Bonds Up, Stocks Down, Traders Confused
That has been the story of the week with bonds soaring and pushing yields on
the ten-year note to 4.11% intraday and a new three-month low. The Dow retreated
from resistance at 10400 last Tuesday and quickly fell back to the bottom of its
recent range at just under 10100. Oil slid to a
three month low and the dollar
rose to a six month high. Triple digit days are becoming the norm as volatility
makes a comeback. It was a heck of a week.
MGIC Invest. - MTG - close: 58.91 change: -1.39 stop: 61.11
Why We Like It:
BUY PUT JUN 60.00 MTG-RL OI=2438 current ask $2.60
Picked on May 15 at $ 58.91
Precision Castparts - PCP - cls: 73.25 chg: -1.73 stop: 75.05
Why We Like It:
BUY PUT JUN 75.00 PCP-RO OI= 66 current ask $3.50
Picked on May xx at $ xx.xx
<-- see TRIGGER
Avalonbay - AVB - close: 73.78 change: -0.26 stop: 72.95
Friday turned out to be a very mixed session with technology stocks bucking the generally weak trend in the market. Shares of AVB pull back toward the simple 10-dma as we cautioned readers earlier in the week. We're not suggesting new bullish positions and more conservative traders may want to exit for a gain early. We're keeping the play open with an eye on our target in the $75.00-76.00 range.
on April 24 at $ 70.05
Caterpillar - CAT - close: 89.00 chg: +0.12 stop: 89.00
We're not willing to call it quits just yet in CAT and since the play is unopened there's nothing at risk. We initially added the play a few days ago with a trigger above resistance at its 50 and 100-dma's in hopes of catching a bullish breakout from the inverse head-and-shoulders pattern. In the original play description we stated that it's imperative to keep an eye on the Dow Industrials, which would likely lead CAT higher or lower as the DJIA fought with resistance near 10,400. Right now it looks like the bears are winning that fight in the DJIA. We're encouraged to see there was no follow through on Thursday's decline in shares of CAT. Yet we're wary that the current technicals will continue to sour. We're going to leave the CAT as a bullish candidate for now with our trigger to buy calls unchanged at $92.35. If we're triggered our target will be the $99.25-100.00 range.
Picked on May xx at $ xx.xx <-- see TRIGGER
Hovnanian - HOV - close: 51.90 chg: -0.30 stop: 49.99
Heads up! Traders need to be very careful. The housing sector continues to show weakness and the declines in the DJIA and S&P 500 on Friday are not very inspiring. We seriously considered closing HOV as a bullish candidate but the stock remains above round-number, psychological support at the $50.00 level. Plus the P&F chart remains bullish with the triple-top breakout buy signal. The bad news is that the technical picture is deteriorating. We are not suggesting new bullish positions and more conservative players may want to exit now to avoid further losses.
Picked on May
06 at $ 54.26
Invitrogen - IVGN - close: 76.86 change: -0.26 stop: 71.49
IVGN has continued to show relative strength over the last few weeks and is trading near one-year highs. We remain bullish with IVGN above resistance at the $75.00 level but we hesitate to suggest new bullish positions given the weakness in the broader market. The BTK biotech index has been bullish the past couple of weeks as investors typically buy the group ahead of the ASCO conference that begins this weekend. The question now is whether or not the sector (and IVGN) will see any sell-the-news type of reaction next week. Technical indicators for IVGN do look a little overbought so traders looking for a new entry point might do well to sit and wait for a dip back to $75.00 although we'd look for signs of a bounce first before committing any capital. The P&F chart remains bullish with an ascending triple-top breakout buy signal and an $85 target. Our target is the $80.00 area. This past week IVGN also announced it would present at the Banc of America conference on May 17th.
