Venezuela banned flights into the country by Continental and Delta and restricted American Airlines to only three flights originating from Miami. This move was planned to further punish the U.S. for restricting Venezuelan flights into the U.S. airspace and to stick it to the U.S. one more time. Venezuelan airlines are rated a class two for safety and cannot add any new flights into the U.S. at that level. Only class one airlines can increase flights into the U.S. market. Class three airlines, the lowest safety level, are prohibited from entering U.S. airspace at all. President Chavez, never known for calm and rational actions, took the step to punish the U.S. for its long standing policy of only allowing those airlines with a strong safety record to access U.S. markets. Venezuela is the fifth largest destination in South America and the loss of these flights will hurt the American carriers but don't look for U.S. officials to relax their rules, especially for Chavez. Over the last two years Chavez has attacked the energy sector by imposing billions in new taxes and making them retroactive. He also changed the royalty schedule for oil produced in VZ and changed the ownership rules for oil facilities in his country transferring ownership of the properties to VZ. He also attacked the mining companies and food service companies who export to America. Last week he ordered the central bank of VZ to turn over more than $5 billion in reserves to the government thus weakening the bank and the countries currency. Chavez said the funds would be used for "off budget" expenditures. Chavez also aggravated the U.S. administration by offering millions of gallons of heating oil to northeastern users at below market rates as another stab at the administration. He has repeatedly said he wants to sell his oil to other nations rather than America and has inked deals with China to start those plans in motion. I seriously doubt U.S. officials will be willing to negotiate with VZ over the flight restrictions given his recent list of attacks on us. Nobody should want to fly on an airplane with substandard maintenance procedures and bad safety records and that makes VZ a no fly zone unless you can get one of the 900 daily seats allowed on remaining the American Airlines flights. While this new flight restriction spat made the news on Friday it was far from the lead story.
Dow Chart - Daily
Nasdaq Chart - Daily
Wilshire 5000 Chart - Daily
Friday was a heavy news day for the energy sector. The morning started off with news that Saudi Arabia foiled a terrorist attack on a facility at the Abqaiq Center. That facility handles about six million bbls per day of Saudi output. Vehicles loaded with explosives attempted to crash through the security gates into the facility but exploded when guards opened fire on the bombers. No material damage was reported to the oil facility but three guards were killed and ten injured in the battle and explosions. Saudi has been hardening their security after Osama called for attacks on oil infrastructure as a way of penalizing the United States with higher prices. Many facilities have tanks guarding the approaches and bunkers with heavy caliber weapons to thwart just such an attack as we saw on Friday.
In Nigeria attacks continued on oil facilities with 455,000 bbls of daily output already offline. Rebels said they would continue the attacks until one third of the 2.5 mbpd of production was stopped or roughly another 400,000 bbls. Rebels are now attacking oil rigs and taking hostages right off the platforms. Nigeria is the fifth largest exporter to the U.S. and exports the light sweet crude strongly demanded by refiners.
Indonesia thwarted an attempted coup attempt this week and had to disperse troops to sensitive locations including gold mines and oil facilities in a state of heightened alert as instability loomed. Late Friday the conditions appeared to be under control and tensions eased. Indonesia exports approximately 1 mbpd.
Earlier this week Ecuador was also in the headlines as protestors staged violent demonstrations with many causalities. The president, Alfredo Palacio, suspended civil rights and ordered police and the military to regain control. Protestors had damaged pipelines and roads necessary to transport crude to the coast for export. The conditions appeared to have calmed late in the week but tensions were still high.
The combination of those events showed just how fragile the oil situation really is. Crude oil prices soared +2.37 on Friday to close at 62.91. This was above the resistance set earlier in the week and erased the drop back to $59.65 we saw on Thursday. The continued news events surrounding black gold are preventing it from making its normal historical lows for this time of year. Typically oil prices fall in late February and early March and then rally into the summer driving season with highs in the May/June period. In 21 of the last 22 years gasoline has set lows in the last two weeks of February and highs in the first two weeks of May. This is because of a buildup of crude inventories as refineries go offline to switch from winter products to summer products. Crude supplies rise with prices dropping while gasoline supplies moderate. Once the refinery maintenance is over they race to catch up with rising demand for gasoline, diesel and jet fuel. The maintenance schedule puts them behind the demand curve causing prices to rise. This year the maintenance schedule is especially tough given the extended run at nearly 100% capacity by many refiners to compensate for those refiners knocked out in the gulf. It is also going to take longer due to the new rules on lower sulphur emissions. Those rules require extensive modifications to refineries making the conversions to low emission fuel. The new rules are expected to remove -500,000 bpd of diesel from the market on a permanent basis due to some older refineries choosing to halt production rather than spend the money necessary for the conversion. The elimination of MTBE as a fuel additive is also expected to remove nearly 300,000 bpd of gasoline from the market. For refiners who have already made the conversions this represents an opportunity for wider margins and stronger earnings. Valero is best positioned to profit from this trend.
