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Daily Newsletter, Monday, 10/10/2005

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Table of Contents

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

Market Wrap

The Bounce that Couldn't

Equities finished at their lows in a light-volume Columbus Day session. Bond markets and Fed/Treasury operations were closed for the day, and there were no economic reports released. The newswire was busy, however, as DPH and GM dominated headlines with fallout from DPH's Chapter 11 filing.

The markets had been strong all night and were gearing up for a gap up open until an earnings warning from chipmaker Xilinx (XLNX) landed. The company revised its fiscal 2006 September quarter sales guidance to a 1%-2% decline from a previously-anticipated projection of flat to 4% growth. Gross margins are expected inline with prior estimates. XLNX went on to close -16% for the day at 22.78. Combined with DPH's news and the headlines beginning to circulate, equity futures fell back to their overnight levels and were ticking red at the opening bell.

Volume was light, but it was mostly negative, particularly on the NYSE where declining volume outpaced advancing between 2:1 and 3:1 for most of the session, finishing 3.76:1 for declining shares. The Nasdaq was less negative, but could only hold in positive territory for short intervals and finished with declining volume outpacing advancing 2:1.

Daily Dow Chart

The Dow failed at an opening high of 10323 and tried again in the early afternoon, failing from a lower high. An afternoon low printed at 10237 just before the close, below Friday's low and within Thursday's downside doji spike. The bounces were heavy and unconvincing. The daily cycle downphase continues from a rollover last week on a failed corrective bounce to the broken rising trendline. Today's lower low and lower high further confirmed that daily downphase. Below 10250 support, the benefit of the doubt goes to the bears, with next light confluence support in the 10150 area, followed by 10000 and the 9700-9800 level. The Dow finished 1 point off its 10237 low, -53 for the day.

Daily S&P 500 Chart

The SPX printed a high of 1196.52 but didnt hold it for long, chopping its way lower to close 1 point off its 1186.12 low, down 8.57 for the day. As with the Dow, Fridays low was broken with authority, and the session finished within Thursdays lower doji shadow at the edge of an airball zone below 1180 to 1160-62. The cycle picture is similar to that of the Dow, with a weekly cycle downphase beginning to assert itself on the daily cycle, which is just now rolling over from last weeks abortive upphase.

Daily Nasdaq Chart

The Nasdaq failed at 2093, closing lower by 11.43 at 2078.92, less than a point off its 2078.11 low. After the 4PM bell, a series of new lows printed, with the Nasdaq Dec. 2005 future contract printing 1553 and QQQQ reaching a low of 38.06. The 2093 Nasdaq high is first resistance, confirming the overhang from 2100-2110, while 2075 remains immediate support. 2050-2060 is more significant, however, and I expect the real test of the current daily cycle downphase to occur at that level.

Daily TNX Chart

The bond market was closed today, as was the Fed's open market desk. The usual Monday 13- and 26-week Treasury bill auctions were postponed to tomorrow.

Ten year note yields (TNX) made a new high for their rally on Friday but failed again in the 4.44% area had that capped the July-August rally. Note that the daily cycle has already reversed down, in what is either a very steep bearish divergence against the higher TNX high, or a very weak/corrective downphase. The former would be as bearish as the latter would be bullish. Rather than struggle with the correct cycle interpretation, price can be our guide here- below 4.44%, TNX bears get benefit of the doubt, while a break above that level, particularly on a closing basis, could be explosive, targeting 4.5% resistance in a hurry.

Daily Chart of Crude oil

The first winter storms arrived as Breckenridge, CO. received 18 inches with some mountain areas expect to get as much as 4 feet. Some schools in Denver were closed. Crude oil traded negative all night and this morning, closing down 40 cents at 61.45. On the daily chart, the downphase that kicked off at the beginning of this month continues to deliver lower lows and lower highs, and descending linear support is down to 60.00. Should that fail, we would look for a possible daily cycle low in the 57-58 area. For the day, crude oil closed lower by .025 at 61.825, off a low of 60.375.

