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Daily Newsletter, Wednesday, 05/24/2006

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Table of Contents

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

Market Wrap

Follow the Leader

Throughout the years, various global markets have taken their turns leading the rest of the globe's bourses. At times, Asian and European bourses have followed U.S. performances. At times the U.S. markets have followed either the Asian or European performances.

This morning, U.S. investors had two distinct patterns to observe during overnight trading. The Nikkei had started in positive territory, plunged deep into negative territory and then bounced into that V-shaped recovery that U.S. market bulls have longed to see. The Nikkei managed a more-than-300-points-higher close, up almost 400 points from its low of the day. European bourses, however, were in trouble, with the CAC, DAX and FTSE all down at least 1.5 percent at 8:00 EST. If U.S. bourses were going to play follow-the-leader, which example would they follow?

Although our indices could not emulate the Nikkei's spectacular almost-400-point climb off the low of the day, they produced a version of its performance by climbing, dipping to a new low, and then springing up again. The day's action left many indices with doji with long lower shadows springing up from new recent lows. Breadth measurements were mixed, however, with down volume and decliners swamping up volume and advancers on the NYSE, but with the Nasdaq and AMEX showing different patterns. On both, decliners were higher than advancers, but up volume turned higher than down.

Our futures had held up relatively well during overnight trading, not violating the immediate post-close dip from Tuesday afternoon and leading some to hope for a bounce. April's durable goods number was weaker than forecast, sending bond yields and metals lower as fears of an inflationary period and subsequent June rate hike lessened. New home sales were not as weak as anticipated.

The numbers proved equity positive, but only until some market participants had time to digest the fact that the economy might be slowing more than was desirable and for others to experience confusion about what those stronger-than-expected homes numbers might portend. Fed futures rates did some jumping around.

By the end of the afternoon's drop, the Wilshire 5000 had temporarily violated its 200-sma; the TRAN had again violated its 72-ema, something it did this week for the first time since October of last year. The Dow had temporarily dropped below the January swing high of 11,047.76. The Nasdaq had dropped below gap and historical support at 2144, and many other support levels were either breached or tested. All that occurred just before indices sprang higher. The Dow was to close about 87 points off its low; the TRAN, about 64 points; and the Wilshire, almost 148 points. While none of these matched the Nikkei's gains off its low, the gains should be respected.

Although the 10-dma's on many indices are now beginning to drop quickly, the indices' prices had become dangerously extended below those averages, perhaps contributing to the fact that indices have tended to chop lower over the last week rather than cascade lower, as they had been doing. For days, however, we've seen a series of potentially bullish inverse H&S's set up on the short-term intraday charts, only to prices fail again just as the right shoulder begins to set up. Some brave bulls have tried to step in, but sellers have always overcome them until today.

Annotated Weekly Chart of the SPX:

The potential for a rollover again tomorrow at the daily 200-sma, where the SPX ended its bounce, can't be ignored. Such a rollover, particularly if levels below today's lows are sustained for any time, will suggest that the 1234 zone might be tested.

Annotated Daily Chart of the Dow:

If the Dow fall through recent support on a daily close rather than bounces, then 10,940 might be next to be tested.

Annotated Daily Chart of the Nasdaq:

Annotated Weekly Chart of the SOX:

If the SOX's 200-ema support holds, watch for rollover potential near 475.85 and up to the 10-sma, the linked daily 200-sma and -ema's, and 504-505.

Some blame today's volatility on economic numbers, but technicians will point to the possibility of today's bounce from the low as being the expected oversold bounce. A look at the day's economic reports is still valid. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending May 19, with that survey again showing declines in the volume. The component that measures that volume fell 6.00 percent week over week on a seasonally adjusted basis. Unadjusted, it plunged 23.0 percent compared to the year-ago level. Other components also fell. Four-week moving averages continue to be influenced by more positive numbers a month ago. Some inched higher, but the one measuring refinance activity dropped 0.1 percent. Refinance's share of mortgage activity increased as the average contract interest rate for 30-year, fixed-rate mortgages dropped to 6.61 percent from the previous week's 6.66 percent. By day's end, the DJUSHB, the Dow Jones U.S. Home Construction Index, had bounced to a 0.96 percent gain, but the day's action showed that the 10-sma was still serving as resistance for this index.

