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Daily Newsletter, Wednesday, 08/17/2005

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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

Producer Prices jumped 1% in July, Oil prices fall

Wednesday's cash session found modest gains among the major averages on negative breadth after the government said producer prices jumped 1% in July (4.6% year-over-year), fueled largely by energy prices jumping 4.4%, with gasoline prices surging 11%. However, core prices, which excludes food and energy prices rose a more tepid 0.4% in July (2.8% year-over-year).

Upbeat responses to quarterly earnings from Hewlett Packard (NYSE:HPQ) $26.82 +13.16% (new 52-week high) and chip-equipment maker Applied Materials (NASDAQ:AMAT) $18.22 +6.11% kept some high beta traders busy in the early going, with the highly anticipated week EIA energy inventory data due out at 10:30 AM EDT.

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Boom! A sell program premium was found and the majors dipped to their morning lows as traders focused on another huge draw in unleaded gasoline inventories with the EIA saying stockpiles plunged by 4.96 million barrels!

As I contemplated how much a yellow Labrador retriever with a broken leg and hip might fetch on an eBay "sympathy auction," so that I could afford to fill up the land yacht in coming weeks, a buy program premium came into the equity markets and stocks firmed.

While unleaded gasoline inventories fell for a seventh-straight week, with stockpiles down 6.24%, or 13.2 million barrels in just the past month, the EIA said crude oil inventories rose by a modest 241,000 barrels (third-straight weekly gain), while refiners continued to churn out distillates, adding 1.19 million barrels to the nation's stockpiles.

With bears having a diverse diet and willing to eat just about anything, sellers turned their attention to the energy complex in Wednesday's trade with September Crude Oil futures (cl04u) settling down $2.83, or -4.28% at $63.25. The September Heating Oil (ho05u) settled down $0.08, or -4.3%, while Unleaded Gas futures (hu05u) settled down $0.092, or -4.67% at $1.891, nearly matching last Wednesday's settlement of $1.896.

The energy pits roared with traders showing open palms for the better part of the afternoon. Some traders cited today's sharp sell-off being led by momentum longs liquidating positions as refiners were operating at 93.5% of capacity last week, a slight decline from 95% the week before. If I were to interpret this as a reason to sell, or take profits, it would be that traders think there might be some slack demand, or extra capacity having come back on line.

The EIA did say it still sees relatively strong demand for gasoline. Despite high prices at the pump, motor gasoline demand averaged nearly 9.5 million barrels a day over the past four weeks, 1.5% above year-ago levels.

U.S. Market Watch - 08/17/05 Close

Miners as depicted by the AMEX Gold Bugs Index ($HUI.X) 208.92 -3.15% were today's sector loser, but still hold a modest gain from last Wednesday. In PINK, I've highlighted the OIX, OSX and XNG indices, where losses here provide a drag not only on the NYSE Composite ($NYA.X) 7,461.77 -0.24%, which is home to many a 1,2 and 3-lettered energy stock, but you'll note that the number of new highs on the New York Stock Exchange (NYSE) have also been dropping off in recent weeks. The AMEX Composite (XAX.X) 1,601.86 -1.18%, which set an all-time high of 1,650 earlier this month, is also littered with many energy, biotech and miner names.

In DASHED Pink (SPX/SPY and OEX) there are also some energy names that may have weighed on today's trade. Exxon/Mobil (NYSE:XOM) $58.18 -1.50% still edges out General Electric (NYSE:GE) $34.10 +0.64% as the most heavily weighted component in the OEX. Well down the list and out of the top 33-weighted OEX components you'll find Schlumberger (NYSE:SLB) $81.74 -2.16%, Halliburton (NYSE:HAL) $55.80 -2.20% and Baker Hughes (NYSE:BHI) $55.83 -2.01%.

Each week I try and post the EIA inventory data for crude oil, gasoline and distillates. Sometimes I think it helps investors to look at the raw data instead of getting just a "one week snapshot" in a paragraph of words.

EIA Weekly Crude Oil, Gasoline and Distillates Table

Remember my thoughts from a couple of weeks ago? When I thought refiners would cut back on their distillate builds and turn their focus toward unleaded and have some "relief at the pump?" Oooooeee, did I miss that one! You want another forecast tonight? I didn't think so.

