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Daily Newsletter, Tuesday, 03/15/2005

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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

The Uptrend Holds

There were many times during the day today that I wasn't sure the uptrend from October 2004 was going to hold (see daily DOW and SPX charts below). Just like the move down on February 22nd to that uptrend line, the move down on Friday also landed on the uptrend line (more so for the SPX than the DOW which had stopped just above the line). It looked like a bearish day on Friday but so far the bounce looks like it could stick. Friday's and today's lows need to hold in order for the uptrend to remain intact. There were no significant market news items today and most of the day was downright boring. Oil rallied strongly off its low of $53.45 and briefly poked its head back above $55 with a high of $55.05. Interestingly enough, both oil and equities rallied together this afternoon. It's just another example of how the market trades on emotions and often disregards negative/positive news, or reacts differently to the same news on different days. Friday the pundits said the market sold off because of the rally in oil. So why did the market rally today on a further rally in oil? They'll likely say because the market already priced in an oil price increase. What a bunch of phooey. (Can you tell I'm not a fundamental trader?).

Looking at some market and stock news from today, there were some downgrades of semis in overseas markets, and the drop in forecasts for testing equipment on Friday (a leading indicator of semi equipment weakness) caused semis to take a beating in the Nikkei and European markets. The SOX was basically flat today though it did close in the green with an end of day rally. IBM got a small lift today with its announcement to buy Ascential (ASCL) for $18.50/share equating to a 17.8% increase above its Friday close for ASCL. The merger is being viewed as positive since the two companies have more than 550 joint customers around the world already. Genentech (DNA) closed up $10.93 (21.7%) to $55.00 after announcing the effectiveness in testing of its Avastin in combination with chemotherapy in preventing death in "non-small cell lung cancer". Caterpillar CAT) dropped almost 2.5% to 96.54 after Legg Mason downgraded them based on valuation concerns and lowered earnings estimates. CAT tends to be a good company to follow as an indication of the health of our industrial complex. Disney (DIS) was up on the news that President Robert Iger was going to replace Michael Eisner this fall as Chief Executive Officer. But American International Group (AIG) dropped on reports that their CEO, Hank Greenberg, will be resigning this week. So these were essentially a wash for the DOW. The US Dollar got a good bounce today, up to $82.04 which wiped out the decline of last week. This depressed the metals with gold down $5.00 (-1.1%) from Friday's close. Silver lost almost $0.14 (-1.8%). Bonds rallied which knocked the 10-year yield down 0.019 to 4.52% and 30-year yield down 0.028 to 4.78%.

Taking a look at the market and some sectors shows that we're on the edge looking over and wondering if we should jump or pull back.

SPX chart, Daily

The SPX chart shows that the up-channel containing price since last August continues to hold. As mentioned above, price came down to the uptrend line from October 2004, just like it did on February 22nd, and we got a bounce today. It wasn't much but until that uptrend breaks, the trend is your friend and you should be looking to buy the dips. As it turns out, that "bounce" from the February 22nd low turned out to be a nice rally. The pattern of the rally from the January low and a potential Fib price target of 1233 and Fib turn date of March 18th (this expiration Friday) leads me to believe we have one more rally leg ahead to a minor new high. This could be setting up the mother of all put plays as an ex-OIN writer used to call these setups. But watch that uptrend line--conservative players should use that as their signal to start looking for opportunities to test the short side. Until then, buy those dips!

DOW chart, Daily

Just like SPX, the DOW is testing its uptrend line. There is a potential Fib price target of 11085 which would closely coincide with SPX 1233. I suspect that if price were to rally above 11,000, the party hats would be out but don't let it fool you--it could end up being the perfect setup sucking in the bulls and trapping them (if they don't use stops). As with the SPX, stay long above the uptrend line but start looking for shorting opportunities if it breaks.

