Daily Newsletter, Thursday, 05/26/2005
HAVING TROUBLE PRINTING?
Inching Higher Into the Holiday
For over a week now we've been in a relatively tight range that has worked its way slowly higher. Whenever we see price action chop its way lower or higher it's usually a sign that the move is running out of steam. So the fact that we've seen price chop its way higher for the past week is actually bearish. The fact that the DOW and SPX are also doing this right underneath their broken uptrend lines (running from March 2003 through the October 2004 low) is even more bearish. The flip side of this of course is that the bearish appearance of this will actually be bullish. If too many traders start leaning to the short side based on this, we could actually get short covering to give us a quick burst over resistance which would likely send us up to challenge the March highs.
I had discussed another warning signal in Tuesday's Market Wrap when I showed how we are in a Fibonacci time window that could mark a turn in the market. That window is/was May 25/26. Considering these windows are +/- 1 day, we essentially have been in the turn window this week. The fact that we've rallied up into this turn window it would suggest that this week will mark a high in the market. The last turn window was March 7/8 and as we know March 7th marked a high for the year. Therefore I'm bearish on the equity market based on the choppy price pattern the past week, trendline resistance at current levels and the Fib turn window. Tomorrow being Friday before a holiday weekend, which are typically bullish, be aware that we could see more rally (or it could just go dead as most everyone heads for the exits early) but I consider the long side to be the riskier side right now. Pulling stops up close would be the prudent thing to do whereas it could be a little early to think about the short side. Let the market tell us a top could be in. Otherwise we could see short covering shoot this market higher by 100-200 DOW points in a hurry.
After the Fed's Jack Guynn, president of the Fed bank of Atlanta, talked yesterday about the need for the Fed to continue to raise rates in order to control inflation, you would have thought the home builders would have had a lousy day today. But Toll Brothers came to the rescue this morning and announced that their fiscal second-quarter earnings more than doubled and that they were seeing strong demand for luxury homes. Their results were well ahead of expectations, and the home builder said it expects profit for the full fiscal year to rise about 70%, followed by a 20% increase in the next fiscal year. TOL was up +5.92, closing at 91.50, a new annual and all-time high. As seen in the home construction index later, the whole industry loved the news. Fear of rising interest rates though was met less enthusiastically by the banking sector which was barely in the green today. In fact the chart of the banking sector, shown later, looks bearish. Generally speaking, as go the banks so goes the market and its one of the reasons I'm feeling more bearish than not about the broader market.
Not a lot has changed in the charts shown in Tuesday's Market Wrap. Because prices are essentially at the same place they were on Tuesday we're facing the same set of questions we had on Tuesday. We're beginning to see more negative divergences on the shorter term charts while the daily charts have rolled over or are threatening to do so.
DOW chart, Daily
The DOW is pressing against the highs of late March/early April and the broken uptrend line that runs from March 2003 through the October 2004 low. Because tomorrow is the last day before the holiday weekend I wouldn't want to get aggressive on either side of the market. The chart looks bearish in that it is up against some tough resistance at the same time the daily chart oscillators look ready to roll over. I would protect profits at a minimum and think about your favorite index/stock for a shorting opportunity. The longer term pattern tells me we could get a turn down to new annual lows. As discussed above, if the DOW is able to rally much above 10,600, it could ignite some short covering and completely change the picture--we could be headed to new annual highs in that case. So we're at a critical place for the market right now and a decision will be made soon, as in the next week.
SPX chart, Daily
The SPX continues to look just like the DOW. It's facing the same trend lines, the daily oscillators look ready to roll over and the larger pattern looks bearish. The big difference with this index is that it's the closest to make new annual highs if more buying sparks this much over 1200. I could then see the short covering get this quickly back up to the March high near 1230. And if that were to happen I don't think there would be anything to stop a rally up to long term resistance near 1250-1260. I currently don't see that happening but again we should get our answer next week. If price rolls over from here it will look bearish.
