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.
Teekay Shipping - TK - close: 44.21 chg: +0.96 stop: 42.45
Why We Like It:
BUY CALL JUL 40.00 TK-GH OI=2433 current ask $5.00
Picked on June xx at $ xx.xx <-- see TRIGGER
Wellpoint Inc - WLP - close: 68.40 chg: +0.76 stop: 64.90
Why We Like It:
BUY CALL JUL 65.00 WLP-GM OI= 56 current ask $4.80
Picked on June 05 at $ 68.40
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.
Picked on May 26 at $ 55.05
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.
Picked on May 18 at $ 92.35
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.
Picked on May 23 at $ 35.24
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.
Picked on May xx at $ xx.xx <-- see TRIGGER
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.
Picked on May 16
at $ 81.31
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.
Picked on May 23 at $106.25
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.
BUY PUT JUL 55.00 MHS-SK OI= 227 current ask $5.20
Picked on June 01 at $ 49.90
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.
Picked on May 24 at $ 53.38
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
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
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.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
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