April Crude Chart - Daily
The problem of geopolitical pressures on oil prices is not expected to change. The Iran problem is expected to heat up over the next two weeks as the date for the next UN action draws near. Nigeria is not expected to improve and it is only a matter of time before some new hot spot appears or a terrorist is successful in crippling Saudi production. We saw the price of crude drop back to our target of $58 in Mid February, which gave us a strong buying opportunity. It is entirely possible we could see another pullback to that area but these geopolitical events are making that less likely as each day passes. This is the period where the price normally declines but the time is growing short based on the historical patterns. Once into March the bias is going to shift to the upside ahead of the summer driving season. Bottom line, buy any dip over the next two weeks.
RIMM got a reprieve on Friday as the Federal Patent Office invalidated the final patent under litigation. As of Friday ALL of the NTP patents have been ruled invalid and the NTP/RIMM case is rapidly approaching a conclusion. The judge on the case warned both parties on Friday that they had better reach a settlement quickly or he was going to issue a ruling that neither party would like. The judge has been growing increasingly frustrated with the lack of a settlement or even the lack of meaningful settlement talks. Friday's final patent ruling should slam the door on NTP and their hopes of a large cash payment. The RIMM CEO said on CNBC there is no reason to settle with NTP given the patent ruling. He said the only reason to settle at all was to keep NTP from attacking their partners in an effort to produce some blackmail proceeds. RIMM said it was willing to discuss a settlement if access providers, manufacturers, users, software providers, etc, were also protected from future NTP action. The clock is clearly running out on the battle yet the judge refuses to acknowledge that the patents have been ruled invalid. It produces a conundrum for RIMM because they have been vindicated by the patent office but still have a judgment pending by the court as though the patents were still in force. Deal or no deal, that is the NTP question this weekend. Facing the potential for zero compensation if the case turns against them NTP lawyers better start making a settlement decision quickly. RIMM has been escrowing money for a settlement every quarter since the case began and reportedly has a cash hoard of more than $2 billion. They have got to be breathing easier today with plans for putting that money back to work very soon.
RIMM Chart - Daily
LEH Chart - Monthly
Lehman (LEH) continues to push higher with a close at $148 on Friday. For long-term holders this is a +1300% gain from the split adjusted $11.31 low we saw back in 1999. Lehman last split 2:1 in October 2000 after a high of $160 was posted in September. This puts Lehman well within range for another split announcement soon. One broker raised their price target for Lehman to $173 saying business was hot and profitability was growing. However options activity suggests traders are more bearish than bullish on LEH and short interest accounts for more than five days of volume. This is a recipe for another move higher on any good news or continued bullishness in the sector. Other brokers with highflying stock prices include BSC $135, GS $144 and LM $136. The Broker Dealer Index (XBD.x) hit a new historic high at 225 on Friday on the rising strength in the sector.
Last week produced some rocky economics despite the Fed's stand that the recovery is gaining strength. Friday was no exception to the headliner rule. The headline number for January Durable Goods showed a -10.2% drop in orders and more than ten times worse than consensus estimates for a -1.0% drop. This is astounding on surface as the biggest drop in more than five years but we always want to look beyond the headline number for the real news. Excluding the volatile aircraft component orders actually rose +0.6% and right inline with many analyst estimates. The other components showed only a minor decrease in activity and a small rise in inventory levels. There was nothing in this report to worry the Fed contrary to the CPI released on Wednesday showing a +0.7% increase. Again, removing the +5% jump in energy prices the core CPI rose only +0.2% and less than the consensus estimate of +0.4%. For the last week economics produces lots of flash but no real substance in the way of Fed damaging numbers. That flash of strong headline numbers did manage to push the Fed funds futures to nearly a 100% chance of a 5.25% rate and analysts are still whispering that 5.5% is likely to be the real target. With the rate target slipping farther out into the future it is amazing the markets can maintain their current bullish bias.
Next week there are some major economic reports on tap with GDP, NAPM, PMI and ISM the ones to watch. These reports should give us a better idea of what the Fed will do as the year progresses. Missing from next week's schedule is the Employment report for February, which is normally on the first Friday of the month. Because month end is not until Tuesday it was moved to the following Friday March 10th. That puts it only about two weeks before the next Fed meeting. Sure seems like those meetings are popping up more often. Seems like Greenspan's last meeting was just last week but it has been nearly a month.
Economic Schedule Week of Feb-27th
Fed Governor Poole said on Friday that a sustained expansion is in place and proceeding well. He also said he was comfortable with the current rate program BUT even if the Fed did go too far the economy can rebound from that event. If the Fed governors are worried about going too far then it is less likely it will happen. Let's hope the meeting in March confirms that fact.
Several indexes set new multiyear highs last week including the Dow, NYSE Composite, Wilshire 5000 and Russell 2000. The Dow was the leader again with the other indexes breaking prior highs by only fractional amounts. For instance the Russell broke its January high of 736.45 with a high on Friday of 737.21 or only a .76 point difference. The NYSE composite broke its high of 8130 with a brief spike to 8140 intraday but fell at the close back to 8126. The Wilshire 5000, an index trading at the lofty level of 13,000 managed only a +15 point breakout intraday over its previous 13030 high posted in early January and closed back at 13009 at Friday's close.
