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Daily Newsletter, Monday, 04/04/2005

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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 Day After

The Day After

It was a very quiet session, both price-wise and news-wise, following Friday's oil rally and equity plunge. That is, until 2PM, when the indices broke upward out of their ranges, reversing all of Friday afternoon's losses and retracing part of the morning plunge as well. There was a pullback into the close, leaving the indices with small gains but well back from the cliff's edge that beckoned this morning.

The run-up coincided with the release of the Semiconductor Industry Association's report that February's $18.1 billion total chip sales figure represented a 15.8% year-on-year gain from last February. Microprocessor sales rose 11% during the period, while DRAM sales were up 36%. Of course, the Nasdaq-led rally also coincided with a long base forming from Friday afternoon above daily cycle and sixty minute cycle lows.

Market breadth was solidly mixed, with advancing volume stronger higher than declining volume on the Nasdaq and AMEX but weaker on the NYSE and OTCBB. Volatility rose, with the OEX volatility index (VXO) finishing higher by .67% at 13.46 and the QQQQ volatility index (QQV) adding 4.01% to close at 17.1. Volume was strong overall, but lower than Friday's.

Daily Dow Chart



Today's bounce failed and retraced slightly from the high, resulting in a doji beneath Friday's tall bearish engulfing and leaving the Dow positive by a mere 16.84 points at 10421.14. The light gains off the lower low permitted the faltering daily cycle upphase to survive another day, but bulls will want to see to a higher low and higher tomorrow. With the 10-day stochastic holding on a possible bearish kiss so early in its upphase, a failure to regain 10475-10485 resistance would spell trouble. A decline from current levels will target first today's low at 10357, following which 10240-250 support comes into view.

Daily S&P 500 Chart



The SPX fared marginally better than the Dow, retracing more of Friday's decline, closing closer to the top of its range, and with the indicators looking stronger as well- no bearish kiss here. 1079 capped the afternoon bounce well within Friday's range, but unlike for the Dow, the SPX's low at 1168 was well above last week's low. Below 1168, last week's 1162 level is in play, below which there's light support at 1155, followed by the more substantial 1140-44 level. To the upside, 1180 is the key goal required to validate the daily cycle upphase, above which 1187-90 is in play.

Daily Nasdaq Chart



Despite leadership from QQQQ during the afternoon bounce, the Nasdaq outperformed the SPX only slightly. The morning low bounced from 1972, last week's low and within the 1970-75 confluence zone, while the high was capped at 1996. The daily cycle is still whispering bullishly, but it needs to clear the 2000-2010 confluence soon to avoid the buy signal's reversing in a bull trap.

Weekly TNX Chart



The Treasury auctioned $16 billion worth of 6-month bills and $18 billion of 3-month bills today, generating 2.24 bids for each accepted on the 6-month bills, at a high rate of 3.035%. On the 3-month bills, the bid-to-cover ratio was 2.42 at a high rate of 2.735%.

Ten year treasury bonds were strong today following a mixed open, but weakened again at the close with the ten year note yield (TNX) closing higher by 0.5 bps at 4.456%. The daily cycle downphase that started late last month has resistance currently in the 4.48% area, with next support at 4.4%.

The National Association of Realtors announced today that its new Pending Home Sales index rose 2.2% in February after declining 2.1% in January. The index tracks the signature (but not closing) of contracts for single-family homes, condominiums and co-operatives- distinct from the Existing Home Sales index which tracks closed, completed sales. Given that a strong upward move in mortgage rates could scuttle some pending sales, this new index is interesting but remains a secondary measure compared with the Existing Home Sales Index.

AIG



Following last week's news about Greenberg's ouster and new allegations about document shredding and destruction of meeting records, Morgan Stanley upgraded AIG this morning to "overweight." Analyst William Wilt told investors that even on a pessimistic analysis, there should be support in the $45-$50 area and went on to set a price target of $59. AIG had issued a letter to shareholders on Sunday from CEO Martin Sullivan, distancing the company from the document destruction allegations and asserting the company's cooperation with investigators on document security. Citigroup Smith Barney joined Morgan Stanley in upgrading AIG, stating that it sees the possibility of criminal prosecution as "extremely remote."

I've generated a 33-year logarithmic quarterly candle chart of AIG above, showing the violation of a very old and formerly reliable support line.

