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Daily Newsletter, Wednesday, 08/31/2005

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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

Energized at Month's End

Stocks and Treasuries finished the month with strong gains on Wednesday as investors contemplated the damage and potential economic benefit from Hurricane Katrina's wrath along the Gulf Coast.

After meeting with his cabinet on Friday, President Bush called Hurricane Katrina one of the nation's worst natural disasters, adding that recovery from the storm will take years.

Earlier this morning, the Bush administration authorized some release of oil from the nation's SPR, citing several major refiners inquiring about oil from the reserve. Citgo Petroleum was reportedly asking for 250,000 to 500,000 barrels as pipelines along the Gulf Coast remained out of service.

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Late Wednesday, Valero Energy (VLO) $106.50 +10.03% said its Krotz refinery is running just 48,000 barrels a day, about 56% capacity, which is down from 70% capacity earlier this week.

As I type, the Louisiana Offshore Oil Port (LOOP) said it had just regained power in Clovelly, La, and expects to have the oil flowing from there through LOCAP pipeline within hours.

"We have our emergency generator up and operating," said Mark Bugg, LOOP's scheduling manager. "We'll get some oil flowing to LOCAP in a few hours."

LOOP's 48" LOCAP pipeline connects Clovelly caverns to terminals and Royal Dutch Shell's Capline Pipeline at St. James, La., hub. The system can move up to 1.2 million barrels a day of crude oil from St. James to Patoka, Ill.

News crossing the wires late this afternoon also has Entergy saying it believes it can have power to refiners and pipelines up and running in 7 to 10 days.

Stocks began the session mixed-to-lower as the near-term September Unleaded futures (hu05u) contract continued its torrid climb to trade $2.93 intra-day. With no upside limits ahead of contract expiration, equity markets remained jittery. October Unleaded (hu05v) settled up 5.5 cents, or 2.53% at $2.255, after surging more than 11% on Tuesday.

As investors kept an eye on unleaded gasoline prices, economic data showed the economy grew at a revised slightly lower 3.3% annualized rate from a previously reported 3.4% rate in the second quarter. Economists expected an unrevised 3.4% reading. The Commerce Department said the revision was largely due to an upward revision in imports and a downward revision to consumer spending, offset by an upward revision to inventory investments.

Core inflation was revised lower to 1.6% annualized from 1.8% in the previous estimate. Core inflation was running at a 2.4% annual clip in the first quarter, creating additional worries for Federal Reserve policymakers, who would like to keep core inflation between 1% and 2%.

But despite the "core inflation worries" from the second quarter data, an insatiable appetite for Treasuries persisted for a second-straight session, with the benchmark 10-year yield ($TNX.X) plunging 7.0 basis points to finish at 4.02%, after trading as low as 4.005% mid-session.

Buying was heavier in the shorter-dated 5-year ($FVX.X) with its yield falling 9.4 basis points to 3.869%.

Buying has been so strong in the Treasury complex the past two sessions that we saw the December Fed Funds futures (ff05z) 96.08 +0.10% rising again today, to now predict the market sees only a 68% chance of two 25 basis point rate hikes from the Fed. Prior to Hurricane Katrina, December Fed Funds were predicting a 30% probability of three 25 basis point hikes.

It would have to me my analysis that this sharp move, or change of posture in this Fed funds contract has investors now contemplating the possibility that the Fed may not be as inclined to raise rates 25 bp at its November 1 meeting. Market participants still see a high likelihood that the Fed will raise its target on Fed funds to 3.75% at its September meeting.

This week's EIA report may have been "thrown out the window" after Hurrican Katrina hit shore after the data was compiled. With roughly 80% of production and refining from the Gulf of Mexico disrupted, next week's figures may also be taken with a grain of salt. EVERYBODY knows there has been disruptions, and the main focus will be when power is restored to the Mississippi / Louisiana shores, and the news will come in bits a pieces.

Still, the EIA said crude oil inventories for the week ended 08/26 fell by 1.5 million barrels to 321.4 million barrels, while gasoline stocks fell for a ninth-straight week, by 508,000 barrles to 194.3 million barrels. Distillate stockpile rose for a fifteenth-straight week, rising by 2.7 million barrels to 135.2 million barrels.

