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Daily Newsletter, Wednesday, 04/05/2006

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Table of Contents

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

Market Wrap

Overnight Dollar Weakness: Fed Almost Through or Foreign Investors Through with Us?

Last night, Kansas City Fed member Hoenig declared his view that Fed rates were close to neutrality but reiterated the statement that the FOMC's further decisions would be data dependent. Overnight, the euro moved up against the dollar, seemingly reflecting the global view that the Fed might be close to ending its rate-hike cycle while Europe might have a bit further to go. The overnight relative weakness could have another impetus, however: it could be reflecting a lower foreign interest in dollar-denominated securities.

The answer may not come until Friday, if it comes then. While most reports concentrated on Hoenig's belief that the rates were close to neutrality, he also added that if economic growth accelerated, the FOMC's decision would be complicated. That statement focused the markets on Friday's important jobs data. Continued dollar weakness after a strong jobs report could indicate that the dollar's weakness relative to the euro had less to do with rate-hike-ending expectations and more to do with a lessened appetite for U.S. securities.

Perhaps (just a joke, subscribers) the dollar was reacting to rumors that "strong dollar" Treasury Secretary Snow might be considering leaving his post. After the market opened and had begun a brief decline after the ISM Services release, Snow reportedly commented that he expected the jobs numbers to be good on Friday, leaving many speculating as to whether he was speaking generally or on more specific knowledge. According to a CNBC report, he would not have access to the official jobs numbers until after the close Thursday afternoon, so many thought he might be relying on predictions and forecasts. What he might have known or not known, some attributed to the steadying in the indices to his statement.

The true impetus behind the overnight relative weakness in the dollar was only one of many factors left up in the air early Wednesday morning as the opening neared. Market watchers appeared to be waiting for the ISM Services and crude inventories numbers. After the Nasdaq achieved a many-year closing high yesterday, NQ futures climbed in the pre-market session, but other futures were quiet and indicating a flattish opening.

If recent patterns were to repeat, that setup predicted an early bounce to new recent highs on some indices, followed by a short, sharp correction. Little evidence could be found as to whether that pattern would repeat again on Wednesday, especially with the services ISM and crude inventories still to come. With European markets busy digesting their own services and other economic numbers, the DAX and CAC 40 hovered near the flat-line level just before our open, although the FTSE 100 showed a stronger gain, spurred by gains in BP.

That early push higher occurred. The short, sharp correction did, too, and then another bounce resulted. The early bounce was characterized by the Dow Jones Transportation Index, pushing above 4700 before the release of today's economic numbers. The TRAN's climb stalled after the ISM Services release, and the TRAN moved sideways until the last hour when it climbed again.

Most had expected an easing in the ISM Services number, to 59.0-59.3 percent from the prior 60.1 percent, but the number proved stronger than expected, rising to 60.5 percent. The crude inventories surprised, too, but that surprise wasn't a pleasant one, leading to a choppy climb all day in crude futures and a close at $68.35. As this report was prepared, crude had moved up to $68.40.

The constant refrain in these Wednesday's Wraps of late has been that as long as the TRAN is gaining or even moving sideways near its highs, the SPX, OEX and Dow are unlikely to drop far. Last weekend, nested Keltner channels had suggested that 1292-1293 was next SPX support, but the SPX wouldn't even drop that far this week, slipping only to Tuesday's 1294.71 low before rebounding to retest the top of its ascending wedge on the weekly chart.

Annotated Weekly Chart of the SPX:

Near the close, 30-minute nested Keltner channels suggested that 1312-1313 would likely be resistance on 30-minute closes for the SPX. Support appeared to be softening, but, since Tuesday morning, the 30-minute 10-sma has held as support on 30-minute closes. The upward trend had not yet changed in tenor and it won't have done so until and unless the SPX breaks below that line on 30-minute closes, with that average just under 1309.70 at the close. Until this pattern changes, bears should assume that the SPX will find support at that 30-minute 10-sma.

