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Daily Newsletter, Thursday, 06/09/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

No Decision Yet

No Decision Yet

OK, this is getting tiring--this was written two weeks ago and repeated last week--"For over a week now we've been in a relatively tight range that has worked its way slowly higher. Whenever we see price action chop its way lower or higher it's usually a sign that the move is running out of steam." Change the above to read three weeks now instead of one week. One look at the daily candles and it's like a blinking green and red light for go-stop-go-stop. There's been no follow through on an intraday basis as well as on a daily basis. This too shall pass and we'll get a couple of session's worth of a trend. In the meantime there's obviously a major battle between the bulls and the bears and I suspect whichever side blinks first will be a result to stops getting tripped and the move will likely be fast. Catch that move correctly and you'll probably get a good ride. On the other hand, if you're positioned wrong and you don't take the stop, you might feel some pain. Making it a little more difficult is the fact that different indices are giving very different pictures. It's a good time to lighten up your positions, trade lightly and quickly and don't get yourself caught stalled on the train tracks with a freight train barreling down on you.


Most of us have heard that when the mainstream media picks up on a trend, the trend is over. Typically magazines for example will publish a story about a trend after it is well recognized because that's what sells magazines. So by the time it's published, the trend has already reversed or is about to. Google (GOOG) has been on a tear and recently Bubblevision added a little "bug" on the screen in order to keep track of GOOG's price. This is highly reminiscent of the dot.com era and the result for GOOG might be the same. This is one powerhouse of a company but the hype around it is over the top, as is its valuation. Maybe it really is different this time but I have my doubts about that. Burn me once shame on you, burn me twice shame on me. Another area is the housing market. Have you noticed how everyone, and I mean everyone, is talking about the housing market. It has made prime time news. Time magazine ran an article titled "Home $weet Home: Why We're Going Gaga Over Real Estate." All of this attention almost always identifies the end of the trend, maybe not this week, but probably soon. The housing market needs to correct and wring out the total frenzy we're seeing around it and we can only hope that the air is let out of the balloon slowly but I'm afraid history is not kind in this regard. All bubbles pop, they don't fizzle.

So let's take a look at the charts and see what they say to us. As I mentioned, there's some confusion between the charts but we've got some pretty good levels to watch for confirmation which direction this market will head. Trade the direction of the break and in the meantime know that we're trapped in a relatively small range and it's making trading difficult.

DOW chart, Daily


It seems each time the bears or the bulls have the opportunity to run with the ball they decide instead to toss it to the other side. We're in the market's version of hot potato. Price continues to bounce up and down between resistance near the top of its down-channel and the April highs and support at its 200-dma. So again, support 10427) and resistance (10600) is easily identified (if not a little wide) and a break of either could get the market moving in that direction. The fact that stochastics is working its way down to oversold while price consolidates sideways is bullish.

SPX chart, Daily


The SPX has been slightly stronger than the DOW in that it has worked its way higher, versus sideways, while consolidating underneath its broken uptrend line. Like the DOW, the fact that stochastics is moving down towards oversold while price consolidates is typically bullish. Support is actually a little closer as far as signaling something bearish is starting--if SPX breaks below 1191, we could be starting something bigger to the downside. The upside is not quite as clear as far as identifying a break goes. The 60-min chart below shows the shape of the consolidation pattern and it's typically bearish.

SPX chart, 60-min


Drawing trend lines off the May 5th high has marked the highs and lows since that date. The last bounce failed to make it back up to the top trend line and that may be telling us something. But price did bounce off the lower line this morning and that's the support line to watch now--if we break below today's l191 low it could be good for a short trade that lasts more than a day.

Nasdaq chart, Daily


I have a headache after looking at this chart. The sellers certainly knew where to sell this index! The daily oscillators are hard over so we'll have to see how far this drops. The first support level is the uptrend line from October 2002 that price was able to recapture after falling below it in April. The 50% retracement of the March-April decline crosses this uptrend line at 2040 so watch this area for potential support.

SOX index, weekly chart


Sticking with the weekly chart of the SOX to give us a little longer term perspective also raises a warning flag for bulls since price has rallied up to the downtrend line from November 2004 which is the top of a potential flag pattern, and currently just above at 443 so only 5 points above today's closing price. The weekly stochastics is also hitting the top of its coiling pattern. The good news for this index is that it got back above its uptrend line (currently at 408) and its 200-wma (427) so support is fairly close.