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While those breakouts are tentative at best there is still no help from the bearish Nasdaq. The Nasdaq is still well below its January high of 2332 and struggling with downtrend resistance at 2286. The index did show a little more life this week but it could not muster an intraday breakout above the short-term resistance at 2295. We did get some higher lows and that gives us a little hope that techs may be finding some reluctant buyers.
The Nasdaq is the only thing keeping the markets from a real rally as February closes. If the six major indexes were all members of a six-horse team pulling a heavily loaded wagon uphill then the Nasdaq would be the horse passed out in its harness and being dragged along with the wagon by the other five horses. It is going to be very difficult to gain any substantial ground until the Nasdaq wakes up and at lease walks along with the rest of the team. Not having to drag the horse as well as the wagon would be a major relief for the rest of the indexes. The virus affecting the Nasdaq and producing the weakness is the semiconductor flu. Led lower by INTC, TXN, AMAT, MRVL, NVLS, STM, TSM and XLNX the SOX is testing support at 520 and well off its 560 highs set in late January. Merrill analyst Joe Osha reported potential price cuts on processors, DRAM and NAND supply for all of 2006. AMD slashed prices for Opteron processors and Osha thinks Intel will follow suit and slash its dual core processors in April. Osha said Intel has an inventory problem ahead of its release of the Woodcrest and Conroe products later this year. Channel checks on NAND chips showed a ramp in inventory levels in Q4 that could slow production in Q1/Q2 until the inventory is absorbed. He also expects Q2 price cuts by SanDisk and others. To put is simply there is no joy in Chipville after Intel struck out. Depression has settled over chip investors and there appears to be no desire to hunt for bargains. Next weeks semiconductor billings on Thursday might provide a spark but first quarter semi sales are normally weak.
SPX Chart - 180 min
That leaves us with a SPX that gained a whopping +2 points for the week to close at 1289 and a dead stop under the 1295 resistance that held back in early January. The NYSE, Wilshire and the Transports were the only indexes to post double-digit gains for the week and all three were only able to make it into the +30s despite their efforts. It is remarkable that the transports were able to gain at all given the spike in oil to $63.25 from the prior weeks $59.15 low. (April contract) The March contract that ceased trading on Tuesday hit $57.40 and the low for 2006. If you were comparing apples to apples that was an oil spike of nearly $6 as the contracts changed and geopolitical considerations mounted. This makes the +31 point gain in the transports even more surprising. I mentioned last Sunday that I thought the extreme volatility in oil prices ahead of the weekend was due mostly to options/futures expiration and the three-day weekend rather than the $58 level being seen as a good buy on Thursday. The two-day drop, which began on Wednesday, proved that point with oil returning to $59 and change but after the Saudi attack we may have seen the lows for spring. Oil prices did not appear to impact the equity indexes despite their volatility. Traders appear to be more focused on the Fed than oil. Bernanke gave a speech on Friday at Princeton where he taught for 17 years and said the Fed is not seeing any material inflation as a result of higher energy prices. I think he must have been reliving his college days and a possible flash back to some sort of chemical induced mental haze to make that statement. Anyone that has bought gas for their SUV or paid their heating bills over the last three months knows that prices have risen even if the Fed does not count energy as an inflation factor. It appears I digressed but that is a pet peeve of mine that they don't count food or energy.
Next week will be data dependant with a strong calendar on Tuesday likely to decide our fate followed by the ISM trump card on Wednesday. As boring as it is we should still be cautiously long over SPX 1275 but I would be cinching my stops really tight on any new bounce to 1295. This is month end and we should see some minimal benefit from cash flows into funds but we are rapidly running out of reasons to remain long. Earnings are over and we have seen a constant parade bad guidance recently and much of it from the consumer sector. Earnings for Q1 are expected to slow drastically except for energy and banking and we should be very close to single digit mode after 14 quarters of double-digit earnings growth. Without the energy sector Q4 would have come in around +4% rather than another double-digit quarter around +15%. Thomson First Call is still stubbornly holding on to barely double digit estimates of +10.8% growth in Q1 and +10.9% growth in Q2. Clearly we are right on the edge of that single digit cliff.
While investors should be pleased to maintain that sort of growth we are way out on that earnings limb and stretching for all it is worth. A couple more double cheeseburgers and we could hear a sharp crack as the streak ends and we tumble back to earth. No earnings growth cycle lasts forever and a retracement in earnings and the markets is only normal. The second year of a second term president is also problematic and history is clearly against a large market gain. Add in the Fed stretching out its rate hike cycle and the market has a nice wall of worry to climb. This is exactly the kind of circumstance that sometimes produces big gains. Fundamentals line up on the side of the bears and short positions increase. A set of positive economic numbers shocks the markets and a new round of short covering, shorting, short covering, shorting begins.
The long-term bullish view about the markets offsets the short-term fears about an earnings decline. Last week the SPX broke $800 billion for the forward earnings consensus. That is the first time ever and suggests that despite the earnings growth decline companies are still far better off than they were in 2000 at the height of the bubble. The forward earnings at the top of that bubble were only $556 billion. Today's numbers represent a +44% increase in real earnings. Interest rates were higher, 6.0% compared to only 4.5% today. Yes, the Fed is on track to hit 5.25% by summer but you get the idea. The clincher is the 1552 high on the SPX back in March of 2000. Earnings are up +44% while stock prices are down -17% and interest rates are more favorable. Inflation is almost nonexistent at 2% according to the Fed and the economy is gaining strength, also according to the Fed. In reality we could be in a stealth bull market and the last three months of sideways movement on the S&P is just consolidation before the next move higher.