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One forex news source expected to see a split in the durable goods and new homes figures that were released today, with that source expecting the numbers to show that growth was being handed off from the housing sector to the factory sector. Expectations for new homes sales centered around a 4 percent drop, while the same source forecast that durable goods would drop 1.5 percent, leaving year-over-year figures at a 8.3 percent drop new homes sales and a 14.9 percent climb for durable goods. Other economists predicted a 0.6 percent drop in durable goods orders and a decline in new home sales to 1.11-1.135 million, down from the previous 1.213 million.

When today's new homes sales and durable goods figures were released, that anticipated handover had not occurred. April's durable goods orders plunged 4.8 percent against a revised higher 6.6-percent gain for March, with the decline termed a broad-based one. Ex-defense goods, durable goods decreased 3.8 percent. Orders for core capital goods fell 1.7 percent. Shipments of those goods rose 0.9 percent.

Aircraft orders have been propping up this headline number for a time, but even those orders dropped. As reported on CNBC, some economists question this component of the durable goods orders number, since Boeing again reported strong figures and that didn't show up in the durable goods number. Orders for transportation goods fell 12.76 percent, with aircraft orders dropping a hefty 32.2 percent. Shipments of transportation goods dropped 3.2 percent. Computer orders dropped 1.3 percent; communications equipment, 27.4 percent; and electronics excluding semiconductors, 10.4 percent. Electronics' shipments declined 0.5 percent. The only components of this number that gained were metals and electrical equipment, with orders for fabricated metals rising 1.9 percent; primary metals, 3.2 percent; and electrical equipment, 5.2 percent. Shipments on all rose.

The durable goods number fueled hopes that the Fed would pause in June. Bond yields dropped, with the Fed funds futures indicating a lower probability of a hike in rates at the June meeting than they had Tuesday.

April's new home sales were expected to drop to 1.15 million, but instead were reported at 1.20 million, reportedly the strongest level this year. Keene Little noted on Option Investor's Futures Monitor that the figure was actually a little lower than March's original 1.213 million sales number, but March's was subsequently revised lower to 1.142 million. That allows the new home sales figure to show the reported 4.9 percent increase in this convoluted accounting. CNBC noted that there's an 11.5 percent margin of error on this figure.

Year-over-year, sales have dropped 5.7 percent. A sector analyst on CNBC reported that sales are dropping into the 2003 levels, but that, in 2003, those levels were record highs, so that the softening is not terrible yet. Inventories indicate a 5.8-month supply, easing slightly below March's 6.0-month supply. House prices rose 2.8 percent, 0.9 percent year over year. While a Lehman Brothers' analyst pointed to rising prices as a sign that demand remains strong, another commentator noted that prices typically continued rising for a while even after demand had begun dropping.

Forecasts for crude inventories proved wrong, with a bigger drawdown in crude inventories than expected and a bigger build in gasoline inventories than anticipated. The EIA reported that crude inventories fell by 3 million barrels, gasoline inventories rose by 2.1 million barrels and distillates climbed by 2.5 million barrels. Some interpret the figures as suggesting that refineries have built up their production of gasoline for summer driving needs faster than expected, with the gasoline figure being of primary importance this time of year. Crude costs were to drop 0.44 percent, to $69.55.

We've been hearing scattered comments that crude prices were impacting demand, and yesterday an IEA official reiterated that view. That official expects crude prices to remain near current levels for a couple of years.

