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Daily Newsletter, Saturday, 05/28/2005

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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

We Can't Get No Market Action

Perhaps thanks to Bo Bice's cover of the Rolling Stone's song on an American Idol episode, even our younger readers will recognize the reference being made in that title. That old Rolling Stone's song could have served as the anthem for both bulls and bears as Friday's session opened. They could have gone right along singing it all day.

One aberration occurred in the Russell 2000. Just after the bond market close, the RUT and MID zoomed up.

Annotated Daily Chart of the RUT:

The RUT might be watched closely next week because either a rollover at the top of that channel or a breakout above it could lead the way for other indices. As noted on the chart, the RUT saw a strong surge in buying about the time of the bond-market close, although big-cap indices did not seem to participate.

The RUT seemed to take over for the SOX, with the SOX waning a bit Friday in its efforts to lead indices higher.

Annotated Weekly Chart of the SOX:

These two indices might be watched carefully next week for market guidance. Not all traders follow nested Keltner channels, but it might also be noted that Thursday ended with the SOX up against the upper boundary of a channel that it rarely violates for more than a couple of days on the daily chart. Friday, it turned down from that channel line. Further challenges might be possible, but so might a downturn toward central channel support. That central channel support is currently at about 409.80-412.70, although Keltner support also exists at a Keltner line currently at 422.81.

SOX bulls might have been taken aback by the lack of follow through on Friday. Although tech-related indices had performed well Thursday and did so in overnight sessions, U.S. futures showed little reaction to the Nikkei's strong climb. Perhaps China's Shanghai Composite's descent to almost eight-year lows tempered what might have been a positive reaction. After some initial volatility near the European open, U.S. futures showed little reaction to the early declines in the U.K., France and Germany, either.

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Big currency moves, expected by some to be a possible driver of markets next week and so on the radar screen pre-market, had not made an appearance overnight. Asian currencies are expected to strengthen against the dollar as the result of any Chinese move to un-peg the Chinese currency from our currency, but hopes of an imminent move by China have been waning. The euro was expected to weaken against the dollar as the result of a possible no vote on this weekend's referendum in France on the EU constitution, but the euro had already declined for a month. Ahead of the vote, euro shorts covered. During the overnight session, the euro continued its perhaps-technical bounce against the dollar, a bounce that continued throughout the trading day.

Those who had hoped that pre-market economic announcements would move the markets were to be disappointed, too. March's personal spending was revised higher to 0.9 percent against the previous 0.6 percent. April's personal spending rose a less-than-expected 0.6 percent as incomes climbed 0.7 percent. Perhaps more closely watched was the core PCE deflator, rising 0.1 percent and 1.6 percent year over year, showing tame inflation pressures. One key measure had shown gasoline prices pushing an inflation measure up 0.4 percent, but that core number excludes gasoline. I'm not so certain that most consumers would exclude it.

However, as one article noted, bonds barely budged after the announcements, and neither did equities. Most market watchers were reassured by the numbers, feeling that the threatened softness from March had been safely negotiated. Futures improved slightly, but only slightly and not for long.

Little note was made by television commentators of J.P. Morgan's reiteration of an underweight rating on stocks in the U.S. and globally. The firm reportedly feels that the earnings environment has deteriorated. The firm's analysts predicted 0.0 percent earnings growth for SPX stocks this year.

The open might have hinted at some movement as markets dipped ahead of the 10:00 release of the U.S. Michigan consumer sentiment index. That index fell to 86.9, down from April's 87.7, to the lowest number in more than two years, but still higher than the expected 85.3-86.0. Gasoline prices weighed on sentiment, as well as some statements from Fed members, including Greenspan's mention of froth in the housing market, one article concluded. The prospect of rising interest rates may also have been a factor. The current conditions component rose to 104.9 versus April's 104.4 and expectations fell to 75.3 from 77.

All in all, nothing prevailed to move the markets on a day that promised and delivered light volume. Action has been choppy or nonexistent lately, confusing traders. Perhaps it's time to step back and take a long-term view, one that will start with the Dow's monthly chart.