BKX banking index, daily chart


The banking sector has been doing the same thing as the broader market by consolidating above support, in this case the broken downtrend line from December 2004. However, it's been struggling underneath its 200-dma so we know what resistance level this index needs to break through.

This morning started with all eyes and ears on what Greenspan had to say before the Joint Economic Committee, with investors hoping to get a clearer picture on the outlook for long-term yields, inflation trends and whether the current round of Fed tightening is nearing an end. While waiting with baited breath for Greenspans words of wisdom the Labor Dept. showed that initial claims fell 21K to 330K (consensus was 335K). This was a level consistent with gains of 175K per month in nonfarm payrolls and roughly in line with the White House's recent estimate of 178K.

As the morning wore on, there was some volatility depending on how Greenspan's remarks were evaluated. He said it is difficult to forecast what the "so-called neutral rate is," implying that it may be premature to set a deadline for an eventual end to Fed tightening. Greenspan has said that we may be close--all part of his doublespeak. While the Fed Chairman has said that the economy is on a "firm footing," he has also reaffirmed that benchmark interest rates may keep rising at a "measured pace," challenging the hopes of many that Fed tightening is nearing an end. He also stated a "bubble" in home prices for the nation as a whole does not appear likely. I want me a pair of them rose-colored glasses he's wearing.

As seen in the above chart for the SOX, chip stocks got a lift today, helped by the earnings report from National Semiconductor (NSM 21.67 +1.77). Despite an 18.2% year-over-year decline in Q4 revenues to $467M as well as forecasts that Q1 revenues will be flat to down 2% from Q4 levels, investors liked the 40% increase in NSM's net income and the declaration of a $0.02 cash dividend. SOX was also helped from a 2.2% surge in shares of Intel ahead of its mid-quarter update. Broad-based strength in Internet stocks, after Smith Barney initiated coverage on Yahoo (YHOO 37.45 +0.82) and Google (GOOG 286.31 +6.75) with Buy ratings, also contributed to technology's solid advance.

With regard to sector strength and weakness, Energy paced the way higher, taking full advantage of a surge in oil prices. Crude oil futures ($54.28/bbl +$1.74) soared 3.3% amid news that the first tropical storm of the 2005 Atlantic hurricane season forced some large oil companies to remove personnel from oil platforms. The sector was helped by reports that ChevronTexaco (CVX 56.04 +1.21) and Unocal (UCL 60.19 +1.72) have reached a proposed settlement with the FTC to clear the way for their proposed $16.4B merger. After a strong bounce last week, oil pulled back this week but it looks like only a correction to last week's strong rally. Today's rally may be part of the back and forth it will do for a little while but it looks like bullish price action.

Oil chart, June contract, Daily


Oil had bounced from just above its uptrend line from early 2004 and stalled at the midline of the up-channel that has contained price the past year and a half. We may see some back and forth consolidation to work off the overbought indicators, but the pullback looks corrective and the rally in oil is expected to continue once it's finished correcting.

Oil Index chart, Daily


As mentioned above, the increase in oil's price today gave the oil index a shot in the arm and boosted it up to the top of its longer term up-channel. This index looks ready for a rest so I would expect a pullback from here. The 50-dma at 459 should act as support now that it's been able to get back above it.

Transportation Index chart, TRAN, Daily


The Trannies have been a big disappointment this week. After giving a buy signal on its P&F chart at 3650, and climbing up to 3670, it's been all downhill since then. This now looks like it was a bull trap (suck in the bulls on a buy signal and then drop hard, trapping those who don't use appropriate stop loss control). After stopping at its 200-sma yesterday, price dropped further and bounced off its 200-ema but closed below its 200-sma.

Shipping Rates chart, Daily


This is a copy of a chart that shows shipping rates and how theyre collapsing. Of course as shipping rates collapse so will the Transports. And Transports gives us a heads up as to how the broader economy is doing. This is not the picture of economic health and is a reason why following the Trannies is important.

U.S. Home Construction Index chart, DJUSHB, Daily


As discussed at the opening, the housing market has been on fire--hot enough to fry shorts. But it needs to hold near its highs in any consolidation otherwise we might have another bull trap in the making. The daily oscillators are bending over so the depth of any pullback will be telling. In the meantime, this is clearly in an uptrend.

