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Daily Newsletter, Wednesday, 08/10/2005

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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

Wounded bear calls on oil

Stocks surged higher in early morning trade despite a negative reaction to networking equipment giant Cisco Systems' (CSCO) $18.25 -6.93% tepid outlook into next quarter.

Early morning reports from the Division of Wildlife showed a record number of bears being harvested, but by late morning with advancers outnumbering decliners by a hefty 4-to-1 margin at the big board, and 2-to-1 margin at the NASDAQ, there was one report of a hunter found crawling on hands and knees near a remote oil well pad in the high mountains of Montana.

In an unsubstantiated report, the bear hunter was evidently trying to set a Guinness Book of World Records by shooting a grizzly bear with a slingshot.

Hmmm... hunting Grizzly with a slingshot and a pocket full of marbles.

Buy program premiums were found after the EIA said crude oil inventories jumped by 2.79 million barrels in the recent week after showing a fractional 196,000 barrel build in the prior week. And while the report was initially described as "very bearish" for oil traders, it may have been forgotten that crude oil inventories for the week ended July 1 and July 8 had both shown draws of over 3.6 million. EIA data from July 22 showed a hefty draw of 2.2 million barrels.

No, I wasn't smart, or dumb enough to try and short the highs based on the headline crude oil numbers, but I hadn't lost all my marbles either. I've been tracking the weekly EIA data and while today's report does suggest that supply and demand may be leveling out a bit, the psychology of higher oil prices may well have saved many a broader equity bear in today's trade.

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Other data released by the EIA showed continued draws in gasoline, with inventories falling by 2.08 million barrels. Refiners continue to crank out distillates, with inventories adding another 2.6 million barrels.

Over the past month, crude oil inventories are down just 0.05%, or 152,000 barrels, down 2.5%, or 8.1 million barrels for the past two months, but down 4.0%, or 13.2 million barrels from 3-months ago.

Yes... when you start to look where inventories are vs. 3-months ago, the latest week's crude oil build is a bit like shooting a Grizzly with a slingshot.

Hey, if there's a silver lining in the "oil cloud," it might be that crude oil inventories have built by 26.5 million barrels versus this time last year. That's a 9.0% gain from last year.

If there's one area of the markets that bears are at the top of the food chain, it remains the energy complex. September Crude Oil futures (cl05u) settled up $1.83, or 2.90% at $64.90 and hit another contract high. September Unleaded Gas futures (hu05u) settled up $0.0739, or 4.06% at $1.8963, while September Heating Oil futures (ho05u) finished up $0.0622, or 3.5% at $1.8388.

Miners, oil, oil service, natural gas and health insurers were atop today's sector winner's list, while networking, Internet, and combined telecom, all of which Cisco Systems (CSCO) is a component, paced declines from mid-session to the close.

Insurance giant American Intl. Group (AIG) $62.24 +1.33% traded as high as $63.73 after reporting Q2 net income of $3.99 billion, or $1.53 a share. The Dow component cited strong results in overseas operations and surging capital gains offsetting lower business volume in some of its U.S. units. The company's CEO said the firm is cooperating as much as possible with accounting probes.

On the topic of accounting, chartered mortgage company Fannie Mae (FNM) $52.64 -3.99% said it was pushing back 2004 results. The company now expects to release 2004 results in second half of 2006 and may curtail disclosures while it completes restatement. Executives refused to provide details on riskier assets it had acquired recently.

Both AIG and FNM's news came prior to the opening bell.

U.S. Market Watch - 08/10/05 Close

News out of the Federal Government had the U.S. budget deficit falling in July to a deficit of $52.79 billion, which was narrower than the Congressional Budget Office's projection of $58 billion and last year's deficit of $69.16 billion. Fiscal year-to-date budget deficit stands at $302.59 billion, compared with year-earlier deficit of $396.22 billion.

Unocal (UCL) $66.10 +0.83% voted to sell the company to Chevron (CVX) $62.48 +2.05% for about $18 billion. A large majority elected to receive all cash for their shares. Chevron expects to gain oil and natural gas reserves in Asia and North America as part of the takeover.

In other merger-related news, Yahoo (YHOO) $34.20 +0.38% said it is set to pay $1 billion and hand China operations over to Alibaba.com in return for a 35% stake in Chinese e-commerce operator. If consummated, Alibaba would maintain Yahoo brands for its search engine, but would gain access to users and advertisers.