U.S. Market Watch - 08/31/05 Close

The Oil Service Index (OSX.X) 171.85 +3.56% and Natural Gas Index (XNG.X) 394.95 +2.32% traded all-time highs, but I'd have to give the S&P Insurance Index ($IUX.X) 325.01 +0.13% my "reversal sector of the day" award as buyers took control despite the uncertainty of dollar damage will mount to after Hurricane Katrina.

The Morgan Stanley Health Provider Index (RXH.X) 481.11 -0.03% was today's weak spot, with Tenet Healthcare (THC) $12.18 -3.79% saying 5 of its New Orleans-area hospitals and another in Mississippi were severely damaged.

Shares of Tiffany & Co. (TIF) $37.42 +12.33% surged to a new 52-week high and fueled some buying among the high-end retailers after the luxury retailer reported quarterly earnings of $50.6 million, or $0.35 a share, up from a year-ago profit of $33.1 million, or $0.22 cents a share. The company attributed a boost of $0.05 a share in its latest earnings to a lower effective tax rate than last year.

The company said sales rose 11% in the latest three months to $526.7 million from $476.6 million in the same period a year earlier. Same-store sales rose 6% in the U.S. and 1% in Japan. On a world-wide, constant exchange rate basis, comparable sales increased 4% in the period.

The results easily surpassed Wall Street's consensus of $0.24 a share on sales of $519.6 million.

Looking ahead, Tiffany lifted its outlook for the full year 2005 to a profit of $1.55 to $1.65 a share from a previous projection for a profit of $1.45 to $1.55 a share. Wall Street's current consensus estimate is for a profit of $1.51 a share for the fiscal year, which ends in January.

Shares of Wal-Mart (WMT) $44.96 -0.50%, which warned investors that higher gasoline prices were hurting results, did trade a 52-week low of $44.70 intra-day and was one of four (AA -1.07%, GM -0.75%, DIS -0.39%) Dow components to finish in the red, in an otherwise bullish session.

Shares of Hewlett Packard (HPQ) $27.76 +2.43% surged to another 52-week high, on no news that I could find. I made note in today's market monitor that the stock is nearing its PnF chart's bullish vertical count of $28.50. Heavy-equipment maker Caterpillar (CAT) $55.49 +3.17% also ticked to a new 52-week high intra-day.

I thought today's trade, from a "stock specific" trade was fascinating and does suggest that while their is doom and gloom being reported by the media, and perhaps many an investment analyst with regards to Hurricane Katrina, there are obviously some buyers that aren't thinking doom and gloom, but opportunity!

Coal stocks "glowed" in Wednesday's session as "the other black gold" bulls stepped up to an alternative energy source. Power lines down and damaged from water? General Cable (BGC) $15.69 +4.60% found a looked-for bid as one of the few "pure publicly traded" plays as oil/gas and utility providers along the Louisiana and Mississippi coast try to restore power to customers.

If you're thinking "this is the bad news for the oil/gas bubble to deflate from," and afraid of buying the proverbial top, then think outside the box.

As President Bush said, the recovery from Hurricane Katrina
will take years.

Rome wasn't built in a day and I don't think New Orleans will rebuild itself in a day either.

While I don't pick plays for the Premier Investor, or OptionInvestor.com play lists, watch the play lists closely the next few weeks. Look for some "old economy" stocks that may have pulled into upward trend (Point and figure or bar chart) that have showed some bullish life the past few session, which could signal that these are the company's that the MARKET sees as benefiting from some economic stimulus as Mississippi and Louisiana begin rebuilding efforts.

Today's top market cap gains were found among integrated oil & gas, oil and gas operations, major drugs, money center banks and communications services.

If you're an S&P trader, you're eyes open up a bit with money center banks showing up on the list. My thoughts are that there is a re-think going on about future Fed tightening.

Drugs? Certainly a defensive sector that has been an under performer the past couple of years, but finds a nice bounce from a curling higher 200-day SMA.

Market cap losers were few, but discount department was atop this list. Casino & Gaming was number 2. Again... think outside the box. Yes, Casino's that operate along the Gulf Coast have suffered major damage. You can't operate a Casino with water-soaked slot machines. Shares of International Game Technology (IGT) $27.72 +1.02% found gains again today.

In Tuesday evening's Market Monitor, I noted that www.stockcharts.com's S&P 100 Bullish % ($BPOEX) had reversed back lower to "bear confirmed" status at 64% and signals that supply (O) of stock among some very large cap stocks is starting to outstrip demand (X).

