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Daily Newsletter, Wednesday, 06/07/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

A Whole Lot of Talking Going On

While this week might not have produced many economic numbers, FOMC members were out in force, and they mostly stood shoulder to shoulder in a hawkish stance. Bernanke, Poole and Bies all commented on inflation risks earlier in the week with Hoenig being the only one who took a even a slight step back from their united hawkish posture. Hoenig agrees with the others that inflation has moved to the upper end of the comfort range, but he noted that it was too early to worry about whether the FOMC's policy has fallen behind the curve with respect to inflation.

Across the globe, equities reacted negatively this week, especially to Bernanke's comments. However, here in the U.S., yesterday many indices had bounced from their day's lows by the close. While some interpret all down days on strong volume as being signs of selling, this writer believes that depends on how the day ends. The strong volume indicates that institutions were involved since we retail traders can't produce that kind of volume on our own. So, what were institutions doing? If that strong volume is coupled with a bounce from the lows, that may mean institutions were accumulating rather than selling, using the dip created when retail traders wanted out in order to buy cheaply. The problem for us retail traders is that institutions can afford to begin accumulating as momentum continues to carry prices lower. They can begin accumulating ahead of a bottom, testing for that bottom. We usually can't, especially when institutions aren't always right, either.

To make matters worse when markets are already jittery, a whole bunch of talking was scheduled for today, too. Atlanta Fed bank president Jack Guynn, former Fed chairman Alan Greenspan, and Fed governor Mark Olson were all scheduled to speak today. Iran and other global powers were doing some talking, too, much of it behind the scenes as the full details of a proposal to Iran were matters for speculation.

The markets appeared set up for at least a short-term bounce, but would it appear? Futures closed above fair value just before the cash open, but traders had seen overnight gains erased after the open often enough that they didn't trust those higher values. That was especially true since a number of stocks and the chemicals sector had received downgrades, balanced by the Semiconductor Industry Association's raising of its forecast for chip sales for 2006. Some reassurance might have come from knowing that futures had held onto gains through the Nikkei 225's rout in overnight trading, but that reassurance didn't last long, especially with the SOX soon dropping below yesterday's low rather than rising.

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Markets chopped up and down as either bulls or bears momentarily gained the ascendancy, but the bears were to win the day. A swift afternoon drop was blamed on a report that the House of Commons in the U.K. had been temporarily shut down due to reports of anthrax, but Fed speak, results of a survey of 116 CEO's, and just plain jittery markets could have been equally valid causes for the ups and downs of the choppy day. The advdec line, VIX, and TRIN's movements were often not in accordance in a way that allowed any confidence in even the shortest-term direction. The SOX kept sliding lower all day as other leading-indicator-type indices such as the BIX, TRAN, RUT and RLX climbed or at least tried to climb before rolling over again. Although the other three of those indices closed lower, the BIX was to close higher by 0.60 percent. At least part of the day, advancers remained above decliners while down volume moved ahead of up volume and indices declined, although that relationship was erased by the end of the day.

After all of that, the Wilshire 5000 and some other indices closed at support at the bottom of recent consolidation zones.

Annotated Daily Chart of the Wilshire 5000:

The Wilshire 5000's long upper shadow can be seen as a positive when it occurs at the bottom of a decline, but gains a less bullish look when it's at the bottom of a consolidation zone. Note the behavior on May 23 when the Wilshire 5000 produced a similar candle, but dipped the next day before springing up and climbing through that consolidation zone. Unfortunately, this chart gives investors few answers.

Like the Wilshire 5000, the SPX nearly duplicated its candle from May 23. The SPX did not manage a close on the 200-sma, as did the Wilshire 5000, but instead closed below it as it had on May 23. In fact, the SPX's 1256.15 close was only cents below the 1256.58 close on May 23.

Annotated Daily Chart of the SPX:

If the SPX duplicated its May 23 daily candlestick, the Dow did not. Some could spot a possible head-and-shoulder confirmation in this week's action, while others might point to the Dow's stop on an important Fib support level.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

The Semiconductor Industry Association said that chip sales for 2006 should grow 9.8 percent, with this projection an increase from its previous forecast of 7.9-percent growth. Higher demand for consumer electronics prompted the increase. INTC's continued slide dragged the index lower, however. The company has announced its intention to sell its communication-chips assets to private investors or other chip firms, but investors weren't interested in holding the company's stock when it's losing market share to AMD. I thought I heard about a downgrade and lowered price target for INTC early this morning, but a search all day has not turned up confirmation of that downgrade. Whatever the cause of INTC's decline and the SOX's, the day's action was ugly. A weekly chart might be the best for seeing what's happening.

