Option Investor

Daily Newsletter, Thursday, 04/07/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Oil Slides, Stocks Rise

Oil Slides, Stocks Rise

Equities marched higher as oil lost some of its sheen, sinking to a new low for the week.

Breadth was strongly positive across the exchanges, with advancing volume leading declining volume 2:1 on the NYSE and 3.3:1 on the Nasdaq. Volatility declined sharply, with the Nasdaq volatility index (VXN) making a new multiyear and possibly record low at 16.56. QQQQ volatility (QQV) lost 3.67% to close at 15.73, while OEX volatility (VXO) lost nearly 4% to close at 12.23.

Daily Dow Chart

The Dow's .58% gain lagged that of its peers, but nevertheless built on yesterday's gains, strengthening the daily cycle upphase on the steady rise from the open. The morning low at 10477 held above yesterday's low, and the high in the final hour fell just short of resistance at 10560. That resistance is also the current level of the 22 day EMA. A break above this level will target the next confluence zone in the 10650 area, followed by 10710-10720.

Daily S&P 500 Chart

The SPX gained .60% t close at 1191, running up from its morning low of 1184. It is relatively stronger than the Dow, having already exceeded the 22 day EMA (and the 50 day, today). The equivalent 10710-720 level for the Dow is less than 10 SPX points away at 1200.

Daily Nasdaq Chart

The Nasdaq, which advanced .99% to close at 2018.8, also finished above the 22 day EMA within its ongoing daily cycle upphase. It finished on the session high, a very bullish close, just below 2025 resistance. Above that 2045-50 is next. Despite closing at the top of its range, the Nasdaq barely advanced above yesterday's range, printing only nominally higher highs and lows. A break below the low at 1998 would spell trouble for the daily cycle upphase.

Daily TNX Chart

Treasury Secretary John Snow testified to the Senate Banking Committee in Washington today, on the reform of government sponsored enterprises (GSEs). In his prepared comments, Snow echoed Greenspan's call for limits on the size of mortgage portfolios held by GSEs (FNM and FRE) in order to limit risks to the financial system. FNM closed higher by 1.85% at 55.15, while FRE added .05% to close at 63.83.

Later in the day, Philly Fed President Anthony Santomero presented a speech to the National Economics Club, in which he stated that the Fed should move "in a slow and cautious manner" in the face of current economic uncertainties. He stressed that his comments were philosophical, but bond traders didn't put too fine a point on it. With crude oil plunging (see below), bond yields shot higher, the ten year note yield (TNX) quickly reversing its losses and spiking briefly above the descending resistance line. This represented the first peek above the line since it kicked off from the year high last month. Despite the reversal at the intraday high, the bulk of the gains held, with the TNX closing the day higher by 3.6 bps at 4.472%.

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As expected, the Bank of England left rates unchanged at 4.75% following recent weaker than expect retail sales and manufacturing data. Shortly thereafter, the European Central Bank left euro zone rates unchanged at 2% in the wake of the European Commission's reduction of its GDP estimate for 2005 from 2% to 1.6%. Euro futures greeted the news with a yawn, holding light gains in early morning trading.

At 8:30, the Office of Workforce Security released the weekly initial claims data, showing a decrease of 19,000 claims to 334,000 claims for the week ended April 2, the largest decline in 2 months. The previous week's figure was revised to 353,000. The 4-week moving average of initial claims decreased 250 from the prior week's revised 336,750 reading to 336,500 claims. Despite the decrease in initial claims, it was reported that there were 90,000 more people receiving unemployment checks, bringing the total to 2.69 million as of the week ended March 26.

At 10AM, the Commerce Department reported that US Wholesale inventories rose 0.6%, with sales falling 0.4%, the largest drop since April 2003. The ratio of inventory-to-sales rose from 1.17 to 1.18.

At 3PM, the Federal Reserve announced February's Consumer Credit report, with US consumer credit increasing 3.1% or $5.6 billion on a 6.1% increase in credit card debt. January's increase was revised up from the $11.5 billion previously reported to $11.6 billion.

Weekly chart of Crude oil

Crude oil rose in the morning but failed to break yesterday's high, and then commenced a vertiginous decline in the afternoon, with May crude dropping through 55 support to a low of 53.875. Marketwatch reported a survey by Platts indicating that OPEC production of crude oil rose in March by 250,000 bpd to 29.83 million bpd. This is higher than most numbers being quoted recently, and, other than price technicals, coincided time-wise with the sudden plunge in price. Once again, the most recent OPEC production quota increase to 27.5 million bpd is of dubious significance, with OPEC currently pumping close to 30 million bpd.

