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Daily Newsletter, Monday, 03/07/2005

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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

Nasdaq Plays Catchup

Nasdaq Plays Catchup

The bullish charge in the Dow and SPX last week mostly missed the Nasdaq, which made up some lost ground today. While the industrials struggled to hold positive, the Nasdaq added .95% for the day. Despite the bullish gains, however, it was a relatively small token and overdue. While the Dow and SPX were tagging new 52 week highs, those highs for the Nasdaq remained 91 points above today's Nasdaq high of 2101.

Volume was light on all the indices despite the QQQQ's high volume surge in the morning. The SPX hit a new 52 week high at 1229 and the Dow at 10984, but it was on light volume and without the breakout "fireworks" on might expect. Breadth was nevertheless positive, with advancing volume beating declining volume by a factor of 1.5:1 on the NYSE and 3.3:1 on the Nasdaq.

Dow Chart - Daily


 

The Dow finished 3.69 points in the red on a closing pullback after peaking at 10984. This left a small gravestone doji for the day, but the light volume and lack of range makes it an imperfect candidate for "The" high. Last week's break above the 10870-10880 level kicked off an upturn in the daily cycle oscillators that will persist so long as last Friday's lows hold. Technicians will note the lower stochastic high against the higher price highs, and the potential bearish divergence that such creates if the indicators turn down from here. Above 10825, the benefit of the doubt goes to the bulls.

Daily S&P 500 Chart


 

The SPX also broke to new highs today at 1229 and was rejected, but it closed in positive territory, +3.19 at 1225.31. The low was set at the open, at 1223. As with the Dow, last week's broken horizontal resistance looks like a rising triangle trendline, with today's action a consolidation at the highs. Provided that 1210 isn't broken from here, the potential oscillator divergence should clean itself up. A close below that level would target last week's lows, however, and a break below 1190 could set up this triangle breakout as a bull trap.

Daily Nasdaq Chart


 

The Nasdaq finally seized the spotlight today, rising 19.6 points to close at 2090.2 after tagging the 2101 high. That level lined up with channel resistance on the daily chart- a channel which resembles an extended bear flag so far. Despite today's gains, the Nasdaq's pattern is completely different from that of SPX and the Dow, and not bullishly so. Nasdaq bulls need to capitalize on the new daily cycle upphase and break north of that 2100 level to invalidate the bearish pattern. Below 2065, the daily cycle uptick should reverse.

Daily TNX Chart


 

The Treasury announced the auctions of 5- and 10-year notes to take place on March 9th and 10th, as well as a 4 week bill announcement to be held tomorrow. These combined auctions total 48B, with the 4-week bill auction the largest at 24B. At 1PM, the 3 month and 6 month t-bill auctions were held, with 38B worth of bills auctioned. Demand was strong, with the 3 month auction generating a bid-to-cover ratio of 2.67 at a yield of 2.71%, while the 6 month auction at 2.935% generated a bid-to-cover of 2.93.



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Ten-year treasury bonds traded both sides of unchanged today, with the ten year note yield (TNX) finishing the day lower by .6 bps at 4.304%. Last week saw some extraordinary upside moves for the TNX, but the shape of the daily cycle oscillators suggests that that upside was the exhaustion spike in the waning daily cycle. A break below 4.28% should be sufficient to confirm a new daily cycle downphase, while a close above 4.4% would kick off an upside trending move from here.

Daily chart of Crude oil


 

The financial press reported a statement made Sunday by John Snow on ABC's "This Week" in which he noted that high energy prices are a drag on the US economy and that, in his opinion, energy prices are "way, way too high." Today, the prices of crude oil fell as low as 52.825 on the Nymex as Reuters reported warmer than usual temperatures and attributed the decline to easing concerns about OPEC's production. OPEC is currently above its27 million BPD limit at approximately 27.63M BPD. The next OPEC meeting is scheduled for March 16 in Iran.

