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Daily Newsletter, Wednesday, 09/13/2006

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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

The News Didn't Get Out

Heading into the cash-market open this morning, futures had split direction, with Nasdaq futures headed higher, Russell 2000 futures almost flat, and Dow and S&P futures moderately lower. On a day light on significant economic news, company-related news stepped in as a price determinant in the pre-market session. There were several reasons for that.

Last night's Wrap addressed the after-the-close developments in Dow-component Merck (MRK), with the latest Vioxx-related research sending that stock sharply lower in post-market trading. Lehman Brothers (LEH) had beat estimates, but had headed lower in pre-market trading when the equity-trading results disappointed investors. HPQ had received more damaging news yesterday and was slipping lower in pre-market trading.

Those negative influences seemed to weigh more heavily on sentiment for Dow and SPX investors than did more positive news from Ford Motor Company (F) and British Petroleum (BP). Ultimately, however, pre-market direction had little to do with the cash market direction other than in some specific stocks such as MRK. Someone failed to issue the appropriate news releases about intended market direction to the market participants.

True to expectations, the Nasdaq zoomed up to test its 200-sma, helped along by a Google (GOOG) move above 400. However, if tech-related indices were supposed to move higher, someone failed to give that news to the investors in the SOX component stocks, and if the day was supposed to be a down one on the non-tech-related indices, someone failed to give the news to the investors in the Dow Jones Transportation Average Index's component stocks. These two indicator indices gave a heads-up that something different was happening than futures had indicated.

Heading into the mid-morning release of the crude inventories numbers, the TRAN zoomed past its early August high, reaching up to test its 72-ema, 50-sma and 200-sma, some of those important averages for the TRAN. At the release of the inventories number, it was only about 20 points below that 200-sma. It had far exceeded the upside target of the small inverse H&S it had formed September 8-12. It was looking overbought, at least on a short-term basis, but that 200-sma acted like a price magnet, and the TRAN finally touched it around noon. Unfortunately, the TRAN couldn't hold onto that average into the close, reinforcing the average's resistance rather than breaking through it.

Annotated Daily Chart of the TRAN:

Since the TRAN's rally was a long-term one, a daily close above that 19.1 percent retracement will not be as important as a weekly one would be. For today, the TRAN's historical resistance at 4452-4457 and the 200-sma held. Resistance just above that comes from the rising regression channel in which it's traded the last month.

At the same time the TRAN was moving up into this resistance zone in the morning, with this indicator index presaging the bounce in several other indices, the VIX was piercing 60-minute Keltner support, dropping below 11 and hitting a low not seen since last March. The VIX's movements proved volatile, however, with the VIX not maintaining the day's high and closing at 11.18. The VIX is almost never a good market-timing tool, but its movements certainly need to be attended so that profit-protecting plans can be put in place. If you read several newsletters, you can bet I won't be the only commentator noting the VIX's movement today. For those new to the markets, a low VIX can indicate that markets are "too bullish," a contrarian indicator for the markets. Remember that it's not a good market-timing tool, however, and that a low VIX can go lower.

The SPX also didn't quite maintain its day's high, ending the day at rather than above previous resistance just above 1318.

Annotated Daily Chart of the SPX:

As of the close, the SPX was facing significant daily Keltner resistance, at 1320.32 on daily closes. This last swing high has produced tentative bearish price/RSI divergence as the SPX faces this resistance. A further test and holding of the resistance tomorrow doesn't preclude a bounce up to test the midline of the rising regression channel, but it looks as if the SPX will soon need either sideways consolidation or a pullback.

Don't assume that will happen tomorrow, but here's a sign to watch. For about a week, many averages were either bouncing from or rebounding back from tests of their 10-minute 100/130-ema's. The SPX was one, and it finally broke above these averages Monday morning. Since then, it's been using the 10-minute 21-ema as support, bounding higher after each touch. That average was at 1316.23 as the market closed today. Before there's even the slightest change in the SPX's short-term rally mode, that average has to be breached on a 10-minute close. Remember that the average is dynamic and will move as the SPX does. Your charting system should help you keep track of it, but put up the -ema and not the -sma.