Annotated Monthly Chart of the Dow:

This chart makes evident some of the reasons for confusion in the markets. Bears might point to the strong resistance that will likely be encountered near the apex of that diamond formed at the Dow's all-time high. That resistance now coincides with the light red rising trendline that's been providing resistance, too. Bulls might point out, however, that the light red rising trendline might be the neckline for a large inverse H&S and that the Dow might be in the right-shoulder-building process. Bears might then counter that instead of a right shoulder, the Dow could be forming a small regular H&S beneath that bold red line.

When I see competing bullish and bearish formations like these, I know that bulls and bears might not yet have worked out which group is going to prevail. Whether that's the right shoulder for an inverse H&S or entire regular H&S, the monthly view shows that the Dow still chops around within that formation. The outcome--either bullish or bearish--has not been decided and neither has final direction.

The daily chart view provides no more clarity, with the two horizontal red lines on this chart representing the apex zone of that diamond visible on the monthly chart.

Annotated Daily Chart of the Dow:

The SPX's weekly chart shows a possible bullish interpretation of the SPX's action, but also points out that the SPX ended the week jammed against potential strong resistance.

Annotated Weekly Chart of the SPX:

The top of that channel is near 1201 on a weekly closing basis. The daily Keltner chart (not shown) reveals upside resistance at about 1210, but Keltner-style bearish divergence has been showing up on the last several swing highs. If that's to continue, the SPX will only graze that upper level or perhaps not touch it. If that 1210-ish upper line is breached, the bearish divergence is erased. If in bullish positions, traders should have profit-protecting plans in place at the current level, up to that 1210 level, and remain on guard for a potential rollover.

The daily Keltner chart suggests about equal possibility for the SPX to drop back toward 1188 or charge up toward 1210, with a slight weighting toward a pullback first. The range-bound trading late last week neutralized the information to be obtained on intraday Keltner charts, so that they don't augment the picture on the daily chart, not giving a preference for a climb or a decline. As long as the SPX maintains daily closes above 1188, it might still be presumed to be moving up toward an eventual test of that channel line now at 1210, but a close below the line currently at 1188 suggests a pullback toward Keltner support now at 1177.

The SPX faces resistance at the top of its descending regression channel, but the Nasdaq broke out of a descending regression channel.

Annotated Daily Chart for the Nasdaq:

The Nasdaq attempts a breakout from daily Keltner resistance, the analogous configuration that the SOX currently tests. A daily close back below the Keltner line currently at 2067.74 suggests a possible pullback toward support currently at 2043.24 and a daily close below that support suggests a deeper pullback, to 2000.50-2018.20. Support at that lower level looks strong enough to hold on the first test, at least as currently configured. No rollover has yet occurred and may not, of course, but it's natural to see a retest of broken long-term resistance, to see if it holds as support. As long as support holds, that's not a bearish development, but instead a necessary one.

The Nasdaq was to gain only 0.21 percent Friday and other indices made similarly small moves. One index moving more than 1 percent was the XOI, the Amex Oil Index. Pre-market news included a Financial Times report that China National Offshore Oil's non-executive directors have hired independent advisors to scrutinize management's contemplation of bidding against ChevronTexaco for Unocal (UCL), to the tune of more than $16 billion. UCL was to post a gain of 2.25 percent Friday.

Pharmaceuticals also came under scrutiny pre-market after Caremark RX and the Justice Department were reported as being close to reaching a settlement that would require Caremark Rx to pay more than $100 million, in a case that might have broader implications for other PBMs, or pharmacy benefit managers. Investigations have centered on whether the PBMs have aided manufacturers in encouraging the use of higher-priced drugs.

Pharmaceuticals were to stay in the news all day. In other news related to the sector, the FDA has begun looking into reports that about 50 men suffered permanent blindness after taking Viagra. Some information suggested that the blindness occurred in men who were suffered from diabetes or heart disease. The company acknowledged that it was discussing changing the label with U.S. regulators. The company also reiterated the drug's safety. Viagra accounts for three percent of Pfizer's (PFE) sales, accounting to a CNBC report. PFE was to drop 1.90 percent in Friday's trading.

Merrill Lynch did its best to provide a further boost to the semiconductor sector pre-market by upgrading LSI. Baird initiated coverage of TXN with a neutral rating. LSI climbed 2.52 percent, and TXN dropped 0.71 percent.

