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Daily Newsletter, Saturday, 06/04/2005

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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

15 Minutes of Fame

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15 Minutes of Fame

The new kid on the block got his 15 minutes of fame this week and the instant notoriety was far more than he bargained for. Dallas Fed President, Richard Fisher, stunned investors and analysts alike with his eighth inning sports analogy on Wednesday and the talking heads will not let him forget it. It was the sound bite of choice every 15 min for the rest of the week. Word on the street according to Greg Valliere of The Stanford Washington Research Group, Mr. Fisher was reprimanded rather harshly for his off the cuff comments. With Greenspan trying his hardest to push rates higher using his patented Greenspeak approach I am sure he was not happy with the one-and-done suggestion from Fisher. In the space of about 60 seconds Fisher destroyed the continued rate hike risk and bonds headed into the stratosphere. The measured pace language had speculators predicting something in the 4% range for year-end and Fishers ninth inning scenario erased that potential in the minds of investors. As of Friday the Fed Funds Futures are showing less than a 50% chance of two more hikes by year-end much less four. Odds are good Fisher will not be doing any on camera interviews in the near future.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


We all know what the market did within seconds of Fishers comments. The Dow had weakened from Tuesday mornings open at 10540 and was looking like a world-class cliff diver getting ready to take the plunge after a disappointing ISM report. The Fisher comments prompted better than a +200 point spike to new two-month highs just over 10580. As Jonathan would say, it was a real bear-be-que. Shorts had just settled in for the summertime swoon and were rudely awakened by a massive short squeeze. The spike did not last the day but dip buyers struggled hard on Thursday to provide support. That support finally crumbled on Friday morning and all the gains for the week were erased despite what was called a market friendly Jobs report.

The Jobs report showed a net gain of only +78,000 jobs in May compared to estimates of +185,000 and a whopping +274,000 in April. There was no positive way to spin the drop in jobs but everyone with a microphone tried very hard. The two main retorts were "if you average the last five months you get +180,000 per month" and "over the last two years 2.5 million jobs have been created." Personally I don't think it makes any difference to the market how many jobs were created in 2003 or even 2004. The market wants to know which direction the economy is headed today, not last year. Secondly, the +274,000 jobs in April were bolstered with an adjustment of +207,000 jobs. This was the "estimated" jobs created by the birth/death fudge factor. Removing the 207,000 government guesstimate leaves only +67K in April. If you want to get really serious nearly two million of the +2.5 million jobs over the last two years were "guesstimate adjustments" based on that scenario.



The way I understand it the government tries to guess how many news jobs were created by new businesses being born as well as how many jobs were lost by businesses being closed. These small businesses are not covered by the actual payroll survey and it boils down to a calculated guessing game. These numbers are added to the actual survey numbers to provide the final tally. The internals of Friday's report were ugly. Service companies only added +64,000 jobs and well below the +232K reported in April. Also, March jobs were revised down by -24,000 to +122K from +146K. Manufacturing payrolls fell again as they have for seven of the last eight months. April's loss in manufacturing was revised even higher to -9,000.

The people in the administration tasked with facing the reporters tried to focus attention to a drop in the unemployment rate to 5.1% as strong evidence of a rising economy. Sorry, Ms Chao, but the unemployment rate fell not because of hiring but from a rising percentage of dropouts. Those are workers who have given up on finding a job or have exhausted their benefits. They are removed from the total "workforce" numbers making the unemployment ratio better than is actually is. Elaine Chao tried to claim that 5.1% was the low for the last decade but Ron Insana reminded her that 3.9% was the low during the dot com bubble. Gotcha!

The May Jobs number was the lowest monthly jobs growth since Dec-2003. Unfortunately wage growth is expanding rapidly with wages up +3.3% in the last six months.