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Because tomorrow is the last day that SPX September options will trade, there may be a bit of a pin-it-to-the-numbers effect, so keep your bearish short-term intentions reined in if the SPX just trades back and forth across that 21-ema as the average flattens. If there's a true retreat, signaled first by a close beneath that average and maybe a retest that sends prices lower again, watch the sharply rising 10-minute 100/130-ema's for possible strong short-term support. As of the close, they were at 1308.29 and 1307.06, respectively, nearing the 38.2 percent retracement of this week's rally, with that at 1308.86.

The Dow also ended the day by testing daily Keltner resistance, with that resistance at 11,558.40 on a daily close. The Dow also showed possible bearish price/RSI divergence on the daily chart.

The Dow closed beneath that Keltner resistance, but it attempted a breakout on the more conventional daily chart, pulling back from its breakout attempt.

Annotated Daily Chart of the Dow:

Like the SPX, the Dow has been bouncing from its 10-minute 21-ema since Monday's breakout above the 10-minute 100/130-ema's. That 21-ema was at 11,527.35 at the close, and the Dow would need a 10-minute close beneath that to even come close to changing the short-term rally mode. Also like the SPX, the Dow has far outrun its 10-minute 100/130-ema's. Logic and history tell us that it will soon need to either trade sideways while those sharply rising averages play catch up or retreat to retest them and see if they're sound support. The 10-minute 100/130-ema's were at 11,462.66 and 11,450.76 as of the close, approaching the Dow's 38.2 percent retracement of this week's rally, at 11,474.50. I would expect at least a short-term bounce attempt if that level and those averages are hit.

Although the Nasdaq's leadership role might have suggested otherwise, it, too, tested daily Keltner resistance today, with that resistance holding at the close. That resistance was at 2,229.80 on a daily close, and it held. The same tentative price/RSI divergence was seen on the Nasdaq's daily chart. While testing this Keltner resistance, the Nasdaq was testing the other levels of resistance seen on the daily chart shown below.

Annotated Daily Chart of the Nasdaq:

Unless the Nasdaq is going to go parabolic on this daily chart and break out of its latest rising regression channel to the upside, it's approaching the time when it should pull back through the channel. Like the SPX and Dow, it has also been bouncing from its 10-minute 21-ema since breaking above its 10-minute 100/130-ema's on Monday. The 21-ema on this chart was at 2,222.02 as of the close and showing the slightest sign of flattening after a straight-up climb for several days. Don't even begin to believe the Nasdaq's short-term rally mode has begun to change as long as prices bounces from this average. A significant or several 10-minute closes beneath it are needed as a first tentative step in changing it.

Like those other indices, the Nasdaq's climb has long outstripped the support of its 10-minute 100/130-ema's, with those at 2,197.99 and 2,193.63 as of the close. They were sharply rising, with the 100-ema having just approached the 38.2 percent retracement of this week's rally, at 2,198.06. Unless the Nasdaq were to plunge straight through these ten-minute 100/130-ema's, expect at least a short-term bounce attempt from a test of them, if they're approached.

The SOX didn't fare as well as other indices, however, with this indicator index's 0.75 percent loss signaling some concern for tech bulls. The SOX needs to lead if a Nasdaq rally is to be believed, at least according to retail traders who help provide momentum for the markets.

Annotated Weekly Chart of the SOX:

The Russell 2000 did not hit daily Keltner resistance but did hit that on the 240-minute chart, often more important for the RUT. That resistance was at 730.20 on a 240-minute close. The RUT was also hitting other resistance, seen on the chart below.

Annotated Daily Chart of the Russell 2000:

As was true with many other often-watched indices, the RUT was bouncing higher from each touch of its 10-minute 21-ema, but the RUT stumbled just a bit at the end of the day, with a couple of 10-minute closes beneath that former support before the RUT bounced into the close. That tells me that the RUT may be one of the first indices to watch for a potential violation of this average and change in the short-term rally mode.

The RUT, like other indices, has far outstripped the support of its 10-minute 100/130-ema's, with those averages now at 721.96 and 720.32, respectively. Although the RUT loosely followed the same pattern, the correspondence of price action with these averages was not quite as strong, but I would still expect a RUT bounce attempt from somewhere near those averages if they are touched.