Let's take a quick look at the point and figure chart of the S&P 100 Index (OEX.X) on an unconventional 4-point box size chart. Conventional 5-point box is used among major institutions.

However, the reason I'd like to show you the 4-point box, is for those of you that are using your bullish % indicator ($BPOEX), as you can more easily understand the recent reversal lower in the bullish % indicator (64% of stocks in this index show a "buy signal" still associated with their chart. Therefore, 36% of the 100 stocks currently have a "sell signal" associated with their PnF chart).

S&P 100 Index (OEX.X) - 4-point box

Wow! A nice gain of just more than 4-points, but it doesn't even show up on the 4-box scale. The point and figure chartist using the "3-box reversal technique" for charting, can't chart any Xs (demand) until a trade at 575 is found.

Analysis here would be that the OEX is seeing some meaningful distribution, not only from the internals as depicted by the bullish %, but the recent 3-box reversal lower (12 points) to 560.

But how those institutional buyers like to lurk around the bullish support trends! Even if its a little 4-point gain to end the month.

In my opinion, a warning bell for weakness has been sounded, but for any meaningful technical damage to be registered, I think it would take a trade at 540. Yes, a bull should assess downside risk to 540, and a bear assess upside risk to 580.

I've noted several recent inflection point high and low bullish % readings, where a trader/investor can tie in with the OEX chart itself. Remember! You can find FREE point and figure charts at www.stockcharts.com.

When reviewing the major averages bullish % charts, remember that these are UNWEIGHTED. In other words, each stock's chart is just as important as another. One stock, one vote (shows a buy signal or sell signal). It is from these very basic supply/demand relationships that traders/investors get an immediate feel/observation as to internal strength, or weakness.

Now, here's the how the top 25 MARKET CAP WEIGHTED OEX components have faired over the past 5-days, 20-days and 52-weeks.

25-most heavily weighted components

Exxon Mobil (XOM) $59.90 +2.20% and General Electric (GE) $33.61 +1.11% are the most heavily weighted components. A couple of weeks ago I profiled a BULLISH trade for GE in the Market Monitor, with thought that we might see some capital rotate away from the "oils," where up until Monday, their SECTOR BULLISH % was weakening from some very high bullish % readings.

The relative weakness of GE, a company that has their finger in just about every piece of the global economic pie is a bit concerning, and may well suggest that energy prices are dragging not only on the U.S. economy, but the global economy as well.

Investors have "fallen in love" with HPQ again. Don't YOU get "first date" butterflies and propose marriage to HPQ so near its bullish vertical count at this point. Easy does it. While stocks can exceed their bullish vertical counts, sometimes never achieve them, HPQ is worth a first date for new entries, but I'm not sure its "marriage material" right here.

I'll have to take a look at DELL on this 12% pullback. Can computers still run after being submerged in water?

For the month of October, roughly 20-trading sessions, the OEX fell 8.17 points, or 1.4%. WMT, PFE and JNJ provided the better part of the drag as did INTC, IBM, JPM and CSCO.

Hmmm... is business 12.79% better at HPQ than it is at DELL over the past 20 days?

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

The QQQQ found the bulk of its gains in the final hour of trade, and gains came quickly above the $38.66 level. Some technical similarity showing up as found in early July. We did see the NASDAQ-100 Bullish % ($BPNDX) give back 2 stocks to reversing lower point and figure sell signals and still reads "bull correction" status at 56%.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
AET None
CTX  
MDC  
NE  

New Calls

Aetna - AET - close: 79.67 change: +0.63 stop: 76.99

Company Description:
As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 14.435 million medical members, 12.976 million dental members, 9.117 million pharmacy members and 13.662 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 684,000 health care professionals, including over 405,000 primary care and specialist doctors and 4,135 hospitals. (source: company press release or website)

