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Daily Newsletter, Thursday, 08/04/2005

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Table of Contents

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

Market Wrap

Bear Aware

Bulls took a powder today as the indices opened on a breakaway gap lower. Those bears who hadn't already given up on stocks in favor of real estate were still shaking their heads in amazement as prices broke and held below yesterday's lows. After a weak bounce attempt after 10AM, prices fell decisively lower, testing Tuesday's lows and returning to Monday's range.

Volume was light, as it's been with rare exception for the past month, but it was heavier than yesterday's figures. Volatility lurched higher, well off its recent decade-plus lows, while volume breadth held decisively negative all day, finishing with more than 2.6 declining shares for each advancing on both the NYSE and Nasdaq. Although I watch those figures all day in real time, I can't recall the last time that volume breadth held levels this negative for the entire day. The TRINQ broke briefly above 2.0.

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The daily charts represent the most concise summary of the various cycles I track, and so they are the featured timeframe for this discussion. As noted today in the Market Monitor, the weekly cycles (not shown) are at or very close to levels at which they should top out, with the 10-week stochastics on bearish kisses. This is noteworthy not just to contextualize the daily timeframe nested within it, but also to understand this week's daily action. Absent a strong upside breakout from here, the weekly cycle is due for a decline. For this reason, the net sideways action of the past 1-2 weeks (depending on the index) looks more bearish than bullish to me.

Daily Dow Chart

The Dow lost 89 points to close at 10609, 3 points above its session low and failing from its opening high of 10697. Today's drop plunged the price back to the range that has held since mid-July, frazzling the nerves of bulls and bears alike. The daily cycle downphase that has been stalling on and off for the past 3 weeks was revived again with today's drop, but the range still hasn't broken. Bears need a break of 10600, with a close below 10560 to confirm the range as a distribution top and set the stage for a move to 10440 support. Bulls need a break of the wedge apex at 10740 to reverse the daily cycle downphase.

Daily S&P 500 Chart

The SPX lost 9.19 to close at 1235.85, sliding from its high of 1245.04 and setting a low of 1235.15. The move retraced all of Tuesday's gains and returned the price to the top of last week's range. It also represented the first session's print below the rising wedge apex, though the light volume doesn't do much to support the bear wedge break interpretation. Bears need a close below 1233-35 to target the 1220 level and turn the daily cycle indicators decisively lower. To the upside, today's high is the goal for bulls, with a close above 1245-46 necessary to turn up the daily cycle indicators.

Daily Nasdaq Chart

The Nasdaq fell 25.5 points to close at 2191.3, one point above the lows. Of its peers, this is the clearest picture of a bear wedge, and today the first clear break below it. The daily cycle has been trending mostly sideways-lower in what appears to be a bearish divergence against this week's higher highs, and a break below 2180 should be enough to seal the deal. Next support is at 2160-65, while bulls need to gun the price back up above 2220. However, based on the bulls' inability to bounce the price off this afternoon's oversold intraday readings, my guess is that there will be more of them eager to escape at or above today's highs than there will be bears looking for cover. Above 1220, the bulls should be back in business, while below it, the bears should continue to press.

Daily TNX Chart

The Treasury announced its quarterly funding requirements this week, and will be stepping up borrowing by over $25 billion. It will also begin selling thirty-year debt again. Both announcements mean more debt to be absorbed by the market. Ten year note yields spent this morning in suspended animation at the 4.3% level before pulling back up to finish the session 1.9 bps at 4.319%. The launch higher during the past week qualifies as a trending move following the daily cycle rollover, and this week set a new high at 4.35%. Bond bears need to see 4.3% hold, with the rising trendline off June support 3 bps below it at 4.27%. A break above 4.35% would target the 4.4% and 4.44% confluence levels.

Daily Chart of Crude oil

September crude oil futures bounced today after touching yesterday's record high and dropping to 60.625 in the wake of the Wednesday weekly inventory data. The financial press had little to say beyond attributing the move to supply concerns. Reuters quoted one analyst as saying that despite higher prices, the oil system is running "close to sustainable limits" with very little or no excess capacity.