Annotated Weekly of the SOX:

The SOX needs to pull up between today's close and 440, or it risks falling to the stronger and longer-term support of the weekly 200-sma at 423.40.

Fed speak had far more to do with the market action than most of the day's economic releases, but those releases began early. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending June 2. The headline number measuring total mortgage loan application volume fell 1.4 percent on a seasonally adjusted basis and plummeted 28.0 percent below the year-ago level on an unadjusted basis. The refinance component has fallen to April 2002 levels, levels it also hit briefly last December. Components measuring conventional and government loan applications also decreased. A number of weeks of declining volume has sent the four-week moving averages for all components lower by more than one percent. The average contract interest rate for fixed-rate 30-year mortgages fell to 6.60 percent from the previous 6.66 percent and points increased.

The day's economic releases resulted in lower crude prices, but decline didn't help equities. Instead, it dragged the OIX and XOI lower, denying markets the upside leadership of the energy sector stocks. Rather, they led to the downside.

Jim Brown commented last night on the EIA's raising of its crude demand estimates for 2006 and 2007, and that action's impact on crude prices. If there was a whole lot of talking going on with respect to our FOMC members, former and current, talk also flies back and forth between Iran and other global powers. Early this morning, the Wall Street Journal reported that world powers had toned down their demand for Iran to stop enriching uranium before talks could commence, asking for a suspension rather than a long-term moratorium. Iran could also continue the precursor step to enrichment if it agrees to the terms reportedly presented by six countries as conditions before multinational talks. Other sources have speculated that Iran will be provided access to the WTO and a new facility to stockpile nuclear fuel, and will be eventually allowed to resume nuclear enrichment. Some speculate that Russia will provide Iran's nuclear fuel. Iran has continued to "play the crude card," as Jim noted last night, however, so few have a firm grasp of whether Iran will likely accept the deal or not.

Violence continues in Nigeria, but crude prices had dropped overnight as tensions eased over the Iran situation and on expectations of a build in inventories. Industry analysts differed in their expectations. Most expected gasoline inventories to rise, but the estimates varied from a 500,000 build to a 1.50-million build. Distillates were expected to rise from 850,000-1.5 million, according to the particular source making the prediction. One group estimated that crude inventories would decline by 500,000 barrels and another that they would climb by 1.3 million barrels. Some called the build in inventories "unexpected." However, with such widely varying estimates, it's difficult to decide whether the Department of Energy's report of a build of 1.05 million, 1.76 million and 1.14 million, respectively, in unleaded gasoline, distillate and crude inventories met or exceeded expectations.

Crude traders reacted as if the surprise build had been bearish for crude prices. Crude dropped further after the release, closing at $70.82. Operable Capacity rose 54,000 barrels, while Percent Utilization fell to 90.97 percent, down from the previous report's 91.44 percent.

Crude dropped back to the bottom of a rising regression channel that was established after the May 22 low. It holds that support, as well as holding far above the 100-sma at $68.86 and a long-term rising trendline now at about $67.07. The choppy back and forth nature of its climb since May 22 questions whether the rise could be a bear-flag rise, but so far, the support holds.

A couple of hours later, at 12:30 EST, Atlanta Fed bank president Jack Guynn discussed the economic outlook and the housing sector, but former Fed chairman Alan Greenspan spoke first. When speaking before the Senate Foreign Relations Committee, at that committee's request, Greenspan addressed rising energy costs. Although the economy had so far been able to absorb those costs, he said, the prices were beginning to curb economic growth and flatten demand. He did not believe that the damage could yet be termed a "serious erosion," according to an Associated Press release, but he called the increase a "huge implicit tax" on consumers. He believes that continued high prices will eventually cut back on our dependence on petroleum. He does not believe that the world's refining capacity can widen the margin with world demand, a comment that will not prove new or surprising to those who have been reading Jim Brown's commentary for the last couple of years.

When Guynn spoke, his comments appeared mixed with regard to his hawkish stature. He called inflation readings worrisome, comments he'd previously made. He called rate policy "close to where it should be" since productivity gains and global forces could ease inflation in the future. In his opinion, the decline in the housing sector could still be called orderly and the rest of the economy is moderating in line with Fed forecasts. He said that he didn't want to let the genie out of the bottle, in terms of letting inflation get out of control, and that he wasn't sure the inflation readings were transitory. The initial focus appeared to be on his worries about the bothersome inflation readings and his intention not to let it get out of control, and not the rest of his comments, as equities rolled down with the SOX reaching a new day's low, one of many it was to eventually reach as it stair-stepped lower all day.

