A wise trader once advised OptionInvestor readers to pay special attention to the way U.S. futures reacted to overnight trading on other bourses. If our futures held steady while other bourses careened lower, a bounce in U.S. markets might be expected.
Last night, Japan's Nikkei suffered a loss of almost 450 points in overnight trading. While 200-point moves have become almost routine in the Nikkei, a 2.68 percent loss captures anyone's attention. European markets turned lower, hit by declines in miners and other commodity-related stocks. Crude had dipped ahead of an expected build in inventories, pressuring European markets, but it was perhaps that dip below $63.00 that helped send our futures higher.
In addition, some theorized that Cisco (CSCO), IBM and Pfizer (PFE) would prove supportive to markets. CSCO reported earnings Tuesday evening and garnered several upgrades. IBM revealed details of its Power6 microprocessor, and PFE was perhaps considering a divestiture of its consumer healthcare unit. Dell (DELL) and Applied Materials (AMAT) both received upgrades, providing further support for techs. McDonald's (MCD) same-store sales and PepsiCo's (PEP) earnings were well received in the pre-market session.
Each of these performed their expected duties in early trading, gapping higher and propelling indices higher, too, although not all retained their gains. It was time for a bounce after some indices had traded down through most of February.
The need for a bounce was apparent in the Wilshire 5000. At the close Tuesday, the Wilshire 5000, our broadest index, had just confirmed a double-top formation by dropping below the trough between the 1/11 high of 13,016.59 and the 1/30 high of 13,008.30. It was time for bulls to put on the brakes if they were going to avoid a deeper decline.
Annotated Daily Chart of the Wilshire 5000:
The bounce in the Wilshire 5000 and other indices occurred despite some hints early during the day that bulls might have difficulty hauling the indices too much higher. The FOMC announced a March 27-28 meeting, reviving worries about rate hikes. The SOX's leap higher moved it further into the huge gap from 11/27, where gap resistance might have been expected. The SOX never did make it over the top of that gap, despite posting a gain for the day. Early morning market-related shows replayed Bush's "America is addicted to oil" statement from last week, and a former Energy Secretary appeared on CNBC to discuss the number of decades it would take the U.S. to move to alternative energy sources.
Crude prices still weigh on traders' minds, but as Europe could testify today, a drop in crude pressures markets, too, when recently strong energy-related stocks drop when crude does. This effect was evidenced when the bounce accelerated after the close of commodities trading, when oil-related issues broke higher after crude trading close. Crude closed at $62.60.
That bounce brought the SPX up to important resistance.
Annotated Weekly Chart of the SPX:
The gain in big caps today pushed the Dow into a triple-digit gain that moved it squarely to the center of a difficult-to-trade pattern.
Annotated Daily Chart of the Dow:
The Nasdaq bounced from support but heads into resistance.
Annotated Daily Chart of the Nasdaq:
Yesterday, the SOX produced a doji at the 10-sma, a sign of indecision. Today, the SOX sprang higher from that 10-sma.
Annotated Daily Chart of the SOX:
Today included few economic releases, so markets were free to react to friendly earnings news and release some oversold pressure. Not all information was market friendly, however. The Mortgage Bankers Association released mortgage applications for the week ending February 3 at 7:00 EST. The component that measures mortgage application activity fell 1.2 percent and the four-week moving average for mortgage volumes fell 1.8 percent. The component measuring purchase mortgage index, a measure of U.S. home sales, dropped 2.4 percent.
This should have been another blow to the housing industry in a week that saw TOL cut its estimates for 2006 home deliveries and Merrill Lynch and Banc of America cut ratings on the company. Refinancing did climb 0.2 percent, but were down as a percentage of overall mortgages. The average rate for a 30-year, fixed-rate mortgage rose to 6.25 percent from the previous week's 5.84 percent.
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The DJUSHB, the Dow Jones U.S. Home Construction Index, was an early downside leader, as were some specific builders such as TOL and KBH. Some other companies in the same food chain dropped. LOW headed lower, although peer HD gapped higher. By the end of the day, the DJUSHB had posted a 1.27 percent gain. TOL had rebounded 3.15 percent, and all the stocks mentioned in this paragraph gained more than 1 percent.