Following the daily coverage of the oil market by the mainstream press, I'm continually struck by the confusion of timeframes. The bearish case for oil, rarely supported but oft-repeated, attributes the pullbacks to various developments that are inconsequential to the longer-term bullish case for oil. Similarly, advances in price tend to get attributed to short term or non-recurring events. Reuters' coverage today gets closer to the truth, in my view- this is a non-renewable resource being consumed at an accelerating rate with no (or dubious) prospective alternatives. Whether short term price has outpaced the true value of a barrel of oil can be debated, but it seems to me that the fundamental long-term bullish case for oil cannot.

On the daily chart above, yesterday's high tested double top resistance from a higher low, in a possible bullish rising triangle. Bulls remain in the secondary uptrend above 59, with primary rising support at the 53 level. For the day, September crude oil closed up .60 at 61.45, off a high of 62.075.

The European Central Bank announced its decision to maintain its overnight rate unchanged at 2% for the 12 nation eurozone. This rate has not changed since June 2003. Also as expected, the Bank of England reduced rates by 25 basis points to 4.5%, citing "subdued" output growth and slowing household spending and business investment.

US Initial claims for week ended July 29th were announced by the Labor Department at 8:30AM. Initial claims for unemployment assistance declined by 1000 applications to 312,000 (seasonally adjusted), pulling the 4-week moving average lower by 2,250 to 316,750. Continuing jobless claims fell 18,000 to 2.58 million. Analysts were expecting weekly claims to rise to 315,000. Tomorrow's data will complete the picture, with the monthly employment report due at 8:30, with Nonfarm payrolls for July expected at 180,000 and the Unemployment rate at 5%.

Equities has been trading lower ahead of the Initial Claims data, and pressed to new lows following its release, while bonds held flat-to-negative as the report was released.

In corporate news, Gillette (G) beat the street with earnings of 49 cents on revenue of $2.77 billion, up from 42 cents in the year-ago period. Estimates were for EPS of 46 cents on revenue of $2.7 billion. The company reported gains across all businesses and in all regions, with Reuters noting a boost in sales from new products such as its "Venus Vibrance pulsating razor for women." G is to be acquired by PG this fall, in a $53.5 billion deal. For the day, G lost 1.23% to close at 52.30.

WMT got a lift in the morning, reporting July same-store sales which rose 4.4%, with Wal-Mart sales up 4.2% and Sam's Club up 5.1% for the month. Total sales rose 10.7% to $22.81 billion for the month, compared with $20.61 billion for July 2004. WMT estimates a 3%-5% gain for August, and was among the stronger of the retail same-store results. However, results overall, including the Gap (GPS), Nordstrom (JWN), the Limited (LTD), Sharper Image (SHRP) and Target (TGT) disappointed, with the S&P Retail Index (RLX) getting clipped for 2.21% to finish at 472.12. The implication is of stressed consumers, beset by persistently rising energy prices and rising borrowing rates. Recall that the Commerce Department reported earlier this week that the savings rate of US consumers has reached zero, at the lowest levels since the Great Depression, according to CNN. This is offset by appreciation in real estate values, and no doubt most homeowners are "saving" via rising property values instead of spending less than their income. But retailers were hurting today as they reported weak same-store sales for the month. WMT closed lower by .83% at 49.27,

Warner Music Group (WMG) managed to beat the street, losing $179 million or $1.41 per share, compared with a loss of $91 million or 85 cents in the year-ago period, on IPO-related charges. Excluding those one time charges, the company lost 27 cents or $35 million, compared with estimates of a 49 cent loss. Revenue was higher by 2% at $742 million, compared with estimates of $721.3 million. WMG gained 6.68% or 1.05 to close at 16.78.

Clorox (CLX) announced Q4 earnings which rose from 86 cents in the year-ago quarter to $1.00 in the current quarter, with net earnings declining from $185 million to $156 million. Revenue rose from $1.19 billion to $1.25 billion. The jump in EPS was attributed to a reduction in the float. Consensus estimates were for 94 cents per share. CLX finished the day 1.54% at 56.74.