In addition to the contribution of the various economic numbers and old-fashioned oversold conditions to the bounce, some credited a Merrill Lynch upgrade of GM to a buy rating with improving market sentiment, too. Others, not so favorably disposed toward the company, might have suggested that the upgrade spurred some short covering. GM was to gain 8.29 percent and $2.03. Traders tend to have strong opinions about GM.

Merrill Lynch's analyst said that he expects about 30,000 to accept the company's buyout program. There's been evidence for some time that big-money people have been accumulating GM stock, however, and new bulls may be somewhat late to the trough as GM's price approaches a downtrend established off the January 2004 high. It appears that the big-money people may have already picked up the best of the prices a while ago. The drop on the week of December 18 was on huge volume, with GM closing off the low of that week. That kind of pattern is often indicative of accumulation, although it's often dangerous to buy on that evidence alone since the downward momentum can carry a stock's price lower even while accumulation is occurring. The weekly chart shows that subsequent tests of an ascending trendline established off that December 18 low were on much lower volume, indicating that sellers were being exhausted as GM was building a base.

While I'm sure that Merrill Lynch's analyst was basing his new buy rating on the survey of workers who intend to take the buyout and other factors he discovered, I'm not entirely sure that buying just before a test of a descending trendline established in 2004 and not tested since last summer is the best place to buy. May be, but this writer would suggest being very careful near the descending trendline, currently near $28.00. For a discussion of how such accumulation can be discovered, see the Trader's Corner article from April 22, 2006, "Should Volume Confirm?"

Other positive stock-specific news came from Medtronic (MDT) with the company raising its full-year EPS outlooks for 2007 and 2008. The stock gained 4.62 percent. Some healthcare stocks have benefited from their position in a defensive sector. Although the HMO, the Morgan Stanley Healthcare Index, turned down 1.34 percent in today's trading, it had spent recent weeks climbing from its April 27 low of 1510.95 into yesterday's high of 1712.61 as there was rotation out of the previous momentum stocks and sectors into more defensive ones.

Market participants were not initially as thrilled with GE's affirmation of its former EPS guidance for 2006. GE managed a 0.73-percent gain by the close of the day.

Neither were market participants thrilled with Vonage's (VG) IPO. One news source speculated that the company's IPO performance might be the worst in two years. Although some sources said that Vonage opened at $17.00 a share, QChart recorded the first trade at only $15.60, and the close at $14.85. Jim Brown had predicted trouble with this IPO, and his prediction played out.

In other developments, South Korea's financial minister opined that gradual changes in Asian forex reserves should be made, moving away from investments in Wall Street and U.S. treasures, although he cautioned that such changes should be gradual. One forex news source believed that such sentiments were already baked into the USD/JPY pair. Today, the dollar gained against the yen, moving up to challenge Monday's high against that currency.

Other concerns today included the bird flu developments. Although, as Jim Brown reported last night, the World Health Organization reported yesterday that initial tests rule out a virus mutation in the form of bird flu that killed human victims in Sumatra, air waves today continued to discuss the possibility that a father had contracted the illness from his infected son. The possibility of human-to-human transmission was admitted by the WHO, but one scientist with the organization denies that the transmission was yet "efficient," and the sequencing of the virus' genes do not indicate genetic reassortment with pig or human flu viruses. The family members who caught the illness lived in extremely close conditions, and there's no evidence that casual contact could yet transmit the illness from one human to another. No evidence exists that anyone outside that close extended family appears to have contracted the illness from them. WHO doctors remain confused about the original source of the illness since none of the poultry in the area had the virus.

Many influences may be found to describe today's market action, but "oversold" describes it fairly well, too. After-hours developments included reports by TIVO, NTAP and PETC. As this report was prepared, TIVO was a penny below its $7.11 close. NTAP was at $32.80, down from its $33.48 close. PETC was at $21.29, down from its $21.83 close.