The Dow also battled a rising wedge trendline, with the Dow's version also building since early 2004. In addition, the Dow may or may not have broken above a bull-flag formation building since the middle of March, with a QCharts-drawn version of the flag showing a breakout the last few hours on Wednesday while a hand-drawn version does not yet show a breakout above the descending trendline forming along the tops of 60-minute candles.

Annotated Daily Chart of the Dow:

For the Dow, the 15-minute Keltner charts are often more useful than the 30-minute ones, at least lately. That's partly because the Dow has been shoved hard one direction or the other several times over the last week or two, skewing moving averages, with the Keltner charts also based on moving averages. The coiling action over the last couple of days has allowed the shorter-term 15-minute Keltner charts to rearrange themselves a bit. They show that the Dow mostly held support on 15-minute closes today at a Keltner line currently just under 11,230, with stronger support down at 11,200-11,211. So far, the Dow's climb looks corrective, but RSI has flattened just above 50 and squiggles back and forth, so it looks just as likely that the Dow will climb into next resistance at 11,250.50 and then 11,262.20 as it is that it will drop to test support. Watch the TRAN. If it's climbing strongly, perhaps expect resistance to be tested, but guard those bullish profits near 11,250-11,255 and then again near 11,277. Unless the TRAN plummets, guard any bearish profits near 11,200-11,211.

The Dow is too narrow and too subject to being pushed around lately to make guesses about first direction tomorrow when charts show that prices are halfway between Keltner support and Keltner resistance. The Nasdaq, however, is certainly closer to both rising channel and Keltner resistance than it is to support. It's difficult to bet on a downward move when an index has just hit yet-another five-year closing high, however.

Annotated Daily Chart of the Nasdaq:

The rising regression channel's resistance appears to be at about 2361 on 30-minute closes. The 30-minute nested Keltner chart shows next resistance currently at 2361.51-2361.27 on 30-minute closes, so there's good concurrence there. That doesn't guarantee that the Nasdaq resistance will hold, especially on an exuberant opening push, but if in short-term bearish positions, I would protect my profits at that zone. Thirty-minute closes are mostly springing up from the 30-minute 10-sma, currently at 2354.31, so that would have to be violated on a 30-minute closing basis for the recent intraday upward trend to change. On any dip, bears should protect profits at that average until there's a breakdown below it that is not quickly reversed. If that support is broken, next Keltner support currently lies at 2347-2349.

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With INTC helping propel the SOX higher, Maxtor's (MXO) disappointing guidance provided little hindrance to the SOX on Wednesday. MXO is being acquired by Seagate Technology (STX) and expects the acquisition to be completed by May. MXO expects a first-quarter loss of $0.39-0.40 on revenue of $875-885 million, against previous expectations of a loss of $0.17-0.21 on revenue of $950-975 million, and anticipates cutting about 900 jobs in Singapore. Neither MXO nor STX is a SOX component, but the prospects of this manufacturer of 3.5-inch hard disk drives could be closely related to the prospects of some other SOX components. It didn't matter on Wednesday.

Annotated Daily Chart of the SOX:

Nested Keltner channels suggest that as long as the SOX continues closing 30-minute periods above support currently near 516 and maybe as low as 514.50, it maintains a target currently near 523.56. RSI on that 30-minute chart suggests that the SOX approaches overbought levels and that bulls should keep snugging up stops. Although it hasn't done so lately, this sometimes-momentum-driven index can maintain overbought or oversold status for quite some time while the trend continues in the direction it had been going. Since the middle of March that has not happened, but the SOX has not closed above the 72-ema since the middle of March, either, and it's done that now. I wouldn't be surprised to see a push at least to the 50-sma or to 524, but I'd be watchful of possible strong resistance in that zone if it did so.

