Daily Newsletter, Wednesday, 02/09/2005
HAVING TROUBLE PRINTING?
by OI Staff
One article Wednesday referred to crude inventories numbers as having bucked expectations. Those numbers weren't the only or the first surprises of the day.
Indices bucked recent expectations, too, and headed down ahead of tomorrow's Trade Balance number.
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Dow:
Almost always a leader, the Russell 2000 has led the pack in dipping to test its 50-dma and 50 percent retracement of the decline off its late-December high. It did more than dip to those levels Wednesday. Most of the day, it held just above them, but late-day action saw the RUT plummeting below long-term S/R, the 50-sma and the 50 percent retracement of the decline off the January high. Its action may help predict how other indices might behave if they should test analogous levels. So far, that prediction does not encourage bulls.
Before bulls nibble on longs at the 50-sma's and 50 percent Fib levels on their preferred indices, they should first make sure that the RUT has bounced back above those levels. If not, Wednesday's late-day action perhaps was not just an overrunning of support. In that case, don't anticipate new bullish entries for other indices at those tests.
Annotated Daily Chart of the Russell 2000:
The SOX also moved down to test the 50 percent retracement of the decline off the high it hit in early December. It also approached the 50-dma. Both the RUT and SOX should be watched Thursday to see if they bounce from these averages and to note the quality of the bounce. Bulls want a strong V-shaped recovery. If there's to be a bounce, bears want to see a tepid climb that closes beneath the midpoint of Wednesday's range. In the RUT's case, bears would actually prefer to see the bounce stopped at the 50-sma and 50 percent Fib level; in the SOX's case, at the 200-sma and -ema's.
This week, the Nasdaq also tested the 50-dma and the 50 percent retracement of its decline off its early January high, but the Nasdaq was making that test from the underside.
Annotated Daily Chart of the Nasdaq:
Those bulls expecting today to be the day that the indices pushed up through recent resistance levels saw their expectations dashed. One chart of the TRAN increases cause for worry, at least for market bulls.
Annotated Weekly Chart of the TRAN:
The early part of the week proved light on economic releases. That was true Wednesday, too, but that didn't mean that potentially market-moving events weren't in the making. News that Carly Fiorina had stepped down as Chairperson and CEO of Hewlett-Packard spiked U.S. futures higher, Mark Davis of the OptionInvestor staff reported. That futures spike was erased at the cash open, although HPQ continued to show gains. HPQ closed higher by 6.90 percent, but the GHA, the GSTI Hardware Index, erased early HPQ-inspired gains to close lower by 0.71 percent.
Although Fiorina's decision was termed a resignation, her comments suggested that differences with the board forced that resignation, ending her term as the first female head of a Dow Jones Industrials company. Robert Wayman, CFO, will serve as CEO on an interim basis, and Patricia Dunn will serve as non-executive chairman of the board.
Goldman Sachs asserted that the change in HPQ's executive lineup was due to operational and performance differences rather than strategic ones, but speculation arose immediately about changes that might follow Fiorina's resignation. Would the printer business be sold? Would other changes result? Goldman Sachs spoke immediately, suggesting that Fiorina's resignation would not likely lead to either a merger or a selling off of parts of the company.
Atlanta Fed president Guynn provided accelerant for the U.S. dollar early in the day, repeating hawkish claims that the FOMC never promised that rates would be raised in a measured manner. The dollar had been easing overnight, but spiked up again in a move that proved to be short lived. That spike happened despite recognition that Guynn speaks for a hawkish minority among the FOMC members. The dollar eased somewhat midday but steadied after a strong treasury auction.
Also before the market open, the Mortgage Bankers Association noted that the 13-basis-point drop in fixed-rate 30-year mortgage rates in the reporting week prompted a rise in mortgage applications, but not home purchasing. The seasonally adjusted index of mortgage applications rose 4.2 percent, building on last week's 7.3 percent gain, and the seasonally adjusted index of refinancing applications soared 7.8 percent, adding to the previous week's 16.6 percent gain. The purchase index gained 1 percent. Rates for adjustable-rate mortgages rose sharply and applications for these type loans dropped sharply, too.
Perhaps due to those hawkish comments from Guynn, however, the DJUSHB, the Dow Jones Home Construction Index failed to benefit from the drop in fixed-rate 30-year mortgages or the rise in mortgage applications. The index erased Tuesday's gains, producing a tweezer-top reversal signal on its daily chart and closed lower by 2.13 percent. Bears in this market should note, however, that the DJUSHB maintains an ascending regression channel that began building off the October low, with the 30-sma loosely following that channel higher. Until the channel's current 838 support and the 30-sma at 815.87 are broken, the trend remains intact, although it certainly looks as if the index may be preparing for a test of that support. This thing has to fall sometime, but many bears have expired of held breath waiting for that to happen.