Economic releases for tomorrow include initial claims, the first quarter's preliminary GDP and chain deflators, all released at 8:30. GDP expectations are for a gain of 5.8 percent, up from the prior 4.8 percent, with the chain deflator expected to be 3.3 percent, as was the prior number. Since it's a key inflation measure, the deflator number will be closely watched and might be capable of moving the markets. Market watchers will not want that number to be too hot. Watch the bond markets to gauge reaction. In his Tuesday night Wrap, Jim Brown discussed the outlook for GDP for this quarter and beyond, noting that growth expectations for the second quarter are declining.

At 10:00, April's existing home sales and help-wanted index are to be released. Existing home sales are expected to drop to 6.60-6.75 million from the previous 6.92 million.

Tomorrow's earnings include those from BLI, HRL, LSE, NDSN, PDCO, PDC, SAFM, SLTC and WSTF.

For those unfamiliar with candlestick theory, those doji on today's daily charts serve as potential reversal signals. They need confirmation by a strong day tomorrow, but their presence perhaps gains weight by the severely oversold nature of the indices, the possibility that some profitable bears might want to take profits ahead of Friday's economic numbers and the upcoming long weekend, and the testing of support levels. Tomorrow morning's economic numbers could undo all of that.

Despite the spring off the day's lows, some ambiguity remained at the close. Monday morning, many indices opened at or just below their five-minute 100/130-ema's and fell from there. Tuesday, some indices--not all--managed to move back above those averages, but spent the early part of the day building H&S's with neckline at or near those averages. Yesterday afternoon's plunge began after the averages were violated and then retested, with prices falling from those averages again in many cases. Since then, they had served as resistance when tested.

I note all this because many indices popped back above those averages late in the day, but then dropped back to test their support as the day ended. This was true of the Wilshire 5000, SPX, OEX, SOX, Dow and Russell 2000, among others. The TRAN ended the day just below these averages.

The strange correspondence across so many indices indicated some basket buying to me, but I'm not sure whether the buying will hold or not. There wasn't time to ascertain if this is to be another failed test of those averages or whether their support will hold, but that correspondence leads me to think that some big-money people might think it will. However, let performance around those five-minute 100/130-ema's be your first guide tomorrow to how the indices are performing at the open. Short-term bulls want to see those averages hold and would prefer to see indices climbing straight from their support. If you're in bullish plays, keep those stops tight and watch the possible rollover levels listed on the chart. I expect markets to be parked somewhere tomorrow ahead of Friday's economic numbers, and they might well be parked at resistance, so that you'll have a decision to make late tomorrow afternoon as to whether you'll hold overnight. It looks to me as markets are due for a several day bounce, but that several-day bounce may not begin until next week, after markets roll down again and retest these lows. Perhaps all but the most aggressive traders might want to lock in at least some bullish profits tomorrow afternoon if the indices have climbed and nudged up under strong resistance to wait out Friday's numbers.
 


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

Komag - KOMG - close: 43.08 chg: +0.37 stop: 41.99

KOMG turned in another volatile session. Shares dipped to $41.25 before bouncing back. Volume was above average. We remain on the sidelines with a trigger to buy calls at $46.11.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Omnicom - OMC - close: 93.02 chg: +1.22 stop: 90.64

OMC has been showing relative strength for weeks and the stock out performed to the upside today with a 1.3% gain on very strong volume. Shares closed at new three-year highs. Our target is the $97.50-98.00 range. If you were looking for a new entry point this might be it! Consider adjusting your stop to the simple 10-dma near $91.89.

Picked on May 15 at $ 92.05
Change since picked: + 0.97
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Amgen Inc. - AMGN - close: 68.07 chg: +1.22 stop: 70.01

Our new put play in AMGN has already turned against us. Shares dipped to $66.28 midday but the stock rebounded along with a 1.3% bounce in the BTK biotech index. We are not suggesting new positions at this time. We'll be watching the simple 50-dma (currently 69.70) to act as overhead resistance. Yesterday we suggested that conservative traders consider a stop loss near $68.50. That may still be a good idea.