The ISM Services and Crude Inventories weren't the only economic numbers on Wednesday. The Mortgage Bankers Association released mortgage applications for the week of March 31 at 7:00 EST. Although the average contract interest for a 30-year fixed-rate mortgage jumped to 6.49 percent, mortgage application volume also jumped, by 7.2 percent. That's a phenomenon that appears illogical, but one familiar to those of us who have lived through periods when mortgage rates were well above 10 percent and climbing almost hourly, it seemed at times. During that period, buyers scrambled to get into homes before rates could hike further. Other components of this release increased, too, with the exception of refinancings' percentage of total applications and applications for adjustable-rate mortgages.

Components of the surprisingly strong services ISM included a rise in new orders from 56.2 percent in February to 59.5 percent in March. The price index fell to 60.5 percent from the previous 64.8 percent, indicating an easing in inflation pressures, good news to those hoping for rate hikes to be soon ended. The employment index also declined, however, to 54.6 percent from the previous 58.2 percent. Markets stalled near the release of this number, with the TRAN easing and then temporarily dropping back below 4700 when crude inventories were released thirty minutes later.

The crude inventories numbers were considered bullish for this commodity. Of particular concern was an unexpected drop in motor gasoline inventories of 4.4 million barrels for the week ending March 31. Those inventories are now 0.2 percent lower than they were a year ago. Crude inventories rose 2.1 million barrels, their highest level in seven years according to Marketwatch.com, but distillate inventories fell along with gasoline supplies, by 2.6 million barrels.

Apple (AAPL) and Microsoft (MSFT) both rose in the pre-market session when news hit that the company was releasing a public beta software termed Boot Camp that would allow AAPL computers with Intel (INTC) processors to run Microsoft's Windows XP operating system. AAPL reportedly continues to take the official stance that it is not assisting efforts to run the rival's operating system on its Macs, but analysts still called this a step toward making the Mac more versatile than other computers. Running the system requires a Windows XP installation disk, too. AAPL closed 9.87 percent higher, INTC gained 0.93 percent, and even MSFT gained 0.47 percent.

Tomorrow's economic calendar is light, with Initial Claims at 8:30 and Natural Gas Inventories at 10:30. Companies reporting earnings include retailers Rite Aid (RAD) and Pier 1 Imports (PIR). The RLX, the S&P Retail Index, broke out above the top of a recent bull-flag pullback on Wednesday and charged up toward recent highs, although it could not quite reach them, threatening a lower or equal high. Since the retailers sometimes serve as propellants to the other indices, noticeably in late October of last year and early February and mid-March of this year, add the RLX to your radar screen tomorrow. Oh, and while you're adding indices to watch, add the BIX and BKX, both threatening to build those currently untrustworthy formations: head and shoulders.

Watch everything you can watch, because some charts give little indication of what will happen next, even over the shortest term. I wouldn't be surprised to see markets chop around tomorrow, consolidating ahead of Friday's jobs number and some intraday charts suggest that as a possibility, too. The RUT, SOX and TRAN resisted any hint of hesitancy on Wednesday, however, each gaining, and that might suggest that if there's to be chop tomorrow, it will follow an early push higher. The TRAN moved to yet another record high and a record closing high; the SOX, to a new four-week high; and the RUT, to a new record closing high although it could not meet Monday's intraday high. If we're accustomed to seeing these three indices lead various others, then they're leading higher.

Keep them on the radar screen tomorrow before you assume they'll continue to do so. The TRAN, especially, looks due for a consolidation day. The RUT hasn't truly broken out again, despite the new closing high. Still, for now, nothing on the charts suggests that these indices are ready to give up, and assuming rollovers remains dangerous until they do.

Jim mentioned the NYA.X and Wilshire 5000 in his Wrap last night. The Wilshire has been in a long-term rising regression channel that now appears to top out somewhere around 13,400.