More compelling than John Snow's cogitation or Reuters' speculation is the stochastic sell signal that has been developing in the wake of last Wednesday's doji spike to the 55 level. While the trend on the daily chart remains higher, the indicators in this timeframe are signaling a downphase. The previous downphase was corrective within the broader climb off the 41 level, and rising trendline support is in the vicinity of 48.20. A break below 52 should be sufficient to confirm the downphase.

Despite this, crude oil closed the day higher by dime at 53.875, just off a session high of 53.925.

It was a quiet day for economic data. The US Department of Transportation's Bureau of Transportation Services (BTS) announced that the Transportation Services Index (TSI) fell .2% in December following November's .7% rise. This was the first decline in 3 months, but December's reading nevertheless represents a 5.1% rise from December 2003's levels. The BTS describes the TSI as "a single seasonally adjusted index of the month-to-month changes in the output of services provided by the for-hire transportation industries, including railroad, air, truck, inland waterways, pipeline, and local transit."

Consumer Credit was the big economic news for the day at 3PM, with US December Consumer Credit revised up to a 5% annual rate at 8.7B from the Fed's previously reported 1.8% rate at 3.1B. That rose to a 6.6% annual rate with January's 11.5B gain, blowing away estimates for 5.2B. Total Consumer Credit was reported at a seasonally adjusted $2.12 trillion.

The corporate news ticker was more active. Before the bell, QCOM raised guidance for fiscal Q2 from EPS of 25-27 cents to 26-28 cents while lowering its revenue forecast from 1.35B-1.45B to 1.35B-1.4B. The company upped its estimates of wireless phone chip shipments and CDMA/WCDMA shipments for the December quarter.

Boeing (BA) CEO Harry Stonecipher resigned as a director and officer at the request of the Board of Directors, with CFO James Bell named as interim CEO on the heels of an investigation into a personal relationship between Stonecipher and a female executive. The executive in question did not report directly to him. The Board determined that the facts indicated that Stonecipher's "actions were inconsistent with Boeing's Code of Conduct" and requested his resignation. Following the announcement, Fitch Ratings felt compelled to stipulate that BA's "A+" credit rating and "stable" outlook remain unchanged. The Air Force added that it sees the matter as internal to BA and won't be revisiting its decision to lift its 20-month ban on rocket-launch contracting by BA.

For the day, BA lost .14% to close at 58.30 on lighter-than-average volume of 6.139M shares.

Another shakeup saw SNE Chairman and CEO Nobuyuki Idei step down in the wake of a difficult 5-years at Sony, to be replaced by the British-born Howard Stringer. Stringer will be the first foreign ever to lead SNE since its inception in 1946. Also handing over the reigns is President Kunitake Ando, who will be replaced by Ryoji Chubachi. SNE rose 2% to close at 39.31 on nearly 5x the average daily volume.

Citing increases in sales from its joint venture with SNE for Spiderman movie merchandising, Marvel Enterprises (MVL) beat estimates for Q4 earnings by 11 cents. The company reported earnings of 30.1M or 27 cents per share, up from 13.49M or 12 cents and blowing away estimates for 16 cents EPS. MVL reiterated its estimate for 2005 EPS between $1.07-$1.12, and places sales $370M and $390M. The company expects Q1 earnings of 25-29 cents compared with 27 cents in Q1 2004, but expects revenue to fall from 122M in Q1 2004 to 88M-99M. MVL did not comment as to its rationale for the projected drop. MVL lost 2.44% to close at 18.

Capital One (COF) announced its agreement to purchase retail banker HIB for a 24% premium to Friday's closing price in a deal worth 5.3B. As a result of the acquisition, COF expects its 2006 operating earnings to decline 1% to $7.64 per share, but told analysts that the deal should boost earnings in 2007 to $8.86. Fitch Ratings responded by placing COF's senior debt and preferred shares on ratings watch positive, and affirmed its short term debt ratings. HIB rose 21.34% to close at 32.24 on volume of 19M shares (compared with its ADV of 776,500 shares), while COF lost 2.66% to close at 76.