Nasdaq chart, Daily

The Nasdaq continues to mark time by running sideways while SPX and DOW have pushed to new highs recently. This sideways triangle pattern shown on the chart, if it follows through with one more push higher, is a classic consolidation pattern and points lower as soon as it's done. I show a downside Fib projection of about 1914 which is very close to the October 2004 lows. A break of the lower trendline of this triangle pattern should be a good signal to get short. Until then, this always has the potential to rally higher out of this pattern, although I consider that a lesser likelihood.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing market is getting close scrutiny because of all the hand-wringing that's going on with it. Are we in a bubble or not, is it going to come crashing down, do we have enough demand to keep it going, etc. Rather than listen to pundits or wonder what the fundamental reasons are for what's happening, just watch the chart. It will always lead what happens in the fundamental world. Price has dropped fairly sharply from its high but is finding support at the top of its longer term up-channel that price has been in since 2002/2003. If it drops back inside then it may be headed to the bottom of the channel and I'd say the housing market will experience a large correction. However, it would have to drop over 30% from its high in order to break its longer uptrend. So there's a long way to go before the "bubble" is pricked. But it does look like the steeper ascent from October 2004 is over.

Oil Index chart, OIX.X, Daily

The Oil index has a similar chart to the previous home construction index except it looks like it could be starting a smaller downward correction. If price pulls back to the top of its longer term up-channel, watch for the same thing though. See if it stays in the steeper up-channel or if it drops back into the longer term up-channel, in which case it will probably head down to the bottom of it.

Bank Index chart, BKX.X, Daily

The banks can give us a good heads up for what's happening in the broader market. If banks' profits are getting squeezed we will likely see a trickle down effect in the other industries. Right now price is bouncing between two uptrend lines--it broke down below a steeper uptrend from October 2004, bounced off its longer term uptrend from May 2004, briefly climbed back above the steeper one and lately found support at its 200-dma's. If price breaks below both the 200-dma's and the longer term uptrend line, it will look bearish for this index.

DJ Transportation Index chart, TRAN, 60-min

Like the banks, the Trannies are good to watch for signs of the overall health of our economy. When we produce, we ship, when we don't, the shippers feel the pain. It's also a good index to watch if you're a DOW Theory fan. So far the TRAN made a new all time high which has not been matched by the DOW. If the market starts breaking uptrends, we could have our non-confirmation indicating that all is not well with the market.

Generally speaking it was a quiet day in the market. The uptrends of importance are holding but I would say barely holding. Any drop below Friday's/today's lows could set off a lot of sell stops. If that were to happen, I would shift to sell the rallies from buying the dips. While I believe we have a little more upside to go, I don't believe there's that much left to the rally from last fall. I think if you're long, follow price up by keeping your stops just below the uptrend lines. If you're long the tech stocks, I think you run a higher risk but again, keep your stops just below Nasdaq 2000 and you will at least get out before the real sell off kicks in. And as a reminder, this is opex week which is known as "scam week". The pile gets pushed around a little more violently as positions are squared. It may not necessarily be trend setting, even on an intraday basis. Wednesdays of opex week are usually the most volatile.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
NoneNone

New Calls

None Today.

New Puts

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

Barr Pharma - BRL - close: 50.00 chg: -0.12 stop: 45.99

No change from previous update.

Picked on March 01 at $ 48.53
Change since picked: + 1.47
Earnings Date 02/02/05 (confirmed)
Average Daily Volume = 800 thousand

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Hartford Financial - HIG - cls: 71.47 chg: +0.49 stop: 69.95

HIG has bounced from round-number, psychological support at the $70.00 level. Normally we would use such a rebound as a new bullish entry point but given the bearish tint to the IUX insurance index we'd prefer to err on the side of caution. Watch for some confirmation in HIG tomorrow before considering new bullish plays.

Picked on February 06 at $ 71.17
Change since picked: + 0.30
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million


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Ingersoll-Rand - IR - cls: 84.57 chg: +0.32 stop: 82.49

No change from previous update.

