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Daily Newsletter, Thursday, 05/12/2005

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Table of Contents

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

Market Wrap

The Bungee Market

If you don't like the direction of the market on any particular day, just wait until the next day since it will probably change. This morning was a mini version of the same thing and it was a very choppy session until this afternoon when someone pulled the plug and the market made a counter clockwise swirling motion and you could hear the gurgling sounds as it headed down the drain. We landed at some pretty solid support levels, such as the SPX 200-dma, so the question now is whether we'll simply switch direction and have another reversal day, one of many lately.

The overnight action in the futures gave us a heads up that we could see a choppy day morning since futures got a little wild between 4:00 am and the 9:30 cash market open. Those gyrations just got more pronounced as we headed into lunch and then price action started contracting as we headed into the 2:00 turn window. That's when the plug was pulled and down we went. The 8:30 economic numbers were somewhat bullish for equities in that U.S. retail sales rose a better-than-expected 1.4% in April and jobless claims increased (which reduces fear of too much growth and consequent Fed tightening action). The retails sales increase was the largest increase in 7 months and was spread across many sectors including automobiles. The retail index still ended in the red today as worries about the future continue to dominate. The negative guidance from Walmart (WMT, 47.65, -0.95) did not help at all. They see Q2 sales coming in below plan and the outlook for 2005 remains challenging. They blamed it on the high cost of gasoline. This is a very reasonable excuse, er reason, considering the fact that many of Walmart's customers are not your well-healed people who feel the impact of higher gasoline prices much more. However, I suspect we'll see many companies lowering guidance and I'm sure high gasoline (energy) prices will be blamed. We do know that the consumer is the engine that drives our economy and we've talked a long time about the hidden tax from high energy costs. Take money away from the consumer and our economy will feel the pinch. Walmart's guidance is merely a warning shot across the bow (or flares dropped in front of a Cessna). Helping the retail sector hold up a little better than the broader market today was a report from Target (TGT) who reported better than expected earnings.

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Looking a little deeper look into the +1.4% retail sales numbers shows that sales ex-autos were up +1.1% versus +0.6% expected (this after revising March sales up by +0.3%). Take away gas sales and that number was +1.0%. General merchandise sales were up a very healthy +1.5%. Year-over-year retail sales were up 8.6%. So even taking out gasoline sales, retail sales were up very respectably. I think Walmart's warning lends credence to the idea that the lower/middle income classes are feeling more of a pinch from higher energy costs. But those higher energy costs are rippling through the economy so everyone and all companies will feel a squeeze on profits. The higher fuel costs certainly aren't helping the airlines. The large drop in oil prices this week has helped the airlines and their losses today were less than the overall market but United Airlines reported a mere $1.1 billion first quarter loss. I heard a good analysis of the trouble the big carriers are in--they are trying to cut costs and continue to operate under an old business model that is no longer working--they're not meeting the needs of their customers. The smaller "discount" carriers are instead looking for ways to improve value for the customer while controlling costs. It's been obvious for a long time now which model works best.

The weekly jobless claims number was also reported at 8:30 am and they were at the highest level since April 2nd--up 4,000 to 340,000 in the week ended May 7th. The Labor Dept could not identify any specific reason for the increase and was unexpected. Expectations were for a drop of 9,000. Claims for the previous week were also raised to 15,000 to 336,000 compared with the initial estimate of a gain of 11,000 to 333,000. The continuing jobless claims were up 15,000 to 2.60M. After all these numbers were reported, futures made a relatively small jump pre-market which was quickly retraced at the open and then the gyrations began but kept price stuck in a relatively narrow trading range for much of the day before the early afternoon break down.

We'll look over the same charts I've shown for the past few weeks. Hopefully by following the same charts we can get a "picture" of the changing market and how the major indices and sectors are doing over time.

