Before the sun had fully risen Friday morning, GE turned on the electricity, brightening the picture for early market action on an option-expiration day. Sunlight dimmed that GE-shed light, however, resulting in a quick pullback that was never fully retraced on some indices. At the end of the day, many indices again sported doji or small-bodied candles at the top of a steep climb.
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the SOX:
Many developments contributed to the rise in the markets, including strong gains in bourses across the globe, but GE was often mentioned. Early Friday morning, GE raised earnings estimates for fiscal year 2006, increased dividends and its planned spending on its share buyback plan, and announced that it would sell most of its losing Insurance Solutions reinsurance division to Swiss Re, collecting $8.5 billion. Within the first forty-five minutes of trading, GE had zoomed up to a four-month high, pulled back and gathered energy for a last-minute punch up to a new high of $35.80, with a four-month closing high of $35.75.
Hewlett-Packard (HPQ) also brightened sentiment in the pre-market period, beating expectations and raising its profit outlook. Thursday, HPQ had broken to the upside out of a two-month long coiling formation on its daily chart. Friday's open brought an attack on $30.00, with a day's high of $30.71, a high HPQ hadn't tested since mid-2001. HPQ's early high was quickly reversed, however, with the day's strong volume and steep pullback off the high indicating that many have been waiting a long time to break even on their HPQ holdings. They'd been waiting since 2001, to be exact. HPQ will have to work through a lot of supply at that level, as the day's trading action clearly depicted. Before traders believe it can rise further, they want to see any pullbacks be accomplished through small-bodied candles with low volume, to indicate that demand is beginning to overwhelm supply. On Friday, the story was the opposite: supply overwhelmed demand. For an example of what should be seen, note February 9's action, comparable to Friday's, and then note the immediate decrease in volume as HPQ fell back and consolidated before another move higher.
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Other companies in the news included Walt Disney Co. (DIS), beating expectations on per-share profit but reporting fourth-quarter net income that fell more than 25 percent. The company blamed films that disappointed. On CNBC this morning, discussion centered on whether Disney's CHICKEN LITTLE release will help the company regain its status among makers of animated films. DIS shares were marked down in Friday's trading, but closed off their low on high volume, a possible sign of accumulation. Downward momentum can continue even when accumulation occurs. The stock perhaps still looks vulnerable to a test of its 100-sma, but if that's accumulation going on, there may be hope of that level holding.
Cisco Systems (CSCO) reported a deal to buy Scientific Atlanta Inc. (SFA), a cable television set-top manufacturer. CSCO dropped, but volume patterns (high volume on downdrafts into support and a spring off the low) may be indicating accumulation each time CSCO approaches the $16.80-17.00 region. Next week will tell.
Another deal in the works was Liz Claiborne Inc.'s (LIZ) offer to acquire J. Jill Group Inc. (JILL) for $18.00 a share, a premium to Jill's Thursday $12.79 closing price. JILL's stock opened near $18.00 and climbed strongly, holding most of its gains into the close. That high volume indicated some were taking the opportunity to unload positions they had acquired way back in the summer.
Telecoms helped lead the markets higher. On Friday, "Baby Bell" SBC Communications completed its acquisition of its former parent company AT&T, after the California Public Utility Commission removed the last roadblock in that deal. The new entity will have the stock-trading symbol of "T" and will assume the AT&T name, but California officials wrangled a deal that requires SBC to stop requiring DSL customers to use SBC's local phone service, too. Although SBC head Edward Whitacre argues that his company has the right to charge rivals to use SBC's lines to deliver their services to customers, California said that the company could not hinder the free flow of Internet traffic on their networks. California officials also cleared the way for Verizon Communications to purchase MCI Inc., with Verizon and MCI still waiting for approval from other states. California will require Verizon to meet some of those concessions, too.
Marvell's (MRVL) rise after earnings led to an improvement in the semi-related issues, with the SOX climbing 2.5 percent. GM rebounded, with car manufacturers across the globe performing well after yesterday's five-month low in crude. As crude drops, the Dow Jones Transports (TRAN) zooms, and Friday was no exception. Since October 19, the TRAN has risen from 3550.55 to Friday's closing high of 4027.52, almost 500 points in a month as crude continued its drop from August's high. Markets won't pause while the TRAN drives them higher.