Annotated Daily Chart of the Wilshire 5000:

My best guess it that markets will attempt to press a little higher, whether that's tomorrow or another time. A press higher tomorrow and then a stall or downturn would fit with the expectation that markets might be a bit nervous ahead of Friday's numbers, but there's nothing on the charts that indicate that this will happen, except the knowledge that 30-minute Keltner or other resistance lies not too far overhead on some indices. Charts just haven't given up much information lately, and it's been an "I believe" market in which you just place your bet and hope for the best. Most would argue that the markets have been climbing higher and it's been dumb not to be long, but tell that to someone who bought March SOX calls on that last SOX breakout attempt in late February or to an OEX trader who bought April ones in mid-March, only to watch the extrinsic premium evaporate for weeks before the OEX finally attempted a climb the last two days. Those buying options do not benefit from those kinds of moves.

It's been frustrating for all to trade these markets. I personally have stopped trying any purely directional trades and have limited my trading to condors or other positions that take advantage of what has essentially been range-bound movement on many indices. I'm acting on the lack of decision that I've seen on the indices, and I suggest that you tailor your own trades to what you're seeing now. Good trading conditions will return and have even offered themselves occasionally during the choppy mess over the last couple of months. Wait for the good ones.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Arch Cap. Grp. - ACGL - cls: 58.39 chg: +0.43 stop: 55.95

ACGL continues to inch higher and the move over $58.00 is bullish. We would consider new bullish positions here. Our target is a move into the $62.50-63.00 range. We do not want to hold over the late April earnings report.

Picked on April 03 at $ 58.15
Change since picked: + 0.24
Earnings Date 04/24/06 (unconfirmed)
Average Daily Volume = 195 thousand

---

Amerada Hess - AHC - close: 148.24 chg: +3.70 stop: 139.95

We did not have to wait long for AHC to hit our trigger. A rise in crude oil futures and concerns over oil and gas inventories helped push the oil sector higher. Shares of AHC produced a 2.55% gain, which is a nice follow through on yesterday's bullish engulfing candlestick pattern. We suggested a trigger to buy calls at $146.51. We are encouraged by the big volume on today's breakout from its consolidation pattern. Volume was more than double the daily average. The play is now open and our target is the $154.00-155.00 range. We do not want to hold over the late April earnings report so our time frame is just 22 days.

Picked on April 05 at $146.51
Change since picked: + 1.73
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 1.5 million

---

Anadarko Petrol. - APC - cls: 105.00 chg: +1.08 stop: 97.90

APC is another oil-sector winner but the rally in APC seems a bit more muted than its peers. Today marks a new monthly closing high. We are aiming for the $109.50-110.00 range. We do not want to hold over the late April earnings report.

Picked on March 28 at $102.10
Change since picked: + 2.90
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 2.5 million

---

Burlington NrthSanta Fe - BNI - cls: 86.14 chg: -0.36 stop: 79.95

BNI came within 4 cents of our target at the $87.50 level. We are suggesting that more conservative traders consider locking in gains here. More aggressive traders might want to aim for the $90 region. The strength in the transportation sector is a positive influence here but a lot of the sector's gains has been driven by the railroads. We do not want to hold over BNI's late April earnings report.

Picked on March 27 at $ 82.51
Change since picked: + 3.63
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Bear Stearns - BSC - close: 142.68 change: +1.43 stop: 131.99

BSC is nearing our target in the $144-145 range. More conservative traders may want to consider locking in some profits right here. We are not suggesting new positions at this time.

Picked on March 24 at $137.65
Change since picked: + 5.03
Earnings Date 06/15106 (unconfirmed)
Average Daily Volume = 1.1 million

---

ConocoPhillips - COP - close: 66.56 chg: +1.41 stop: 61.45

COP is seeing some nice follow through on the recent bounce from support. Today's move over the $65.00 level is another bullish development. Our target for COP is the $69-70 range. The P&F chart for COP is bullish with a triangle breakout and an $82 target.

Picked on March 29 at $ 64.80
Change since picked: + 1.76
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 10.5 million

---

Deere Co - DE - close: 80.91 change: +0.45 stop: 75.95

DE hit another new high today and the stock. Our target is the $84.00-85.00 range. The P&F chart is bullish and points to a $112 target.