Nasdaq-100 (NDX) chart, Daily
The Nasdaq-100 may be hitting resistance a little bit ahead of the COMP if one considers the last high on March 7th as resistance. This is essentially at the 1550 level and the NDX is there. So the NDX is hitting potential resistance at the same time the DOW and SPX are hitting their resistance levels. Along with negative divergences on the shorter term charts you can see that today's high was met with a daily turn down in the RSI. This is a heads up that the new high is being met with weaker breadth, a sign of a top, potentially. But also like the other two above, a rally above this resistance level could ignite some short covering. In that case look to the COMP to see if it runs into resistance at 2100 (2072.54 high today).
SOX index, weekly chart
We looked at the weekly chart of the SOX on Tuesday because it's pressing against its 200-weekly moving average. The SOX hasn't been able to close above this average since March 2002 and the highest it's been able to get is 9 points above it which was in February 2005. With the 200-wma just under 429 an over-throw of 9 points this time would take the SOX up to 438. Today's high was 434.28. I see a mixed picture on the SOX--the weekly chart shows a potential bull flag since last December. The internal wave count would suggest a pullback before this flag breaks to the upside but the alternative EW interpretation is that the SOX is on the verge of a hard breakdown. So in either case it looks like we should be prepared for a pullback at a minimum and a hard drop at a maximum. The coiling in stochastics may provide some clues--play the direction of the break.
BKX banking index, daily chart
The banking sector is a good one to watch because it's often a leading indicator for the broader market. The fact that it bounced up to and failed at the broken uptrend line is bearish--it's the kiss goodbye. It's currently bouncing between its 200-dma's and bounced off its broken downtrend line from the December high. The daily oscillators are threatening to roll over and it's looking bearish.
This morning's economic numbers included the weekly jobless claims and they were bullish for the economy. But bullish for the economy means bearish if you're worried about continuing rate increases from the Fed so the market reaction was muted. It's one of those times where you're not sure whether you should laugh or cry so instead you look numb. Jobless claims were up 1,000 to 323,000 and the 4-week average was up only 500 to 330,500. Continuing claims dropped 22,000 to 2.57M. The GDP was also released which was up +3.5% for the 1st quarter versus the previous estimate of +3.1%. The revisions to the GDP were largely due to an unexpected decline in the trade deficit in March, so again it was mixed news since it wasn't real growth as much as it was a reduction in imports. Economists had been predicting +3.6%. The economy had grown at a +3.8% rate in the 4th quarter so there was a bit of a slowdown in growth. That bearish news is bullish (see Fed reaction above). Do you see why I don't trade fundamental news? The core personal consumption expenditure price index rose 2.2%, unchanged from the initial estimate last month. Continuing the bullish news is bearish, U.S. corporations' before-tax profits from current production rose a record 23.6% to an annualized $1.307 trillion in the first quarter. The increase brought the year-over-year growth up to +35.9%, the fastest growth since the third quarter of 1987.
Some stocks in the news included Costco which reported fiscal third-quarter profit rose 5.6% as same-store sales jumped 7%. Their revenue rose 10% to $12 billion. American International Group (AIG) is closer to getting the hammer from New York Attorney General Eliot Spitzer, or at least a few key people will certainly feel the pain soon. Spitzer filed a civil complaint against AIG today. He and other regulators have been investigating AIG's accounting and whether it used certain reinsurance transactions to manipulate its financial statements. The probes forced Maurice "Hank" Greenberg, AIG's former chief executive and chairman, to step down in March. It also forced the company to admit to a series of accounting improprieties that helped inflate its net worth by $2.7 billion, or 3.3%. No small change.
Recently there has been discussion about the oil situation and there has been lots of speculation about what will affect the price of oil and even its impact on our economy. As long as oil hangs around the $50 level the equity market seems less and less interested in following it. That may turn around and bite a few people later but there seems to be a nonchalance at the moment. One of the issues often discussed here is refining capacity versus pumping capacity. Historically, the price of oil has followed the supply of oil and not the demand for it. That may be changing as the recognition mounts that it doesn't matter how much crude we pump out of the ground. What matters is how much refined crude is available. So while extra pumping by OPEC and others may build up inventories, which would normally depress the price of oil, that may not happen this time around. Even if high oil prices ease, prospects for cheaper gasoline, diesel and jet fuel are likely to be limited for at least several years by a this shortage in refining capacity.
