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Daily Newsletter, Saturday, 04/30/2005

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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

Drop in Oil Punctuates Month End

WE 04-29

 

WE 04-22

 

WE 04-15

 
DOW

10192.51

+  34.80

10157.71

+ 77.37

10080.34

- 381.00

NASDAQ

1921.65

-  10.51

1932.19

+ 24.04

1908.15

-   91.20

S&P 100

552.74

+    1.34

551.40

+   3.64

547.76

-   14.93

S&P 500

1156.85

+    4.73

1152.12

+   9.29

1142.83

-   38.58

W5000

11363.52

+  26.22

11337.30

+ 90.52

11246.78

- 387.81

SOX

385.65

-    3.70

389.35

+   6.66

382.69

-   34.31

RUT

579.38

-  10.15

589.53

+   8.78

580.75

-   29.97

TRAN

3426.44

-  13.61

3440.05

+ 60.27

3379.78

- 216.92

VXO

15.18

 

15.38

 

17.99

 

VXN

18.54

 

19.04

 

21.77

 

Drop in Oil Punctuates Month End

The Dow was in danger of posting the worst April in 35 years until the bottom fell out of the oil market. Crude dropped more than $2 just prior to the close of trading and was credited for several buy programs that hit the tape. The end of day sell off in oil was obviously influenced by month end portfolio shuffling but that point was all but ignored by TV commentators. The sharp end of day moves in oil, bond, and equities were likely all related to rebalancing by funds.

Dow Chart - Daily


Nasdaq Chart - Daily


Friday contained a diverse blend of economic news and like the prior weeks that news was a mixed pot of economic stew. The Employment Cost Index came in at +0.7% and lower than expected and showed that labor costs were actually moderating rather than climbing. This was the fourth quarterly decline in total compensation and suggests the labor market is weakening rather than firming. A weak jobs market allows employers to pay less due to competition for available positions. Higher benefit costs are weighing on wages meaning employers are cutting wages to offset the higher cost of benefits like health care. This tame report should be Fed friendly as it shows there is no wage inflation to support price inflation for consumer goods. In fact Friday's number was the weakest index showing since 2000. Wages grew by only +0.6% or +2.4% year over year and is the slowest growth in recent memory.

Personal Income and Spending was also released on Friday with a headline number of +0.5% and right at consensus estimates. Wages in this report grew +0.3% for the month and spending rose by +0.6%. The increase in spending over income reduced the savings rate by -0.4%. The PCE deflator, closely watched by the Fed as a gauge of inflation, rose by +0.5% due mostly to higher energy prices. The core deflator rose slightly less at +0.3%. These numbers were slightly faster than the Fed's forecast. This could cause some Fed concern next Tuesday but only slightly.


The final Consumer Sentiment for April fell to 87.7 from 92.6 with the expectations component leading the drop. This was the fourth consecutive monthly decline and the largest of the four months. Economic fears, rising interest rates and high gas prices continue to be blamed.

On the positive side of the economic ledger the NY-NAPM rose sharply to 341.2 from the prior month level of 329.1. This was a +3.7% jump and it was led by a +50% increase in the six-month outlook from 50 to 77.8. Current conditions also jumped from 58.3 to 74.2. The only material declines came in the quantity of purchase component from 80.0 to 65.0 and the average days of inventory on hand which fell to 15 from 30. Lower inventory levels could lead to a short squeeze if demand suddenly increases and the soft patch suddenly releases its grip on the economy. This report suggests the NYC economy rose sharply in March in direct opposition to what we have been seeing nationwide. This could be seen as a leading indicator of a broader rebound ahead.

The Chicago PMI fell from 69.2 to 65.6 and showed a slight cooling of manufacturing activity in that region. A slight decline was expected after the very strong reading in March and a +7 point jump over February. Analysts should be happy with the minor decline, which was actually better than the forecasted drop to 64. Inventories rose +6 points and employment fell -4 but both remain strongly in positive territory.

This has been a rocky week for economics with the GDP and Durable Goods orders both painting the picture of a continued soft patch for the economy. In hindsight this could be good news given the FOMC meeting on Tuesday. Many analysts are now calling for the Fed to step aside until the economy picks up some speed and that call is growing in strength. They are still expected to raise +25 points on Tuesday but now there is increasing doubt that they will continue hiking past June. This makes the May economics very important for Fed watchers and the calendar is full of events next week. The ISM Index on Monday is a look at manufacturing on a national level. The index has fallen for four consecutive months and another drop just ahead of the Fed meeting could be market positive. I know that sounds crazy but a weaker economy means the Fed is less likely to continue raising rates as long as they previously planned. The best scenario for traders would be an end to rate hikes at the August or September meeting. This would give buyers a very green light to buy a late summer dip.

