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Daily Newsletter, Wednesday, 07/12/2006

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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

Bulking Up the Supraspinatus

The supraspinatus muscle extends along the top of the shoulder blade. It's an important muscle, especially to those who participate in throwing sports. It's the muscle used when the arm is lifted, and it holds the arm in the shoulder joint after the throwing motion.

Many indices have been sporting potential inverse H&S's on their daily charts. Markets have been engaged in bulking up that supraspinatus muscle in the right shoulders of those potential formations. Prices are pumped up and down until the muscle strengthens enough to allow prices to be thrown higher or weakens enough that the shoulder collapses. Neither has happened yet with one possible exception.

Market uncertainties contribute to the forces that pumping prices up and down. A bigger-than-expected drawdown in crude inventories, a downgrade of Genentech (DNA) after blowout earnings but lower-than-expected Avastin sales, a miss by Fastenal (FAST) and a lowering of full-year EPS guidance by consumer-discretionary-company Brunswick (BC) kept markets straining against the added weight. Geopolitical concerns contributed, too. A smaller-than-expected widening of the trade gap perhaps kept prices from dropping too far and supported that supraspinatus muscle, as did Genzyme's (GENZ) strong performance after it beat analysts' expectations.

All this lifting and dropping of index prices has created charts that are a mess. In some cases, the current potential inverse (or reverse) head-and-shoulders began forming just after the confirmation of regular head-and-shoulder formations, so which should be believed? Most form near long-term trendlines, but may be straddling those trendlines rather than forming cleanly above or below them.

In addition, the current inverse H&S formations threaten to disintegrate into triangles and may have already done so in some cases. Triangles have a less-bullish and even-more-ambiguous outlook than do inverse H&S's. To make matters worse, RSI (not shown on the charts below) hovers near the equally ambiguous and neutral 50 level on the Wilshire 5000, S&P 500, Dow and even the Russell 2000, although it's a bit lower on the Nasdaq.

The SPX daily chart illustrates many of these characteristics.

Annotated Daily Chart of the SPX:

The 100/130-ema's on intraday charts were proving less helpful as benchmarks this week than they've been in the past, but the two-minute versions did perhaps prove helpful to watch, as they were clear resistance this afternoon. Mostly, however, prices on this index and others are chopping across these usually important averages, and they're not as useful as they have been in the past. Watch the two-minute versions, however, for a first heads-up to bullish/bearish tenor early tomorrow morning, as they're as good as anything else for a short-term look. They were at 1261.21 and 1261.89 at the close but will move a bit with price movement tomorrow morning.

On 15-minute Keltner charts, the SPX has approached support, but those supporting channel lines still slant sharply lower, so it's unclear whether they'll hold. As today ended, that support was at 1256.32-1257.48 on 15-minute closes. Keltner support looked slightly stronger on the shorter-interval charts, such as three- and five-minute ones, suggesting that it's within the realm of possibility that markets could attempt to rise early tomorrow morning but certainly not promising such a bounce attempt.

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This is the most tentative of evidence with the SPX caught within a pattern known for its unpredictable moves, however. The SPX is also at the bottom support of a descending regression channel off the July 3 high, a possible bull flag. To further complicate matters, the 60-minute Keltner chart still shows a vulnerability to a further drop, to 1254. Those support the idea that the SPX could attempt a bounce, but they don't preclude the possibility that the prices could just slide further down that channel or even break down out of it. The bounce theory would hold more weight if the SPX had managed more of a bounce off the day's low.

A first task for bulls would be to close 15-minute periods above a Keltner line currently at 1260.31. Resistance may be firming at 1261.97-1263.30 on 60-minute closes. If all this conflicting information seems confusing, you're right. It's confusing because market action is confused. Any time you see a H&S possibly disintegrating into a triangle, you know you're seeing confusion.

Annotated Daily Chart of the Dow:

Like the SPX, the Dow's two-minute 100/130-ema's were strong enough to rebuff the Dow's attempted advance this afternoon. Those averages are currently at 11031.92 and 11038.59, so those averages are the first levels to watch for bullish/bearish barometers early tomorrow morning. Two-minute anything's are not going to serve as barometers for long-term moves, however, so use them as early barometers only.

Also like the SPX, the DOW was testing Keltner support at the close today, with nearest resistance at 11023.49 on fifteen-minute closes and with supporting channel lines still sloping down so strongly that they are perhaps not able to provide strong support. Shorter-interval Keltner charts feature support that looks a little stronger. The possibility of a bounce attempt is not precluded, but certainly not promised, either. On charts up through the 7-minute one, a short-term bounce looks a little more likely than a decline right off the bat, but futures' reactions to overnight developments will mean far more than what was signaled at the close today.