Picked on May 23 at $ 66.85
Change since picked: + 1.22
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.8 million

---

Apollo Group - APOL - close: 50.92 chg: -0.11 stop: 54.45

We have been warning readers to expect a bounce near $50.00 and APOL delivered one today. Watch for shares to rebound toward $52 or its 10-dma before stalling. Our target is the $47.75-47.50 range near its early March lows.

Picked on May 17 at $ 51.75
Change since picked: - 0.83
Earnings Date 06/20/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Franklin Res. - BEN - close: 86.85 chg: -0.93 close: 92.55

Brokerage and investment-related stocks continued lower on Wednesday. BEN lost just over 1% on above average volume. We are not suggesting new plays at this time. Our target is the the $85.00-84.50 range.

Picked on May 14 at $ 89.30
Change since picked: - 2.45
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Burlington NorSantaFe - BNI - close: 74.50 chg: -0.56 stop: 77.51

BNI tried to bounce again this morning but the rebound failed under its descending 10-dma. We're a little surprise that the drop in crude oil did not lend more strength to the transports today. The Dow Jones Transport index closed in the red after a volatile session. It's worth noting that the index is currently bouncing from its lows of the day. That would make us hesitate to open new put positions in BNI at the moment. Our BNI target is the $70.50-70.00 range.

Picked on May 23 at $ 75.06
Change since picked: - 0.56
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

IDEXX Labs - IDXX - close: 76.33 chg: -0.05 stop: 77.05*new*

IDXX continues to trade under a trend of lower highs and short-term resistance at its simple 10-dma. However, we're still worried about an oversold bounce so we're lowering the stop loss to $77.05. We are not suggesting new put positions at this time. Our target is the $74.00-73.50 just above the simple 200-dma. FYI: the P&F chart points to a $64 target.

Picked on May 11 at $ 77.93
Change since picked: - 1.60
Earnings Date 04/28/06 (confirmed)
Average Daily Volume = 125 thousand

---

Ipsco Inc. - IPS - close: 89.55 chg: -1.76 stop: 97.55

IPS managed to hit a new relative low at $86.77 this afternoon before bouncing back toward the $90 level. This remains an aggressive play and we're worried about an oversold bounce higher. More conservative traders may want to lock in some profits now and/or adjust their stop loss lower. We are not suggesting new positions. Looking at the intraday chart we'd expect a bounce back toward $92.00-92.50 soon. Our target is the $85.50-84.50 range. If you're a Point & Figure chart fan then you'll notice that the bearish target has dropped from $83 to $77 now.

Picked on May 18 at $ 93.95
Change since picked: - 4.40
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 459 thousand

---

3M Co. - MMM - close: 83.82 chg: +0.38 stop: 85.01

We would look for new weakness before initiating new put positions on MMM. Maybe a failed rally under $84.50 or another drop under $83.50 look like potential entry points. We're not looking for a big move just a drop into the $80.25-80.00 range. The $80.00 mark was resistance in the past so we expect it to act as new support.

Picked on May 23 at $ 83.44
Change since picked: + 0.38
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 3.2 million

---

Nucor - NUE - close: 104.55 chg: +2.23 stop: 108.41

The bounce in NUE today was fueled by pretty big volume. That's a warning sign for the bears. We do note that the rebound stalled at its descending 10-dma. We are not suggesting new bearish positions at this time. Our target is the $95.50-95.00 range. FYI: NUE is due to split 2-for-1 on June 1st.

Picked on May 17 at $105.40
Change since picked: - 0.85
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 2.5 million

---

SanDisk - SNDK - close: 58.99 chg: +0.01 stop: 63.05

We do not see any big changes from our SNDK new play description from Tuesday night. However, we'd probably wait and look for a failed rally near $60.00 or $61.50 before initiating new positions. Our target will be the $53.00-52.50 range. Be advised that SNDK is holding its annual shareholder meeting on Thursday, May 25th. There is no way to know if the meeting will produce any stock-moving news.

