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Daily Newsletter, Tuesday, 06/20/2006

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Table of Contents

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

Market Wrap

Where's the Beef?

A good trader friend, John, has been asking me that question lately. Every time we get a rally we don't seem to get much follow through. The internals of the rallies are either "too much too fast" and flame out quickly (a mark of short covering rallies in a bear market) or they lack punch with less than normal volume and less than inspiring internals. Last week's rally from the low on Thursday is a good example. We saw very strong internals if you looked at advancing volume vs. declining volume. Too strong really--in excess of 10:1. And sure enough there's been no follow through since the high put in on Friday morning. We had an opening pop on Friday morning as follow through to Thursday's rally and then nothing.

Today we had the makings of a break to the upside but the downtrend held. This morning's rally was turned around and the bulls gave up everything they gained. Actually the DOW at least kept some of its gain but the S&P 500, COMP and RUT gave it all back plus a little extra since they ended marginally in the red. Are we seeing rotation into the bluest of the blue chips again? If so we know how well that turned out for the market last time that happened (the DOW lead the way to the highs in May).

If I put on my rose-colored glasses though (that would be the bullish pair), I see the possibility that we have simply been consolidating the past three days. Perhaps we'll have a little more consolidating to do before the next leg up. The DOW, naturally, gives me the strongest bullish feeling in this regard. We had a strong impulsive rally off last week's low and now we're just motoring sideways. This sideways consolidation should lead to further upside. Therefore, while the other indices are looking more bearish, I have a feeling we haven't seen the last of the buying. From a short term perspective though, it's hard to determine whether or not we're going to see a further dip before the buyers step back in (or shorts are forced to cover again). We'll see what we can glean from the charts.

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We'll spend most of the time in this report looking at charts because frankly there's not much else going on. It's been a light economic week, including today, and even the news rooms seemed to be slow.

As a reminder for the week, so you'll know who's writing which Market Wrap when this week, I (Keene Little) am writing tonight in place of Jim who will be writing Wednesday's Wrap. I will be writing Thursday's and then we'll be back to a normal schedule.

The two economic reports today were Building Permits and Housing Starts, both of which came out at 8:30 AM. Equity futures rallied a little off the news but whenever I see futures make a move before the cash open it always makes me suspect. The futures are moved a lot easier than the cash market and many times it seems some of the bigger houses try to move futures one way so that they have the ability to trade against that move when cash opens. So this morning's move up would be a good time for the Boyz to sell into it if that was their intention. After this morning's open we did in fact see a little bit of a settle as the futures, with cash following, dropped back near the point where price was before the 8:30 reports. But then the market reversed and headed higher into the afternoon. Too bad it couldn't continue.

Back to the reports, new construction of U.S. houses increased 5% in May after three months of declines. While confidence among builders continues to weaken, housing starts rose to a seasonally adjusted annual rate of 1.96M in May, a 5% increase and stronger than the expected 1.86M. Starts of single-family houses rose 2.1% to 1.59M in May, while starts of large apartment units rose 19.7% to 371,000. With fewer and fewer people able to buy homes, especially as banks rein in aggressive lending practices, there will probably be more pressure on rentals. That might explain some of the emphasis on large apartment buildings. On the down side, building permits, a leading indicator of housing construction, fell 2.1% to a seasonally adjusted annual rate of 1.93M from 1.97M in April.

Analysts attributed the increase in construction to an unusually dry spring in many parts of the country which allowed builders to start work on more new homes. But this may have been a 1-month shot in the arm for this construction industry as the analysts cautioned that a slowing housing market (feeling the impact of higher mortgage rates) could see a further slide in construction activity. The drop in building permits backs up that expectation.

The builders sense a further slow down as well. The sentiment among U.S. home builders fell in June making it the 6th month in a row and it has now dropped to an 11-year low. The housing market index dropped four points to 42, the lowest since April 1995. May's reading was revised up to 46 from 45. Readings over 50 indicate most builders think business conditions are good or fair. The index was at 68 in October and peaked at 72 in June. It has fallen in eight of the past nine months. If you look at the chart of the Home Construction Index you will see that investors started selling off about this time.