Tonight's extended session was rather quiet with media-giant News Corp. (NWS) $17.44 +1.45% edging up 58 cents to $18.02 after saying Q4 net income rose 67% vs. a year ago.

CV Therapeutics (CVTX) $25.83 -2.34% fell 62 cents during the regular session, but jumped to $27.55 in late trading after the company said its first of two Phase III studies Regadenoson, which helps detect coronary artery disease, met primary endpoint.

I want to quickly review the S&P Banks Index (BIX.X) 354.33 -0.52%, which is down another 2.24% since our visit last Wednesday.

Several weeks ago I mentioned that sources deep within the "bear camp" would eventually start pointing to "higher yields" among the major Treasury maturities as being doom and gloom for stocks. You didn't hear much of that this morning, but I still think (those of you that have followed my commentary over the YEARS) that while the Fed methodically raises rates from historically low levels, we need some SELLING in the longer-dated maturities to widen the spread.

The daily bar chart of the BIX.X isn't the best chart to show intra-day action, but we can see how the BIX.X did show some life this morning. Go back up to our intra-day breadth table and we can see some "relief" from the 5-year to 30-year Treasury yield spread on an intra-day basis. The banks were bidding.

But you'll have to take my word that when oil prices broke to a new record high, just about EVERY EQUITY GROUP reversed gains at that very minute!

I say "oil is psychological." Yes, it is also a fundamental "tax" on the economy, but at times, you can really see how a higher trade in oil becomes the "psychological trigger" for selling of equities.

I don't mean to laugh, but when oil broke to a new high, it was like equity trader's eyes popped open wide. Yeah... kind of like shooting a Grizzly bear in the fanny, then realizing what you've just done. Some say you're supposed to just "play dead" and take your chances, cause if you run, that bear is going to run you down and eat you up.

S&P Banks Index (BIX.X) - Daily Interval

Again, the BIX.X is just a portion of the financials, and while the banks struggled the past 5-days, brokers held their own, insurance was soft, but the U.S. Market Watch shows both the BIX.X and BKX.X a point of contention, and still NO HELP for bulls to fully exterminate the bearish population.

Don't just "forget" or write the banks off and predict doom. Understand why they will trade weak, or strong, based on loan generation, but also their LENDING SPREADS.

S&P 500 Index Chart - Daily Intervals

Here is a chart of the S&P 500 Index (SPX.X) with WEEKLY (blue) and MONTHLY (red) pivot analysis retracement. The levels, or "zones" I see as being important support/resistance are colored in yellow.

Do you see how today's bar looks a little similar to the BIX.X bar? A nice pop, but then the reversal.

My point here is that the SPX.X challenges the highs again, without ANY real help from the BIX.X since its relative high "top" on July 15.

With bears starting to grumble that it is "higher yield" that is doom and gloom for equities, traders/investors need to follow the BIX.X as an important sector/index.

The BIX.X does suggest broader equity cautiousness at this point, but it has been my observation, that just when the BEARS count them out, that's when they rally strongest. It's not a "finite" 10-year yield, or a "finite" price of oil either that triggers buying or selling in the group.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
APC CCL
  KOSP

New Calls

Anadarko Petrol. - APC - close: 89.90 chg: +2.74 stop: 86.99

Company Description:
Anadarko Petroleum Corporation's mission is to deliver a competitive and sustainable rate of return to shareholders by developing, acquiring and exploring for oil and gas resources vital to the world's health and welfare. As of year-end 2004, the company had 2.37 billion barrels of oil equivalent of proved reserves, making it one of the world's largest independent exploration and production companies. Anadarko's operational focus extends from the deepwater Gulf of Mexico, up through Texas, Louisiana, the Mid-Continent, western U.S. and Canadian Rockies and onto the North Slope of Alaska. Anadarko also has significant production in Algeria, Venezuela and Qatar, and exploration or production positions in several other countries. (source: company press release or website)

Why We Like It:
We have remained bullish on oil and oil stocks but have hesitated about re-entering new bullish positions. We had hoped that the group might offer a deeper consolidation and thus a better entry point before going long stocks in the group again. Right now crude oil shows no signs of slowing down so we're going to carefully offer a bullish play in APC. Unlike many of its peers APC has been consolidating sideways (between $84 and $90) over the last month instead of hitting new highs. Yet now the stock looks poised to breakout over resistance at the $90 level. We are going to suggest using a trigger at $90.51 to open the play. Our short-term target is the $94.75-95.00 range.