DOW chart, Daily

Since the April low where the DOW bounced off the bottom of its parallel up-channel, which has contained price since 2004, it got back up to its 200-dma near 10,400. This also marks the resistance level where price highs and lows have been registered since September 2004. With the hard turn down from this obvious resistance level, and the daily stochastics and MACD getting ready to roll back over, this is not the picture of health for the market. The corrective look to the bounce (overlapping highs and lows and only a 3-wave rally) makes it look like this will quickly break below 10,000 and 9700-9800 would be the next target.

SPX chart, Daily

The SPX chart currently looks like the bulls at least have a fighting chance here, as opposed to what the DOW chart looks like. Price broke above the downtrend line from March and above its 200-dma. It is now coming back down for a retest of that broken downtrend line and its 200-dma. The 200-dma is located at 1158.60 (it did a slight undercut of that today) and the downtrend line is near 1156. If SPX gives up its 200-dma, DOW's 10,000 level is toast and SPX could be headed to the bottom of its up-channel near 1115. But if the 200-dma/downtrend line holds, we could get a good launch higher. It can't lollygag around this level though--it must bounce hard and get a rally leg started immediately.

Nasdaq chart, Daily

The NAZ has been in a down-channel and is not threatening to break out yet. In fact it remains trapped beneath it price resistance level identified by the October 2004 high and March low. It hasn't even been able to get up to test its 200-dma which also is where the downtrend line from January's high. As with the other charts, the daily oscillators are threatening to roll back over and this looks like it's ready to head lower.

SOX index, daily chart

The SOX was one of the few sectors that were green today. But unfortunately it doesn't help its daily chart. Last week I mentioned to watch the 400 level for resistance to short this index (SMH put options). This is the level where the broken uptrend line is located (actually 401 today) and this is where the SOX failed. The bounce pattern looks complete here and looks like a good shorting candidate. Watch early action tomorrow morning to see how the techs react to Dell's earnings news but I don't feel bullish about this index at all. If it were able to get back above the trend line, it will still have to deal with its 200-dma right above it, just below 408.

The general impression from the above charts is bearish. They're all in synch and they're all pointing down. The market has been very twitchy for a few weeks now and if the bearish-looking charts get too many bears leaning on the market we could easily see flare-ups due to short covering. This will continue to be a problem for those trying to short the market. Unlike in 2000-2001 we have MANY more participants willing and able to short the market, and many of them panic easily and cover their shorts quickly. Many more options players now know how to use put options. We have e-mini futures traders the likes of which we did not have in 2000. We have 8000+ hedge funds who are using program trading to spike the market around. It is a very difficult market to trade with conviction and it's hard to prevent getting stopped out from whipsaws. So, we could easily see a 100-point rally in the DOW on any given day and it may not mean anything. The larger picture of this market is bearish and that's the way I'd be leaning for now unless and until that picture changes (we start taking out the resistance levels shown in the above charts).

Even today's early price action was an indication of confusion. Do we trust the increase in retail sales as a positive indicator that the consumer is strong and still spending? That would then mean the economy will continue to grow and that's good for stocks. But what of Walmart's warning? Their report may have been a heads up that we have a consumer that is being dragged down by rising energy (gasoline) costs which would make Walmart's warning something that the rest of the economy is going to soon feel. The increase in jobless claims is never good for the economy unless you're Greenspan and then you think it's good because it means productivity is improving so we need fewer jobs. But don't get me started on Greenspan. The leading sectors to the downside today were energy related stocks, the gold and silver index (I'll discuss the US dollar and precious metals later), the transports (see chart below) and the financials. The green sectors were the SOX, high tech and disk drive. Stronger but still in the red were the pharmaceuticals, health care and airlines (helped by dropping oil prices). Speaking of oil prices, oil got pummeled today and this following a relatively steep drop this week. From Tuesday's high of $53.15, oil got down to $48.25 today before getting a small bounce after hours.