Picked on February 27 at $ 83.00
Change since picked: + 1.57
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.1 million

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Parker-Hannifin - PH - close: 68.57 change: +0.53 stop: 63.99

No change from previous update.

Picked on March 03 at $ 68.11
Change since picked: + 0.46
Earnings Date 01/18/05 (confirmed)
Average Daily Volume = 1.0 million

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PACCAR - PCAR - close: 76.72 chg: +1.49 stop: 71.99

It looks like traders decided to buy the dip to the $75.00 level and PCAR out performed most of the market on Monday. Readers can use today's strength as a new bullish entry point.

Picked on February 28 at $ 75.25
Change since picked: + 1.47
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.0 million


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Progressive - PGR - close: 90.50 change: +1.96 stop: 87.49*new*

PGR turned in a strong day rising 2.2 percent with volume surging during the late afternoon ramp up as the stock broke out over the $90.00 level. Today's move could put shorts on the run and we would expect to see some follow through tomorrow. We cannot find any news or events to account for the late day strength. We're going to take advantage of this move and raise our stop loss to $87.49.

Picked on March 07 at $ 89.20
Change since picked: + 1.30
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 770 thousand


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Red Robin Burger - RRGB - close: 49.05 chg: +1.02 stop: 43.99

No change from previous update.

Picked on March 10 at $ 48.00
Change since picked: + 1.05
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand


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Texas Industries - TXI - cls: 64.90 chg: +0.82 stop: 63.49

No change from previous update.

Picked on January 09 at $ 60.18
Change since picked: + 4.72
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 238 thousand

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Wellpoint - WLP - close: 121.50 chg: -1.31 stop: 119.99

No change from previous update.

Picked on March 06 at $126.88
Change since picked: - 5.41
Earnings Date 04/20/05 (unconfirmed)
Average Daily Volume = 2.1 million

Put Updates

Allergan - AGN - close: 73.31 chg: +0.22 stop: 76.05

AGN did produce a meager bounce today but volume was rising with the stock late in the session. We're expecting another positive day tomorrow but traders can look for a failed rally under the $75 level as a new bearish entry point.

Picked on March 13 at $ 73.09
Change since picked: + 0.22
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand

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Apollo Group - APOL - close: 74.40 chg: +0.40 stop: 78.01

No change from previous update.


Picked on January 23 at $ 77.61
Change since picked: - 3.21
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million

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Career Education - CECO - close: 33.04 chg: -0.18 stop: 37.51

No change from previous update.

Picked on February 22 at $ 34.90
Change since picked: - 1.86
Earnings Date 02/15/05 (confirmed)
Average Daily Volume = 2.1 million

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Google Inc - GOOG - close: 174.99 chg: -2.81 stop: 185.01

No change from previous update.

Picked on March 10 at $179.49
Change since picked: - 4.50
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 10.9 million

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Ishares Dow Jones US Energy - IYE - cls 75.95 chg: +0.55 stop: 80.01

All right. Now we're starting to grow a little uneasy. A one-day oversold bounce is to be expected but the IYE has now bounced two days in a row. Readers should be on their toes here and conservative traders may want to lower their stops!

Picked on March 09 at $ 76.25
Change since picked: - 0.30
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 124 thousand

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Cheniere Energy - LNG - close: 72.50 chg: +1.82 stop: 75.01

LNG is bouncing much like the oil sector indices. We would not suggest new bearish plays until LNG trades under $69.00 again.

Picked on March 11 at $ 69.49
Change since picked: + 3.01
Earnings Date 03/10/05 (confirmed)
Average Daily Volume = 517 thousand


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Oil Service Holders - OIH - close: 95.78 chg: +1.07 stop: 100.01

The OIH is bouncing just like the IYE and the OIX index. Conservative traders may want to adjust their stops.