The index declined in all four regions of the nation in June, but the West is still feeling a stronger demand and their index remains positive at 61. I can see it in Seattle where home prices and sales are still relatively strong. But even here realtors tell me it's starting to slow faster than they expected. The other three areas of the country declined in June. The U.S. index has declined in 10 of the past 12 months, falling by a total of 30 points, matching the largest year-over-year plunge in the 21-year history of the index. We knew this was coming (you did, right?) and it's only a question of how bad the correction will be--shallow longer term correction or swift and steeper decline. I'm thinking relatively shallow this year (although it's been pretty steep the past few months) but then the decline will kick into gear next year.

Overall the price patterns are leaving me guessing about the short term direction. I'm getting a bearish sense looking at some of the major indices which makes me think we'll immediately head for new lows below the June lows. But the current pullbacks lead me to believe we'll see at least another leg up first. Looking at the charts we can see a similarity between the indices

DOW chart, Daily

A strong bounce off the June low took the DOW up to its 20-dma. As the center of the Bollinger Band this is an important moving average that shows the intermediate trend. If the 20-dma, currently at 11027, can not be recaptured, the bears will continue to rule. The 200-dma at 10893 is even more important for the bulls to hold so we've got a tight range to help us determine where the market will head next. I think a drop below 10800 would be bearish.

SPX chart, Daily

SPX looks more bearish than the DOW based on its inability to get back above its 200-dma. After bouncing off the June low it failed the retest of the 200-dma--the kiss goodbye. The bulls could make a nice run if SPX can get back above 1261 otherwise a drop below 1230 would look bearish and the June lows would be at risk of breaking.

Nasdaq chart, Daily

If the DOW is relatively strong and SPX relatively weak, then the COMP is sickly. It is stuck well below its 200-dma and couldn't even make it up for a test of its 20-dma. Additionally, the 50-dma is dropping hard and is getting ready to cross its 200-dma. This would be a longer term sell signal for many managed funds. Currently price is trying to hold onto it uptrend line from August 2002.

QQQQ chart, Daily

While the COMP looks very bearish, and the QQQQ could be interpreted as just as bearish (it too couldn't get back above its 20-dma), the larger wave count supports the idea that the June low could have been the completion of a larger pullback from the January high. This would mean we should get a rally (probably choppy) through the summer that takes us to new market highs. I have to admit that scenario is not looking particularly good right now.

SOX index, Daily chart

Another bounce, another kiss goodbye. After breaking its uptrend line from April 2005 the SOX gave it a perfect retest and failed. That's a sell signal pure and simple, with a stop just above the trend line. Take those every time since your risk is minimal. It'll be interesting now to see whether or not the daily oscillators will get this turned around and headed back up.

BKX banking index, Daily chart

The banks bounced hard off the 200-dma last week but have been struggling since. Short term the current pullback gives me the impression that this will head higher again and at least give us an a-b-c bounce that might even reach for the 50-dma. Unfortunately the securities broker index gives me the opposite impression.

Securities broker index, Daily chart

The securities broker index looks downright bearish. If the 200-dma continues to hold down this index I'd get short and stay there for a while. If it manages to push back up then we'll probably see a retest of the broken uptrend line from May 2005, currently near 213.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing index remains trapped in a very tight parallel down-channel, making the decline look particularly bearish. Eventually we'll get a break of this channel which will set up a larger sideways/up correction before heading lower again. The price objective near 500 continues to look like the right one.

Oil chart, August contract, Daily

Oil's pattern is beginning to look like a descending wedge which would be bullish. The uptrend line near $68.50 or the 200-dma approaching $66.60 make for good downside targets, although the descending wedge, with a small throw-under, suggest support more in the $68 area.

Oil Index chart, Daily

If the oil index keeps heading lower then that will tell us oil will likely break its uptrend line and head south with this index. Currently flip-flopping on both sides of the 200-dma leaves us guessing which way this is going to go.

Transportation Index chart, TRAN, Daily

The Trannies almost made it up to its 50-dma today, which was more bullish than the broader market. But price hasn't quite broken its downtrend yet and looks bearish by that measure. A rally above 4700 would be bullish but until then it's questionable.

U.S. Dollar chart, Daily

The US dollar has a Fib target area of $88.36-86.64 and that's where price has been struggling. The uptrend line from January 2005 is slightly higher so this area will be strong resistance. I expect the dollar to head lower again once this is finished. That could then give us a bounce in the metals.