BUY CALL JUN 70.00 IUV-FN OI=164 current ask $7.90
Picked on May 03 at $ 75.51
Eli Lilly - LLY - close: 58.76 change: -0.43 stop: 57.49
The DRG drug index has been cycling higher for the last few months and has reached a new turning point. The group has been consolidating lower the last several days and is due for a bounce or the beginning of the next leg higher. There is also the possibility that the DRG drug index could slip lower and retest the bottom of its wider, rising channel. If this occurs we'd expect LLY to pace the decline and break support near the $58.00 level. The catalyst we need to beware is investor reaction to the ASCO conference that began this weekend. The biotech stocks will probably have the biggest reaction but the drug sector will react as well. Since the DRG has already been consolidating the last several days we're not so concerned for a sell-the-news move but it could still occur. Considering these influences in addition to a market that looks vulnerable to more selling we are not suggesting new bullish positions. Instead we will reiterate our previous suggestion to wait for a new move over the $60.00 mark before committing any capital. FYI: P&F chart watchers will note the quadruple-top breakout buy signal and LLY's $79 price target.
Picked on May 04 at $ 60.15
Reynolds American - RAI - cls: 78.45 chg: -0.55 stop: 77.95
It looks like shares of RAI were not done consolidating when we added the stock to the play list in early May. Fortunately, we decided to use a trigger above short-term resistance near the $81.25 level. Thus we remain on the sidelines waiting for RAI to trade at our entry point of $81.31. We are a little surprised that RAI and the tobacco sector has not done better the last couple of sessions. Recent news revealed that a Minnesota judge has dismissed the "lights" cigarette case against RAI. Yet shares of RAI are slowly drifting back toward the bottom of its six-week trading range near the exponential 200-dma and the $77.00 region. RAI is currently in danger of reversing its recent P&F buy signal. We will stand by our trigger to go long for now but if RAI breaks down under the $76.50 mark then more aggressive traders may actually want to consider bearish positions.
Picked on May xx at $ xx.xx <-- see TRIGGER
Research In Motion - RIMM - cls: 70.58 chg: +1.53 stop: 66.85
Whoa! We warned readers that RIMM tends to be volatile and that's one of the reasons why we labeled this play high-risk. RIMM is proving that our caution is warranted. The stock gapped down this morning and dipped toward the $67.00 level after a research firm downgraded shares to a "sell". Yet the bullishness in the NASDAQ and the entire group of technology-related sector indices helped inspire a rebound in RIMM pushing the stock back above round-number resistance at the $70.00 mark. This looks like a new bullish entry point but traders should think twice about initiating new bullish plays with the NASDAQ right under resistance at the 2000 level. We would suggest waiting for the NASDAQ to breakout first. Our target for RIMM remains the $76-77 range.
Picked on May 10 at $ 70.51
Fording Cndn Coal - FDG - close: 79.35 chg: -4.55 stop: 86.51*new*
FDG is a new bearish candidate we added to the play list on Thursday night following its technical breakdown. A reprint of the original play description follows but readers need to decide if they want to wait for an oversold bounce before considering new positions or whether or not they want to chase it. Friday's decline and massive volume (about 6x the average volume) sent option values soaring. The June 85s rose more than 50 percent and the June 75s have doubled from Thursday's prices. We are lowering the stop loss to $86.51. Our target remains in the $76-75 range. Here's a reprint of Thursday's play:
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.
BUY PUT JUN 85.00 FDG-RQ OI= 486 current ask $8.50
Picked on May 12 at $ 83.90
L-3 Comm. - LLL - close: 65.23 chg: -0.64 stop: 69.55
Already breaking down, shares of LLL lost close to one percent during Friday's market pull back. The stock did hit the $65 region and tried to bounce twice from the $64.65 level. LLL does look short-term oversold so we would expect a bounce next week unless the major averages continue declining. Readers can look for a bounce back toward the $67.00-67.50 range and then use a failed rally there as a new bearish entry point. Our target remains the $63-62 range.
Picked on May 10 at $ 68.01
Marriot - MAR - close: 60.80 chg: -0.52 stop: 64.21
MAR is almost there. The stock lost another 0.8 percent on Friday and hit another new relative low at $60.40. MAR is very close to our target in the $60.00-58.00 range and we're suggesting that readers prepare to exit. Actually, some traders may want to plan an exit anywhere between $60.40 and $60.00 to avoid any potential bounce since the $60 mark could be round-number, psychological support.
