm aid (2.9% reduction) and housing grants to the poor (4.5%), with 45B to be taken out of Medicaid and an abolition of subsidies for Amtrak. Defense spending would be increased by 4.8%, as would aid to Pakistan, Jordan, Columbia and Afghanistan. The proposed cuts would reduce the budget deficit from its current estimated 427B to 390B in 2006 (3% of GDP) and 251B in 2008. This 251B figure, which the President had promised would be a reduction of the deficit "by half", represents the promised cut based on a starting point of 521B that was forecast in early 2004.

Weekly chart of Crude oil


Secretary of State Condoleezza Rice announced the appointment of Lieutenant-General William Ward as security coordinator to oversee peace-making operations in the Middle East. In particular, Ward will assist the Palestinian Authority to consolidate and expand their security efforts with a view to enhancing Israeli-Palestinian security. As well, it was announced that Israeli Prime Minister Sharon and Palestinian President Abbas will each meet with President Bush this spring.

Later in the session it was announced that Israel and Palestine will announce a cease-fire tomorrow at the Egyptian summit, bringing an end to 4 years' fighting.

Crude oil futures declined throughout the session as the US Dollar Index rose to 3 month highs. The current daily cycle downphase kicked off from confluence resistance below the 50 level, with support first at 45, followed by 44 and what appears to be head and shoulders neckline just below 42. Crude oil finished the session lower by 2.53% at 45.30 on the Nymex.

It was a quiet day for news, with the lone economic report released at 3PM. Consumer credit rose in December from a revised 2B increase in November to 3.1B, missing estimates for an 8B increase. December's rise brought the total of outstanding 2.104T of outstanding consumer credit. The upward revision in the November number from its record low of -8.7B to a gain of 2B was the most noteworthy element in the report.

Chinese internet portal SOHU reported its Q4 results, announcing a decline in net income from 28 cents per share or 11.6M in Q4 2003 to 17 cents per share or 6.5M in the current quarter. These results matched consensus expectations, but the stock got hit for an 11.38% loss, closing at 15.26.

Toymaker HAS reported net earnings of 82M or 44 cents per share, up from 41 cents or 76M in Q4 2003. Revenue fell from 1.1B to 1.06B in the current quarter. Q4 2004's EPS missed consensus expectations by 5 cents per share, and the company's operating margin declined from 11% to 9.8% year over year. HAS cited a tougher than anticipated US retail environment. The stock lost 1.96% to close at 20.00.

Consumer and wireless electronics maker VOXX delayed the release its 2002 form 10K filing and announced that its previous auditor, KPMG, has been subpoenaed by a grand jury seeking documents relating to its former audit engagements. VOXX closed higher by .73% at 16.50.

Aviation hardware supplier GR announced Q4 earnings of 36.7M or 30 cents per share on revenue of 1.26B, up from Q4 2003's 22.6M or 19 cents on revenue of 1.13B. Despite the improvement, these results missed expectations of 38 cents EPS for the current quarter. The company attributed its improvement over last year's results to higher sales to plane makers across its range of products. The stock added 2.64% to close at 35.41.

Consumer nondurable household product maker CLX reported Q2 net income that rose to 59 cents per share excluding items, beating estimates of 53 cents. Sales rose 9% to 1B, beating estimates of 981.3M and exceeding the year-ago level of 920M. The company attributed the gains to an across-the-board increase in sales volume, with gains in "Glad" bags and Latin American sales leading the pack. CLX rose .65% to close at 58.98.

After the bell, EDS announced Q4 earnings of 53M or 10 cents per share on sales of 5.25B, up from Q4 2003's restated loss of 70 cents per share / 337M. Excluding items, the company earned 25 cents, beating expectations by 2 cents. The stock closed the session at 21.36, up 1.18%.

Activision announced fiscal Q3 earnings of 97.3M or 63 cents per share on revenue of 680.1M. Profits were up 27% from Q3 2003's 53 cents or 77M. Consensus estimates had been for 56 cents EPS on revenue of 617M. The stock was lower by .25% at 24.00 as of this writing, having risen 27 cents to 24.06 during the regular session.

Tomorrow looks to be quiet again news-wise, with no economic data due until Wednesday, and then only Wholesale Inventories for December. With little news today and light volume across the indices, traders had little to which to react and were slow to initiate new positions. Unfortunately for bears, this manifested itself on the heels of Friday's strong upward move, and suggests no more than corrective downside action within the ongoing daily cycle up-phase.