Gold chart, August contract, Daily

The currently bounce in gold may lead to one more drop to its uptrend line near $550, possibly even down to a Fib projection at $531. But this should be getting close to a larger bounce, potentially back up to at least $625.

Results of today's economic reports and tomorrow's reports include the following:

Tomorrow is even quieter than today as far as economic reports go--only Crude Inventories at 10:30 AM. The market will be left to its own devices and worries so that could mean retail trading will rule the day and we know how choppy that can get.

Sector action was mixed today, reflecting prices which for the most part closed at the flat line. Those in the red were led by the oil service (OSX), healthcare, disk drives, biotech and the SOX. Those in the green were led by gold and silver, airlines, securities brokers and Transports. The rest were essentially flat on the day.

Market internals also reflected price action, with a slightly more bearish tone than what we saw in the prices. With decliners beating advancers and declining issues edging out advancing issues it mirrored the broader market. But new 52-week lows swamped new highs 378 to 82. When we see this coupled with the DOW holding up, it smacks of distribution and rotation into the biggest large caps so that the large funds can sell quickly if needed. Overall volume today, was low at less than 4B and that further makes it a challenge to determine where the market is heading short term.

We'll need some additional price action to help discern the short term direction of the market. Longer term traders on both sides should be a little nervous right here. I suspect any move to lows below June's will mean a hard and fast decline so be out of long positions if that were to happen. It's possible we'll see a move higher still but the way it's been going so far--either strong but short-lived shots higher or very choppy and whipsawing moves--it's been tough to play the long side. I don't see that changing. We're into summer time trading and the lower volume (as we saw today) makes it that much more difficult.

Hopefully by my Market Wrap on Thursday we'll have a few more answers as to what the market is doing. In the meantime, be careful if you're day trading this--take profits quickly and then reevaluate for the next trade. Longer term traders will need to establish their stop levels while we wait for direction here. See you Thursday. Jim will be writing tomorrow's Wrap.
 


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

Chipolte Mex Grill - CMG - cls: 60.67 chg: -0.31 stop: 57.45

The bounce in CMG is definitely struggling but the stock isn't seeing a lot of selling pressure so far. CMG failed to breakout over the $62 level this afternoon and we're starting to think that shares will dip toward the $58.00-59.00 region. We suggest patience. Wait for the dip and signs of a bounce first. Of course we'll be pleasantly surprised if CMG does bounce from the $60.00 level like we initially thought it might. Our target is the $67.50-70.00 range. We do not want to hold over the late July earnings report. FYI: The P&F chart points to a $75 target.

Picked on June 18 at $ 61.76
Change since picked: - 1.09
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

---

Cognizant Tech. - CTSH - close: 62.48 chg: +0.27 stop: 62.49

There is no change from our previous updates on CTSH. We're still waiting for a breakout over the $65.00 level. Our suggested trigger to buy calls is at $65.05. More aggressive traders may want to jump in early around $64.35. Our target is the May highs in the $69.50-70.00 range.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

General Dynamics - GD - cls: 65.21 chg: -0.29 stop: 63.99

GD lost another 0.4% today and closed near its simple 50-dma. We're starting to think that shares will dip into the $64.50-64.00 region. Wait for signs of a bounce (from $65.00 or) above the $64.00 level as our next entry point to buy calls. We're a little surprised that defense-related stocks aren't showing more strength given all the headlines about N. Korea's plans to test a new long-range missile. Our target is the $69.00-70.00 range.

Picked on June 18 at $ 66.12
Change since picked: - 0.91
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Google - GOOG - close: 387.17 chg: -0.97 stop: 384.50

GOOG is still consolidating under its 50-dma. We don't see any changes from our previous updates. Traders might want to consider put plays if GOOG trades under its 200-dma ($379) and the $375.00 level. We're sticking to our plan to buy calls with a trigger at $401.00 for now.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 9.8 million

---

Legg Mason - LM - close: 99.92 chg: -0.22 stop: 96.99

The sell-off in the broker-dealer sector stalled today. The XBD actually closed in the green but remains vulnerable and under technical resistance at its 200-dma. Given the XBD's precarious position any bullish plays on LM are risky. The stock (LM) tried to bounce this morning but failed near $102. Traders can choose to buy a bounce above $99.00 or wait for a new move over $102. Just remember this is an aggressive play. More conservative traders may want to bail out early if shares traded under $98.80.