Last Wednesday, I noted on the Nasdaq chart that the Nasdaq looked as if it were building strength for a push up toward the 2140 region, but that it would likely find strong resistance there. Thursday, the Nasdaq pushed higher than I had anticipated, to 2168.54, but it closed well off its high of the day, with resistance holding. The next day, it broke lower.

Annotated Daily Chart of the Nasdaq:

The Nasdaq was also pushed back this afternoon by its test of the two-minute 100/130-ema's, with those averages at 2097.63 and 2099.23 at the end of the day. The Nasdaq had dropped to 15-minute Keltner support at the close, complete with tentative bullish divergence, but just as was seen on the other indices, those supporting channel lines still turn lower and may not be capable of supporting the Nasdaq. Shorter-interval charts also show slightly firmer support, but these charts show that the Nasdaq bull's first task would be to complete a 15-minute close above a Keltner line currently at 2095.70.

The 30-minute chart shows a grimmer possibility, of a drop to 2082.84, and the 60-minute one, a drop to retest the June low. Bulls need to pull together now, soon, to start closing 30- and 60-minute periods higher again, erasing that possibility.

Since my chart provider has elected not to join some other charting services and immediately provide SOX quotes and charts for their subscribers after the PBOT began requiring subscription fees, I do not have up-to-date SOX charts as usual. I have registered my displeasure, but I imagine that my displeasure alone does not weigh strongly in the company's plans. Therefore, my charting abilities are restricted.

Annotated Daily of the SOX:

This week's consolidation has occurred along the important weekly 200-sma, not shown on the map above because it's a daily chart and not a weekly one. Stockcharts.com lists that weekly 200-sma at 426.59, with daily candles stitching lines back and forth across it, but perhaps a bit more below it than above it. That's a weekly average, and so it will be the weekly close that's important here.

Bullish or bearish divergences can continue while a trend continues, too, but note the pronounced bullish divergences here as the SOX slides toward round-number support near 400 and as the SOX tests and has slightly exceeded the October 2005 low of 413.00.

The only intraday SOX chart I have suggests nearest Keltner support grouping near 415 on 15-minute closes and the nearest Keltner resistance grouping near 419-420 on 15-minute closes. One is the neckline of a continuation-form (and therefore, less reliable) H&S and the other is near the right-shoulder level. Bulls of any stripe want to see the SOX shoot up past 420 then above Tuesday's high, while bears want a breakdown below Tuesday's low.

After-hours developments didn't lend much clarity. The SMH dropped but then bounced, heading up just a little above the cash-close level. After the close, Cree (CREE) said that it wouldn't meet previously forecast earnings of 24 cents, and instead expects to earn 22 cents, but it wasn't clear whether the SMH drop and bounce was occurring in response to CREE's announcement or not. CREE also expects lower gross margins than previously expected, and revenue should be at the lower end of an already forecast range.

The company noted that a recent slowdown in demand for mobile products might push LED chip sales lower, but that other products should mostly make up the difference. Investors didn't care much about those offsetting products, however, as they had sent CREE's price to 19.40 as this report was prepared, down from the close at 22.59.

Earnings releases and adjustments to guidance had trickled in all day, and so did economic releases. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending July 7. The volume of mortgage applications steadied after several weeks of declining numbers. The composite index increased 1.0 percent on a seasonally adjusted basis but was still 29.1 percent lower than the previous week's number and 36.3 percent lower than the year-ago level on an unadjusted basis. Other component indices, including the purchase, refinance, and conventional indices, also increased, but the government index fell 1.3 percent from the previous week. The four-week moving averages were mixed, with the market index inching 0.2 percent lower and the purchase index climbing 0.6 percent, but the refinance index falling 1.7 percent. The average contract interest rate for a fixed-rate thirty-year mortgage inched higher to 6.81 percent from the previous week's 6.80 percent.

Today, due to Brunswick's (BC) lowering of full-year guidance, many questioned how well consumer discretionary companies would perform, and many of those stocks turned lower. That included many in the food chain of the homebuilders, such as Lowe's (LOW) and Home Depot (HD). The DJUSHB dropped, too, by 2.92 percent, continuing a decline out of a recent consolidation zone and dropping to a new summer low. RSI has not dropped to a new low, however, signaling tentative bullish divergence. Some homebuilders' stocks showed early and tentative signs of some institutional accumulation on May 22 and again on June 2, with momentum continuing to push the stock prices lower since then. Institutions can step in ahead of you and me, and can weather that further lowering of prices as momentum carries them lower, but for retail traders, this serves only as an early warning signal that, absent new developments, the slope of that strong slide lower in these stocks may flatten. It's time to think about protective measures for bearish positions, while uncertain yet whether it's time to exit and particularly whether it's time to switch sides. Today's slide was a little stronger than expected by this thesis, however, and may mean that some who began accumulating have decided to distribute that stock again.