As Jim Brown has mentioned, the TRAN's climb should not be attributed only to the decline of crude, although a clear correlation with crude exists, as an improving economy also benefits the transports. UPS, although not a TRAN component, probably contributed to the TRAN's climb on Friday, for example. UPS announced that it will initiate higher shipping prices in 2006. Still, some have worried that the Dow is not following quickly enough in its sister index's path, however, leaving some of speculate about the implications of the divergence.
Late last week, the TRAN showed no indication of pausing. It confirmed a continuation-form inverse H&S with an upside target of about 4290-4320, depending on how it's drawn. A long-term envelope that the TRAN has never violated for more than a few points intra-week has resistance just above 4200. It was this resistance that turned the TRAN back late in 2004 and then again in late February, and it may well do so again, if tested. Target and resistance, it indicates that the TRAN may still have upside, but limited upside that may be met this week. Traders should keep the TRAN on their radar screen.
Weekly Chart of the TRAN:
It's been my contention for a while that the indices are going to keep going
north as long as the TRAN drives them there.br>
Goldman Sachs - GS - close: 131.58 chg: 1.17 stop: 124.99
Why We Like It:
BUY CALL JAN 130 GS-AF open interest=9560 current ask $5.90
on November 20 at $131.58
Hovnanian - HOV - close: 48.36 change: 0.35 stop: 44.45
Why We Like It:
CALL JAN 45.00 HOV-AI open interest= 792 current ask $5.70
Picked on November xx at $ xx.xx <-- see TRIGGER
Walter Inds. - WLT - close: 51.50 change: 1.93 stop: 45.95
Why We Like It:
BUY CALL JAN 50 WLT-AJ open interest=2625 current ask $4.30
Picked on November 20 at $ 51.50
Chicago Merc. Exchg. - CME - cls: 375.90 chg: -2.35 stop: n/a
Why We Like It:
BUY CALL JAN 400 CMJ-AK open interest=763 current ask $14.40
Picked on November 20 at $375.90
Questar Corp. - STR - close: 76.25 chg: -0.80 stop: n/a
Why We Like It:
BUY CALL JAN 80 STR-AP open interest= 479 current ask $3.10
on November 20 at $ 76.25
Amerada Hess - AHC - close: 128.64 chg: 0.66 stop: 121.49
Crude oil slipped lower again on Friday but that didn't stop the oil sector from closing in the green. Shares of AHC dipped back toward its 50-dma but managed a bounce higher back into the closing bell. We want to reiterate that we're definitely bullish long-term on AHC but this is an aggressive play to go long calls on AHC now with crude oil still in a two-month downtrend. Fortunately, the one-month trend in shares of AHC is bullish and short-term technical look positive. We also like the Point & Figure chart on AHC, which has a strong buy signal and a $160 price target. We have a seven-week target in the $139.85-140.00 range. More conservative traders may want to wait for a new high over 130.75 before considering new bullish positions.
BUY CALL JAN 125.00 AHC-AE open interest=613 current ask $9.60
Picked on November 16 at $128.49
Intl. Bus. Mach. - IBM - cls: 87.77 chg: 0.88 stop: 83.99 *new*
Technology stocks have helped lead the rally this past week and in the front of the pack was IBM. The stock broke through significant resistance at the $85.00 mark and has not looked back. IBM's gains this past week have also produced a new buy signal on its Point & Figure chart that now points to a $104 target. We're targeting a rally into the $89.90-90.00 range. However, IBM does look a little bit short-term overbought so we would not suggest new bullish positions here. A dip back to its simple 10-dma, near support at $85.00, could offer another entry point. We are raising the stop loss to $83.99.
Picked on November 15 at $ 85.25
Intel Corp. - INTC - close: 25.30 chg: 0.19 stop: 23.45
The SOX semiconductor index turned in a very strong performance on Friday, up 2.5%, but sadly shares of INTC lagged behind its peers. INTC continues to struggle with short-term resistance at the simple 100-dma near $25.50. We are not suggesting new bullish call positions at this time. Traders interested in starting new plays can watch for a potential dip back toward the $24.50-24.75 region. Our year-end target is the $26.00-26.50 range.
Picked on November 06 at $ 23.99
NovAtel Inc. - NGPS - close: 29.81 chg: 0.60 stop: 27.75
It has been a quiet week for NGPS. The stock has spent the last five days churning sideways in its $28.00-30.00 trading range. However, the bullish market has lifted NGPS toward the top of its range and the stock looks poised to breakout. Our strategy is to go long calls on a breakout with a trigger at $30.45 above last week's high. If triggered we'll target a move into the $35.00-36.00 range.