After the upbeat MBAA report, news from Countrywide Financial (CFC) surprised. Countrywide Financial reported that its December fundings fell 6 percent from the previous month's on an average daily basis, although volume increased 37 percent over the year-ago level. January's fundings fell 19 percent, but the company blamed three fewer business days in the month for that drop.
Several other companies bucked expectations, disappointing when giving EPS forecasts for the first quarter. Those companies included BGP, CAM and KEA. Large insurers beat expectations, with American International (AIG) besting EPS estimates by six cents. Insurers AIG, Cigna (CI), and AON Corp (AOC) all bested expectations, too, although CI's revenue declined from the year-ago levels. Prudential (PRU) also released strong earnings and reaffirmed in-line guidance for the year. Those results pulled insurers up, with the IUX, the S&P Insurance Index, breaking above recent 324 resistance. The IUX was one of the few indices destined to close in the green, closing up 0.74 percent. Others included the XAU, the Gold and Silver Index, climbing 1.13 percent; the HUI, the Gold Bugs Index, gaining 1.51 percent, and the XNG, the Natural Gas Index, climbing 0.27 percent.
The negative sentiment at the open outweighed the good, however, bucking usual reactions in the last week, with CSCO and KKD declines contributing to the negative sentiment. CSCO would close lower by 3.34 percent, and KKD, by a whopping 9.19 percent.
December's Wholesale Inventories preceded the crude inventories number by thirty minutes, released at 10:00. Unless this number surprises enough to impact the GDP outlook, it's usually not market moving, but it bucked expectations and proved to be market moving after all. Although one source differed, the number rose .4 percent against an expectation of a rise of .9 percent. December's wholesale inventory-sales ratio fell to 1.14. Normally, this ratio at least would be considered good news because it suggests a depletion of inventories that will require a new build. U.S. 2004's wholesale sales climbed a record 13.8 percent. That 10:00 release began the long cascade down Wednesday morning.
Crude inventories numbers bucked expectations, too, when the Department of Energy released them near 10:30. The DOE reported that crude inventories fell 1 million barrels and distillates fell 3 million barrels, but that gasoline supplies rose by 500,000 barrels. According to one source, expectations had been for a rise of crude inventories by 500,000 barrels, a drop in distillates by 2 million barrels and a rise of gasoline inventories of 1 million barrels. Crude futures had been climbing since about 10 minutes before the released, surged up to $46.40 by 10:50, and then fell to the day's low of $44.50. Crude closed right at the midpoint of the day's range, nearly flat with Tuesday's close.
While Thursday's economic releases aren't numerous, they could be market moving. Thursday's economic releases begin with the usual 8:30 release of jobless claims, but also include December's Trade Balance, also released at 8:30, and January's Treasury Budget, to be released at 2:00. Trade Balance forecasts ranged from $57.4-58.1 billion, below the $60.3 billion seen in the previous number. The world's economists have been discussing how likely it will be that the narrowing will occur. Expectations for that narrowing have been high, and a widening could be taken badly. Here's one area where traders don't want to see a bucking of expectations tomorrow.
Remember to watch the RUT and the SOX. A bounce must include a Russell move back above the 50-sma and the 50 percent retracement of the decline off recent highs and a SOX move back above its 200-ema and -sma before it's believable. The TRAN's move to levels at which it usually tops and the VIX's recent lows argue caution.
New Option Plays
by OI Staff
Call Options Plays
Put Options Plays
Phelps Dodge - PD - close: 90.37 chg: -2.17 stop: 92.01
Phelps Dodge Corp. is the world's second-largest producer of
copper, a world leader in the production of molybdenum, the
largest producer of molybdenum-based chemicals and continuous-
cast copper rod, and among the leading producers of magnet wire
and carbon black. The company and its two divisions, Phelps Dodge
Mining Co. and Phelps Dodge Industries, employ more than 14,000
people worldwide. (source: company press release)
Why We Like It:
Investors seem to be turning away from copper producer Phelps Dodge. The stock broke down through the bottom of its nine-month trading range several days ago in addition to breaking down under technical support at the 100-dma. The breakdown was fueled by above average volume, which normally suggests more weakness ahead. Plus, PD is suffering with a bearish divergence in its MACD over the last few months. We also see that PD's point-and-figure chart has produced a bull trap pattern and broken its rising support with a $78 bearish price target. Our plan is to use a TRIGGER under round-number support at $90.00. If the market continues to slip lower then PD should break the $90 level soon. Our entry point will be $89.90. Our target will the $84.00 level just above the 200-dma.