Fed Governor Olson worried that investors may have sought out riskier investments as the flat yield curve offered them less opportunity for gain.

The International Monetary Fund did its part to weigh down U.S. markets today, too, again warning U.S. officials of the dangers of the growing deficit, calling the previous support of the deficit and the dollar "possibly temporary," according to one report. The IMF still believes that the U.S. economy drives growth across the globe, with that engine continuing despite various challenges, including hurricane damage, a rising-interest-rate environment, and rising energy prices. Investors did not need a reminder of the dangers of the deficit, however, and that perhaps contributed to the grim outlook on the markets.

CEO's proved less optimistic on the economy than they had been previously, according to a second-quarter Business Roundtable survey. The Outlook Index fell to 98.6 from 102.2, but remained above the year-ago level of 94.3. Only 41 percent of CEO's expect to increase staff, down from the first-quarter's 43 percent, but still above the 35 percent level from a year ago. Those expecting to increase capital expenditures decreased to 48 percent, down from the previous 50 percent reading and flat with the year-ago level. Those anticipating higher sales for the second quarter fell to 83 percent, down from the last quarter's 85 percent and also below the 85 percent reading from a year ago.

At 3:00 EST, April's consumer credit report was released. Economists predicted that consumer credit rose by $3.9 billion, a big leap higher from March's $2.5 billion. If that rise had been steep, the actual reported $10.6 billion seemed astronomical. That news appeared to hasten the rollover that had already begun. Non-revolving credit climbed by $7.6 billion while revolving credit rose $3.0 billion.

In stock-specific news today, a number of upgrades and downgrades were issued. Banc of America Securities downgraded Northrop Grumman to a neutral rating from its previous buy rating and set its target price at $70.00, and Robert W. Baird downgraded Johnson Controls (JCI) and BorgWarner Inc. (BWA) to neutral ratings. NOC dropped 0.87 percent; JCI rose 1.59 percent; and BWA dropped 2.11 percent. Deutsche Bank went after a number of chemical companies, including Dow Chemical (DOW) and DuPont (DD). DOW dropped 1.26 percent, and DD, 2.56 percent. The firm said that its GDP forecast was below consensus and that a slowing economy would impact these companies and the sector. Banc of America Securities upgraded Boeing Co. (BA) to a buy rating and set its target price at $93.00. BA rose 1.00 percent. C.H. Robinson Worldwide (CHRW) also received an upgrade, with this transport stock rising as a result. CHRW is a component of the TRAN, the Dow Jones Transportation Index. CHRW rose 1.57 percent.

Target (TGT), Dell (DELL), Northwest Airlines (NWACQ), and Fairchild Semiconductor International (FCS) also made news. TGT said that consolidated gross margin rate and selling, general and administrative expense rates will be slightly higher in fiscal 2006 than in 2005, excluding the influence of a fifty-third week. According to a filing with the SEC, it expects a low double-digit percent increase in full-year earnings before interest and taxes, while the fiscal 2006 earnings per share percent increase should be in the mid teens. Target was also presenting today at a Piper Jaffray conference along with other retailers. TGT rose 2.73 percent. DELL announced that Google (GOOG) would use its servers in the most recent version of GOOG's Search Appliance product. Dell dropped 1.36 percent. NWACQ's flight attendants voted not to accept the airlines contract, intended to cut costs, and the company said it would ask for a preliminary injunction to stop their union from striking. The company has already asked the bankruptcy court to reject their existing labor agreement, and now it will ask the court to make a ruling and then allow the company to impose a new contract. FCS said that gross margins should increase from 0.5 to 1 percentage point but reiterated its guidance for Q2 revenue. The company expects that revenue to be flat to down by three percent. FCS dropped 2.06 percent.

Earnings for tomorrow include those from CATS, CRAI, FCEL, GLBC, LUB, NSM, RENT and TTWO. Few economic numbers have been released this week, and that trend continues until Friday's numbers. Tomorrow includes only the usual initial claims, released at 8:30, April's wholesale inventories, released at 10:00 and natural gas inventories, released at 10:30. Because wholesale inventories don't tell a lot about personal consumption, this number doesn't usually move the markets unless the number moves enough to change the GDP outlook. Expectations are for a rise of 0.5-0.6 percent, up from the prior 0.2 percent. As Jeff Bailey commented yesterday, however, in this hyper-alert market, any number has the capability of moving markets.