It is crazy isn't it? I do think I can rationalize what a trader is talking about when he gives the "reason" for selling, based on the scenario that the decline in capacity utilization might be construed as being bearish (lower) for unleaded gasoline. And while I'm not from Missouri (the show me state), I guess we could look for a rise in unleaded gasoline stockpiles next week, but a 4.96 million draw this past week would need some monitoring to that scenario.

Hey, if you were, or are long unleaded futures, it is pretty easy to sell and take some profits, then ask some questions next week.

Oh! I wanted to quickly draw your attention to today's hour-by-hour trade in Treasuries. Go back and look at today's 10, 11, 12, 1, 2 and 3 o'clock interval changes.

Let's just discuss the 10-year YIELD ($TNX.X) for simplicity sake. This is the benchmark bond that many traders will "quote."

What's going on at 10:00? Pretty much unchanged. Hmmm... not a "knee-jerk" reaction we might look for, with higher yield signaling an INFLATION response.

Now, what takes place from 11:00 to the 03:00 close? A slight move higher in YIELD right?

OK ... now I don't track crude, unleaded gas, or heating oil in the intra-day market internals, but look at the Commodities Research Bureau Index (CRB.X). What takes place after 11:00? Remember, the EIA data was released at 10:30 AM EDT.

Hmmm... are you thinking "that looks slightly re-factionary?" As if lower energy prices might be less taxing, or stimulative?

Oh those regional banks and the BIX.X. Buggers showed some bullish life on Tuesday when they traded a WEEKLY R1 in their pivot matrix, the first trade of a weekly R1 since last doing so the week of 07/11-07/15. Since the week of 07/11-07/15, the BIX.X has NOT traded a WEEKLY R1 (resistance 1) and has shown the ability to trade WEEKLY S1's (support 1) and lower WEEKLY S2's.

YOU don't need to be a Pivot Matrix expert to grasp what may be taking place here. All you need to do is think like a computer would think.

Here, let me take a sledge hammer and I'm going to hit your knee with it. Let's say your knee is a WEEKLY S1. What is your reaction? (Next time you try that Jeff, I'm going to move my knee).

OK.... now you see me getting ready to swing the sledge hammer again. What are you going to do (no, you can't punch me in the nose)? Move your knee right? Bam! I got your foot this time (WEEKLY S2) and a lower target. See what is going on here, but to the downside.

Now.... I'm not going to try and hit your "belt" with the sledge hammer. This would be a WEEKLY Pivot. The middle part of your body. No.... things are pretty content around the PIVOT. Just a tummy rub.

Hmmmm, how about a tickle with a feather under your arm? At a WEEKLY R1? What's your reaction to that? On the first tickle, you might jump away and grin and say... "Ooo that tickles."

OK, I digress, but I want traders to get a "feel" for what may be taking place within the BIX.X and their weekly Pivot levels. Next week, you might say, hey, tickle my knee (WEEKLY S1) or tickle my tummy (WEEKLY Pivot). Just don't hit me with that sledge hammer again.

Should things get carried away with the tickling, then its your chin, or just behind the ears and WEEKLY R2 (resistance 2).

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

What I like about using Pivot Levels, is that we can imagine that we are a computer and without emotion, manage a inventory of banking stocks. If our lower support levels keep getting pounded with stock from sellers, the computer sets itself up to then sell rallies at resistance. Eventually, buying and selling reaches some type of equilibrium, and things turn. Suddenly support levels are being hit (S2, or S1) and buyers start "tickling" resistance levels (R1, R2) on a more frequent basis.

Now MARKET bulls shouldn't be getting overly euphoric at this point. Those of you that have followed my analysis over the years know that I like to go back in time and set up some tests.

See the "History in WEEKLY Pivots:" where I point to some bars that would represent time from 03/28-04/01. During that time, the BIX.X has been under selling pressure, but that week, we did witness the BIX.X trading UP to a WEEKLY R1. See how it wasn't until 04/21/05 that the BIX.X made a climactic bottom?

Just put that in your mind right now. Bears can do the same thing. The question right now is... will history repeat, and are we currently experiencing a trade similar to 03/28-04/01, or are we currently making a bottom like that found on 04/21?