The May trade balance figures proved slightly better than expected. Several sources expected the May trade gap to widen, with some setting expectations for a widening to $64.7 billion and some as high as $65.0 billion. One forex news source also warned that the trade gap would widen although that source expected the gap to remain below the $66.6 billion level reported last October. The gap did stay below that record: far below. Admittedly, the gap did widen, but by a small enough amount that some headlines tagged it as steadying instead. The gap was at $63.8 billion, up from the prior month's $63.3 billion.

Both exports and imports rose. Exports increased 2.4 percent to $118.7, the biggest percentage gain in more than a year. In particular, exports to China grew faster than imports, twice as fast year-to-date according to a Rex Nutting report on MarketWatch.com. Exports of foods and feeds, industrial supplies, consumer goods and services all reached record levels. Exports were also helped, however, by a weakening dollar and exports of big-ticket civilian aircraft. Auto exports fell.

Imports rose 1.8 percent to $182.5 billion, pushed higher by record imports for petroleum. Imported petroleum rose by 17.0 percent to a record $27.9 billion. This resulted in the U.S. showing record deficits with Mexico and OPEC member nations.

Excluding petroleum products, the deficit declined to $43.2 billion, a continuation of a recent pattern. Remember, however, that much of that narrowing can be attributed to those big-ticket civilian aircraft orders. Imports of foods and feeds, apparel and autos all fell.

For the year-to-date, imports rose 12.3 percent above the previous year's figure; exports, 12.0 percent; the deficit, 12.8 percent. These increases are measured against a year that turned in a record $716.7 billion deficit. All in all, most decided that the trade deficit doesn't signal any warnings concerning the second-quarter GDP.

Another little noted economic release was the U.S. CEO Confidence number released by the Conference Board. In the survey conducted in the second quarter, confidence dropped to 50 from the previous quarter's 57, with CEO's expecting slower economic growth. That brings the confidence number to the benchmark 50 level. The current conditions component tumbled 10 points to that neutral 50 level. The expectations index slipped to 47, the lowest level in more than five years. Yet when looking at their own sectors, most CEO's did not expect a slowing economy to impact their profits or do much harm to their industries.

Geopolitical developments also factored into the day's climate and, some believed, strongly impacted trading. I'm not so sure since they may have just provided the excuse for indices to do what they looked set up to do anyway.

In response to attacks being blamed on Hezbollah, Israel's prime minister noted early today that the cabinet would convene for an emergency meeting in which its response would be considered, and that response was soon initiated. In those attacks, as many as seven Israeli soldiers were killed, with two reportedly killed later in Israel's response. Some Israeli troops, reportedly two, were also captured in the initial attacks. The prime minister of Israel termed the attacks an "act of war." The defense minister said Israel held the Lebanese government responsible. Israel has begun an assault in southern Lebanon, using planes and tanks.

The White House weighed in, too, blaming Syria and Lebanon for the kidnapping of the soldiers. Syria denied any role.

Also, U.S. Secretary of State Rice responded to Iran's rejection of the nuclear deal, with Iran still insisting that it will not make any final decision until August. Rice noted that the UN has already discussed sanctions and that Iran's rejection now forces the major powers to act.

Late in the day, some news sources began reporting that Beijing and Moscow have a draft resolution on dealing with North Korea and that they will present that draft to the UN. Their version may be similar to the one that the U.S. and Japan have crafted, some believe. A Chinese diplomatic mission is in North Korea now.

Geopolitical tensions may or may not have contributed to today's declines, but they certainly helped drive crude prices higher in early trading. Ahead of the crude inventories number, the IEA trimmed the estimate of oil demand for this year by 30,000 barrels per day from last month's annualized estimate, but increased the estimate of demand for next year to 1.57 million barrels per day. The IEA believes that non-OPEC oil supplies will rise to 1.7 million barrels per day next year, up from this year's 1.1 million barrels per day. The IEA thinks that this build in non-OPEC supplies should reduce the demand for OPEC crude next year, when compared to this year's figure, with the IEA estimating that OPEC has effective unused production capacity measuring 2 million barrels a day. It might be interesting to note that Canada's trade gap widened today when reported, with some of that widening attributable to lower exports of oil.

When today's crude inventories number for the week that ended July 7 was released, the drop was about three times the expected one. The Energy Department reported that crude inventories dropped 6 million barrels and gasoline inventories fell 400,000 barrels. Distillate supplies climbed 2.6 million barrels. The American Petroleum Institute (API) reported crude supplies falling only 3 million barrels and said that gasoline supplies rose by 1.4 million barrels, disputing the government's report of a drop in gasoline inventories. The API said that distillates rose 4.3 million barrels.