Suggested Options:
We are suggesting the September calls.

BUY CALL SEP 90.00 APC-IR OI=1020 current ask $3.40
BUY CALL SEP 95.00 APC-IS OI= 967 current ask $1.50

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/29/05 (confirmed)
Average Daily Volume = 2.0 million
 

New Puts

Carnival Corp - CCL - close: 51.79 chg: -0.68 stop: 54.01

Company Description:
Carnival Corporation & plc is the largest cruise vacation group in the world, with a portfolio of 12 cruise brands in North America, Europe and Australia, comprised of Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn Cruise Line, Windstar Cruises, AIDA Cruises, Costa Cruises, Cunard Line, Ocean Village, P&O Cruises, Swan Hellenic, and P&O Cruises Australia. Together, these brands operate 79 ships totaling more than 137,000 lower berths with 12 new ships scheduled for delivery between January 2006 and April 2009. Carnival Corporation & plc also operates the leading tour companies in Alaska and the Canadian Yukon, Holland America Tours and Princess Tours. (source: company press release or website)

Why We Like It:
CCL turned in very impressive gains over 2003 and 2004 but 2005 has been a year of consolidation. The stock did bottom back in late April but shares have now broken the three-month rising trend when CCL broke down below its simple 200-dma in late July. The P&F chart helps paint a bigger picture that points to a bearish $38 price target. It's also worth noting that analyst firm Prudential dropped coverage on CCL back on July 25th. It's common these days for a firm to just drop coverage instead of issue a "sell" recommendation since many of these firms are trying to keep or gain investment-banking relationships with the companies they cover. We are suggesting bearish positions here given today's failed rally and decline under its simple 100-dma and its exponential 200-dma. Our target is the April lows but we'll set the official exit in the $47.75-47.00 range. We do plan to exit ahead of CCL's mid-September earnings report.

Suggested Options:
We are suggesting the September puts since we plan to exit ahead of the company's earnings report.

BUY PUT SEP 55.00 CCL-UK OI=499 current ask $3.70
BUY PUT SEP 50.00 CCL-UJ OI=916 current ask $0.85

Picked on August 10 at $ 51.79
Change since picked: - 0.00
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume = 2.5 million

---

KOS Pharma - KOSP - close: 71.11 chg: -3.81 stop: 72.51

Company Description:
Kos Pharmaceuticals, Inc. is a fully integrated specialty pharmaceutical company engaged in developing, commercializing, manufacturing and marketing proprietary prescription products for the treatment of chronic diseases. The Company's principal product development strategy is to reformulate existing pharmaceutical products with large market potential to improve safety, efficacy, or patient compliance. The Company currently markets Niaspan and Advicor for the treatment of cholesterol disorders, Azmacort for the treatment of asthma, Cardizem LA for the treatment of hypertension and angina, and Teveten and Teveten HCT for the treatment of hypertension. Kos is developing additional products, has proprietary drug delivery technologies in solid-dose and aerosol metered-dose inhalation administration and is pursuing certain strategic business development and licensing opportunities. (source: company press release or website)

Why We Like It:
There is no denying the strength in shares of KOSP. Yet we suspect that the stock may have topped. Shares spiked higher on August 4th after reporting better than expected earnings but there was no follow through to the new high. The move almost looks like a small double-top when combined with the spike higher on July 20th. News out today could also spark some profit taking in the stock. In KOSP's 10-Q report the company disclosed that they had received a subpoena from the government to investigate KOSP's marketing practices. Here is an excerpt from their 10-Q:

"In February 2005, Kos learned that the Office of the Inspector General of the U.S. Department of Health and Human Services, in conjunction with the U.S. Department of Justice, is conducting an investigation of Kos sales practices. In March 2005, the United States Department of Justice, through the Office of the United States Attorney for the Eastern District of Wisconsin, served a grand jury subpoena on Kos. The subpoena requests production of a variety of documents related to Kos marketing and sales practices. Kos has produced a number of documents in response to the subpoena and continues to provide the government with additional responsive documents. Kos has also engaged outside counsel to assist it in conducting its own internal investigation of its sales practices."