With equities across the globe reacting negatively and somewhat in concert to rate-hike suggestions, it might be worth noting that the Bank of England is now engaged in a two-day meeting, and that the last meeting had contained a surprise bidder for a rate hike. Some believe that a rate hike will be the next move by the Bank of England, but probably not tomorrow, at the conclusion of the two-day meeting. The ECB also announces interest rates tomorrow, both just before our cash market opens.

As frustrating as this statement will be, today's action did not decide the next market direction. The Wilshire 5000 and SPX almost repeated their May 23 performances, while both the Dow and the SOX dropped to next strong support. Both the Dow and SOX stopped at or near support, however. Countering the bearishness of that action was the BIX's bounce from support on a day when many would have expected the BIX to decline.

Annotated Daily Chart of the BIX:

I can't find conclusive evidence of whether markets will crater or bounce again within recent consolidation zones. That's the nature and cause of these consolidation zones: bulls and bears are still battling it out.

If the SOX doesn't pull up soon, it has the possibility of falling to 420-423, perhaps dragging the other indices lower with it, but the BIX bounced off support tested today, attempting to lead indices higher. The Wilshire 5000 and SPX nearly duplicated their May 23 performances, and those performances did not result in a breaking of the consolidation patterns, so we can't conclude that today's action will result in a final breaking of those zones, either. They may, and they may not. The RLX and TRAN stayed within recent consolidation patterns.

I'll tell you when a reasonable forecast can be made, but the markets closed on the edges of cliffs, and like the old cliff-hangers of old, the movie ended without any idea whether a hero was going to come to the rescue, or a villain in the form of the head of a central bank somewhere around the globe was going to push them over the edge. Watch futures' reactions to overnight actions, but trust nothing, especially as tomorrow is a Thursday before option expiration week, an often volatile trading day. If futures bounce while other indices do, or hold up while other indices do, a temporary bounce might be attempted. If futures drop when other indices climb, a test of lower lows might be expected. I would advise staying out of the markets until evidence is clearer, but if you're trading, take profits quickly.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None DRQ None
  ESRX  
  SLB  

New Calls

None today.
 

New Puts

Dril Quip - DRQ - close: 74.77 chg: -3.50 stop: 80.05

Company Description:
Dril-Quip is a leading manufacturer of highly engineered offshore drilling and production equipment which is well suited for use in deepwater, harsh environment and severe service applications. (source: company press release or website)

Why We Like It:
If you can't beat them, join them! Oil stocks have reversed sharply from a nascent bullish buy signal into very clear sell signals. Oil service stocks seem to be taking the worst beating and the group closed near their lows for the session suggesting more weakness to come. The risk here is that the OIX oil index might bounce from its 200-dma and the OSX oil services index might bounce from its 200-dma but that would require another significant drop. Part of the risk is that DRQ is already down about $9 from the recent high three days ago and shares are going to be due for a bounce soon. The challenge is that everything looks bearish. The MACD buy signal has reversed, the RSI is bearish, stochastics are bearish, DRQ has closed under potential support at $75.00 and its 50-dma after producing a failed rally under $80.00 (all bearish). Volume has been above average on the declines, which is also bearish. We are going to suggest puts with DRQ under $75.00 for now. Please note we're suggesting two targets. Our conservative target is the $70.25 level. Our aggressive target is the 100-dma (currently 65.96) so we'll put that at $66.25 for now. Another risk to consider is that if Iran refuses to discuss the new proposal and defies the U.N. and the West again oil futures could spike higher and inspiring new strength in the oil stocks.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 75.00 DRQ-SO open interest= 41 current ask $5.60
BUY PUT JUL 70.00 DRQ-SN open interest=127 current ask $3.40

Picked on June 07 at $ 74.77
Change since picked: + 0.00
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 390 thousand

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Express Scripts - ESRX - close: 70.96 chg: +0.43 stop: 72.65

Company Description:
Express Scripts provides integrated PBM services, including network-pharmacy claims processing, home delivery services, benefit-design consultation, drug-utilization review, formulary management, disease management, and medical- and drug-data analysis services. The Company also distributes a full range of injectable and infusion biopharmaceutical products directly to patients or their physicians, and provides extensive cost-management and patient-care services. (source: company press release or website)