While some indices might have moved glacially if at all on Friday, individual stocks sometimes showed stronger moves. Telecommunications equipment company Ditech Communications Corp. (DITC) saw its stock lose more than a third of its value, 38.12 percent, after Thursday's earnings report beat expectations for earnings but lowered expectations for Q1 revenue to less than half what analysts expected. The company's president and CEO blamed a decline in orders from Nextel as a result of Nextel's merger with Sprint. The company collected several downgrades Friday morning. TiVo (TIVO) beat expectations by narrowing its Q2 loss more than expected, but received a downgrade and dropped 3.02 percent. Chico's FAS (CHS) achieved an all-time high after it also beat forecasts in its Thursday-night report, closing higher by 8.42 percent. Esterline Technologies (ESL) jointed the list of those companies beating expectations, soaring higher by 10.01 percent.

Markets will remain closed for the holiday Monday. Tuesday's economic releases are light, but Wednesday's and Thursday's calendars prove heavy, with much information on the manufacturing sector, housing sector, retailers and the employment situation all due. With Greenspan's "froth" statement about the housing market still bubbling through the markets and Fed Vice Chairman Roger Ferguson admitting Friday that housing prices in many U.S. markets might be "relatively high" and subject to a slowing, information about the housing sector might be closely watched. Many of next week's announcements will be.

Tuesday's numbers include the National Association of Purchasing Management-Chicago May survey results, to be released at 10:00 am. This survey measures business conditions in the Chicago area in both the manufacturing and non-manufacturing sectors. Some consider it a leading indicator for the ISM manufacturing index to be released the next day. Reportedly, the FOMC committee members watch this Chicago number. Also, US-Farm Prices will be released Tuesday afternoon, at 3:00. The Department of Agriculture releases this index of prices received by farmers.

Wednesday's releases begin early with the usual 7:00 release of the MBA's figures for loan applications, this covering the week of 5/27. ICSC-UBS store sales for the week of 5/28 will follow shortly, released at 7:45. At 8:55, the Redbook survey will provide additional insight into sales at chain stores, discounters, and department stores. Together with the more consistent ICSC-UBS indicator, the Redbook survey helps economists gauge consumer spending habits. The RLX has been on a tear lately, but slowed to a 0.19 percent gain Friday. It faces January's huge gap lower, as yet unable to move into that gap last week. A downturn here might be important, but if the RLX climbs, gains might be tempered by gap resistance.

Investors may brush aside many of those releases to get a better look at the May ISM Manufacturing Index to be released at 10:00. This number can be market moving and is also one that the Federal Reserve watches closely. Motor vehicle sales for May will begin being released about 4:00.

Thursday will be another full day of economic releases. At 6:00 am, Monster releases its employment index for May. The Thursday release of jobless claims will come as usual at 8:30 along with Q1 productivity and unit labor costs. Because of this release's importance in measuring inflationary pressures, it, too, will be closely watched. The April job report surprised to the upside, so this report should garner attention. The 10:00 release of the Challenger Job-cut Report for May will provide further insight into the employment situation, but it's likely to be overshadowed by the coincident release of April's factory orders.

At 10:30, the Department of Energy give updates on crude, gasoline and distillate inventories. The day's releases conclude with the 4:30 update on the U.S. Money Supply for the week of May 23.

Friday rounds up the week, with the U.S. employment situation for May released at 8:30, a potentially market-moving release. Termed the most comprehensive report on the employment situation, this report is also one that Greenspan watches. By that point, market watchers might be exhausted, but the week finishes up with a bang, with the May ISM non-manufacturing index, expected at 10:00.

Market action might have lulled traders this week, but some predict that it won't do so next week. I've pointed out many indices breaking out or attempting to break out over long-term resistance, but still subject to a downturn beneath that resistance. Some indices consolidate in broadening or other consolidation patterns. The choppy action has chopped up chart signals, too. Longer-term charts harbor signs of impending breakouts but also include warnings of strong resistance.