Crude inventories surprised. A 1.0 million barrel build in crude had been expected, but crude inventories dropped 300,000 barrels instead. A positive take on that drop in inventories was that more refinery capacity had come back online, and a build of 4.3 million barrels in gasoline inventories supported that view. However, distillates also dropped 300,000 million barrels. The more positive view was to win favor, sending crude prices lower and driving the TRAN back above the neckline of a head-and-shoulder formation it had just violated that morning. As the TRAN has done so many times in the past immediately after violating a bearish formation's support, it has climbed right back up to the right-shoulder level, ready to invalidate that formation first thing tomorrow morning on any kind of gain. The TRAN certainly can not continue invalidating bearish formations and zooming higher indefinitely, but it should certainly be watched to see if it can do it again tomorrow or if today's gain was just a short-covering bounce that will be reversed. That formation was seen on the 60-minute chart, but the weekly chart gives a longer-term view.
Annotated Weekly Chart of the TRAN:
Many sectors gained. Airlines benefited with the XAL gaining 2.18 percent. PFE led the healthcare sector into gains. The DRG, the Pharmaceutical Index, gained 1.51 percent. Telecoms also gained. Time Warner's (TWX) Carl Icahn may be planning to split the company, and Univision (UVN) may be for sale, some report. Other communications-related news included Vonage Holdings' plan to raise $250 million in a public offering, the first major Internet telephony company to go public. Citigroup, Deutsche Bank and UBS will serve as underwriters.
CSCO rallied the networkers. The NWX, the Networking Index was to gain 3.38 percent. Other tech-related indices climbed. The GHA, the GSTI Hardware Index, rose 2.19 percent.
The RLX, the S&P Retail Index, also bounced. The index found resistance most of the day at its 200-sma but finally bouncing into a 0.89 percent gain. Wal-Mart (WMT) had announced plans to spiff up its stores and make other changes. WMT's gain at first appeared similarly unimpressive, although some conditions related to the volume and price patterns suggested that WMT's stock could continue attempts to bounce, and it did by the end of the day. The bounce sent the stock's price just below a gappy, choppy consolidation area for WMT.
After-hours reporting companies included Whole Foods (WFMI) and Electronic Data Systems (EDS). As this report was prepared, WFMI was off its after-hours low, but trading at $70.20 after closing at $72.05. EDS was trading at $25.75, up from its close of $25.51.
Economics releases will be light tomorrow, too. They will include only initial claims for the week ending February 4, released at 8:30; December's wholesale inventories, released at 10:00; and natural gas inventories, released at 10:30. Wholesale trade numbers seldom move the markets. If they changed enough that they might be deemed to be impacting the inventories across all spectrums--manufacturing, wholesale and retail--they could conceivably impact the GDP forecast and could then be market moving, but the expectation is for a flat number.
Natural-gas inventories may prove more important, although the mild winter has alleviated some concerns about natural-gas supplies. Earnings reports may take center state in this climate. Reporting companies include AET, AYE, BECN, BRO, CSK, FFH, GY, GXP, HCC, GSI, JJZ, LUFK, MLM, MDTH, NFS, OCAS, OSIS, PNRA, RR.L, SKYW, SLF, TSCM and UN. These and many other companies will provide further insight into consumer products, retail, energy, insurance and other sectors.
Even more important may be a sale of 30-year bonds tomorrow afternoon. Traders should be aware of that event at 1:00 EST, watching how bond prices react and their impact on equities.
If this report had been wrapped up and emailed to readers at about 1:30, its title might have been something such as "Marking Time," as the bounce appeared to be a run-of-the-mill oversold bounce up to test resistance. The advice would have been to watch for rollovers and levels of potential support might have been emphasized, so readers could watch for those on any rollover. That run-of-the-mill oversold bounce might still be the right term to apply to today's action, but that action extended prices a little further than feels comfortable for that theory. A bounce was expected and not out of the ordinary, but the magnitude of the bounce perhaps was.
Still the SOX remained below its open on 1/27, the morning that it gapped so high. The RUT ended the day snugged right beneath a rising wedge's resistance, with that wedge building since late 2003 and with the RUT's breakout above that wedge being reversed a couple of weeks ago. The TRAN still works on a possible reversal signal on its weekly chart. And the Dow still has that broadening formation that any seasoned trader dreads seeing.
As I closed last Wednesday's Wrap, I commented that the "TRAN tests long-term resistance, as it seems to have been doing interminably . . . and the SOX [stopped] just below the top of the last huge gap." Nothing much has changed with those two indices. My advice last week was to trade carefully in the choppy environment, and that's advice I would now give even more emphasis with the Dow in that broadening formation.
