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Daily Newsletter, Saturday, 04/09/2005

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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

April Streak Ends


WE 04-07


WE 04-01

 

WE 03-24

 
DOW

10461.34

57.04

10404.30

- 38.57

10442.90

-186.80

NASDAQ

1999.35

14.54

1984.81

-   6.25

1991.06

-  16.73

S&P 100

562.18

   4.69

557.49

-   0.22

557.71

-  10.23

S&P 500

1181.20

   8.28

1172.92

  1.50

1171.42

-  18.23

W5000

11634.59

65.86

11568.73

  7.05

11561.70

-168.08

SOX

416.95

   5.73

411.22

-    4.66

415.88

   1.75

RUT

610.75

-    0.80

611.55

-    3.71

615.26

-    7.31

TRAN

3596.70

-  89.91

3686.61

-  58.06

3744.67

-    5.91

VXO

12.62

 

14.09

 

13.42

 
VXN

16.96

 

17.61

 

17.15

 

April Streak Ends

Oil fell to 53.45 and extended its streak of down days to five but equities reversed after four days of gains. With the weekend looming traders elected to take profits rather than risk hard fought gains as resistance held. The four-day equity bounce attracted a lot of press attention but it failed to break the resistance we have discussed for two weeks.

Dow Chart - Daily


Nasdaq Chart - Daily


Our week was devoid of any material economic reports and traders took that opportunity to buy critical support and we saw four days of gains. There was no excitement and no volume with volume across all markets less than 4B shares every day. While the up days were on low volume Friday's drop was the lowest volume of the week. The Dow managed only 1.6B shares and the Nasdaq only 1.5B. The indexes stuck to their support/resistance range as traders wait for earnings to begin next week.

Taking heads on TV credited the drop in oil prices as the reason for the jump in equities. We have theorized about this for many weeks but the rotation out of oil was very weak as was the move into equities. There was a complete lack of conviction on both sides and the week ended with a whimper. Despite the drop in oil prices we saw almost no drop in oil stocks. Every recent drop in oil has produced a corresponding drop in oil stocks and I fear the lack of movement this week is suggesting investors believe it will be brief.


Interest rates also declined early in the week but rebounded on Thursday and posted their highs on Friday at 4.52%. This drop in rates along with the drop in oil drew some reluctant investors off the sidelines earlier in the week but once those rates rebounded the interest in equities faded. The FOMC minutes for March will be released on Tuesday and most analysts expect it to portray an anxious Fed and one that is poised to move aggressively if conditions don't change soon.

The biggest contrarian factor for the markets on Friday was the drop in the transports. 19 of the 20 Dow transport stocks finished in the red despite five days of declines in oil. A research report saying shipments fell -1% in March and an earnings warning from USFC soured the sector and the TRAN lost -3% on Friday. USFC said its quarterly earnings would be less than half what analysts expected and analysts were quick to jump to the conclusion that trucking volumes were slipping. Up until now everyone had used the constant upside guidance from the truckers as evidence the economy was improving despite the lack of vision in the economic indicators. With oil down -$5 for the week you would think transports would be rejoicing but there was no joy in Mudville after USFC struck out. YELL -4.39, USFC -2.72, USFC is being acquired by YELL, CNF -4.36, UPS -1.36, FDX -1.94. Even railroads were down on the news as investors trashed the sector rather than the individual issues, NSC -2, UNP -1.85, BNI -1.71. The damage would have been worse but Overnite (OVNT) raised guidance to the high end of their prior estimates and said it was seeing a continued improvement in customer mix and a stable pricing environment.

Transportation Chart - Daily


Copper Chart - Daily


To decide if overall economic demand is slowing we can look at the commodity stocks to see how investors there see the future. Copper has ceased rising and has been holding for over a month at its $1.50 highs. It is not rising but is still poised to move higher soon. This suggests economic growth is still holding. Steel, a lesser indicator for growth given the dumping of cheap, low quality steel on the markets, is showing an ugly pattern. Using US Steel (X) as our proxy we see that the highs came in late February and Q4 support at $50 has broken. Nucor (NUE) has also rolled over and is testing support at the 100-day average. Cleveland Cliffs fell -2.77. I think it is too soon to say the boom is over but a failure in copper on the heels of steel would be a strong sign.