Oil chart, June contract, Daily

Oil is trading well technically. By that I mean it's trading well off trend lines as seen on the above chart. Oil's rally stopped dead at the intersection of the downtrend line from the April high and the uptrend line from the December 2004 low. The longer term uptrend line from the end of 2003 currently sits near $47.25 and its 200-dma is now at $47.45. I would expect at least a bounce from these levels if not the start of a longer term climb back up to new highs. If oil instead drops below this support level, it may be forecasting a global slowdown. It would say the oil inventory is getting higher due to overpumping and lack of demand. That would be a case where equities will not be happy with a reduction in oil prices since a slowing economy is not good for stocks' growth prospects.

Oil Index chart, Daily

Oil stocks got pummeled along with oil's decline. With oil dropping below $50 again there are probably many who are worried that oil stocks are over-priced. Oil stocks could be headed to the bottom of their longer term up-channel, the bottom of which is located near its rising 200-dma. This one could find support around 425-428. If oil holds above its 200-dma and starts to rally back up, that could be a signal to try these stocks to the long side. Keep your eye on oil.

Transportation Index chart, TRAN, Daily

As mentioned last week, I like to watch the Trannies because they often give a heads up about the health of the economy. When products are produced and purchased there's a need to transport those products. The lack of transportation requirements usually means only one thing and it's not bullish. This chart is bearish--price came up and failed at its downtrend line and also broke back below its 200-dma. The daily oscillators are getting ready to roll over after hitting resistance. If this were a stock I'd be shorting it.

U.S. Home Construction Index chart, DJUSHB, Daily

For the same reason as the Transports, watching the housing sector can give us a heads up about the all-powerful consumer. If the consumer stops buying homes, that's a signal they're pulling in their spending horns. On top of that, all the businesses around homes (appliances, furniture, services, etc.) begin to suffer. Bulls still have some hope here but it's waning. Watch the uptrend line from October 2004--a drop below 800 is a confirmed break of the uptrend. The correctiveness of the bounce from the April low leads me to believe that trend line will break and probably sooner rather than later. A climb back above 850 would be bullish.

U.S. Dollar chart, Daily

The US dollar had a big day today--dollar bulls were breaking out the bubbly (and the Buffets and Gates could be getting nervous). The dollar broke above its 200-dma today, and specifically above its exponential 200-dma, something it hasn't done since May 2004. It also broke above the top of its ascending triangle pattern, a bullish signal. This could end up being a 1-day wonder (or 1-week wonder as it did in May 2004) so it's too early to celebrate the dollar's strength but it's a good start.

Gold chart, June contract, Daily

As we often see, the metals reacted opposite to the dollar's move. The significance of the drop in gold today (down $5.50 to $422.40 and at one point down over $7 today) is that it broke below its uptrend line that has supported price for the past 2 years. This could be a significant break and bears watching. If it quickly recovers and gets back above both its trend line and its broken 200-dma ($429), no foul. But the fact that it's broken below its 200-dma again (after briefly doing so in February) AND below that uptrend line, this one could be for real.

Tomorrow's economic reports include Business Inventories, Export Prices ex-ag, Import Prices ex-oil (these at 8:30 am) and then the preliminary Michigan Sentiment at 9:45 am. These reports and the reaction to Dell's earnings could give an early jolt to early morning action. Dell reported a quarterly profit increase of 28% to $934M, or 37 cents a share, compared to $731M, or 28 cents a share, a year ago. Their revenue rose 16% to $13.4B, up from $11.5B. These numbers were in line with estimates so while Dell's stock rose after hours, it remains to be seen whether or not the market feels they're good enough to help wipe out the negative tone left at today's close. This remains a very difficult market to trade intra-day. The market feels twitchy and emotionally driven (fear and greed) and those emotions seem to be getting out of hand at times. This creates whipsaws as the market over-reacts both ways. We continue to see DOW triple-digit days that negate each other. It's a market that requires greater degrees of courage to let the market whip about (with wider stops) or you must take profits quickly otherwise you'll be coughing them back up as the market comes flying back in your face. Don't get married to any positions and don't be afraid to scalp this market. At the moment it appears the downtrend will resume but we're still in the chop zone. A break below DOW 10K will likely mean a quick drop to at least 9800 and that's a trade I'd hang onto. Until then be very careful out there.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
None FDG

New Calls

None today.
 