As you know these types of investigations can turn into deeper probes and tend to undermine investor confidence in the stock. If it turns out to be nothing it's still a great excuse for traders to lock in some profits here. Looking more closely at KOSP's chart we see that its RSI and stochastics have turned bearish. Plus, we see that if KOSP trades under the $68.00 level it will reverse its P&F chart into a new sell signal. We are going to suggest that traders use a trigger at $68.25 to open the play. More conservative traders may want to use a trigger under its simple 50-dma instead. Our target will be the $62-60 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 70.00 KQW-UN OI=255 current ask $3.00
BUY PUT SEP 65.00 KQW-UM OI=318 current ask $1.45

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/04/05 (confirmed)
Average Daily Volume = 642 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Danaher - DHR - close: 55.83 chg: +0.35 stop: 53.99

There are no surprises here. DHR rose and fell with the markets and the session failed to stop was looks like an imminent sell signal in DHR's MACD indicator. We are not suggesting new bullish plays at this time. Instead we're watching to see if DHR bounces from the $54.50 region near its simple 200-dma. More conservative traders may want to exit now and sit back and watch.

Picked on August 03 at $ 56.67
Change since picked: - 0.84
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.5 million
 

Put Updates

Aetna - AET - close: 78.10 chg: +1.11 stop: 79.01

Traders holding put positions here in AET should be on red alert. AET did breakout over its 21-dma and 100-dma, which should have acted as technical resistance. The move today also produced a new buy signal in the stock's MACD indicator. We are surprised that we were not stopped out today. Our stop loss is 79.01. The high today was $79.00. Yesterday we suggested that more conservative traders may have wanted to consider an early exit if AET traded above the $77.50-77.60 region. That is still a valid suggestion. We are going to keep the play open for now as today's rally did fail at the $79 level and AET and the markets could still turn lower. However, we are not suggesting new positions here. Wait for a move back under $76.00.

Picked on August 07 at $ 75.55
Change since picked: + 2.55
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 2.0 million

---

Best Buy Co - BBY - close: 49.23 chg: -0.57 stop: 52.51

The action today in BBY looks like good news. The early morning rally quickly stalled and shares closed near their low for the session. This is a failed rally near the $50.50 region and it looks like a new bearish entry point. Our target is the $45.50-45.00 range but we are watching the simple 50-dma with caution as it could offer some technical support for BBY.

Picked on August 08 at $ 49.31
Change since picked: - 0.08
Earnings Date 09/13/05 (unconfirmed)
Average Daily Volume = 5.0 million

---

CR Bard - BCR - close: 63.34 chg: +0.14 stop: 65.51 *new*

There is little to report on for BCR. The stock failed to participate in the market's rally this morning but it also failed to participate in the afternoon sell-off. Shares have been churning between $62.90 and $63.50 for the last few sessions. What we do notice is that volume has been coming in way above average for the last week. We are going to lower the stop loss to $65.51.

Picked on August 03 at $ 64.45
Change since picked: - 1.11
Earnings Date 07/19/05 (confirmed)
Average Daily Volume = 553 thousand

---

Eastman Chemical - EMN - close: 52.89 chg: -0.56 stop: 56.01

EMN produced a failed rally under new resistance at the $54.00 level. Per our comments yesterday today's action looks like a new bearish entry point to buy puts. Our target is the $50.50-50.00 range.

Picked on August 05 at $ 53.90
Change since picked: - 1.01
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 872 thousand

---

Fedex Corp - FDX - close: 84.80 chg: +0.17 stop: 86.01

The action in FDX continues to be interesting. Today the stock shot higher this morning to hit new seven-week highs and breakout over resistance at the $86.00 level and technical resistance at its simple 50-dma. Unfortunately for the bulls the rally quickly failed as oil climbed to new highs. This may have proven to be a bull trap. We are still sitting on the sidelines with a suggested entry point to buy puts at $82.99. More aggressive traders may want to buy puts on a decline under short-term support at 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: 37.02 chg: -0.98 stop: 40.51*new*

Investor reaction to CSCO's lowered guidance for the company's Q1 undermined the entire networking sector. CSCO lost almost seven percent today and FFIV trailed in CSCO's shadow with a 2.57% decline. Our target is the $35-34 range. We are lowering the stop loss to $40.51.