Borland warned on Friday that earnings would fall short of expectations. This was another in a long string of warnings by software stocks. Borland said it was taking longer to close deals and they were seeing weaker IT spending by its customers. This is not a good sign for tech stocks in general but keep in mind software stocks typically have a rocky start in Q1/Q2.

Despite Friday's drop in the indexes the SOX held near its highs and very close to 420 resistance. The SOX was the strongest indicator of bargain hunting by investors ahead of earnings. This strength helped hold up the Nasdaq and probably was instrumental in keeping the Nasdaq over 2000 for most of the week.

After the close on Friday Ford warned that earnings for the full year would be well below prior estimates. Earlier this year Ford said that earnings would be in the $1.75-$1.95 range. According to Ford that new range is now $1.25-$1.50. Problems included higher steel prices, all time highs in oil and escalating health care costs. GM is also suffering from rising health care with $1500 of the cost of each car attributed to health care for current and retired employees. I believe we need to face the facts that U.S. automakers are in serious trouble long term as gas prices eventually hit and exceed $3 a gallon. Toyota (TM) is expected to eventually become the world leader in production.

Oil prices fell to $53.40 at Friday's close and the low for the week. This appears to have produced a clear double top at $58 but is far from a material sell off. The Q2 demand slump is underway and inventories are building as evidenced by the seventh consecutive weekly increase in API inventory numbers. Levels have risen from 296.4 mb on Feb-11th to 317.1 mb on Apr 1st. This steady climb comes as demand for heating oil weakens but the ramp up into the summer gasoline demand has not yet started. This is a historical period for weakening demand but once the summer driving season begins that inventory level should decrease once again. The key this year will be how much gasoline demand weakens with prices holding over $2 a gallon. I am relieved to see the drop in oil prices as expected but individual oil stocks have not yet cracked. COP is holding over $109 and very close to its $112 resistance highs. The same holds true with most of the stocks with the refiners literally pinned to their highs given the flurry of refinery outages over the last two weeks. Only XOM and CVX are showing any weakness. XOM as the hulking behemoth has been weak since March 9th when a single investor dumped 25 million shares about 30 min after the CEO made cautionary comments at the shareholder meeting. That dump knocked -$5 off the price of the stock and positive sentiment has yet to return to XOM.

Chevron, rumored to be an acquirer of Unocal had also been weak since early March and their eventual announcement this week punctuated that weakness with a drop back near $56. CVX is the only stock of the group to return to support at its 100-day average. That would be a buy signal for me but caution is warranted on CVX. Until the deal is done there is the risk of somebody bidding higher for the Unocal assets. This is not likely since there was an informal bidding process including Italian oil group Eni and China's offshore producer CNOOC Ltd. According to insiders CVX and CNOOC were the top two bidders with CNOOC offering the most cash. However, CNOOC was unable to complete the terms of their offer in time and they cancelled their bid at the last minute. A CNOOC official quit after they failed to complete the deal. This bidding process should have eliminated any surprise bidders appearing now but it never hurts to be cautious. CVX is rumored to be planning to sell $3 billion of Unocal assets as soon as the deal is completed. Those assets will include much of Unocal's onshore assets in the U.S. and Canada, which are mature and costly to maintain. Another potential sale could be its Asian power plants. Chevron's main interest in Unocal was their proven reserves in the Gulf of Mexico, Indonesia and Thailand. Chevron is the fifth largest oil company and the 20th largest company in the world. This acquisition gives them a sizeable boost in reserves at a time when buying future production makes very good sense. Chevron has an average cost per produced barrel of $27 and we are not likely to see that number on the open market ever again. Chevron acquired 1.7 billion barrels of proven reserves plus numerous other properties, gas fields, power plants, etc. Just valuing the 1.7B bbls of proven reserves at $50 a bbl equals $85 billion not accounting for production costs. Chevron acquired Unocal for $18 billion and will likely end up selling more than $3B in non-core assets. Not a bad deal to get $85B in reserves for $15B of mostly stock. That works out to about $9 a bbl. I believe CVX is a buy at these levels as long as you realize it could return to something in the $50-52 range while the acquisition news plays out.