A dire situation worsened as the death toll from Pakistan's 7.6 magnitude earthquake broke 20,000 and chaos erupted in Mazaffarabad as victims resorted to looting and violence. Reuters reported that aid agencies estimated the number of people in need of urgent assistance at 120,000. As many as 40,000 were in need of medical attention, and officials estimated the number of dead as high as 40,000.

Taylor Devices (TAYD), manufacturer of earthquake protection technology such as seismic dampers, was up 2.71% at 3.03, jumping as it did last December following the Sumatran earthquake and tsunami that it caused. For the day, TAYD gained 16.5% to close at 3.53.

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In other corporate news, Northrop Grumman (NOC) warned that 2005 EPS will suffer by 25-30 cents to $3.55-$3.65 as a result of Hurricanes Katrina and Rita. Revenue for the year is expected at $30.5-$31 billion. Previous guidance had been for EPS of $3.90-$4.00 on revenue of $31-$31.5 billion. However, NOC said that it does not expect the hurricanes to impact its overall financial health. 12,500 of its 19,800 workers were back on the job in Louisiana and Mississippi. NOC closed lower by 1.05% at 53.48.

Delphi (DPH) finally filed for bankruptcy protection under Chapter 11, the largest bankruptcy in US automotive history. As Chairman and CEO Robert Miller put it, "We took this action because we are determined to achieve competitiveness for Delphi's core U.S. operations, and the key to accomplishing that goal is reducing these costs as soon as possible. We simply cannot afford to continue to be encumbered by high legacy issues and burdensome restrictions under current labor agreements that impair our ability to compete." The company said that it expects global operations to continue uninterrupted. Without going into the company's balance sheet, a significant "legacy issue" is the company's collective agreements and pension commitments, the latter estimated to be underfunded by $4.5 billion. Marketwatch reported that wages will be cut to $10 per hour and cost-of-living allowances will be eliminated, as well as a host of other such reductions.

Not all personnel will lose, however. The UAW said that "Delphi's decision would be extremely disappointing under any circumstances, but it is all the more so in light of the company's announcement on Friday -- just one day before filing bankruptcy -- that it had sweetened the severance packages for Delph's 21 most highly compensated executives because the old severance package was -- as a Delphi spokesperson put it -- 'uncompetitive.' Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers, engineers, administrative and support staff, mid-level managers and others. All of them deserved better from Delphi's senior executive leadership."

Reuters reported that the company intends to offer executives a 10% stake in the reorganized entity as a further incentive to stay. No doubt, this approach to "legacy commitments" is a warning shot to all who might be counting on managerial beneficence or even contractual corporate pension plans to assure their financial future, particularly in industries beleaguered by tightening margins and international competition.

DPH plunged 49.09% in premarket trading to 1.12, while former parent, GM, was down 3.36% to 27.34 before the bell. GM was downgraded on the news due to its exposure to DPH and the possibility that it too could file for protection. Banc of America's analyst estimated that possibility at a 30% likelihood. DPH will host a press conference on Wednesday to discuss its reorganization. A press release is expected to be issued prior to the press conference, on Tuesday evening.

Later in the day, S&P downgraded DPH to "D", citing an "uncompetitive business structure with high fixed costs, primarily because of the rich wages and benefits given to its US hourly workforce." Given the extremely wide gulf separating North American wage and benefit levels from those of our Asian counterparts, one could conceivably impute this type of reasoning to a large number of North American employers. S&P also cut GM's long-term debt rating deeper into junk status, from "BB" to "BB-" with the observation that DPH's bankruptcy could further impede GM's ability to turn its ailing operations around. DPX finished lower by 65.18% at $0.39, off a 33 cent low. GM lost 9.93%, closing at 25.48, new 6-month lows.