Later in the session, New York A-G Eliot Spitzer stated that he sees the possibility of a settlement between his office and AIG: "Based upon these efforts, and based upon our knowledge to date, we believe that a civil resolution with the corporation will ultimately be achievable." With many speculating over the weekend as to the possibility of criminal prosecutions, this statement no doubt caused many insiders to breathe a deep sigh of relief. It certainly did for bullish investors: Contrary to the multiple upgrades that generated a morning gap-up open that was quickly sold to the session lows, the Spitzer statement resulted in a strong blast upward for the stock, with AIG launching from 51 to peak at a session high of 54.95. For the day, AIG closed higher by 4.57% at 53.28.

Weekly chart of Crude oil



The financial press was headlining a "flat" open for equities early this morning, with Reuters noting that investors were "growing accustomed" to high oil prices. Crude oil prices broke to new (not inflation-adjusted) record highs this morning as OPEC President Sheikh Ahmad al-Fahd al-Sabah announced that the ministers have been discussing a possible additional 500,000 barrel per day quota increase. This is the secondary increase mentioned at the time of the mid-March 500,000 bpd increase that raised the production limit to 27.5M bpd at the time.

With actual production currently exceeding these quotas, it's unsurprising that the market ignored the comments for most of the session. The financial press attributed the recent strength in oil prices to a number of factors, including the Goldman report to a possible $105 price target and speculative fund buying. While short- and mid-term price action is no doubt influenced by such factors, the real story is increasing global demand on finite supplies. Friday's Venezuelan refinery outage due to a power failure only served to highlight the issue.

May crude oil peaked at a morning high of 58.275. On the daily chart, this represented a nominal new high, retesting the daily cycle high without violating it. However, the combined gains from late last week with today's strength were sufficient to stall the daily cycle downphase. A failure to break below 56 this week should see an upside reversal for the daily cycle, a very bullish development should it occur. For the day, however, May crude closed lower by .275 at 57 on the Nymex.

ChevronTexaco (CVX) announced its agreement to acquire Unocal (UCL) in a deal valuing UCL at $62 per share based on a purchase price of $18 billion in cash, stock and assumption of $1.6 billion in UCL debt. CVX stated that it expects the acquisition to be "broadly neutral" to earnings per share while adding to cashflow per share. CVX will pay UCL shareholders 1.03 CVX shares per UCL share, or $65 cash for each UCL share. Later in the session, Fitch reaffirmed CVX's "AA" debt rating, while Friedman Billings downgraded CVX to "market perform" from "outperform." Friedman expects the acquisition to be dilutive to the company's return on capital. CVX closed lower by 3.95% at 56.97, while UCL lost 7.38% to close at 59.60.

There was good news for debtors as AP announced a Supreme Court decision in Rousey v. Jacoway ruling individual retirement accounts unseizeable by creditors to personal bankruptcy. In a ruling permitting a bankrupt Arkansas couple to keep more than $55,000 in accrued savings, the Supreme Court decided that IRAs should be protected under bankruptcy laws.

This is set to be a very quiet week for economic data, with no major reports scheduled until Thursday, when we get Initial claims, Wholesale inventories and Consumer credit. Tomorrow is the Challenger layoff report, and the Petroleum inventory reports will be released Wednesday at 10:30AM. Last but not least, Chairman Greenspan speaks on tomorrow and on Friday, and will testify to the Senate Banking Committee on reforming GSEs on Wednesday.

Equities are attempting valiantly to firm under the influence of last week's daily cycle upturn. However, crude oil remains strong and interest rates, while pulling back, remain closer to this year's highs than to the lows. A strong showing from stocks tomorrow will do a great deal to bolster the uncertain daily cycle, which in turn should set the stage for a multi-day to multi-week upphase. Whether that bounce proves to be corrective or not is another issue, but it's a great deal more positive than what traders were contemplating this morning as the Dow broke beneath last week's low.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

New Calls

None today.
 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petroleum - APC - cls: 78.72 chg: +0.52 stop: 72.45

Another new all-time high for crude oil helped push APC to an early lead this morning. Unfortunately, APC couldn't hold on to most of its gains but the stock was bouncing higher by the afternoon. Technicals remain positive. Yet there is some talk that oil could pull back this week. If that does occur we'd look for APC to retreat to the $75-76 levels, which should act as short-term support. A bounce from $75-76 could be used as a new bullish entry point.