Economic reports seemed to figure little in the day's activities, with investors seemingly paying little attention to the news they offered. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey, with the headline touting the rise in applications in a holiday-shortened week. That headline referenced the seasonally adjusted week-over-week rise of 3.2 percent, however. When compared to the year-ago level, applications dropped 22.8 percent. Applications for refinancing loans increased a seasonally adjusted 0.1 percent, but dropped as a percentage of total applications, as might be expected with the average interest rate for a fixed-rate, 30-year mortgage rising. The rise was a moderate one, however, to 6.32 percent from the previous 6.31 percent.

A Marketwatch.com writer noted that the spread between a fixed-rate, 30-year mortgage and a one-year ARM is now only 36 basis points, the tightest spread in more than five years. That writer believes that the previous much-wider spread had driven many to obtain ARMs, a factor that had previously kept the housing market growing.

ARMs were to figure in another economic release by the Mortgage Bankers Association today. The MBAA reported that the number of mortgage foreclosure procedures that have begun rose 0.43 percent in the April-to-June quarter. Although that foreclosure rate was the highest in a year, it's still low by historical standards, the AP reports. The foreclosure rates proved highest among those with ARMs, sometimes borrowers considered "subprime."

Included in this release was information that the number of delinquencies or mortgage payments overdue by 30 or more days inched lower, to 4.39 percent from the previous 4.41 percent. The MBAA's chief economist expects both this delinquency rate and the rate of foreclosures to increase modestly in the next few quarters, but believes that the conditions for mortgage bankers are fundamentally sound.

Expectations for crude inventories, as reported by Jim in last night's Wrap, were for sharp declines. Jim noted that Platts predicted a drop of 1.9 million barrels; J.P. Morgan, 2.0 million barrels; and TFS, 2.7 million barrels. The decreases were sharp. The Energy Department reported that crude supplies fell more than those expected numbers, by 2.9 million barrels. Gasoline inventories rose by 100,000 barrels, while distillates climbed 4.7 million barrels. The American Petroleum Institute reported that crude supplies dropped a whopping 7.9 million barrels, gasoline inventories climbed 4.4 million barrels, and distillates rose 6 million barrels. The Energy Department and API figures frequently disagree, but this is a big disagreement.

Crude futures stabilized, producing a near-doji at the bottom of the long slide off the early August high. Crude for October delivery closed at $64.07 (daily chart, QCharts), up 0.53 percent from yesterday's close.

British Petroleum gained more than two percent today. J.P. Morgan upgraded the stock to a buy rating, citing valuation as the reason. Other news related to the company concerned BP's report that it was cleaning up a leak in California, with that leak resulting in a spill of about 1,000 barrels of refined product. The company's president also reported to lawmakers that it's near a resolution on flawed Gulf of Mexico drilling leases, working with the Department of Interior to reach that resolution. Many crude-related stocks bounced along with crude, however, with the OIX gaining 1.42 percent and the XOI, 1.40 percent.

Airlines reported that they spent 29 percent more per gallon for fuel in July than they had in July, 2005. Fewer flights resulted in less fuel used, however. Overall, the carriers spent 5.1 percent less than they had in the previous July. The XAL, the Airline Index, gained 0.67 percent.

Shortly after the crude inventories were reported, U.S. Treasury Secretary Henry Paulson addressed the Senate Banking Committee and, through his comments, the international economy. The dollar consolidated in the early morning ahead of that speech and did so as the speech began, too. Many wanted to see what Paulson would say about China's exchange rate flexibility, and he did speak about the subject, but markets appeared little affected as his points about monetary policy began to appear in print. He believes that China's inflexibility with the yuan hinders its domestic economy and that reform is needed. None of that is startling news or anything different that prior administration policy.

Paulson does believe there could be a backlash if China moves too slowly to reform its economy, with that backlash coming from other large economies. While he proposes that we should seek creative solutions to help U.S. workers whose jobs are lost due to Chinese competition, he posits the theory that, on the whole, U.S. workers, businesses and the global economy benefit from a strong Chinese economy.

These remarks accompany Paulson's first major address and come ahead of his trip to the semi-annual G-7 conference and also to China next week. The dollar spent the day consolidating at recent highs.

