Surprise, surprise, surprise! The jobs numbers for April came in at +274,000
and blew past estimates of +175K with ease. This was a major miss by those
analysts who read their tealeaves and predicted weak numbers. Not only was the
April number a blowout but February and March were also revised higher. The
back to their highs for the week on the news but could not hold
Coventry Hlth Care - CVH - close: 69.52 chg: +0.93 stop: 66.99
Why We Like It:
BUY CALL JUN 65.00 CVH-FM OI=241 current
Picked on May xx at $ xx.xx <-- see TRIGGER
Avalonbay - AVB - close: 72.74 change: -0.26 stop: 69.49 *new*
Friday was a very lackluster day for the markets despite the positive jobs number. Shares of AVB, which had shown strength through most of the week, pulled back a tad on Friday. We remain bullish but don't be surprised to see AVB fade back toward its simple 10-dma before continuing higher. Our target is the $75.00-76.00 range. The 10-dma is near $71.77 so look for a bounce in the $71.50-72.00 region. We're raising the stop loss to $69.49.
BUY CALL JUL 65.00 AVB-GM OI= 761 current ask $8.80
Picked on April 24 at $ 70.05
Chubb Corp - CB - close: 83.55 chg: +0.69 stop: 79.49
The insurance sector was a strong performer this past week with a number of companies turning in very positive earnings results. The IUX insurance index rebounded sharply and shares of CB broke out to new multi-year highs. Currently both the IUX and shares of CB look a little overbought so we would not be surprised to see both pull back a bit next week. We would watch for CB to dip toward the 10-dma before bouncing higher. Readers can use a bounce from the 10-dma as a new entry point. Our six-to-eight-week target is the $88-90 range. Currently CB's Point & Figure chart shows a triple-top breakout buy signal with a $107 target.
BUY CALL JUN 75 CB-FO OI=214 current ask $9.10
Picked on May 01 at $ 81.78
Golden West Fincl - GDW - close: 62.94 chg: -1.19 stop: 60.95*new
Heads up! It may be time to go to yellow alert here. Both the banking indices appeared to breakout from their descending channels and above technical resistance at their 200-dma's midweek. In the last two sessions both indices have reversed course suggesting the move could have been a bull trap. Friday's session saw profit taking in the banking sector and shares of GDW followed suit with a 1.8 percent decline. GDW's breakdown below the 10-dma could be a reason for concern. We're watching the $62.00 level for support. If GDW trades under $62.00 we may exit early. More conservative traders may want to consider raising their stop loss toward the $62 region. We're going to raise our stop loss to $60.95.
Picked on April 26 at $ 62.55
Hovnanian - HOV - close: 53.89 chg: +0.52 stop: 49.99
HOV is a new bullish play from the Thursday newsletter. We suggested a trigger to go long/buy calls at $54.26 (above resistance near $54.00). Shares of HOV traded to $54.35 on Friday hitting our trigger and opening the play. The move also produced a fresh triple-top breakout buy signal on its P&F chart with a $63 target. A reprint of Thursday's original play description follows:
We believe that comments about the demise of the homebuilders has once again been issued prematurely. Yes, the rise in interest rates has been a factor even if it only affected investor confidence. Currently Wall Street still expects the FOMC to raise rates again at the next meeting but beyond that the future of rates will be much debated and it's possible the Fed could halt its current strategy and leave rates in the 3.00-3.25 percent range. This will still leave mortgage rates historically low and we're approaching one of the best seasons of the year for homebuilders. Focusing more specifically on the home building sector there has been some positive analyst comments in the last month about a strong Q1 and Q2 for the group and using the recent weakness as a buying opportunity. HOV came out today and helped validate those claims. Here is an excerpt from HOV's press release out this morning:
"For the second quarter of fiscal 2005, the dollar value of net contracts, including unconsolidated joint ventures, increased 25.3%, and the number of net contracts increased 8.5%, when compared with the second quarter last year. The sales value of contract backlog at April 30, 2005, including unconsolidated joint ventures, increased 61.0% on a year-over-year basis, and the number of homes in contract backlog increased 35.7% when compared to the end of the second quarter of fiscal 2004. For the month of April 2005, the dollar value of net contracts, including unconsolidated joint ventures, rose 50.6%, while the number of contracts increased 20.1%, when compared with April 2004."
It doesn't sound like HOV is experiencing any sort of slow down and the stock price looks poised to breakout over resistance near $54.00. If HOV does trade above the $54.00 level it will reverse its P&F chart from a sell signal into a new triple-top breakout buy signal. Our strategy is to use a TRIGGER at $54.26 to open the play. Our short-term target will be the $59.00-60.00 range.
