December op-ex week tormented traders with an extended sideways range that broke definitively today. What started in the morning as a very light volume range kicked off into a decline to multiday lows in the case of the Dow and multiweek lows in the case of the Nasdaq.
The drop started just after the 1PM Treasury auction results were released, though those results weren't notably disappointing (see below). Volume picked up on the decline as intraday support failed. Combined exchange volume broke 3.3 billion shares, and breadth was strongly negative by the close, 2.27 declining shares for each advancing on the NYSE and 4.12 declining shares for each advancing on the Nasdaq.
Daily Dow Chart
The Dow, buoyed by MRK and PFE, closed with a minor 39.06 point loss at 10836.53. The lower low and lower high, and upper doji shadow are all bearish. The new low bodes ill for the tentative stall in the daily cycle indicators, but price came to rest on rising trendline support. Below the 10825 low, next support is clustered at 10725-750.
Daily S&P 500 Chart
Unlike the Dow, the SPX broke rising trendline support off the October low on the move below 1267, reaching a low of 1259.28 before closing -7.4 at 1259.92. Parallel trendline support is at 1255, below which the 1244-46 confluence comes into view. 1267-70 is new resistance- the high of the day was 1270.51.
Daily Nasdaq Chart
The Nasdaq got croaked for a 29.74 loss to close at 2222.74. The morning high was 2256.03, the low 2221.79 and right on 2220 support. This level would coincide with 1246 on the SPX chart. The Nasdaq has clearly been the weakest link here, with the range since mid-November looking like a flat head and shoulders top, no upward drift equivalent to that on the SPX and Dow. Below 2220, next support is at 2200. 2230-35 is now resistance.
Daily TNX Chart
The Treasury announced that tomorrow's 4-week bill auction to refund $24 billion in maturing debt will be for $11 billion, resulting in a net paydown of $13 billion. This reduction in debt will free up liquidity to the markets, and both equities and Treasuries bounced slightly following the 11AM announcement, though the strength was short-lived. This followed action from the Fed's open market desk at 10AM, adding an overnight repo of $7.5 billion with no expiries, for a net add for the day in that amount. Despite this substantial amount of new liquidity being added to the markets, price action remained listless and weak both for equities and treasuries.
Partially offsetting these positive liquidity developments were the 13- and 26-week bill auctions announced last week and conducted today. The Treasury auctioned $34 billion of these bulls to refund $30.67 billion maturing, raising new cash of $3.3 billion. Foreign central banks purchased $11.3 billion of the total. The 13 week bills sold for a high rate of 3.895% and median rate of 3.87% yielding 3.98%, with 2.19 bids tendered for each accepted. The 26 week bills sold for a high rate of 4.22%, a new high for the year, and median rate of 4.195% yielding 4.372%, the bid-to-cover ratio 2.17.
Ten year note yields (TNX) fell 1.3 bps to close at 4.442%, right on support from the August highs and above confluence support since mid-October. The TNX flattened against 13-week rates (IRX), closing just over 8 bps above the 3.86% IRX. The yield on today's 26 week bills was just 4.372%. Greenspan has said that a flat or inverted yield curve doesn't necessarily indicate economic weakness, which is a fair statement. It may indicate many things. The one thing it certainly indicates is that the cost of short term money is rising and, in some cases exceeding the cost of longer term money. Is it because demand for money "now!" is growing in the same way as "backwardated" options will see the front-month contract price exceed the back-month contracts? Or is it because mortgage and other long term demand has peaked? It's debatable and fascinating question.
Daily Chart of Crude oil
The Minerals Management Service updated its production shut-in statistics today. The MMS calculates that 27.63% of daily oil production is shut in, while 20.14% of daily natural gas production remains shut in. The MMS noted that improvements have been slow, and estimates that this recovery will "continue with incremental movement over the next several months."
Crude oil opened at the bottom of Friday's range and bled its way lower. The 57.80 low coincided with the upper descending trendline on the broken bearish channel, and the bounce left a doji shadow to confirm the support. However, the daily cycle indicators are early in a new and so-far powerful downphase, and that low will be important support. Below that comes the November low in the 56.70 area. Bulls need a break back above 59.50, followed by a gap fill to 61 to whipsaw the daily cycle indicators back up. For the day, crude oil finished lower by 1.05 at 58, it's lowest close since November 30th.