Crude Oil Chart - Daily


SPX Chart - Daily


The markets rebounded from critical support on Monday and managed to trend slightly higher as the week progressed but there was no excitement. To call it a rally would be a misnomer. It was more likely traders just marking time until earnings appear. Resistance held across all indexes and the week ended up just repeating the range from the prior week. It was hardly an exciting rebound. Fund flows were flat with only $100 million hitting mutual funds in the week ended on Thursday. This was very anemic considering the typical fund inflows ahead of the April 15th deadline for retirement contributions. It was also announced that fund flows for March totaled only $6.7B compared to $10.5B in February and $10.1B in March of 2004. $10.8B flowed out of money markets for the last week in what could have been tax payment outflows. That suggests that traders are being hit with tax bills on the 2004 rebound and with the drop so far in 2005 they are having to dip into cash to pay the bill. Typically traders count on having the Q1 bounce produce enough profits to cover those taxes for the prior year. That plan failed badly in 2005 and it is putting a crimp in cash flow into the markets.

The Dow rebounded from Monday's lows at 10365 to fail at almost exactly the spike high from last week at 10555. Friday's drop put it right back in the middle of that range at 10460 and in neutral territory. The Dow was dragged down on Friday by the transports and by the cyclicals. There was a lot of profit taking in those sectors that have been hot and it appeared traders saw the bounce back to resistance as an opportunity to lighten up once again. Support remains at 10380-10400 and resistance at 10550. Until that range breaks there is nothing to get excited about.

Last Monday the Nasdaq rebounded off its double bottom at 1975 and retraced its entire range back to top at 2020 resistance once again. Like the Dow this was a complete retracement of the prior weeks drop but it came on low volume and very little excitement. The Nasdaq fell back to rest right in the middle of the range at 2000 and just above the 200- day average at 1994. With the SOX providing support it appears to be setting up for a potential earnings related bounce but there is very little upward pressure from anything but the SOX. A rally over 2020 would run into very serious resistance at 2080-2100 and I would not hesitate to short that level. I seriously doubt we will see a rebound of that magnitude but I mention it here so you can be prepared for that best-case scenario. A short there could run for several months into the summer doldrums.

The SPX moves duplicated the Dow/Nasdaq moves for the week with Friday's close at 1181 right in the middle of its current 1165-1195 range. The 30/50/100 day averages have converged at 1992 and are providing strong short-term resistance. That 1192 level is going to continue to be resistance but the uptrend support is rising at 1175. This should produce confusion now that it has risen over the horizontal resistance levels we saw touched since late March in the 1165-1170 range. I would continue to key on a break of 1165 as a critical breakdown and one that would signal a potential plunge into summer. On the upside a break over 1195 finds shortable resistance at 1210-1215.

My market sentiment heading into earnings remains "don't fight the Fed." Inflation is rising and we have increasing indications that the Fed may remove the measured pace language and possibly hike 50 points instead of 25 sooner than previously expected. Most analysts now believe the Fed is only half done and could accelerate hikes for the second half of the cycle. Cyclical stocks have begun to roll over on fears this will happen soon. Homebuilders are weakening as mortgage rate fears increase. Retailers are slipping on slowing consumer sales due to higher gas prices. Tech spending is in doubt after the dozen or so software warnings this week. We are moving into a historically weak period on the market calendar after a 28-month bull market. Unless earnings guidance is a blowout to the upside I believe it is time for the markets to rest. This rest could take the form of continued range trading or a return to long-term support as the summer doldrums appear. May is just around the corner and the "sell in May and go away" crowd could be hoping for one last earnings bounce before they exit. Next week is expiration week and volatility should increase given the short option month. Economic reports return with a vengeance with 12 key reports and several minor ones. The most watched could be the FOMC minutes of the March meeting on Tuesday. This will give traders a clue for how aggressive the Fed might be in the near future. This is week where a direction could appear with Friday my target for a turning point. Definitely enter passively and exit aggressively.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
RIMM SBUX

