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Daily Newsletter, Wednesday, 07/20/2005

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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

Convoy! "Ah, breaker one-nine, this here's Rubber Duck."

Convoy! "Ah, breaker one-nine, this here's Rubber Duck."

Buyers stood their ground and sellers continued their retreat in the wake of a "disappointing" quarter from Yahoo! Inc. (NASDAQ:YHOO) $33.40 -11.47% and Intel (NASDAQ:INTC) $27.44 -4.42%. A "sure thing" for bears in the NASDAQ-100 Tracker (QQQQ) $39.46 +0.71% didn't pan out as heavyweight Amgen (NASDAQ:AMGN) $81.17 +15.10% provided the counterbalance, and then some.

Keene Little may have called it with his "full moon" commentary in last night's Market Monitor (see bottom of today's Futures Monitor 07/19/05 10:55:58). "I just realized Thursday is the full moon and that day is within the +/- 2 day window of Fib July 25th (next Monday) turn date.....

What the heck? Moonbeam Keene!

Sing it! "It was the dark of the moon on the sixth of June and a Kenworth pullin' logs...." ("Convoy" by C. W. McCall)

The moon! The moon! Zoom, zoom, zoom!

U.S. Market Watch - 07/20/05


At 3,650 they were lookn' iffy, but a startling earnings release and upped guidance from Canadian National Rail (NYSE:CNI) $64.70 +7.47% (not a component of the TRAN) gave economic bulls renewed reason to be bullish the Dow Transportation Average (TRAN) 3,769 +3.64% to one of its biggest daily point gains in history.

Gains among the transports were fueled by the weekly EIA data. Crude Oil inventories, while down 900,000 barrels for the week ended July 15, begin to stabilize after two weeks of greater-than 3.5 million barrels draws. Unleaded gas stockpiles fell by 1.3 million barrels, while distillate inventories rose by 2.2 million barrels. Their ninth-consecutive weekly build!

But look! See the price inversion taking place with Heating Oil (a distillate) and Unleaded Gas futures? My analysis/review of weekly EIA inventory figures (see tonight's Option Market Monitor 05:20:59) would suggest that refiners may me switching back their focus to unleaded gas. Relief at the pump may be just around the corner!

Dow Transports (TRAN) - Daily Intervals


Something was "said" today that brought a ferocious amount of buying into the transports. I didn't hear Fed Chairman Alan Greenspan say anything different than what he has said in recent months. Yes, better than expected earnings reports from AMR Corp. (NYSE:AMR) $14.47 +1.68% and Continental (NYSE:CAL) $15.90 +1.27% were a positive for the group, but both made it clear that jet-fuel prices remain a heavy burden.


Broker Bear Stearns is an excellent fundamental shop and we have "benchmarked" a bearish call on the truckers from several weeks ago, which weighed heavily on the TRAN has it tried to make a move above 3,650.

But I think it was a strong Q2 report and upping of guidance from Canadian National Rail (CNI) that had sector participants rethinking things.

CNI posted a 30% in Q2 profits, saying net income came in at C$416 million, or C$1.47 per share. That compared with the net profit of C$326 million, or C$1.13 per share, in the second quarter of 2004. ($1 = C$1.22)

CNI upped its 2005 per-share earnings forecast, saying it now expects to report a profit 20% to 25% higher than C$4.34 a share in 2004. The company had previously forecast a 10% to 15% rise.

CNI's board also authorized a new share buyback program of 16 million shares.

Canadian National Rail (CNI) - Daily Intervals


A quick look at CNI would depict a stock where market participants found themselves surprised. I've tied in some point and figure chart observations with the above bar chart. For me, the $65 level is a "prove it to me" level, where a trade at $65 would have the stock breaking to new highs, and supply should be limited. I anchored the base of retracement at the April low, and then pulled upper retracement (100%) to the bullish vertical count from the point and figure chart of $79.

Somebody sold the stock back in April from $59.48 to $57.45 on heavy volume of more than 1.5 million shares. Let's call that "smart money" for now. Today's 1.4 million shares and price action hints somebody wants back in. Perhaps bears want out!