Crude futures had spiked higher into and then just after the release of the crude inventories, dropped lower afterwards and then climbed to a new day's high. QCharts shows the daily close at $74.95.

Today Frederic Miskin, President Bush's FOMC nominee, addressed a confirmation hearing at the Senate Banking Committee. He set forth his qualification for a position on the Federal Reserve Board, mentioning his professorship at Columbia University's graduate school of business and his authorship of numerous books and articles on the financial system and monetary policy. In a three-year period leading into 1997, his position as director of research at the New York Fed meant that he regularly attended FOMC meetings. Miskin was questioned by the panel later in the day, with Miskin confirming that he would keep an open mind about targeting a specific rate for inflation.

In company-specific news, the European Commission fined Microsoft (MSFT) $357 million. The EU said that the company had not complied with one of its previous antitrust rulings. MSFT dropped 1.99 percent. In addition, Credit Suisse cautioned that Apple Computer (AAPL) might lower guidance, sending AAPL's stock lower by 4.83 percent. UBS lowered EPS estimates for Dell and it dropped 4.44 percent. JP Morgan lowered its revenue estimates for IBM, and it dropped 1.29 percent. These developments contributed to the general weakness in the techs. Some feel that techs are particularly susceptible if consumer spending weakens during an economic slowdown.

Although my source had originally said that Texas Industries (TXI) would report tomorrow, it actually reported after the bell. The company reported Q4 net income of $41.9 million or $1.58 a share as compared to the year-ago level of $41.7 million or $1.66 a year. Quarterly revenue rose. After the close, Weyth (WYE) said that if business trends continue, it expects its FY earnings to be on the higher side of the expectations previously forecast. It also noted that it had received and responded to a warning letter from the FDA, related to a Puerto Rico facility. The company noted other developments in several drugs in its pipeline. Nike (NKE) announced after the bell that tomorrow would be the launch date for the Nike+iPod sport kit, a product that NKE developed in partnership with Apple (AAPL). A sensor in the footwear and a receiver plugged into the nano can communicate, allowing a runner to receive information on speed, distance and calories burned during the run.

Tomorrow's economic reports include initial claims at 8:30, natural-gas inventories at 10:30 and June's Treasury Budget at 2:00. Companies reporting earnings tomorrow include MAR, PEP, PII, and TRB.

Traders should also perhaps note the upcoming Bank of Japan policy meeting, with many jitters in Japan ahead of Friday's decision. Just as global markets positioned themselves ahead of the FOMC's decision, they may be attempting to do so ahead of the Bank of Japan's meeting. That positioning is made more difficult because of conflicting statements from Bank of Japan members and officials from the Ministry of Finance. Japan's decision can impact other bourses, particularly if Japan changes the gold and/or currency composition of its reserves as a result.

So far, the financial minister claims that no such changes are anticipated and that, instead, Japan would take steps to counter any rapid or disorderly forex moves. Some had speculated that Japan might increase its ratio of gold in its forex reserves, so the financial minister's statement was not considered supportive of gold prices. Apparently, they didn't hurt, either, with the YG contract closing at $653.50.

In my discussion at the beginning of the article, I pointed to many chart characteristics, including neutral RSI levels, that add to confusion about where markets are going. If technical analysis pinpoints all that is known about the markets, as it's supposed to do, then it's telling us that all that is known presents a conundrum, even for those with enough money to move the markets. We don't have that amount of money. Keep your positions to an account-appropriate level and use stops.

For what it's worth, both the VIX and the VXN approached or touched Keltner resistance that often holds. For the VIX, that resistance lies at 14.97-15.38, with the VIX approaching those 60-minute Keltner lines and leaving long upper shadows on the last two 60-minute candles of the day. For the VXN, today's test of resistance was accompanied by tentative bearish divergence, but the VXN did break slightly above that 21.86 resistance. Neither the VIX nor the VXN should be used for market-timing decisions, but this enhances the impression that it's either time for an equity flush lower or for support to hold and markets to bounce, perhaps within those formations marked above.

I'm a respecter of triangle breakouts, but if those inverse H&S's are disintegrating into triangles, they're doing it on daily charts, so that confirmation requires a daily close above or below a triangle's trendlines. Keep positions entered on breakout or breakdowns small, remembering the propensity for markets to come right back and retest broken resistance or support. While markets are within those potential inverse H&S's or triangles, whatever they might be, I have no suggestions as it's just chop.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None CAT None
  SHLD  
  WFMI  

New Calls

None today.
 