Picked on April 28 at $ 63.37
Parker Hannifin - PH - close: 57.97 change: -0.41 stop: 62.01
After the early May bearish reversal shares of PH have been consistently weak. Now the stock is hitting new three-week lows while its MACD indicator has produced a new sell signal with Friday's decline. The P&F chart continues to look weak as well with a sell signal pointing to a $44.00 target. We would use the recent weakness as a new bearish entry point but more patient traders can look for a possible bounce back toward the $59 level and then consider new put positions. Our target is the $55-54 range.
BUY PUT JUN 60.00 PH-RL OI=302 current ask $3.50
Picked on April 28 at $ 59.08
Chubb Corp - CB - close: 80.45 chg: -1.51 stop: 79.99
It was a weak day all day for the insurance group and the selling appeared to pick up speed into the afternoon. The IUX insurance index pierced support near the 295 level just as shares of CB pierced support near the $80.00 level in the last couple of hours of trading. Our stop loss was at $79.99 closing the play. The MACD indicator has produced a new sell signal but more aggressive players might want to watch for a bounce back above the $82.50 level as a potential bullish entry point. The $85.00 level has been set as new overhead resistance.
Picked on May 01 at $ 81.78
Coventry Hlth Care - CVH - close: 64.21 chg: -2.51 stop: 66.99
It could be game over for the CVH bulls. After two weeks of trying to breakout over the $70.00 level the stock finally faltered and broke down below its multi-month trendline of support and technical support at its 50-dma on Thursday. Friday's high-volume decline merely confirmed the breakdown. Our plan was to go long/buy calls at our trigger of $70.51. That never occurred and we're closing the play unopened. Nimble traders may actually want to consider bearish positions with a target in the $57.50-60.00 range. The $60 could be round-number support but we see the exponential 200-dma near 57.50 and the simple 200-dma just north of $55. The P&F chart has reversed from a buy signal into a sell signal pointing to $57.
Picked on May xx at $ xx.xx <-- see TRIGGER
Lehman Brothers - LEH - close: 87.55 chg: -0.30 stop: 92.80
Target achieved. Smith Barney issued a note on the broker-dealer sector and trimmed its earnings estimates for some big name brokers. The Smith Barney analyst is concerned about revenue weakness in the second quarter for the group. This news sent shares of LEH declining sharply at the open and the stock traded to $85.92, which is inside our target of $86-85. After a quick bounce shares of LEH faded toward the $86 level again before yet another late day bounce. Volume has been very heavy during the declines over the last few days. We're closing the play but readers may want to keep an eye on LEH. It wouldn't surprise us to see another bounce toward the $90.00 level, which might roll over again and offer another short-term bearish entry point.
Picked on April 29 at $ 89.45
When I was studying physics in high school, the teacher explained an easy method for determining the direction of the torque. If you curled your fingers in the direction of the rotation, he explained, your extended thumb pointed in the direction of the torque. I got that, no problem, and grasped much more complicated concepts later in college physics, but the next part of my high school teacher's explanation--the easy part, as it turned out--stumped me. He talked about torque being directed "into the board" and "out of the board." What board?
The board was the blackboard, of course, a term he expected us to grasp with no explanation needed. I was trying for a more complicated explanation. Writers on investing websites freely use terms that might seem more complicated than they are to those new to trading. Heres a listing of some common terms used on the OptionInvestor website and a brief explanation of the terms:
BoE: Bank of England.
BoJ: Bank of Japan.
ECB: European Central Bank. This central bank serves functions similar to those of our FOMC (see below), such as setting discount rates. Global market watchers do pay attention to the statements coming out of meetings by the leaders of this central bank and the others listed above. Those statements concern interest rates, risks to the economies of the various regions, and currencies issues, among others. Links to the websites of these central banks can be found below:
Studying press releases by these central banks can give insight into global economic developments.