By Friday morning the one-and-done crowd had morphed into a two-and-through stance and by Friday afternoon the majority of analysts were returning to the 4% fold. Several Fed heads had been approached and none were seen ready to rebut Fisher or agree with him. The gag order had gone out and Fed governors were avoiding the microphone. Edward Gramlich was trapped into a couple of hurried comments and after several refusals to answer he finally said he did not know what inning the Fed was in and then bolted for the safety of closed doors. Another analyst commented that Greenspan may have to penalize investors for Fisher's remarks by using stronger language to reemphasize his continued measured approach. Greenspan was rumored to be speaking Sunday night and the bond market raced to square up positions as they neared Friday's close. The actual time of his speech is 9:PM ET on Monday night when he does a remote video speech to Beijing China. Unfortunately he is going to do a Q&A session after the speech and you can bet Fisher's baseball analogy will get its fair share of coverage. Translators should also have their hands full as Greenspan will definitely try to set the record straight without actually saying anything definite. Considering how hard he is to understand in English I would hate to see how the translation comes out in Chinese. Greenspan will speak again on Thursday when he gives testimony to the joint economic committee in Washington and you can bet he will be grilled by the members on live TV.

We also got the ISM Services number on Friday and like the earlier ISM number it fell unexpectedly to 58.5 from 61.7 in April and well below consensus estimates of 61.0. This was the second consecutive monthly decline. Export orders were mostly responsible for keeping it from being much lower. Exports rose to 62.0 from 52.5 and were the only component with a decent gain of more than a point.

Bonds saw some serious buying with yields on the ten-year notes falling to 3.81% shortly after the open. This was a 15-month low and appeared to show substantial worry by investors that the economy was slipping fast. Fortunately there was a key reversal of fortunes about 10:AM and the yields rose to close at 3.98%. Still under 4% as they had been for three days but it was a sizeable sell off. The 30-year bond yield fell to 4.15% a level that matched the June-2003 dip and an all time low for that issue. Given the effort by Greenspan to push rates higher this has got to be giving him some serious heartburn. The housing bubble he has been battling got a serious boost with rates back at decade lows. Tough to cool off that sector when the fires are being fueled by 4% money.

The Fed has a real challenge ahead for the June meeting. The economy is clearly slowing but rates are still well below where Greenspan wants them. Does he continue the measured pace language or sharpen the tone to offset the Fisher comments? The ISM on Wednesday came in at 51.4 and just enough to give him one more free rate hike. The Fed has never hiked rates with the ISM under 50 and odds are very good the June number, due out on July-1st, could break that 50 level. With the FOMC meeting on June-28th they can legitimately take another hike with ISM and Jobs not until the following week.

Offsetting the dismal economy blues has been a two-week spike in copper prices. Copper rose to $1.55 on Friday and levels not seen since 1989. If bull markets have a copper roof then we are very close to a strong rally. The $1.50 ceiling we have seen in 2005 was shattered and the most likely direction from here is up. According to analysts the recent copper inventory levels have fallen to 30-year lows. With 400 pounds of copper in every new home a new building cycle powered by low rates should push those inventory levels even lower.

Another commodity soaring this week was oil. The July contract closed over $55 and +$7 from its lows last week. Falling inventory levels of heating oil, multiple refinery outages and global production problems continue to push prices higher. Two refineries producing over 500,000 bbls each per day were hit with problems. Prices were also fueled by comments from the U.S. Energy Information Association director John Cook. He said oil will set new all time highs soon and prices could average over $60 before the year is out. He said rising demand will easily burn through the current inventory and production was not increasing as hoped. Russia said that their production would only increase by +3% in 2005-2006 compared to +11% two years ago. The problem is declining production in existing wells and insufficient capital to increase exploration and completion of new wells. Putin is feeling the cash squeeze after his Yukos takeover. Nobody wants to play in his backyard and risk having their toys confiscated. Three OPEC countries have been falling behind their production quotas due to declining output from existing wells. Saudi, Kuwait and Iran are trying to cover the shortage according to the EIA. This confirms in part the analysis released by FRO last week indicating that oil shipments from OPEC nations were decreasing. FRO is a holding company primarily engaged in operating oil tankers. It was also reported that a new record in jet fuel consumption was set in May. With the summer travel season upon us both gasoline and jet fuel consumption should rise. There was also a long-term weather report earlier in the week that predicted a stronger than normal hurricane season in the Caribbean. Last year's hurricanes removed 40 million bbls from production and helped send prices sharply higher. A repeat of that calamity this year could be a serious problem given the already tight supplies. If you took my advice to add to positions when oil dipped under $50 you had plenty of time to act in mid May and it is very doubtful we will see those levels again this year.