Picked on March 31 at $ 76.10
Change since picked: + 2.62
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 2.3 million

---

Occidental Petrol. - OXY - cls: 73.64 chg: +0.00 stop: 67.99

OXY didn't move much today as shares tested the $75.00 level as overhead resistance. It is worth nothing that volume was pretty strong. That's actually a negative. Big volume without any movement could mean some investors are liquidating their positions. Be on the look out for a dip back toward the $70-71 levels, which should act as support.

Picked on April 03 at $ 73.64
Change since picked: + 0.00
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million

---

Oil Service Holdrs - OIH - cls: 97.85 chg: -0.85 stop: 92.49

A new all-time high for crude oil this morning helped push the OIH up over the $100 level. Unfortunately for crude it couldn't hold its gains and the OIH followed crude lower. If the OIH does dip we'll look for a bounce from the $95 level. We do note that the MACD buy signal looks stronger today.

Picked on April 03 at $ 98.70
Change since picked: - 0.85
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million

---

PalmOne - PLMO - close: 25.39 chg: +0.25 stop: 23.25

No change from previous update dated (04/03/05).

Picked on March 23 at $ 25.71
Change since picked: - 0.32
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million

---

Red Robin Burger - RRGB - cls: 49.46 chg: -0.11 stop: 47.85

No change from previous update dated (04/03/05).

Picked on March 10 at $ 48.00
Change since picked: + 1.46
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand
 

Put Updates

Allergan - AGN - close: 69.07 chg: -0.40 stop: 72.51

AGN continues to sink. We are prepared to exit at $67.50.

Picked on March 13 at $ 73.09
Change since picked: - 4.02
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 50.90 chg: +0.51 stop: 53.01

BZH did manage a bounce today pacing the rebound in the home construction sector index. However, the rally in BZH was beginning to fade in the late afternoon, which keeps the stock within the current trend of lower highs.

Picked on March 17 at $ 51.43
Change since picked: - 0.53
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Intl Bus. Mach. - IBM - close: 90.32 chg: -0.12 stop 92.15

No change from previous update dated (04/03/05).

Picked on March 17 at $ 89.86
Change since picked: + 0.46
Earnings Date 04/14/05 (unconfirmed)
Average Daily Volume = 4.8 million

---

Invitrogen - IVGN - close: 68.80 chg: +1.16 stop: 70.15

We would use today's bounce as a new entry point for puts.
No change from previous update dated (04/03/05).

Picked on April 03 at $ 67.64
Change since picked: + 1.16
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 848 thousand

---

MGM Mirage - MGG - close: 70.38 chg: -0.44 stop: 72.51

MGG began to breakdown this morning but had rallied back above the $70.00 level by late afternoon. It appears that we can thank JP Morgan for MGG's strength. The broker came out with positive comments defending the stock suggesting investors buy MGG on any weakness. We're going to stick by our strategy for now and if MGG trades at $68.75 or lower we would buy puts with a $62.00-62.50 target for MGG. However, the company just announced today that its earnings date would be April 19th and that gives us much less time than anticipated. More conservative traders may want to sit this one out.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 997 thousand

---

Mcgraw Hill Cos - MHP - close: 86.69 chg: +0.66 stop: 88.51

No change from previous update dated (04/03/05).

Picked on March 15 at $ 88.40
Change since picked: - 1.71
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

---

Millipore - MIL - close: 42.60 chg: -0.24 stop: 45.05

No change from previous update dated (04/03/05).

Picked on March 16 at $ 43.95
Change since picked: - 1.36
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 358 thousand

---

Pacificare Health - PHS - cls: 56.40 chg: +0.05 stop: 60.05

No change from previous update dated (04/03/05).

Picked on March 20 at $ 59.04
Change since picked: - 2.64
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

---

Retail Holdrs - RTH - close: 92.01 chg: +0.88 stop: 96.51

Red Alert! We're getting some weird readings on our Qcharts for the RTH. The stock appears to have gapped down but the change for the day is plus 88 cents. Double-checking with stockcharts we see the same chart with all the values about $1.50 less. This looks like there was some sort of adjustment made to the RTH values but the HOLDRS.com website doesn't have any news on it. We suggest that traders step back and not initiate any new positions for the time being.