BUY CALL DEC 25.00 QAZ-LE
open interest= 98 current ask $7.70
Picked on November xx at $ xx.xx <-- see TRIGGER
Phelps Dodge - PD - cls: 131.19 chg: 1.14 stop: 123.45
Copper prices produced a strong surge on Friday and the commodity is nearing $2.00 a contract, which is multi-year if not all-time highs. This strength in the metal pulled shares of PD higher and the stock hit our trigger to buy calls at $131.25. We do not see any changes from our new play description on Thursday night so we're reposting it here:
You know the old saying, "if at first you don't succeed, try, try again." Well, we're going to try again with PD. The metal stocks are moving and copper prices continue to march higher. This time we're going to alter our bullish strategy a bit with PD. We're going to suggest a trigger at $131.25. Only if PD trades at our trigger or higher will we suggest buying calls on the stock. We're also going to set our stop loss at $123.45, which is under the recent lows of this week. More aggressive traders might want to put their stop under the simple 50-dma at $123.00. Our target is the $139.90-140.00 range. The Point & Figure chart for PD points to a $150.00 target. More conservative traders may want to target the October high near $138.50.
BUY CALL DEC 125 PD-LE open interest=1128 current ask $9.20
BUY CALL JAN 125 PD-AE open interest=2138 current ask $12.00
Picked on November 18 at $131.25
Rockwell Autom. - ROK - cls: 57.49 chg: 0.10 stop: 53.90
ROK continues to creep higher and hit another new seven-month high on Friday but it looks like the rally is losing some steam. We would not suggest new bullish positions right here. Overall the pattern looks very promising for ROK but shares might dip back to its 10-dma or even the $56 or $55 level before moving much higher. We are targeting a move into the $61-62 range. We are raising our stop loss to $54.80.
Picked on November 03 at $ 55.90
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
AmerisourceBergen - ABC - cls: 78.00 chg: 0.00 stop: n/a
The lack of upward momentum in ABC is unnerving. The overall pattern remains bullish and its P&F chart is bullish (with a $114 price target, no less) but we're just not seeing any oomph in the stock's trajectory. This sideways consolidation killed our November strangle and has done a lot of damage to our current December strangle with the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). Our estimated cost was $2.80. Our current target is for a rise to $5.00 in the strangle. If ABC can push past the $78.80 level it looks like the bulls will be in the clear or at least in strong shape to challenge the $80 level. Considering the recent dividend and stock split news announced this past week we would expect the slow but upward bullish trend to continue.
Picked on October 16 at $ 74.81
Amer. Eagle Out. - AEOS - cls: 23.66 chg: -0.18 stop: n/a
If you just looked at AEOS' closing numbers on Friday it would not tell the whole story. The stock rallied Friday morning but the rally stalled near the top of its gap down from this past week. This is not too much of a surprise since the top and bottom of a gap tends to act as support or resistance. What is more interesting for traders was news from rival Gap (GPS). GPS reported an earnings warning and guided lower for the fourth quarter. Shares of GPS lost more than 7% and threw doubt back into the retail picture for apparel stores. We suspect that the action on Friday for AEOS could be a turning point before the stock turns lower. At this time we're not suggesting new strangle positions. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70.
Picked on November 13 at $ 25.47
Abercrombie&Fitch - ANF - close: 61.01 chg: -0.85 stop: n/a
The earnings warning from rival Gap (GPS) undermined the rally in shares of ANF. However, the pull back in ANF on Friday did not dip below broken resistance, now new support, at the $60.00 level. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.
Picked on November 13 at $ 59.67
D.R.Horton - DHI - close: 34.81 chg: -0.15 stop: n/a
The rally in the homebuilders took a breather on Friday but the action this past week appears to have launched the new leg higher. DHI blew past earnings estimates and guided higher going forward when they reported on the 16th. In the last two sessions the stock has broken through major resistance at its 50-dma, 200-dma and its 3 1/2 month trendline of resistance (see chart). We are not suggesting new strangle positions at this time. Our current strangle strategy involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.
Picked on November 13 at $ 32.56
Four Seasons - FS - close: 50.10 chg: -0.18 stop: n/a
FS continues to under perform the market and the stock looks poised to breakdown under the $40 level again. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.