On Sunday there will be a movie on TV called Oil Storm. This is a docudrama suggesting what would happen given several very plausible events. Oil prices could rise to $150 a bbl according to the film if a hurricane hit Port Fourchon LA crippling production in the gulf. The nation turns to Saudi for help but terrorists chose that time to cripple output given the emergency demand. (check out Fox for times in your area)

Copper Chart - Daily


Oil Chart - Daily


The Nasdaq spent three days at 2095 resistance, which dates back to multiple breakout attempts in the first quarter. This was a very strong rebound for techs given the sub 1900 dip in late April. The Nasdaq has seen gains in 19 of the last 23 days. Much of the gains came on the back of the SOX, which rebounded sharply to strong resistance at 440 and a long jump away from its 376 low in late April. Intel was a strong supporter of the SOX with gains on 15 of the last 16 sessions. Unfortunately the wheels may be ready to come off this chip rally. Nearly all analysts feel the chips have come too far too fast and far too early in the cycle. The SOX lost nearly -6 points on Friday and there is a serious pothole ahead. Intel gives it's mid quarter update on Thursday night and while they are not expected to cause waves there is always fear of the unknown. A late report out on Friday showed that laptops/notebooks outsold desktop PCs in May for the first time ever. Another analyst said channel checks showed those sales rising rapidly due to the wide acceptance of the Wi-Fi standards and proliferation of hot spots. It was estimated that portable computers could post a 3:1 margin over desktop deliveries by 2006. This is very good news for Intel and Dell. Intel has the largest share of the laptop market and that share is very high margin. It stands to reason that Intel could be reaping the profit rewards of this new trend. For that reason I would not bet against Intel next Thursday but I would not bet on them either. They have returned to very strong resistance at $28 and it will take a strong report to push them higher.

Despite the Nasdaq dive on Friday the markets are not in that bad of shape. The Dow is the weakest link this time around and ended the day clinging to 10460 as support. I mentioned on Tuesday night that without a catalyst the path of least resistance was down and I would short Dow 10550 and S&P 1195-1200 if given the chance. Well the catalyst came with the Fisher comments just before 10:00 on Wednesday and gave us an excellent short entry at 1203-1205 on the S&P. The futures traders in the Futures Monitor loaded up at 1205 on Friday and are looking good this weekend. The Dow is hard to use as a market indicator this week because of the volatility within its 30 stocks.

A better view is seen using the Russell-2000 and the Wilshire-5000. The Russell failed at 625 resistance but did not fail far with a 620 close. The Russell has been uncharacteristically strong for an early summer. The rebound to 625 put it just a strong week away from a potential break to test the highs. The Wilshire-5000 came within rock throwing distance of 12000 and its resistance highs. Both of these indexes suggest the market breadth is much stronger than the Dow/Nasdaq would suggest.

Russell Chart - Daily


Wilshire 5000 Chart - Daily


While I have not entirely lost my bearish view there is a lot of bullishness building in the market despite the calendar. The selling on Friday was due in part to simple profit taking given the three-week rally. Most of that rally was built on short squeezes prompted by sudden news events. Still any way you look at it the markets have held up rather well given the circumstances.

For next week the challenge is going to be the Fed and Intel. Greenspan has at least two chances to blame Fisher's comments on irrational exuberance from the new kid on the block. He will likely restate the measured pace party line and could punctuate it with some sharper comments just to remind everyone who is really in control. This means there is substantial event risk surrounding the Greenspan appearances. Everyone has their party hats on to celebrate the end of rate hikes and Greenspan could easily cancel the party. Secondly the Intel update needs to be very strong to push techs higher. Any inline comments could be seen as insufficient justification for further tech buying. The Intel bar has been set high after the news on notebooks this week. Everyone will be expecting a strong upward revision and I doubt they will be happy if Intel says desktop components are piling up in the warehouse.