Picked on April 03 at $ 94.13** Needs to be adjusted.
Change since picked: + 0.88
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 1.6 million

---

Wynn Resorts - WYNN - cls: 63.67 chg: -2.37 stop: 70.05

Good news! WYNN is continuing to breakdown with another 3.58 percent decline today in spite of a broker starting coverage on the stock with an "out perform" rating. Volume was very strong on today's decline suggesting more weakness ahead.

Picked on April 03 at $ 66.04
Change since picked: - 2.37
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

None
 

Dropped Puts

Google Inc - GOOG - close: 185.29 chg: +5.25 stop: 185.01

The INX Internet index put in a strong session adding 1.7 percent. The move was partially fueled by a big rebound in GOOG. Shares of GOOG climbed 2.9 percent to breakout over the $185.00 level and its simple 100-dma. We cannot find any specific news to account for the bounce but it could be traders trying to positions themselves ahead of GOOG's April earnings report. Our high-risk, aggressive play is stopped out at $185.01.

Picked on March 10 at $179.49
Change since picked: + 5.80
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 10.9 million
 


Trader's Corner

Point & Figure - Relative Strength

So far in this series on Point and Figure charts we have discussed; P&F basics, P&F support and resistance, P&F formations and P&F price objectives This week I would like to continue on with the series and chat about a very important P&F tool used for evaluating stocks, Relative Strength. Please take note though the relative strength used in this discussion does not have anything to do with the Relative Strength Index used in most charting platforms. The RSI evaluates a stock's or index's strength to itself to see if it is getting stronger or weaker where as the RS used here is an evaluation of performance to another stock or index.

If you simply want to equal the performance of the broad averages then all you have to do is buy the Spiders, the Diamonds or an index mutual fund and passively sit back and wait. However, if you want more, if you want to outperform the averages, outperform the indexes then Relative Strength is the tool for you. And the only way to outperform the averages is to own stocks that are outperforming the averages and the best way to tell whether your stock is outperforming is to evaluate its performance relative to the average you want to outperform or measure its Relative Strength.

Relative Strength is a measure of the magnitude of the movement of a stock in relation to another stock or index rather than a way to determine price direction. A Relative Strength chart in a row of Xs does not mean the security has risen in price, it just means it is stronger than the index (or other equity) to which you are comparing it. And vice versa, a Relative Strength chart in a row of Os does not mean the security has fallen in price, it just means it is weaker than the index (or other equity) to which you are comparing it. A stock could be climbing but in a row of Os on a RS chart.

This is probably a good time to make sure you all realize that when I talk about outperform I dont mean only outperform to the upside, I also mean outperform to the downside as well. I have always believed you can make more money in a bear market than a bull market (with a few exceptions like 1999) because stocks fall in a more orderly manner than they rise.

The Formula for Relative Strength

The Relative Strength formula is simply the price of the stock divided by the Index and the result is multiplied by 100. Here is the equation: (Stock Price / Index Price) * 100 = Relative Strength

A RS chart uses a three-box reversal method just like the basic P&F charts. The decimal place is moved to yield a whole number, similar to a stock price then the ratio is plotted on a point and figure chart the way any stock would be. The buy and sell rules are the same as for any other point and figure chart. You use the basic formations I have talked about in previous articles and then lay over the support and resistance lines.

The patterns of interest are simple double top breaks and double bottom breaks because they are most prevalent but any P&F formation that generates a buy or sell signal will work. This identifies whether the RS charts is on a buy signal or on a sell signal. You also need to take note if the column is in Xs as this shows that the stock is outperforming the index in the short term or if the column is in Os then the stock is underperforming the index in the short term. When evaluating a RS chart the scale is not important, it is the chart formation of the RS chart that matters. As a matter of fact, when evaluating a RS chart you do not even need to see the scale and I will not be showing the scale on the examples that follow.

RS signals are long-term signals with some lasting more than a year so don't try to use them for short term trades.

The four different states a Relative Strength chart can be in are as follows:

Buy Signal in Xs - This is the strongest Relative Strength reading. The fact that the stock is in a column of Xs, shows that it is currently outperforming the index and the buy signal gives you the go ahead to position yourself long.