Picked on August 03 at $ 38.76
Change since picked: - 1.74
Earnings Date 07/20/05 (confirmed)
Average Daily Volume = 1.4 million

---

Fannie Mae - FNM - close: 52.64 chg: -2.19 stop: 57.01

Bad news sent shares of FNM to their worst decline in weeks with a 3.99% drop on volume way above its average. Investors recoiled at news that FNM would delay its quarterly reports. Wall Street is worried that FNM's restatement will cost more than previously expected and could actually lead to the stock being delisted from the NYSE. There are a ton of funds and pensions that have huge chunks of FNM and a delisting would probably force them to liquidate their holdings. At least one analyst firm reiterated their "sell" rating on the stock. FNM is a bit oversold and extended so we'd probably expect a minor bounce tomorrow but our target remains unchanged at the $51.50-50.00 range.

Picked on July 27 at $ 56.49
Change since picked: - 3.85
Earnings Date 00/00/05 (unconfirmed)
Average Daily Volume = 3.3 million

---

Google - GOOG - close: 285.68 chg: -5.89 stop: 300.01

Buckle those seat belts and grab the Malox. GOOG is seeing some profit taking. The stock lost just over two percent today and came within cents of our suggested entry point to buy puts. GOOG hit new eight-week lows at $284.88 and shares look poised to continue trading lower tomorrow. Our suggested entry point to buy puts is at $284.50. If we are triggered we are targeting a decline into the $255.00-250.00 range over the next several weeks. We are suggesting the September puts (your choice: 290, 280, 270, or 260 strikes).

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: 104.83 chg: +0.87 stop: 107.01

LEH may have out performed the market today but the action still looks like a failed rally near the $106 level. This may prove to be another bearish entry point but bulls aren't giving up LEH without a fight. Our target is the $100.00 region before August option expiration. A new challenge for the bears is the simple 50-dma, which is now trading at 100.61 and could act as technical support.

Picked on July 21 at $105.13
Change since picked: - 0.30
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 2.7 million

---

3M Co. - MMM - close: 72.00 change: -0.00 stop: 75.11 *new*

We see no change from our previous update. Our target is the $70-68 range. We are lowering the stop loss to $75.11, just above the simple 50-dma.

Picked on July 19 at $ 74.29
Change since picked: - 2.29
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

---

MicroStrategy - MSTR - close: 75.11 chg: +1.75 stop: 77.51

Positive comments regarding MSTR's 10-Q that was filed yesterday evening may have spooked some shorts (and there are a lot of them) into covering some MSTR this morning. That's what we believe accounted for the gap higher. Fortunately, the rally ran out of steam but this remains a very aggressive, high-risk play. We would not consider new positions until MSTR trades back under $75.00 (or even this afternoon's low near $74.66). Our target is the $70.50-70.00 range.

Picked on August 05 at $ 74.95
Change since picked: + 0.16
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 570 thousand

---

Neurocrine Bio. - NBIX - cls: 45.44 chg: -0.74 stop: 49.11*new*

NBIX continues to show relative weakness and lost another 1.6% today. Shares are testing the $45.00 level, which could act as round-number, psychological support. We wouldn't be surprised to see an oversold bounce from there but a failed rally under $47.00 could be used as a new bearish entry point. We are lowering the stop loss to $49.11.

Picked on August 07 at $ 47.30
Change since picked: - 1.86
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 543 thousand
 

Dropped Calls

None
 

Dropped Puts

None
 


Trader's Corner

Broadening Formations versus 'Triangles'

OIN SUBSCRIBER QUESTION
Looking the weekly Nasdaq chart for the composite, is the pattern that of a broadening top?

RESPONSE:
Here's the Nasdaq Composite (COMP) weekly chart below. The pattern here is not a broadening top, but may be forming another type of triangle (different than the 'megaphone' shape of a broadening top) of the type described as a 'diagonal' triangle; and, even more specifically, as an upward diagonal triangle.

However, this assumption that this particular triangle pattern is forming is yet to be seen. To complete this pattern would take ONE more decline (e.g., into a fall low toward 2000) to complete the 5th price swing that falls to the lower (upward sloping) line. Another move higher, well above 2200, would be the final advance and consist of a breakout ABOVE the upper line equal to a final advance before a more significant correction.

A triangle consists of drawing two sloping lines through highs and lows on a chart; from hourly to weekly. When the triangle slopes more or less sideways, rather than at having an up or down slant (i.e., the diagonal triangle), it's a 'horizontal' triangle.

(R.N.) Elliott said that triangles were patterns containing 5 up or down swings or moves called 'waves'. The whole pattern making up a triangle is often the final part of a bull or bear market. It's a type of complex correction (up and down price swings) that will lead to a last move; in the case of an advance, usually to final high well above the ones before it.