After the bell, TXN gave its midquarter update and slammed the QQQQ below 38 support. The company expects total revenue to come in at $2.91B-3.03B compared with prior guidance of $2.90B-3.14B. The company expects earnings per share between 22 cents and 24 cents, compared with its prior estimate of $.22-$.26.

There are no major economic reports scheduled for tomorrow, and Wednesday's slate is quiet as well with the Fed Beige Book due at 2PM. The earnings calendar is also quiet for tomorrow, and other than the Treasury auctions, the markets will be on their own. On the one hand, last week's breakouts in the Dow and SPX were blessed by the Nasdaq today, but the light volume and persistence of resistance remain troublesome, as does the afterhours selling in QQQQ following the TXN update.

Still, the daily cycles on all 3 indices have executed a "Crazy-Ivan," now on young buy signals, and unless bulls completely drop the ball here marked by a failure of Friday's lows, those daily cycles will continue to point higher. Provided that the Friday lows are not revisited, these new signals need to strengthen- even a sideways consolidation in today's range would do it for the bulls.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

Play Updates

In Play Updates and Reviews

Call Updates

Alliance Resource - ARLP - cls: 78.80 chg: -0.95 stop: 74.49

Uh-oh! Readers need to be careful here. ARLP spiked to $80.99 this morning and then promptly sold off. Shares did bounce from their lows but began to fade again this afternoon. The session almost looks like a bearish engulfing candlestick. Now ARLP is due for some rest but readers may still want to consider taking some profits here. We'll look for the $75.00 level to offer support.


 

Picked on February 27 at $ 75.01
Change since picked: + 3.79
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 95 thousand

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St Joe Co - JOE - close: 75.64 chg: +0.59 stop: 72.49

We did not have to wait very long for JOE to breakout over the $75.00 level and hit our entry point at $75.51. Shares did that today and the MACD is inching closer to a new buy signal.


 

Picked on March 07 at $ 75.51
Change since picked: + 0.13
Earnings Date 05/04/05 (unconfirmed)
Average Daily Volume = 500 thousand

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Progressive - PGR - close: 89.76 change: +1.00 stop: 85.80

PGR is one of our new calls that has quickly passed our trigger to buy calls. The plan was to go long at $89.51 and shares of PGR quickly did that this morning.


:

Picked on March 07 at $ 89.51
Change since picked: + 0.25
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 770 thousand

Put Updates

Apollo Group - APOL - close: 77.50 chg: +2.81 stop: 78.01

Danger! Danger! We can't find any news to explain APOL's sudden strength but the 3.76 percent rally was fueled by decent volume. If you check the intraday chart you'll see rallies powered by volume. The stock is testing resistance at the $78.00 level and its descending trendline. Conservative traders may want to exit now. At this point we are expecting APOL to hit our stop loss tomorrow.


 

Picked on January 23 at $ 77.61
Change since picked: - 0.11
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million

Drops

Research In Motion - RIMM - cls: 62.22 chg: -5.10 stop: 70.51

Target achieved! Actually RIMM has surpassed our initial target of $64.00-64.50. The stock lost 7.5 percent on very big volume to breakdown below its January lows. The move was caused by a Piper Jaffray downgrade to "market perform". This kind of drop on a day when the NASDAQ out performs can look pretty negative. We are closing out the play at $64.25 (middle of the range). While we do suggest readers take profits here some may want to consider just significantly tightening stops and targeting the $61-60 area.