On the daily chart, today's steep bearish engulfing came down to test rising trendline support at the 53.875 low. A break of this line would undo the current uptick in the 10 day stochastic. Oil bears need to see this occur, because so far the daily cycle downphase been weak and corrective compared with the force of the upphases that preceded it. For the day, May crude oil closed lower by 3.13% or 1.75 at 54.10, a new low for the week.

In corporate news, WMT issued a profit warning this morning, stating that it is expecting Q1 EPS at the low end of its prior 56-58 cent range. Analysts were looking for 57 cents. Same store sales are expected to rise 3%-5% from Q1 2004. As far as profit warnings go, this one was pretty tame- consider GM's (which company was downgraded again, today by Citigroup) bunker-buster warning announced a few weeks ago. However, WMT was hit for over 1.5% in premarket trading, and Reuters had the warning running as the top headline on its homepage.

My own suspicion is that the financial press failed to connect the dots with what should have been the night's headline story: that Senators Schumer and Graham introduced an amendment to apply a 27.5% tariff on Chinese imports if China does not release its currency peg within 180 days. You'll recall that China recently scaled back its participation in the upcoming G7 meeting, and has been utterly inflexible and dismissive in the face of US demands on the currency issue.

For WMT, this appears to me to be a frying-pan / fire proposition, as any increase in the cost of imports from China, whether due to currency devaluation or tariff, will increase the prices it must pay to its offshore suppliers. Later in the day, AG Edwards downgraded WMT to "hold" from "buy" citing the speed of checkouts, lack of creativity in mechandising, and higher oil prices. The possibility of trade friction with China didn't make the grade. WMT closed the day lower by .57 or 1.15% at 48.93 on volume of 23.9M shares, compared with the average of 13.9M shares.

Pier-1 (PIR) announced disappointing earnings for Q4 of 18.8M or 21 cents per share, down from 48.3M or 53 cents per share in Q4 the previous year. Sales fell from 555.3M to 525.8M, and comparable store sales declined 10.7%. The EPS results missed expectations by 5 cents, and analysts were looking for revenue of 535M. Declining to provide projects for Q1 2005, PIR forecast a Q1 loss of 3-10 cents per share. PIR got clocked for a 5.5% loss at 17, on nearly 5x its average daily volume.

In other corporate news, PFE was requested by regulators in Europe and the FDA to suspend sales of its Bextra arthritis medication, and to include a black box warning on its other Cox-2 inhibitor, Celebrex. The FDA stated that Bextra was singled out because it can cause a potentially deadly skin reaction called Stevens-Johnson Syndrome. As well, other manufacturers of painkillers such as Aleve, Advil and Motrin, were requested to increase their warnings of heart risk and intestinal bleeding. PFE closed lower by .22% at 26.80.

Rite Aid (RAD) announced Q4 earnings that rose from 9 cents per share or 59.4M this quarter last year to 35 cents or 228.6M, a huge gain resulting from a tax benefit of 179.5M or 29 cents. The company cited increasing purchases of prescription medicine by mail order as the reason for a difficult quarter, with sales falling 1.3% to 4.34B. RAD rose 6.63% to close at 4.02.

After the bell, Accenture (ACN) announced Q2 earnings that rose from this 123.1M or 22 cents in the year-ago quarter to 209.8M or 35 cents on revenue that rose from $3.1 billion to $3.8 billion. Expectations were for 32 cents EPS on $3.71 billion. The stock, which had closed lower by .32% at 24.89, was higher by 3.46% at 25.75 as of this writing.

With no economic data scheduled for tomorrow, market participants will be free to continue focusing on the decline in oil. Rising intraday bond yields had dragged somewhat on equities, and the indices broke to new highs after the cash close at 3PM. Tomorrow is also scheduled to be a light day for earnings announcements. Currently, stocks are looking strong within daily cycle upphases that have plenty of room to run before reaching overbought territory. Provided that the pattern of higher highs and higher lows isn't violated (as it nearly was today on the Nasdaq), the benefit of the doubt goes to the bulls.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
CRS None

New Calls

Carpenter Tech - CRS - close: 63.08 chg: +1.16 stop: 59.95

Company Description:
Carpenter Technology, based in Wyomissing, Pa., is leading manufacturer and distributor of specialty alloys and engineered products. (source: company press release)

Why We Like It:
CRS has a somewhat steady pattern of trending higher over the past several months. A quick glance at the daily chart does show a few pull backs but the overall trend looks like one of a bullish, rising channel. Several days ago CRS put in another short-term bottom and the stock is rebounding higher. Two days ago the company announced that it was raising prices on some of its products. Technical oscillators are bullish and its MACD just produced a fresh buy signal yesterday. We like the close over the 50-dma today and the bullish P&F chart that points to a $76 target. However, we see some resistance at the $64.00 level. Our plan is to use a TRIGGER at $64.05 to open the play. More aggressive traders can use an alternative entry point on a pull back toward the $60.00 mark although we'd prefer to buy a bounce from $60.00 if CRS did pull back. Our target is the $70.00 region. What makes this play somewhat more risky is the time frame. We do not want to hold over the April 25th earnings report and even that date has not yet been confirmed.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 60.00 CRS-EL OI=489 current ask $5.50
BUY CALL MAY 65.00 CRS-EM OI= 77 current ask $2.75

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/05 (unconfirmed)
Average Daily Volume = 334 thousand

New Puts

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petroleum - APC - cls: 76.94 chg: -1.29 stop: 72.45

No change from previous updates on 04/05/05 and 04/03/05.