Picked on March 09 at $ 96.10
Change since picked: - 0.32
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.1 million

Dropped Calls

Nova Chemicals - NCX - close: 48.32 chg: -0.64 stop: 47.95

NCX performed its second mysterious sell-off in the last few days during Monday's session. The stock fell sharply at the open and then proceeded to breakdown under support at the $48.00 level. We were stopped out at $47.95. Shares did manage a bounce from its lows but volume was very heavy on today's decline. Readers might want to keep an eye on NCX for a bounce back above the $50.00 level.

Picked on February 22 at $ 48.01
Change since picked: + 0.31
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 383 thousand

Dropped Puts

Genentech - DNA - close: 53.65 chg: +9.57 stop: 47.11

Believe it or not it was a very boring day for DNA with shares trading in a 50-cent range for most of the session. Then all of that changed in the last hour of the day. Shares were briefly halted for news pending. After they reopened for trading DNA exploded higher for a 21.7 percent gain. The company announced that its latest Phase III trial of Avastin combined with chemotherapy helped lung cancer patients live longer (source: AP). One broker followed the news with an upgrade. We were quickly stopped out at $47.11. We knew this was a high risk play and outlined the risks in the original update but we didn't expect any kind of news like this for another month or two.

Picked on March 10 at $ 44.20
Change since picked: + 9.45
Earnings Date 04/11/05 (unconfirmed)
Average Daily Volume = 3.8 million

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MicroStrategy - MSTR - close: 70.83 chg: +5.94 stop: 68.51

Ahah! We warned you MSTR was still volatile. We're also happy that we used a trigger to wait for MSTR to confirm the breakdown. This morning Jefferies upgraded the stock to a "buy" and raised their price target to $81.00. This sent shares of MSTR soaring. We're going to close the play unopened. Nimble traders may actually want to consider bullish positions if MSTR can breakout over $73.50.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume = 659 thousand


Trader's Corner

Point and Figure 201

In our last session we talked about P&F basics and how to draw a chart. We discussed the importance of the box size and the reversal amount and setup a couple of examples to show how these two P&F Attributes are used.

I would now like to show you how to draw support and resistance trend lines on a P&F chart.

P&F trend lines are simple tools to help you determine areas where buyers are willing to support the price of a stock by buying - support, and areas where the supply tends to take over - resistance. There are only four types of trend lines used in Point and Figure Charting. They are:

Bearish Resistance Line
Bearish Support Line
Bullish Resistance Line
Bullish Support Line


I have decided to continue to use the GE example from last week because it shows better trending than does INTC. Here is GE's P&F chart.


The Bearish Resistance Line

A Bearish Resistance line shows where we expect stocks to meet selling pressure. Stocks trading below the Bearish Resistance Line are not good candidates for purchase.

To build the Bearish Resistance Line work your way from left to right, look for the highest column of Xs. I will use a plus sign '+' to mark the Line. Starting at the $58 box, I will add one '+' move over and down one box, and add another '+'. Continue this process until the line is pierced with a row of Xs, which is a break of the bearish resistance trendline and tells you demand is starting to overtake supply. Here is how the Bearish Resistance line will look.

The Bearish Support Line

The Bearish Support Line runs parallel to the Bearish Resistance Line, but below it. Notice the angle of the Bearish Support Line and the Bearish Resistance line are the same. A Bearish Support line shows where we expect stocks to see the selling pressure easing.

To create the Bearish Support Line working your way from left to right start with the lowest column of Os. I will use a plus sign '+' to mark the Bearish Support Line. Starting at the $47 box, add one + then move over and down one box, and add another +. Continue this process until a row of Os pierces the line, which is a break of the bearish support line. This is the most bearish of all scenarios but could also be capitulation and the stock is starting a process of making a bottom.

Notice that several specific events need to occur before we can draw a Bearish Support Line and Bearish Resistance Line with certainty. Obviously, you need a column of higher Xs, indicating buying pressure. To the right of this column of Xs, you also must have multiple columns of Xs that do not make a higher highs indicating that the buying pressure is easing. Next you must have a column of Os indicating that selling pressure is starting to exert itself then multiple columns of lower Os demonstrating selling pressure is increasing.