Why We Like It:
Insurance stock AET has managed to weather the August weakness relatively well. The stock may have broken through support at $80.00 and its simple 100-dma but there has been no follow through to the downside. Instead the stock has been consolidating sideways all month. After producing a double-bottom pattern near $74.50 in late July and early August shares of AET narrowed its consolidation to $76.50-80.00. Now AET is breaking out over technical resistance at its simple 50-dma. Short-term oscillators are positive and we're seeing similar improvements on some of its weekly indicators. If AET can breakout over the $80.00 level it will produce a new buy signal on its Point & Figure chart. We want to suggest a trigger to buy puts at $80.25. Our target will be the $84.75-85.25 range. FYI: we're also bullish on Cigna (CI) and readers might want to watch that stock for a breakout over the $116.00 level.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 75.00 AET-JO OI= 652 current ask $6.30
BUY CALL OCT 80.00 AET-JP OI=2158 current ask $3.10
BUY CALL OCT 85.00 AET-JQ OI=1008 current ask $1.15

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

Centex - CTX - close: 67.75 chg: +2.37 stop: 63.99

Company Description:
Dallas, Texas-based Centex, through its subsidiaries, is one of the nation's premier companies in homebuilding, financial services, home services and commercial contracting. (source: company press release or website)

Why We Like It:
We think homebuilders are due for a bounce and it looks like that bounce has begun. The sector rebounded sharply today as bond yields tumbled for their second day in a row. Lower yields also drag down mortgage rates, which are a boon for the builders keeping home prices more affordable. The builders could also be getting a boost from the perceived benefit of the massive rebuilding that will take place across Louisiana and Mississippi following hurricane Katrina's damage. CTX doesn't just build homes but also has a construction services unit that builders schools, hospitals, office buildings, hotels, etc. We also like how shares of CTX are rebounding from close to technical support at its simple and exponential 200-dma. Today's rally pushed the stock through technical resistance at the 10-dma and the 100-dma, which also broke through its five-week trendline of resistance. However, just to be sure we want to use a trigger to confirm the breakout. We're suggesting a trigger at $68.25 to open the play. If triggered we'll target a move into the $73.00-75.00 range. We do anticipate some resistance near $70.00 so don't be surprised to see a test of the $70 level and a dip back toward $68.00 before it continues higher.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 65.00 CTX-JM OI=2117 current ask $5.30
BUY CALL OCT 70.00 CTX-JN OI=5907 current ask $2.45
BUY CALL OCT 75.00 CTX-JO OI=2001 current ask $0.90

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 1.6 million

---

MDC Holdings - MDC - close: 76.38 change: +2.23 stop: 71.99

Company Description:
MDC, whose subsidiaries build homes under the name "Richmond American Homes," is one of the largest homebuilders in the United States. The Company also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary HomeAmerican Mortgage Corporation. MDC is a major regional homebuilder with a significant presence in some of the country's best housing markets. The Company is the largest homebuilder in Colorado; among the top five homebuilders in Northern Virginia, suburban Maryland, Jacksonville, Phoenix, Tucson, Las Vegas and Salt Lake City; and among the top ten homebuilders in Northern California and Southern California. MDC also has established operating divisions in Dallas/Fort Worth, Houston, West Florida, Philadelphia/Delaware Valley and Chicago. (source: company press release or website)

Why We Like It:
MCD is another play on the rebound in the homebuilders and any potential rebuilding from hurricane Katrina. We like the rebound from technical support at its simple and exponential 200-dma. Volume on today's rally was very strong but to confirm the move we want to use a trigger at $77.01. We do expect some resistance at $80.00 but will target a move into the $83.00-85.00 range.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 75.00 MDC-JO OI= 17 current ask $5.20
BUY CALL OCT 80.00 MDC-JP OI= 72 current ask $2.75
BUY CALL OCT 85.00 MDC-JQ OI= 97 current ask $1.30

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/13/05 (unconfirmed)
Average Daily Volume = 489 thousand

---

Noble Corp - NE - close: 71.30 change: +2.54 stop: 67.25

Company Description:
Noble Corporation is a leading provider of diversified services for the oil and gas industry. Contract drilling services are performed with the Company's fleet of 60 mobile offshore drilling units located in key markets worldwide. This fleet consists of 13 semisubmersibles, three dynamically positioned drillships, 41 jackups and three submersibles. Approximately 80 percent of the fleet is currently deployed in international markets, principally including the Middle East, Mexico, the North Sea, Brazil, West Africa, India, and the Mediterranean Sea. The Company provides technologically advanced drilling-related products and services designed to create value for our customers. The Company also provides labor contract drilling services, well site and project management services, and engineering services. (source: company press release or website)