There are no material economic reports next week so we will have to get by on a daily rehash of the ISM/Jobs while waiting for Greenspan's testimony and Intel's update on Thursday. I am neutral on the market for direction. It still feels heavy to me but the natives are getting restless. I plan on remaining short under 1205 but would go long on a break over that level. 1205 has become my short/long indicator and that keeps me from having to make a trading decision over and over again as the week progresses. I only have to worry about one number and then follow the market from there. The challenge I see is the lure of only one more rate hike. Historically investors like to buy the market with only one rate hike to go. Up until Wednesday that was projected to be somewhere in the November time frame. Now they have been promised an early Christmas in June and any reference to a bag of coal instead of the desired end of hike scenario is not going to sit well. Cash is always a position. Definitely enter passively and take profits quickly.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
TK None
WLP  

New Calls

Teekay Shipping - TK - close: 44.21 chg: +0.96 stop: 42.45

Company Description:
Teekay Shipping Corporation transports more than 10 percent of the world's sea-borne oil and has recently expanded into the liquefied natural gas shipping sector. With a fleet of approximately 145 tankers, offices in 14 countries and approximately 5,500 seagoing and shore-based employees, Teekay Shipping Corporation provides a comprehensive set of marine services to the world's leading oil and gas companies, helping them seamlessly link their upstream energy production to their downstream processing operations. Teekay's reputation for safety, quality and innovation has earned it a position with its customers as a premier marine midstream company. (source: company press release)

Why We Like It:
Crude oil has turned in a strong week with a rise to $55 a barrel. This is not only fueling bullish breakouts in the oil stocks but in the oil tankers as well. Shares of TK bucked the market decline on Friday and broke out over its three-month trendline of lower highs. The stock also pushed past its simple 50-dma and closed right on its 200-dma. Thanks to a recent WSJ article, it's widely known that many of the tanker stocks are targets for the bears due to a seasonal slow down during the summer months and new tankers coming online increasing supply. This scenario may hold true normally but the rising price of crude has meant stronger profits for the industry. We like the bullish breakout on Friday but we want to see some confirmation. We'll suggest a trigger above round-number resistance at the $45.00 mark. Our entry point will be $45.05. Our target is the $49.50-50.00 range. More aggressive traders might want to look for a dip back toward the $43.00 region as an entry point.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 40.00 TK-GH OI=2433 current ask $5.00
BUY CALL JUL 45.00 TK-GI OI=5440 current ask $1.75
BUY CALL JUL 50.00 TK-GJ OI=3661 current ask $0.40

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 681 thousand

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Wellpoint Inc - WLP - close: 68.40 chg: +0.76 stop: 64.90

Company Description:
WellPoint, Inc. is the largest publicly traded commercial health benefits company in terms of membership in the United States. WellPoint, Inc. is an independent licensee of the Blue Cross and Blue Shield Association and serves its members as the Blue Cross licensee for California; the Blue Cross and Blue Shield licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.), Wisconsin; and through HealthLink and UniCare. (source: company press release)

Why We Like It:
Given the rising cost of healthcare it's no wonder that health insurance stocks have been out performing for a long time. That trend continues today. A number of health insurers bucked the market decline on Friday. WLP was one of them with a breakout to another new all-time high after a four-week sideways consolidation (and a 2-for-1 stock split). While it might seem odd going long a stock at its highs if we're expecting the market to pull back a bit we do like WLP's relative strength. If WLP does pull back we can use it as a bullish entry point. While we're willing to go long at current levels, you, the reader, can choose to wait for a possible dip in WLP. If so the first level of support looks like the $66.00 region but we're going to give WLP a very wide stop at $64.90, since the $65 level would be round-number support. Our target is the $74-75 range before its late July earnings report. Other health insurance stocks we like and are considering as potential plays are Cigna (CI) and Aetna (AET).