Picked on June 18 at $102.45
Change since picked: - 2.53
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Manpower - MAN - close: 65.23 change: +1.46 stop: 64.45

It was a strong day for MAN with volume coming in above average. The stock has bounced twice in the last two days near $63.50 and its 10-dma. The MACD on the daily chart is nearing a new buy signal. More aggressive traders may want to buy calls right here. We're going to stock to our plan with a trigger at $66.05. We do not want to hold over the mid-July earnings report.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 959 thousand

---

Reynolds American - RAI - cls: 111.49 chg: +0.68 stop: 107.45

Shares of RAI closed higher today adding 0.6% but studying the intraday action on RAI make the session look more bearish. The stock appears to have produced a short-term failed rally. While technicals are bullish we're expecting another dip toward the $110 region. We would continue to keep an eye on larger rival MO, which has rallied toward resistance at its simple 200-dma. Watch for another bounce above the $110 level as a new entry point for RAI. We are suggesting two targets. Our conservative target is $115.00. Our aggressive target is $119.00.

Picked on June 15 at $111.15
Change since picked: + 0.34
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

---

United Tech. - UTX - close: 60.98 chg: +0.08 stop: 58.75

We do not see any changes from our previous updates on UTX. The stock traded mostly sideways on Tuesday although it may be noteworthy that the MACD has produced a new buy signal today. Our target remains the $64.00-65.00 range.

Picked on June 08 at $ 60.13
Change since picked: + 0.85
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million
 

Put Updates

Apple Computer - AAPL - close: 57.47 chg: +0.27 stop: 60.05

AAPL is still consolidating near support at the $57.00 level. We don't see any changes from our previous updates. We're suggesting a trigger to buy puts at $56.85 in an attempt to capture the next leg lower. If triggered our target will be the $50.50-50.00 range. We do not want to hold over AAPL's mid July earnings report.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Amgen Inc. - AMGN - close: 64.96 chg: -0.79 stop: 68.05 *new*

The bears appear to be in control of AMGN. The stock lost another 1.2% and closed under potential support at the $65.00 level. We are lowering our stop loss to $68.05. Our target is the $62.65-62.25 range. We do not want to hold over the mid July earnings report.

Picked on June 05 at $ 67.48
Change since picked: - 2.52
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

---

Barr Pharma - BRL - close: 51.14 chg: +0.42 stop: 52.65 *new*

Bear did not make any progress in BRL today. The stock traded mostly sideways. Look for the $52.00 level to act as short-term overhead resistance. Our target is the $48.00-47.50 range. We are adjusting our stop loss to $52.65.

Picked on June 05 at $ 52.20
Change since picked: - 1.06
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Carpenter Tech. - CRS - close: 100.75 chg: +0.28 stop: 105.01

Shares of CRS tried to bounce this morning but the rally failed under $104.50. We do not see any changes from last night's new play description. We're suggesting a trigger to buy puts at $99.25. If triggered our target will be the $92.00-90.00 range, which is above potential support at $90.00 and its exponential 200-dma at $89. We do not want to hold over the late July earnings report. The P&F chart currently points to a $76 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume = 651 thousand

---

Digital River - DRIV - close: 40.00 change: +0.63 stop: 42.55

DRIV produced a bit of a bounce today adding 1.6% on below average volume. We wouldn't begin to worry until shares traded over $41.00 and then we'd look for the 100-dma near $41.60 to act as resistance. Our target is the $35.25-35.00 range.

Picked on June 19 at $ 39.45
Change since picked: + 0.55
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Express Scripts - ESRX - cls: 65.46 chg: -1.36 stop: 70.10

ESRX lost another 2% today. Volume came in below average on the decline. More conservative traders might want to think about locking in some gains again. Our conservative target was the $65.25 level. Right now we're aiming for our aggressive target at $60.50. The P&F chart is bearish and points to a $52.00 target. We do not want to hold over the late July earnings report.