Why We Like It:
Oil services companies are going to be in strong demand as our nation's energy sector tries to rebuild the damage caused by hurricane Katrina. This is pushing oil service stocks to new highs and shares of NE touched a new all-time high today near $72.00. Volume was very strong and NE looks poised to breakout from its recent $67-72 trading range over the past five weeks. The MACD on the daily chart is nearing a new buy signal and short-term oscillators are already bullish. The P&F chart points to a $94 target and just produced a new double-top breakout. We are suggesting bullish positions here above $70.00 but more conservative or momentum type traders can wait for a new high over $72.00. Our target is the $78.00-80.00 range.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 70.00 NE-JN OI=267 current ask $4.30
BUY CALL OCT 75.00 NE-JO OI= 73 current ask $1.95

Picked on August 31 at $ 71.30
Change since picked: + 0.00
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume = 1.8 million
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Kerr Mcgee - KMG - close: 88.03 chg: +1.02 stop: 83.90 *new*

As previously reported the administration did announce that it was opening the Strategic Petroleum Reserve (SPR) to help alleviate shortages caused by Katrina. That didn't stop the rally in oil stocks and the OIX index added 2.17% while OSX services index added 3.5%. Shares of KMG climbed 1.17% and broke through three-week old resistance at the $88.00 mark. Per our comments yesterday we're suggesting that readers consider exiting half their position at our initial target of $89.50-90.00 and the second half of their position at $92.00-92.50. We are raising the stop loss to $83.90.

Picked on August 21 at $ 85.99
Change since picked: + 2.09
Earnings Date 07/27/05 (confirmed)
Average Daily Volume = 2.4 million
 

Put Updates

AutoZone - AZO - close: 94.50 change: +0.60 stop: 97.75

Retailers bounced higher with the rest of the market and AZO managed to under perform its peers in the sector. We're watching the simple 10-dma to act as overhead resistance. Our target is the 91.25-91.00 range near its simple 200-dma.

Picked on August 28 at $ 95.45
Change since picked: - 0.95
Earnings Date 09/20/05 (unconfirmed)
Average Daily Volume = 732 thousand

---

Carnival Corp - CCL - close: 49.34 chg: +0.25 stop: 52.01

While it's interesting that the Federal government is considering using cruise ships to evacuate people or use them as temporary emergency shelters for the damaged coast line we don't believe it's going to affect the share price of either CCL or RCL. The stock did not participate much in today's broad market bounce. Our target is the $47.75-47.00 range.

Picked on August 10 at $ 51.79
Change since picked: - 2.45
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume = 2.5 million

---

CDW Corp - CDWC - close: 59.08 chg: -0.51 stop: 62.01

Heads up! CDWC under performed the market and its peers with a 0.85% decline on above average volume. The stock broke down under the $59 level and hit our trigger to buy puts at $58.99 thus opening the play. Shares did manage a bounce from its simple 100-dma but the intraday chart looks bearish. Our target is the $55.00-54.00 range.

Picked on August 31 at $ 58.99
Change since picked: + 0.09
Earnings Date 07/19/05 (confirmed)
Average Daily Volume = 867 thousand

---

Electronic Arts - ERTS - close: 57.28 change: +0.87 stop: 60.01

ERTS is a new play from the Tuesday night newsletter. Today's action looks like an oversold bounce and a failed rally under its simple 200-dma could be used as a new bearish entry point. For more details see our previous update. Our target is the $51.00-50.00 range.

Picked on August 30 at $ 56.41
Change since picked: + 0.87
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 3.7 million

---

Federated Dept. Stores - FD - cls: 68.98 chg: -0.50 stop: 73.51*new

We find it pretty interesting that FD did not bounce with the rest of the market or the retail sector today. The stock tried to bounce early on but it failed near the $70.00 level. Volume was pretty heavy today. Our target is the $67.00-65.00 range. We are lowering the stop loss to $73.51.

Picked on August 22 at $ 71.99
Change since picked: - 2.88
Earnings Date 08/10/05 (confirmed)
Average Daily Volume = 2.2 million

---

Fedex Corp - FDX - close: 81.44 chg: +0.07 stop: 86.01

The transportation sector index may have bounced today but shares of FDX failed to truly participate. The pattern remains bearish. We do expect a bounce once FDX touches round-number support near $80.00 but our target is the $76-75 range. Watch for the $83 region to act as overhead resistance.