Not to be ignored is Sunday's referendum in France on the EU constitution and its possible impact on currencies and equities. A no vote, likely according to some polls, might crater the euro against the dollar, although some speculate that "crater" might be too strong a word, especially since the euro has already trended down against the dollar for the last month in anticipation of a negative outcome. Friday's move higher was either a validation of the sentiment that the euro has been oversold this month or else just a technical bounce that relieved some of the pressure. Some feel the euro has enough support to withstand such an action, but U.S. multinational companies who do business in Europe might not benefit from a surge in the dollar against the euro if that occurs.

The dollar's move might be choppy as the U.S. ratchets up pressure on China to un-peg its currency from the U.S.'s, perhaps leading to a strengthening of that currency against the dollar. Like a see-saw, one event might send the dollar higher and another, lower, with the relative effects difficult to weigh from this vantage point. No one knows whether or when China will take that action. Will the U.S. economy suffer more from paying higher prices for imports from China if our dollar slips against the yuan or from seeing our multinational companies' earnings fall due to the effect of a falling euro against the dollar? Will our interest rates rise if China dumps U.S. assets that it had held to keep its currency undervalued against ours, and will those rising rates blow all that froth off the housing market?

Although Treasury Secretary John Snow assured senators this week that a revaluation of China's currency would not lead to a dumping of U.S. securities, or that such a dumping wouldn't affect large U.S. capital markets much if China did just that, others differ. Some speculate that large currency moves could impact our markets and could be one of the biggest market movers next week, if such moves occur.

It would be nice to predict as this report is prepared how the referendum will turn out in France, how the euro and dollar will react, what secret plans China makes for its currency and how the dollar would react to that, but those predictions are impossible to make. It might be important to watch how the dollar reacts Sunday night and then how our futures react to a dollar move, if there is any. If there's a strong surge one direction or the other in the markets, that might get some equity movement going. Otherwise, I'm not sure that the bulls and bears have yet settled who is going to win the sweepstakes as we head into summer trading conditions.

Be particularly careful and remain aware of undercurrents that might impact market action next week. Watch the SOX and RUT for clues as to whether rollovers or breakouts have begun. Watch that CCI ghost on the Nasdaq to see if it confirms or is invalidated. If rollovers begin, watch carefully the breakout levels for potential strong support on a pullback.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
FMD None

New Calls

Editor's note:

We are bullish on stocks in general but remain wary about adding new bullish candidates at current levels. The major stock averages remain short-term overbought and due for a correction.

First Marblehead - FMD - close: 44.05 chg: +0.65 stop: 42.49

Company Description:
First Marblehead provides outsourcing services for private, non-governmental, education lending in the United States. The Company helps meet the growing demand for private education loans by providing national and regional financial institutions and educational institutions, as well as businesses and other enterprises, with an integrated suite of design, implementation and securitization services for student loan programs tailored to meet the needs of their respective customers, students, employees and members. (source: company press release)

Why We Like It:
While we remain cautious on stocks short-term we're willing to outline a potential bullish set up for shares of FMD. The stock was hammered in late April after the company reported earnings and then issued an earnings warning. Naturally investors were unhappy to hear the news and the stock gapped lower. The initial oversold bounce failed near $42.50 but now recent strength has pushed FMD back towards the bottom of its gap down and round-number resistance at the $45.00 level. The P&F chart has already reversed from its sell signal into a new buy signal with a $55.00 target. We think FMD might offer traders a "fill the gap" type play. We're suggesting a TRIGGER to buy calls at $45.01. Our target will be the $49.50-50.00 range, since the $50.00 level is both round-number resistance and relatively close to technical resistance at the top of the gap down.

Suggested Options:
We're going to suggest the July calls. September strikes are also available.