FIB: Traders use this term as shorthand for Fibonacci numbers. University courses have been devoted to the background and uses of Fibonacci numbers, but the short version is that these are the series of numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 . . . .), with each new number in the series, after the first two, calculated by adding the previous two numbers. This series of numbers has been used to predict everything from the number of rabbits born to a single pair n months after they begin breeding, to the number of petals on a flower. Turns out that flowers have 3, 5, 8, 13, 21, 34, etc. petals. Fascinating, right?
Something else proceeds from a study of the numbers. After the first five numbers of the series, the ratio of one number to the next in the series is 0.618, making each number 61.8 percent of the number that will follow it. This number and proportions of this number (one-half, for example) turn out to have relationships to all kinds of thing, too, including to movements of the stock market. Market watchers find that after a big rally or big decline, prices sometimes reverse and retrace part of the prior movement before resuming the rally or decline. Often those retracements turn out to be based on Fib numbers or the ratios between the numbers. For example, a 61.8 percent retracement is sometimes seen.
Dont worry: you dont have to memorize the numbers. Most charting services have a snap-on Fibonacci bracket with the most commonly watched retracement values already calculated as default values. It's tempting to believe that movements around Fib numbers become self-fulfilling and that's all that's behind the importance of the Fib numbers. Because so many traders watch them, many sell or buy near a Fib number. However, those flower petals and breeding rabbits argue against that conclusion. Something else appears to be at work, although now that the Fib numbers are so widely known, that self-fulfillment factor now must play a part.
EMA: Exponential moving average. You don't need to know how to calculate it to use it. Unlike simple moving averages that give equal weight to all price points in a given period of time, an exponential moving average gives greater weight to the most recent prices. Some technicians prefer to use ema's when studying longer-term moving averages such as a 200-period moving average. Others stick with simple moving averages. Experiment and make your own observations.
FOMC: Federal Open Market Committee. This committee consists of twelve members, with its best-known current member being Board of Governnors Chairman Alan Greenspan. The committee has three duties, with most Americans being most familiar with its duty to set the discount rate, usually reported on news services as "the interest rate," as in "the Fed hiked the interest rate." The FOMC also conducts daily open market operations, useful to watch in gauging whether the FOMC is adding to liquidity on any given day.
The FOMC typically sets those discount rates during two-day meetings eight times a year. For more information about the FOMC, check the site: http://www.federalreserve.gov/FOMC
HOD: High of the day.
H&S: Head-and-shoulders formation. Sometimes traders refer to inverse or reverse H&S's, too. A H&S formation is typically a bearish formation that looks like a head and two shoulders, with an inverse or reverse formation typically a bullish formation that looks like an upside-down head and two shoulders. Each requires confirmation by a thrust through the neckline. Formerly more reliable whether than they appear to be in recent years, confirmation can not be considered guaranteed. More information about this formation and others such as triangles and wedges can be found in technical analysis texts.
LOD: Low of the day.
MAX PAIN: This term becomes important during option expiration week. Max pain describes a settlement number for a stock or index that would cause maximum pain to owners of options, from the most options expiring worthless. Max pain can be determined from studying option chains, observing open interest numbers. Some feel that stocks or indices are often maneuvered to max pain numbers and pinned there, if possible. Some investors plan options plays based around the likely settlement value for a stock or index, while others feel the numbers have little value in predicting settlement values. Make your own observations.
MOC: Market on Close. This refers to an order to buy or sell at market price as near the market close as possible, with these orders often coming from the big boys and girls of the stock market. We usually get a look at what MOC orders are like about twenty minutes before the close, with exchanges and the SEC setting rules for when those MOC orders have to be entered. NYSE Rule 123C, "Market on The Close Policy And Expiration Procedures" (SIC), states that in order to avoid large imbalances at the close, all MOC orders must be entered by 3:40 p.m. Exceptions exist, of course, such as when a stock is halted for trading and with different procedures employed on expiration days. Once those MOC orders are made known to the specialist and placed, they cannot be revoked until 3:50 unless the order was wrongly entered or because of a regulatory halt.