Picked on August 23 at $ 82.99
Change since picked: - 1.55
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

Google - GOOG - close: 286.00 chg: -1.27 stop: 290.51

We are still surprised that GOOG has not yet stopped us out at $290.51. The lack of follow through on its bullish breakout over its multi-week trendline of resistance is shocking. The $290.00 level remains short-term overhead resistance. We're not suggesting new plays at this time. Instead we're suggesting that traders exit bearish positions although by the look of GOOG's short-term technicals we might get lucky and get a chance to exit in the $280-284 region if the stock continues to slip.

Picked on August 11 at $284.50
Change since picked: + 1.50
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 13.6 million

---

Illinois Tool Works - ITW - cls: 84.28 chg: +1.21 stop: 86.51*new

Traders need to turn defensive here on ITW. Positive broker comments this morning and a wave of buying pressure for anything remotely building or construction related helped push ITW back over the $84.00 level and its simple 50-dma. Investors bid up construction-related stocks assuming they'll benefit from the massive rebuilding following hurricane Katrina. We are not suggesting new plays and we're lowering the stop loss to $86.51.

Picked on August 23 at $ 85.05
Change since picked: - 0.77
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

KOS Pharma - KOSP - close: 68.05 chg: +2.19 stop: 70.51

Traders need to pay attention here with KOSP. The stock rallied sharply today adding 3.3% and reversing yesterday's sell-off. Short-term the stock is still in its bearish trend lower but KOSP is testing technical resistance at its simple 10-dma (now at 68.55). There is additional resistance at the 50-dma near $70.00 but what concerns us is the bullish breakout in the BTK biotech index today (+2.5%). Normally we might look for a failed rally under the 10-dma as a new entry point but right now we'd step back and just watch.

Picked on August 22 at $ 68.25
Change since picked: - 0.20
Earnings Date 08/04/05 (confirmed)
Average Daily Volume = 642 thousand

---

3M Co. - MMM - close: 71.15 change: +0.17 stop: 72.01*new*

No change from our previous update on Tuesday. We're lowering the stop loss to $72.01. Our target is 70.00.

Picked on July 19 at $ 74.29
Change since picked: - 3.14
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

---

United Parcel Svc - UPS - cls: 70.89 chg: +0.47 stop: 74.21

There is no real change from our previous update on UPS. The transports managed a decent bounce but UPS under performed its peers. Readers can watch for a bounce toward the 50-dma near $71.35. A failed rally there can be used as a new entry point. Our target is the $68-67 range.

Picked on August 17 at $ 71.99
Change since picked: - 1.10
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 2.6 million

---

Urban Outfitters - URBN - cls: 55.66 chg: +0.61 stop: 57.01

URBN is off to a bad start. Shares of apparel retailer URBN managed to bounce higher along with the rest of the market and the retail sector but not before dipping toward the $54.00 level. That's right. This morning the stock broke down under support at $54.50 and its simple 100-dma to trade at our suggested trigger point of $54.25 opening the play. The question now is how high will this bounce go and will the $56.00 level, which was support the previous two weeks, now act as resistance. We would not suggest new positions until we see the bounce fail.

Picked on August 31 at $ 54.25
Change since picked: + 1.41
Earnings Date 08/11/05 (confirmed)
Average Daily Volume = 1.1 million

---

Wynn Resorts - WYNN - close: 47.72 chg: +0.95 stop: 50.25

With virtually the entire market in bounce mode today it was not a surprise to see shares of WYNN produce an oversold bounce too. The closest level of overhead resistance is the simple 10-dma now at 48.37. The next level of overhead resistance is the $50.00 mark.

Picked on August 19 at $ 49.95
Change since picked: - 2.13
Earnings Date 08/01/05 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Calls

None
 

Dropped Puts

Ingersoll Rand - IR - close: 79.62 chg: +2.09 stop: 80.01

It's time to go! We're exiting early now that shares of IR have broken out above technical resistance at the simple 200-dma and price resistance at $78.00. The move was probably fueled by the huge surge in anything building-related as investors bet on the massive building effort sure to come following hurricane Katrina. Don't forget that IR is due to split 2-for-1 on Friday.

Picked on August 24 at $ 77.49
Change since picked: + 2.13
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.1 million

---

Simon Prpty Grp - SPG - close: 76.07 chg: +1.51 stop: 77.01

It does not look like SPG is going to work out for us and we're choosing to cut our losses as soon as possible. The stock rallied sharply today adding just over two percent on above average volume. The move over round-number resistance at $75.00 and technical resistance at the 50-dma is bad news if you're short.