After the bell, Alcoa (AA) announced Q3 net earnings that declined from $460 million or 52 cents in the year-ago quarter to $283 million or 32 cents per share. Revenue rose 13% from $5.98 billion to $6.57 billion. Estimates were for EPS of 29 cents on revenue of $6.61 billion. The company attributed its miss to high energy input costs and softer prices for aluminum. AA closed -1.65% at 22.66 for the day.

There were no economic data released today, but this is scheduled to be a heavy week. Tomorrow, we'll get the FOMC minutes from the September 20 meeting, followed by the EIA petroleum report on Wednesday. On Thursday, it's Export Prices ex-ag and Import Prices ex-oil, the Trade Balance, and Treasury Budget. On Friday, we'll get Retail Sales, the CPI, Industrial Production and Capacity Utilization, Michigan Sentiment and Business Inventories.

For tomorrow, with the return of normal volume and the resumption of trading in the bond market, equity traders will be faced with a possible retest of Thursday's spike lows. With the indices going out at their session lows, there's the higher likelihood of followthrough, with a gap down open. The key test will come at Thursday's lows, however, as the success or failure of those levels will determine whether or not the bounce since Thursday has been a bear flag, or a more complex accumulation pattern. With nearly untradeable chop between Thursday's low and Friday's highs, a bounce from that low will likely result in more chop, as the market continues to struggle with the accumulation - distribution dilemma near the bottom of last week's vertiginous slide. Because of the weakness in the daily and weekly cycles noted above, my bias remains bearish here, but that could change on a move above today's/Friday's high. We'll be following the action live in the Market and Futures Monitors. See you there!
 


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

BP Prudhoe Bay - BPT - close: 73.07 chg: -0.88 stop: 72.49

BPT tried to rally this morning but failed under the $75.00 level. New losses in crude oil and the energy sector continue to weigh on the stock. We remain on the sidelines. Our adjusted trigger to buy calls is at $75.05. However, considering the ongoing weakness in the energy sector traders may want to reconsider initiating any bullish positions in the group.

Picked on October xx at $ xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 175 thousand

---

Broadcom - BRCM - close: 44.68 chg: -1.79 stop: 44.49

Whoa! The semiconductor sector was hit very hard today. The SOX index fell 3.2% after Xilinx (XLNX) issued an earnings warning. Shares of XLNX gapped lower and closed with a 16% loss. This weighed on the entire sector and traders rushed to take profits in BRCM too. Today's close under the $45.00 level could be bad news for BRCM bulls. We are in danger of being stopped out at $44.49. Keep an eye on the simple 50-dma near $44.10, which is BRCM's next level of support. We will be stopped out if BRCM dips to the 50-dma but nimble traders might watch for a rebound and a new entry point, of course now that the SOX has broken down from its trading range the next move in BRCM may be lower as well.

Picked on September 25 at $ 45.05
Change since picked: - 0.37
Earnings Date 10/20/05 (confirmed)
Average Daily Volume = 7.0 million

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Bear Stearns - BSC - close: 104.65 chg: -0.60 stop: 102.49

BSC is extending its weakness from last week. Today's drop marks the sixth loss in a row. The stock is very short-term oversold and due for a bounce. The close under the $105 level could be used as a signal to exit. We're choosing to keep the play open since today was Columbus day and the bond market was closed and many of the market's professional traders were absent. Friday's MACD sell signal looks stronger now.

Picked on October 02 at $109.75
Change since picked: - 5.10
Earnings Date 09/15/05 (confirmed)
Average Daily Volume = 1.2 million

---

Cardinal Health - CAH - close: 62.49 chg: -1.06 stop: 59.85

CAH dipped to its 21-dma and the $62.00 level today. A bounce from here could be used as a new bullish entry point. However, we would wait to see the broader indices turn higher before initiating new bullish positions. Right now the major indices look pretty vulnerable!