I wish I could predict that higher spiral for the next couple weeks but
unfortunately my crystal ball is out for repair. Until we actually see a break
from this range we need to remain guided by our long/short indicators at
1275/1270. As long as we remain over 1275 we should remain cautiously long. Let
the day traders fight it out in cyberspace and we will wait patiently for the
next market move to confirm a direction. A convincing move over SPX 1295 would
cause me to add to longs but keep my stops below 1295 to avoid the expected
volatility. I would also want to see some life return to the Nasdaq but you
can't have everything in life.
Ashland - ASH - close: 66.31 change: +0.94 stop: 64.75
Why We Like It:
BUY CALL APR 65 ASH-DM open interest=911
current ask $3.40
Picked on February xx at $ xx.xx <-- see TRIGGER
Cigna - CI - close: 124.57 change: +0.61 stop: 119.90
Why We Like It:
BUY CALL APR 120 CI-DD open interest=469 current ask $7.60
Picked on February 26
F5 Networks - FFIV - close: 67.16 chg: +2.76 stop: 63.85
Why We Like It:
BUY CALL APR 65 FLK-DM open interest=1527 current ask $6.70
Picked on February 26 at $ 67.16
Amer. Science. - ASEI - cls: 74.91 chg: +0.38 stop: 67.84
Unfortunately ASEI spent the day on Friday unsuccessfully trying to breakout over resistance at the $75.00 level. We would not suggest new bullish positions here. The overall pattern and the current bounce looks bullish for the stock. Plus, the P&F chart shows a bullish triangle breakout pattern with a $100 target. Yet right now, with the major indices going nowhere, shares of ASEI might retrace a bit before moving higher. Traders can choose to buy a breakout over Friday's high (75.30) or look for a dip (and a bounce) back near the $72.00 region. Don't forget that the current bounce was fueled by rumors that GE was considering ASEI a takeover candidate and this helped fuel some short covering since ASEI has/had relatively high short interest. Our target is the $79.75-80.00 range.
BUY CALL APR 70 KBU-DN open interest= 594 current ask $8.10
Picked on February 23 at $ 74.05
Beazer Homes - BZH - close: 65.44 change: -0.64 stop: 63.19
The homebuilders have not been able to build on last Wednesday's gains. Here's a quick recap - last Wednesday the group rallied higher on some positive comments for Toll Brothers (TOL). The next day TOL reported better than expected earnings results but said that demand was slowing down and that comment sucked the wind out of the sector's sails. The overall pattern for BZH looks attractive. Shares are still bouncing from a test of technical support at their 200-dma. The daily chart's MACD indicator has produced a new buy signal. We are fighting a bearish P&F chart so diehard P&F traders may not want to open bullish positions here. We are not suggesting new call positions at the moment although we would watch for a bounce from $65.00 or a bounce from $64.00 as a potential entry point. Our short-term target is the $69.85 mark.
Picked on February 15 at $ 65.05
Cephalon - CEPH - close: 76.40 change: -0.09 stop: 69.99
The BTK biotech index was one of the best performing sectors on Friday and the index closed at a new multi-year high. Unfortunately, the sector move failed to inspire a similar gain in shares of CEPH. The move over $76.00-76.50 over the last couple of days is certainly bullish for CEPH but its inability to hold it suggests a potential short-term top right here. The daily chart shows a new buy signal with its MACD indicator but we would not be surprised to see CEPH pull back and retest the $75.00 level as support first before moving higher. The Point & Figure chart displays an ascending triple-top breakout buy signal that points to a $93 target. We are aiming for a rally into the $82.00-82.50 range. Traders should remember that any time you're trading a biotech stock there is an elevated status of risk. You never know when an unexpected announcement about a drug in development or even from a competitor can send the stock you're trading gapping higher or lower in an instant.
BUY CALL MAR 75 CQE-CO open interest=2960 current ask $2.95
BUY CALL APR 75 CQE-DO open interest=1800 current ask $5.30
Picked on February 23 at $ 76.65
Chico's FAS - CHS - close: 47.41 change: +0.01 stop: 45.89 *new*
Retail stocks turned in a mixed performance on Friday. Disappointing earnings guidance from the Gap (GPS) did not inspire much confidence in the group. Shares of CHS dipped to $46.66 before traders bought the pullback and pushed shares back into the green. We were hoping for a dip closer to the $46.00 level, which should be support. If we consider the lackluster trading in the major averages we're not that excited about opening new call positions in CHS right here. The overall bullish pattern for CHS remains in effect. The P&F chart points to a $70 target. Unfortunately, we're almost out of time for this play. CHS is due to report earnings on Wednesday. That means we need to exit on Tuesday afternoon near the closing bell. We are raising our stop loss to $45.89.