New Puts

Caterpillar - CAT - close: 71.31 chg: -2.09 stop: 74.01

Company Description:
For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2005 sales and revenues of $36.339 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. (source: company press release or website)

Why We Like It:
The bounce in CAT has failed at the $75.00 level. Now the stock's momentum is reversing and its MACD on the daily chart is nearing a new sell signal. With the market selling off we suspect that CAT might dip back toward its simple 200-dma near $66.50. We're going to suggest put options with CAT under $72.00. Our target will be the $67.50-66.50 range. We do not want to hold over the company's earnings report on July 21st so this will be a short-term play.

Suggested Options:
Aggressive traders might consider trading the July options, which expire after Friday, July 21st. We're suggesting the August strikes.

BUY PUT AUG 72.50 CAT-TA open interest=4049 current ask $3.40
BUY PUT AUG 70.00 CAT-TN open interest=4799 current ask $2.20
BUY PUT AUG 67.50 CAT-TU open interest=6376 current ask $1.35

Picked on July 12 at $ 71.31
Change since picked: + 0.00
Earnings Date 07/21/06 (confirmed)
Average Daily Volume = 5.1 million

---

Sears Holding - SHLD - close: 148.37 chg: -8.08 stop: 154.05

Company Description:
Sears Holdings Corporation is the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. (source: company press release or website)

Why We Like It:
There were new concerns today about a slow down in the American consumer. Investors responded by selling retail stocks. The RLX retail index fell 2.5%. Shares of SHLD lost over 5%. The drop today is a bearish engulfing candlestick pattern and a breakdown under support at $152, the 50-dma and the $150 level - all on above average volume. We are suggesting puts with SHLD under $150.00. Traders can choose to open positions now or wait for a possible bounce back toward $150 or the 50-dma (near 152.60). Our short-term target is the $142.00-140.00 range. That doesn't give us the best risk-reward ratio since we're using a stop loss above $154.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 150.00 KTQ-TU open interest=2091 current ask $7.20
BUY PUT AUG 145.00 KTQ-TV open interest= 310 current ask $5.00

Picked on July 12 at $148.37
Change since picked: + 0.00
Earnings Date 08/17/06 (unconfirmed)
Average Daily Volume = 1.9 million

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Whole Foods - WFMI - close: 61.20 chg: -1.86 stop: 64.01

Company Description:
Founded in 1980 in Austin, Texas, Whole Foods Market is the world's leading natural and organic foods supermarket and America's first national certified organic grocer. In fiscal year 2005, the company had sales of $4.7 billion and currently has more than 180 stores in the United States, Canada, and the United Kingdom. (source: company press release or website)

Why We Like It:
WFMI is another retailer that took a beating today losing 2.9%. If the consumer really is pulling back then a high-end, luxury grocer like WFMI could be hurt by it. The action over the last few months looks like a bearish head-and-shoulders pattern. Meanwhile technicals are turning bearish with the MACD on the verge of a new sell signal. We are suggesting puts here with WFMI under $62.00 but more conservative traders might want to wait for a drop under $60.00 or the June low (59.42). Our target is the $56.00-55.00 range. The P&F chart points to a $43 target. We do not want to hold over the late July earnings report.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 65.00 FMQ-TM open interest=2696 current ask $5.30
BUY PUT AUG 60.00 FMQ-TL open interest=5731 current ask $2.55
BUY PUT AUG 55.00 FMQ-TK open interest=3715 current ask $1.00

Picked on July 12 at $ 61.20
Change since picked: + 0.00
Earnings Date 07/31/06 (confirmed)
Average Daily Volume = 1.4 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Fortune Brands - FO - close: 72.00 change: -0.47 stop: 69.74

The market weakness should be cause for alarm. While FO is holding up relatively well we do expect it to turn lower if the markets continue to sink. Right now we'd expect a dip to the simple 10-dma near $71.00. Or if the sell-off gets really bad then FO might fall toward the $70.00 level. Wait for the decline to occur and then signs of a bounce before considering new bullish positions. Our target is the $74.00 level. We do not want to hold over the July earnings report (21st - unconfirmed).