New Calls

Research In Motion - RIMM - cls: 77.22 chg: 2.16 stop: 72.49

Company Description:
Research In Motion is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information including email, phone, SMS messaging, Internet and intranet-based applications. RIM technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. RIM's portfolio of award-winning products, services and embedded technologies are used by thousands of organizations around the world and include the BlackBerry wireless platform, the RIM Wireless Handheld(TM) product line, software development tools, radio-modems and software/hardware licensing agreements. Founded in 1984 and based in Waterloo, Ontario, RIM operates offices in North America, Europe and Asia Pacific. (source: company press release)

Why We Like It:
RIMM has turned out a surprising show of strength in spite of a mixed earnings report on April 5th. The company came in light on revenues but beat Wall Street estimates by 6 cents. Analysts are in disagreement with some offering positive comments and others downgrading RIMM. We suspect that RIMM could surprise traders to the upside but currently shares are testing overhead resistance near $78.00 and its simple 100-dma. Our plan, which should be considered a higher-risk strategy, is to use a trigger at $78.25. By waiting for RIMM to trade over the $78.00 level it will reverse its P&F chart sell signal into a new buy signal. Our short-term target will be the $84-85 range. Remember, this is an aggressive play. RIMM could easily be tossed around by any volatility in the NASDAQ as we enter earnings season.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 75.00 RUP-EO OI=3724 current ask $6.20
BUY CALL MAY 80.00 RUP-EP OI=4540 current ask $3.80

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 10.1 million
 

New Puts

Starbucks - SBUX - close: 48.62 chg: -1.88 stop: 51.75

Company Description:
Starbucks Corporation is the leading retailer, roaster and brand of specialty coffee in the world, with more than 9,000 retail locations in North America, Latin America, Europe, the Middle East and the Pacific Rim. The Company is committed to offering the highest quality coffee and the Starbucks Experience while conducting its business in ways that produce social, environmental and economic benefits for communities in which it does business. In addition to its retail operations, the Company produces and sells bottled Frappuccino coffee drinks, Starbucks DoubleShot coffee drink, and a line of superpremium ice creams through its joint venture partnerships. The Company's brand portfolio provides a wide variety of consumer products. Tazo Tea's line of innovative superpremium teas and Hear Music's exceptional compact discs enhance the Starbucks Experience through best-of-class products. The Seattle's Best Coffee and Torrefazione Italia Coffee brands enable Starbucks to appeal to a broader consumer base by offering an alternative variety of coffee flavor profiles. (source: company press release)

Why We Like It:
Looks like SBUX's stock is going a bit stale. On Thursday the stock gapped lower under the simple 200-dma after reporting March same-store sales that were lower than expected. Volume on Thursday's decline was pretty heavy. To make matters worse Friday produced a 3.7 percent decline on heavy volume, which confirms the technical breakdown from Thursday only this time SBUX has broken the $50.00 mark and its exponential 200-dma. Friday's decline also helped produced a new sell signal in the P&F chart with a $42.00 target. Furthermore Friday's decline also put SBUX under support near the $49.00 level from the month of February. We believe that SBUX will continue lower and we're targeting a drop into the $45.00-44.00 range. The challenge for option traders is that we do not want to hold over SBUX's April 27th earnings report. That gives us about 2 1/2 weeks.

Suggested Options:
We are suggesting the May puts

BUY PUT MAY 50.00 SQX-QJ OI=6152 current ask $2.75
BUY PUT MAY 47.50 SQX-QT OI=2869 current ask $1.50
BUY PUT MAY 45.00 SQZ-QI OI= 490 current ask $0.80

Picked on April 10 at $ 48.62
Change since picked: - 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 4.3 million
 


Play Updates

In Play Updates and Reviews

Anadarko Petroleum - APC - cls: 76.26 chg: -0.68 stop: 72.45

APC has spent the last few days consolidating lower as crude oil pulled back from its highs. APC's technical signals are mixed but they are trending lower. Bulls need to see APC rebound from the $75.00 level or its simple 50-dma near $73.25. We would not suggest new bullish positions until we see APC produce a significant bounce from one of these support levels. Keep in mind that we plan to exit before its late April earnings report.