BUY CALL JUN 50.00 HOV-FJ OI= 526 current ask $5.70
Picked on May 06 at $ 54.26
Invitrogen - IVGN - close: 75.03 change: -1.49 stop: 71.49
IVGN has continued to show relative strength with gains in five of the last six sessions. This past Friday saw some profit taking, which isn't out of the norm. We remain bullish on the stock given its recent bullish breakout and its bullish P&F chart that currently points to an $85 target. However, we would probably look for shares to dip back toward the simple 10-dma (near $74) before continuing higher. Readers can use a bounce from the 10-dma back above the $75 mark as a new bullish entry point. Our target is the $80.00 level.
BUY CALL JUN 70.00 IUV-FN OI=174 current ask $6.70
Picked on May 03 at $ 75.51
Eli Lilly - LLY - close: 60.18 change: -0.26 stop: 57.49
The DRG Drug index has been out performing the broader market for weeks and avoided much of the recent weakness. Shares of LLY have also been out performing over the last few weeks and has managed to produce a bullish breakout above its trading range, its 200-dma, and resistance at the $60.00 mark. We remain bullish on the stock but we're expecting a dip next week. The DRG index is starting to show a little fatigue and the group could consolidate lower for a couple of days before continuing higher. We'll be watching LLY's $59 and $58 levels to act as support should the $60 mark fall. Readers can use a bounce from either level as a new bullish entry point but we'd probably wait for the stock to trade back above the $60 level before buying new call positions.
BUY CALL JUL 55.00 LLY-GK OI=11071 current ask $6.10
Picked on May 04 at $ 60.15
Nucor - NUE - close: 53.52 chg: +1.21 stop: 49.95
We're starting to see NUE display a bit more strength and the stock is bouncing from the $50.00 level, bolstered by its 200-dma's. As we have suggested before more aggressive traders might want to consider bullish positions above the $52.50 level and/or its 21-dma. We are still waiting for a breakout over resistance at the $55.00 level and its 100-dma. Our entry point is currently at $55.05.
Picked on April xx at $ xx.xx <-- see TRIGGER
Reynolds American - RAI - cls: 80.09 chg: -0.43 stop: 77.95
We added RAI to the list a few days ago after it looked like the stock had built a new short-term base and was on the verge of breaking out into a new leg higher. Shares of RAI have been consolidating sideways the last few weeks between $77.00, underpinned by its exponential 200-dma), and the $80-81 levels. We suggested that readers use a trigger at $81.31 to open the play. In the last two sessions we've seen RAI try to mount a new rally but both times the stock failed to pierce resistance in the $81.25 region. We remain bullish but stick by our suggested entry point at $81.31. Our target is the $85-86 range. Currently the P&F chart has reversed into a new buy signal that points to a $90.00 target. Tobacco stocks could do well early next week after news came out on Friday after the bell about a new legal decision. According to a Reuters article a New York federal appeals court overturned a ruling that would have established a nationwide class action suit for smokers to file suit against cigarette companies seeking punitive damages.
BUY CALL JUN 80.00 RAI-FP OI=2963 current ask $2.55
May xx at $ xx.xx <-- see TRIGGER
Adobe Systems - ADBE - close: 57.70 chg: +0.78 stop: 60.01
This next week could prove interesting for ADBE. The trend over the last few weeks has been a bearish one with ADBE dropping drastically and then bouncing back to fill the gap. This oversold bounce began to fade lower as we expected it to but shares found support near the 200-dma. Currently the P&F chart is very bearish with a $39.00 target. However, short-term technical oscillators are suggesting a bullish breakout could be just around the corner. Given these conflicting signals we would not suggesting new bearish positions at this time. We are going to leave our stop loss at the $60.01 mark for now. More conservative traders might want to consider a tighter stop either near $59.00 or at $58.51 or even at $58.26. Our target remains the $55.00 region.
Picked on April 26 at $ 59.12
CDW Corp - CDWC - close: 56.37 chg: +0.58 stop: 57.26 *new*
CDWC's little bounce has brought the stock right back toward resistance near its 40 and 50-dma's and its four-week trend of lower highs. This is where the stock should fail and turn lower again. However, if it does not we want to be stopped out. Therefore we're lowering the stop loss to $57.26. Readers can use a decline back under the $55.50 level as a new bearish entry point.
Picked on April 24 at $ 55.68
Lehman Brothers - LEH - close: 90.24 chg: -0.86 stop: 92.80*new*
Good news! LEH displayed some relative weakness on Friday and rolled over under its 100-dma. We're a little surprised as we expected the stock to continue to bounce on Friday like the XBD broker-dealer index, which added another one percent. This bodes well for next week. Aggressive traders may want to consider new bearish positions here. We would suggest that readers wait for another drop below the $89.50 mark before buying puts. Our target remains the $86-85 range. We're expecting the $85 level, underpinned by its 200-dma, to act as support. We are lowering the stop loss to $92.80.