Rule 123C also relates how MOC buy and sell orders must be treated in relationship to limit orders. You can read the rule for yourself by following this link: http://www.nyse.com/Frameset.html?displayPage=http://rules.nyse.com/NYSE/Help/Map/rules-sys248.html
The Amexs rule 118 governs Nasdaq National Market Securities' MOC orders, saying that imbalances of 25,000 shares or more must be published in a manner specified by the Exchange. As of April, 2004, SEC rules state that "Beginning at 3:50 p.m., Nasdaq shall disseminate by electronic means and Order Imbalance Indicator every 30 seconds until 3:55 and then more frequently afterwards. Information on the Nasdaq's Net Order Imbalance Indicator (NOII) can be found here: https://noii.nasdaqtrader.com/public/
Why do we care about MOC orders? The easiest explanation is that knowing whether buying or selling pressure is highest helps make end-of-day decisions. At least one article recently concluded that MOC imbalances tended to be reversed in after-hours trading and early the next morning, information that has not been corroborated by this author, so it may be that the imbalances should help one make exit decisions only. For example, if a trader were planning on exiting a bearish position by the close and MOC orders showed selling pressure, that trader might decide to wait until as late as possible to sell. If the MOC orders showed buying pressure, that trader might decide to sell as soon as possible.
Subscription services offer MOC order information, but they tend to be expensive. Check with your charting service or online broker as to the best way to view MOC orders.
MOF: Minister of Finance
OPEX: Option expiration. Traders often refer to opex week, or the week of
options expiration. As explained on the CBOE site, stock options typically
expire the Saturday immediately following the third Friday of the expiration
is also the expiration date for the OEX. SPX settles differently, on
Friday morning. Holidays result in expirations one day ahead, and, obviously,
options stop trading the day before expiration.
For options traders, opex week and the few days immediately following opex can produce changes in options pricing. Options for the next month can lose value quickly in the Monday and Tuesday following opex week.
To learn more about options expiration, check the Learning Center on the CBOE site at http://www.cboe.com/
P&F: Point and figure charting. This type of charting method employs columns of X's and O's, with the X columns representing uptrends and the O columns representing downtrends. Because of the method employed in their construction, they tend to filter out choppy movements and show the underlying trend because prices have to move a specified reversal distance before a new column is begun. A unique characteristic of these charts is that the movement from one column to the next is dependent only on price action and not on time. To learn more about P&F charting, refer to the P&F bible, POINT & FIGURE CHARTING by Thomas J. Dorsey, or get an overview at this site: http://stockcharts.com/support/pnfCharts.html
SPREAD: Traders referring to "the" spread usually reference the difference between the bid and ask on a stock or option price. If an OEX call option shows a bid price of $1.70 and an ask price of $1.95, the spread is $0.25. Traders referring to "a" spread usually reference a type of combination play in which one call or put option is bought and another sold. These spreads can be used to establish bullish or bearish positions, depending on the combination of options employed. Lawrence G. McMillan in OPTIONS AS A STRATEGIC INVESTMENT tells all you want to know about spreads of either type.
TRIANGLE: When prices coil, they sometimes coil into a triangle or wedge shape. One technical analysis guru distinguishes the two by noting that with a wedge, the converging trendlines both head up or both head down, while with a triangle, the converging trendlines do not both head the same direction. With a triangle, the bottom trendline can be flat and the top descending, or the top can be descending and the bottom ascending, or the top flat and the bottom ascending. In the first case, the triangle is sometimes called a bearish right triangle; in the second, a neutral triangle; and in the third, a bullish right triangle. The names are self explanatory.
WEDGE: See the explanation of "triangle" for the distinguishing characteristics of triangles and wedges. Wedges can also be bullish or bearish. Technicians deem a rising wedge a bearish one, with gains unsupported and the wedge likely to break to the downside. They deem falling wedges bullish, with the wedge likely to break to the upside.
Perhaps you found your personal "board" among this list of frequently used
terms, or perhaps it wasn't included. For explanations of words not included,
try these sites:
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.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
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