Suggested Options:
We are suggesting the May calls even though we plan to exit near the end of April to avoid earnings.

BUY CALL MAY 75.00 APC-EO OI=4562 current ask $4.20
BUY CALL MAY 80.00 APC-EP OI=3933 current ask $2.05

Picked on March 31 at $ 76.10
Change since picked: 0.16
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 2.3 million

---

Carpenter Tech - CRS - close: 61.68 chg: -1.40 stop: 59.95

CRS is a new play from the Thursday night newsletter. A reprint of our strategy follows:

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 $4.50
BUY CALL MAY 65.00 CRS-EM OI=187 current ask $2.10

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

---

Occidental Petrol. - OXY - cls: 72.22 chg: -0.80 stop: 67.99

OXY has managed to consolidate sideways between $72 and $75 while crude oil has slid lower this past week. We still believe in the upside of oil and the oil stocks but OXY could dip toward the $70.00 level. Be patient and don't rush to open any new positions. A dip to and bounce from the $70.00 level could be used as a new bullish entry point. We would suggest waiting for the bounce before initiating new plays.

Suggested Options:
We are suggesting the May calls even though we plan to exit before the April earnings report.

BUY CALL MAY 70.00 OXY-EN OI=4871 current ask $4.50
BUY CALL MAY 75.00 OXY-EO OI=5584 current ask $1.95
BUY CALL MAY 80.00 OXY-EP OI=2129 current ask $0.70

Picked on April 03 at $ 73.64
Change since picked: - 1.40
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million

---

Oil Service Holdrs - OIH - cls: 96.00 chg: -1.97 stop: 92.49

The OIH holders have pulled back in the last two sessions but remains in its short-term sideways consolidation between $96 and $100. If the OIH doesn't bounce from the $95.00 level and its rising 50-dma we would expect additional support in the $94-93 range. Considering the pull back in oil prices we would hesitate to initiate new bullish plays at this time. Wait to see if and when the OIH produces a significant bounce before going long. More conservative traders may want to wait for a new high over $100.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 95.00 OIH-ES OI=2434 current ask $4.70
BUY CALL MAY 100.00 OIH-ET OI=6928 current ask $2.40
BUY CALL MAY 105.00 OIH-EA OI=4049 current ask $1.10

Picked on April 03 at $ 98.70
Change since picked: - 2.70
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million

---

PalmOne - PLMO - close: 24.27 chg: -0.32 stop: 23.85

Larger rival RIMM has managed to rebound in the last couple of sessions but not so for PLMO. Instead shares of PLMO continue to drift lower toward support near $24.00 and its 50-dma. We are growing increasingly concerned here. Conservative traders may want to exit now to minimize any losses. We are not suggesting new bullish positions until PLMO trades back over $25.00 or $25.50.

Suggested options:
We are not suggesting new positions at this time.

Picked on March 23 at $ 25.71
Change since picked: - 1.44
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million

---

Potash Corp. - POT - close: 88.39 chg: -0.11 stop: 85.99

POT is a relatively new addition to the play list added on April 5th. We like its long-term bullish trend and its bullish P&F chart with a $105 target. We would use the pull back to the $88.00 level as a new bullish entry point. However, we would want to verify market direction before initiating new positions. That means if the major averages are sinking we'd probably hesitate to add new longs in POT. More conservative traders who don't want to buy the dip can wait for a new high over the $92.00 level. Our target is the $97-99 range before POT's April 27th (unconfirmed) earnings report.

Suggested Options:
We are suggesting the June options because they have the most open interest. We do plan to close the play before the April earnings.