There are lots of other reports next week but the Jobs report on Friday will be the next wall of worry bulls must climb after the Fed meeting. The gain of only +100K jobs in March was well below the recent averages. Estimates are dropping, currently at +175K with whisper numbers UNDER +100K. Should this jobs report vary much from +150K in either direction the market should react very strongly. The Fed will get an advance look at the numbers so it will already be priced into their decision but most traders don't realize this. They will react to the actual Jobs announcement instead.

Friday was a crazy day for those not accustomed to looking at the market with a broader view. At 1:30 a sell program hit the oil futures and knocked -1.55 off the price in a matter of minutes. Commodity traders felt this was due to the expiration of the front month contract in heating oil and unleaded gas. Personally I believe there were more factors at work. Recently we have had short covering price jumps in oil ahead of the weekend. I believe there were a lot of longs hoping for a repeat and time ran out on them with no movement. Those longs could have been mutual funds facing a month end and losses across the board in their portfolios. They could have been hoping for a last pop in oil before rotating back into equities for month end.

Funds that must remain balanced with certain percentages of assets in bonds and equities were faced with a -3% drop in the Dow and -4% drop in the Nasdaq for the month. This meant they needed to sell bonds and buy equities going into the close to maintain their stated balance. Bonds sold off sharply beginning at 12:45 just as equities began to rally. There were three distinct buy programs on equities in the afternoon, which provided the majority of lift.

The drop in oil could have been related to heating oil and unleaded gas expiration but I believe it was related to funds once again. Funds needed to take profits in oil to offset losses in equities. The combination of movement in oil, equities and bonds was too coincidental to be an accident. This was a pure bout of end of month tape painting at its finest and should not be construed as having any bearing on real market sentiment.

Oil drops -$2.00 to close under $50 for the first time since February 18th! That will be the headline in the weekend papers. Oil closed at $49.60 and more than -$6 off the $56 level seen the prior week. However, most oil stocks rallied on Friday despite the sharp drop in oil prices. Confused? The 100-day average is currently $49.75 for crude and this is a strong buy level. Conoco Phillips led the rebound at +2.09 for the day with most oil stocks finishing higher. I have been recommending adding to oil positions under $50 and that recommendation has not changed. Remember, we have been expecting a drop in demand as we transition from the heating oil season into the gasoline season. This drop in demand creates a build in oil inventories and that is what we have been seeing. Once the driving season begins those inventories will begin to shrink once again. We have been waiting for the pull back to $50 to buy oil not sell it. I received several emails asking if we should be exiting oil but that is the wrong thinking. You need to understand the seasonality and trends. Even at $50 we are still well above last years levels. The current chop on the chart looks exactly like the chop we saw in Oct/Nov last year with a bottom just over $40. Once demand begins to pick up again prices should rise into the fall months. We could see prices retreat even further but I continue to see it as a buying opportunity not a sell signal. An ideal entry opportunity would be a dip to the 200-day average at $47.

Crude Oil Chart - Daily


SOX Chart - Daily


SPX Chart - Daily


If you recall last Tuesday I showed you a chart of the advancing/declining volume and the new highs and lows for the last two weeks. The activity since then has been even more bearish with new lows shooting up to 441 on Friday compared to new highs at only 79. This is not a good sign for the markets. The declining volume has also been rising despite two days of positive markets. Thursday declining volume was 3.6B shares compared to only 802M shares of advancing volume. Decliners were 5:1 ahead of advancers. Friday's tape painting exercise barely managed to reverse that ratio to 1.5:1 in favor of advancers. Volume was very high at nearly 5B shares. In technical terms most of us would understand the market sentiment stinks.

Earnings have improved with 74% of the S&P now reported and earnings growth is well over +15% and +50% better than analysts had predicted just a month ago. That has failed to produce a meaningful rally or even a hint of positive times ahead. Now that earnings are fading the interest in stocks could fade with it. The Friday tape painting was unsuccessful in creating any material short covering and that suggests shorts are comfortable at current levels.

The Dow still has strong resistance from 10200-10260 and we could not even reach that 10200 level on Friday despite the tape painting. The morning dip to 10050 should have been enough to produce some bargain hunting but buyers other than the 11:00 program were noticeably absent. The opening spike to 10135 was sold hard as was the program trade spike from 10050. I still believe we will see 9800 soon and this chop is just sparring between the bears and the dip buyers. The market volatility continues to be very strong with alternating triple digit days but no trend. This is not the kind of action that attracts buyers off the sidelines. They see wave after wave of bargain hunters get chopped to ribbons 24 hours later and that is not the kind of game they want to play.