To show you how to draw the Bullish Support and Resistance lines I would like to use last 8 columns on the GE chart. Here is a blow-up of those last few lines.

Bullish Resistance line

A Bullish Resistance line shows where we expect stocks to see easing of buying pressure.

For the Bullish Resistance line, working from left to right start at the highest column of Xs and place a '+' then move over one column and up one row. In this example I will place a '+' in the 32 box move over one column and up one row to place another '+'. Continue this process until a row of Xs pierces it and breaks resistance, which is the most bullish of all scenarios but could also be the beginning of a topping process.

Bullish Support line

The Bullish Support Line runs parallel to the Bullish Resistance Line, but below it. Notice the angle of the Bullish Support Line and the Bullish Resistance line are the same. A Bullish Support line shows where we expect stocks to see the buying pressure increase. Stocks above the Bullish Support line are good long candidates.

Working your way from left to right, start at the lower most column of Os and place your first '+'. Starting with the box at 20 place a '+' then move over one column and up one row and place the next '+'. Continue this process until a row of Os pierces it and breaks support.

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Notice that several specific events need to occur before we can draw a Bullish Support Line and Bullish Resistance Line with certainty. Obviously, you need a column of higher Xs, indicating buying pressure. Then to the right of this column of Xs, you also must have multiple columns of Xs that make higher highs indicating that the buying pressure is increasing. Next you must have a column of Os indicating that selling pressure is exerting itself then multiple columns of higher Os demonstrating decreasing selling pressure.

Once a support or resistance line has been broken you need to start over again from where the last trendline ended off and work you way from left to right to start building the next trendline.

Let's look at another example. Here is the P&F chart for AIG with the trendlines drawn in by Stockcharts.com. For some reason StockCharts does not draw the bullish and bearish channels - both support and resistance lines. I suspect that it clutters up the chart too much and you may miss the true essence of P&F with too many lines. Or it could be that the Bearish Resistance and the Bullish Support lines are the more important trendlines for when these are broken it usually means the stock is changing from bullish to bearish or vice versa.


Start with the first blue bullish support line. Here is how we draw the line - "Working your way from left to right, start at the lower most column of Os and place your first '+'. Then move over one column and up one row and place the next '+'. Continue this process until a row of Os pierces it and breaks support."

While AIG was above this support line it is bullish and your first hint that the bullishness is in trouble is when the Red Bearish Resistance line starts to form showing us that supply is starting to overtake demand. Here is how we draw the Bearish Resistance line - "Work your way from left to right, look for the highest column of Xs, add one '+' move over and down one box, and add another '+'. Continue this process until the line is pierced with a row of Xs."

The Bearish Resistance line starting to form only means bulls beware but it is yet not time to bail. It is time to bail and look for new long candidates when the Bullish Support line is pierced by a column of Os meaning that supply has overtaken demand and AIG has now become bearish. I have marked this column with a magenta arrow.

Now the bears are in control and supply of overwhelming demand but it is also time to start watching for signs of bullishness creeping in. That happens when the next Bullish Support line starts to form and AIG's complexion changes from bearish to bullish when the Bearish Resistance line is pierced by a column of Xs (marked with the 2nd magenta arrow). Demand is overwhelming supply and AIG is bullish.

AIG remains bullish for quite some time but of course stocks ebb and tide and eventually supply will overtake demand. Fortunately the P&F chart will alert us as soon as this happens when you see Bearish Resistance line starting to form and/or the Bullish Support line is broken (marked with the 3rd magenta arrow).

Point and Figure charts provide a very good visual for determining whether a stock (or index) is bullish or bearish. Stocks are bearish if price is under a Bearish Resistance line and bullish if above a Bullish Support line. Then P&F charts also informs you when the tide is changing and when to bail on a bullish or a bearish position.

The next article will cover double tops and bottoms, triple tops and bottoms, catapults and triangles.

Until then, remember trade your plan and plan your trade.


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

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