This is likely to be a short-term play so we are suggesting the March puts.
BUY PUT MAR 95 PD-OS OI= 371 current ask $7.10
BUY PUT MAR 90 PD-OR OI=2144 current ask $4.20
BUY PUT MAR 85 PD-OQ OI=2973 current ask $2.20
Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 2.2 million
In Play Updates and Reviews
by OI Staff
Cooper Industries - CBE - close: 69.33 chg: -1.56 stop: 67.49
Shares of CBE hit some profit taking on Wednesday, as the major averages turned lower. The drop under the $70 level is discouraging but readers can watch for a bounce from support at the $68.00 level.
Picked on February 03 at $ 70.01
Change since picked: - 0.68
Earnings Date 01/25/05 (confirmed)
Average Daily Volume = 436 thousand
Goldman Sachs - GS - close: 111.45 chg: -0.10 stop: 105.00
CIBC started coverage on GS with an "out perform" and this probably helped propel shares of GS to an intraday high of $113.35. Unfortunately, the weakness in the major averages pulled GS right back down to give up all its early morning gains. We would expect some follow through on today's failed rally. A dip back to $110 or the 10-dma could be ahead of us.
Picked on January 30 at $106.12
Change since picked: + 5.33
Earnings Date 03/17/05 (unconfirmed)
Average Daily Volume = 3.4 million
Apollo Group - APOL - close: 76.44 chg: -2.32 stop: 80.11
Good news for the bears. APOL has broken down through the bottom of its one-week trading range following yesterday's failed rally at the $80 level. This looks like a new bearish entry point although APOL has yet to break its simple 100-dma.
Picked on January 23 at $ 77.61
Change since picked: - 1.17
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million
by OI Staff
A Trade and Trend Checklist, Part 2
For my trade and trend checklist, I'm using the Acronym "POVS" ('Pops' with a "V"), for the first letter of each word, to remind myself to check the following:
Pattern; i.e., price or chart pattern
The above are the major chart/indicator aspects I check before making a trade AND for my ongoing evaluation as to whether to stay in any option I'm holding.
I'll carry on a bit more on "Pattern" by seeing how patterns mentioned in my Trader's Corner of a week ago were influences.
[ To see the previous article, click here ]
These are such things as formation of a double top or bottom, a deflection or rebound from a down or up trendline (respectively), a return to a previously broken trendline that may now have an opposite influence, a return to the top or bottom end of a likely trading range, etc.
I suggested two major chart aspects relating to Index patterns that could/would likely be influences on the rebound occurring in the S&P indices and in the Nasdaq.
In the daily chart of the S&P 500 (SPX) and S&P 100 (OEX), it was what would happen on a return to the previously broken up trendline. Support areas, once pierced (broken) tend to "become" resistance later on and vice versa (resistance "becomes" support). So, the question was would the trendlines in question act as deflections to the rally going on in the indices?
In the daily chart of the Dow 30 (INDU), the pattern was simply a rebound to a down (resistance) trendline - in the INDU weekly chart it was a return to the previously broken up trendline that was of interest.
THE RELEVANT CHARTS -
The S&P 500 Index (SPX) stopped short and then appeared to reverse after intersecting from what was the prior up trendline (had you kept it on the chart extended to the right). I marked key resistance in my 2/6 Sunday Index Trader column as being at 1205, which was the SPX high so far this week.
This 1205 figure came from just seeing where the intersection would be on this trendline extended out as seen below, not from any prior chart point like a prior top or anything -
By the way, regarding questions I've gotten on the location of my Index Trader articles - you need only go to the Web site, not the e-mailed Newsletter and click on "Index Trader" up top.
The S&P 100 (OEX) chart below shows the same return to ITS previously broken up trendline. This, by way of showing how the same pattern tends to be repeated on similar indexes - but, not always. Sometimes the Dow chart shows a different pattern.
I'll come back to a comment on overbought/oversold and my "Sentiment" indicator later on.
The Dow 30 (INDU) as shown on its daily chart below, did NOT come back to a previously broken up trendline, merely to its down trendline - very straightforward as INDU often is in its pattern.
Note that the above down trendline in the daily Dow chart cuts THROUGH one day's intraday price range. This is an example of the optimal way that I usually draw trendlines which touch the greatest number of highs and greatest number of lows - how "internal trendlines" are constructed. The market is not so mechanical as to always draw trendlines mechanically. Rather, they help up see the dominant trend direction and rate of change up or down.