Picked on May 23 at $ 58.98
Change since picked: + 0.01
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 11.1 million
 

Strangle Updates

None
 

Dropped Calls

Carpenter Tech. - CRS - cls: 109.94 chg: -0.64 stop: 111.45

A midday spike to $118.00 appears to have ended this play. CRS spent the first half of the day slipping lower from $114 to $106 when suddenly, without explanation, the stock spiked to $118.00. We did not believe it so we looked at the time and sales data. At 13:57:17 there was a trade at $118.00 for 200 shares. The trade before it was $110 and the trade after it was around $108.00. It looks like we've been hit by a fluke trade higher. If you could have been triggered in that one tick higher our trigger was at $116.51 and our stop was at $111.45. Consider this play closed.

Picked on May 24 at $116.51 *bad tick*
Change since picked: - 6.57
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume = 448 thousand

---

Deere Co - DE - close: 84.08 chg: -0.54 stop: 83.29

We warned readers yesterday that DE looked poised to move lower. Shares of DE continued lower following Tuesday's failed rally. The stock hit our stop loss at $83.29 closing the play.

Picked on May 23 at $ 84.71
Change since picked: - 0.63
Earnings Date 08/15/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Getty Images - GYI - cls: 64.96 chg: +0.58 stop: 63.39

Tuesday's failed rally looked ominous so we raised our stop loss to $63.39. That may have been too tight. Shares of GYI gapped open lower (64.38) and traded to $63.32 before bouncing. We've been stopped out but readers might want to watch for a move over $65.50 as a new bullish entry point. We'd target the 50-dma.

Picked on May 23 at $ 65.80 *gap higher*
Change since picked: - 1.42
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 997 thousand

---

Occidental Petrol. - OXY - cls: 93.67 chg: +0.56 stop: 91.99

Another volatile session for OXY may have left traders seasick. The stock gapped lower only to surge up toward $95 then reverse course and dip toward $91.00 only to reverse again and close in the green. We would have been stopped out at $91.99. A dip in crude oil prices did not help the bulls any today.

Picked on May 23 at $ 95.90
Change since picked: - 2.23
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 3.4 million
 

Dropped Puts

CB Richard Ellis - CBG - cls: 71.57 chg: -4.58 stop: 80.65

Target achieved. CBG turned in a very weak session losing 6% on big volume. The stock actually dipped to $68.51, which is well below our target in the $74.00-73.50 range.

Picked on May 17 at $ 77.93
Change since picked: - 1.78
Earnings Date 05/02/06 (confirmed)
Average Daily Volume = 613 thousand

---

Femsa Fomento - FMX - close: 84.22 chg: -3.25 stop: 90.05

Target achieved. Well that was a lot quicker than expected. FMX continued lower following yesterday's failed rally. The stock dipped to $81.79, which is near Monday's low. Our target was the $82.50-82.00 range. We would be very wary about new bearish positions. Shares now look poised to bounce toward $87.50 again.

Picked on May 23 at $ 87.47
Change since picked: - 3.25
Earnings Date 04/28/06 (confirmed)
Average Daily Volume = 415 thousand
 

Dropped Strangles

Fedex - FDX - close: 107.32 chg: -0.36 stop: n/a

Target achieved. Shares of FDX dipped to $106.00 this afternoon and that pushed the put side of our strangle to our target. We have been suggesting that readers exit if either option in our strangle traded at $4.50 or more. The June $110 puts (FDX-RB) hit a high of $4.70 today. Our estimated cost was $2.60.