The last economic release of the day was August's Treasury budget. Unless there's a big surprise, this number does not typically move markets since most of the information is predictable and there are big seasonal variations. Expectations had been for a deficit of 67.0 billion after the prior $51.3 billion deficit. The actual deficit was reported at $64.6 billion, less than had been expected. That did seem to prompt a breakout from the indices' latest consolidation patterns, but candles proved small and the breakouts less enthusiastic than previous ones over the last few days. Bearish price/RSI divergences remained pronounced on short-term intraday charts. Post 2:00 breakouts were not fully maintained, with most indices flailing around after those breakouts. At least for the afternoon, buyers appeared to be suffering a little fatigue.

Continuing on the theme that Goldman Sachs introduced yesterday, Lehman Brothers' (LEH) produced a strong earnings report this morning. The company beat expectations of $1.50 a share earnings on revenue of $4.01 billion, instead reporting $1.57 a share and revenue of $4.18 billion. However, LEH's stock had traded sharply higher Tuesday and saw a bit of a sell-the-fact weakness in pre-market trading after the report. The pre-market action may also have been pinned on disappointments in the company's equity-trading results. Someone didn't get the news out that there was supposed to be that sell-the-fact effect today, however, because LEH gained during the cash market action, posting a 2.99 percent gain for the day.

In other company-related news, the Wall Street Journal featured a report on Ford Motor Co. (F). The reported noted that F intends for its reformulated restructuring plan to slice a third of its white-collar costs. F gained 1.43 percent.

Economic reports for tomorrow include jobless claims for the week ending September 9, with claims expected to climb to 315,000 from the prior 310,000. At the same 8:30 time period, August's import/export prices and MARTS August retail sales will be reported. The import/export prices are expected to rise 0.4 percent after the prior 0.9-percent gain. Retail sales are expected to gain 0.3 percent after the prior 1.4-percent climb. Business inventories for July will be reported at 10:00, and are expected to rise 0.6 percent, with the prior gain at 0.8 percent. Natural gas inventories come last at 10:30.

After-hours developments included Xilinx (XLNX) reporting that it would trim its sales forecast for the second quarter because Asia-Pacific sales had disappointed. Sales for that quarter are now expected to decline 4-7 percent from the first quarter's. The previous range had been flat to down 5 percent. XLNX is a semiconductor-component maker. Business Objects (BOBJ) also was trading heavily in after-hours trading, rising after it said it would acquire Armstrong Laing Ltd., a privately held company.

Earnings tomorrow include those from ADBE, BSC and PIR, but prove rather light. Much of the day will be concerned with positioning ahead of Friday's important CPI number and the usual option-expiration shenanigans.

Many indices have been using the 10-minute 100/130-ema's for support or resistance over the last week, with those averages last tested on Monday. The indices have risen far above this support and will soon need to either retrace down to them or trend sideways/sideways-down while the averages play catch up. Meanwhile, many indices are using the 10-minute 21-ema as short-term support on their breakouts, so a strong or several-10-minute period violate of those 10-minute 21-ema's is needed before this short-term rally mode even begins to change. Watch those averages for clues.

After several days of strong gains and ahead of option expiration and Friday's CPI, a consolidation day would be the typical expected fare. If you're in bullish plays, know whether you want to weather that CPI release Friday morning, depending on whether you have enough cushion that you can sleep well Thursday night. Know how to protect your profit and institute the measures needed to do so. For others, tomorrow may be a wait-and-see day, a day that's would provide a good time to test out the newest indicator or charting system that you've needed time to test.

What about bears who want to test the waters as the SPX approaches a retest of the May high and as other indices test key levels? All the signs are there--parabolic rises, outrunning of short-term 100/130-ema's, volatility measures--that markets have outrun support on a short-term basis and need to consolidate gains if not do some retracing.

The VIX's plunge lower today and rebound off that low certainly could even be argued as potential evidence in favor of a retracement that's more important than a short-term one, too, but it's potential evidence only and somewhat undermined by option-expiration-related activity and the VIX's unreliability as a precise market-timing tool. On March 14, the VIX dipped .01 below today's 10.54 low as the SPX zoomed up to test a previously reached high. The SPX climbed for two more days, consolidated in a sideways-sideways down movement, dipped for a week, and then zoomed up to its May high. Bears barely had an opportunity to get out even before that new high, and that's only if they held on until mid-April and had perfect timing.