Why We Like It:
ESRX looks poised to breakdown from its five-week consolidation under its simple 200-dma and exponential 200-dma. The stock has produced a big bearish rounded-top pattern over the last several months and shares finally broke down under the $80.00 level in late April. Now ESRX looks poised to begin its next leg lower. The MACD is on the verge of a new sell signal and the P&F chart has already broken through support and points to a $64 target. You'll also see that the 50-dma is about to cross under the 200-dma, which is normally a pretty bearish development. We are going to suggest a trigger under Tuesday's low at $69.59. If triggered at $69.59 we'll suggest two targets. Our first target is potential support at the $65.00 level so we'd suggest selling at $65.25. Our second target is old support near $60 so we would suggest selling around $60.50. More aggressive traders may want to jump the gun and buy puts on a break under $70.00.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 70.00 XTQ-SN open interest= 860 current ask $2.80
BUY PUT JUL 65.00 XTQ-SM open interest= 319 current ask $1.25

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Schlumberger - SLB - close: 60.51 chg: -3.45 stop: 65.01

Company Description:
Schlumberger is the world's leading oilfield services company supplying technology, information solutions and integrated project management that optimize reservoir performance for customers working in the oil and gas industry. The company employs more than 64,000 people of over 140 nationalities working in more than 80 countries. Schlumberger supplies a wide range of products and services from seismic acquisition and processing; formation evaluation; well testing and directional drilling to well cementing and stimulation; artificial lift and well completions; and consulting, software and information management. In 2005, Schlumberger operating revenue was $14.31 billion. (source: company press release or website)

Why We Like It:
SLB is another big-cap oil services stock that is leading the group lower. The recent bounce from the 100-dma and breakout over the 50-dma was a bull trap and proved to be a bear-flag consolidation pattern. Now that shares are breaking down we're going to try and ride the wave. Readers can choose to wait for a breakdown under $60.00 or wait for a bounce and a failed rally under the 100-dma (near $63.00) as their preferred entry point to buy puts. Our target is the $55.75-55.50 range, above its rising 200-dma. The P&F chart shows a fresh triple-bottom breakdown sell signal with a $49 target.

Suggested Options:
We are suggesting the July puts. Pick the strike that best suits your trading style.

BUY PUT JUL 65.00 SLB-SM open interest=3032 current ask $5.90
BUY PUT JUL 62.50 SLB-SZ open interest= 146 current ask $4.20
BUY PUT JUL 60.00 SLB-SL open interest=3104 current ask $2.90
BUY PUT JUL 57.50 SLB-SY open interest= 406 current ask $1.85
BUY PUT JUL 55.00 SLB-SK open interest= 598 current ask $1.15

Picked on June 07 at $ 60.51
Change since picked: + 0.00
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 10.0 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Priceline.com - PCLN - close: 32.18 chg: +0.65 stop: 29.85

PCLN displayed relative strength again for the second day in a row. Shares spiked higher near the open and closed with a 2% gain. Volume came in well above its daily average. We did not find any specific news to account for the strength today. Readers should remain wary as the MACD on the daily chart is nearing a new sell signal. We are not suggesting new positions. Our target is the $34.50 level.

Picked on May 25 at $ 30.67
Change since picked: + 1.51
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 432 thousand

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VF Corp. - VFC - close: 64.31 change: +0.40 stop: 61.84

VFC tried to rally higher again but its momentum was sapped by the market's weakness. On a technical basis we remain bullish but given the weakness in the major indices we would really hesitate to open new call positions. VFC is likely to retest the $63.50 region again. Be ready for it. Our target is the $68.00-70.00 range.

Picked on June 01 at $ 63.51
Change since picked: + 1.35
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 545 thousand
 

Put Updates

Amgen Inc. - AMGN - close: 67.21 chg: -0.40 stop: 69.55

Biotech stocks tried to rally this morning but the sector reversed course midday to produce another bearish failed rally. AMGN lost 0.59% on the session and looks poised to head lower tomorrow. More conservative traders may want to wait for a drop under $66.75-66.50 before initiating positions. Our target is the $62.65-62.25 range. More aggressive traders may want to aim lower since the P&F chart points to a $60 target. We do expect a bounce near the $65.00 level. We do not want to hold over the July earnings report.

Picked on June 05 at $ 67.48
Change since picked: - 0.27
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

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Franklin Res. - BEN - close: 88.23 chg: +0.70 close: 92.55

The XBD broker-dealer index managed a minor bounce today and BEN followed suit. Yet it's worth noting that like many stocks today BEN pared its gains and was headed lower into the close. The MACD looks ready to roll over into a new sell signal. Meanwhile the 50-dma is crossing under the 200-dma, which is a very bearish (longer-term) signal. More conservative traders may want to lower their stop loss. Our target is the $85.25-85.00 range.