Here's a snapshot of today's TRAN component action.

Dow Transport Components - Sorted by Daily Net %


Again... CNI is NOT a component of the TRAN and there are three (3) "railroad" stocks in the TRAN. But look at the reaction the truckers got today. Convoy!

Here's what the TRAN components looked like on 06/08/05 (see Market Wrap that night) and we might be seeing a "rethink" reaction from Bear Stearns' call that day.

Dow Transport Components - 06/08/05 Close


Hmmm... UPS is trading just about where it was on 06/08/05, FDX is lower. But look at the "truckers" and the "rails." Does this say anything about the strength of the economy? CNF is up $7 from 06/08 benchmark, JBHT is up $1, YELL is up $4, LSTR, which was a focal point of Bear Stearns on 06/08 has reclaimed it ground.

S&P 500 Index (SPX.X) - Daily Intervals


Jim Brown pointed out a wedge in the SPX in last night's wrap. I just wanted to follow up with the reverse head/shoulder pattern that looks to be "in play." For months we were warned by bears of the head/shoulder top. If it didn't look "hunchbacked" to bears at $122.00, then maybe today's 4-year high might get their attention. Note the volume spike (London terrorist bombing). Yes I shorted that in the QQQQ that day (head/shoulder top was in play). Looks like "smart money" did some buying, and buying continues.

Oh... speaking of reverse head/shoulder patterns.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals


What INTC and YHOO declines took away, AMGN gains added. The sky was falling last night.

The QQQQ was rather calm in tonight's extended session. Hey, heavyweight AMGN excerpted a lot of energy today, and it may take several sessions for things to "calm down" with INTC and YHOO.

After the closing bell, shares of eBay (NASDAQ:EBAY) $34.87 -1.41% jumped to $39.84 (last tick in extended session) after the online auctioneer said it earned $291.6 million, or $0.21 per share, for the three months ended in June, a 53% increase from $190.4 million, or $0.14 cents per share at the same time last year.

If not for accounting charges unrelated to its ongoing operations, eBay said it would have earned $0.22 per share. That topped the mean analyst estimate of $0.18 cents per share.

eBay also presented investors an optimistic outlook for the rest of the year and forecasted 2005 revenue of $4.3 billion to $4.4 billion, including as much as $1.05 billion in the current quarter. Excluding accounting items unrelated to it ongoing business, eBay expects 2005 earnings of $0.82 or $0.83 per share, which is above current consensus of $0.79 per share.

Google (GOOG) $312.00 +0.67%, which is not a QQQQ component, but quickly becoming a "bellwether" for internet/media, closed at an all-time high, then added $4 to $316.00 in tonight's extended session.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None INFY

New Calls

None today.
 

New Puts

Infosys Tech. - INFY - cls: 69.92 chg: -1.08 stop: 75.01

Company Description:
Infosys is a leading global technology services firm founded in 1981. Infosys provides end-to-end business solutions that leverage technology for our clients across the entire software life cycle: consulting, design, development, re-engineering, maintenance, system integration, package evaluation and implementation. In addition, Infosys offers software products to the banking industry, as well as business process management services through its majority-owned subsidiary, Progeon. (source: company press release or website)

Why We Like It:
The market strength has been great for our bullish plays but we don't think it will last. The rally is looking more and more overbought and extended and we don't want to chase it. That's why we're looking for stocks poised to move lower when the broader indices finally pause and reverse course. INFY looks like a good candidate for puts. Technically the stock has produced what appears to be a double-top pattern under resistance at the $80.00 level. The move also produced a Point & Figure chart sell signal that points to a $61.00 target. Shares turned lower after investors responded negatively to their July 12th earnings report. Analysts are worried that growth expectations are too high based on their recent performance. Plus, INFY's head of sales resigned on July 19th and that's rarely a good sign for a company. We are going to suggest puts with the stock under $72.00 and its simple 10-dma. We'll use a wide stop loss at $75.01 but more conservative traders may want to consider a tighter stop near the top of the gap down in the $74.00 region. Our target is the $62-60 range while our time frame is about eight weeks so there is no need to rush right out and buy puts. Plan your entry. Some traders may want to wait and see if the NASDAQ fails to breakout over the 2200 level first before initiating new bearish positions here in INFY. Another risk readers should be aware of is the India stock market is trading near new highs. A continued rally there could stall any descent in the U.S. shares of INFY.