This may be one of those times when bears caught in losing plays claim that the Plunge Protection Team is active in the markets or that continued gains day after day are insane, and all or none of that may be true, but what is true is that a rally continues until it stops. Certainly the congruence of so many indices first breaking through their 10-minute 100/130-ema's on Monday, and since then bouncing strongly from each touch of the 10-minute 21-ema smacks of program or institutional or maybe even PPT buying.

However, those congruent bounces show us that someone with big money is bouncing these markets. Those bounces from those averages prove to us that this short-term rally hasn't yet produced evidence that it has stopped. If you're in short-term trades ahead of option expiration, let those averages well documented above be your first guide, but be alert to the possibility that this week's impending option expiration and the action that might precede Friday's CPI might lead to some disorganization. A break below those 10-minute 21-ema's may be followed by action that chops back and forth across them as if they're no longer relevant, rather than the expected or hoped-for (by bears) drop to the 10-minute 100/130-ema's.

So, be forewarned that something important may be happening with the VIX and with the narrowing of the SPX's price pattern as it climbs, and with the potential bearish price/RSI divergence on the daily chart, but don't count too heavily on that something important being an immediate turnaround.

Whether in bullish or bearish positions, we're all being warned that we should take small losses and get out if our first suppositions prove to be wrong. Watch those short-term averages first, and perhaps watch them particularly on the RUT and the TRAN, two indices that helped move others higher today.
 


New Plays

New Option Plays

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

New Calls

Mettler Toledo - MTD - close: 63.66 chg: +1.42 stop: 59.99

Company Description:
METTLER TOLEDO is a leading global supplier of precision instruments and services. The Company is the world's largest manufacturer and marketer of weighing instruments for use in laboratory, industrial and food retailing applications. The Company also holds top-three market positions in several related analytical instruments and is a leading provider of automated chemistry systems used in drug and chemical compound discovery and development. In addition, the Company is the world's largest manufacturer and marketer of metal detection and other end-of-line inspection systems used in production and packaging and holds a leading position in certain process analytics applications. (source: company press release or website)

Why We Like It:
The recent market strength has been strong enough to fuel a bullish breakout in shares of MTD. The stock has been consolidating mostly sideways the past three months and the consolidation took the form of an inverse (bullish) head-and-shoulders pattern. MTD's breakout over resistance near $62.00 and the $62.50 level has produced a new MACD buy signal. The weekly chart's MACD is also nearing a new buy signal. The Point & Figure chart has produced a triple-top breakout buy signal with a $72 target. We are suggesting call positions with MTD above $62.00. Traders have a choice to open positions now or wait for a possible pull back toward the $62.00-62.50 level, which should now act as support. Our target is the $68.00-69.00 range. Please note that we normally try to avoid playing stocks with average volume this low so traders may want to consider this a higher-risk play. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the October calls. You, the individual trader, should decide which month and strike price best suits your trading style and risk.

BUY CALL OCT 60.00 MTD-JL open interest= 13 current ask $5.20
BUY CALL OCT 65.00 MTD-JM open interest= 40 current ask $1.55

Picked on September 13 at $ 63.66
Change since picked: + 0.00
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 43.92 chg: -0.46 stop: 39.95

The rally in semiconductors paused on Wednesday. The SOX slipped 0.7% following two days of solid gains. Shares of CYMI slipped about 1% as the stock struggled to breakout over technical resistance at the 100-dma. The stock continues to look bullish following the breakout over resistance near $42.50 and traders might want to wait for a dip back toward $42.50-43.00 as a new entry point to buy calls. Our target is the $47.00-48.00 range but the next hurdle for CYMI is the 100-dma (near 44.55) and the $45.00 mark.

Picked on September 06 at $ 42.55
Change since picked: + 1.37
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

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Hartford Finc. - HIG - close: 86.80 chg: +0.51 stop: 82.99

HIG continues to rally. The stock added another 0.59% following yesterday's breakout over resistance near $86.00. Our only concern today was the lack of volume, which came in below average. We remain bullish and don't see any changes from our new play description from Tuesday. Our target is the $91.50-92.00 range, near its May highs. However, we do expect some resistance in the $89-90 region. We do not want to hold over the early November earnings report.