Picked on August 18 at $ 75.24
Change since picked: + 0.83
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 946 thousand
 


Trader's Corner

Putting It All Together

You said in your recent Sunday Index Trader that the market was at or near a bottom and had some price targets that pretty well fit the lows of this week (mon,tues). Did you mean to say your Nas 100 target was 1447 to 1440 since it looked like the bottom of your channel was about 1550?

Since the strong rally today (wed) looks like the market reversal that was near, do you find similar recurring technical aspects that suggest that that its getting close to a turnaround at either a top or bottom?

RESPONSE:
No on the Nasdaq 100 (NDX) going to FOURteen something; I had a typo in my summary ('bottom line') commentary at top where I said that my original Nasdaq targets had been '1447 to perhaps '1440': I meant to say '1547' to '1540'.

In my specific NDX index commentary further on, which I hope you saw, the one WITH the NDX chart, I went on to say: " I continue to have call buying interest if the (NDX) index gets to its up trendline, at the green (up) arrow in the 1550 area." Monday's low (8/29) was 1551, versus the close today (8/31) at 1581. See the full commentary, on the OI web site by clicking here.

I also thought that NDX might make a final low 10 points or more lower than this target. However, the Nas 100 tends to trade pretty 'technically' and it often would find support at the its well-defined up trendline; even, though the Nasdaq Composite (COMP) broke below its lower trendline, but the COMP rally was way 'overdone' on the upside, reflecting many smaller Nas stocks that were perceived as undervalued.

I've overlooked factors in the past that might have caused me to hold off from a premature trade. Being WRONG! sometimes can be helpful if you go back and do a post-mortem on what you overlooked; e.g., the market was quite overbought or oversold; their was a prior top or bottom you weren't paying attention to, that again brought in major selling or buying interest; etc.

I use an acronym, "POVS", for my check list of factors I find most important to review carefully and standing for:
Pattern
Overbought/Oversold
Volume (a 10-day average of UpVolume, useful to see BOTTOMS only
Sentiment

PATTERN relates to chart patterns like key reversals, double tops, etc.; also, steepness of a trend, trendlines, retracements and things of this nature that mostly relates to PRICE patterns.

OVERBOUGHT/OVERSOLD is mostly, for me, defined by a 13-day RSI for most of the major indexes, with the exception of a 21-day Slow Stochastic indicator that I find especially useful in seeing the Dow 30's (INDU) relative overbought or oversold condition.

SENTIMENT is the level of bullishness or bearishness that I measure by looking at a daily ratio of CBOE call volume relative to total put volume for EQUITIES. I don't want to use the Index options volume numbers, as there's significant hedging going on with them a lot of the time. So, TRADER 'sentiment' is important.

I'll show my "POVS" chart for the Nasdaq here and compare what I assume to be THIS current BOTTOM with the last one in April, which was picture perfect, so to speak, in that ALL aspects were showing a bottom type pattern:

PATTERN
Completion of a 62% 'Fibonacci' retracement. Trendline 1 (T1), drawn with only TWO points, versus the more 'trustworthy' three points, was pierced and prices continued lower. However, an up trendline of 3 points was formed with Monday and Tuesday's lows and this appears to be the new 'valid' up trendline.

PATTERN contu:
Monday's low in COMP also corresponded with completion of a 62% retracement. Common retracements of a prior price swing are: 38% (sometimes 33%); if exceeded, a retracement often becomes one-half or 50%; if exceeded again (and UNLESS the index or stock is going to have a ROUND-TRIP to its prior low), its common for a retracement to go about an eighth more and achieve a 62% retracement (sometimes, 2/3rds or 66%).

OVERBOUGHT/OVERSOLD
The Nasdaq Composite as can be seen above, did not get to what I would call a typical 'fully' oversold extreme, which is a reading between 35 and 30.

The Nasdaq 100 (NDX) was somewhat closer to achieving this condition and its chart is below. The main consideration of PATTERN relative to NDX, is that it has bottomed so far right at its up trendline, or the lower end of its (uptrend) channel:

BACK TO THE NASDAQ COMPOSITE 'POVS' CHART
in order to discuss my 'VOLUME' and 'SENTIMENT' indicators:

VOLUME
This is an indicator that is significant for BOTTOMS only.