Suggested Options:
We are suggesting the September puts but October work well and have more open interest.

BUY PUT SEP 75.00 IUN-UO OI= 0 current ask $7.10
BUY PUT SEP 70.00 IUN-UN OI=20 current ask $4.10
BUY PUT SEP 65.00 IUN-UM OI=40 current ask $2.15
BUY PUT SEP 60.00 IUN-UL OI=16 current ask $1.35

Picked on July 20 at $ 69.92
Change since picked: + 0.00
Earnings Date 07/12/05 (confirmed)
Average Daily Volume = 922 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Chubb Corp - CB - close: 87.33 change: +0.19 stop: 84.99

No change from our previous update. We remain defensive and won't hesitate to exit if CB starts to weaken. Our stop loss is at $84.99 but our mental stop is closer to $86.40. We are not suggesting new plays and plan to exit on Friday afternoon at the close.

Picked on June 10 at $ 85.05
Change since picked: + 2.28
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 1.2 million

---

Pediatrix Med Group - PDX - cls: 77.33 chg: +0.41 stop: 72.34

No change from our previous update. PDX is holding up pretty well considering the relative weakness in the healthcare stocks. Our target is the $80.00-82.00 range.

Picked on July 11 at $ 76.10
Change since picked: + 1.23
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 158 thousand

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Reynolds American - RAI - close: 83.48 chg: +1.38 stop: 78.83 *new*

A positive earnings report from larger rival Altria Group (MO) helped boost shares of RAI today. Shares of RAI added 1.68 percent on volume that's been better than the last few sessions. The stock is nearing our target in the $84.00-85.00 range. More conservative traders may want to seriously consider taking profits now. RAI announced that they will report earnings next week on July 27th. We will plan to exit this play before their earnings assuming RAI doesn't hit our target between now and then. We are raising the stop loss to $78.83.

Picked on July 10 at $ 78.83
Change since picked: + 4.65
Earnings Date 07/27/05 (confirmed)
Average Daily Volume = 664 thousand
 

Put Updates

Fedex - FDX - close: 84.36 chg: +2.20 stop: 85.01

Wow! Today's candlestick looks like bad news for the bears. The combination of positive earnings results from a trucking company and another drop in oil prices helped fuel the rebound in shares of FDX. Technically this is a bullish engulfing candlestick and could very well be a bullish reversal in progress. We are NOT suggesting new plays here. If the market continues higher tomorrow we suspect we'll be stopped out at $85.01.

Picked on July 19 at $ 82.16
Change since picked: + 2.20
Earnings Date 06/23/05 (confirmed)
Average Daily Volume = 2.1 million

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Ishares Global Energy - IXC - cls: 89.34 chg: -0.05 stop: 91.61

We remain on the defensive here. The plan was to capture a quick drop as investors locked in profits. The oil sector is showing too much relative strength for our liking. Longer-term we remain bullish on the group but hesitate to suggest new call plays with the sector so overbought.

Picked on July 14 at $ 89.15
Change since picked: + 0.19
Earnings Date 00/00/00
Average Daily Volume = 33 thousand

---

3M Co. - MMM - close: 74.68 change: +0.39 stop: 77.51

No change from yesterday's update.

Picked on July 19 at $ 74.29
Change since picked: + 0.39
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

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Children's Place - PLCE - cls: 47.00 chg: -0.19 stop: 47.51

We are encouraged by PLCE's relative weakness today but we remain on the sidelines. Our suggested entry point is at $44.90 under technical support at the 100-dma and under round-number support at the $45.00 mark.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/11/05 (unconfirmed)
Average Daily Volume = 775 thousand

---

Wellchoice - WC - close: 68.95 chg: -0.54 stop: 72.51

Healthcare stocks continue to show relative weakness and WC still looks poised for more profit taking. No changes from our previous update.