I wish I could tell you for CERTAIN, but I can't. However, with some "softening" in energy sectors, which have undoubtedly HELPED the SPX/SPY and perhaps the OEX, the BIX.X will remain a focal point of mine. And hopefully yours. Banks carry a MUCH GREATER WEIGHTING in the SPX/SPY and OEX than do energy stocks. Some bear bloggers were out in force today reminding bulls that the main reason the SPX was able to hit 4-year highs earlier this month was because of energy stocks.

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

I want to show the SPX with its current WEEKLY and MONTHLY Pivot retracement. Remember, these levels are simply derived by a mathematical formula (something a computer can understand). If we compare what the BIX.X is doing within its WEEKLY Pivot retracement (trades R1 Tuesday, but SPX nowhere close) and what the BIX.X is doing within its MONTHLY Pivot retracement (has traded MONTHLY S1, but SPX nowhere close to 1,159) we get a very different impression.

Impression: Good gravy! The SPX.X has downside risk to 1,159!

Analysis: Great! Now you (bull bear) understand the pending importance of the BIX.X!!!!

Now look where the SPX hit a low back in April (04/20) and put that in perspective of what the BIX.X did when it made a 04/21 low. You see, the BIX.X didn't need to trade 10% higher in order for the SPX to trade 10% higher. Why? Because there are so many darned banks in the SPX!

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

Watching the QQQQ trade intra-day, it sure seems to want to gravitate either side of $39.00. My source for "Max Pain" theory levels remains out of commission and I haven't had the time to try and study QQQQ/NDX options chains to try and derive a possible August expiration "Max Pain" theory level. Still, I think there might be some "old bears" looking to cover some shorts as the QQQQ eases back into the neckline. If the QQQQ were to break back above that $39.60 level, which just happens to be this week's WEEKLY R1, then bears could be in trouble ... again.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

New Calls

None today.
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Danaher - DHR - close: 54.93 chg: -0.27 stop: 53.99

We have been expecting a dip in DHR to $54.50 and its 200-dma for days now. That dip occurred today and traders bought the initial dip. The question now is whether or not there is any follow through on the morning's bounce. We are still not suggesting new positions yet. We're watching for a rebound back over $56.00.

Picked on August 03 at $ 56.67
Change since picked: - 1.74
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.5 million
 

Put Updates

Best Buy Co - BBY - close: 49.09 chg: -0.01 stop: 52.51

The RLX retail index managed a minor bounce today but not so for BBY. Actually BBY did bounce but it failed this morning and the stock looks poised for more weakness ahead. If you missed yesterday as an entry point this still looks like an entry for new bearish positions. Our target is the $45.50-45.00 range.

Picked on August 08 at $ 49.31
Change since picked: - 0.22
Earnings Date 09/13/05 (unconfirmed)
Average Daily Volume = 5.0 million

---

Building Materials - BMHC - cls: 71.29 chg: -0.04 stop: 75.01

We see no change from our Tuesday update on BMHC. We would still open new bearish positions with BMHC under its simple 10-dma but more conservative traders may want to wait for a decline under the $70.00 level. Our target is the 100-dma (currently 63.95).

Picked on August 16 at $ 71.33
Change since picked: - 0.04
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 289 thousand

---

Carnival Corp - CCL - close: 49.79 chg: +0.68 stop: 52.51

CCL produced a bit of an oversold bounce today. We watch for the bounce to run out of momentum in the 50.50-51.00 region. Our target is the $47.75-47.00 range.

Picked on August 10 at $ 51.79
Change since picked: - 1.80
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume = 2.5 million

---

Eastman Chemical - EMN - close: 51.06 chg: -0.29 stop: 54.01

We see no change from our previous update. Our target is the $50.50-50.00 range.

Picked on August 05 at $ 53.90
Change since picked: - 2.84
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 872 thousand

---

Federated Dept. Stores - FD - cls: 73.31 chg: +0.75 stop: 75.75

The RLX retail index managed a meager bounce today led strongly by a sharp rally in Nordstrom. Shares of FD tried to bounce but failed at their simple 50-dma. We remain on the sidelines waiting for FD to trade at $71.99 to open the play.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/10/05 (confirmed)
Average Daily Volume = 2.2 million

---

Fedex Corp - FDX - close: 84.20 chg: -0.16 stop: 86.01

FDX displayed some relative weakness this morning when shares fell through the bottom of its recent trading range near $84.00. More aggressive players could have used the move as a new entry point to buy puts. We are still waiting for FDX to hit our trigger at $82.99. If opened our target is the $76-75 range.