I liken trading in the absence of economic news to that of trading during light-volume summers or holidays. The volume might not be as light as it is during summertime trading, but the patterns can be similar: hours of stunning boredom punctuated by quick moves that come out of nowhere. Reactions to news are often exaggerated and then sometimes quickly reversed.
If long, continue to protect long profits. Be watchful for the possibility of rollovers, but if downside develops, bears should make plans ahead of time as to how you'll protect profits near the support levels mentioned. This advice should not be deemed the lack of an ability to make a decision, but rather as a decision that market action does not prove particularly predictable according to standard technical analysis tools during this period. Special care is needed.
For specific guidance, rollover potential remains on the SPX below 1269-1271. Between 1271-1273.20 or so looks like a particularly choppy zone, but I wouldn't consider the SPX more bullish until a close above 1273-1273.20.
Cummins Inc. - CMI - close: 99.70 change: +0.24 stop: 96.95
CMI did indeed find some support near its simple 10-dma this morning. The stock bounced from its lows but the bounce was not very convincing and CMI is struggling with the $100.00 mark. We remain pretty cautious. The DJIA index added more than one hundred points and CMI's efforts amounted to a 24-cent bounce. We are not suggesting new positions.
Picked on February 2 at $101.01
Express Scripts - ESRX - close: 91.36 chg: +0.81 stop: 87.85*new*
ESRX bounced from the $90.00 region again (actually 89.54) and short-term technicals are hinting at some improvement. We would consider new bullish positions here but you might want to tighten your stop loss. We are raising our stop loss to $87.85 just under the 50-dma near $88.00. More conservative traders may want to wait for a move over $92.00 or $92.50 before considering new bullish positions. Our target is the $99.50-100.00 range. We do not want to hold over the late February earnings report.
Picked on January 29 at $ 92.42
Universal Health - UHS - close: 49.89 chg: +0.13 stop: 48.49
We don't see any change from our previous updates. Our trigger to buy calls is at $50.51. If triggered then we'll target a rally into the $54.50-55.00 range. The P&F chart is bullish with a $61 target. We do not want to hold over the late February earnings report.
Picked on February x at $ xx.xx <-- see TRIGGER
Administaff - ASF - close: 39.51 change: -0.74 stop: 42.65
We have been triggered in ASF. The stock continued lower today and broke down under round-number support at the $40.00 mark. Our trigger to buy puts was at $39.90. We are a little bit wary with the intraday bounce from its lows but readers can watch for a failed rally under $40.00 or even $41.00 as a new bearish entry point for puts. Our target is the 200-dma but we're using an exit range of $35.25-34.50. This is a short-term play. We do not want to hold over the February 16th earnings report.
Picked on February 08 at $ 39.90
Cameco Corp. - CCJ - close: 70.00 change: +1.43 stop: 73.76
A number of the metal and mining stocks produced an intraday bounce off their lows today. CCJ was one of them with a rebound from its simple 50-dma. The short-term pattern is still bearish but CCJ might continue to bounce from here. Watch for resistance near the 10-dma (73.67). A failed rally under the 10-dma could be used as a new bearish entry point although we'd hesitate to open new put positions with CCJ above $70.00. Our target is the $61.50-60.00 range. The P&F chart is bearish and points to a $57 target. CCJ is set to split 2-for-1 on February 23rd.
Picked on February 07 at $ 68.57
Ambac Fincl. - ABK - close: 75.85 change: +0.10 stop: 78.05
ABK still looks bearish with its short-term trend of lower highs. We don't see any change from our previous updates. There is some short-term technical support at its exponential 200-dma and simple 100-dma near the $74 level. We do expect a bounce there. Our target is $71.00. Our time frame is four to six weeks, probably sooner.
Picked on February 05 at $ 76.09
Intl Bus. Mach. - IBM - close: 80.80 change: +1.15 stop: 82.05
IBM has moved back into the danger zone for bears. The bounce back over $80 has turned its short-term technical oscillators bullish again. Bulls still have work to do. IBM remains under technical resistance at its 200-dma and appears to have resistance in the $81.00-82.00 region. We are not suggesting new put positions until IBM trades back under $79.50 again. Our target is the $75.25-75.00 range.
Picked on February 06 at $ 79.49
Johnson Controls - JCI - cls: 67.03 chg: -0.21 stop: 70.05
JCI is still sinking lower and hit a new relative low today but like a lot of stocks it rebounded from its worst levels of the session. We suspect it will continue to bounce tomorrow until it hits the short-term trendline of lower highs. Our target is the $65.50-65.00 range.