Sara Lee (SLE) reported a net loss on revenue that declined 5% to $4.8 billion, earning $148 million or 19 cents, down from $354 million or 44 cents per share in the year-ago quarter. Net of one-time charges, SLE earned 36 cents, beating expectations by a nickel. The company also announced a share repurchase program of $2 billion, reduction of at least $1.5 billion in debt during the next 2 years and reaffirmed its 79 cent dividend for 2006. Later in the day, Fitch downgraded SLE's senior debt to "BBB " from "A", citing the share buyback and other capital initiatives. The stock opened lower, dropped to a low at 10AM, and rose from there to finish the day 2.26% at 20.81.

Today's action was ominous, coming as it did in the context of the weekly cycle picture and the extended, extreme low volatility readings. One analyst noted that mutual fund cash-to-asset ratios are back to record lows at levels seen only once before, in March 2000. That's not to say that an immediate and vertiginous plunge is imminent. But it does indicate that, at the very least, it is late in the bullish party, and the balance of probabilities favors the downside from here. Price is the only primary indicator, and it remains in an uptrend even counting today's drop. But increasingly, the secondary indicators are flashing warnings, and bulls should not hesitate to protect their profits if the price trend begins to reverse.

After the bell, Viacom reported Q2 earnings that rose 6% from 41 cents or $717 million in Q2 2004 to $726 million or 47 cents in the current quarter, beating the street by a penny. Revenue rose from $5.4 billion to $5.9 billion, beating expectations by $500 million. VIA.B was up 2 cents in afterhours as of this writing.

Aside from the monthly Nonfarm Payroll report, tomorrow is set to be a critical day for purely technical reasons. Today's decline wiped out nearly all of the equity indices' gains since Monday. With the weekly cycle topped out and on a bearish stochastic kiss, a close at or below Monday's lows would result in a gravestone doji candle for the week- a potential bearish reversal print. With bond yields trading in an upside trending move, crude oil, natural gas and gasoline prices firm and volatility coming off recent lows, equities are at levels that bulls will need to see defended. While weekly tops are usually not quick affairs, the argument can be made that we've been watching the process unfold in recent weeks. That doesn't rule out more tests or even new highs, but it does imply that the vast bulk of the upside has been seen for this run.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
None EMN
  KBH
  MSTR

New Calls

None today.
 

New Puts

Eastman Chemical - EMN - close: 54.15 chg: -1.00 stop: 56.01

Company Description:
Eastman manufactures and markets chemicals, fibers and plastics worldwide. It provides key differentiated coatings, adhesives and specialty plastics products; is the world's largest producer of PET polymers for packaging; and is a major supplier of cellulose acetate fibers. Eastman is leveraging its heritage of innovation and strength in polyester, acetyl and organic chemistry technologies to drive growth and meet increasing demand in four select markets: building and construction, packaging, health, and electronics. Founded in 1920 and headquartered in Kingsport, Tenn., Eastman is a FORTUNE 500 company with 2004 sales of $6.6 billion and approximately 12,000 employees. (source: company press release or website)

Why We Like It:
EMN has been slowly consolidating sideways the last three months but with a trend of lower highs. Technically all of its indicators point lower and the share price recently broke down below technical support at both its simple and exponential 200-dma's. We also see that its P&F chart is bearish and points to a $49.00 target but this could move lower as a decline under the $54.00 mark would produce a new double-bottom breakdown sell signal. We are going to suggest a trigger under support at the $54.00 level. Our suggested entry point to buy puts will be $53.90. We'll start with a stop loss at $56.01. Our target will be the $50.50-50.00 range.

Suggested Options:
We are going to suggest the September puts.