Picked on September 25 at $ 61.95
Change since picked: + 0.54
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 2.0 million

---

Cameco Corp - CCJ - close: 51.72 chg: -0.31 stop: 49.49

In the news over the weekend CCJ announced it would sell its entire 6.7% stake interest in Energy Resources of Australia Limited, another uranium producer. The headline didn't seem to have much of an affect on shares of CCJ. We see no changes from our weekend update.

Picked on September 18 at $ 53.30
Change since picked: - 1.58
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 862 thousand

---

Cigna - CI - close: 114.80 change: -0.97 stop: 111.49

Market weakness on Monday pulled CI lower and the stock is nearing technical support at its simple 50-dma (113.97). We would wait for the stock to trade back over $116.50 before considering new bullish positions.

Picked on September 29 at $116.51
Change since picked: - 1.71
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 991 thousand

---

General Dynamics - GD - cls: 119.27 chg: -0.32 stop: n/a

News that hurricane Katrina would force rival defense contractor Northrop Grumman (NOC) to reduce its earnings estimates did not seem to have much of an affect on shares of GD today. This is a strangle play so we do not care what direction GD moves as long as it moves enough to make the strangle position profitable. We do plan on holding over the October 19th earnings report. Our strategy is to buy the November 125 call and the November 115 put.

Picked on October 09 at $119.59
Change since picked: - 0.32
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand

---

Altria Group - MO - close: 71.52 change: -0.94 stop: 69.90

Monday brought more profit taking to shares of MO. The stock lost 1.29% and looks headed toward support near $70.75 and its 50-dma near 70.45. We would not suggest new plays at this time.

Picked on September 18 at $ 73.14
Change since picked: - 1.62
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume = 6.7 million

---

Pre Paid Legal - PPD - close: 39.70 chg: +0.35 stop: 37.85

PPD continues to show relative strength. The stock traded to $40.29 intraday, which was enough to hit our trigger at $40.10 opening the play. Readers can choose to buy a bounce from $39.00, which should be short-term support or wait for a new relative high (40.30) before initiating new long positions. Our target is the $44.00-45.00 range. We will plan to exit ahead of the October 24th earnings report.

Picked on October 10 at $ 40.10
Change since picked: - 0.40
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 72 thousand
 

Put Updates

Black & Decker - BDK - close: 79.14 chg: +0.45 stop: 83.05

BDK displayed some unusual strength today. More conservative traders may want to seriously consider exiting here for a profit. We're going to maintain our target in the $78-77 range.

Picked on September 14 at $ 83.31
Change since picked: - 4.17
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 636 thousand

---

O'Reilly Auto. - ORLY - close: 28.09 chg: -0.14 stop: n/a

There is little change in shares of ORLY. The stock continues to churn inside its pennant type pattern. Remember, this is a strangle play. We do not care what direction ORLY moves as long as the move is big enough to make our investment profitable. We're suggesting traders buy the November 30 call and the November 25 put. We will hold over the late October earnings report.

Picked on October 09 at $ 28.23
Change since picked: - 0.14
Earnings Date 10/26/05 (unconfirmed)
Average Daily Volume = million

---

Ryland Group - RYL - close: 62.25 chg: -2.13 stop: 66.75*new*

Homebuilders were punished again. The DJUSHB home construction index lost 3.6%. Shares of RYL followed with a 3.3% decline on very strong volume. Our target is the $60.50-60.00 range. We are going to lower the stop loss to $66.75.

Picked on October 05 at $ 65.70
Change since picked: - 3.45
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 1.0 million

---

Wynn Resorts - WYNN - close: 42.73 chg: -0.12 stop: 45.11

WYNN tried to rally again this morning but failed under the $43.50 level. This looks like a new bearish entry point but you might want to wait for some downward momentum before initiating positions.

Picked on October 06 at $ 42.18
Change since picked: + 0.55
Earnings Date 10/31/05 (unconfirmed)
Average Daily Volume = 1.3 million
 

Dropped Calls

None
 

Dropped Puts

None
 

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