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In corporate news, FPL Group (FPL) announced its $11 billion acquisition of Constellation Energy (CEG). The Wall Street Journal cited "a person with knowledge of the matter" in reporting that the deal would be for stock only, valuing each CEG share between $61-$62. The combined power companies will provide operations along the entire East Coast, generating more than 30,000 megawatts of power. Reuters reported that it's also the first merger in the wake of the new energy bill, repealing the Public Utilities Holding Companies Act that limited such mergers. Moody's subsequently affirmed the debt ratings of the two companies while revising its outlook on CEG from "stable" to "positive" and on FPL from "stable" to "negative." The changes came what Moody's perceived to b a lower business risk profile to CEG, and a higher risk to FPL based on CEG's unregulated generation and risk management businesses, larger operations and higher percentage of cashflow generated from unregulated businesses.
CEG closed lower by 4.22% at 59.01, while FPL lost .37% to close at 42.79 after trading a high of 44.00 in the morning.
Pepsi Bottling (PBG) warned that 2006 EPS will fall from this year's projected $1.83-$1.87 range to $1.76-$1.84, due to a $.18 per share charge from the expensing of its employee stock options. On a pro forma basis, 2006 EPS is expected to be $1.94-$2.02 compared with consensus estimates of $2 per share. PBG closed higher by .04 at 29.50.
Shopping this past weekend was "healthy" but not spectacular, according to market researchers at NPD Group, who reported that merchants are hoping for a surge in last-minute shopping. Because Christmas Eve will be on a Saturday this year for the first time in 11 years and Chanukah will be later, Michael P. Niemira, chief economist at the International Council of Shopping Centers expects last minute shopping to surge this year. NPD Group reported that discount and electronic retailers have been the strongest this season, while mall-based apparels have been mixed. WalMart reported that December sales should come in higher by 2%-4%, but food has been outselling general merchandise. Because margins are thinner on food, that trend could have a deleterious impact on profits. WMT lost .33 to close at 48.94.
Circuit City, one of those electronic retailers, reported that Q3 earnings from continuing operations rose from a Q3 2004 loss of $5.9 million or -$.03 to a gain of $10.1 million or 6 cents per share in the current quarter. Sales roles from $2.53 billion to $2.91 billion in the period, and same-store sales rose 13.1%. These results beat estimates by 2 pennies. The 2006 full-year sales growth projection was raised from 5%-8% to 10%. The company also announced that Chairman and CEO Allan McCollough will retire as CEO on February 28th, 2006, and as Chairman in June. Philip Shoonover was nominated to the board and will be come CEO on McCollough's exit.
Clorox (CLX) guided higher this morning, saying that Q2 earnings from continuing operations should rise from 41-47 cents to 44-49 cents per share. Consensus estimates were 45 cents prior to the update. Q3 earnings are expected at 66-73 cents and Q4 at $1.04-$1.14, compared with consensus estimates of 74 cents for Q3 and $1.06 for Q4. The full-year estimate for 2006 remained at $2.91-$3.06 per share, compared with a consensus of $2.95. CC gained 6.4% to close at 22.62.
In other news, the National Association of Home Builders reported that its sentiment index declined from 61 in November to 57 in this month, the lowest level since April 2003. This is a diffusion index, with readings above 50 indicating expansion. The NAHB cited rising interest rates and higher energy costs for the decline. The PHLX Housing Sector Index (HGX) lost 1.65% to close at 520.68, off a low of 519.86.
There were no major economic reports released today, but it's scheduled to be a moderately busy week. Tomorrow we'll get Housing Starts and Building Permits, along with the PPI, all before the opening bell. On Wednesday, in addition to the weekly Mortgage Bankers and EIA Petroleum Report, we'll get the GDP and Chain Deflator final numbers for Q3. On Thursday, it's the weekly Initial Claims and Natural Gas inventory reports, along with Personal Income and Personal Spending, and Leading Economic Indicators. On Friday, we'll get Durable Orders, Michigan Sentiment and New Home Sales.