You can see from the chart segment above of 'Volume', that the 10-day average of daily Nasdaq (total) Up Volume, bottomed below the lower line recently and then turned up. What is this all about, since I don't often show this (volume) chart on my weekly commentaries?

Volume is an important ancillary indicator that is second only to price in being important for technical analysis. Of course in fact, all technical works with is price and volume information - well, in stock index futures, there is some analysis that can be done with "open interest", but this doesn't enter in here.

Stock market volume will often 'precede' price. For example, before a market gets to or near a price area that will be perceived as offering 'value', especially a market that is in transition, there will usually tend to be a contraction of trading activity (volume) to a similar and reoccurring level and this occurrence will tend to precede the most substantial and sustained market rallies.

I wrote something about this topic and its use as a type of bottoming "indicator" recently, as part of an article that was published in the July '04' issue of Technical Analysis of Stocks & Commodities magazine.

The most significant volume figure for stocks, for its use as one type of indication for significant or major bottoms, is up or advancing volume. Total NYSE or Nasdaq daily advancing volume is a count of all shares bought on upticks, or at a price higher than the preceding transaction.

Up volume is an excellent test of buying interest being as this type trading activity reflects a willingness to "pay up" for stocks so to speak. To refine the daily figure, I use a 10-day moving average of advancing volume for both the New York Stock Exchange (NYSE) and Nasdaq.

There is a tendency in any given period, of months or years, for there to be a "base" line for how far (what contraction level) a 10-day moving average of Nasdaq or NYSE Up volume will fall to before there is a market bottom. For example, when a 10-day moving average of total NYSE up volume contracts to around 530-545 million shares - this figure will vary depending on what phase of the trend that we are in.

With Nasdaq, the 'baseline' 10-day moving average figure has been in recent months, around 490 million shares. The NYSE daily UpVolume average is what I use on my S&P 'POVS' chart and will be shown with my last chart, that of the S&P 500. I use the SAME 'SENTIMENT' indicator for both the Nasdaq and the S&P.

PATTERN aspects of the S&P 500 (SPX) was completion of a 'well-defined' up trendline with the two lows of this week. The rally from this trendline suggests that a bottom is in. (See the up green arrows for the points.) The RSI, in the case of the S&P 500 DID achieve a 'fully' OVERSOLD reading. The 10-day moving average of NYSE UpVolume got to its 'baseline' and a strong rally ensued today. Stay tuned for what's next.

Note that in the LAST bottom (see the yellow circles), the 10-day UpVolume line did not get to its more typical 'baseline'. ALL of these indicators do not have to line, just as SPX and COMP did not get 'fully' oversold in this most recent rally that, nonetheless, suggests that a bottom has been reached ahead of another rally.

Last, but not least is my 'SENTIMENT" indicator. A discussion of the most recent 'oversold' reading was discussed in my most recent (8/28) Index Trader column as can be seen online (go to LINK in the early paragraphs ABOVE) and was as follows:

"I anticipated last week that a bottom would not come UNTIL there was a reading on my sentiment indicator at or near (or below) at least one day's total equities CBOE call to put volume ratio closer to parity; specifically, 1.2 or less. Friday's reading on my sentiment scale was 1.2. The chart plotting these (call/put) numbers is seen on the OEX chart.

The greater activity in puts finally put my bullish/bearish sentiment indicator down pretty close to the level of sufficient 'bearishness' to suggest a bottom. A further fall to the price levels mentioned above, might give me an even lower reading, but its gotten pretty close already, as can be seen on 'Sentiment' section on the OEX chart above."

The THEORY of 'contrary opinion' is that when traders/investors reach a certain level of bullishness, or bearishness, the market is in a condition to rally, or fall, as the case may be.

This because, at an extreme level of bullishness, a point has been reached where everyone who is going to buy into the market has (mostly) done so. When an absence of bullish news occurs or there is bearish news or views that come out, the market tends to sink due to a lack of buying; i.e., it may not be huge selling that occurs, but what there is, is not met by enough buying to keep prices from falling; e.g., the past few weeks.

Conversely, when there is even one day where the bulls 'throw in the towel' so to speak and finally get active in puts, this usually signals that those who were going to sell have done so already and the market is ready to rally again.

IMPORTANT NOTE:
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@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.

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