The Nasdaq was hit harder than the Dow on Friday with a technical breakdown below 1900 at midday. Were it not for the tape painting it could have been much worse as there was no material attempt to move off the 1895 level until the programs started running at 12:45. Nasdaq 1900 should be strong support but a real breakdown appears imminent. A breakdown could target 1750 for a new low.

Uptrend support across all the indexes has broken as well as the 200-day average on all but the S&P. That 1155 level on the S&P continues to act as a magnet on an intraday basis but so does current support at 1140. That support has been tested three times over the last two weeks and buyers appeared each time. This would be my key level to watch for market direction. Periodically a level will appear that has become the battleground where forces are evenly matched. This is currently 1140-1160 on the S&P. A break under the bottom of this range could trigger additional selling as a sign the bulls are surrendering.

The SOX also broke to a new five-month low of 376 at Friday's open. The support at 385 finally failed and the SOX spent most of the day under 380. The end of day buy programs returned it to close right on 385 once again but it looks very heavy. KLAC lowered guidance for the current quarter and warned that sales could be down -10%. On Monday we will see the Semiconductor Billings for March and another drop there could accelerate the weakness in the SOX. Chip results have been very mixed depending on what type of product each company produces. There have been some good reports like MCHP but they were offset by reports like we saw from Taiwan Semi and KLAC.

The real picture is one of earnings growth in nearly all areas with current earnings much better than expected. In theory stocks should be celebrating this earnings cycle instead suffering. The problem is the economy, the Fed and the future. While earnings guidance has been mostly positive there have been the occasional potholes. Because the economic reports have been mixed with a heavy dose of worry investors are concerned that the current earnings growth may not last. This is heightened by the current Fed cycle. While the term economic stagflation has returned to the mainstream press it is probably the stagnation in the markets that worry everyone most. We are oversold in most cases given the nearly -1000 point drop in the Dow from the years highs to the recent lows. Despite that drop we have not seen a rebound stick for more than 48 hours since early March. While one analyst on Friday was calling the S&P a perfect buying opportunity with a "W" bottom I fail to see it.

April is typically one of the strongest months of the year and at one point Friday morning we were only 35 Dow points away from the worst April in 35 years. My point to this is simple. March and April have been a disaster. Volatility is rapidly increasing and while alternating triple digit days are good for the swing traders they are damaging to overall market sentiment. Money flows into the market have shriveled to nothing. Fund inflows in March totaled only $14.9 billion but only $3.1 billion flowed into U.S. equities with the rest going into funds investing overseas. Trimtabs estimates April will be even slower with only $1.8 billion moving into domestic funds and $1.2B into overseas funds. To put this into perspective it would be like trying to stretch a single $30 fill up in the family car for the entire month. Fund managers are having to trim positions to pay the bills and handle disbursements. Buy stocks? Not until the cash flows appear again. You can't buy on good intentions and most managers have already trimmed the most likely positions to keep from selling the good stuff.

Everyone is praying Dow 10K, Nasdaq 1900 and S&P 1140 will hold and not subject them to another round of forced position reductions. I fear that any new leg down could produce some real belt tightening and a change in mindset from a simple correction to something more serious ahead. That could produce an even bigger drop since we always over do every move. So far we are holding in normal correction territory on the Dow at -9% from the high to the recent low at 10,000. The S&P has fared a little better at -7% from the highs to its 1136 low. The Nasdaq is the black sheep and has fallen nearly -14% since its January highs. In the grand scheme of things these numbers are normal for a pull back but given the calendar and the weak economy the summer doldrums are not likely to impress us with gains.

Starting with May we have the worst four months of the year ahead of us with July being the exception. May, August, June and September have historically been the four weakest months for the Dow and in that order with Sept the worst. For the S&P the worst five months are May, June, August, February and September with the insertion of February the wild card. Any way you look at it we have a potentially rocky period ahead unless somebody starts injecting cash into mutual funds. Obviously all the market history in the world does not assure the coming months will follow the historical averages. There are far too many factors that impact investor sentiment on a continuing basis. It does however help color that sentiment for those traders who have suffered through more negative summers than they care to remember. This is why the "sell in May and go away" strategy has earned so many followers. I would continue to be cautious on long entries and use any rallies as opportunities to enter short positions. The current volatility is providing plenty of opportunity but none of it is the buy and hold type. If you are not a trader it may be time to go fishing. Unless something changes the path of least resistance is still down but we are oversold enough that another short squeeze could be just around the corner. Definitely enter passively and exit aggressively.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
CB None

Editor's note:

We believe that the current (trading) trend in the markets is down. Yet many stocks have reached oversold conditions. Friday's rally looks like the beginning of a short-term oversold bounce. This is not a place where we want to add many new bullish or bearish plays. We will wait a day or two to see where the bounce begins to falter before listing new bearish plays.