Picked on November 08 at $ 55.37
Hutchinson Tech. - HTCH - cls: 25.44 chg: 0.30 stop: n/a
Unfortunately, HTCH remains stuck inside its sideways trading range. If we do not see shares breakout one way or the other in the next week we will probably exit early to avoid a total loss. We are not suggesting new strangles at this time. The options in our strangle were the January $30 calls (UTQ-AF) and the January $20 puts (UTQ-MD). Our estimated cost was $1.65. We have adjusted our initial target from $3.00 to breakeven at $1.65 since the post-earnings reaction was not as big as expected.
Picked on October 26 at $ 24.89
Lear Corp - LEA - close: 28.89 chg: 0.81 stop: n/a
Shares of GM continued to rally sharply for their second day in a row and it's starting to rub off on shares of LEA. Overall the trend remains bearish for LEA and the stock has resistance at both the $29 and $30 levels. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). We are targeting a rise to $3.20 or more.
Picked on November 06 at $ 30.24
Loews - LTR - close: 97.80 change: 0.06 close: n/a
LTR hit yet another all-time high on Friday at $98.70. The trend remains bullish but the momentum appears to be slowing. Our target is for a rise to $5.00 in the strangle and/or we'll exit if shares of LTR hit $99.90, since the $100 level is probably going to act as round-number resistance. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. FYI: the December $95 calls hit a high of $4.60 on Friday.
Picked on October 23 at $ 89.94
Verifone Holdings - PAY - cls: 23.70 chg: 0.03 stop: n/a
Shares of PAY bounced sharply from a test of support near $22 and its 200-dma's on Thursday. We're a little surprised that Friday's session failed to produce much follow through on the rebound. However, the overall pattern remains bullish and the calls side of our strangle is poised to be the winner. Our November strangle in PAY hit our target a couple of weeks ago. Our remaining strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more.
Picked on October 12 at $ 19.98
Protein Design Labs - PDLI - cls: 27.80 chg: 1.40 stop: n/a
Hmm... we've been expecting a bounce higher into the $26.50-27.00 region but we are surprised by PDLI's strength on Friday with a 5.3% gain on above average volume. The move is partially fueled by a strong day in the biotech sector this past Friday. This may prove to be a turning point in the stock price. PDLI has broken above its simple 50-dma and above its six-week trendline of lower highs. Short-term oscillators have naturally turned positive and its MACD has produced a new buy signal. With a strangle we don't care what direction the stock moves as long as it moves significantly in one direction. We'll need to see PDLI above $30 or under $25 in the next couple of weeks or we'll be facing a loss for the play. The December options expire in about four weeks. The options in our hypothetical strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We'll plan to sell if either side rises to $3.25.
Picked on October 30 at $ 27.70
Spectrum Brands - SPC - close: 17.80 change: 0.20 stop: n/a
We do not have much new to report on for SPC. The stock gapped lower a couple of weeks ago after its earnings report. The stock dipped to $16.00 before producing an oversold bounce. The trend remains bearish but the oversold bounce may not be over yet. We have about four weeks before December options expire. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW). We are aiming for a rise to $2.50 or more.
Picked on November 08 at $ 20.63
eBay Inc. - EBAY - close: 44.67 chg: 0.87 stop: n/a
EBAY did make another rally attempt on Friday but shares couldn't push past resistance at the $45.00 level. Our November strangle has expired with a loss. Traders may want to keep an eye on EBAY as a bullish candidate for regular call options if the stock breaks out over the $45 mark.
Picked on October 18 at $ 40.42
General Dynamics - GD - cls: 117.21 chg: -0.89 stop: n/a
Shares of GD spiked higher on Friday morning but the rally quickly failed and the stock closed back under its 50-dma and inside its trading range from the previous two weeks. Our November strangle has expired with a loss.
Picked on October 09 at $119.59
Harman Intl - HAR - cls: 99.20 chg: -0.43 stop: n/a
True to form, shares of HAR rallied higher at the open and closed within 80 cents of the $100.00 mark and strike price. Our November strangle has expired with a loss. We fully expect Murphy's law to come alive and see shares take off either direction next week.
Picked on October 18 at $100.80
Kos Pharma - KOSP - close: 61.53 chg: 0.53 stop: n/a
KOSP continued to bounce on Friday and it is near the top of its descending channel. Unfortunately, the rally wasn't enough to save this play and the November strangle has expired with a loss.
Picked on October 20 at $ 59.80
Most of us know doctors, attorneys or other professionals who must complete a number of continuing education credits each year in order to maintain their licenses. What if our brokerages required traders to complete continuing education classes each year to maintain our trading privileges?