BUY CALL JUN 85.00 POT-FQ OI=667 current ask $6.60
BUY CALL JUN 90.00 POT-FR OI=232 current ask $3.80
BUY CALL JUN 95.00 POT-FS OI=123 current ask $1.90

Picked on April 05 at $ 90.18
Change since picked: - 1.79
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume = 504 thousand

---

Red Robin Burger - RRGBE - cls: 52.59 chg: -0.46 stop: 49.49

RRGBE turned in a strong week out performing most of the market. The stock climbed to new relative highs not seen since December. Shares are up significantly from our entry point and we have been suggesting that readers strongly consider exiting early with RRGBE above the $52 level. Currently we're hanging on to see if shares can tag our initial target at $54.00. Keep your ears open on Monday, April 11th as RRGBE holds a conference call to discuss its updated guidance. With RRGBE this close to our target we are not suggesting new bullish positions.

Suggested options:
We are not suggesting new positions at this time.

Picked on March 10 at $ 48.00
Change since picked: 4.59
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

---

Whole Foods - WFMI - close: 102.08 chg: -1.68 stop: 98.99

We recently added WFMI to the play list as a call candidate when shares broke out on Wednesday through the top of its three-week trading range. The move helped produce a new MACD buy signal. We also like the bullish P&F chart with its $139 target. Since Wednesday's newsletter we've been disappointed to see a significant lack of follow through on the breakout. Friday's market sell-off drug shares of WFMI back under the top of its previous trading range. The stock is in danger of retesting the $100 level and its 50-dma. We would hesitate to begin any new bullish positions. More aggressive players can look for a bounce from the $100 level. We would prefer to wait for WFMI to trade back above the $104 mark before opening new long positions.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 100.00 FMQ-ET OI=1037 current ask $5.40
BUY CALL MAY 105.00 FMQ-EA OI=1188 current ask $2.95
BUY CALL MAY 110.00 FMQ-EB OI= 580 current ask $1.40

Picked on April 06 at $104.16
Change since picked: - 2.08
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand
 

Put Updates

Allergan - AGN - close: 70.62 chg: -0.92 stop: 72.51

This past week was a bullish one for both the drug sector and the biotech sector. Yet the rally could not push AGN above resistance at the $72.00 level. AGN's failed rally under $72.00 also reinforces the descending trendline of resistance dating back to January. This looks like a new bearish entry point but keep in mind we're only targeting a move to the $67.50 level.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 75.00 AGN-QO OI= 74 current ask $5.10
BUY PUT MAY 70.00 AGN-QN OI=2074 current ask $2.15

Picked on March 13 at $ 73.09
Change since picked: - 2.47
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 48.04 chg: -1.28 stop: 51.51*new*

Target achieved! BZH dipped to $47.77 on Friday as investors continue to worry about the affects of higher interest and higher mortgage rates on homebuilders' profits. Our target has been the $48.00-46.50 range. We suggest traders exit here to close the play. However, if you're feeling a little aggressive (and we are) we're going to hold on for another day. The Dow Industrials and the DJUSHB index both look like they could trade lower early next week. We're going to hold out for a drop towards the lower end of our target range. If you haven't exited yet be prepared to exit. We're tightening our stop loss to $51.51.

Suggested options:
We are not suggesting new bearish positions at this time.

Picked on March 17 at $ 51.43
Change since picked: - 3.39
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Intl Bus. Mach. - IBM - close: 87.60 chg: -0.84 stop 92.15

Time is running low for our put play in IBM. Fortunately for us the stock is drifting lower as well. Shares really under performed the markets all week with a new breakdown under the 200-dma and the $90.00 level and new five-month lows. The good news is that the Industrials look vulnerable to more selling early next week. This should help IBM even more toward our goal at the $85.00 level. The bad news is that IBM already looks short-term oversold with losses five out of the last six sessions. Be prepared for a possible bounce toward the $89-90 level again. Yet also be aware that we plan to exit this play on Friday, April 15th to avoid earnings on Monday the 18th.

Suggested Options:
We are not suggesting new bearish positions at this time.

Picked on March 17 at $ 89.86
Change since picked: - 2.26
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.8 million

---

Mcgraw Hill Cos - MHP - close: 86.04 chg: 0.00 stop: 88.51

MHP creeps ever closer to our target in the $85.00-84.00 range. The four-week trend of lower highs certainly suggests that MHP will breakdown to new lows. We are not suggesting new bearish plays at this time. More conservative traders may want to exit early near the exponential 200-dma at $85.30.

