Bulls were inspired today by falling oil prices, oversold conditions where price stopped on strong support, particularly for the Nasdaq, and they liked the encouraging economic data. The Dow (+1.3%) saw 29 of its 30 components in the green today and it recorded its first triple-digit gain in nearly a month while the Nasdaq (+1.6%) closed above the psychological 2000 mark for the first time in more than a week. In so doing it also broke its downtrend line from its March 7th high. Falling crude oil prices ($53.95/bbl, -$0.25, May contract), resulting from strong inventories data, eased some inflationary concerns ahead of tomorrow's February Personal Income and Spending report and Friday's March employment report. Crude oil inventories rose 5.4 mln barrels (consensus was +2.5 mln) and distillates fell only 1.1 mln barrels (consensus was for -1.5 mln), which offset a larger than expected decline in gasoline inventories (-2.9 mln barrels vs consensus of -1.8 mln). That drop in gasoline inventories is worrisomewe could see much higher prices in gasoline as the summer driving season approaches. Stand by for a Consumer Sentiment drop if gas prices keep heading higher. And the auto companies will not have an easy time selling their gas-guzzling SUVs and trucks. And with more money going to fill their vehicles, there will be less discretionary spending for all the other things in life. That will have an impact on the bottom line of a lot of non-oil related companies. But thats in the future (next month). Today was bullish.
Amer. Intl Grp - AIG - cls: 57.16 chg: -1.04 stop: 55.95
Uh-oh! We feel like yelling, "ABORT, ABORT!" but we're not willing to give up on AIG just yet. AIG was the only Dow-component not to trade higher today. Instead shares dropped 1.78 percent after the company postponed their Q4 results for the second time. The lack of follow through on its reversal and on such a bullish bounce in the markets makes us very wary.
Picked on March 29 @ $ 58.01
PalmOne - PLMO - close: 25.08 chg: +0.22 stop: 23.25
We don't have much to report on for PLMO and this time that's a bad thing. The lack of participation in today's market bounce is a concern. Be on your guard.
Picked on March 23 at $ 25.71
Red Robin Burger - RRGB - cls: 50.56 chg: +0.14 stop: 44.99
No change from previous update.
Picked on March 10 at $ 48.00
Allergan - AGN - close: 70.09 chg: -0.32 stop: 75.01
The lack of participation in today's market bounce is good news for the bears.
Picked on March 13 at $ 73.09
Beazer Homes - BZH - close: 49.70 chg: -0.35 stop: 54.01
Ding! BZH slipped to $48.50 this morning, near the 100-dma, before bouncing. Yesterday we suggested that conservative traders consider exiting at $48.50. We're going to maintain our $48.00-46.50 target. Today's breakdown under the $50.00 mark is good news for housing bears in BZH and the lack of participation in the market's bounce by the home construction index is also good news. However, we do notice that BZH appeared to be bouncing higher by the close. Look for possible bounce back into the $51-52 range before BZH turns lower.
Picked on March 17 at $ 51.43
Google Inc - GOOG - close: 180.45 chg: +0.88 stop: 185.01
Good news! The market produced a big bounce and First Albany reiterated its "buy" rating on GOOG but shares of the search-engine giant failed to respond positively. This bodes well for our put play but we remain cautious especially if the market continues to bounce. Look for a drop under $177 before considering new bearish positions.
Picked on March 10 at $179.49
Intl Bus. Mach. - IBM - close: 90.68 chg: +0.08 stop 92.15
Today's 8-cent gain in IBM looks like good news to us. The Dow gains 135 points and IBM only adds 8 cents? That looks like relative weakness and bodes well for our put play. However, we remain cautious. The markets are still oversold and could continue to bounce for a few days yet. We would wait for IBM to trade back under the $90.00 level before considering new bearish positions.
Picked on March 17 at $ 89.86
MGM Mirage - MGG - close: 70.80 chg: +0.55 stop: 72.51
No change from previous update. MGG's lack of participation on the rally is good news for the bears. Our trigger to go short/buy puts is $68.75.
Picked on March xx at $ xx.xx <-- see TRIGGER
Mcgraw Hill Cos - MHP - close: 87.89 chg: +1.83 stop: 90.21
MHP bounced with the market today and almost erased yesterday's losses. Be careful.
Picked on March 15 at $ 88.40
Millipore - MIL - close: 43.59 chg: -0.58 stop: 46.05
Good news! MIL did not participate in the market's oversold bounce today. Instead the stock lost 1.3 percent on heavy volume suggesting more weakness ahead.
Picked on March 16 at $ 43.95
Pacificare Health - PHS - close: 58.62 chg: +0.64 stop: 62.01
No change from previous update.
Picked on March 20 at $ 59.04
Toll Brothers - TOL - close: 77.10 chg: +0.09 stop: 80.51
We are encouraged that the home construction index and TOL did not truly participate in the market bounce today. However, we remain somewhat cautious as Merrill Lynch issued some positive comments on TOL today. If we don't see a continuation of the breakdown soon we may exit early.
Picked on March 17 at $ 76.81
Fedex Corp - FDX - close: 95.00 chg: +1.79 stop: 96.01
We are choosing an early exit in FDX. The bounce in the transports from its long-term support trendline and FDX's bounce from the $93.00 level have put our bearish play in serious jeopardy. We'd rather cut our losses here.