On the WEEKLY Dow 30 (INDU) chart below, it was interesting to note that the weekly highs of late-August/early January were deflected by the previously broken up trendline.
What does this pattern yield of practical use to traders now? It does suggest that the most recent rally might not go very far as that prior top could have marked the high for some time to come - such an outcome is a tendency when you see this formation. Not for nothing, did someone call this the kiss-of-death trendline. Time will tell on what further rally potential there is.
NASDAQ and RALLIES TO A PRIOR (DOWNSIDE) GAP -
With the Nasdaq Composite (COMP), the pattern that I was seeing as significant was the downside gap that formed on an overnight sell off in January. A daily chart gap is where the next day's high doesn't reach the prior day's low - a "gap" then exists. This is an area where there was "unfulfilled" selling. Traders would have sold in this area but couldn't, instead having to sell at lower levels -
The Nasdaq Composite rallied to above this gap area - the gap did not act as resistance. The saying is that gaps get "filled" - but sometimes not MORE than that, as this area may be stubborn resistance for some period of time. You may have noticed that the Nasdaq 100 (NDX) trades the most "technically". We need compare the two charts - the Composite and Nasdaq 100.
A note on Oscillator Overbought/Oversold readings - as seen in the RSI Indicator above (the number 2 in my "POVS" checklist), January's low occurred right at the level that is usually considered to mark an oversold condition in the Nasdaq.
This was not the most reliable "signal" for a bottom as there was nothing in the pattern that might confirm a bottom there. But the oversold reading did signal the exact (down) swing low.
NASDAQ 100 (NDX) -
It's chart's gap DID act as resistance: as soon as the gap area was nearly "filled in" (by a move to near the high end of it), a sharp downside move occurred within a day as can be seen below -
Gaps sometimes don't get filled in completely, contrary to the saying that they do. The more significant is the resistance, the more they tend NOT to.
Another technical aspect you may recall me discussing is the tendency for the 21-day moving average to tell us where the Index trend is going. If a rally takes an Index back to ABOVE the 21-day average, this is often telling us that the rally is going to continue. If the same average acts as resistance, it says that the trend may still be down, and a further downswing take the Index to the lower trading band (green line on the chart above).
You may have also heard me say that I like to see two CONSECUTIVE days where the close is above or below some support or resistance point of significance - this because of the tendency, especially in Stock Index futures, for stop-loss orders to be elected (activated) and for the resulting buying or selling to take the Index (or stock) only temporarily over the point.
Zooming in on the Nasdaq 100 (NDX) chart below shows us that there were NOT such two consecutive days with closes above the 21-day average. This is another example of a pattern not showing up that you would like to have - to stay long NDX calls in this case. This pattern made me at least want to exit calls at this point. It would have possibly got me into puts - at this point I could exit with a small loss if the rally DID develop further.
As the NDX goes of course, so goes QQQQ - but with the tracking stock it was even more apparent (at dashed blue line) what was the previous "breakdown" point. A return to a breakdown point (or breakout point in the case of a bottom), especially in a stock, indicates a place of potential distribution, an area where there will be a significant amount of stock for sale - hence, resistance.
VOLUME - notice how daily trading volume in the Q's fell off on the high point of the rebound. Volume should "confirm" the price pattern. If the price is going up, the trend in volume ought to be the same.
I'm going to mention "Sentiment" here, but write more about my Call to Put Indicator next time. The following S&P 100 (OEX) chart is the same one as seen above -
If you have found your way to my Index Trader column found as a section up top on the Option Investor WEB site (not the e-mail Newsletter), I indicated that I found the last low in the S&P suspect in that sentiment did not give a reading that I usually associate with a "final" bottom. This is the lower-most indicator on the S&P 100 (OEX) chart above.
My Call to Put Sentiment Indicator made its last peak (noted with the red down arrow) on 2/7, two days ahead of today's reversal. This indicator tends to peak, or bottom, 1-5 trading days before a reversal. So, it was right on "schedule"!
The goal is to see Patterns and Indicators "confirm" each other by at least two key technical aspects, of Pattern, Overbought/oversold, Volume or Sentiment, suggest a similar thing. We assume a trend will continue until it reverses. Highlighting the potential or likelihood of an UPCOMING reversal is very valuable to option traders.
Option traders benefit the most from ANTICIPATING a reversal, before option premiums get inflated after a (trend) reversal is already apparent or suspected.
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Contact Support with 'Leigh Stevens' in the Subject line.
Good Trading Success!!
Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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