Picked on February 14 at $ 47.61
Google Inc. - GOOG - close: 377.40 chg: -0.67 stop: 349.99
If not for last Thursday GOOG's week would have been pretty boring. The stock's oversold bounce is struggling with every level of potential resistance. Right now the stock is testing the $380 level and its 21-dma. While the daily chart's MACD indicator has produced a new buy signal we would not suggest new bullish positions right here. Next week seems to be up for grabs. The markets will likely be pushed around by the boatload of economic data due to be released. Meanwhile GOOG has an analyst conference scheduled for Thursday, March 2nd. We do find it very interesting that GOOG's P&F chart has reversed back into a buy signal with a $464 target. Our bullish target remains the $394 level. More conservative traders (who probably shouldn't be trading GOOG anyway) may want to tighten their stops. This is a very aggressive speculation play.
Picked on February 16 at $366.46
Goldman Sachs - GS - close: 144.16 change: +0.20 stop: 141.45
Our last update told readers to watch for a bounce from the $143.00 level. We said a bounce from $143 could be used as a new bullish entry point. Well, that's exactly what GS delivered on Friday. The stock gapped lower to open at $143.05 and then immediately rebounded. Unfortunately, GS could not manage to make a new high despite a new high for the XBD broker-dealer index. We remain bullish on the sector and the overall pattern for GS is certainly bullish. The question is whether or not the stock will produce any sort of pre-earnings run. Stocks in the broker sector tend to produce a run up ahead of earnings and then sell-off a bit no matter how great the earnings results were. GS is due to report earnings in a couple of weeks. We plan to exit ahead of the earnings report. More aggressive traders may want to give GS more room to maneuver and put their stop loss under $140.00. More conservative traders may want to tighten their stops toward the $143.00 level. We're going to leave our stop where it is at $141.45. The Point & Figure chart points to a $169 target. We are only going to target the $149.85-150.00 range.
BUY CALL MAR 140
GS-CH open interest=4018 current ask $6.10
Picked on February 22 at $145.53
Hartford Fin. Srv. - HIG - cls: 83.29 chg: -1.21 stop: 79.95
Watch out. We have been warning readers that HIG may need to retrace back toward the $82 level and it looks like that consolidation has begun. Shares lost 1.4% on Friday and volume came in well above the daily average. Short-term technical oscillators are turning negative. We expect shares to pull back toward the $82 level, which should be short-term support. Earlier we suggested that more conservative traders could have exited near $85 and if you did not you might want to think about exiting early here or at least adjusting your stop loss toward $82.00. We are not suggesting new bullish positions at this time.
Picked on February 14 at $ 82.12
MDC Holdings - MDC - close: 63.54 chg: -0.90 stop: 61.15
We remain on the sidelines with MDC. Our plan is to catch the next leg higher with a trigger to buy calls at $65.05. It looked like MDC was prepared to begin that next leg higher on Wednesday when the stock broke out over its simple 50-dma and its long-term trendline of resistance. Unfortunately, MDC has not seen any follow through. If triggered we will target a rally into the $69.50-70.00 range.
BUY CALL APR 60 MDC-DL open interest= 0 current ask $6.50
Picked on February xx at $ xx.xx <-- see TRIGGER
Altria Group - MO - close: 72.45 chg: -0.93 stop: 71.85
We are still in a wait-and-see mode with MO. The stock has been bouncing around in the $72.00-74.00 range. We want to catch a bullish breakout over resistance at $74.00 and we're suggesting a trigger to buy calls at $74.10. More conservative traders may want to wait for MO to trade over its simple 50-dma (currently 74.30) before initiating positions. If triggered we are going to target the $77.50-78.00 range. We will also keep an eye out for a bounce from support at its rising 200-dma, now at 70.93. However, Friday's trading has produced a bearish engulfing candlestick pattern and MO's short-term oscillators are turning bearish. We'd be careful about trying to buy the first bounce.
BUY CALL APR 70 MO-DN open interest= 1967 current ask $4.50
Picked on February xx at $ xx.xx <-- see TRIGGER
Occidental Petrol. - OXY - cls: 92.38 chg: +2.38 stop: 85.95
Wow! If nothing else OXY will keep your heart racing with all the gap ups and downs. On Friday the stock gapped higher after some bullish analyst comments. JP Morgan upgraded the stock to an "over weight" and UBS reiterated their "buy" rating and raised their price target to $111. The 2.6% gain on Friday has pulled the daily chart's macd indictor closer to a new buy signal. Oil stocks in general were stronger on Friday as geopolitical concerns continue to heat up. We remain bullish. Readers can choose to go long here at current levels or wait for a potential pull back if OXY decides to fill the gap from Friday morning. Our target is the February highs in the $97.50-98.00 range.
BUY CALL APR 90 OXY-DR open interest=105 current ask $6.00
Picked on February 21 at $ 92.00 *gap higher*
Potash - POT - close: 94.47 chg: -0.45 stop: 89.95
POT experienced a little bit of profit taking after Thursday's bullish breakout and readers may want to use the dip as a new bullish entry point. On Thursday the stock broke out over its short-term trendline of resistance and its 10 and 200-dma's. Our short-term target is the $99.50-100.00 range. If POT can trade over $96.00 it will produce a new P&F chart buy signal and more aggressive traders may want to aim for a higher target.