U.S. Dollar chart, Daily


The US dollar is hugging the top of its parallel up-channel and it looks like it's headed higher. The recent pullback was corrective and the recent rally looks like it might reverse the daily oscillators. There's also a likely chance that the dollar will consolidate further before heading up again but any consolidation would also be a strong indication that another rally leg is coming. The upside Fib target is just above $89 before it could see a more significant pullback.

Gold chart, June contract, Daily


As the US dollar pulled back, gold rallied. It rallied up to its downtrend line from March and got close to retesting its broken uptrend line from early 2004. That was also the location of its 50-dma. Like the dollar we could see gold consolidate a little while before an attempt at its 200-sma, currently at 430.35 so about +$7 from its current position. We'll be switching to the August contract next week which closed at 426 today.

Sector action was mostly green today, led by the oil service index and the other energy indexes. The Financial sector also finished on a strong note. Health Care was also a bright spot for investors, getting a boost from continued momentum in HMOs (i.e. UNH, WLP, AET, CI and HUM) and strength in Biotech, after a Phase II clinical trial showed Rituxan was effective in treating rheumatoid arthritis (i.e. BIIB and DNA). The Materials sector, however, was the worst performing sector, as a strong dollar weighed on dollar-denominated commodities across the board.

Overcapacity concerns at Louisiana Pacific (LPX 23.56 -1.38), which prompted Smith Barney to downgrade LPX to Hold from Buy, also weighed on the sector. The Industrials sector also struggled on the day, after Morgan Stanley downgraded United Parcel Service (UPS 71.25 -1.11) and lowered its earnings estimates for FedEx Corp. (FDX 87.60 -2.10), citing higher fuel costs and competitive domestic parcel pricing.

Tomorrow will be relatively quiet as far as economic numbers go. We'll get Export and Import prices and Trade Balance numbers at 8:30 and then the Treasury Budget at 2:00, none of which should appreciably move the market. We'll have to see how the cash market reacts to the INTC earnings news. The reported that their Q2 gross margin is expected to be about 57% versus prior guidance of 56%, and Q2 revenue will be in the $9.1B-$9.3B range versus prior guidance in the $8.6-9.2B range. Both of these new estimates are better than previous estimates which is good news, right? That's why INTC sold off from its closing price of $27.68 down to $27.29 at its after-market close. It was a sell the new event since INTC had rallied into its earning's report. But equity futures are essentially flat in after hours so we'll have to see if the cash market has anything to say about INTC's news.

The market continues to be very challenging to trade on a short term basis because there's no follow through. Traders need to take profits quickly otherwise they've been giving them back. One look at the daily chart shows you that we've gone essentially nowhere for 3 weeks now. That will change but for the time being definitely take profits quickly!
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
CB None
EXP  
OXY  
TOT  

New Calls

Chubb Corp - CB - close: 84.95 change: +1.32 stop: 82.49

Company Description:
Founded in 1882, the Chubb Group of Insurance Companies provide property and casualty insurance for personal and commercial customers worldwide through 8,000 independent agents and brokers. Chubb's global network includes branches and affiliates throughout North America, Europe, Latin America, Asia and Australia. (source: company press release)

Why We Like It:
Insurance stocks have been a pocket of strength in the markets lately and CB has not been left behind. The stock has been consolidating its late April breakout over the last five weeks and now looks poised to breakout over resistance at the $85.00 level. The Point & Figure chart shows a bullish catapult breakout pattern that points to a $107 target. We're not that optimistic. Instead we suggest traders use a trigger at $85.05 to catch any breakout over resistance at the $85.00 level. Our short-term target will be the $89.50-90.00 range. We do not plan to hold over the stock's late July earnings report.

Suggested Options:
We are suggesting the July calls but that only gives us about five weeks. More conservative traders may want to consider the October calls.