Suggested options:
We are not suggesting new bearish positions at this time.

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: 57.50 chg: -2.15 stop: 60.05

Good news! The market sell-off on Friday helped spark a failed rally in PHS at the $60.00 resistance level. This looks like a new bearish entry point. Short-term oscillators have reversed course and the stock closed under its simple 100-dma. Bear in mind that our target is the $55.00-54.00 range.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 60.00 PHS-QL OI=2365 current ask $4.20
BUY PUT MAY 55.00 PHS-QK OI= 946 current ask $1.75

Picked on March 20 at $ 59.04
Change since picked: - 1.54
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

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Wynn Resorts - WYNN - cls: 63.13 chg: -1.86 stop: 68.05 *new*

Gambling-related stocks have turned in a mixed performance this past week. Yet WYNN continues to look bearish following its breakdown under the 100-dma on April 1st. Thursday produced a failed rally at the 100-dma and 10-dma together and Friday's follow through lower looks like a new bearish entry point. We are targeting a drop toward the $60.00 level but we are planning to exit the play at $60.50. Please note that we're lowering the stop loss to $68.05.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 65.00 UWY-QM OI=986 current ask $4.90
BUY PUT MAY 60.00 UWY-QL OI=938 current ask $2.60

Picked on April 03 at $ 66.04
Change since picked: - 2.91
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

None
 

Dropped Puts

MGM Mirage - MGG - close: 72.87 chg: 0.36 stop: 72.51

We are running out of time on the MGG play. The company is due to report earnings on Tuesday, April 19th and we do not want to hold over the event. The sudden show of strength on Thursday-Friday this week has eroded our hopes for a breakdown under support near $69.00. MGG never hit our entry point so we are closing the play unopened.

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
 


Trader's Corner

Turning the Abstract into the Concrete

Two women study three white rectangles outlined in black against a white background. The title is "Deliberation". The first woman tilts her head head. "What does it mean?" she asks.

Raising one eyebrow, rubbing a forefinger under her chin, the second woman intones, "It means something different to each person."

Not exactly. The three rectangles have a specific meaning. The women aren't visiting an art gallery featuring abstract art, but rather are looking at a candlestick formation. Deliberation serves as a moderately reliable bearish reversal signal.

Annotated Daily Chart for LEA:

After completing the deliberation pattern, LEA would tumble all the way to sub-$50.00 levels before reversing upward again. Despite the abstract name, the pattern revealed concrete proof of waning buying interest. The gap higher proved to be an exhaustion gap. The upper and lower shadows uncovered the bulls vs. bears battle, and hinted that bulls would not win the battle.

Go beyond the abstract name. Do more than memorize chart patterns. Although the names may sound like mumbo jumbo, the patterns aren't abstract. The messages about buying and selling interest can be understood.

They should be understood. Breaking down chart patterns or formulas used in technical analysis helps traders use these tools more effectively. To see how a trader might gain a deeper understanding of a pattern, technical analysis tool, or formula, consider pivot points. In a recent Traders Corner article, Jane Fox discussed pivot points, providing formulas used for their calculations. Building on the information that Jane provided, readers might delve further. Here is the formula for the pivot:

Pivot point = P = (H L C)/3

What does that formula mean? It's an average of the high, low, and close. How would that average change as prices move? What happens to that average on an up day when prices close near the high of the day? What about on a down day when prices closer near the low of the day?

If price closes nearer the high of the day, that average or pivot point will be above the midpoint of the previous day's range, in the more bullish half of that day's range. If price closes nearer the low of the day, that average is going to be below the midpoint of the previous days range. A series of strong day's results in pivots marching higher, and a series of weak days results in pivot points stepping lower.

Let's run some numbers. If MYTH, a hypothetical stock, traded a high of 24 and a low of 18, and closed at 22, the midpoint of the day's range would be 21. Would the pivot point be above or below that midpoint, in the bullish or bearish half of the day's range? The pivot point calculation (Case 1) would be as follows:

Pivot Point = P = (24 18 22)/3 = 21.33. This is above 21, the midpoint of the day's range.