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65.00 WLP-GM OI= 56 current ask $4.80
BUY CALL JUL 70.00 WLP-GN OI=248 current ask $1.70

Picked on June 05 at $ 68.40
Change since picked: + 0.00
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million
 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - close: 55.09 chg: -0.80 stop: 52.95 *new*

If you're feeling bearish then the market's momentum oscillators are looking pretty good as most of them are beginning to turn negative after days in overbought territory. If you're feeling bullish then a brief pull back is just what the market needs before scaling to new relative heights. Right now we're beginning to think that the market correction we've been expecting the last week or two may finally be upon us but until the DJIA breaks down under support near the 10,400 level and its 200-dma's we'll be somewhat hesitant to pile on a bunch of new bearish positions. At the same time, if we're expecting more of a dip then this isn't the best place to consider bullish positions either. We would watch shares of AIG for a pull back toward the $54.00 level, which should coincide with its four-week trend of higher lows (see chart). We are going to raise our stop loss to $52.95 to reduce our risk should the markets drop too much. It is worth noting that Friday's decline in AIG was fueled on volume that was about half the norm, which would probably lend more strength to the bullish camp. AIG's P&F chart remains bullish and points to a $69.00 target. Our target is the $59-60 range. A bounce from $54.00 might be the next attractive bullish entry point. In the news on Friday S&P downgraded AIG's debt rating over concerns the company will need to raise its reserve levels.

Suggested Options:
We are not suggesting new bullish positions at this time. Wait for a bounce from the $54 level. If this occurs we like the July calls.

Picked on May 26 at $ 55.05
Change since picked: + 0.04
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million

---

Caterpillar - CAT - close: 93.97 chg: -1.21 stop: 89.99

Industrial machinery stocks got even more positive analyst comments on Friday and CAT was labeled with a new "buy" rating. The analyst comments were focused on rising profit margins for the group with an expectation for falling material costs yet rising prices for the finished product. Earlier this week a Merrill Lynch analyst issued positive comments on the industry as well. Yet even a new "buy" rating wasn't enough to stop CAT from following the DJIA lower during Friday's market pull back. We remain bullish on the stock but the momentum oscillators are definitely looking tired. We would expect shares to pull back toward the $92.00 level near its simple 100-dma. Until we see a bounce we would not suggest new bullish positions. CAT's P&F chart is bullish with a $115.00 target. Our target is the $99.25-100.00 range, which coincides with the inverse/bullish head-and-shoulders pattern.

Suggested Options:
We are not suggesting new bullish positions at this time. Wait for a bounce from the $92 level. If this occurs we like the July calls.

Picked on May 18 at $ 92.35
Change since picked: + 1.62
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

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Career Education - CECO - close: 34.82 chg: -0.62 stop: 32.45

The market's decline on Friday appears to have short-circuited CECO's minor breakout over its simple 100-dma. The stock remains stuck in a sideways consolidation between $34 and $35.50. Traders can watch for a bounce from the $34.00 level as a new bullish entry point but we would be hesitant to initiate new long positions. CECO may drop back to retest the simple 50-dma near $33.25 if the major averages pull back too quickly. It is true that CECO's P&F chart is bearish but if the stock can trade over the $36.00 level it will produce a new bullish buy signal/reversal. Our target is the $38.50-39.50 range.

Suggested Options:
We are not suggesting new bullish positions at this time. We're going to watch to see if CECO bounces from the $34 level or not.

Picked on May 23 at $ 35.24
Change since picked: - 0.42
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million

---

Rockwell Collins - COL - close: 49.22 chg: -0.32 stop: 44.95

In spite of the market weakness on Friday both COL and the defense sector indices remain close to their recent all-time highs. However, the upward momentum has definitely stalled and hopefully the group (and COL) will correct as we expect them to. We like COL for its relative strength but don't want to chase it near its highs and under round-number resistance at the $50.00 level. Our plan is to buy a pull back toward technical support near the 100-dma. If you look at the chart below you'll see that investors have been consistently buying dips to the 100-dma for months. We (the newsletter) are going to use a trigger to open the play. Our plan would be to buy calls on a pull back into the $46.25-45.50 range. You, the reader, do not have to immediately go long on a pull back. Instead we would suggest waiting for signs of a bounce from the 100-dma before initiating new bullish positions. If we're triggered our short-term target will be the $50.00 level although the bullish P&F chart points to a target closer to $70.

Suggested Options:
If COL pulls back and hit our entry point we'll suggest the July calls.