Picked on July 14 at $ 69.46
Change since picked: - 0.51
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 268 thousand
 

Dropped Calls

Coventry Hlth Care - CVH - cls: 70.49 chg: -1.06 stop: 69.49

Healthcare stocks continue to under perform the broader indices. CVH was one such stock that closed with a 1.48 percent decline on a session where the broader averages were hitting new relative highs. The intraday dip under the $70.00 level hit our stop loss at $69.49 closing the play.

Picked on July 05 at $ 72.75
Change since picked: - 2.26
Earnings Date 08/02/05 (unconfirmed)
Average Daily Volume = 1.0 million

---

Quanex - NX - close: 59.59 change: +1.21 stop: 54.99

Target achieved. The broad market rally today helped fuel NX's rebound from Tuesday and the stock added more than two percent. Shares are testing round-number resistance at the $60.00 mark. Our target was the $59.50-60.00 range so we are closing the play.

Picked on July 07 at $ 55.10
Change since picked: + 4.49
Earnings Date 08/25/05 (unconfirmed)
Average Daily Volume = 337 thousand

---

Toll Brothers - TOL - close: 58.25 chg: +1.35 stop: 51.98

Target achieved. Another big day for the homebuilders and the broader market helped push TOL to yet another new all-time high. TOL added 2.37 percent to trade into our target range of $57.50-60.00. We are closing the play.

Picked on July 10 at $ 51.98
Change since picked: + 6.27
Earnings Date 08/22/05 (unconfirmed)
Average Daily Volume = 2.4 million
 

Dropped Puts

Martin Marietta - MLM - cls: 72.19 chg: +3.19 stop: 70.51

Thank God for play triggers. We were thankfully still sitting on the sidelines waiting for MLM to confirm its bearish reversal so we can close this play unopened. The gap higher today was fueled by positive earnings news. MLM isn't due to report until August 1st but the company raised its earnings guidance from 0.95-1.10 per share to $1.27-1.30 a share.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 313 thousand
 


Trader's Corner

Determining Resistance Levels

OIN SUBSCRIBER QUESTION
Where do you see resistance in the stock indexes currently and what criteria do you use to figure resistance?

RESPONSE:
Before I show charts and note where I would calculate potential resistance levels currently, some background information on 'criteria' on resistance or support areas.

1.) PRIOR HIGHS/LOWS
The first thing to check, or the first criteria in figuring current support and resistance levels is to look at any prior highs or lows that are at or near the current price. If a prior high is some distant, this is of course also a potential topping out point, but it's just going perhaps to be an 'ultimate' resistance point.

There is an assumption being made that buyers will AGAIN have buying interest at a prior (down) swing low. And that sellers will again come out when a prior high is reached. There is nothing more simple than this criteria and is based on actual prior buying or selling.

Where it gets more tricky is when there is either no prior high or low that is close to current levels OR prices of a stock or index have exceeded a prior high or fallen below a prior low.
Of course, in the present circumstances there is always going to be a prior rally peak to reference, given that the market still has a long long way to go to equal or exceed the 2000 top.

And, since we are quite far off the 2002-2003 bottom, there is a long way to go before any index at least would go to a new all-time low.

2.) TREND CHANNEL LINES
When there is NO prior high or low that is close to current levels, the next thing I look at is to see if prices are near the top or bottom line of the two parallel lines that make up a trend channel.

3.) A PREVIOUSLY BROKEN TRENDLINE
Sometimes there is a prior support trendline that was broken in the past and that prices have now come back to. This is a third possibility for finding potential resistance. Let me emphasize that finding potential 'support' or 'resistance', with the EXCEPTION of a prior top or bottom, is always a bit of an educated guess.

Moreover, resistance levels are somewhat approximate where any (channel, etc.) trendlines are being used, as an index can top slightly under, right at, or slightly above such trendlines. Or, of course, the index or stock can bust out above or below such lines or just follow the trendline up, 'hugging' the line. It's the most common thing to see happen in fact and VERY useful for option holders.