BUY CALL MAR 90 POT-CR open interest= 486 current ask $6.20
on February 23 at $ 93.05
Prudential - PRU - close: 77.42 change: +0.87 stop: 74.59*new*
PRU is breaking out! The stock gapped higher on Friday morning to open at $77.10. Our trigger to buy calls was at $77.05 so we have adjusted our entry point to reflect the gap higher. The move over $77.00 is a breakout over resistance. Technical indicators are improving and its P&F chart shows a double-top breakout buy signal with a $103 target. If you missed the entry point on Friday morning we'd still consider new bullish positions right here. Our target is the $82.00-82.50 range. We do expect some resistance near $80.00. We are adjusting our stop loss to $74.59 just under Wednesday's low.
BUY CALL APR 75 PRU-DO open interest=111 current ask $4.10
Picked on February 24 at $ 77.10
Total - TOT - close: 127.66 change: +0.35 stop: 124.95
We do not have anything new to report on for TOT. The oil stocks were trending higher on Friday due to geopolitical concerns but shares of TOT are still showing a bit of relative weakness here. A bounce from its rising 200-dma, which has been consistent long-term support, could be used as a new bullish entry point to buy calls. More conservative traders may want to wait for a move over $130.00 or its 50-dma before initiating plays. Our target is the $137.00-140.00 range.
BUY CALL MAR 125 TOT-CE open interest= 21 current ask $4.60
BUY CALL APR 125 TOT-DE open interest= 0 current ask $6.50
Picked on February 16 at $127.61
Tenaris S.A. - TS - cls: 160.41 chg: +3.26 stop: 149.95 *new*
TS is showing relative strength again with a 2% gain on Friday. Volume wasn't that great on Friday's session and that doesn't lend a lot of conviction behind the rally. The daily chart for TS shows the macd indicator nearing a new buy signal. If oil stocks continue to rally next week we would not be surprised to see TS hit our target in the $164.00-165.00 range. You may recall that TS is a steel company that produces pipes and fixtures for the oil industry. More aggressive traders may want to aim higher since a move over $165.00 would be a new high. We are raising our stop loss to $149.95.
Picked on February 21 at $156.22
Apollo Group - APOL - close: 58.09 chg: +0.91 stop: 60.01
Uh-oh! APOL surprised us on Friday with an oversold bounce we weren't really expecting. Watch the descending 50-dma, now at 58.95, to act as short-term overhead resistance. If shares push past the 50-dma there is still resistance near $60.00. We would not suggest new bearish positions at this time. Our target is the $53.00-52.50 range.
Picked on February 19 at $ 58.06
(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: 72.46 chg: -0.24 stop: n/a
We have three weeks left before March options expire and even less time if you plan to exit ahead of the stock split. BMHC has been struggling with resistance near $75 for the last couple of weeks and it would be great if shares could hit new relative lows soon. We are not suggesting new strangle positions. 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. We are adjusting our target to breakeven at $8.20 by March expiration.
Picked on December 18 at $ 80.95
Encana Corp. - ECA - close: 42.04 chg: +0.03 stop: n/a
Oddly enough shares of ECA haven't been moving much the past couple of days in spite of the volatility in crude oil. The overall trend for the stock looks bearish given its breakdown under the $45.00 level and its 200-dma and the failed rally near the same level a week later. We are not suggesting new strangle positions. Our strangle 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
Loews Corp. - LTR - close: 93.35 change: -1.95 stop: n/a
Hmm... we cannot find any specific news but LTR must have said something bearish at a travel show on Friday. That's the only thing we can find that might explain the sudden spike down on Friday morning. Volume was very strong at more than three times the daily average. We are not suggesting new strangle positions. Buying this strangle was a bet that LTR will be trading at more than $102 (above resistance) or less than $88 (under support) by March expiration. The options in our strangle are the March $100 calls (LTR-CT) and the March $90 puts (LTR-OR). Our estimated cost is $1.75.
Picked on February 13 at $ 95.72
Ryland Group - RYL - close: 72.11 change: +0.37 stop: n/a
Traders bought the dip near $70.00 on Friday and RYL looks poised to continue its rebound. There is still about two months to go before April expiration. There is no way to know where RYL will be two months from now but this rebound may suggest the stock is stuck in a range. More conservative traders might want to consider just exiting early. If you exited today you could probably sell the options in our strangle for around $4.00-4.40 and limit your loss. We are not suggesting new strangle positions at this time. 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
Universal Health - UHS - close: 50.75 chg: -0.17 stop: 49.99
UHS is expected to report earnings on Monday, February 27th and Wall Street is looking for UHS to produce profits of 44-cents a share. We do not want to hold over the report so it was our published plan to exit on Friday near the closing bell.
on February 15 at $ 50.51
Mention EW Theory to most traders and their eyes immediately glaze over. It's a difficult trading method to master but once you get a feel for the movement of the market through EW analysis you start to understand what the next move is likely to be. And if your interpretation of the wave pattern says the market is going to zig but instead it zags, that too can be very useful information. The market is primarily driven by investor mood. Many traders would like to believe that fundamentals control a stock's price but in fact a stock's price is often something that has nothing to do with fundamentals. Social mood dictates whether investors are feeling generally bullish or generally bearish and that mood translates to bull and bear markets and cycles within these markets.