Picked on August 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: 37.50 chg: +1.87 stop: 40.01

An analyst upgrade to a "buy" rating this morning must have spooked some bears into covering their shorts. FFIV rallied very sharply at the open and the stock added 5.2%, which erased a large chunk of our paper gains in the play. We're not suggesting new positions at this time. Our target remains the $35.00 level but traders may want to exit anywhere under $36.

Picked on August 03 at $ 38.76
Change since picked: - 1.26
Earnings Date 07/20/05 (confirmed)
Average Daily Volume = 1.4 million

---

Google - GOOG - close: 285.10 chg: -0.55 stop: 300.01

We see no change from our Tuesday update on GOOG. We remain bearish with the stock under its 50-dma. Our target is the 100-dma now at $258.00.

Picked on August 11 at $284.50
Change since picked: + 0.60
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 13.6 million

---

KOS Pharma - KOSP - close: 70.86 chg: +0.73 stop: 72.51

There is no change from our previous updates on KOSP. We're suggesting that traders buy puts if KOSP trades at or below $68.25. If opened our target is the $62-60 range.

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

---

Lehman Brothers - LEH - cls: 104.70 chg: +1.67 stop: 107.01

Bulls just refuse to give up on LEH. We're not suggesting new positions and we considering an exit this weekend. It's not uncommon for the brokers to see small rallies ahead of their earnings report and LEH is due to report in mid-September.

Picked on July 21 at $105.13
Change since picked: - 0.43
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 2.7 million

---

3M Co. - MMM - close: 71.76 change: +0.52 stop: 75.11

There is little new to report on for MMM. The stock continues to show weakness and looks poised to hit our target in the $70-68 range if the market continues to see profit taking.

Picked on July 19 at $ 74.29
Change since picked: - 2.53
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

---

Neurocrine Bio. - NBIX - cls: 45.74 chg: -0.34 stop: 48.51

It looks like the recent oversold bounce from the $45.00 level has already run out of steam. Our target is the simple 200-dma near $43.00.

Picked on August 07 at $ 47.30
Change since picked: - 1.56
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 543 thousand

---

United Parcel Svc - UPS - cls: 72.31 chg: +0.17 stop: 74.21

Coming out with a big vote of confidence CSFB started coverage on UPS with a "neutral" (why bother?). UPS did show some relative weakness this morning and traded under the $72.00 level, which has been the bottom of its recent trading range. The stock hit our trigger to buy puts at $71.99 opening the play. In other news UPS announced it was ordering eight new planes from Boeing. Our target for UPS is the $68-67 range.

Picked on August 17 at $ 71.99
Change since picked: + 0.32
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 2.6 million

---

Wynn Resorts - WYNN - close: 52.25 chg: +1.33 stop: 54.01

There is no change from our strategy discussed on Tuesday. We're suggesting that traders wait for confirmation of the new breakdown with a trigger to buy puts at $49.95. If triggered our target is the $45.25-45.00 range.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/05 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Calls

Anadarko Petrol. - APC - close: 85.34 chg: -2.24 stop: 85.98

The oil bulls were plowed over by a sharp sell-off in crude oil prices today. Traders locked in some profits in APC too and the stock lost 2.55% on above average volume. The stock fell through its 40-dma and 50-dma before pausing near the $85 level. We have been stopped out at $85.98. We will be watching for the bounce in oil as the longer-term run is not yet over.

Picked on August 11 at $ 90.51
Change since picked: - 5.17
Earnings Date 07/29/05 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Puts

None
 


Trader's Corner

Wedge Patterns: Another Type of Diagonal Triangle

OIN SUBSCRIBER COMMENT/QUESTION
"As always, your columns are stimulating and of lasting interest.

Question: Is there a distinction between a rising or lowering Diagonal Triangle after a respective up or down trend and the rising or lowering wedge after an up or downtrend, respectively?"