Picked on July 06 at $ 71.30
Change since picked: + 0.70
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 674 thousand

---

Halliburton - HAL - close: 74.88 chg: -0.70 stop: 71.99

A lot of oil service stocks out performed the market today. Unfortunately any rally attempt in HAL was squashed by news that the U.S. Army was dropping its multi-billion contract with HAL. The stock traded sideways with an intraday bearish pattern of lower highs. We're going to leave HAL as a bullish candidate on the newsletter for now but we're looking for other oil service plays to add to the newsletter.
We are labeling this a slightly more aggressive play because of our time frame. We do not want to hold over HAL's earnings report on July 20th. Further crimping the time we have for the play to work is our decision to use a trigger. We want to use a trigger at $76.05 to open call plays. Conservative traders may want to use a tighter stop. We are going to have two targets. Our conservative target will be the $79.85 mark. Our aggressive target will be the $82.00 level. Please note that HAL is due to split 2-for-1 on July 17th.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 7.9 million

---

Investment Tech - ITG - close: 52.59 chg: +1.59 stop: 48.95

Watching the market today was were a bit worried by the weakness in financials and the bearish breakdown in the broker-dealer sector index. Fortunately, ITG continues to show relative strength. The stock added over 3.1% on above average volume. We do not see any specific news to account for the stock's strength today. There was one headline confirming that ITG would report earnings on August 3rd. Our short-term target will be the $54.95-55.00 range. More aggressive traders might want to aim higher and use a wider stop (under $48.00).

Picked on July 11 at $ 51.00
Change since picked: + 1.59
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 700 thousand

---

Rio Tinto - RTP - close: 211.14 chg: -2.57 stop: 205.90

Gold futures continued to rise today as tensions heat up in the Middle East with two more Israeli soldiers kidnapped and Iran about to be referred to the U.N. Security Council for punishment. Yet the rise in gold was not enough to fuel a breakout in RTP. The stock remains under its 50-dma and shares slipped 1.2%. We are repeating our comments from yesterday that more conservative traders might want to wait for the breakout past the 50-dma and the $215.00 level. The Point & Figure chart points to a $240 target. We are going to aim for a rally into the $225.00-228.00 range. We do not want to hold over the early August earnings report. Please note that RTP can be a volatile stock so expect the big intraday moves.

Picked on July 11 at $213.71
Change since picked: - 2.57
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 492 thousand
 

Put Updates

Apple Computer - AAPL - close: 52.96 chg: -2.69 stop: 58.55

AAPL dropped to a new relative low on above average volume with today's 4.8% decline. AAPL received some negative analyst comments about its expected revenue numbers today that really fueled the decline. We are not suggesting new plays at this time. The P&F chart remains bearish with a $44 target. We are targeting a decline into the $50.50-50.00 range.

Picked on June 28 at $ 56.85
Change since picked: - 3.89
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Air Products Chem. - APD - close: 63.92 chg: -0.99 stop: 65.01

It doesn't get any closer. APD hit $65.00 this morning before turning lower. Shares closed with a 1.5% decline and closed under the 50-dma. We remain somewhat cautious here but if the major averages continue to sink we'd expect APD to follow suit. We're leaving the stop loss at $65.01. Our target is the $59.00-58.00 range.

Picked on July 09 at $ 62.95
Change since picked: + 0.97
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Apollo Group - APOL - close: 49.47 chg: -0.69 stop: 52.01 *new*

Wednesday's decline under $49.50 looks like a new entry point to buy puts on APOL. We're going to lower our stop loss to $52.01. Our target is the $45.50-45.00 range.

Picked on July 09 at $ 49.92
Change since picked: - 0.45
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Intl. Bus. Mach. - IBM - cls: 75.48 chg: -0.99 stop: 78.75

It's a battle for every inch but slowly the bears are pulling IBM lower. The stock lost 1.29% on above average volume and its MACD is poised to produce a new sell signal. Fueling the decline today were bearish comments from J.P.Morgan who cut their revenue estimates for IBM. We are not suggesting new put plays. Currently our target is the $73.50 level. More aggressive traders might want to aim lower in the $72-70 region.

Picked on June 06 at $ 78.75
Change since picked: - 3.19
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 73.14 chg: -0.73 stop: 77.01

Traders might want to consider exiting here for a profit. IDXX is testing the June lows near $73.00. We are not suggesting new plays at this time. Our conservative target at $75.25 has already been hit and we're now aiming for the $72.00 level.

Picked on June 12 at $ 77.95
Change since picked: - 4.85
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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D.R.Horton - DHI - close: 22.83 change: -0.18 stop: n/a

Homebuilders continue to sink. The DJUSHB index lost 2.9% today. Unfortunately for us shares of DHI only fell 0.78%. Please note that the stock is outside of our suggested entry range to open strangle plays. Our estimated cost was about $1.70. Right now we're planning to exit if either option rises to $2.55 or more. The options in our strangle are the August $25 call (DHI-HE) and the August $22.50 put (DHI-TX).