I'll break this EW primer into two parts with the second part in next week's Trader's Corner.
EW Theory is a technique used to measure social mood. There are several ways to measure social mood such as Consumer Sentiment. This helps us gauge public mood so as to get an idea how that will affect investor mood. The songs written over the ages reflects social mood--think about music of the 1950s versus the 1960s. Writings over the centuries have reflected social mood of those times. But there's no better direct measurement of social mood than the stock market as it happens to be one of the best gauges of how people are feeling. And this is true back to the beginning of record keeping for publicly traded commodities. People are generally hopeful and bullish and that's why the stock market stays on an upward trend over long periods of time which smoothes out the boom and bust periods.
Even bubbles haven't changed over time--speculation brought to a fever pitch, controlled by fear and greed just as it's always been. Tulip bulb mania in 1635 (trading prize tulip bulbs), the South Sea Company bubble in 1720 (slave trading), gold in 1980, Beanie Babies in 1997 (a $5 doll was fetching $600), the tech market in 2000, the housing market in 2006--these are all examples of speculation taken to new levels and without regard to the true fundamental value. And then of course we see the opposite end of the cycle where people can't get rid of their investments fast enough and it's usually at the bottom of the cycle. Social mood is cyclical in nature and understanding how to read these cycles in bull and bear markets can help you be a successful trader/investor.
EW Theory is probably the most accurate and consistent stock market forecasting strategy ever. It is subject to interpretation and therefore is not foolproof but it provides one of the best windows into the mind of the market--people. It can be used wherever human beings show their emotions--the stock, bond, commodity and currency markets, in fashion trends, political trends, and any other arena that is subject to a herd mentality and a prevailing social mood. There is some suggested reading material at the end of this article for anyone interested in learning more about this fascinating topic.
Left to operate on its own, the markets would reflect the ups and downs of social mood. We can see cycles on whatever time scale we want to observe the market. Intraday cycles to monthly to yearly and decades/centuries all show the same patterns. Smaller time frames show the same patterns as fractals of the larger patterns. This is what Elliott Wave Theory studies--these repeating patterns in different time frames of trading. Over the past couple of decades we've had more government interference in the market place, which seems to be getting worse (e.g., injecting massive amounts of money into the banking system through the stock, bond and currency markets) and this action will skew the daily and weekly swings in the market and generally speaking it will aggravate the swings and make them larger or last longer than they normally would. But the swings can still be measured with EW analysis. And this analysis is basically done by counting waves. So when asked what they do all day, Elliotticians will say they count from 1 to 5 and say their ABC's.
I'll start this tutorial by stating the study of Elliott Wave is not a quick and short endeavor. What started as a theory by R.N. Elliott in the 1930's has evolved into a trading technique as well as a method to predict large social mood changes and what that will mean to the world. He studied the cycles in the stock market and noted repeating patterns in these cycles. He also noted fractals of these patterns, which basically are the same patterns in different time frames. This is where the real power of EW analysis comes in. Like so many other technical studies of the market, EW analysis can be used intraday, daily, weekly, monthly, you name it. Each wave in a larger wave pattern consists of similar smaller waves and this can be taken right down to tick charts. I will say that this analysis is subject to more error once you get below 60-min charts and this may have to do with program trading and market manipulation but longer time frames tend to smooth out these anomalies.
The Basic Pattern
These impulsive 5-wave moves identify the primary trend in the time frame of interest. After a 5-wave move it will then be corrected. The simplest correction is an A-B-C wave count and this is what a correction would look like after the 5-wave move:
and Corrective Count
Notice in the above chart that after the 5-wave move is completed it is then labeled as a larger degree wave-(1). After the 3-wave A-B-C correction it is labeled wave-(2). Wave-(1) is the motive wave which is the impulsive move and is the one that identifies the trend. Each wave in the direction of the motive is also an impulsive wave and will consist of 5 waves (so it's a smaller fractal of the larger wave). Each wave that is counter to the motive is a correction and will consist of a smaller 3-wave move (or some variation of it). So in the pattern above, waves 1, 3 and 5 will be impulsive and consist of 5 smaller waves whereas waves 2 and 4 will be corrective and will be 3-wave moves. Looking at wave-(2) above, the primary direction of the move is down. Waves A and C are in the direction of this primary direction and therefore will be impulsive 5-wave moves (the exception is that wave-A can be more complex and have a corrective count) whereas wave-B is against the move and therefore will itself be corrective.
Putting this together we get a structure that looks like this:
Complete Impulsive and Corrective Count
Notice the fractals of the waves within the larger degree waves. Also note the Fibonacci number of waves within the groupings of waves. The Fibonacci sequence is 1, 2, 3, 5, 8, 13, 21, 34, 55 ... (keep adding the previous 2 numbers to get the next number). There are two large degree waves  and , which consists of 8 smaller waves (5 waves up, 3 waves down), and the number of waves comprising those 8 waves is 34 waves. Not only is the EW pattern comprised of a Fibonacci number of waves but as I'll show later it is typically guided by Fibonacci relationships between the waves. This is the natural order of the universe and it's found right here in the stock market. It means we humans are part of the natural order as well. We think we're smarter than that with all our computers and analysis but in the end we're affected by the same emotions and simply following the natural order and patterns.