New Puts

Fording Cndn Coal - FDG - close: 83.90 chg: -4.45 stop: 88.75

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust. Through investments in metallurgical coal and industrial minerals mining and processing operations, the Trust makes quarterly cash distributions to unitholders. The Trust, through its wholly owned subsidiary, Fording Inc., holds a 60% interest in the Elk Valley Coal Partnership and is the world's largest producer of the industrial mineral wollastonite. Elk Valley Coal Partnership, comprised of Canada's senior metallurgical coal mining properties, is the world's second largest exporter of metallurgical coal, and expects to supply approximately 27 million tonnes of high-quality coal products to the international steel industry in 2005. (source: company press release)

Why We Like It:
We have had our eyes on FDG for a while now but never added it to the play list due to its pattern. The stock has been consolidating in a neutral pattern of lower highs and higher lows for several weeks. Normally we would look for the prevailing pattern (which was up) to overcome but this time FDG is breaking down. The stock broke out from its neutral wedge and declined below technical support at its 100-dma on volume more than double the average. FDG's P&F chart also shows a sell signal that currently points to a $74 target. We are suggesting bearish positions at current levels with a target in the $76-75 range. This would put FDG near its simple and exponential 200-dma's. Readers can choose to buy puts at current levels or look for a possible bounce back toward the $85-86 levels and use a failed rally there as a bearish entry point.

Suggested Options:
We are suggesting the June puts. The next available would be September strikes.

BUY PUT JUN 85.00 FDG-RQ OI= 483 current ask $5.50
BUY PUT JUN 80.00 FDG-RP OI=1293 current ask $3.20
BUY PUT JUN 75.00 FDG-RO OI= 230 current ask $1.55

Picked on May 12 at $ 83.90
Change since picked: - 0.00
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 394 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 74.04 change: -0.36 stop: 72.95 *new*

AVB held up relatively well considering the market's decline today. The stock could easily pull back toward its simple 10-dma near $73.00 and stay within its narrow rising channel. We're still suggesting that more conservative traders exit early for a profit. Our target is the $75-76 range. We are raising our stop loss to $72.95.

Picked on April 24 at $ 70.05
Change since picked: + 3.99
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand

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Caterpillar - CAT - close: 88.88 chg: -2.02 stop: 89.00

Ouch! The triple-digit Dow decline was tough on CAT. The stock lost more than 2.2 percent on strong volume. The MACD indicator is starting to look vulnerable too. This is a good reason why we're using a trigger on this play. We remain on the sidelines. Our entry point to buy calls is at $92.35, above its simple 100-dma. No change from our previous update on 05/11/05.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

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Chubb Corp - CB - close: 81.96 chg: -0.91 stop: 79.99

Technicals are really starting to sour for CB. After today's market decline and the weakness in the IUX insurance sector it may be a good idea for more cautious traders to exit early. At this point we expect CB to trade back toward old resistance and what should be new support in the $81.00-80.00 range. We are not suggesting new bullish plays at this time.

Picked on May 01 at $ 81.78
Change since picked: + 0.18
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 1.2 million

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Coventry Hlth Care - CVH - close: 66.72 chg: -1.48 stop: 66.99

If you're long this stock or its calls today's decline should be flashing a big "red alert" to you. CVH actually broke down below technical support at its 50-dma today. The stock has also broken down below its multi-month trendline of support dating back to the October low. We remain on the sidelines with a trigger to go long at $70.51 but if CVH doesn't bounce back tomorrow we'll probably close this play unopened.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 973 thousand

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Hovnanian - HOV - close: 52.20 chg: -1.78 stop: 49.99

Housing stocks got hammered today with a 3.2 percent decline in the DJUSHB home construction index. Shares of HOV paced the decline in the sector. The stock is still above its 50-dma and a hose of other moving averages in addition to what should be round-number, psychological support at the $50.00 level. We are not suggesting new bullish plays at this time.