New Calls

Chubb Corp - CB - close: 81.78 chg: +2.39 stop: 77.49

Company Description:
Founded in 1882, the Chubb Group of Insurance Companies provide property and casualty insurance for personal and commercial customers worldwide through 8,000 independent agents and brokers. Chubb's global network includes branches and affiliates throughout North America, Europe, Latin America, Asia and Australia. (source: company press release)

Why We Like It:
We like CB for its bullish technical breakout and relative strength. The stock has been pretty resistance to the market's intermediate down trend and somewhat resistance to the market's recent volatility. Overall CB has been able to maintain its bullish trend of higher lows and Friday's gain pushed the stock to a new four-year high over multiple levels of resistance. The next level of significant resistance looks like the $90.00 level. Currently the P&F chart has produced a triple-top breakout buy signal pointing to a $107 target. We are suggesting bullish positions with a target in the $88-90 range. More patient traders may want to see if CB pulls back again toward the $80.50-81.00 region and buy the dip.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 75 CB-FO OI=172 current ask $7.60
BUY CALL JUN 80 CB-FP OI=450 current ask $3.50
BUY CALL JUN 85 CB-FQ OI=172 current ask $1.00

Picked on May 01 at $ 81.78
Change since picked: + 0.00
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 1.2 million
 

New Puts

None today, see note.


Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 72.00 change: +0.98 stop: 67.49

A triple-digit bounce in the Industrials helped AVB breakout from last week's trading range. The stock has already retested the $70.00 level and its 100-dma as support. Friday's gain put AVB at a new three-month high over the February peak. Now shares look poised to make a run higher. Our target remains the $75-76 range. We would consider new bullish positions based on AVB's relative strength but keep a close eye on the major averages. If there is no follow through on Friday's bounce next week it may be prudent to shy away from bullish plays.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65.00 AVB-GM OI= 761 current ask $8.40
BUY CALL JUL 70.00 AVB-GN OI= 570 current ask $4.40
BUY CALL JUL 75.00 AVB-GO OI= 157 current ask $1.65

Picked on April 24 at $ 70.05
Change since picked: + 1.95
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand

---

Golden West Fincl - GDW - close: 62.33 chg: +0.07 stop: 59.95

Both the BKX and BIX banking indices turned in decent gains on Friday. If the rally continues then both banking indices could produce a bullish breakout from their current descending channels. Yet therein lies the challenge. The sector remains oversold from its highs but is facing tough resistance overhead. Fortunately, GDW has shown a lot of relative strength compared to many of its peers. GDW has also produced what looks like a short-term bottom over the last couple of months. The stock dipped to $61.50 near its 10 and 100-dma's on Friday and traders bought the dip suggesting this is a new bullish entry point. We would consider new bullish positions here but ONLY if the major averages can produce a follow through on Friday's bounce. More conservative traders may want to wait until after the Tuesday FOMC meeting before considering any new positions. Our target is the $66.50 level.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 60.00 GDW-FL OI=208 current ask $3.80
BUY CALL JUn 65.00 GDW-FM OI=504 current ask $0.95

Picked on April 26 at $ 62.55
Change since picked: - 0.22
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 1.3 million

---

Nucor - NUE - close: 51.10 chg: +1.33 stop: 49.95

Our NUE play remains in limbo. The stock has slipped back toward support near $50.00 and its 200-dma's. Shares remain short-term oversold and in a two-month downtrend but they are near support for NUE's longer-term up trend. Prudential reiterated its under perform rating on NUE this past Friday and a Reuters article, also out on Friday, described a slow down or a soft spot for steel prices recently. NUE should have traded lower. Thus we believe that Friday's bounce is probably just that an oversold bounce. However, since there is the possibility of the Industrials bouncing from the 10,000 level then NUE could bounce from the $50 level. We will keep NUE on the play list but we remain on the sidelines. Our current trigger to go long is at $55.05. However, we might adjust our entry to over the 21-dma if conditions change. Alternatively, if the market continues to sink and NUE trades under $49.00 we may switch to bearish positions.