BUY PUT SEP 55.00 EMN-UK OI=680 current ask $3.20
BUY PUT SEP 50.00 EMN-UJ OI=668 current ask $0.45

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 872 thousand

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KB Home - KBH - close: 78.36 chg: -0.87 stop: 82.01

Company Description:
Building homes for nearly half a century, KB Home is one of America's premier homebuilders with domestic operating divisions in some of the fastest-growing regions and states: West Coast-California; Southwest-Arizona, Nevada and New Mexico; Central-Colorado, Illinois, Indiana and Texas; and Southeast-Florida, Georgia, North Carolina and South Carolina. Kaufman & Broad S.A., the Company's publicly-traded French subsidiary, is one of the largest homebuilders in France. In fiscal 2004, the Company delivered homes to 31,646 families in the United States and France. (source: company press release or website)

Why We Like It:
Here we go again. The rally in the homebuilders has stalled. While we remain bullish on the group we are going to try and scalp a few points from KBH as it consolidates lower. The stock has broken its three-month trend of support and all of its daily technical indicators have turned south. This is an aggressive, high-risk play so treat it with caution. Traders may want to consider waiting for a bit before entering positions just to see if KBH bounces back toward the $80.00 level again before moving lower. However, it is worth noting that the DJUSHB home construction index has also broken its three-month trendline of support, suggesting a short-term change in direction. We are going to target the $71.50-70.00 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 80.00 KBH-UP OI= 981 current ask $4.60
BUY PUT SEP 75.00 KBH-UO OI=1268 current ask $2.35
BUY PUT SEP 70.00 KBH-UN OI= 383 current ask $1.15

Picked on August 04 at $ 78.36
Change since picked: 0.00
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume = 2.4 million

---

MicroStrategy - MSTR - close: 75.37 chg: -1.08 stop: 77.51

Company Description:
Founded in 1989, MicroStrategy is a global leader in business intelligence (BI) technology. MicroStrategy provides integrated reporting, analysis, and monitoring software that helps leading organizations worldwide make better business decisions every day. Companies choose MicroStrategy for its advanced technical capabilities, sophisticated analytics, and superior data and user scalability. (source: company press release or website)

Why We Like It:
MSTR is another candidate for aggressive players. The stock is prone to being volatile but we suspect the next move will be down. The stock got a big pop higher on July 29th after its better than expected earnings report. That rally stalled at the $80.00 level, which was resistance back in January 2005. After a week of trying to breakout over the $80 level shares are now testing the top of its gap near $75, which is acting as support. Given that the broader markets still look somewhat extended and overbought from their July lows and the fact that we're moving into the slow August-September time period for stocks we believe that odds are good MSTR will fill its gap before moving higher. We are suggesting a trigger at $74.95 to open the play. Our target will be the $70.50-70.00 range. We're not that happy with the stop loss because MSTR can be very volatile but we're not excited about putting a stop at $80.01, which is current resistance. Our readers should adjust the stop to best suit their needs.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 75.00 EOU-UO OI=271 current ask $4.70
BUY PUT SEP 70.00 EOU-UN OI=161 current ask $2.70

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 570 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Danaher - DHR - close: 56.36 chg: -0.31 stop: 53.99

No surprises here. With the market trading lower DHR held up relatively well. Our comments yesterday suggested that traders may want to wait for a dip towards the 10-dma near $55.60 or even the $55.00 level before considering new bullish positions.

Picked on August 03 at $ 56.67
Change since picked: - 0.31
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.5 million
 

Put Updates

Alliance Res.Part. - ARLP - cls: 89.08 chg: -2.33 stop: 91.01

Ding! The play is now open. The market weakness today helped ARLP produce a bearish engulfing candlestick, which is normally interpreted as a bearish reversal pattern. The drop under $90.00 is good news too and ARLP traded at our suggested entry point at $89.39 to open the play. Our initial target is the $85.00-84.00 range. Some traders may want to target the simple 10-dma instead, which is currently near $83.35.