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

---

Reynolds American - RAI - cls: 82.61 chg: -0.21 stop: 78.75 *new*

Shares of tobacco giant RAI continue to consolidate sideways between $82.00 and $83.30. Momentum oscillators have naturally flattened out and are starting to look negative. We would not suggest new bullish positions at this time. Instead traders can watch for a dip and bounce from the $81.00 level or a momentum-type entry point on a breakout over $83.40. We would prefer to buy a dip and if the major averages pull back too sharply we could see RAI slip toward the $80.00 level, near its simple 50-dma. Monday should be interesting as RAI issued a press release on Friday afternoon after the closing bell. A federal judge has dismissed an antitrust, price-discrimination lawsuit again RAI by some of its wholesalers. This is obviously good news but we don't know if it can shock RAI out of its trading range. The P&F chart remains bullish with a $90.00 target. Our target is the $85-86 range. We're going to cinch up our stop loss a bit to $78.75.

Suggested Options:
We are not suggesting new bullish positions at this time. Yet if RAI does bounce from the $81 region we would look to buy the July calls.

Picked on May 16 at $ 81.31
Change since picked: + 1.36
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

---

United Technologies - UTX - cls: 106.25 chg: -0.84 stop: 102.45

We've been suggesting that readers watch for a pull back toward the $105 level and now it looks like UTX may finally provide one. Momentum oscillators are reversing course and UTX has broken short-term support at its 10-dma. We are expecting a drop back toward the $105.00 level. Actually, the way the market tends to overreact we'd suggest patience and look for UTX to dip toward the $104 level. That's where traders bought the dip back on May 20th. Buying a bounce from either level sounds like a good plan to us. The bullish P&F chart points to a $131 target. We are targeting a move into the $114.00-115.00 range.

Suggested Options:
We are not suggesting new bullish positions at this time. Yet if UTX does bounce from the $105-104 region we would look to buy the July calls.

Picked on May 23 at $106.25
Change since picked: + 0.00
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million
 

Put Updates

MedcoHealth Sol. - MHS - close: 50.34 change: -0.42 stop: 52.21

We remain bearish on MHS but continue to suggest that readers look for the stock to trade under $49.50 before initiating new bearish positions. If you missed the original play we listed MHS as a put candidate on May 31st after the stock broke down from its wedge-like pattern and broke down under technical support at its 50-dma. Yet shares had stopped at the $50.00 mark so we suggested a trigger at $49.90. MHS dipped below our trigger on June 1st opening the play but followed up with a bounce. Fortunately, that bounce has stalled under former support at the 50-dma. This is good news for the bears but we want to see some confirmation that the trend has changed. If MHS trades back under $49.50 we suggesting buying puts and target a drop into the $45.50-45.00 range. We do want to caution traders that the simple 100-dma could be a problem for the bears and that resides near $47.50. The P&F chart is currently bearish and points to a $44 target.

Suggested Options:
If MHS trades under $49.50 we would suggest the July puts.

BUY PUT JUL 55.00 MHS-SK OI= 227 current ask $5.20
BUY PUT JUL 50.00 MHS-SJ OI=2403 current ask $2.00
BUY PUT JUL 45.00 MHS-SI OI=1694 current ask $0.55

Picked on June 01 at $ 49.90
Change since picked: + 0.44
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

United Thera. - UTHR - close: 49.13 chg: -1.37 stop: 51.26 *new*

Almost there! Once again UTHR has come relatively close to hitting our target in the $48.25-47.50 range. FRiday's intraday low was $48.50. We're encouraged because the breakdown under the $50.00 mark and its 50-dma appears to confirm that UTHR will trade lower - at least toward stronger technical support at its rising 100-dma (currently near $47.00). Volume on Friday's decline was well above average. We are not suggesting new plays at this time. Given Friday's weakness we're expecting UTHR to hit our target relatively soon. However, more conservative traders may want to seriously consider exiting here. We are going to lower our stop loss to $51.26, placing it above last week's high.

Suggested Options:
This close to our target we're not suggesting new bearish plays.

Picked on May 24 at $ 53.38
Change since picked: - 4.25
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 452 thousand
 

Dropped Calls

Federated Dept Stores - FD - cls: 67.90 chg: -1.19 stop: 64.45

Target achieved. FD may have closed lower on the day but not before trading to an intraday high of $69.83. That's enough for us as our target was a move into the $69.50-70.00 range. The failed rally under the $70.00 level doesn't bode well for anyone who has not yet exited. While there is support near the $67.00 level it would not surprise us to see FD retrace back toward the $65 region. We're closing the play at $69.50.