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

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 3.3 million

---

Websense - WBSN - close: 53.05 chg: +1.46 stop: 49.49

The good news here is that Friday's 2.8 percent gain completely erased Thursday's decline. The "bad" news is that WBSN is still stuck under its 40-dma. Overall the picture remains the same. WBSN is bouncing from the bottom of its wide rising channel with price support near $48.00 bolstered by its 200-dma. A similar pattern is seen on its P&F chart with investors buying the dips to its long-term trendline of support. We remain bullish but if the broader market indices fail to mount any sort of sustainable rally next week then WBSN's own rally is likely to stall. Traders can choose to go long at current levels or hope for a dip back toward the $50.50-51.00 region. Momentum traders can wait for a breakout over $54.00 as a new entry point. Our target is the $59.00-60.00 range.

Suggested Options:
We are suggesting the July strikes although Junes are available.

BUY CALL JUL 50.00 DQH-GJ OI= 89 current ask $6.90
BUY CALL JUL 55.00 DQH-GK OI=208 current ask $3.80
BUY CALL JUL 60.00 DQH-GL OI=215 current ask $1.95

Picked on April 27 at $ 52.85
Change since picked: + 0.20
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 751 thousand
 

Put Updates

Adobe Systems - ADBE - close: 59.47 chg: +1.00 stop: 61.01 *new*

We initially added ADBE as a short-term put candidate on April 26th. The stock had "filled the gap" from its mid-April drop and shares were producing a failed rally near resistance at the top of the gap. The short-term trend still looks weak but Friday's bounce was a bit unexpected. The stock remains under resistance at the $60.00 level and $60.75. The GSO software index remains in a bearish trend but could bounce another day or two before turning lower. The same could be said for ADBE. Readers may want to wait a day or so to see if the $60.00 level holds before considering new bearish positions. We're going to lower our stop loss to $61.01. Our short-term target is still the $55.00 level.

Suggested Options:
We're not suggesting new positions at this time. Wait a day or two to see if resistance holds.

Picked on April 26 at $ 59.12
Change since picked: + 0.35
Earnings Date 06/16/05 (unconfirmed)
Average Daily Volume = 3.3 million

---

CDW Corp - CDWC - close: 54.69 chg: +0.83 stop: 58.01

CDWC is showing a little volatility. The stock gapped higher on Friday morning after the company's management tried to bolster their stock price. The company said they had increased their stock buy back program by an additional three million shares on top of the 1.5 million share program already in effect. The initial strength on Friday did not hold and the stock sank to another two-week low before the afternoon market buy programs kicked in. We remain bearish on CDWC. However, readers may want to stand back and look for a bounce back toward the $56.00 level. A failed rally near $56.00 could be used as a new bearish entry point. Our target remains the $50.00 region.

Suggested Options:
We are suggesting the July puts

BUY PUT JUL 60.00 DWQ-SL OI=1682 current ask $6.10
BUY PUT JUL 55.00 DWQ-SK OI= 612 current ask $2.80
BUY PUT JUL 50.00 DWQ-SJ OI= 697 current ask $1.05

Picked on April 24 at $ 55.68
Change since picked: - 0.99
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 920 thousand

---

Infosys Tech. - INFY - close: 59.20 chg: +1.72 stop: 62.51

Nothing moves in a straight line so it's not surprising that INFY produced an oversold bounce on Friday, especially with the major averages in positive territory. The question is where will the bounce fail. INFY's eighteen-month bullish trend appears to have been broken. The recent earnings warning for 2006 does not inspire investor confidence and the GSO software index remains in a bearish pattern. Furthermore INFY's P&F chart has reversed from a buy signal to a sell signal with a $49 target. Here's our suggestion. Wait and watch for INFY to bounce back toward the $60.00 or even $61.00. A failed rally at either level could be used as a new bearish entry point but be sure that INFY is rolling over. Just to play it safe if INFY hits either level look for a $1.00 drop (in this case back under $59.00 or back under $60.00, respectively) before initiating new bearish positions. Our target is the $51-50 range. Our time frame is six-to-eight weeks.

Suggested Options:
We are suggesting the June puts although at this time the July puts have more open interest. You may want to use July's.