Picked on May 14 at $ 89.30
Change since picked: - 1.07
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Burlington Nrth.SntFe - BNI - cls: 74.41 chg: -2.35 stop: 80.01

The Dow Jones transportation index only lost 0.9% today but railroad stocks were hit much harder. CSX fell 2.8%, UNP lost 3.1% and BNI fell 3% on strong volume, which is bearish. Today's failed rally in BNI looks like another bearish entry point to buy puts. We are suggesting two targets. Consider selling half your position at $70.50 and the rest of your position at $66.00.

Picked on June 05 at $ 75.64
Change since picked: - 1.23
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Barr Pharma - BRL - close: 51.86 chg: -0.34 stop: 54.25

Drug stocks managed a meager bounce today but shares of BRL failed to hold any gains. The stock has produced what looks like a failed rally at its simple 10-dma that readers can use as a new bearish entry point to buy puts. The MACD indicator is nearing a new sell signal. Our target is the $48.00-47.50 range near the May lows.

Picked on June 05 at $ 52.20
Change since picked: - 0.34
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Digital River - DRIV - close: 39.25 chg: +0.01 stop: 44.25

DRIV tried to produce an oversold bounce today but the stock's momentum failed under the $40.50 level and shares gave up almost all of their gains. We want to remind readers that we had two targets on DRIV. Our first target was the $40.20 level. Our second target is at $37.65. More conservative traders may just want to exit now to lock in any gains.

Picked on June 04 at $ 43.56
Change since picked: - 4.31
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 983 thousand

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Intl. Bus. Mach. - IBM - cls: 79.15 chg: -0.61 stop: 81.05

We were almost stopped out today. Yesterday's bullish reversal fed this morning's rally until IBM stalled under its 21-dma near $80.75. Shares ended up producing a big failed rally pattern. More aggressive traders may want to open new put positions right here given the weakness in the major market averages. More conservative traders will probably feel better waiting for a drop under $78.75 or $78.50 to buy puts.

Picked on June 06 at $ 78.75
Change since picked: + 0.40
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

Nucor - NUE - close: 47.92 chg: -3.48 stop: 54.05 *new*

The selling in steel-related stocks today picked up speed. Shares of NUE lost 6.77% to drop back below the $50.00 level and break technical support at its 100-dma. We are adjusting our stop loss to $54.05. We are also adjusting our target to the $47.00-46.50 range. More conservative traders might want to consider exiting now to lock in gains. Aggressive traders may want to aim lower since the P&F chart points to a $37 target.

Picked on May 31 at $ 52.64 *split adjusted
Change since picked: - 4.72
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Wynn Resorts - WYNN - close: 69.79 chg: +1.30 stop: 73.51

WYNN produced a pretty decent bounce today and shares closed with a 1.89% gain. However, the stock's intraday trading is more revealing. The rally failed at $71.50 and the stock closed back under the $70 level and its 100-dma. This looks like a new bearish entry point to buy puts. We are going to suggest two targets. Consider selling half your position in the $65.25-65.00 range and then sell the rest of your position in the $61.00-60.00 range. The simple 200-dma near $60 could be support.

Picked on June 05 at $ 69.11
Change since picked: + 0.68
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 1.2 million
 

Strangle Updates

None
 

Dropped Calls

Halliburton - HAL - close: 70.35 chg: -3.03 stop: 69.99

It's time to abandon ship. The selling in the oil stocks is just picking up in intensity. The OIX lost 2.99% while the OSX oil services index lost 4.77%. Shares of HAL fell 4.1% on strong volume. Yes, there is a chance that HAL could bounce from $70.00 or its 200-dma near 68.50 but we'd rather exit now especially with the major averages looking so sour.

Picked on May 25 at $ 73.80
Change since picked: - 3.45
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 7.1 million

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Hydril - HYDL - close: 70.67 change: -3.47 stop: 71.75

The volatile shares of HYDL lived up to their label with a 4.6% sell-off. The stock plunged through technical support at its simple 200-dma today. We've been stopped out at $71.75. If shares trade under the May 22nd low at $69.60 readers might want to enter bearish plays.

Picked on June 04 at $ 77.65
Change since picked: - 6.98
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume = 328 thousand

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iShares Global Energy - IXC - cls: 100.20 chg: -2.84 stop: 99.49

One could argue that IXC still has support at $100 and its rising 200-dma (99.49) or its exponential 200-dma (98.93). However, the sell-off in the oil stocks doesn't appear to be slowing down any time soon. We're going to exit early now before being stopped out.

Picked on May 25 at $103.67
Change since picked: + 3.47
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 47 thousand

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Kerr Mcgee - KMG - close: 103.16 chg: -4.45 stop: 104.85

It looks like we should have abandoned ship with Monday's bearish engulfing candlestick pattern. KMG continued to sell-off and the selling was pretty sharp today with shares closing down 4.1% and breaking down under the $105 level and its 50-dma. We would have been stopped out at $104.85.