Picked on March 31 at $ 76.10
Change since picked: + 0.84
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 2.3 million


Occidental Petrol. - OXY - cls: 73.02 chg: -1.14 stop: 67.99

No change from previous updates on 04/05/05 and 04/03/05.

Picked on April 03 at $ 73.64
Change since picked: - 0.62
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million


Oil Service Holdrs - OIH - cls: 97.97 chg: -1.23 stop: 92.49

No change from previous updates on 04/05/05 and 04/03/05.

Picked on April 03 at $ 98.70
Change since picked: + 0.73
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million


PalmOne - PLMO - close: 24.59 chg: +0.04 stop: 23.85

No real change from previous updates on 04/05/05 and 04/03/05. More conservative traders may want to exit here. PLMO's lack of participation in today's bounce is not a good sign. The current consolidation looks somewhat bearish and points to a coming breakdown under the $24.50 level.

Picked on March 23 at $ 25.71
Change since picked: - 1.12
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million


Potash Corp. - POT - close: 88.50 chg: -0.99 stop: 85.99

No change from previous update on 04/05/05.

Picked on April 05 at $ 90.18
Change since picked: - 1.68
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume = 504 thousand


Red Robin Burger - RRGB - cls: 53.05 chg: +0.49 stop: 49.49 *new*

No change from previous update on 04/06/05. We are still suggesting that readers consider taking profits here. Our official target is $54.00. We are raising the stop loss to $49.49.

Picked on March 10 at $ 48.00
Change since picked: + 5.05
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand


Whole Foods - WFMI - close: 103.76 chg: -0.40 stop: 98.99

No change from previous update on 04/06/05.

Picked on April 06 at $104.16
Change since picked: - 0.40
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand

Put Updates

Allergan - AGN - close: 71.54 chg: +0.43 stop: 72.51

No change from previous update on 04/05/05.

Picked on March 13 at $ 73.09
Change since picked: - 1.55
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand


Beazer Homes - BZH - close: 49.32 chg: +0.34 stop: 53.01

No change from previous update on 04/06/05.

Picked on March 17 at $ 51.43
Change since picked: - 2.11
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand


Intl Bus. Mach. - IBM - close: 88.44 chg: -0.56 stop 92.15

No change from previous update on 04/05/05 and 04/06/05.

Picked on March 17 at $ 89.86
Change since picked: - 1.42
Earnings Date 04/18/05 (unconfirmed)
Average Daily Volume = 4.8 million


MGM Mirage - MGG - close: 72.51 chg: +2.22 stop: 72.51

No change from previous update on 04/05/05. Our entry point to buy puts is $68.75.

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: 86.04 chg: +0.24 stop: 88.51

No change from previous update dated 04/03/05. The consolidation continues to look bearish. Our target remains the $85.00-84.00 range. More conservative traders may want to exit near the exponential 200-dma near $85.30.

Picked on March 15 at $ 88.40
Change since picked: - 2.36
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand


Pacificare Health - PHS - cls: 59.65 chg: +0.57 stop: 60.05

No change from previous update on 04/05/05. Be careful here! PHS is testing resistance near the $60.00 level. Double-check your stop loss placement. Ours is $60.05.

Picked on March 20 at $ 59.04
Change since picked: + 0.61
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million


Wynn Resorts - WYNN - cls: 64.99 chg: +0.94 stop: 70.05

No change from previous update on 04/05/05. WYNN is testing overhead resistance at the 10-dma and 100-dma.

Picked on April 03 at $ 66.04
Change since picked: - 1.05
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million

Dropped Calls


Dropped Puts

Millipore - MIL - close: 44.42 chg: +0.54 stop: 45.05

MIL is still stuck in a longer-term down trend but we are uncomfortable with today's breakout and close over the simple 50-dma. Bears can argue that volume was very light and suggestive that the move is certainly suspect. Yet bulls will point out the new growing positive tone to the technical oscillators. We're choosing to exit early and minimize our losses.

Picked on March 16 at $ 43.95
Change since picked: + 0.47
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 358 thousand


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