BUY PUT JUN 65.00 IUN-RM OI= 50 current ask $9.00
BUY PUT JUN 60.00 IUN-RL OI=284 current ask $5.30
BUY PUT JUN 55.00 IUN-RK OI= 76 current ask $2.70

Picked on April 26 at $ 58.24
Change since picked: + 0.96
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 504 thousand

---

Lehman Brothers - LEH - close: 91.72 chg: +0.09 stop: 94.05 *new*

Heads up! Our put play in LEH has been triggered. The stock was weak on Friday morning before the afternoon buy programs sent the market bouncing back. The low for the day was $89.45, which was exactly our trigger point. Coincidence? We suspect that both LEH and the XBD broker-dealer index could rally another day, maybe two, before continuing lower. That means we need to give LEH a little more room than we have now with our stop loss at $92.51. We hate to do it but to give this play a chance we need to adjust our stop loss to $94.05. The $94 level has been resistance this past week so it's a good spot to stick our stop loss. More aggressive traders may actually want to stick their stop above the $95.00 level. If you look at the chart below you'll see the short-term trend of lower highs. Yet another alternative would be for any trader who did enter bearish plays on Friday's dip to consider exiting now and then re-entering positions once we see where the bounce fails. We suspect it will be near $94 but it could be near the $95 level. We'll be watching for the failed rally and alert you to any new entry points. We will be adjusting our target to the $86-85 level.

Suggested Options:
We are not suggesting new plays at this time. Watch for LEH to bounce higher for a day or two then consider a new entry point. We like the June puts.

Picked on April 29 at $ 89.45
Change since picked: + 2.27
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million

---

Marriot - MAR - close: 62.75 chg: -0.62 stop: 66.11

MAR is a new bearish play from the Thursday night newsletter. Friday's session saw shares lose another 0.97 percent on strong volume. There is no change in our strategy. A reprint of Thursday's play description follows here:

We like MAR as a bearish candidate because the bullish up trend has been broken. Shares of MAR were very strong for months but the stock peaked a couple of weeks ago ahead of its April earnings report. When the market tanked mid April shares of MAR broke down under its trendline of support and its simple 50-dma and its 100-dma. The market's recent oversold bounce helped lift MAR just high enough to retest the $66.00 level (and its 40 and 50-dma's) as new resistance. Now MAR is turning lower on big volume nearly double the norm. Short-term technical oscillators are turning bearish. This looks like an opportunity to capture a quick decline toward the $60.00-58.00 range. The $60.00 level is likely to be round-number support while the $58 level should be supported by its simple 200-dma.

Suggested Options:
We are suggesting the June puts although Julys will certainly work.

BUY PUT JUN 65.00 MAR-RM OI= 175 current ask $3.30
BUY PUT JUN 60.00 MAR-RL OI= 550 current ask $1.05

Picked on April 28 at $ 63.37
Change since picked: - 0.62
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

PACCAR Inc - PCAR - close: 67.90 change: +1.09 stop: 70.01

The action in PCAR on Friday appears to be nothing more than an oversold bounce. Shares are still in a two-month bearish trend. Any bounce back toward the $69.00 level and its exponential 200-dma can be used as a new bearish entry point although we'd wait to see that the rally was indeed failing before initiating positions. The P&F chart remains bearish with its $54 target. Our target is the $62.50-62.00 range.

Suggested Options:
We are suggesting the June puts. You might want to consider using May or August options if you want more open interest.

BUY PUT JUN 70.00 PAQ-RN OI= 37 current ask $4.10
BUY PUT JUN 65.00 PAQ-RM OI=103 current ask $1.80

Picked on April 27 at $ 66.45
Change since picked: + 1.45
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 1.0 million

---

Parker Hannifin - PH - close: 59.94 change: +0.86 stop: 62.01

PH is a new bearish candidate from the Thursday night newsletter. While shares did bounce on Friday there is no change to our strategy. Look for a failed rally near $61.00-61.50 as a new bearish entry point. A reprint of Thursday's play description follows:

It looks like shares of PH have been in trouble ever since the stock lost its upward momentum back in December 2004. There was a sharp drop in mid January as investors reacted to the company's earnings report where PH missed earnings estimates. The stock managed to rebound somewhat through February-March only to find resistance near $70.00. In late March PH crashed again after issuing an earnings warning. Ever since shares of PH have been pinned under resistance near $62.00. Now with the major market averages on the verge of breaking down yet again we suspect this could be an attractive entry point for put positions in PH. Technical traders will note that PH's MACD is nearing a new sell signal and its RSI and stochastics are turning bearish again too. Plus, the stock's P&F chart is in a sell signal with a $44 target. Our target is the $55.00-54.00 region. More conservative traders may want to wait for a little confirmation and only initiate new plays on a decline below the $58.00 level.

Suggested Options:
We are suggesting the June puts although the May and August strikes do have more open interest.