Picked on August 04 at $ 89.39
Change since picked: - 0.31
Earnings Date 07/27/05 (confirmed)
Average Daily Volume = 60 thousand

---

CR Bard - BCR - close: 63.62 chg: -0.83 stop: 67.51

Looks like everyone had the same idea this morning. Following yesterday's breakdown below the 200-dma shares of BCR opened up weak today and dropped to $62.79 on heavy volume. Now there was a bounce this afternoon and we would not be surprised to see the oversold bounce push BCR back toward the $65 level. We would watch for a failed rally under the $65.00 region as a new bearish entry point (failed rally = watch for the bounce to roll over). Our short-term target is the $60.50-60.00 range. FYI: today's weakness has pushed the P&F chart target from $59.00 to $55.00.

Picked on August 03 at $ 64.45
Change since picked: - 0.83
Earnings Date 07/19/05 (confirmed)
Average Daily Volume = 553 thousand

---

Fedex Corp - FDX - close: 85.00 chg: 0.35 stop: 86.01

A positive article on Barron's Online may have been the reason FDX displayed relative strength today. However, it's worth noting that FDX remains under technical resistance at its 50-dma and its rally this morning stalled under $85.20 and shares churned sideways for the rest of the session. We are sticking to our strategy to only buy puts if FDX trades at our trigger of $82.85 but more aggressive traders may want to consider new positions if FDX trades under the $84.00 level.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

F5 Networks - FFIV - close: 38.05 chg: -0.71 stop: 42.51

We are encouraged by FFIV's weakness today (-1.8%) as it confirms yesterday's breakdown below support at the $40.00 mark. However, traders may want to be patient and look for an oversold bounce back toward the $39.00 or $40.00 region. Watch for the bounce to roll over under the $40.00 level to be a new bearish entry point. Our initial short-term target is the $35.00-34.00 range.

Picked on August 03 at $ 38.76
Change since picked: - 0.71
Earnings Date 07/20/05 (confirmed)
Average Daily Volume = 1.4 million

---

Fannie Mae - FNM - close: 55.87 chg: 0.47 stop: 59.01

No surprises here. Yesterday we warned readers to watch for a potential bounce from the $55.00 level. FNM hit $55.12 this morning before rebounding. If FNM doesn't fail at the $56.00 mark then we would watch for a bounce back toward its simple 100-dma (also near its 10-dma), which should act as overhead technical resistance near $56.65.

Picked on July 27 at $ 56.49
Change since picked: - 0.62
Earnings Date 00/00/05 (unconfirmed)
Average Daily Volume = 3.3 million

---

Google - GOOG - close: 297.73 chg: 0.43 stop: 300.01

No change here. We remain on the sidelines. Our suggested entry point to buy puts is at $284.50. More aggressive traders may want to speculate on new positions if GOOG trades under $295. This is already a very high-risk play.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 13.6 million

---

Lehman Brothers - LEH - cls: 105.16 chg: -1.49 stop: 108.01

Good news. The XBD broker-dealer index got hit with some profit taking today and the sector index lost 1.85 percent. This helped pull LEH down 1.39% toward three-week old support at the $105.00 level. We remain bearish and continue to target the $100.00 level but more conservative traders may want to wait for the breakdown under $105.00 before considering new positions.

Picked on July 21 at $105.13
Change since picked: 0.03
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 2.7 million

---

3M Co. - MMM - close: 73.35 change: -0.84 stop: 76.77

MMM is starting to show its true colors again with a new four-week low today. Short-term technical oscillators are bearish. The decline under $74.00 looks like a new entry point. Our short-term target is the $70.00 region.

Picked on July 19 at $ 74.29
Change since picked: - 0.94
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

---

Panera Bread - PNRA - close: 57.58 chg: -0.27 stop: 60.01

No change here. We are not suggesting new plays. We plan to exit on Monday afternoon at the close to avoid holding over Tuesday's earnings report.

Picked on August 1 at $ 57.49
Change since picked: 0.09
Earnings Date 08/09/05 (confirmed)
Average Daily Volume = 601 thousand
 

Dropped Calls

None
 

Dropped Puts

None
 

DISCLAIMER

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.

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