Picked on March 22 at $ 77.29
Change since picked: + 3.62
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Grainger W.W.Inc. - GWW - close: 77.40 change: +0.89 stop: 73.95

The technical picture with GWW is definitely improving with the stock finally breaking out to new highs. Our target is the $79.90-80.00 range. More aggressive traders may want to aim higher but we would not hold over the mid-April earnings report.

Picked on March 30 at $ 76.51
Change since picked: + 0.89
Earnings Date 04/17/06 (confirmed)
Average Daily Volume = 449 thousand

---

Halliburton - HAL - close: 77.34 chg: +2.14 stop: 71.45

The rally continues for oil-service stock HAL. Our target will be the $79.85-80.00 range. More aggressive traders may want to aim for the January highs near $82. The P&F chart looks very bullish with a $90 target. We do not want to hold over the April 21st earnings report.

Picked on April 04 at $ 75.20
Change since picked: + 2.14
Earnings Date 04/21/06 (confirmed)
Average Daily Volume = 8.0 million

---

Lehman Brothers - LEH - close: 148.46 change: +1.33 stop: 140.79

LEH's MACD on the daily chart has finally produced a new buy signal. The stock made its first attempt at breaking out past the $150 region today. If the market continues to be strong we expect LEH to breakout. Please note that we are adjusting our exit strategy. We are suggesting that readers consider selling half their positions at $153.00 and then sell the second half of their position at $159.00.

Picked on March 22 at $144.61
Change since picked: + 3.85
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

Nabors Inds. - NBR - close: 72.98 chg: +0.98 stop: 68.85

The rebound continues in shares of NBR. The stock bounced from the $70 level yesterday and bulls continue to pursue the stock today. NBR appears to have produced a small bull-flag pattern. Our target is the $74.00-75.00 range but more conservative traders may want to lock in some profits right now. Don't forget that NBR is due to split 2-for-1 on April 18th. We plan to exit ahead of the late April earnings report.

Picked on March 28 at $ 68.85*gap higher*
Change since picked: + 4.13
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 3.7 million

---

Pantry Inc. - PTRY - close: 65.03 chg: +0.91 stop: 58.85

Chalk up another one for the bulls. PTRY hit another new high today. Our only complaint was the less than average volume. Our target is the $67.00-68.00 range. The P&F chart points to a $78 target. We do not want to hold over the late April earnings report.

Picked on March 26 at $ 61.85
Change since picked: + 3.18
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 364 thousand
 

Put Updates

Apollo Group - APOL - close: 51.20 chg: +0.33 stop: 53.31

We see no change from Tuesday's new play description. APOL continues to be weak and is still trading inside its bearish channel. We're suggesting a trigger to buy puts at $49.85, which is under support at the $50.00 level. If triggered we will have two targets. Our first target is the $45.50-45.00 range. Conservative traders can exit here, the rest of us we're suggesting sell half their position. We'll keep the other half open and target a decline into the $41.00-40.00 range, which is closer to the bottom of its channel. Please note that APOL has a two-day analyst meeting April 5th and 6th and news from that meeting could send shares either direction. Some of our readers might want to wait until after the analyst meeting before considering positions.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/22/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

Strangle Updates

(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.)

---

Encana Corp. - ECA - close: 48.43 chg: -0.34 stop: n/a

Oddly enough ECA did not participate in the market's or the oil-sector's rally today. Shares spent the session sides and closed in the red. 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.

Picked on January 10 at $ 45.56
Change since picked: + 2.87
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 73.24 change: +3.60 stop: n/a

This is bad news! The 5% rally in the homebuilders was mirrored in shares of RYL. Today's gain in RYL is a breakout over resistance near $72.50 and its 200-dma. Volume was above average. Given our time frame with this strangle this looks like the killing blow. It also looks like the breakout from an inverse or bullish head-and-shoulders pattern. We are not suggesting new strangle positions. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN).