Picked on March 27 at $ 93.89
Cheniere Energy - LNG - close: 63.57 chg: -0.09 stop: 70.01
Target achieved! LNG continued to breakdown this morning and shares traded well into our target range of $62.00-60.00. Yesterday we mistakenly listed the target as $62.50-60.00. The low today was $60.60 before shares bounced back. We're closing the play at $62.00 per our published strategy. If you have not closed the play we urge caution. The market could continue to bounce for several days. LNG does have some resistance at the $65.00 mark but it would not surprise us to see LNG bounce even higher.
Picked on March 11 at $ 69.49
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Like many, I have often tried and failed at interrupting such points, resulting in buying tops and selling bottoms. Think its, "The Fear Factor" working at its best?
But the origins of one of the most useful retracement theories for stocks and other markets came from someone who lived in the middle ages and was studying the population growth of rabbits.
Leonardo Fibonacci was an Italian mathematician who was doing such work in the early 1200s. The number sequence that is named after Fibonacci is where each successive number is the sum of the two previous numbers; i.e., 1, 2, 3, 5, 8, 13, 21, 34, 55, 144, etc. Any given number is 1.618 times the preceding number and .618 times the following number.
There are some technical indicators whose formulas rely on the Fibonacci number sequence, but the main application is to look at price moves in stocks or index and use the fibonacci retracements of .382 or 38 percent, .50 or 50 percent and .618 or 62%.
Looking at the number progression of 1, 2, 3, 5, 8, 13, 21, etc. where each succeeding number is the sum of the two before it, there are certain arithmetic relationships that exist: .618 is the percent that each number is OF the next higher number; .382 is the inverse of .618 (100 61.8 = 38.2). Well stick to a shorthand and round off .382 and .618 to an even 38 and 62 percent %.
Imagine a stock that in 12 months goes from 10 to 20, up $10 dollars. The stock has had a fantastic double but you think it could go yet substantially higher. You wished you had owned it at 10 and but still would like to buy it, but cheaper than 20. The stock starts to trade lower. At what level could you hope to buy the stock?
Considering what would constitute the 38, 50 and 62% retracements of the 10 to 20 dollar advance would suggest the following -
1. If the demand is really strong for the stock, you might not be able to buy it cheaper than 16.25 (.38 of the 10 gain subtracted from the 20 high point)
Also useful in trading index and, stock options, is to track what would constitute the 38, 50 and 62% retracements, after a minor or intermediate price swing.
There is a simple pragmatic reason for this popularity; buying or selling in these retracement areas often results in coming close to buying at the low and selling at the top. Maybe the saying of buy low, sell high, owes something to the common retracements.
You can set most charting applications to calculate retracements ranging from .33 to .38, .50, .62 to .66, In an correction (fall in price) within a larger uptrend, use of the retracement "tool" is by first pointing at the low, then the high. An example is provided below with the most recent (daily) chart shown below for the S&P 100 (OEX) and using my charting programs retracement drawing tool.
It is interesting to note that the OEX that as of the chart date below, the index has now come within 1 point of a 50% retracement of its October to early-March advance. Stay tuned on what follows! Many traders will assume support in this area because of the Index having retraced now fully half of its prior run up.
As, well, this one-half (.5) retracement coincides with current price as being at its prior low, at its 200-day moving average and near my lower (moving average) envelope line. All suggest a possible rally point, technically. Talk about convergence!
Considering just the Fibonacci aspects; if 554 is pierced then 546.50, at the 62% retracement, is where a final bottom might be (according to the common retracement concept). This view assumes that the OEX is still in an uptrend and won't retreat all the way back to the prior (late-Oct bottom) low.
By the way, you can always use a calculator and add or subtract the 3 percentage figures once it appears that a high and a low is in place for any minor or secondary trend in an index or a stock, and which allows a calculation of the retracement possibilities.
COMPUTING CORRECTIONS WITHIN AN UPTREND -
WITHIN A DOWNTREND -
In general in a countertrend rally within a dominant downtrend, once a minor downside correction begins, look to see if a rally gets to as high as a 38, 50, or 62% retracement of the prior move from high to low. If the rally begins faltering and buying interest dries up, it adds to the possibility that prices have rebounded as far back up as they are going to. And, to the more venturesome suggests a possible short or a play in puts.
SOME GENERAL GUIDELINES ON FIBONACCI RETRACEMENTS:
In a normal trend (not powered by something extraordinary), a retracement will often be about half or 50% of the prior move. A common level to buy or sell by some will be at this point. After about this much of a return move has occurred; with an exit if it continues on much beyond 50%; e.g., 5% more.
Within the range of normal, but evidence of a weaker trend, will be a retracement of 62% or perhaps 2/3rds (66%). If prices hold this area, it can suggest initiating a trade, with an exit if the retracement exceeds 66%.
If a retracement exceeds one level, look for it to go to the next; e.g., if a retracement goes beyond 38%, look for it to go on and approach 50%. If it exceeds 50%, look for 62%. If a retracement exceeds 62% (or a maximum of 66%), then I look for what I call a "round trip" or a return all to the way to the area of the prior low or high this type action suggests a retest of the low or high and is the ultimate "retracement" so to speak, of 100%.
Retracements are most commonly done from the low to the high of the trading period being looked at (e.g., hourly, daily, weekly charts). If daily, intraDAY high to intraday low, and not based on the highest close to the lowest close, etc. However, you can experiment with retracements based on closing levels as they also are worth exploring; and can add to understanding of where the market is going. The common retracement levels work on all time frames or chart types; e.g., hourly (or less), daily, weekly and monthly charts.
Good Trading Success!!
Today's Newsletter Notes: Market Wrap by Keene Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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