Previously, the shortage of plants to refine and process crude oil into usable products has been largely a problem for the U.S., by far the world's largest oil consumer. But growing demand for oil from China, India and other rising powers is aggravating the shortfall in refining and threatening to keep prices elevated for years. Global demand is expected to grow by nearly two million barrels a day this year -- from 82.5 million barrels a day last year -- but the world's capacity to refine and process crude oil is expected to grow by less than half that. The only thing that will alleviate this problem is a global economic slowdown which is possible. In the meantime, the high cost of refined oil will likely keep pressure on airlines, auto makers, trucking lines and other industries that are especially sensitive to the prices of oil-based fuels.
As we follow the chart on oil, it's close to giving us an answer to the question about whether it's going to pull back a little further or start its climb back up.
Oil chart, June contract, Daily
The pattern to the downside is a bullish descending wedge and the expectation is that price will soon break out of this and head north. A typical outcome of these patterns is a relatively quick retracement of it--in other words back up to the previous high of $60. The equity market would not be happy with that and would likely take notice of a rapid climb back up in oil prices. Price is currently pressing the top of this pattern, the downtrend line from the high, so it's close to giving a buy signal. The alternative to that is another turn down so that it can find support at its uptrend line and 200-dma, both just above $47.
Oil Index chart, Daily
Like the price of oil, the index is pressing against the downtrend line from the March high. So like oil, we're about to get a buy signal with a break of the downtrend line, or we'll get a turn back down as it heads for support at the uptrend line and 200-dma around 428. If it heads back down for 428, the previous low, watch for bullish divergence on a retest of that low for a buy signal. For those of you in Jim's LEAP calls on the oil stocks, keep an eye on this index for a signal to cover some of your insurance put positions.
Transportation Index chart, TRAN, Daily
The Trannies are looking tired--price is up against the top of a parallel down-channel at the same time the daily oscillators are threatening to roll over. The longer term pattern suggests to me that the bounce from the April low is counter-trend and that the dominant trend will be down. This index is a good barometer for the broader market.
U.S. Home Construction Index chart, DJUSHB, Daily
Thanks to Toll Brothers, which reported strong earnings this morning, the home construction index got a strong bounce today which took it above the top of its long term up-channel. An internal Fib projection for this leg up from May 13th is at 915 which is based on 162% of the 1st leg up off the April 15th low. This is a very common Fib relationship between these waves and today's price stopped within a 2 points of this mark. Therefore be alert for a turn back down from here. If price falls back below the top of the up-channel, this will look like an overthrow.
U.S. Dollar chart, Daily
The US dollar has had a nice rally and is looking like it's ready for a break. I'm not so sure the rally is finished but it does look ready for a pullback and consolidation. I expect to see the dollar to stay above $85.40 in its pullback. If it were to break below that then I would look to its uptrend line from March for support. It's beginning to look like its in the middle of an ascending wedge which I suspect will take a couple of months to play out.
Gold chart, June contract, Daily
Gold is threatening to break its downtrend and if the US dollar pulls back I suspect we'll see gold make an attempt to rally. If it manages to rally back up to its broken uptrend line near 428, and if the dollar is holding above $85, I'd be looking to short gold. For now I'm feeling slightly bullish about the metal, at least for a short term trade.
Sector action today was almost all green. The biggest loser today was the gold and silver index. The REIT index was marginally in the red and the pharmaceuticals and energy indexes were marginally green. The big winners today were the techs--the internet indexes, the SOX and computer technology. Leading the pack were the Airlines and also strong were the Transports.
It will be a relatively quiet morning as far as economic reports. We'll get Personal Income and Personal Spending (no surprises expected or anticipated) and the Michigan Sentiment which is also not expected to shake up the market. Be ready for a morning move followed by a flat market as the traders head for the doors to start their holiday weekend early. It's not a bad day to consider doing the same. Next week is when we should get a good setup for a good directional trade. Hopefully we'll have a better idea which direction.
New Option Plays
by OI Staff
Call Options Plays
Put Options Plays
We are considering several new bullish candidates but the markets continue to look short-term overbought and due for a minor correction. Volume on today's market gains was light, which doesn't inspire much confidence to initiate new long positions now. The NASDAQ is up nine out of the last ten sessions, which is an unsustainable pace.