BUY PUT JUN 60.00 PH-RL OI= 52 current ask $2.45
BUY PUT JUN 55.00 PH-RK OI= 63 current ask $0.80

Picked on April 28 at $ 59.08
Change since picked: + 0.86
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million
 

Dropped Calls

None
 

Dropped Puts

None


Trader's Corner

If/Then Statements with Keltner Channels

Even the best trade setups occasionally turn sour. A recent article described how nested Keltner channels can be used to determine breakouts and set targets, but they can also confirm when Keltner-based trades turn sour. They allow the construction of if/then statements that set specific goals for preserving or invalidating a breakout signal.

An example occurred Thursday and Friday, April 21 and 22. A breakout signal was invalidated. The OEX had been building a broadening formation at the bottom of its drop off the April 12 high, alternating rallies with steep descents. Thursday had been a rally day. The OEX had risen to test its 200-sma, the 38.2% retracement of its fall from the April 12 high and nested Keltner resistance. Climbing above and maintaining the 200-sma into the close would have been a coup for bulls, and so it might have been assumed that a drive into that average would occur near the close. It did, creating a new Keltner channel breakout signal in the process.

Note: Background and settings for the nested Keltner channels discussed in this article can be found in the Sunday, March 20 Traders Corner article.

Annotated 15-Minute Chart of the OEX for Thursday, April 21:


Experienced traders might have found the breakout suspicious. Reasons included the already stated notion that the late-day push had been intended to close the OEX back above its violated 200-sma. In addition, the drive stopped short of the 50% retracement of the plummet off the April 12 high and had taken on the look of a bearish rising wedge.

A suspicious trader might have wanted to know Thursday evening what would be needed to invalidate that breakout signal the next morning. The breakout above that black channel had suggested the OEX would move to the outer boundary of the next wider channel, so a 15-minute close beneath the black channel line would be needed to invalidate the signal. Thursday night, a trader would have been able to construct the following if/then statement: If the OEX closes a 15-minute period candle below the Keltner line currently at 553.29, then it will have invalidated the breakout signal. The upside target would be erased. At the open, the Keltner line might move somewhat: hence, the "currently at" part of the statement.

Take another look at that chart from Thursday, April 21 and note the thin red line. That's the central basis line of the smallest channel, the blue one. When that blue channel turns up, the OEX is moving higher. When it turns down, the OEX is moving lower. When it flattens, the movement is losing momentum. If OEX closes had been above the red basis line, a close below it would tend to flatten the blue channel. If closes had been below the basis line, a close back above it would tend to flatten the blue channel. A trader looking at that chart Thursday evening would know that a 15-minute close beneath that red line would tend to flatten the blue channel. It would be a signal that the upward movement might be losing momentum.

Friday morning, that upside target was erased by a 15-minute close beneath the black channel line, and the small blue channel started to flatten after a close beneath the central basis line.

Annotated 15-Minute Chart of the OEX, April 22


That first 15-minute candle corroborated the impression that Thursday's breakout was not to be trusted. Friday, April 22, the OEX eventually dropped to a low of 546.88 before bouncing. Trading had been volatile for days, with breakouts untrustworthy, but the ability to construct an if/then statement based on Keltner evidence had given traders concrete levels to watch. They knew when a breakout play was being invalidated and its target erased.

Even working trades see short-term retracements against the position. Knowing when a trade still works despite those to-be-expected retracements proves just as important as determining when trades turn sour. Keltner-based if/then statements can be used for that purpose, too.

Annotated Daily Chart of the TRAN:


On the chart above, the red central basis line of the small blue channel shows up in bold to make it more visible. Continued daily closes beneath that basis line kept the TRAN's smallest Keltner channel pointed down and the TRAN traveling lower within that channel. The if/then statement that market watchers might have constructed was as follows: As long as the TRAN produces daily closes beneath the red line, then the TRAN remains vulnerable to declines toward the lower black channel line.

Another statement could be constructed. If the TRAN began producing daily closes above the red line, then the TRAN was trying to steady and the downside thrust might be losing momentum. Bears in transportation stocks might have been alerted to a deceleration in downside momentum. This did happen, but the TRAN was to switch gears again the next day, April 22, and then resume its downward course.

A special situation exists when if/then statements do not work as well. This occurs when the Keltner channels flatten and line up, one within the other. This equilibrium state occurs when prices consolidate in a tight range over a prolonged period. The central basis lines of the various channels converge, and appear to be strong support or resistance. Traders might be tempted to construct if/then statements that sound like the following: If prices close above/below the mid-channel level, then the upside/downside target is at the next outer channel boundary.

Annotated 15-Minute Chart of the Dow, Early April


With this easily recognized exception, nested Keltner channels offer traders an easy way to gauge whether a Keltner-based trade still works or has been invalidated.
 