Picked on September 12 at $ 86.29
Change since picked: + 0.51
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million

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Manpower - MAN - close: 62.38 chg: +2.10 stop: 57.99 *new*

Our new play in MAN is off to a strong start. Shares vaulted higher following yesterday's bullish breakout. The stock added 3.48% on rising volume and is currently challenging potential resistance at its 100-dma. If you didn't get a position filled this morning you might want to wait for a pull back into the $60-61 region before opening new positions. We're raising the stop loss to $57.99. The P&F chart has produced a new buy signal (bearish signal reversed) and points to a $77 target. Our target is the $65.00-66.00 range.

Picked on September 12 at $ 60.28
Change since picked: + 2.10
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand

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Omnicom - OMC - close: 93.44 chg: +1.20 stop: 88.84 *new*

The rally in OMC just marked its sixth gain in a row. Today's session saw OMC rise to $94.24 before paring its gains. Volume on the session was very strong and we can't see any specific news to account for the rise in volume. Shares continue to look short-term overbought so we're not suggesting new positions at this time. Our target is the $96.00-96.50 range. The Point & Figure chart for OMC is very optimistic with a $131 target. Please note that we're raising the stop loss to $88.84.

Picked on September 10 at $ 90.97
Change since picked: + 2.47
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

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United Ind. - UIC - close: 53.55 change: +0.76 stop: 49.99

There is really no change from our previous update on UIC. The profit taking might be over as shares continue to bounce from Monday's low. Short-term technical indicators are improving. Traders looking for a new entry point might want to jump in here but we'd suggest a higher stop loss. The stock has already hit our primary target in the $54.75-55.00 range. Our secondary target is the $57.50 level.

Picked on August 27 at $ 51.77
Change since picked: + 1.78
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand
 

Put Updates

EOG Resources - EOG - close: 60.78 chg: +0.96 stop: 65.31

After seven days of losses for crude oil futures the commodity finally produced an oversold bounce. This fueled some short covering and bargain buying in the oil and oil service stocks. Shares of EOG added 1.6%. We have been warning readers to expect a rebound toward the 10-dma, which is currently near $63. We're not suggesting new positions at this time. Our target is the $57.50-55.00 range.

Picked on September 06 at $ 63.85
Change since picked: - 3.07
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

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Express Scripts - ESRX - close: 83.50 chg: -0.81 stop: 82.51

There is no change from our previous updates on ESRX. On Sunday we added ESRX as a put candidate because the stock looked poised to breakdown from its five-week trading range and slide under support near $80.00. Now, with a positive market, the stock has rallied toward the top of its trading range near $85.00. Nimble traders may want to consider switching directions and buying calls if ESRX can breakout over the $85 level. If a breakout higher occurs we'd aim for the $90 region. Currently our suggested trigger to buy puts is at $79.85.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Fluor - FLR - close: 81.08 change: +1.12 stop: 86.01

FLR finally produced an oversold bounce near the $80 level but the early strength failed near $82.50 and its exponential 200-dma. This sort of failed rally might be used as a new entry point but more conservative traders may feel better waiting for another decline under the $80.00 mark. Our target is the $75.50-75.00 range.

Picked on September 10 at $ 81.74
Change since picked: - 0.66
Earnings Date 11/06/06 (unconfirmed)
Average Daily Volume = 863 thousand

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Johnson Controls - JCI - close: 72.91 chg: +0.98 stop: 74.16

The oversold bounce in JCI continues. The stock added another 1.3% and the two-day rally has turned short-term momentum indicators higher. So far the stock remains in a bearish pattern of lower highs but the question is where will this current rally fail? JCI appears to have some resistance near $74, which is why we put our stop loss is at $74.16. There is stronger technical resistance at the 50-dma and 200-dma but these moving averages are near $76. We're not suggesting new positions and more conservative traders might want to think about cutting their losses early.

Picked on August 22 at $ 72.96
Change since picked: - 0.05
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Radian Group - RDN - close: 60.90 chg: +0.49 stop: 61.16

Double check your stop loss placement. The oversold bounce in RDN continued for another day and the stock is challenging short-term resistance near $61.00. Odds are good that if the markets are positive tomorrow then RDN will follow suit and hit our stop loss at $61.16. We're not suggesting new positions at this time.