For tomorrow, the big issue will be whether we've seen a genuine change of trend on the indices, or whether it's a buying opportunity. On the SPX and Nasdaq, rising support finally failed, and did so on a sharp decline. On the Dow, that technical damage is absent. The sharp decline left the intraday cycles oversold and in some timeframes, trending. A bounce is due on those cycles for tomorrow. If it is weak, or absent, or fails within today's range (ie at a lower high), then the weakness reflected on the daily charts will be confirmed. A break of today's high would be the first big step toward repairing the damage on the Nasdaq and SPX, confirmed by a return back above the broken trendline. Join us in the Market and Futures Monitors tomorrow, where we'll be following and reporting on the action throughout the day.
Apache - APA - close: 69.17 change: -0.33 stop: 67.99
Crude oil continued to slide on Monday and the oil sector did not escape the market-wide weakness. Shares of APA lost another 0.47% and its technical indicators continue to worsen. APA is testing support at its trendline of higher lows and the 100-dma. If the stock doesn't bounce from the $69 (or $68) level tomorrow then odds are good that we'll be stopped out. Consider the late day turn lower on Monday APA looks vulnerable to more selling. We are not suggesting new positions and more conservative traders may want to exit early to avoid further losses.
Picked on December 08 at $ 70.98
Dominion Res. - D - close: 80.50 chg: -0.37 stop: 74.75
Shares of D were not able to avoid the market's weakness either. The stock dipped to $80.31 and looks poised to test the $80.00 mark tomorrow. The lack of reaction to the S&P credit downgrade today is probably bullish. We would not suggest new bullish positions in D right here. Watch for a dip and a bounce from the $80.00 level before considering new bullish positions. If the market averages turn lower then we'd look for D to test its 10-dma (near $79). Our target for D is the $84.50-85.00 range compared to the P&F chart, which points to a $92 target.
Picked on November 27 at $ 78.24
Femsa Fomento - FMX - close: 69.58 chg: -0.10 stop: 67.75
The Mexican stock market had a rough day losing more than 180 points for a 1% loss on Monday. Therefore the early morning, intraday spike to $71.11 in shares of FMX is a mystery. We cannot find any news or catalyst to account for the failed rally, which is exactly what this looks like - a failed rally and a short-term top. We have been triggered at $70.65 but we are not suggesting new bullish positions. Honestly, conservative traders, if you were triggered, you may want to just exit early right here to avoid further losses. The afternoon sell-off was picking up speed into the closing bell and this suggests more weakness tomorrow. We repeat we are not suggesting new bullish positions in FMX at this time.
Picked on December 19 at $ 70.65
Garmin ltd - GRMN - close: 61.35 change: +0.31 stop: 57.90
GRMN managed a bounce from its simple 10-dma this morning but the stock was already fading lower late this afternoon. If the major averages turn lower again tomorrow then we'd look for GRMN to hit the $60 level and/or its simple 50-dma. We would not even consider new bullish positions until we see a bounce from $60. Our mid-January target is the $69.00-70.00 range. We do not want to hold over the January earnings report. More conservative traders may want to tighten their stop losses.
Picked on December 13 at $ 63.54
Kerr Mcgee - KMG - close: 91.62 chg: -0.90 stop: 88.99
KMG also suffered another round of profit taking like most of the oil sector. Today's decline confirms the drop under the 10-dma and the stock looks poised to test round-number support at the $90 level. We would not suggest new positions at this time. Our mid January target is the $98.50-100 range.
Picked on December 02 at $ 90.26
Kinder Morgan - KMI - close: 92.44 chg: -1.53 stop: 91.90
Oil may have closed lower but natural gas futures were able to turn around from earlier weakness and closer higher on the session. Unfortunately, this strength in the natural gas futures failed to translate into strength for KMI. The stock was weak pretty much from the start and sank throughout the rest of the session. The stock is testing technical support at its 21-dma and 100-dma. Shares also have additional support near $92.00 at the bottom of its two-week trading range. We are not suggesting new positions here.