 

Picked on February 23 at $ 69.75
Change since picked: - 7.53
Earnings Date 03/22/05 (unconfirmed)
Average Daily Volume = 7.9 million


Trader's Corner

Point and Figure - Let's begin with the basics

Point and Figure charting has been around for many many years. But it still works and still offers some advantages other types of charting do not. Point and Figure charts are only concerned with price, unlike candlesticks or bar charts, where the vertical coordinates are based on price and the horizontal coordinates are based on time. If you have been studying charts for any length of time, this concept may be hard to grasp. Point and Figure charts don't care if the price action covered one day, one week, one month or one year, to the P&F chartist time is irrelevant. The point and figure chart is concerned only with price movement and time is not taken into consideration while plotting the price action. Since only price changes are recorded, if no price change occurs then the chart is left untouched.

You have probably heard the term 'noise' when referring to charts. Noise is all the fluctuations and gyrations price action can make when it is not trending. And since stocks only trend 30% of the time there is a lot of noise on price charts. Wouldn't it be nice if you could take most the 'noise' out of the chart? Since time is not a factor in P&F, the disturbances caused by small fluctuations in price (noise) are removed and, therefore, trends become easier to spot.

So how do P&F charts remove the noise from charts? P&F chart's prices are in vertical columns of Xs and Os. The Xs represent demand or increasing prices and Os represent supply or decreasing prices. Each X and O in turn represents a change in a price increment called the box size. There are two attributes that affect the appearance of a P&F chart: box size and reversal amount.

First of all let's talk about the box size. This is the minimum price increment that will be drawn on the chart. So if the price changes by less than the box size, no box is drawn and the chart remains unchanged. The price can bounce around within this price increment all it wants but unless it moves greater than the box size the P&F chart will not change. All the 'noise' inside this increment is removed. Increasing the box size filters smaller price movements and decreasing the box size adds more 'noise.'

All of the examples I will use in this and subsequent articles on P&F will use a $1.00 box size. However, it should be obvious that a $3.00 reversal in a $50 stock is much different than a $3.00 reversal in a $5.00 stock or a $150.00 stock. To compensate, we adjust the box size for different price levels.

Traditional box size values are listed in this table:

Price Range   Box Size
Under $0.25   .0625
.26 to 1.00   .125
1.01 to 5.00   .25
5.01 to 20.00   .50
20.01 to 100.00   1.00
100.01 to 200.00   2.00
200.01 to 500.00   4.00
500.01 to 1,000.00   5.00

This system was designed long before the Dow crossed the 1,000 point mark, much less 10,000 so when plotting the DOW, some use a box size of 50 and a box size of 25 for the S&P 500 and the NASDAQ indexes.

When choosing a box size it is important to remember your goal is to highlight significant price moves while filtering noise. If you were to play with various box sizes, you would find that small changes in box size have little effect on the chart or the signals generated. Each X or O is a box.

The second attribute that affects the appearance of the P&F chart is the reversal amount. The reversal amount is the number of boxes that need to be retraced to cause the P&F chart to reverse from a column of X's to a column of O's or vice versa. When the reversal amount is small, reversals will be more frequent and longer-term price trends will be more difficult to identify. Increasing the reversal amount makes longer term trends to appear more readily but the short-term ones disappear. Everything is a trade-off isn't it?

So how many boxes do you use for a reversal? Well another name for Point and Figure Charting is "The Three Box Reversal Method." While I don't know how it was originally decided, there is a visual appeal to using the three boxes to designate a change in direction.

Making a Column of Os

P&F charts are only concerned with high and low prices, the closing price is irrelevant and as long as the price action continues in the same direction you stay in the current column.

For example if you're in a column of Os, and the low today forces one box to be added to the chart then add an O to the column. Of course, if the low is more than one box lower, then fill in all of the boxes to match that low price.

Continue marking Os in the current column as long as the stock continues to make lower lows. That is to say continue in the current column of Os, regardless of any other price action, disregarding the highs during the trading session. This is an important point so let me say it another way: as long as the low for the stock adds one box to the column of Os, ignore the highs. Or as long as the high for the stock adds one box to the column of Xs, ignore the lows.

Moving to a Column of Xs

To move from a column of Os to a column of Xs, two things must occur. First, the stock must not move down one box during the trading session, in other words the stock may not make a lower low. Second, the high price for the stock must be at least three boxes higher than the lowest O. If these two conditions do not take place, then the P&F chart is not updated.