BUY CALL JUL 40.00 FMD-GH OI= 0 current ask $5.60
BUY CALL JUL 45.00 FMD-GI OI=38 current ask $2.50


Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 782 thousand
 

New Puts

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - close: 56.40 chg: +0.69 stop: 52.49

So far so good. Investors are reacting positively to the newly minted civil lawsuit filed by NY Attorney General Spitzer's office against AIG and two of its top execs. The street seems pleased that the focus of the suit is so "narrow" as some are calling it. This sent shares of AIG soaring on Thursday to breakout over resistance at the $55.00 level and hit our trigger to go long/buy calls a $55.05. Friday's 1.2 percent gain was a nice follow through to Thursday's breakout. Here's what we expect to happen next. The markets still look short-term overbought and due for a dip. AIG is arguably short-term overbought too. We'll expect a dip in AIG back toward the $55.50-55.00 level, which should now act as new support. Traders can buy a bounce from $55.00 as a new bullish entry point. Our target remains the $59.00-60.00 range.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 50 AIG-HJ OI=11233 current ask $7.50
BUY CALL AUG 55 AIG-HK OI=62862 current ask $3.60
BUY CALL AUG 60 AIG-HL OI=45105 current ask $1.20

Picked on May 26 at $ 55.05
Change since picked: + 1.35
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million

---

Caterpillar - CAT - close: 94.31 chg: -0.12 stop: 89.00

We're not complaining about the action in CAT either but this may not be a good spot to initiate new positions. We initially added CAT a couple of weeks ago with a trigger to go long once the stock broke through resistance at the $92 level and its 50-dma. This also proved to be a bullish breakout from an inverse (or bullish) head-and-shoulders pattern. That H&S pattern projects a $100 price target (give or take a point). Thus far CAT is doing pretty well with a retest of the $92 level as support on Wednesday. Our concern now is that the major market averages still look overbought and due for a pull back. Readers may want to wait for a dip back toward the $92 level again before starting new positions. If the pull back gets ugly we could see CAT slipping toward the $90 level. Our target remains the $99.25-100.00 range. Meanwhile the Point & Figure chart is bullish with a $109 target.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 90.00 CAT-GR OI= 180 current ask $6.00
BUY CALL JUL 95.00 CAT-GS OI=3279 current ask $2.70
BUY CALL JUL100.00 CAT-GT OI= 368 current ask $0.85


Picked on May 18 at $ 92.35
Change since picked: + 1.96
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

---

Career Education - CECO - close: 34.97 chg: -0.03 stop: 32.45

We're starting to wonder if we picked the wrong education stock to play on the breakout. CECO's larger rival APOL has been much more consistent with its up trend and follow through on the recent breakout over the 200-dma. We are still bullish on CECO and the recent sideways consolidation could be just the rest this stock needs before pushing higher. However, readers have a choice to make. We believe the major indices look a bit extended and due for a pull back. If that occurs then we'd look for CECO to dip back toward the $34.00 level (maybe 33.50) near its 50-dma. Readers could use the dip as a new bullish entry point. If the market does not consolidate lower then traders could use move of a momentum-type entry point on a push through $35.50 and its simple 100-dma (currently 35.57). If shares of CECO can trade above the $36.00 mark it will reverse its P&F chart from bearish to a new bullish buy signal. Our target remains in the $38.50-39.50 range.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 30.00 CUY-GF OI= 762 current ask $6.00
BUY CALL JUL 35.00 CUY-GG OI=4639 current ask $2.45

Picked on May 23 at $ 35.24
Change since picked: - 0.27
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million

---

Rockwell Collins - COL - close: 49.55 chg: +0.29 stop: 44.95

Our bullish COL play may require a little extra patience. We're drawn to the stock by its relative strength. Like the DFI defense sector index, shares of COL are trading at new all-time highs. This might look like a tempting entry point after a six-day sideways consolidation. However, COL is nearing what should be round-number, psychological resistance at the $50.00 mark. Combine that with the fact that the major market indices are short-term overbought and due for a consolidation then you can understand why we would prefer to buy calls on COL after a significant dip. A quick look at its daily chart shows that investors have been consistently buying pull backs near its simple 100-dma. Right now that 100-dma is near $45.50. We are suggesting that readers use a trigger for new bullish plays if COL dips into the $46.25-45.50 range. It is certainly possible that COL will not consolidate that low and we may be forced to adjust our entry point down the road.

Suggested Options:
If we are triggered in COL we'll suggest the July calls although Octobers are available.