Picked on May 17 at $ 66.60
Change since picked: + 1.30
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million

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Wynn Resorts - WYNN - close: 55.02 chg: +1.62 stop: 44.99

Wow! We continue to be impressed by WYNN's strength. An analyst upgrade to "out perform" by CIBC on Friday morning sent shares of WYNN gapping higher on Friday. We were expecting the stock to pull back as shares looked short-term overbought on Thursday. We mentioned that WYNN could have been experiencing a short squeeze and the upgrade on Friday probably had some bears panicking. Our target was the $57.00-58.00 range and WYNN hit an intraday high of $56.90 on Friday morning. We realize that WYNN missed our target but that's awfully close. We're closing the play here at $55 and suggesting that readers consider doing the same. The stock looks way too short-term overbought and we'd hate to see profit taking drag WYNN back toward round-number support at the $50.00 level. We'll be sure to keep an eye on WYNN for another bullish entry point now that the stock has broken its three-month bearish trend.

Picked on June 01 at $ 49.96
Change since picked: + 5.06
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 2.2 million
 

Dropped Puts

None
 


Trader's Corner

Range Bound or Trending?

Earlier this year, a Traders Corner article discussed favorite indicators and how those might change as the market switched from range bound to trending and back again. When markets trend, oscillators such as stochastics become less useful and moving averages become more important. If markets trend higher, for example, a stochastics sell signal might hint at a pullback but produce only sideways consolidation. Taking such countertrend signals can deplete trading accounts, so it's important to recognize when a market might transition into a trending mode or out of it. This article discusses several ways in which a range-bound or trending market might be identified.

One easy axiom alerts day traders to a possible change in tenor. That axiom states that small-range days tend to follow large-range days, at least on the major indices. Obviously, that axiom does not always hold true. Nevertheless, day traders might watch for the possibility of a range-bound day after a day that trended strongly higher or lower. Thursday's doji day on many indices was an example of this axiom holding true.

Other tactics are not always so easy to identify or express, but the next one proves almost that easy. The same observations that help traders identify new entries in a trending market can also pinpoint moments when the market transitions from trending to range-bound or vice versa.

Many technicians use a key moving average to identify buy or sell signals in a trending market. If that moving average slopes higher or lower and prices bounce up or down from it, prices trend, too. A 100-ema often prompts such bounces, with experimentation needed to find the appropriate time frame to watch. If markets trend higher, buy signals that come in conjunction with tests of an appropriate moving average might be taken, but sell signals ignored. If a market trends lower, sell signals might be taken if they come in conjunction with tests of the underside of appropriate averages, but buy signals ignored. The week of May 23-27 provided many examples of trending markets. The SOX was one.

Annotated 10-Minute Chart of the SOX:

The simple observation that a market bounces up or down from a sloping MA identifies a trending market as well as helps to identify new entries. In addition, the market might be transitioning from a trending one to a consolidating one if prices stop bouncing from the key moving average. Although prices sometimes transition directly from trending one direction to trending another, those V- or inverse V-shaped reversals probably don't happen as often as the transition from trending to consolidation.

The SOX provides a couple of examples of such a possible change in trend in the making. Since January 2004, the SOX has been repeatedly testing its 200-week simple moving average from below. With only one-week exceptions, one in January 2005, the SOX has not produced weekly closes above that moving average all that time, until last week. In fact, the SOX has not traded consistently above that average since August 2001. This week will mark a first time that the SOX closed above that average for two weeks in a row in that time. Some might note that this week's candle, a doji-like candle, doesn't yet inspire great confidence in the breakout, so that MA might continue to be watched carefully.

If there had been a little more confidence in the breakout, the second weekly close above the 200-week sma would be the simplest of signs that the SOX's long-term trend lower might be ending. Some choppiness--as visible on a weekly or monthly basis--might ensue as the SOX transitions from that long-term trending behavior below the 200-week sma into consolidation or a new uptrend. In fact, this week's doji-like candle was representative of just such choppiness.