RESPONSE:

Before I answer this question, let me backtrack for others. For those who didn't see it, there's a reference here to my last (8/10/05) Trader's Corner; this column can be viewed in its entirety by clicking here

I was speculating on the possibility that the weekly Nasdaq Composite (COMP) might be tracing out an upward diagonal triangle. There are only 4 points or 'touches' to the two sides of 'triangle' formations so far; if less than 5 defining points however, the pattern is not called a 'triangle' typically. At least not according to the analysis of (R.N.) Elliott, who analyzed this type of pattern extensively.

Therefore, I was imagining a possible completion of a triangle by a COMP pullback to as low as the 2025-2000 area (making point 5 below), followed by a final move to a high for this advance; i.e., dating from late-2002 per the markings on the chart below:

When I wrote this and displayed the chart below, it seemed unlikely that the Composite would again dip below 2100. Stay tuned on that, as COMP closed yesterday (8/16/05) at 2137.

Some points about a "diagonal triangle' pattern relating to your question, as I think I understand it anyway:

1. The rising or falling diagonal triangle has both trendlines sloping up or down; versus the upper line sloping down and the lower line sloping up, which forms the more common 'horizontal' triangle.

2. Both the upward and downward sloping diagonal triangle usually form as the final 'consolidation' before a final run up to a new high or, fall to a new low, respectively.

3. Because this type formation is usually a continuation pattern; i.e., the trend will CONTINUE after the narrowing up and down price swings complete themselves ...

4. the slope of the triangle is in the (same) direction as the ongoing trend.

5. The breakout is UP in the case of the upward sloping triangle and DOWN in the case of the downward sloping triangle, which continues in the same direction as the prior overall trend.

THE WEDGE PATTERN
The 'wedge' pattern is also an 'imagined' triangle, where 2 of he trendlines are lines connecting several highs and lows of price swings that carry less far each time; resulting in a projected apex or end point of the triangle that becomes narrower and narrower.

However, wedge patterns are typically REVERSAL type patterns. The wedge pattern slopes in the same direction as the prior trend. But, a rising or falling wedge implies a reversal of price direction ahead. And, the ENTIRE advance or decline, more or less, is contained WITHIN the trendlines.

The Dow 30 Average (INDU) formed an upward sloping wedge between the summer of 2004 and the early part of this year (2005). Once the lower trendline was broken, an intermediate INDU downtrend was signaled; e.g., a downtrend of several weeks and carrying back toward the area from which the index started tracing out the wedge:

The wedge example in the Dow chart above didn't quite achieve a decline all the way back to the prior low around 9800. But, hey, 10,000 was seen as 'the' magic number (for buyers) at the time and what's a couple of hundred points in the Dow anyway!

There's a point that I would make here: not to hang on for perfect objectives. INDU pierced its down trendline after reaching 10,000. This was around 101.8 in the Dow Index (DJX). It was then time (if not sooner) to exit DJX puts, and not to expect a final decline to the 98.0 area.

Back in March, I used the following chart example, also in the Dow Industrials (INDU), as showing back to back wedge type patterns in INDU:

Another historical example of a FALLING wedge can serve to illustrate a 'measuring' implication of wedge patterns:

On the chart below, I applied the measuring rule of thumb for a price objective on wedge patterns, where the next trend should at least get to the area of the beginning of the wedge pattern. In this example: to the highest prior top from the START of the wedge formation; only a "minimum" upside objective is implied.

TThe trend that follows can go well beyond this point, which has certainly been true in the case of the QQQQ (Nasdaq 100) tracking stock, which has advanced so far to as high at $40.

You may not always see a whole lot of difference between these triangles. But, the rising/falling diagonal triangle forms after a trend has gone for some time, has 5 highs or lows that touch the two lines and this is followed by a breakout above or below the triangle. br>
The wedge formation implies 'compression' of buying and selling interest as the price swings get narrower and narrower. The rising and falling wedge will typically be followed by a new trend that is in the opposite direction of the trend that has come before.

In my experience, the wedge reversal pattern, either of the rising (bearish) or falling (bearish) type, is more common in individual stocks than in the indexes.

I also find it a quite reliable pattern in the sense that this formation very often results in a sizable reversal. One taking the new trend back to where the wedge began to form; i.e., resulting in achieving the 'minimum' upside or downside objectives:

RRISING BEARISH WEDGE - eBay Inc (EBAY):

FALLING BULLISH WEDGE - Intel Corp (INTC):

NOTE - br> PPlease 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! br>  

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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