If MYTH, our hypothetical stock, traded a high of 24, a low of 18, and closed at 18, the pivot point calculation (Case 2) would be as follows:

Pivot Point = P = (24 18 18)/3 = 20. This is below the midpoint of the day's range.

In both cases, the pivot point is above the close of the previous day. Is this always true? What would need to happen for the close to be above the pivot? Let's do some elementary algebra and figure it out. Imagine a case in which the previous day's close was above the pivot, say one point above the pivot.

P = C-1 = (H L C)/3
3(C-1) = H L C
3C 3 = H L C
2C 3 = H L

So we have three variables here, but let's still substitute a value for the close and see what we find. Imagine that the close was at 20.

2(20) 3 = H L
37 = H L

Is it possible for the high and low to equal 37 when the close was 20? Sure it is. The high could have been 22 and the low 15, for example. We can't assume that because the first two cases produced pivot points above the close that they'll always be above the close, so maybe that adds one bit of knowledge to our understanding of how pivots work.

How do the first two cases discussed above affect the support or resistance levels? The formula for S1 is as follows:

First level of support = S1 = 2P H.

Remember that P is an average of the high, low and close. The closer this average is to the high of the day, the nearer the first level of support the next day is going to the high of the day preceding it. Previous calculations showed us that P is nearer the high when the close was nearer the high, on days when prices are showing strength. That seems intuitive and it is, but tinkering with the numbers confirms our intuitions.

In what cases will support and resistance levels bunch up? In what cases will they spread wide? Although it appears contrary to logic, is it ever possible for S1 to be above the close? Could that first support level ever be right at the high of the day used for the calculations? Run through sample numbers to find out. For example, an examination of the formula shows that the only way S1 could ever equal the high of the previous day is if prices spent all day at the opening level, never moving. Elementary algebra returns this conclusion. If the S1 is to equal the high of the day, then the formula reads as follows:

S1 = H = 2P H
Solving for P:
2H = 2P
H = P

If H must equal P in order for the S1 to be at the high of the day, then go back to the formula for the pivot and substitute H for P:

Pivot = P = H = (H L C)/3
H = (H L C)/3
3H = H L C
2H = L C

Tinkering with that last formula shows that if the low is any value lower than the high of the day, the close must be higher than the high of the day, an impossibility. For example, imagine that the low is 1 point below the high. Here is how that last formula above would work out, with (H-1) substituted for the low:

2H = (H 1) C
Solving for C:
H 1 = C

That says that the close is 1 point above the high of the day. Can't happen. No value returns a valid solution. The only way S1 can be at the high of the day is if the low and the high are equal.

What about resistance levels? The formula for R1 is 2P L. What will happen to this number in cases when MYTH closes nearer the high of the day? Since the pivot rises as MYTH closes nearer the high of the day, one might reason that the R1 will move higher. Calculations will show that to be true.

I know what you're thinking. Some charting services offer click-on-the-chart pivot analysis support and resistance points. If yours doesn't, a spreadsheet will. Perhaps you can't think of a single reason that you'd ever want to know whether S1 was likely to end at or near the high of the previous day and the conditions needed to make that happen. However, if you want an instinctive knowledge of what the formulas mean and how they work under differing market conditions, if you're making hold-over-or-not decisions on the fly at the end of the day, nothing beats an hour or two making calculations or even running different number combinations through your spreadsheet so that you intuitively understand these matters.

Does this help? Sure it does. Try it with other technical analysis tools.

Hand chart some of those X's and O's in point-and-figure charting. You'll gain a better knowledge of what this charting method is showing about supply or demand. Combine the candlesticks in a multi-candle-pattern and you might understand the pattern's implications better. Combining the three candles of an evening-star pattern results in a gravestone doji, for example, leaving a long upper shadow and either no real body or a small real body at the bottom of the candlestick. Suddenly, that three-candlestick pattern looks clear in its implications. Prices pierced resistance, but were met with strong selling and rebuffed.

Not mumbo jumbo after all, is it?
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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