Of course, different time frames provide different viewpoints. From May 11, the SOX has been bouncing from tests of the 15-minute 100/130-ema's. When that stops happening, something that has not yet occurred, although the SOX was testing those averages at the close Friday, the SOX might be transitioning out of its shorter-term trending-higher behavior. If the SOX starts crashing through those averages Monday morning, the short-term ascending trend might be changing and those who had been managing SOX-related trades using methods appropriate to a trending market might step back, watching for a while, prepared to switch gears if the SOX were to consolidate or employ trending techniques again if it instead were to trend lower.

In both instances, a longer-term trending-lower behavior with respect to the 200-week sma and shorter-term trending-higher behavior with respect to the 15-minute 100/130-ema's, a change in behavior near those key averages will help identify a transitioning from trending behavior to consolidating behavior. The same trading vehicle that works best for trade entries in a trending market helps identify a transition from trending to range-bound behaviors or vice versa.

Not all traders watch nested Keltner channels, but those who do are also given clues that markets will be range-bound for a time. This often occurs when those channels line up inside each other, with their basis lines in close proximity to each other. The OEX showed this type of behavior on its 15-minute chart Thursday, ahead of Friday's economic numbers, for example, but the Nasdaq also shows an example on a daily chart.

Annotated Daily Chart of the Nasdaq:

When nested Keltner channels settle into such an equilibrium position, prices might be range bound or move in a choppy fashion. Oscillators such as stochastics sometimes prove helpful in such markets, but they unfortunately sometimes flatten, too, when such equilibrium positions occur. Equilibrium on nested Keltner channels suggests that profits need to be taken quickly, at channel boundaries, if trades are entered at all. Such times of equilibrum often prove to be a time of transition between one trending movement and another.

The presence of consolidation patterns such as rectangular patterns, "p" accumulation patterns or "b" distribution patterns also signal range-bound trading. A last--and, for some, more clear-cut--indication of whether markets are range-bound or trending is the average directional index or ADX. Charting services construct the ADX by combining two values measuring buying strength and selling strength and smoothing the data by taking a moving average. Developed by J. Welles Wilder, this indicator oscillates between 0 and 100, measuring the strength of a trend. Some want to see an ADX level above 20 or 25 before they consider a market trending; others want to see higher values, perhaps as high as 35 or 40. One source uses transitions from below 20 to above 20 as a sign that a trend has begun and transitions from above 40 to below as a sign that a trend's strength may be waning and range-bound trading might begin. Values indicating a strong trend may vary according to the security being watched, so get to know the values that indicate a strong trend in the security you want to trade.

Whatever benchmark you decide works best for the security you trade, watch for times when the ADX transitions from values below that level to values above it as a sign that a trend is strengthening.

Annotated Daily Chart of GOOG:

The ADX line does not indicate whether the trend is an ascending one or descending one, but only whether it's strong or weak and whether it's growing stronger or weaker. Divergences can be useful to watch, too. However, the ADX possesses two other components that do help to assess whether selling or buying pressure strengthens or weakens. That's the selling and buying pressure lines mentioned earlier. Some refer to these positive and negative directional indicators as the +DI (positive) and -DI (negative) indicators. ADX is always the bold line, but different charting services color these other lines differently. As should be obvious from GOOG's chart, QCharts colors the buying pressure or +DI line orange and the selling pressure or -DI line blue.

As with the ADX line itself, these lines can be watched for signs of divergence. A rising trend with bearish divergences showing up in the price/+DI line might offer a warning of waning strength in the trend. Some also suggest using crossings of the +DI and -DI line as buy and sell signals, but as GOOG's chart demonstrates, these crosses could soon whipsaw traders out of their accounts when markets are range bound.

As with all other indicators, ADX requires some time spent becoming familiar with the way this indicator works on the securities a trader most often watches. How can this time be found? By not trading when markets are choppy and range bound, as several techniques described in this article indicated might be true Thursday. Instead, spend those days paper-trading and investigating this tool and others. Avoid giving your money over to your broker as you're repeatedly whipsawed out of trades.
 

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

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