Let's find a P&F chart to follow to see how this works. If you really want to get a handle on P&F charting it would be worth your while to get a sheet of graph paper and draw the chart yourself.

To build a chart, you have to start somewhere. I've chosen INTC whose price back in 2001 moved from $27 to $31 over several trading days. The box size is $1.

Here is what the P&F chart for INTC looks like. For now start with the left hand column. (This is a P&F Chart from Stockcharts.com)


 

Here is the left most column:

31    O
30    O
29    O
28    O
27    O

The first column from $27 to $31 is filled with Os, telling you that sellers are in control of the stock.

To move to the second column and start a column of Xs, two things must occur. First, the stock cannot touch $26 during the trading session for this would add another O to the column. And second, the high for the day must be $30 or higher (3 boxes higher than the lowest O). In our example, that is exactly what has occurred. INTC printed a price of $30 but not to $31 and did not touch $26 (a lower low) so a column of Xs is drawn.

So we mark a column of Xs, telling us that demand is overcoming supply. When marking the column of Xs, start one row above the last O, and fill at least 3 boxes with Xs. In this case, start at $28, and fill in the boxes for $28, $29, and $30 with an X.

31   O  
30   O X
29   O X
28   O X
27   O  

One day (you don't know the date) INTC fell to $27 but not to $26 and did not touch $31 so a column of Os is drawn.

31   O    
30   O X  
29   O X O
28   O X O
27   O   O

Then on another day INTC trades up to $31 but does not trade down to $26 so a new column of Xs is drawn. But do you see something different here? Notice the 6 on the 28 row. This is the only indication of time and tells you the P&F chart has now moved to the 6th month of the year. We are now in the month of June 2001.

31   O     X
30   O X   X
29   O X O X
28   O X O 6
27   O   O  

Let's move forward 6 columns and take note of the 7 in the 7th column of Os? That tells us we have moved to July and look at how much 'noise' you see on the chart. From the 6 (June) to the 7 (July) a whole months worth of trading and there is only 2 or maybe 3 updates to the P&F chart. Now look at a daily bar or candlestick chart of INTC and see how much noise you see. The number of updates from July (7) to August (8) was even less. (P&F denotes the 10th month October with an "A", November with at "B" and December with a "C")

32               X  
31   O     X       8 O
30   O X   X O X   X O
29   O X O X O X 7 X O
28   O X O 6 O X O X O
27   O   O   O   O   O

Let's stop here and do another example. The more you practice and draw these charts the better you become. However, that may be a moot point since there are many websites that will draw P&F charts for you so you don't have to actually draw them yourself. However, you should know how they are constructed.

Let's start with a look at a BAR chart of GE from August 2004 to now. A yearly high was made on December 14th at 37.75. Let's see if we can identify this high on the P&F chart.


 

Here is the P&F chart for GE and once again, I got this chart from StockCharts.com.


 

Let's "read" the last column of Xs. The column started in the month of June (6) when first of all GE did not move down one box during the trading session, or did not make a lower low. Secondly, GE's high for the day was at least $32, three boxes higher than the lowest O at 29. These two conditions took place so a new row of Xs was created. Then in September (the 9 on the chart) GE reached higher than $34 but did not reach $35 until November (the B on the chart). And then it was not until December that GE reached over $37 but not to $38.

Since June GE has never fulfilled the conditions for a reversal to a column of Os and since December GE has not been able to make a higher high to add another X. Take a look at the bar chart and see how much noise has been eliminated and how the P&F chart gives you a much clearer picture of how GE has traded over the last 8 months.

P&F charts can take out most of the gyrations and fluctuations you see in bar or candlestick charts but we have only touched the surface of how useful these charts can be. Next week we will address how to draw support and resistance lines on the charts. So see you then.

Remember plan you trade and trade your 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.

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