Picked on June 08 at $ 69.59
Change since picked: - 4.13
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Expeditors - EXPD - close: 100.40 chg: +1.24 stop: 100.35

EXPD is still showing a lot of relative strength. Traders might want to switch sides and buy calls if EXPD trades over the $102.00 or $102.50 levels. A breakout over the $102.50 region would suggest the current six-week consolidation was nothing but a big bull flag pattern. We're trying to catch a decline back toward the bottom of the current channel. We're suggesting a trigger to buy puts at $97.85. If triggered our target is the $90.50-90.00 range, where shares found support a few days ago. We want to reiterate that this is an aggressive play.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Group 1 Auto - GPI - close: 53.54 chg: -4.16 stop: 60.15

Negative analyst comments that GPI may be overvalued sent shares of the stock to a 7.2% loss on very big volume. Both Moody's and S&P downgraded their credit rating on GPI from stable to negative. More conservative traders may want to seriously consider locking in some profits right here although it's worth noting that GPI closed at its low for the day, which is usually bearish for the next trading session. Our target is the $51.50-50.00 range.

Picked on June 11 at $ 58.46
Change since picked: - 4.92
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

---

Intl. Bus. Mach. - IBM - cls: 77.99 chg: +0.32 stop: 80.05

We do not see any changes from our previous updates on IBM. The stock remains in a bearish pattern in spite of the news out today. The company released news that IBM has developed a new transistor with a speed of 500 gigahertz, which is about 100 times faster than the fastest PC chips on the market today. Our target is the $73.50-73.00 range. Please note that we will be running into a time crunch soon. We don't want to hold over the mid-July earnings report.

Picked on June 06 at $ 78.75
Change since picked: - 0.76
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 75.74 chg: -0.89 stop: 80.05

IDXX lost another 1.1% today and its daily chart's MACD indicator has produced a new sell signal. The stock is nearing what appears to be support at the $75.00 level and its 200-dma. We have two targets. Our conservative target is the $75.25 mark. Our aggressive target is the $72.00 level. Odds are good that IDXX will see some kind of bounce near $75.00.

Picked on June 12 at $ 77.95
Change since picked: - 2.21
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

---

Intuitive Surgical - ISRG - cls: 98.99 chg: -0.81 stop: 108.25

We do not see any changes from our previous update. ISRG looks pretty bearish with the breakdown under its 200-dma and the $100 level. At the same time ISRG look short-term oversold and the stock could easily bounce back toward the $105 level. The stock's volatility makes this an aggressive, higher-risk play.
Our target is the $91.00-90.00 range. The P&F chart points to a $74 target.

Picked on June 19 at $102.45
Change since picked: - 3.46
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Nucor - NUE - close: 49.18 chg: +0.56 stop: 51.61

Traders need to be on their toes here with NUE. The stock failed to produce any sort of follow through on Monday's bearish reversal and bearish engulfing candlestick pattern. That doesn't mean that NUE isn't headed lower but we're seeing mixed signals and one of those signals is a buy signal on the daily chart's MACD indicator. We would consider buying puts with NUE under $50.00 but more conservative traders may want to wait for a move under $48.00 first. Our target will be in the $42.75-42.50 region near the bottom of NUE's channel (see chart). We do not want to hold over the July earnings report.

Picked on June 19 at $ 48.62
Change since picked: + 0.56
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 5.9 million

---

Oshkosh Truck - OSK - close: 49.10 chg: +0.16 stop: 52.05

We do not see any changes from our previous updates on OSK. The stock spent Tuesday's session trading sideways. Our target is the $45.50-45.00 range. The P&F chart looks bearish with a $34.00 target.

Picked on June 13 at $ 49.49
Change since picked: - 0.39
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand

---

Supertex - SUPX - close: 35.62 change: -0.36 stop: 39.25

Semiconductor stocks are still moving lower and shares of SUPX lost 1% today. At the moment we would look for an oversold bounce. SUPX is testing support near $35.00 and its exponential 200-dma. The stock bounced from $35.00 back in mid-May and shares do look a little short-term oversold. A bounce back toward $38.00 may be in the near future but readers can use a failed rally under $38.50 as a new entry point for puts. Our target is the $31.00-30.00 range. We do not want to hold over the early August earnings report.

Picked on June 19 at $ 35.99
Change since picked: - 0.37
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 263 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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