An important thing in terms of what a triangle can tell us about where a major trend is going, is that the final thrust or price swing will tend to go in the same direction as the direction of the slant. Since there is an upward slant to COMP's triangle above, we can guess that the final move will be higher; but, before that it wouldn't be surprising to see another decline of a couple hundred points.

This idea that the up and down price swings as labeled from 1 to 4 above, plus the possible 5th, comprises a working out of buying and selling before a final push higher. After that, a bigger correction than seen to date, could be in COMP's future.

All this looks like a crystal ball forecast for sure, but fits a certain predictable 'wave' pattern. The huge move up of 2003 is the biggest and strongest move ('impulse wave 3'). The back and forth since the early 2004 top is all part of a complex 'correction' (wave 4) followed by a final advance (wave 5); that advance completes the Nasdaq bull market that began with the late 2002 low.

One way for me to solicit some e-mails is for me to make my occasional take on how the market moves since the '02 bottom fits a (Elliott) wave pattern interpretation; i.e., of 5 waves up in a bull market; and, the 3 part down-up-down (ABC) components of a bear market. Sometimes a possible 'wave' interpretation I find that 'fits' wave theory, predicts how the broad market trend is unfolding. This may help me in trading a major low or high here or there.

I have to also see other things develop that are more 'classical' technical analysis, but I find certain major theories of the structure of, or how, markets trend, to be of interest (e.g., Dow theory, Gann analysis, Elliott Wave interpretations). For sure in my estimation, a breakout ABOVE or BELOW the upper or lower trendlines on the COMP weekly chart will be an indication of the direction of the major trend.

The last thing I would convey about the chart above is that if the high at '4' instead is exceeded relatively soon, with COMP then moving well above 2200, there is a different pattern (wave) interpretation that kicks in; one suggesting that the low at point '3' was THE completion of the broad '04 -'05 sideways trend already. And, that COMP is into a final advance of the 2002 to 200? bull market.

If on the other hand the correction falls toward the lower trendline, then rebounds from there, we could figure that there's is probably then upside potential for a final advance to around 2400 or higher.

BROADENING BOTTOMS AND TOPS:

The chart below shows a period last year when the hourly Dow (INDU) formed a distinct broadening top pattern. This is the 'megaphone' pattern; this formation is also called a 'reverse symmetrical' triangle.

The breakout, above or below the line is what makes the broadening formation, either a broadening top or a broadening bottom.

Just like any trendline that gets pierced, a return move TO it, often marks later resistance or support; resistance in the example below when INDU rebounded back toward the 10275 area to the trendline, followed by a downside reversal.

The chart below, also an hourly chart, showed a period earlier this year when the chart pattern of that of a broadening bottom. There was one spike up to above the upper trendline, which doesn't particularly matter. The key thing is that the pattern is one of higher highs and higher lows within a defined time span.

The broadening formation is one sometimes seen in the indexes, more often in stocks, although in it's not the most common pattern in individual stocks either. It's always a wide-swinging trading range, with higher successive highs and lower successive lows. When you see the bottoming formation especially, it's pretty predictable (for a bottom).

As described in my book (Essential Technical Analysis) there was a study done at MIT on technical chart patterns that had a better than 'chance' predictive value. The study was about whether technical price 'patterns' had future predictive value. Assuming you could define the characteristics of a chart pattern well enough to set up the conditions for a computer search of historical stock market data. Individual stock price histories were used.

The 5 technical patterns that yielded what the MIT group termed "statistically significant test results" (for predicting a trend change) were the Head & Shoulders (H&S) top and bottom pattern, 2.) a double top, 3.) rectangle top, 4.) a rectangle bottom and 5.) the Broadening bottom formation they didn't find the top pattern to have the same degree of reliability as the bottom formation of this type.

The pattern of lower lows and higher highs in a broadening bottom highlights a wide-swinging price range before a next advance begins. The clue to the trend is when prices break out above the upper line and when a pattern of higher relative highs begins after that of course.

An example with some 'measuring' implications can be seen in Essential Technical Analysis. The chart is from 1998, which seems like ancient history now:

The pattern is the same whether you see it back when or, in Intel Corp (INTC) during the period shown (from last November to early-April):

The 'measuring' (minimum) objective implied by the widest part of the pattern and added to the 'breakout point' was achieved or was very close to it, at the recent INTC high around 29.

NOTE -
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

Good Trading Success!
 

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.

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.

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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