The potential fly in the bullish ointment is the auction activity from the treasury, with more auctions scheduled each day until the ten year note auction on Thursday. With the Fed's open market desk having drained reserves aggressively last week and the treasury draining liquidity via new debt issuances this week, the primary fuel for rallies will be getting skimmed. However, as we saw Friday, that's not always an impediment for the bulls. So long as the daily cycles continue to point north, oversold intraday readings should continue to indicate good buys at support- always with active stops, of course.


New Plays

New Option Plays

Call Options Plays
Put Options Plays

Play Updates

In Play Updates and Reviews

Call Updates

None today.

Put Updates

None today.


None today.

Trader's Corner

No Tiki no Tradie

Linda Bradford Raschke switched from using the TRIN as her primary market internal to the TICK a few years ago. Since then many traders have discovered the usefulness of the TICK indicator and now cannot trade without it. So what is all the fuss about?

What is the TICK Indicator?

The TICK indicator measures market breadth by subtracting the number of NYSE stocks on the downtick from the number of NYSE stocks on the uptick. If a trade is at a higher price than the previous trade, that trade is known as an "uptick" trade because the price went up. If a trade is at a lower price than the earlier trade, that trade is known as a "downtick" trade because the price went down. The "tick indicator" measures how many stocks are moving up or how many are moving down in price.

The TIKI indicator is the difference between the number of up ticking DOW stocks vs. the number of down ticking DOW stocks.

TICK = Upticking issues - downticking issues

This number will fluctuate throughout the day, underscoring the level of buying and selling pressure at a given moment.


The TICK is a breadth indicator giving traders a view into the strength or weakness of market internals. If you compare the number of upticking stocks to the number of downticking stocks, the result will reflect the markets up or down momentum at a certain point in time. For example, if the SPX is slowly moving upwards and the downticking stocks outnumber the upticking stocks reflected by a downtrending TICK, it is likely that only a few strong stocks are holding up the overall market. What happens, of course, is that when the buying in these few issues is done, the overall market itself will move downward.

On the other hand, if the overall market is declining but the upticking stocks begin to outnumber the downticking issues, reflected in a positive trending TICK, you would have a good case for the market to turn around and start a rally.

Traders can use the TICK to confirm price moves and provide advance warning of momentum shifts. Uptrending TICKs are bullish and downtrending TICKS are bearish.

Look for divergences when price makes a new high (or low) but the TICK makes a lower high (or higher low), failing to confirm the price move and warning of a slackening (or accelerating) of momentum and potential stall or reversal. A similar phenomenon would be a steady trend in the TICK that runs counter to the trend of the market. Let's take an example. Here is a chart of the 5 minute TICK and SPX on February 2nd.


Notice the lower highs on the TICK but the SPX is climbing. Then the TICK makes a lower low but the SPX makes a higher low. These divergences should alert a trader that there is weakness in this rally and there are fewer and fewer stocks holding up the index.


On February 3rd I made note in the Market Monitor that the TICKS were making a double bottom but the S&P futures (symbol ES)was making a lower low and that I read this as bullish and we may see a rally. I wasn't sure as to how big the rally would be but I was warning to not be short.


ES rallied 5 points from its low of 1185.75. This rally did have a few other things going for it as well like MACD divergences and touches of S2 pivot points but the TICK chart was the one that alerted me to possible strength.

Another use of the TICK is to use extreme high or low readings to identify sentiment/momentum extremes (similar to the overbought/oversold oscillator stochastics) - Extreme high or low TICK readings can accompany market climaxes, warning of possible blow-off moves.

On February 2nd the FED made an announcement of a 0.25 rate hike. Everyone knew what the FED was going to do but still the markets have to react and react they did. However, using the extreme TICK reading after the announcement would have been good for your pocket book.


First of all at 2:25 the TICKS hit a high of 1335 when ES was trading at 1196. ES eventually hit a low of 1190 for a 6 point ride. Then at 2:48 the TICKs once again moved over +1000 but this time to +1229 when ES was trading at 1193. The subsequent low was 1189.25 for another 3 or 4 point move. Now these trades are fast and not for the faint of heart so not for everyone but even if you don't trade them they will give you a good feel for market extremes. So if the TICKs are over +1000 or under -1000 they are at an extreme and not a good idea to be in a trade contrary to the expected move.

Because the TICK indicator is very sensitive and also very volatile it can be deceptive because it is simply a snapshot of the market at any given time. To counteract this you can use a larger time frame or smooth the indicator with the 10 period moving average to remove some of the "noise" and better reveal its true nature.

Bottom line

The TICK/TIKI are very short-term indicators that can be used to measure intraday price momentum. By comparing the number of upticking stocks to the number of downticking stocks, you get a measurement of the market's internal strength or weakness at a given point in time. It can provide advance warning of momentum shifts and be used to confirm price strength and direction.

C U next time

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.


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