Picked on June 04 at $110.86
Change since picked: - 7.70
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Marathon Oil - MRO - close: 74.14 chg: -2.87 stop: 72.95

MRO did not escape the oil-sector carnage today. Shares lost 3.7% to breakdown under the $75.00 level and its 100-dma. We are suggesting that readers exit immediately as MRO looks headed toward the $70.00 level and maybe lower near its 200-dma.

Picked on June 04 at $ 78.39
Change since picked: - 4.25
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 3.1 million

---

Omnicom - OMC - close: 95.54 chg: +0.24 stop: 91.75

OMC continues to show relative strength but we're going to suggest an early exit here too. The rally today reversed course given the market's afternoon weakness. That's to be expected. The problem here is that we do not want to see OMC consolidated back toward short-term support at $94.00 and again at $92.00 only to stop us out. We are suggesting that readers exit early here due to the major indices bearish tone. More aggressive traders might want to risk it and let OMC ride since the stock performed pretty well during the last market sell-off.

Picked on May 15 at $ 92.05
Change since picked: + 3.49
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Transocean Inc. - RIG - close: 76.40 chg: -3.56 stop: 77.99

RIG was one of the big names in the oil services sector leading the way lower today. The stock lost 4.4% on big volume. Bob Pisani was on CNBC today talking about how investors were worried that the rates these companies can charge for their equipment may be slipping. We would have been stopped out at $77.99. If the stock trades under the May low you might want to consider bearish plays and aim for the 200-dma near $70.

Picked on June 04 at $ 83.15
Change since picked: - 6.75
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 5.7 million

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Valero Energy - VLO - close: 58.66 chg: -2.19 stop: 59.85

VLO is another oil-sector casualty today. The stock broke down under short-term support at the $60.00 level and technical support at its 100-dma today. We would have been stopped out at $59.85.

Picked on June 04 at $ 63.05
Change since picked: - 4.39
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 9.8 million
 

Dropped Puts

Apollo Group - APOL - close: 55.38 chg: +2.46 stop: 53.85

We warned readers yesterday that something didn't look right with APOL. Today the stock completely out performed the markets with a bullish breakout over technical resistance at its 100-dma. Shares closed with a 4.6% gain on above average volume. We would have been stopped out at $53.85. We cannot find any news to account for APOL's strength today.

Picked on May 17 at $ 51.75
Change since picked: + 3.63
Earnings Date 06/20/06 (unconfirmed)
Average Daily Volume = 2.1 million

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Monster Worldwide - MNST - cls: 44.59 chg: -1.61 stop: 50.05

Target achieved (surpassed). MNST continued to sell-off and shares lost another 3.48% today on above average volume. Our target was the $45.25-45.00 range.

Picked on May 31 at $ 48.87
Change since picked: - 4.28
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.2 million
 

Dropped Strangles

None
 


Trader's Corner

Moving Averages Pinpoint Resistance and a 'Sentiment' Question

One OIN SUBSCRIBER wrote me asking about whether I thought the retracements to date of the last big run up, would be exceeded given that the market hasn't been able to gain any traction and with the weak close of today, plus asked:
"... isn't it unusual for a low bullish sentiment day by your indicator occurring before another sharp sell off? I haven't seen it in the last couple years that I remember."

RESPONSE: Every once in a while, especially when there's conviction that the Fed may go on another inflation fighting rate raising tack, traders take advantage of a rally to buy puts; exactly what happened before this latest round of selling. I wasn't bullish particularly but thought last week's rebound would carry a bit higher than it did. When I looked at the charts it was quite noticeable that:
1.) the big break that occurred recently leaves what looks like a massive resistance overhang or big SUPPLY of stock ready to be sold on any advance to higher levels.
2.) with the bearish chart patterns, it was apparent that the rallies had carried back up to the 'danger' zone of a return to key moving averages.

Given some other factors, especially the contrary opinion idea that high bearishness might mean TOO MUCH pessimism, I thought the recovery momentum would carry somewhat higher. While I didn't emphasize a strong possibility of downside reversals at key moving averages in my weekend (Index Trader) commentary, it is one of my basic trading rules when I SEE it develop.

The 'key' moving averages I use for the major stock indexes are the 21-day, 50 and 200-day averages. The first, the 21-day is a more common trading average benchmark, as it's only infrequently that the 50 or 200-day gets pierced, on the upside or downside; with the index then coming back to that average for an upside or downside 'test' of upside or downside momentum.