BUY CALL JUL 80.00 CB-GP OI=1223 current ask $5.30
BUY CALL JUL 85.00 CB-GQ OI= 989 current ask $1.60
BUY CALL JUL 90.00 CB-GR OI= 267 current ask $0.25

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.2 million

---

Eagle Materials - EXP - close: 90.45 chg: +1.92 stop: 86.95

Company Description:
Eagle Materials Inc. is a Dallas-based company that manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates. (source: company press release)

Why We Like It:
A bear could easily argue that EXP is looking a bit overbought and extended here but as a bullish momentum play the stock is showing lots of strength. The company must be doing plenty of business given the current homebuilding boom. We like how EXP broke through resistance near the $87.00 level and then pulled back to retest broken resistance at $87 as new support. The fact that the stock and the options tend to have lower volume than we like makes this a bit more aggressive for us. Traders need to keep that in mind. The P&F chart looks very bullish as it points to a $124.00 price target. We're going to suggest buying calls at current levels and target a move in the stock toward the $97-99 range.

Suggested Options:
We are suggesting the October calls although July strikes are available.

BUY CALL OCT 85.00 EXP-JQ OI= 65 current ask $9.00
BUY CALL OCT 90.00 EXP-JR OI=252 current ask $5.70
BUY CALL OCT 95.00 EXP-JS OI= 20 current ask $3.80

Picked on June 09 at $ 90.45
Change since picked: + 0.00
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 134 thousand

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Occidental Petrol. - OXY - close: 75.51 chg: +2.12 stop: 71.95

Company Description:
Occidental Petroleum Corporation is a world leader in oil and natural gas exploration and production and a major North American chemical manufacturer. (source: company press release)

Why We Like It:
We like how the oil sectors have pushed through resistance at the top of their descending channels and the group could be set for another leg higher just as the summer driving season is upon us. With that in mind we are drawn to OXY who is a relative strength leader in the sector. Shares are trading very close to new all-time highs here over resistance at the $75.00 level. Again, bears could argue that OXY looks overbought but given the stock's history and current out performance we're willing to buy the breakout with a stop loss under the recent low. The P&F chart shows a double-top breakout buy signal that points to a $98 target. We would go long here at current levels with a short-term target in the $79.75-80.50 range. Depending on your risk profile traders can watch OXY for a pull back into the $73-74 range as a new entry point or wait for shares to trade back over the $76.00 level before initiating new positions.

Suggested Options:
We are going to suggest the August calls although July strikes are available.

BUY CALL AUG 70.00 OXY-HN OI=7387 current ask $7.40
BUY CALL AUG 75.00 OXY-HO OI=4966 current ask $4.10
BUY CALL AUG 80.00 OXY-HP OI=6791 current ask $1.90

Picked on June 09 at $ 75.51
Change since picked: + 0.00
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.7 million

---

Total S.A. - TOT - close: 114.00 chg: +1.21 stop: 110.95

Company Description:
Total is a leading multinational energy company with 111, 401 employees* and operations in more than 130 countries. Together with its subsidiaries and affiliates, Total is the fourth largest publicly-traded oil and gas integrated company in the world**. Its businesses cover the entire oil and gas chain, from crude oil and natural gas exploration and production to the gas downstream (including power generation), transportation, refining, petroleum product marketing, and international crude oil and product trading. Total is also a world-class chemicals manufacturer. (source: company press release)

Why We Like It:
If you like the oil sector but you don't feel like chasing a new high in the case of our new OXY play then consider TOT as a potential bullish candidate. Like the oil-related sector indices shares of TOT have broken through resistance at the top of its descending channel. The stock has also broken through technical resistance at its 50-dma and 100-dma. We also like its bullish P&F chart, which currently points to a $139.00 target. We are willing to initiate bullish option positions at current levels but traders have a choice. You could look for a possible dip back toward the $112.00 level and buy a bounce. Or you could wait for TOT to clear what looks like minor resistance in the $114.50 to 115.00 range. Our target is the $119.50-120.00 region.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 110.00 TOT-HB OI=113 current ask $6.40
BUY CALL AUG 115.00 TOT-HC OI= 94 current ask $3.30
BUY CALL AUG 120.00 TOT-HD OI=206 current ask $1.50

Picked on June 09 at $114.00
Change since picked: + 0.00
Earnings Date 08/04/05 (unconfirmed)
Average Daily Volume = 857 thousand
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - close: 55.55 chg: +0.60 stop: 52.95

We're starting to believe that AIG is not going to dip toward the $54.00 level. Today's bounce appears to be a bounce from its five-week trendline of support (see chart). Thursday's gain could have also been fueled by news that embattled chairman M. Greenberg resigned from the AIG board last night. We are going to suggest new bullish positions here but traders may want to consider a stop loss tighter than our own at $52.95.