Picked on January 25 at $ 69.90
MGIG Invest. - MTG - close: 62.73 change: -0.12 stop: 66.05
MTG dipped toward $62 and bounced. Watch for a failed rally near $64.00 and its 200-dma as a new bearish entry point to buy puts. Our target is the $58.00-57.50 range.
Picked on February 06 at $ 63.70
Meritage Homes - MTH - close: 58.76 chg: +0.63 stop: 62.05
Homebuilders rallied today but it looks like an oversold bounce. We don't see any change from our previous updates on MTH. Our target is the $52.00-50.00 range.
Picked on February 02 at $ 58.76
(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.)
Building Materials - BMHC - cls: 72.43 chg: +0.13 stop: n/a
Wednesday proved to be a relatively volatile day for BMHC but the stock ended the session close to unchanged. We are not suggesting new strangle positions at this time. The options in our strangle play 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
Encana Corp. - ECA - close: 44.39 chg: -0.63 stop: n/a
ECA continued to sink today and closed under round-number support at $45.00. Shares are currently testing technical support at the 200-dma. This looks bearish. We're not suggesting new positions in ECA right now. Our strategy involves the April $50 calls (ECA-DJ) and the April $40 puts (ECA-PH). Our estimated cost is $3.45. We are aiming for a rise to $5.95.
Picked on January 10 at $ 45.56
Ryland Group - RYL - close: 68.62 change: +1.00 stop: n/a
RYL rebounded from its lows of the session and we don't think the bounce is over yet. Watch for another rally back toward the $70 level again. We're not suggesting new positions. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN). Our estimated cost is $7.00. Our target is $12.00.
Picked on January 22 at $ 75.19
Google Inc. - GOOG - close: 369.08 chg: +1.16 stop: n/a
Target achieved. Shares of GOOG were weak for most of the morning and hit a low near $355. This was more than enough for the puts in our strangle (February $420 puts GOP-ND) to hit our target of $60.00. The high for the puts today was $64.50. We are happy to be out. The intraday bounce from GOOG's lows looks like a set up for a stronger oversold bounce.
Picked on January 29 at $433.49
OSCILLATOR TYPE INDICATORS:
These 3 popular technical indicators each basically show the same three things: direction of price momentum, how strong that momentum is (steepness of the line) and something called 'overbought' or 'oversold' by use of those upper and lower lines; what use is that?
If you haven't experienced getting 'killed' in options because you bought puts when either Stochastic, RSI or MACD indicators suggested that an Index or Stock was 'overbought', you may have a sadistic 'treat' in store for you.
Buying calls when these indicators are down near the low end of their 1-100 'scale' (Stochastics and RSI) or when MACD got near a prior low (when prices rallied back when), has been part of some of my early trading disasters.
Then, why the heck use them? Should you pay attention to these; or, are they just 'noise'? I will discuss each in turn (some on stochastics today) but not all at once, keeping it (relatively) short and trying to make the discussion strictly relevant to their possible usefulness to you in assessing market or stock trends. In and of themselves, these technical indicators are of limited use/usefulness in making trading decisions. But, first up, a look at:
MY CURRENT TECHNICAL OUTLOOK:
First are TRENDLINE considerations. Since the Dow 30 stocks got back somewhat in favor again recently, the Dow Average (INDU) has taken on a somewhat more key role in assessing the current up trend, as to the market staying within an overall UP trend and making guesses has to how far this current correction will carry (or, when the trend would reverse).
Bullish price action relative to trendline considerations in the current sideways to lower move is that INDU 'held' its daily up trendline. From my weekend Index Trader column, I suggested that 'key' support was 10730. Today's low was 10740 and the trendline is shown on the INDU daily chart below:
I would note the close (just) over the 21-day moving average, which is a bullish plus also. Of course, it's one thing to hold above a prior low, or at a trendline and another to break out above persistent overhanging resistance. Stay tuned on that!
Shown above is the Stochastic indicator and it tends to be the oscillator 'type' (more on this further on) indicator I look at for the Dow 30. I find that the Stochastic 'works' well in suggesting the area of the occasional intermediate highs and lows that I like to trade using the Dow Index calls and puts. As important as the indicator is the LENGTH setting. I always show this by writing it in; i.e., '21-day'.
At the blue up arrow, the lower 21-day stochastic line got to, although not really under (unlike some of the past bottoms), the lowermost (red) level line. This suggested that at the prior dip to the up trendline, according to the Stochastic indicator, INDU was at/near to 'oversold' (as defined by my 'length' input and my SETTING on the lower line where I set oversold as '15').