In the recent market situation, ability of the indexes to get back above these particular moving averages was going to be a test of the strength of the recovery rally and buying interest. A moving average is not unlike a trendline. Once a trendline is pierced, a rebound back to it often finds renewed selling interest or resistance coming into play. Support 'becomes' resistance and vice versa. The same with moving averages at key junctures.

Some of the current charts will serve to illustrate these points, plus will pinpoint the retracement levels that remain intact to date.

S&P 500 DAILY CHART:

The recent S&P 500 (SPX) price action offers one of those occasions when there is no 'slippage' back above the 21-day average on the rebound. Rather the SPX rally closed just over, but practically AT this average, followed by a reversal the next day. And, with today's weak Close, coinciding with the intraday low, we have another instance of a 1-day close under the very important 200-day moving average and the index looking weak.

My rule of thumb is that one close under a key trendlines, as well as a key moving average, is not conclusive if this action is reversed the next day; as it was the first time, the prior instance of a daily Close under this average. This was followed the next day by a significantly lower intraday low when SPX reached a 50% retracement (of its Oct to April advance); however, this was followed by a rally into a Close that put the Index back above its 200-day average. Stay tuned on what happens tomorrow. A close back above 1260 keeps bullish hopes alive.

A close below 1247, at the 50% retracement suggests that SPX could then next retreat to the level that would represent a 62% retracement in the 1229 area.


S&P 100 (OEX) DAILY CHART:

The recent rebound stopped right at the 50-day average. Today's low then fell under its 200-day, a very important average in terms of how institutional money managers tend to judge the relative strength or weakness of the market.

A retreat to below the 50% retracement at 573 would be bearish and suggest a possible next downside target to the 566 area, at the next lower retracement marked on the chart below representing a 62% give back of the last major run up; 62% being the next retracement level that's considered technically significant. Another key test would be the low end of the multimonth trading range at 570.

Contrary to 'contrary opinion'!, the last dip in my trader 'sentiment' indicator seen above, wasn't associated with UPSIDE potential or possibilities at least not to date. Stayed tuned on that! Quite the opposite, there's been a sharp and renewed decline after that (Friday) reading. The majority opinion is exactly right sometimes, but is a rarer occurrence on the street of dreams!

DOW INDUSTRIALS (INDU) DAILY CHART:

The Dow came back up to close to its 21-day average on Friday but price action reversed back to the downside at the beginning of the week. The best example of prior support (once pierced) 'becoming' resistance later on, was seen with the previously broken up trendline. That's at the first down arrow seen on the chart below.

Today's INDU close under 11000 generated some public press coverage, but if you look back at the prior lows, the more important level is just above 10,900, at the early-May intraday low and representing a 50% retracement. The next lower retracement target is in the 10,730 area.


NASDAQ COMPOSITE (COMP) DAILY CHART:

The important retracement here is the 2/3rds or 66% level at 2145. A close under 2145, not reversed the next day, would suggest the possibility that COMP was headed all the way back to the rally starting point in October. The prior low made in February was the support that 'became' resistance, as was the key 200-day moving average. Stay tuned on what comes next. A significant couple of days are coming up.


NASDAQ 100 (NDX) DAILY CHART:

The Nas 100 or NDX chart is another story in terms of retracements. Although I measured only a 66% retracement to date if we went back and the index's JULY low, this was a bit of 'fudge'.

The rule of thumb that has stood the test of time, would suggest that if NDX exceeded a 2/3rds retracement of its last major upswing, it was headed to a 100% retracement of its prior advance, suggesting a downside target to the 1515 area. Stay tuned on that one too!


RULE OF THUMB ON RETRACEMENTS:
A retracement that goes further than a 38% Upside or Downside retracement will reach 50%. A retracement that carries beyond 50%, particularly on a Closing basis (and not reversed the next day), tends to lead to a 62%, or 66%, retracement. If more than 66% of a prior move is retraced, there's a good chance that a 100% retracement back to the starting point (of the advance or decline) will occur.

Of course, not ALWAYS! If it was that simple, always just buy the 50% retracement for example, 'too many' traders would make money doing so. I say it like this because techniques that work reliably in the market get NOTICED and will get used by more and more traders; and, presto, the technique doesn't work anymore.

Or, it's a 'self-fulfilling' prophecy for a while. But the market will always go where it wants to go eventually. However, because the market does trade in reoccurring patterns and cycles, some techniques work very well indeed, especially when used with skill and knowledge.


** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Click here to email Leigh Stevens Support [at] 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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