Picked on September 06 at $ 58.99
Change since picked: + 1.91
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 722 thousand
 

Strangle Updates

None
 

Dropped Calls

Las Vegas Sands - LVS - close: 68.81 chg: -3.33 stop: 67.95

Abandon ship! Abort mission! Reverse course! There was no follow through on yesterday's bullish surge higher in LVS. A dip back toward $70.00 and a bounce would have been okay but LVS only spiked higher at the open and then plunged. We do not see any news to explain the relative weakness on Wednesday. The only thing we could find was a bearish breakdown in rival WYNN, which slid through the bottom of its recent trading range on big volume. Part of trading is knowing when to exit and today's move in LVS is not just a decline but a bearish engulfing candlestick pattern (a.k.a. bearish reversal). Yes, there is a chance that the stock might bounce near $68.25-68.00 but we're not willing to risk it.

Picked on September 12 at $ 72.14
Change since picked: - 3.33
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million
 

Dropped Puts

Boeing - BA - close: 76.32 change: +2.06 stop: 76.26

We have been stopped out of BA at $76.26. The company issued some positive comments about air cargo traffic and investors responded with a 2.77% rally and a breakout over one of its descending trendline of resistance (lower highs) and minor resistance near $76.00. What the company said was that air cargo traffic would rise over 6% annually for the next couple of decades. Bulls still have some hurdles on BA's chart with the 50-dma and 200-dma still overhead.

Picked on August 10 at $ 75.75
Change since picked: + 0.57
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Burlington NorSantaFe - BNI - cls: 70.56 chg: +2.72 stop: 66.75

We are dropping BNI as a bearish candidate. It was our suggested strategy to buy puts on a breakdown under support near $64.00 with a trigger at $63.74. This never occurred. Instead the transports and the railroad stocks have reversed higher. The bullish breakout over $68.00, the 50-dma, and now the $70.00 level is pretty positive for BNI. Rising volume on the breakout is also a bullish signal.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.8 million
 

Dropped Strangles

None
 


Trader's Corner

Patterns and Pivots

I received a follow up note from one of our Subscribers, for whom I answered on some trading topics that included the two-part column I did last Wednesday and the Wednesday before that on Point & Figure charting and which read:

"Thanks for addressing some of my question! The "Trading Day" question was asking for your experience/recommendation as to opening hour, intra day and final hour issues/strategies. A number of trading strategies/systems suggest various ways to enter and exit short term trading. Curious as to your thoughts. A related topic is the use of pivot points in trading."

TIME OF DAY:
I don't have a lot to say on opening hour, intraday and final hour issues. There are trading 'systems' and methods that will buy or short breakouts below the opening hour price range and/or have various other time-of-day considerations or inputs. The Open and Closing price of any session was considered so important to the creators of Japanese Candle charts that they considered highs and lows outside the Open and Close as 'shadow' type movement of relatively minor importance in determining the trend or suggesting upcoming trend reversals.

Obviously, the Open is important and if the trend continues strong past it, that's usually indicative of a strong trend. If the trend continues strong into and through the final hour, this is also suggesting a strong trend. A Close near the High or near the Low is telling for the trend. In a strong trend, there can be days where the Close is near the High in an uptrend or near the Low in a downtrend. A reversal in that pattern often represents just that, a trend reversal.

If upside or downside momentum fades in the last hour, such as on profit taking, this is pretty normal, but if there is strong buying or selling this may be part of the 30 percent of the time that the market is strongly trending. The most frequent intraday change in the trend in the indexes I found to be around 1 pm Eastern.

PIVOT POINTS:
Pivot points as a topic is just not a defined or well-defined topic in technical analysis. If you go searching through the books on the subject, including my own "Essential Technical Analysis", or "Technical Analysis From A to Z", etc. there is no definition of the term. This is not to say that it's a meaningless term. I've heard of a 'pivot point' trading method or system but don't have the details. Anyone who has any references on the subject, send them to me. I'm interested.

Mostly the term 'pivot' point can be and often is pretty subjective. I use the term 'pivotal' support or resistance to mean a price point that if pierced, would be significant for the trend; e.g., suggesting a possible reversal of the trend or acceleration of the existing trend.

MY INDEX TRADER COLUMN:
I wrote on the subject of the 'nominal' nature of last week's pullback in my most recent Index Trader column with the suggestion of still good upside potential. I write the Index Trader on the weekend, most often on Saturday. The section with these articles is seen ONLY on the Option Investor web site.