That might not be a bad idea. Here on this site, we try hard to educate our readers. Other than our educational articles, the CBOT is one place to head for those courses.
One recent Thursday afternoon, I registered for and then listened to a CBOT (Chicago Board of Trade) webinar titled "Detecting High Probability Turning Points Using Volume Spread Analysis." Todd Krueger and Tom Williams, author of MASTER THE MARKETS, explained their theory that combining a study of the price spread and volume gives traders insights on what actions professionals might be taking.
Williams peppered his discussion with cautions about the viciousness of professionals toward retail traders, illustrating by saying at one point, "Professionals will agitate the herd [retail traders] into selling, and professionals come in and buy. The herd does the same thing all the time, and professionals take full advantage."
Williams and Krueger noted that such action can be discovered by looking for high volume on weakness, with a bar that closes well off its low. "Buying," he says, "when it does appear, will appear on a down bar." The news will have been horrible and professionals will have marked prices down hard, he says. Lots of stops will have been triggered. Bears will have been encouraged to go short. But they're about to be locked into a losing play.
A classic example occurred in LEH in mid October as the Refco debacle was hitting the news. LEH alleged in a lawsuit filed in California that another hedge fund, Wood River Capital Management, duped the firm into wiring almost $21 million to the hedge firm's account at Merrill Lynch.
Annotated Daily Chart of LEH:
No special volume studies are needed to see the actions of professionals, William claims, when studying highly liquid entities such as the Dow emini's. Ninety percent of the volume comes from professionals in such liquid issues. Although I'm not sure that he'd agree about the percentage in an individual stock such as LEH's, the action here clearly illustrates the effect he mentioned, so LEH's chart was chosen for illustration purposes.
Williams asserted that traders should "remember the background," with this action seen in mid October now being part of the background should LEH decline. Professionals were anxious to acquire LEH at prices just below $105. If it should retreat there again, traders should watch for signs that it's being accumulated again.
Strength always shows up on down bars and weakness on up bars, Williams stated. An example of weakness might appear first at resistance, with a high-volume bar that either closes well off its high or else has a small range. Williams determine high or low volume by comparing it to the volume on the two previous bars on the time frame being examined. The close well off its high tells an obvious story, but the tight range tells a story, too, when coupled with that high volume, Williams explains. The high volume shows that professionals were active. The lack of price movement shows that they were actively unloading the stock. They were selling.
If the bar is a high-volume bar with a large range, and there was not a sharp pullback, Williams cautions that the next few bars should be watched. Volume should drop off if prices pull back slightly or price bars trend sideways, showing that there's no more supply to meet the demand. A break higher on high volume followed by low-volume sideways movement reassures traders that the overage in supply that had been there is no longer there.
However, if the weakness seen in a high-volume low-range bar is confirmed by a pullback, remember that background, too, Williams cautions. When prices return to that resistance, it's possible that a low-volume bar will tell you that professionals weren't active. They weren't interested at that price.
Annotated 2-minute Chart of the YM:
Williams wouldn't approve of the candlesticks I show here. He uses bars that show only the close. The range and close are all that's important, he says, using the analogy of studying what someone has accomplished during the day. He wouldn't want to see evidence of how they behaved when they arose from bed if the end-of-day accomplishments were what interested him, he asserts.
These charts demonstrate several other aspects of Krueger and Williams' practices, but don't do their theories justice in this brief article. The charts cover different time intervals, something both advocate studying. Also, no stochastics or other price-derivative studies appear on those charts. Williams contends that you need two variables to make decisions, and that oscillators such as stochastics, derived from price, don't offer a new variable. Volume does.
These observations may not do justice to Williams' work, but they do introduce the wealth of information offered free to traders who want to continue their education. Events this month include webinars titled "Learn How to Greatly Simplify Your Gold Trading" and "How to Achieve Long-Term Success with Short-term Trading." Classes require registration and broadband or high-speed connections, but are free. Registration with CBOT will get you reminders about upcoming classes. Most classes allow you to submit questions to be answered, time permitting, by the presenters. They tend to be chart intensive, offering examples of the principles being discussed.
Your brokerage might not require continuing education to maintain your account,
but it's not a bad idea anyway.
Today's Newsletter Notes: Market Wrap & Trader's Corner by Linda Piazza, and
all other plays and content by the Option Investor staff.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
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