Picked on July 09 at $ 23.90
Change since picked: - 1.07
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 3.7 million

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KB Home - KBH - close: 42.40 change: -1.60 stop: n/a

KBH was one of the worst performing stocks in the homebuilding sector today. Shares of KBH lost 3.6% and its MACD is nearing a new sell signal. The stock is outside our suggested entry range to open strangles so we're not suggesting new plays. Our estimated cost was about $1.45. The options we suggested were the August $50 call (KBH-HJ) and the August $40 put (KBH-TH). We would like to exit if either option rises to $2.45 or more.

Picked on July 09 at $ 45.76
Change since picked: - 3.36
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

Dropped Calls

Bear Stearns - BSC - cls: 135.33 chg: -3.03 stop: 134.95

We have been stopped out of BSC at $134.95. Investors are growing nervous and they sold the financial stocks today. The XBD broker-dealer index lost 2.2% and broke down under its 200-dma. Participating in the sell-off was BSC. Shares lost 2.18% to close near the $135.00 level and its 50-dma. We warned readers that we expected a dip toward the $135 level. Unfortunately, there was a late day intraday spike to $134.91, which stopped us out.

Picked on June 29 at $137.51
Change since picked: - 2.18
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Google - GOOG - close: 417.25 chg: - 7.31 stop: 399.00

The sell-off in tech stocks is getting pretty ugly and we don't think it's over yet. Shares of GOOG lost 1.7% and have closed under their 10-dma. GOOG did receive some analyst comments today. One firm was bearish while the other was bullish so it was a wash. The trend in GOOG remains bullish but short-term momentum indicators are starting to look bearish. We would expect a dip to the $410 level or maybe the $400 region and right now we don't want to suffer that kind of pull back so we're suggesting that our readers exit early!

Picked on June 21 at $401.00
Change since picked: +16.25
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 9.8 million

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Komag Inc. - KOMG - close: 44.21 change: -1.53 stop: 44.49

We have been stopped out of KOMG at $44.49. The stock is another casualty of the tech stock sell-off, especially hardware. There were a lot of bearish analyst comments on tech and the hardware stocks today.

Picked on July 06 at $ 47.54
Change since picked: - 3.33
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Union Pacific - UNP - close: 88.23 chg: -2.00 stop: 88.49

We have been stopped out of UNP at $88.49. Railroad stocks were hammered pretty hard today with most of them under performing the Dow Transportation sector index's 1.45% decline. UNP lost 2.2% on above average volume. The move today in UNP, and several other railroad stocks, looks like a bearish breakdown worth investigating for potential put plays.

Picked on June 29 at $ 91.54
Change since picked: - 3.31
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 1.6 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

When Long-Term Trends Reverse

THE major consideration that got me into technical analysis as a separate and additional study to study of market fundamentals (e.g., economic growth trends, earnings trends, etc.) was that I lacked 'objective criteria' for when to get out of a position. This is another way of saying that I had no clear cut criteria for when a trend reversed from up to down, down to up.

This was when I was trading the futures markets more than stocks, so it was not that I had no concern about having a time-limited position. Of course options present even more of a challenge due to amount of built in time premium, which is a more subjective evaluation and 'premium' given to the seller of the option, than is true of the 'carrying charge' premium of physical commodities or even financials like bond and stock futures.

I've heard so many stories (and I remember my own!) of people that road a big tech stock position from hugely profitable, relative to their cost basis, to a fraction of what the stock or stock portfolio was worth in 2000. This was because they 'believed' in the tech 'revolution' or believed in the individual company's 'story'; i.e., their business model, their earnings potential, etc. There is nearly always a 'belief' involved, rather than simple ignorance, not knowing what to do, etc.

REMEMBER THIS CHART PICTURE?
Well maybe you didn't have the trendlines there but you'll likely remember the GO-GO period of the late-1990s into the early-2000 top. Consistent with 'objective criteria' for when the major trend started to reverse, was the downside penetration of the steeper up trendline. A sharp price break followed. A fortune making time to buy Nasdaq stock puts!

After prices stabilized and rebounded after the first big break, a number of weekly lows then defined the next lower (less steep) trendline. You can see 1-week's sharp fall under this trendline, but only one, until a couple of months later when the lowest of the 3 trendlines also gave way. This line was constructed with our 'minimum' of 2 points, but ended up only pointed to areas of resistance at the weekly highs for a few weeks.

So, the first 'technical' method I started paying close attention to involved trendlines. For example, when an up or down trendline got pierced, especially a long-standing one. I learned to look not only at 'external' trendlines but at 'internal' or 'best-fit' trendlines.

External trendlines are straight lines that connect only a minimum of 2 (3 is best) or more of the lowest lows or the highest highs. An internal, best-fit, trendline connects the MOST number of highs or lows and may cut through some bars (of a bar or candlestick chart). External trendlines are pretty much the only thing you'll see used with Point & Figure charts; e.g., from Jeff Bailey's Monday 7/10 Market Wrap commentary.