Picked on April 30 at $115.13
Change since picked: - 7.81
Earnings Date 06/21/06 (unconfirmed)
Average Daily Volume = 1.4 million
 


Trader's Corner

Retracements and Key Indicators Useful to Find Market Bottoms

I wrote on the weekend, in my Index Trader column, about the likelihood or (a better term) the 'probability' that the market was near a bottom. I was a little early in terms of time, not too far off in terms of price. In the Nasdaq, particularly the Nasdaq 100, there were no prior lows that could or might suggest any upcoming support. I was focusing on, as much as anything, the 'oversold' extreme that had been reached. However, relying too much on how 'oversold', a strictly relative and pretty unreliable gauge when prices are in freefall, is not going to pin down possible PRICE OBJECTIVES for a possible bottom. Especially so, as I say, when the market is falling like a stone and buyers run away in droves! As we see over and over, the market goes from extreme to extreme, which is a function of investor/trader psychology in going from overly optimistic (and unrealistic) to overly pessimistic, which is also often equally unrealistic.

Before I go further I will just note that my most recent Index Trader article (5/20) which I refer to above (which most of you know is a section accessible via the Option Investor.com WEB site) and appropriately titled "How Much More?" can be seen online by clicking here.

In these kind of panic selling situations, one helpful tool that can help in picking possible (price) areas where the market may stop falling, are the so-called 'fibonacci' retracements. A DOWNSIDE retracement is how much, on a PERCENTAGE basis, an Index or a stock has fallen, relative to the point gain from its last major or significant low to the highest high reached on an advance. An UPSIDE retracement is the reverse; i.e., how much, on a percentage basis, an Index or a stock has RISEN relative to the point decline from a major or significant top to the lowest low on a decline.

The most common retracement amounts are 38% (.381), 50% (.5), 62% (.618). These are the 'fibonacci' retracements. Charles Dow talked a lot about how frequently stock and market averages saw retracements of around one-half. For example, corrections to an intermediate-term up trend, were often around 50% of the prior advance, from the prior low Close to its highest closing high. I myself use the INTRADAY highs or lows rather than the Close; Dow didn't consider the intraday lows and highs to be that important. But, the price swings were MUCH smaller in his day and he didn't have computer aided buy or sell programs either!

W.D. Gann thought that the one-third and two-thirds retracements were also important; e.g., in a very strong trend, retracements may only be a third of the prior price swing. In a weak trend, retracements might be as much as two-thirds or 66%. I measure the 66% retracement a lot. It is so close to the 62% level for one thing. And, my rule of thumb is that if there is CLOSE, not reversed the next day, that is greater than a 66% retracement of a prior move, it is a sign that there will be a 100 percent retracement to a prior high or prior low. This is how in fact that many DOUBLE tops and double bottoms set up.

I'll spare you dear readers today a full explanation of the origins, whys and wherefores of FIBONACCI numbers and retracements, but you can go back to a prior Trader's Corner (3/30/05) and find out more by clicking here.

The strongest average or index may retrace only a 'minimal' 38% (e.g., to date, the Dow) whereas the retracement on the weakest index might be fully two-thirds or 66% (e.g., to date, the Nasdaq 100). When there is a decisive downside or upside penetration of the 38, 50 and 62% retracements, look for a possible move to the NEXT retracement amount. A 'next' retracement amount can be 100%. Sometimes you have to make a judgement call on WHICH prior high or low to use.

For example, on all the charts below, except NDX (the Nasdaq 100), the prior major or significant low was the OCTOBER bottom. In NDX, what I noticed was that it 'looked' like its most significant prior 'benchmark' low was its JULY bottom. I favored using this for my start point because I noticed that if I used the NDX July low, the retracement to date is approximately 66%.

IF this recent market decline is a retracement in a still ongoing intermediate uptrend, it makes more sense that NDX has retraced about two-thirds of its most significant price swing. Here is where I am making use of some other market indicators that suggest that the market is near at significant (intermediate) low. More on that later.