The weekend Option Investor Daily (e-mail) newsletter that got sent to you Saturday (9/9), didn't have the usual web LINK to this article, but my article was up and online on Sunday (9/10). It was only necessary to check the Index Trader section of the Option Investor.com web site the next day. The online Index Trader section and access to my most recent Index Trader article can be reached online by clicking here.

POINT & FIGURE (P&F) CHARTING:
The recent trend has been a beautiful trading opportunity, without bullish extremes in sentiment, coming up out of a bullish Head & Shoulder's bottom, which I'll write about in a moment and with an S&P breakout to new highs that was apparent on a Point & Figure chart. I noticed this especially as I wrote my last two Trader's Corner columns (check your 8/30 and 9/6 Option Investor Daily market e-mails or go to the OI web site) on constructing P&F charts and which OIN's Jeff Bailey uses most frequently.

Back on 8/30 the OEX bar chart was showing the pattern below, which looked like it could be a double top:


The '1X3' Point & Figure chart however on the same date (8/30) was suggesting the beginnings of an upside breakout and a possible new up leg:


Today (9/13) this same P&F chart looks like this:


THE HEAD & SHOULDER'S PATTERN:
The Head and Shoulder's pattern, usually written in shorthand as 'H&S', can be a top OR bottom pattern. The bottom pattern is sometimes called an 'inverse' Head and Shoulder's due to the association with this pattern most often being a top.

As I describe in my book, Dr. Andrew Lo and colleagues at MIT in an extensive statistical evaluation of the trend outcome AFTER the formation of a number of chart patterns, found that the Head and Shoulder's was one of the few (5) had a predictive outcome that was well above chance.

You don't see this pattern all that often; when I see it, I want to maximize my trading based on the probability of a strong trend. An H&S bottom formed in the S&P indices over May-July and the outlines of the pattern are drawn on the next chart:

One other study (Bulkowski: "Encyclopedia of Chart Patterns") found that 93% of the H&S Top formations surveyed broke out to the downside (i.e., penetrated the neckline) once they had formed. The reliability of the Head & Shoulder's BOTTOM pattern wasn't as high at 83%, but I'll take those odds anytime.

The average RISE once there was an upside breakout of the neckline, such as seen below, was 38%, with the most likely gain between 20 and 30 percent. He found moreover, that since this pattern was so reliable, it was NOT necessary to WAIT for a breakout above the neckline. Rather, when the 3rd. bottom formed (noted as the 'RS' or Right Shoulder) below and prices started rising from this low, this was an optimal time to buy. I bought some OEX calls at that point, more on the 'confirming' breakout above the neckline.

Predictably, with the breakout to a new high for the current move seen today, call volume jumped and puts receded, resulting in a jump in my CBOE Equities Call to Put ratio; i.e., a jump reflecting an increasing bullish outlook, but not yet at an extreme. This is fairly typical of index 'legs' or trends that are of above average strength and duration; that is, bullishness (or bearishness) rises more slowly. This is part of the dynamic that keeps the fewest people making the most money! Did I tell you my word on buying 'breakouts': foolish! (in index options)...unless you like paying inflated premiums!!

In my opinion the only 'safe' time to buy calls with the chart pattern shown above was at the bottom, but how did could we know it was final? We could assume it was and place an exiting stop just under the low. But, the soundest 'safe' purchase was after the next higher bottom formed, as it set up the reliable H&S bottom formation. And, a 'minimum' objective could be measured to 612. This target might not be hit, but there was good reason, technically at least, to figure that there was going to be an advance to at least re-test the prior high.

MOVING AVERAGES
There are other indicators that could have gotten us into the S&P 100 (OEX) or Nasdaq 100 (NDX) calls and the following moving average pairs continue to work well when solid trends develop; i.e., as moving average 'crossover' pairs. The problem with using moving averages alone, certainly as a 'mechanical' system, is the 'whipsaw' effect of multiple upside and downside crossovers occurring when the market goes into a non-trending period. This is common.

But using certain moving average crossover pairs, especially ones like the following found as a result of 'optimization' studies, in CONJUNCTION with price pattern analysis/study (always, the #1 consideration) can be quite useful.



Good Trading Success!

** E-MAIL QUESTIONS/COMMENTS **
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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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