BEFORE CONTINUING, A NOTE ON MY INDEX TRADER ARTICLES:
This Wednesday Trader's Corner article also serves as an adjunct to my weekend 'Index Trader' column, an online (only) section at the Option Investor.com web site.

I wrote in my weekend Index Trader ("What Market?") that the Nasdaq and NYSE Markets as represented by the Nasdaq Composite (COMP) and S&P 500 (SPX) respectively, were diverging more than usual. Both markets have been having some trouble gaining upside traction, but it's especially true of the Nasdaq. If you took out the oil, gold and other commodity related (e.g., ADM) stocks out of the S&P Index, it would look to be struggling too.

In my Wednesday Trader's Corner articles I typically also work in a technical midweek update to my weekend Index Trader. Especially so when I can demonstrate the relevant technical/trader tools discussed here. My most recent Index Trader can be seen by clicking here.

NASDAQ AND S&P TRENDS ON CURRENT LONG-TERM CHARTS:
The long-term up trendline on the Nasdaq has been decisively pierced or 'broken' with the decline of recent weeks, as seen on the weekly COMP chart below. The broken up trendline is an internal/best fit trendline, showing the angular ascending trend; trendlines show the percentage rate of price increase or decrease over time, without putting a (percentage) number on it.

When internal dynamics (fundamentals) change, the angle becomes less steep and price momentum slows. Traders have discovered that momentum or trend changes keep going until a new equilibrium or trendline is established.

The SECOND OBJECTIVE RULE FOR TREND CHANGES has nothing to do with trendlines. A major uptrend shifts from up to down when the last major (downswing) low is exceeded. Charles Dow would say that only the Close matters.

I look at breaks of both the prior Close and the Low above. The key prior weekly Close is 2065. A Friday close under 2065 in COMP could be the confirmation so to speak of a shift in the major Nasdaq trend from up to down. A further fall below 2025 would be a second confirming event.

There is another consideration in the Nasdaq weekly chart above. The 8-week RSI is showing an 'oversold' extreme, suggesting that a second down leg would more likely come, if it comes at all, after an oversold type rebound; e.g., back up to 2200, maybe even 2300. 'Oversold' or 'overbought' are secondary technical indicators, but worth paying attention to for possible short-term upside reversals back above up trendlines on the DAILY charts.

THE S&P AND OTHER KEY INDEXES LONG-TERM TRENDLINES:
The S&P 500 (SPX) had fallen under both its long-term internal and external up trendlines. The recent rebound brought recent weekly highs right up to the trendline at the red arrow as seen in the weekly SPX chart below. Prior support and prior support TRENDLINES, once broken, often defines resistance later on (resistance also often 'becomes' later support).

1245 is key must hold support on a weekly CLOSING basis for SPX. There has been so far one weekly close at this level, but prices rebounded in the following week.

The Dow Industrials (INDU) seems to be trying to hold above it's dominant long-term up trendline and recent dips under the support trendline have been followed by rallies.

A weekly INDU Close below 10,950 would be under its up trendline and suggest that this narrow selection of blue chip stocks was now also losing upside momentum:

AH-OH! NAS 100 IS SLIPPING BOTH WAYS.
While the week is not over for the Nasdaq 100 (NDX), the midweek trend here is not looking good. BOTH my 'objective' criteria for a trend REVERSAL from up to down: 1.) a break of the long-term up trendline and a 2.) Weekly CLOSE (stay tuned for that on Friday!) under not only the prior weekly Closing low at 1544 but under the prior line of weekly lows per the level line on the chart below.

If we get further weakness into the end of this week, could this be 'confirming' a bear market ahead, at least in Tech? Maybe so, although it's not completely accurate to say that Nasdaq equals just technology stocks.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT:
I'd like to point to the bottom of the next chart, this one is DAILY and of the S&P 100 (OEX). Those of you who follow my Index commentaries will note that I've been saying for some time that the only thing I HAVE NOT been seeing that I tend to see at tradable bottoms is a build up in bearishness.

Finally, the earnings to date for Q2, the many earnings 'warnings', slowing housing, relentless rise in oil prices, the threat of more rate hikes, etc. seems to have sunk in and traders have picked up their put activity considerably. And resulting in a falling ratio of CBOE daily equities call volume relative to put volumes, and resulting in the start of a bearish outlook in the extreme as seen in the lowermost of my indicators above.

Trendline breaks are EARLY warnings of 'trouble in River City' or slowing momentum. Sentiment doesn't usually LEAD momentum as much as FOLLOW momentum. Why this is the case is another story for another time. Thanks for your e-mails, but they are too FEW, meaning I would like to hear from you!

** 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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