Picked on December 02 at $ 92.75
Polaris Ind. - PII - close: 48.94 change: -0.95 stop: 48.49
PII fell toward last weeks low and actually hit a new relative low but managed to bounce, twice, from the $48.70 region. We are not suggesting new positions and more conservative traders may just want to exit early.
Picked on November 21 at $ 48.47
Ryland Group - RYL - close: 73.03 change: -2.11 stop: 71.85 *new*
Homebuilders were leaders to the downside on Monday with the DJUSHB home construction index losing more than 2.1%. Shares of RYL out performed to the downside as well losing 2.8% but on very low volume. The stock is pulling back toward its rising trendline of support (higher lows). We're going to raise our stop so that if RYL breaks down below this support we'll be taken out. We are not suggesting new positions at this time. Our new stop loss will be $71.85. Tomorrow brings more housing data with the new building permits and housing starts.
Picked on December 13 at $ 73.96
Questar Corp - STR - close: 81.30 chg: -0.62 stop: 77.45
As expected STR turner lower on Monday but the stock actually held up better than we expected. Shares did not dip to the $80 level (yet) and the 10-dma can still act as support. Only on a bounce from the $80 level would we consider new bullish positions. Our target is the October highs in the $89.00-90.00 range. The P&F chart points to a $105 target. FYI: STR is also a current strangle play on the newsletter's play list.
Picked on December 13 at $ 80.85
Total S.A. - TOT - close: 127.79 change: -1.24 stop: 126.49
TOT's breakdown under the $128 level may be bad news. The stock's technical picture is deteriorating and if shares don't bounce very soon then odds are we'll be stopped out. The next level of support is the 50-dma just a few cents above our stop loss. We are not suggesting new positions.
Picked on December 13 at $130.25
Tractor Supply - TSCO - cls: 53.15 chg: -1.12 stop: 51.95
TSCO under performed the RLX retail index on Monday. The stock lost more than two percent and broke down to a new two-week low. This looks pretty bearish and conservative traders may just want to exit early right here to salvage their trading capital (or raise their stop toward breakeven). If TSCO doesn't rebound tomorrow we'll probably exit early assuming we're not stopped out.
Picked on November 30 at $ 52.75
Valero Energy - VLO - close: 51.79 chg: -0.48 stop: 49.74
VLO is just another casualty to the oil-sector sell-off. The stock looks poised to test its 50-dma near 50.92 soon. A bounce from here or the $50 level could be used as a new bullish entry point. We are not suggesting new plays at this time. Our post-split target is $58.50. FYI: VLO is also a current strangle play in the strangle section.
Picked on December 08 at $ 53.28 (split adjusted)
Zimmer Holdings - ZMH - close: 70.16 chg: -1.39 stop: 67.75
ZMH lost almost two percent as part of the market's pull back on Monday. We are not suggesting new plays right here.
Picked on December 11 at $ 68.62
Magna Int. - MGA - close: 68.54 chg: -0.71 stop: 70.31
MGA's decline today may be the sort of failed rally entry point we've been looking for. More conservative traders may want to wait for a drop under $68.00 before considering new put positions. We don't see any other changes from our weekend update.
Picked on December 04 at $ 68.14
Netflix - NFLX - close: 25.67 chg: -0.63 stop: 27.45
NFLX did continue lower on Monday losing 2.39% following Friday's failed rally pattern. This might be considered a new bearish entry point to buy calls - only do so carefully and monitor your stops. The biggest risk is a short squeeze. Our target is $22.55. The P&F chart points to a $15 target.
Picked on December 09 at $ 25.99
PACCAR Inc. - PCAR - close: 69.91 change: -0.21 stop: 72.51
PCAR continued to drift lower but the stock has not hit our trigger at $69.49. We remain on the sidelines. If triggered we'll target a drop into the $65.25-65.00 range before
Picked on December xx at $ xx.xx <-- see TRIGGER
(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.)
Amer. Eagle Out. - AEOS - cls: 21.22 chg: +0.06 stop: n/a
We don't see any change from our weekend update for AEOS. We're not suggesting new plays. 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. FYI: currently the January $22.50 puts are trading at $1.75bid/$1.85ask.