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.


Trader's Corner

If/Then Statements with Keltner Channels

Even the best trade setups occasionally turn sour. A recent article described how nested Keltner channels can be used to determine breakouts and set targets, but they can also confirm when Keltner-based trades turn sour. They allow the construction of if/then statements that set specific goals for preserving or invalidating a breakout signal.

An example occurred Thursday and Friday, April 21 and 22. A breakout signal was invalidated. The OEX had been building a broadening formation at the bottom of its drop off the April 12 high, alternating rallies with steep descents. Thursday had been a rally day. The OEX had risen to test its 200-sma, the 38.2% retracement of its fall from the April 12 high and nested Keltner resistance. Climbing above and maintaining the 200-sma into the close would have been a coup for bulls, and so it might have been assumed that a drive into that average would occur near the close. It did, creating a new Keltner channel breakout signal in the process.

Note: Background and settings for the nested Keltner channels discussed in this article can be found in the Sunday, March 20 Traders Corner article.

Annotated 15-Minute Chart of the OEX for Thursday, April 21:


Experienced traders might have found the breakout suspicious. Reasons included the already stated notion that the late-day push had been intended to close the OEX back above its violated 200-sma. In addition, the drive stopped short of the 50% retracement of the plummet off the April 12 high and had taken on the look of a bearish rising wedge.

A suspicious trader might have wanted to know Thursday evening what would be needed to invalidate that breakout signal the next morning. The breakout above that black channel had suggested the OEX would move to the outer boundary of the next wider channel, so a 15-minute close beneath the black channel line would be needed to invalidate the signal. Thursday night, a trader would have been able to construct the following if/then statement: If the OEX closes a 15-minute period candle below the Keltner line currently at 553.29, then it will have invalidated the breakout signal. The upside target would be erased. At the open, the Keltner line might move somewhat: hence, the "currently at" part of the statement.

Take another look at that chart from Thursday, April 21 and note the thin red line. That's the central basis line of the smallest channel, the blue one. When that blue channel turns up, the OEX is moving higher. When it turns down, the OEX is moving lower. When it flattens, the movement is losing momentum. If OEX closes had been above the red basis line, a close below it would tend to flatten the blue channel. If closes had been below the basis line, a close back above it would tend to flatten the blue channel. A trader looking at that chart Thursday evening would know that a 15-minute close beneath that red line would tend to flatten the blue channel. It would be a signal that the upward movement might be losing momentum.

Friday morning, that upside target was erased by a 15-minute close beneath the black channel line, and the small blue channel started to flatten after a close beneath the central basis line.

Annotated 15-Minute Chart of the OEX, April 22


That first 15-minute candle corroborated the impression that Thursday's breakout was not to be trusted. Friday, April 22, the OEX eventually dropped to a low of 546.88 before bouncing. Trading had been volatile for days, with breakouts untrustworthy, but the ability to construct an if/then statement based on Keltner evidence had given traders concrete levels to watch. They knew when a breakout play was being invalidated and its target erased.

Even working trades see short-term retracements against the position. Knowing when a trade still works despite those to-be-expected retracements proves just as important as determining when trades turn sour. Keltner-based if/then statements can be used for that purpose, too.

Annotated Daily Chart of the TRAN:


On the chart above, the red central basis line of the small blue channel shows up in bold to make it more visible. Continued daily closes beneath that basis line kept the TRAN's smallest Keltner channel pointed down and the TRAN traveling lower within that channel. The if/then statement that market watchers might have constructed was as follows: As long as the TRAN produces daily closes beneath the red line, then the TRAN remains vulnerable to declines toward the lower black channel line.

Another statement could be constructed. If the TRAN began producing daily closes above the red line, then the TRAN was trying to steady and the downside thrust might be losing momentum. Bears in transportation stocks might have been alerted to a deceleration in downside momentum. This did happen, but the TRAN was to switch gears again the next day, April 22, and then resume its downward course.

A special situation exists when if/then statements do not work as well. This occurs when the Keltner channels flatten and line up, one within the other. This equilibrium state occurs when prices consolidate in a tight range over a prolonged period. The central basis lines of the various channels converge, and appear to be strong support or resistance. Traders might be tempted to construct if/then statements that sound like the following: If prices close above/below the mid-channel level, then the upside/downside target is at the next outer channel boundary.

Annotated 15-Minute Chart of the Dow, Early April


With this easily recognized exception, nested Keltner channels offer traders an easy way to gauge whether a Keltner-based trade still works or has been invalidated.
 

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