For example, someone long calls will generally achieve the lion's share of a gain once a resistance trendline is reached. After it is reached the rally often slows considerably and further gains may not exceed the erosion of the option premium.

4.) RETRACEMENT LEVELS
The so-called 'Fibonacci' retracements of 38, 50 and 62 percent, as well as 1/3 (33%) or 2/3rds (66%), are levels where resistance, or support, are often found.

5.) MOVING AVERAGES
Certain moving averages may end up 'defining', more or less, where buying or selling may cause a deflection from resistance, or a rebound from support.

S&P 500 (SPX)
The S&P 500 broke out to a new high, relative to the past several months. Therefore, it will be necessary to also look at charts of SPX's current daily chart trend channel as well as a weekly chart to see the prior peak (before this recent new high), in order to figure a next upside objective and possible resistance.

A couple of points before moving on: the 21-day moving average 'acted as' support or resistance in a couple of prior instances, as noted by the red down arrow for resistance and the green up arrow for support on the daily chart below.

The most recent low occurred after SPX reached its up trendline; this was the most telling sign for the end point of the last pullback. The 50-day moving average, although pierced some intraday (not on a closing basis), was also associated with the last bottom.

How do you tell if a moving average will be significant? By seeing if the index resists rising or falling above/below key moving averages; e.g., 21, 50, 200-day averages. If the trendline is pierced, it's important to determine if this is only temporary, lasting solely for day or two.

The next chart below, also an S&P daily, shows the current uptrend price channel that has tended to define the various highs and lows for the current uptrend in SPX. Based on the upper channel line, near resistance (at the red down arrow) is implied at around 1240.

Because of the tendency for a trend to slow down once it hits the upper end of an uptrend channel like this, holders of long calls might do well to take at least partial profits on long calls held from lower levels.

Note that the prior closing high at 1225 was the approximate support on the last consolidation before today's surge. There was ONE close under the prior high, but this was reversed the following day; TWO consecutive days' closes above or below a 'line' of support or resistance is more definitive. A prior high, once exceeded, tends to 'become' future support.

Now that the prior (March) high was pierced , a look at the SPX weekly chart is needed to see where the rally peak was before March 2005; we have to go all the way back to 2001 to see where that was. This suggests that major resistance can be assumed for the 1300 area, until/unless proven otherwise by market action.

By the way, those lows seen in the daily chart above back in April and May, when seen on the weekly chart below, form a very clear cut up trendline. Support over several weeks was found at this trendline, as noted by the green up arrow.

I have connected the early 2003 weekly lows above by bisecting or cutting through some of the lowest lows; this is an 'internal' or 'best fit' trendline. The most effective use of trendlines in my experience, is as a guide to seeing the predominate trend direction or seeing visually the predominate price momentum. An up trendline is not invalid if it cuts through an extreme low or two, as long as prices rebound again in short order.

IMPLIED RESISTANCE IN NASDAQ
The Nasdaq Composite (COMP) closed at a new closing high and very close to the prior intraday high from early-January at 2190. Therefore COMP closed at or very near what we can assume to be current 'resistance'. This is also not far under the upper line of the steep uptrend channel and near the upper trading 'band' or moving average 'envelope' line.

The moving average envelope lines are set at the percent figure that represents where the particular index has been at the high and low extremes of prior months. These moving average envelope lines (based on the 21-day average), when reached, at least suggest that COMP is 'overbought'. Knowing the market is at an extreme is quite useful to holders of long calls from lower levels, particularly from the 2050 area.

The recent strong rally began from the area of prior lows. Again, note that there was ONE daily close below 2050, but this was reversed the following day. I point this out as an example of how a cluster of prior lows 'defines' current support; and an area to buy Nasdaq calls such in the popular Nasdaq 100 (NDX) options.

If there is a decisive upside penetration of 2190-2200 in the Composite, we of course need look at the weekly chart to see the next level of likely overhead resistance. Per the weekly chart below, I've noted potential next resistance in COMP as beginning in the 2250 area.

Good Trading Success!

NOTE -
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Contact Support with 'Leigh Stevens' in the Subject line.
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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