Picked on November 13 at $ 25.47
Abercrombie&Fitch - ANF - close: 63.01 chg: -0.33 stop: n/a
We don't see any change from our weekend update for ANF. 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
Blue Coat Sys. - BCSI - cls: 43.24 chg: -0.02 stop: n/a
BCSI tried to rebound but it failed near old support at the $44 level. This would suggest the new direction will be down. February strikes are now available and anyone looking for a new position can hope for a bounce back toward the $45 level. At this time we're not suggesting new plays. Our current play involves the January $50 call and the January $40 put. Our estimated cost is $3.25. We're aiming for a rise to $5.50. Remember we have about five weeks left before January options expire.
Picked on December 04 at $ 45.43
Building Materials - BMHC - cls: 81.25 chg: +0.30 stop: n/a
BMHC displayed a bit of volatility in the first hour of trading. The stock traded higher to $82.91 and then dipped to $79.76, which gave readers a great chance to open new strangle positions near the $80.00 mark. Another late afternoon dip toward $80.15 offered another entry point to launch a strangle position. We initiated this play over the weekend with a suggested $81.50-79.00 entry window. The options we are suggesting are the March $90 calls (BGU-CR) and the March $70 puts (BGU-ON). Our estimated cost is $8.20. Our target is $12.50 by March expiration.
Picked on December 18 at $ 80.95
Chicago Merc. Exchg. - CME - cls: 367.15 chg: -1.86 stop: n/a
We do not see any change from our weekend update. We are not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.
Picked on November 20 at $375.90
D.R.Horton - DHI - close: 36.57 chg: -1.24 stop: n/a
The homebuilders were hit hard with profit taking on Monday and DHI lost more than 3.2%. We are not suggesting new strangles in DHI at this time. Our current play 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. FYI: the DHI-AG calls are currently trading at $2.50bid/$2.60ask.
Picked on November 13 at $ 32.56
Four Seasons - FS - close: 48.27 chg: -0.22 stop: n/a
FS continued to drift lower but failed to breakdown under minor support at the $48.00 level. 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. FYI: the FS-MJ puts are trading at $2.50bid/$2.75ask.
Picked on November 08 at $ 55.37
Lear Corp - LEA - close: 28.05 chg: -0.43 stop: n/a
We do not see any change from our weekend update on LEA. 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). Our estimated cost was $1.60.
Picked on November 06 at $ 30.24
Verifone Holdings - PAY - cls: 23.45 chg: -1.00 stop: n/a
The sometimes volatile shares of PAY suffered some serious profit taking Monday morning and closed with a 4% decline on above average volume. The stock's low today proved to be a bounce off its simple 50-dma. We're not suggesting new positions. Our current 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. Currently the PAY-AX calls are trading at $1.60bid/$2.05ask.
Picked on October 12 at $ 19.98
Questar Corp. - STR - close: 81.30 chg: -0.62 stop: n/a
We do not see any change from our weekend update for our strangle play on STR. We are no longer suggesting strangle positions in the stock. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more. FYI: the STR-AP calls are trading at $3.30bid/$3.60ask.
Picked on November 20 at $ 76.25
Texas Ind. - TXI - close: 49.75 chg: -1.00 stop: n/a
We see no change from our weekend update on TXI although it is noteworthy that TXI lost almost 2% and broke down under round-number support at $50.00 and technical support at its 50-dma. We are not suggesting new strangle positions. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our estimated cost is $2.70. We're looking for a rise to $5.00 or more.
Picked on November 27 at $ 49.57
Valero Energy - VLO - close: 51.79 chg: -0.48 stop: n/a
We do not see any change from our weekend update for our strangle play on VLO. We are not suggesting new strangle plays. Our current play involves the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our adjusted cost is $2.93. Our adjusted target is $4.75.
Picked on November 21 at $ 50.50
FMC Corp. - FMC - close: 51.85 chg: -0.82 stop: 51.95
The recent sell-off continues for shares of FMC and the stock has broken down below support at the $52.00 level and its simple 50-dma. We've been stopped out at $51.95. Volume came in well above its daily average. Normally, since FMC is a chemical producer, you'd think that lower oil prices would be bullish for the company but the stock is certainly not reacting that way.
Picked on December 01 at $ 55.04
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