Picked on May 06 at $ 54.26
Change since picked: - 2.06
Earnings Date 03/02/05 (confirmed)
Average Daily Volume = 1.2 million

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Invitrogen - IVGN - close: 77.12 change: +0.15 stop: 71.49

IVGN continues to show relative strength. Not only did shares close in the green amid a market-wide sell-off but IVGN hit another new relative high above $78.00 intraday. In the news IVGN announced it would be presenting at the Banc of America securities conference on May 17th. If IVGN does dip in the near future look for a bounce from the $75.00 level as a new bullish entry point.

Picked on May 03 at $ 75.51
Change since picked: + 1.61
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand

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Eli Lilly - LLY - close: 59.19 change: +0.44 stop: 57.49

LLY displayed some relative strength today with a bounce from the $58.00 level as we expected. Yet we remain cautious. If the market is going to turn lower then LLY is likely to follow even though drug stocks are typically seen (or used to be seen) as "safe" havens stocks. We're not suggesting new bullish positions until LLY trades back above the $60.00 level. Keep in mind that the ASCO conference begins this weekend and there could be a number of headlines (good and bad) coming out of the conference that will influence drug and biotech equities next week.

Picked on May 04 at $ 60.15
Change since picked: - 0.96
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million

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Reynolds American - RAI - cls: 79.00 chg: +0.18 stop: 77.95

Try as it might RAI could not breakout over the $80.00 level and its 50-dma today. We're surprised that there was not a more bullish reaction to the news out today. A Minnesota judge has dismissed a class-action suit against R.J.Reynolds regarding a claim that the company mislead consumers that its label for "lights" cigarettes were misleading. We're still in limbo here. RAI is oscillating around the $79 level. We are waiting for shares to trade at $81.31 before going long.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

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Research In Motion - RIMM - cls: 69.05 chg: -2.09 stop: 66.85

It's time to go to yellow alert! Seeing some profit taking in RIMM is not a surprise since the stock has been showing relative strength the last few days. What worries us is the pattern during today's trading with what looks like a short-term top near its 40 and 100-dma's and a decline under its 50-dma and exponential 200-dma. We are not suggesting new bullish plays at this time. Remember this is a high-risk play. If any conservative players did jump in on this one you may want to consider exiting now to avoid further losses.

Picked on May 10 at $ 70.51
Change since picked: - 1.46
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 1.7 million
 

Put Updates

L-3 Comm. - LLL - close: 66.00 chg: -1.84 stop: 69.55 *new*

Thursday's market decline really helped accelerate LLL's weakness. The stock lost another 2.7 percent on volume about twice the average. Our target is the $63-62 range but don't be surprise to see some support near $65. We're lowering the stop loss to $69.55.

Picked on May 10 at $ 68.01
Change since picked: - 2.01
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 855 thousand

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Lehman Brothers - LEH - close: 87.85 chg: -1.15 stop: 92.80

Good news. The early strength in LEH failed near the $90.00 level and the stock closed near its lows for the session on very strong volume over twice the average. Our target is the $86-85 range.

Picked on April 29 at $ 89.45
Change since picked: - 1.60
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million

---

Marriot - MAR - close: 61.32 chg: -0.64 stop: 64.21

No change from our previous updates. MAR is nearing our target in the $60.00-58.00 range.

Picked on April 28 at $ 63.37
Change since picked: - 2.05
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

Parker Hannifin - PH - close: 58.38 change: -1.15 stop: 62.01

No change from previous update on 05/08/05. Our target is the $55-54 range.

Picked on April 28 at $ 59.08
Change since picked: - 0.70
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million
 

Dropped Calls

Golden West Fincl - GDW - close: 62.07 chg: -0.99 stop: 60.95

We have been cautious on the bank stocks and GDW for the last few days but we've been focusing on support in the $62 area. The stock remains above the $62 mark but today's candlestick produced a bearish engulfing pattern. We also see a new MACD sell signal. We're running for the exits before this gets any worse.


Picked on April 26 at $ 62.55
Change since picked: - 0.48
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 1.3 million
 

Dropped Puts

None

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