Buy signal but reversed to Os - This is the second strongest Relative Strength reading. The stock is outperforming on a longer term basis but is currently ebbing in the constant ebbs and tides of the market. As long as the chart does not give a sell signal and stays above the support line the buy signal is intact.

Sell signal in Os - This is the weakest Relative Strength reading. The fact that the stock is in a column of Os, shows that it is currently underperforming the index and the sell signal gives you the go ahead to position yourself short.

Sell signal but reversed to Xs - This is the second weakest Relative Strength reading. The stock is underperforming on a longer term basis but is currently ebbing in the constant ebbs and tides of the market. As long as the chart does not give a buy signal and stays below the resistance line the sell signal is intact.

No Signal - Flat - If the chart is on a buy and a column of Os breaches a support line before a sell signal is given the chart is on no signal. If the chart is on a sell and a column of Xs breaches a resistance line before a buy signal is given the chart is on no signal.

Now let's look at some examples. I have chosen to use the S&P Equal Dollar Weighted Index (Stockcharts symbol - $SPXEW) for comparison instead of the Capitalization Weighted S&P ($SPX) because the Equal Dollar Weighted gives a broader picture of how many stocks are rising or falling than does the Capitalization Weighted index where just a few of the largest stocks have a greater impact.

Let's start with a very simple sideways move that has given very clear buy and sell signals.

In March of this year AXP gave its first sell signal since the buy signal back in August of 2003. Of course we don't know if AXP was on a buy from before August 2003 because the chart does not go back that far, but even so, that was a long signal. Also take a look at the sell signal it was not a double bottom, not a triple bottom, not a quad bottom but a 5 time bottom. I would say that is a very good indication that you should be out of your long positions and positioning yourself short. You certainly don't need any trendlines on this chart to help you with your buy and sell signals.

Here is Boeing (BA) compared to SPXEW:

Boeing (BA) gave a buy way back in December 2003 and is still going strong. I would be in long positions as long as the chart stays above the red resistance line and does not give a sell signal.

In which would stock would you want to be long - AXP or BA?

Here is a RS chart of Walmart(WMT) compared to SPXEW.

I was not able to squeeze the chart small enough to take an image of the title.

WMT gave a sell signal in December of 2004 and is still on the sell and looking rather weak. This is not a candidate for long positions. Not much need for trendlines on this chart either to help you with your sell signals because the red resistance line is a long ways off.


Here is INTC compared to SPXEW:

This chart is getting a little more complicated now. In June of 2003 the RS chart broke a double top and INTC generated a buy signal, the strongest of all signals. The next column of Os was the second strongest Relative Strength reading and as long as INTC does not give a sell signal or break the blue support line you should stay long. Now see where the blue support line is breached by the column of Os, (right under the 4 on the 4th column of Os)? This is where you would be getting out of long positions but not yet into a short. In July of 2004 INTC did indeed give a sell signal and it now time to go short. You stay short until you get a buy signal or the red resistance line is breached.

Now this chart is getting even more complicated.

1. The first Buy signal on this chart came in March 2003 and it stayed until the sell signal in May 2003 but you would have been out of your long positions when the blue support line was breached sometime in April 2003.
2. The AIG RS chart got whipped around a bit in 2003 because it gave a buy signal in July and another sell in September.
3. This sell signal stayed until the buy signal in January 2005, where you would have exited your short position but not taken long positions because the chart was below a red resistance line. AIG did give a TRIPLE sell in March of 2005 in light of all the troubles it has been having and it was here where you would have positioned yourself short again.

Here is MSFT compared to SPXEW:

See if you can figure out where you would go short, long or flat before you look at the annotated chart below.

The first sell signal on this chart came in November of 2004 and it was below the red resistance line so you would have taken MSFT short and still short today.

When using the Relative Strength charts one has to remember the all important part of this analysis is the word "Relative." If the whole market is falling a relative strength chart will tell you the stocks that are strong relative to the broader index but they may be falling as well. So it would be wrong to use these charts to position yourself long. You should be using other tools to evaluate the state of the market and position yourself in stocks that reflect your bearishness or bullishness. In other words if you see the market bullish as a whole then look for bullish RS candidates to take long but if you see the market bearish as a whole then look for bearish RS candidates to take short.

Next week Bullish Percent charts - if I can get to a point of understanding them myself that is.
 

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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