In Play Updates and Reviews
by OI Staff
Amerada Hess - AHC - close: 92.73 chg: -0.40 stop: 89.95
No change from our previous update on 05/25/05. Our target is the $93.50-94.00 range but more conservative traders may want to consider taking some profits now.
Picked on May 17 at $ 89.41
Change since picked: + 3.32
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 1.6 million
Amer. Intl Group - AIG - close: 55.71 chg: +1.63 stop: 52.49
Could this be a case of "buy" the news? Wall Street has been expecting NY Attorney General Spitzer to file suit against AIG for a while now and his office finally filed that suit today. Once the news hit shares of AIG broke out on big volume through resistance at the $55.00 level and hit our trigger to buy calls at $55.05. The lawsuit is a civil one against AIG and two if its former executives alleging fraud and deception. Today's reaction in the stock price seems to confirm our suspicions that the worst may be behind it for shares of AIG. Our target is the $59.00-60.00 range and we're suggesting the August calls.
Picked on May 26 at $ 55.05
Change since picked: + 0.66
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million
Caterpillar - CAT - close: 94.43 chg: +1.96 stop: 89.00
We've been expecting a dip toward the $90.00 level but we may have to consider the possibility that the market is going to keep growing more overbought. Today's rebound from the simple 10-dma near the $92.00 level looks like a bullish entry point but consider new positions carefully. Our target remains the $99.25-100.00 range.
Picked on May 18 at $ 92.35
Change since picked: + 2.08
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million
Career Education - CECO - close: 35.00 chg: +0.61 stop: 32.45
Today's bounce looks like a potential new bullish entry point but we would be careful. The market is still short-term overbought and we'd prefer to wait for the major averages to dip before initiating new long positions.
Picked on May 23 at $ 35.24
Change since picked: - 0.24
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million
Rockwell Collins - COL - close: 49.26 chg: +0.52 stop: 44.95
Momentum traders may want to give COL another look here as it nears a new high. We're going to stick to our plan and look for a pull back toward the 100-dma. Our entry point to buy calls is in the $46.25-45.50 range. No change from our previous update on 05/24/05.
Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 800 thousand
Federated Dept Stores - FD - cls: 67.88 chg: +0.55 stop: 64.45
No change from our previous updates.
Picked on May 17 at $ 66.60
Change since picked: + 1.28
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million
Reynolds American - RAI - cls: 82.17 chg: +0.25 stop: 77.95
We're watching for a dip into the $80-81 range. Wait for a bounce before considering new positions.
Picked on May 16 at $ 81.31
Change since picked: + 0.86
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand
United Technologies - UTX - cls: 107.62 chg: +0.79 stop: 102.45
UTX continues to show relative strength with another late day bounce off from the $106.50 region. Momentum traders may want to initiate positions here. We'd still be prone to wait for the pull back as the major averages remain overbought and today's gains were on light volume for the market.
Picked on May 23 at $106.25
Change since picked: + 1.37
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million
United Thera. - UTHR - close: 51.96 chg: +0.33 stop: 56.05
We were expecting an oversold bounce and shares managed to trade near the $52.50 level before momentum began to fade this afternoon. No change from our previous updates. Our target is the $48.25-47.50 range.
Picked on May 24 at $ 53.38
Change since picked: - 1.42
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 452 thousand
Precision Castparts - PCP - cls: 77.72 chg: +1.42 stop: 75.05
The breakdown below technical support at its simple 100-dma and price support near $72.00 never materialized for shares of PCP. We're going to close the play unopened. Per our previous update traders may actually want to consider going long calls on the stock now that shares are beginning to breakout over its three-month trend of lower highs. We'll keep an eye on it for a possible bullish play.
Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 492 thousand
Strayer Education - STRA - cls: 87.37 chg: +1.20 stop: 87.75
STRA was a new bearish candidate we added to the list last night. It would appear that our stop loss may have been too tight. Shares managed to trade to $87.87 on an intraday basis, which was enough to tag our stop loss at 87.75. We are not convinced that STRA will not trade lower as today's gains were fueled by below average volume. It may be prudent to watch for a breakdown below the $85.00 level before considering new bearish positions.
Picked on May 25 at $ 86.17
Change since picked: + 1.20
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 258 thousand
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