BUY PUT JUN 95.00 LES-RS OI= 243 current ask $6.00
Picked on April 29 at $ 89.45
Marriot - MAR - close: 61.93 chg: -0.18 stop: 64.21 *new*
It would appear that the oversold bounce in MAR is already beginning to fade. We're even more encouraged by MAR's relative weakness on Friday after reading that CIBC issued positive comments on Friday morning suggesting that investors use the recent weakness as a buying opportunity. Looking more closely at the intraday chart we see that very short-term support near $62 broke down late on Friday afternoon. Our target remains the $60.00-58.00 range. We're lowering the stop loss to $64.21 near the 100-dma. We are not suggesting new positions at this time. However, nimble traders might want to consider another failed rally under the $63 level as a new bearish entry point. The P&F chart does point to a $55.00 target but we suspect the 200-dma near $58 will be technical support.
Picked on April 28 at $ 63.37
Parker Hannifin - PH - close: 59.75 change: -0.34 stop: 62.01
The recent failed rally under resistance near the $62.00 level in the last few days looks like a new bearish entry point. Plus we're seeing the technical oscillators beginning to validate this pull back and we wouldn't be surprised to see the MACD produce a new sell signal this coming week. The P&F chart is already in a sell signal pointing to the $44.00 level. We would open new bearish plays at current levels. Our target remains the $55-54 range.
BUY PUT JUN 60.00 PH-RL OI=318 current ask $2.35
Picked on April 28 at $ 59.08
PACCAR Inc - PCAR - close: 68.04 change: +0.95 stop: 70.01
One could still argue that PCAR is still in its two-month down trend of lower highs but we don't like the relative strength displayed on Friday. Earlier this past week we suggested that more conservative traders may want to exit if PCAR trades over $68.00 and we think that sounds like a good idea. The stock does still have resistance near $70.00 in addition to its exponential and simple 200-dma's in the $69-70 range so PCAR may end up rolling over again anyway.
Picked on April 27 at $ 66.45
Technical traders often learn to recognize price/oscillator divergence early in their trading careers. Reading any given website devoted to technical analysis turns up mentions of price/MACD or price/RSI divergence. Nested Keltner channels also display a form of divergence.
Note: Those new to nested Keltner channel analysis might review articles in the Sunday, March 20 and Sunday, May 1 Traders Corner articles for background information and chart settings.
Annotated Daily Chart of the OEX:
Prices produced bearish divergence when the blue channel could not pierce the black channel on last spring's approach. Price action proved weaker in this respect. This proved true even though a close study of the price action reveals that prices moved higher in March than they did in December. Relative to the positioning of the Keltner channels, however, price action proved weaker. In this case, the action also produced bearish price/MACD divergence, corroborating the Keltner-style bearish divergence, but regular price/oscillator divergence does not always accompany Keltner-style divergence.
Another form of Keltner divergence can be discovered on the above chart. Note that when the blue channel was retesting the upper black channel boundary in February and March, that black channel was farther away from the purple channel line than it had been on a similar test in December. That's divergence, too.
Intuitively, these divergences hint that the OEX was not as strong on the second attack of the top black channel line as it had been on the first attack of that channel line. Indeed, the second attack marked a swing high.
Daily Chart of the OEX:
A higher price high on the second swing high or test of Keltner channel lines isn't required for Keltner-style bearish divergence.
Annotated Three-Minute Chart of the SOX:
As has been apparent from the choice of different time frames for these charts, bearish divergences can be produced on a chart of any time interval. Of course, greater significance can be attributed to bearish divergence showing up on a longer-term chart than on a shorter-term one. Traders should tailor the time intervals watched to a preferred style of trading. Scalpers will watch shorter-term charts while swing or position traders will lengthen the time intervals watched. Even swing or position traders can tailor entries or exits by watching for these divergences on shorter-term charts, however.
Just as is true of other types of divergences, bearish divergences occur at swing highs while bullish ones occur at swing lows. Nested Keltner channels can also produce bullish divergences, as they do in the following chart.
Annotated Three-Minute Chart of the ES Contract
No bullish price/MACD divergence existed to show that prices might be more likely to move up toward the top black channel line than drop again to the bottom black channel line. Keltner-style bullish divergence was the only sign that might happen as prices coiled.
As with all types of divergence, whether signaled by nested Keltner channels or price/oscillator differences, divergences warn that a thrust might be losing momentum. They tell traders to pay attention. If the trend remains a strong one, that divergence can be resolved by sideways price movement, so an immediate reversal cannot be assumed. Sometimes, despite divergence, the original movement resumes.
Annotated 60-Minute Chart of the TRAN:
chart, the TRAN's price action failed to follow through on the clear
Keltner-style bullish divergence. Traders should not act blind faith, on
Keltner-style divergences alone, any more than they should with other types of
divergence. However, the warning provided by Keltner-style divergences offers an
opportunity to make exit or entry plans ahead of a reversal if one is to occur.
Those traders employing nested Keltner channels will find this another useful
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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