Picked on May 26 at $ 55.05
Change since picked: + 0.50
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million

---

Caterpillar - CAT - close: 97.45 chg: +0.87 stop: 92.49 *new*

CAT continues to show relative strength and came relatively close to our $99.25-100.00 target with today's high of $98.58. We are going to raise our stop loss to $92.49 but more conservative traders may want to use a tighter stop loss. One alternative would be a stop under the $94 level. Actually truly conservative traders may want to consider exiting here for a profit with CAT up over $5 from our entry point or at least taking partial profits off the table.

Picked on May 18 at $ 92.35
Change since picked: + 5.10
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

---

Rockwell Collins - COL - close: 48.57 chg: +0.04 stop: 44.95

No change here. We continue to wait for COL to pull back toward its 100-dma. Our suggested entry is a dip into the $46.25-45.50 range although we made adjust this range higher as the 100-dma keeps climbing.

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: 84.45 chg: +0.97 stop: 79.99 *new*

Shares of RAI continue to creep higher. The stock is actually lagging behind rivals Altria (MO) and Loews (LTR), who have both broken out to new highs (and incidentally look like potential momentum plays). RAI is nearing our target range in the $85.00-86.00 region so we are not suggesting new plays. Instead traders can prepare to exit or at least raise their stop losses. We're going to raise our stop to $79.99.

Picked on May 16 at $ 81.31
Change since picked: + 3.14
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

---

Teekay Shipping - TK - close: 44.49 chg: +0.12 stop: 42.45

No change here. We are still waiting for TK to breakout over resistance at its 100-dma and the $45.00 level. Our official entry point to buy calls is at $45.05. However, more aggressive traders may want to consider positions now given TK's intraday bounce of its 50-dma for the second day in a row.

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

---

United Technologies - UTX - cls: 106.02 chg: -0.20 stop: 102.45

UTX did dip below the bottom of its trading range at the $106.00 level but traders were there to buy the dip at $105.25. Readers might want to consider new bullish positions on today's intraday bounce or look for a little confirmation with a move over $106.50 or even $108.00.

Picked on May 23 at $106.25
Change since picked: - 0.23
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million

---

Wellpoint Inc - WLP - close: 69.06 chg: +2.35 stop: 64.90

It was a strong day for health insurers and WLP surged with a 3.5 percent gain off yesterday's dip toward support near the $66.00 level. This is a new high for WLP. We also note similar strength in shares of Cigna (CI) and Aetna (AET), which also look like momentum candidates. Our WLP target is the $74.00-75.00 range.

Picked on June 05 at $ 68.40
Change since picked: + 0.66
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million
 

Put Updates

ITT Industries - ITT - close: 94.73 chg: +1.16 stop: 96.01

Overbought or not stocks can always get more overbought and ITT may be headed that direction. The stock reversed from yesterday's breakdown after the company reaffirmed earnings toward the high end of previous guidance today. Volume was pretty strong on today's rally and that puts bears like us in danger. We labeled this a more aggressive, risky play and now that risk is looming closer. We're not suggesting new bearish positions at this time and conservative traders may want to bail out early.

Picked on June 08 at $ 93.85
Change since picked: + 0.88
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume = 581 thousand

---

MedcoHealth Sol. - MHS - close: 50.60 change: -0.68 stop: 52.21

We are encouraged by MHS' under performance today but remain wary. We are not suggesting new bearish positions until the stock trades under the $49.50 level.

Picked on June 01 at $ 49.90
Change since picked: + 0.70
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

Whole Foods - WFMI - close: 117.97 chg: +1.10 stop: 121.05

WFMI is seeing a little bit of a bounce here. Watch for a failed rally under the $120.00 level. Traders may want to wait for another drop below the $117.40 or even the $117.00 level before considering new bearish positions. Remember this is an aggressive, higher-risk play. A stock like WFMI can always become more overbought.

Picked on June 08 at $117.40
Change since picked: + 0.57
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 859 thousand
 

Dropped Calls

Career Education - CECO - close: 38.90 chg: +2.62 stop: 32.95

Target achieved. CECO soared for a 7.2 percent gain today on strong volume and traded into our target range of $38.50-39.50. Nearly all the major education stocks posted gains today

Picked on May 23 at $ 35.24
Change since picked: + 3.66
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million
 

Dropped Puts

None

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