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: 67.72 chg: -0.16 stop: 64.45

We're starting to think that maybe we should have exited when FD hit $69.50 a few days ago. Thus far FD has been holding up pretty well near its simple 10-dma but if the major averages see any type of profit taking next week we would expect FD to slip back toward the $65.00 level. The $65 level was once resistance and now broken should act as support. We're certainly not suggesting new plays at this time. We are going to adjust our target to $69.50-70.00 so we can exit if FD spikes toward overhead resistance again. In the news FD has set July 13th as its shareholder vote to approve the $11 billion deal to acquire May Department Stores (MAY).

Suggested Options:
We are not suggesting new plays at this time.


Picked on May 17 at $ 66.60
Change since picked: + 1.12
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million

---

Reynolds American - RAI - cls: 82.84 chg: +0.67 stop: 77.95

Friday's bounce from RAI's simple 10-dma after a six-day sideways consolidation looks like a potential bullish entry point. However, like most stocks, if the markets see any consolidation lower next week we would expect shares of RAI to follow. We've been suggesting that readers watch for a dip back into the $80-81 range. Actually we'd prefer buying a bounce from that area. The P&F chart is positive and currently points to a $90.00 target. We're targeting a move into the $85.00-86.00 range.

Suggested Options:
We are not suggesting new positions at this time. Watch for a dip. If RAI provides a new entry point we'd prefer to buy the August calls.

Picked on May 16 at $ 81.31
Change since picked: + 1.53
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

---

United Technologies - UTX - cls: 107.88 chg: +0.26 stop: 102.45

UTX continues to show plenty of relative strength and the stock now looks poised to breakout over the $108.00 level. We initially added UTX to the bullish play list after its breakout above resistance at the $105 level but we wanted confirmation of the move and listed a trigger to go long at $106.25. UTX powered through the $106 level and its previous highs from December last Monday. This produced a new triple-top breakout buy signal on its P&F chart, which now points to a $131 target. We are targeting a move into the $114.00-115.00 range. Readers now have a choice to make. Traders can use a momentum-style entry point on a breakout above the $108 level. Or, since you know we're expecting a market pull back sooner rather than later, we'd watch UTX for a dip back toward the $106.00 to $105.00 levels and buy a bounce there.

Suggested Options:
We are suggesting the August calls. Junes are available.

BUY CALL AUG 100.00 UTX-HT OI=1994 current ask $9.70
BUY CALL AUG 105.00 UTX-HA OI=6754 current ask $5.80
BUY CALL AUG 110.00 UTX-HB OI=1575 current ask $2.70

Picked on May 23 at $106.25
Change since picked: + 1.63
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million
 

Put Updates

United Thera. - UTHR - close: 48.81 chg: -3.15 stop: 53.38*new*

Oh! So close. UTHR lost another six percent on Friday with big volume (almost five times the normal volume) powering the move. Shares of UTHR have now broken down below the $50.00 mark, which posed a potential threat as round-number support. Plus, UTHR has broken below its technical support at the simple 50-dma. The big move was fueled by an analyst downgrade moving UTHR to a "market perform". We are lowering our stop loss to breakeven at $53.38. UTHR hit an intraday low of $48.37 on Friday, which was almost enough for our target $48.25-47.50 range. More conservative traders may want to consider exiting the play now before the stock produces any sort of oversold bounce. We are not suggesting new positions.

Suggested Options:
We are not suggesting new plays this close to our target.


Picked on May 24 at $ 53.38
Change since picked: - 4.57
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 452 thousand
 

Dropped Calls

Amerada Hess - AHC - close: 94.85 chg: +2.12 stop: 89.95

Target achieved. Actually AHC has surpassed our target of $93.50-94.00. An 84-cent jump in crude oil to $51.85 a barrel on Friday helped fuel a nice rally in the oil sector. Shares of AHC have now broken through resistance at the top of its three-month descending channel and its simple 50-dma. While this looks like a bullish breakout worth considering as a new entry point we'd be careful. Volume in the markets and in AHC has been pretty light the last couple of days as investors began heading out early for the long, three-day weekend. Plus, crude oil has jumped 6.6 percent in the past week and looks short-term overbought. Of course as we all know it can get more overbought before consolidating. We're closing the play per our strategy at 93.50.

Picked on May 17 at $ 89.41
Change since picked: + 5.44
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 1.6 million
 

Dropped Puts

None Today.


Trader's Corner

When It's Good to Feel Bad

When is it good to feel bad? Maybe when your trading performance declines.