There are some typical relationships between the size of the waves which is a subject for another article (this will become too long if I go into all the details). But one EW rule is that wave-3 can't be the shortest wave. This is a hard and fast rule, no exceptions, unlike some of the other EW rules. If wave-3 becomes the shortest wave in your count then you have the wrong count. The 5th wave and 1st wave are often the same size and there is usually a Fibonacci relationship (38%, 50% or 62%) between the waves. Along with the count itself this can often help identify price targets where the move might find support/resistance.
Another EW rule is that wave-4 can not overlap with wave-1. So in a move to the upside the low of wave-4 must stay above the top of wave-1. This rule does have an exception and that's when the 5-wave move is inside an ascending or descending wedge (called diagonal triangles or ending diagonals in EW terminology) which might look something like this:
Inside the wave-(5) in the above examples, which is where these wedges are often found, you can see that the 1st and 4th waves overlap. Also note that these wedges consist of all 3-wave moves for each of the 5 waves making up the wedge. These wedges (and triangles discussed later) are the only place you find a lack of impulsive waves for 1, 3 and 5. This is what you look for when you see these wedges forming.
This brings us to some of the corrective wave structures. While there is only one motive wave--a 5-wave move--there are several types of corrective waves and these are by far the most difficult to interpret. It's often times not obvious what the EW count is until after it finishes. This is still helpful in identifying where you might be in the larger pattern and is therefore helpful in identifying the probable direction of the next move and make projections for how far the next move will go. But real-time trading corrective moves can be a lot more challenging than trading an impulsive move.
There are two major styles of corrections--sharp and sideways. The sharp correction is a steep pullback against a rally or bounce against a decline. A sideways correction tends to chew up time instead of getting a larger price correction. Corrections will often be identified by the number of waves that make up each leg of the correction. For example, in an A-B-C correction that has waves A and C consisting of 5 waves each and wave-B consisting of 3 waves then it'll be referred to as a 5-3-5 correction and denotes a sharp correction referred to as a zigzag. The two primary styles of corrections can be broken into four main categories:
Zigzags (5-3-5 structure, includes 3 types: single, double and triple sets of
I'll save a more detailed description of the various corrective types of waves for a follow-up article. Keeping it simple (?) for now, this shows an example of some of the above corrections:
This is a zigzag and shows the 5-3-5 structure of the A-B-C count. This would be a sharp pullback correction to a rally.
Flat 3-3-5 Correction
This is a flat correction with a 3-3-5 structure. Note that in these 3-wave corrections wave-C is always a 5-wave move. When we're in a correction wave-C is the one to look for to indicate that the correction is ending. When you see this pattern ending with a 5-wave move you can prepare for a reversal back up in this case.
In the figure below, an expanded flat is a little different in that wave-C will extend beyond wave-A. Also, wave-B can be higher than the start of wave-A which can throw off the correct interpretation since the new high is often thought of as the end of the previous move (up in this case) but in fact it may have ended at the previous high. The best way to tell is by looking for the move up, wave-B here, to see if it's only a 3-wave move in which case it should be middle of the correction and you should look for a sharp move down to finish it. That would look like this:
Expanded 3-3-5 Correction
The common Fibonacci relationship between waves A and C in these expanded flat corrections is wave-C = 162% of wave-A. So again, using that Fib relationship and the final 5-wave move for wave-C will often give you a downside target to watch for a reversal back up.
The next category is triangles and this shows the 4 types:
Notice the internal structure of each of these patterns is a 3-3-3-3-3. In other words there are 5 internal waves (labeled a-b-c-d-e) and each consists of 3 waves. Once again, if you see one of these patterns developing, count the number of internal waves and when you think wave-e is tracing out, get ready for a reversal.
The last category is the double or triple threes. This is simply a combination of the above waves separated by a 3-wave move that is labeled wave-X. It could be a zigzag and a flat separated by a wave-x and would look like this:
Double and Triple Corrections
You can see how the corrections are much more difficult to deal with than a single type of impulsive 5-wave move. Trading 5-wave moves is much simpler but unfortunately the market spends most of its time correcting and therefore it pays to study and practice these corrective waves. Because our stock market is in a very long term uptrend any pullback is by definition corrective. In other words bear markets are corrections to the longer term impulsive uptrend. That means bear markets are full of corrective moves and it makes EW analysis challenging. But even inside a correction you will see impulsive waves at the smaller degrees and therefore it's a very useful tool in all market conditions.
Next week I'll wrap up this introduction to EW Theory with some practical work, showing actual patterns and how it can be used in live trading. If you'd like to get some additional information on EW Theory, I put together a recommended reading list. I would read them in the order listed so as to get a better understanding of the subject without getting overwhelmed with detail that's hard to understand. The last two books are less about the details of wave structure and more about the market and the economy and how you can see the application of EW Theory. You may email me any questions you have on the subject.
1) The Elliott Wave Principle Robert Prechter and A.J. Frost
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Keene
H. Little, and all other plays and content by the Option Investor staff.
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