RETRACEMENT EXAMPLES

S&P 100 (OEX) CHART:
There was no point in also using the S&P 500 (SPX) chart as, in terms of the 200-day average and ITS percent retracements, the charts have identical aspects. When lows reach a major retracement, we want to look at other indicators that might also suggest a possible bottom; especially in the case of the current market, the index is at an oversold extreme according to the RSI (not shown in this chart) and has retraced to a key or pivotal moving average, especially the 200-day average which is seen in the OEX chart below. The intraday rebound from the area of the 50% retracement today is a very suggestive that OEX has reached at least an interim bottom.

THE DOW 30 (INDU) CHART:
We wouldn't expect the Index or average that had been the strongest, leading the recent market advance, to retrace as much as the other 'following' indexes. The Dow 30 Industrials (INDU) retraced 38% of its Oct to early-May advance. The fact that there was no close under this retracement AND that these recent lows are in the area of the cluster of lows seen in early-April, suggests also that the Dow has bottomed, for now anyway and maybe for this recent price swing.

The NASDAQ COMPOSITE (COMP):

The Double top in the Nasdaq Composite (COMP) was the telling start point of this recent major decline. It was not surprising to see the Nasdaq market falling farther than the S&P and retracing 66% of its Oct to late-April advance. The index retraced far less of its prior MAJOR decline (from the early-2000 top) than the S&P, which in turn did not retrace nearly as much as INDU, which almost reached it prior all-time peak.

While COMP pierced its 200-day moving average quite decisively, it is also very oversold. The fact that there was a very solid intraday rebound from its low today, which was in the area of its two-thirds (66%) retracement, suggested that it was time finally today for the die-hard holders of Nasdaq puts to take the money and treat yourself to something for a good trade, especially if you bought em when COMP made that double top, one of the most reliable of reversal patterns, or started falling through 2300.

Of course, stay tuned on a prediction of a bottom in the to date intraday lows made in the 2136-2140 area in the Composite!

THE NASDAQ 100 (NDX):
This was the 'money' Index in terms of buying Index option puts. As I went into earlier, there is not necessarily a strictly 'mechanical' way to always measure retracements. I decided to take the July low in the Nasdaq 100 as the starting point in what I was going to measure as the retracement amount. The first rally off the July '05 low was fairly shorted lived and the retracement went on and on, finally reaching a bit more than 66% (but only with one closing low below it). I thought it was possibly more telling to see what percentage retracement the recent NDX lows would represent relative to the last July to this January advance.

If NDX continues to fall however below today's low, there becomes a significant chance that it will retest its October low in the 1515-1520 area and thereby achieve a full 100% retracement of its Oct to January advance.

INDICATORS

Those who have followed my analysis and market timing advice for some time, will likely remember that good a good indication for a bottom is seen when the following conditions are met:
1. The major indexes are 'OVERSOLD'; i.e., readings below 30 on the 13-day Relative Strength Index (RSI)

2. Trader 'sentiment' is at a bearish extreme for at least one-day within 1-5 days of a possible low, as measured with a daily CBOE Equities Call to Put volume ratio.
(These indicators are shown with the OEX daily chart below.)

3. The 10-day moving average of total daily UP Volume for the NYSE and for the Nasdaq reaches certain reoccurring 'baseline' levels and then turns higher. I will go into my Up Volume indicator more next week as to the rationale as to why a measurement of ADVANCING volume used in this way might be a key indicator for a bottom (there is no comparable measure suggestive of major TOPS using up or down volume averages). The daily Up volume figure along with its 10-day moving average for both the NYSE and the Nasdaq are also shown in the last two charts below.

The 3 indicators I describe here PLUS the retracements seen to date are suggesting that at least an interim, if not 'final' bottom, has set up.

OEX CHART WITH THE RSI AND MY 'SENTIMENT' INDICATOR:

LEAD S&P INDEX; S&P 500 (SPX) AND NYSE DAILY UP VOLUME:

LEAD NASDAQ INDEX; THE NASDAQ COMPOSITE (COMP) AND NASDAQ DAILY UP VOLUME:


** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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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