Picked on January 22 at $ 75.19
Change since picked: - 1.95
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Apple Computer - AAPL - close: 67.21 chg: +6.04 stop: 57.65

Target achieved. From the beginning we said our target was the simple 50-dma and AAPL hit the 50-dma late this afternoon. The big 9.87% rally was fueled by news out this morning. AAPL announced new software that allows its Intel-based Mac computers to use Microsoft's Windows XP operating system. Shares gapped open at $64.71 and surged into the closing bell. Given the strength of today's rally and the big volume we would expect the stock to continue higher tomorrow. More aggressive traders may want to aim for the $70 region. There might be some minor resistance near $68.00.

Picked on March 29 at $ 62.30
Change since picked: + 4.91
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 34.2 million

---

Southern Peru Copper - PCU - close: 91.00 chg: +4.01 stop: 79.95

Target achieved. Actually PCU has surpassed our target in the $89.50-90.00 range. The metal and mining stocks were on fire today. PCU added 4.6%. PD rallied 3.5% to close at a new high. FCX added 3% to challenge its highs. RTP added another 3.17% to close at a new high. More aggressive traders may want to let their PCU positions ride a bit longer. Stocks that break the $90 level tend to hit the $100 region as the $100 mark acts like a psychological magnet.

Picked on March 30 at $ 84.50*gap higher*
Change since picked: + 6.50
Earnings Date 04/24/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Panera Bread - PNRA - close: 72.15 chg: -2.81 stop: 71.95

PNRA surprised us today with a 3.7% decline on big volume. The company reported better than expected same-store sales growth of 9.3% for March. Yet investors reacted negatively. Some speculated that the market wanted to see even stronger growth. Shares dipped under the $72.00 level and hit our stop loss at $71.95, closing the play.

Picked on April 02 at $ 75.18
Change since picked: - 3.03
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 458 thousand

---

Toyota Motor Corp. - TM - close: 112.64 chg: +2.24 stop: 105.95

Target achieved. The U.S. ADR shares of TM finally showed some volume today, even though volume remains under the daily average. More importantly TM surged 2% to hit our target in the $112.50-115.00 range. Traders with a longer-term horizon may want to aim higher.

Picked on March 12 at $106.68
Change since picked: + 5.96
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand

---

Tenaris - TS - close: 202.24 chg: +12.04 stop: 177.79

Target achieved. We can thank Morgan Stanley for TS' relative strength today. The analyst firm raised their price target on the U.S. shares of TS from $215 to $250 stating that earnings growth looked strong given the "ongoing boom for offshore drilling rigs" (source: Reuters). Our target was the $198-200 range. Given the strength of the rally today more aggressive traders may want to let their positions ride a bit long and just up their stop losses. Yet keep in mind that TS has an analyst conference tomorrow and news from that meeting could send the stock either direction!

Picked on April 03 at $186.75
Change since picked: +15.49
Earnings Date 05/01/06 (unconfirmed)
Average Daily Volume = 553 thousand

---

Valero Energy - VLO - close: 62.50 change: +2.66 stop: 56.45

Target achieved. The rally in the oil sector finally rubbed off on shares of VLO. The stock added 4.44% on above average volume. Our target was the $62.50-63.00 range. Traders might want to keep an eye on fellow refiner SUN, which just broke out over its 50-dma.

Picked on March 15 at $ 57.55
Change since picked: + 4.95
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Puts

Texas Industries - TXI - cls: 61.20 chg: +2.16 stop: 61.35

The market rally was just too strong today and TXI rebounded back above the $60 level to hit our stop loss at $61.35. The play is closed.

Picked on April 03 at $ 59.25
Change since picked: + 1.95
Earnings Date 03/30/06 (confirmed)
Average Daily Volume = 392 thousand
 

Dropped Strangles

None
 

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