Our trading lives should enhance our times with family and friends, by engaging our minds, providing a sense of fulfillment and hopefully filling the coffers. They should not make us feel tired or dispirited. We should not endure separation anxiety when we're away from our computers, unable to stare at charts, trying to find a way to move the markets the direction we want.

So what do we do when we're feeling bad about our trading lives? We should be assured that our psyches are working as they should. In an article originally written for THE SCIENCES in 1991, Randolph M. Nesse, then associate professor of psychiatry at the University of Michigan in Ann Arbor, proposed that psychic pain might serve a purpose. It might be necessary for us humans to sometimes feel shame, jealousy, anxiety or even depression. Those emotions might be particularly important in our trading lives, helping us to grow as traders, honing in on an appropriate trading style, or even to make the difficult decision that the trading life is best left to others.

Anxiety elicits a fight-or-flight response, obviously helpful when we should be alert to changing conditions in the markets, but widen the argument to consider what this emotion and others mean to our trading lives in general. Each of these negative emotions forces us to take stock of what we're doing in our trading lives. Sitting-straight-up-in-the-middle-of-the-night, heart-pounding anxiety signals that a trader might be risking too much on trades or employing a trading style not suitable to that trader's psychological makeup, for example. Although the explanation sounds simplistic, how many of us persist in trading practices that just aren't working, determined that we're going to make them work? Perhaps it takes something bad to make us stop. Perhaps it takes shame or depression.

That's just what Nesse suggests. Although uncomfortable to experience, shame, sadness or depression can be particularly helpful to all people, and to traders in particular. Nesse refers to these bad feelings as "low mood" emotions and said they serve a concrete purpose. He theorized that these low mood emotions force us to allocate our energies. Depressed people feel too tired to make decisions, too paralyzed to move or take action. While that wouldn't be a good thing if a decision to exit a losing play must be made, it can be a good thing overall. A depressed trader might turn away from the screen, too uncertain to initiate new trades. Nesse's article "What Good Is Feeling Bad?" draws the conclusion that "[l]ow mood withdraws investments from wasted enterprises."

Withdrawing investments--emotional, time or financial--seems an appropriate response to wasted enterprises, especially if those enterprises are losing trades. It's difficult to change the way we do things, Nesse says. We run risks when we change strategies that worked for us in the past, and that's certainly true for traders, too, and may explain why we keep plugging away using the now-failing strategies that worked for us in the past. But neither Nesse nor I would suggest jumping from one strategy to another. Some evidence suggests that we humans tend to be too optimistic, sometimes leading us to take chances that do not prove to be well advised. Depression and other low mood emotions slow us down long enough to evaluate the strategies we have been employing and assess whether changes are necessary. Removing that excessive optimism while we make those assessments would be a good idea, even if we have to suffer some shame to do it. Nesse wasn't referring to market investments, but the conclusion sounds apt to the trading life, too.

If you're feeling anxious, ashamed or depressed about your trading life, don't bury those emotions. Investigate why you're feeling them. Are you investing too much in individual plays? Have you had a long losing streak that's risking your or your family's financial well being? Does the trading strategy you've been employing take so much time that you have no energy, either physical or emotional, left over for your family or fun pursuits?

Nesse advises that it's not wise to make quick or light decisions as to how we invest our energies, and I'd say the same about the way we invest our emotions and funds, too. Lighten positions so that you can sleep through the night. Close out all positions ahead of holidays or vacations if that makes sense to you or your positions. Take a day off, away from the computer, spending that day with loved ones to remind yourself of what's important in life. Evaluate what you want from your trading life and how you can best use that trading life to improve the quality of your real life. If you're ashamed of your trading performance and jealous of someone else's, with jealousy being another sometimes-useful negative emotion, spend some time studying that other person's trading style. Allow that uncomfortable shame- or depression-induced paralysis to force you to make slow and considered decisions. Write down goals. Think it through. Ask the hard questions, too, such as whether you should be trading at all or rather using your gained knowledge to evaluate the skills of an advisor who might handle your finances.

Go ahead and feel bad. It's good for you. And maybe for your trading account.

Today's Newsletter Notes: Market Wrap and Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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