The 'default' settings for 'overbought' and oversold level lines for most charting applications for their ('Slow) Stochastic indicator is at 80 and 20.
If you see a Stochastic indicator that shows just below it "(10(5),3)", the key number is the FIRST number (10), that of 'length'; meaning HOW MANY closes it uses to calculate the Stochastic number. (You can mostly disregard the other numbers.)
If that first number is '5', used on a Daily chart, the Stochastic is looking at 5-days, a very short-term measurement; if length is set to 13, the stochastic formula is calculating more than 2 weeks (10 trading days) of closes and the indicator is then calculating trend momentum on a longer timeframe.
I use '21' above as my length setting, which then calculates slightly more than 4 weeks (20 trading sessions) in the case of a daily chart (21 hours in the case of an hourly chart, etc.) and is a 'fibonacci' number (e.g., 5, 8, 13, 21, etc.) and which I have found highlights the intermediate trend quite well on THIS particular indicator, Stochastics.
On the Relative Strength Indicator on my hourly charts, I also use a 'length' setting of '21'; so, applied to an hourly chart, the RSI formula is calculating the last 21 hourly closes. On this basis, the RSI did not register at 30 or below on the recent apparent bottom at the blue UP arrow on the OEX chart above, using the common RSI 'default' setting of 70 and 30 (as the level lines suggesting 'overbought' and 'oversold').
I often see that when prices get 'fully' oversold, fully overbought, subsequent trend reversals are strong and prolonged. However, as with all this stuff it's all relative. On the last peak in the hourly RSI Indicator at the blue down arrow on the OEX hourly chart above, RSI was not fully 'overbought' either, as evaluated by an upper 'overbought' line setting at 70. However, at that juncture hourly prices were in a declining trend (lower rally highs) and the down TRENDLINE, coupled with a relatively high RSI reading, were the key, combined, bearish aspects.
If we look at the OEX chart, we need also look at the S&P 500 (SPX) chart below, as SPX has been the leading index in advance of recent weeks and months. On the recent hourly decline below 1260 in SPX, which pierced the mid to late-Jan. lows, SPX appeared to be heading to a re-test of the key late-Dec. low around 1246.
Instead, SPX reversed at a point that touched and defined another trendline; that of the possible lower end of a downtrend channel, suggesting at least minor, if not 'final', support. The subsequent rebound back above the prior lows around 1260, was a bullish chart development. Yet to come is what happens at the down trendlines noted by the red (down) arrows.
Since uptrends consist of rising or equal (a 'double bottom') lows, price action over the next few days should be watched closely as whether this recent rebound is going to mark an important low. It at least looks like a promising trade for any who bought NDX calls when prices reversed back above the minor hourly down trendline by today's opening and low above 1652.
Also of course, the latest decline did not pierce the important late-December low around 1634 and this latest rebound and upside reversal was above that area, which is bullish.
Speaking of reaching or not reaching upper or lower, overbought or oversold, extremes, there was one major trading index that DID reach a 'fully' oversold short-term (hourly) RSI extreme, as seen on the Nasdaq 100 hourly chart (NDX) above.
The Nasdaq Composite (COMP) achieved a double bottom low in the 2240 area, making this hourly chart the most bullish of the hourly charts shown above. COMP did not get 'fully' oversold so to speak. But, as patterns often occur or can be looked at in pairs, the top in COMP that formed in the 2312 area, was not accompanied by an overbought extreme.
At the time of the aforementioned COMP top (2312) top, there were a number of highs in the same area forming a 'line' of resistance showing consistent selling pressure, AS WELL AS a bearish 'divergence' with the 21-hour RSI as ITS trend was declining, as highlighted by the down-sloping (cyan) RSI trendline shown above.
'OSCILLATOR' TYPE INDICATORS:
I'll have more to say on this in subsequent Trader Corner's articles that explore the Stochastics, RSI and MACD indicators. I'll continue on this topic in my next (Wed.) Trader's Corner article. Just remember what an 'oscillating' fan is: one that is set to move back and forth between two fixed/extreme points.
MY INDEX TRADER COLUMN:
More on my specific predictions, support and resistance, etc. is found in my weekend Index Trader column, available on the Option Investor.com WEB site (not part of the e-mailed weekend OI Daily). You will see a web LINK to the Index Trader at the top of your weekend Option Investor Daily e-mail. My most recent (Sat, 2/4) Index Trader can also be viewed online by clicking here.
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Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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