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Daily Newsletter, Thursday, 09/14/2006

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Table of Contents

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

Market Wrap

Just Another Opex Push

It's becoming a signature now. When the Boyz decide to push the market higher they do it the same way. The mega banks' trading teams, with the support of some powerful institutions, have mega amounts of money to move the market wherever they'd like. So when we get close to opex it's becoming more and more apparent that they move the market swiftly so as to make a mint off the move. They can buy cheap front-month options and watch them inflate 10x easily. They sell deep in-the-money options and then buy them back cheaper or push the market high enough so that they expire worthless. It doesn't take a rocket scientist to see how they're able to make so much money now "risk free".

A very sharp reader (thanks for the link Joe) sent me a copy of some research he had done that is quite an eye-opener. He shows how the Fed, SEC, major banks and others are involved in nothing less than a fraudulent scheme that makes a very few players huge sums of money at the expense of the smaller traders, all in the name of providing stability to the market. A free market we no longer have. Here's a link to his article on Silicon Investor--I highly recommend it: http://tinyurl.com/enk4u.

You'll see the footprint of these people manipulating the market--they drive it higher (in this case), let it consolidate a little sideways with barely a pullback, drive it higher, rest, and continue. Look at the rally in August during opex week. Same pattern. They don't sell the market off very often but when they do it's the same pattern in reverse. So when you see this develop, especially during opex, join them and trade in the direction of the push. As long as each "rest" is more sideways than anything else, hang on for the ride.

We had a nice bullish week, especially in the brokers index and transports, both of which I'll show charts later. But the larger pattern remains bearish and the push higher this week actually looks to have finished off some of these bearish patterns. If this is true then the market will have a hangover next week. But before moving to the charts, we had several economic reports today that we'll look at.

The unemployment numbers showed a drop of 5K to 308K, bringing the level of new claims down to where it was in July. Interestingly many economists are now thinking that the low unemployment numbers as a sign that the economy is not slowing down much and that that will mean the Fed will have to get back on its rate-increasing campaign. One can only imagine the shock and horror in the stock market if that happens.

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The 4-week average of initial claims fell 1,500 to 314,250. Continuing claims rose 18K to 2.50M while the 4-week average fell by 500 to 2.485M. The relatively high levels of continuing claims reflects the difficulty workers are having finding jobs while the relatively low number of initial claims says there aren't as many people losing their jobs. So companies aren't letting people go but they're not hiring either. This creates somewhat of a stagnant condition for the unemployed.

Retail sales numbers were released and showed a rise of 0.2% in August. Auto sales helped prop the numbers higher (but as the inventory numbers show, not enough). Lower gasoline prices reduced the retail sales number. The increase in auto sales doesn't square with the report from the auto makers who have been reporting a drop in sales (-6.3%). There will probably be a revision in the retail sales number next month, as in oops, silly us, we forgot to include some big negative number (but shhh, don't let anyone know now that it doesn't look good). Sales excluding autos were up 0.2%. Retail sales for the past year are up 6.7% and obviously the continued spending by consumers is important to our economy.

But retail spending on durable goods was not so good. Furniture sales were down 0.3% and this of course is no surprise considering the slowdown in the housing market. Other than that the numbers reflected a mixed bag across the various sectors and doesn't indicate a big move one way or the other. The market doesn't react to these numbers because they're already priced in in other reports. But economists use them to fill out their forms to help them get an idea about GDP growth.

U.S. import prices were up 0.8% in August. Imported petroleum prices were up 2.3% in August (that should see a big correction in September) while up 25.9% just in the past 5 months. Excluding petroleum products import prices were still up 0.5%, the biggest increase since May. Import prices have risen at least 0.8% in 4 of the 5 past months and adds to the inflation concerns of the Fed. They were up a revised 1.0% in July (previously reported up 0.9%). Imported food rose 2.5% which is the largest increase since March 2005. Prices for all imported goods are up 6.6% in the past year. Export prices were up 0.4% for August and up 5.2% for the past year. If US companies start raising prices to match the rise in import prices you can bet your bottom dollar that the Fed will raise rates again. Want to see the market throw a little hissy fit? Watch what happens when the Fed starts strongly hinting that the data supports another rate increase. Worse if the Fed surprises the market next week with a rate increase.

Business inventories stayed in line with sales in July, keeping the inventory inventory-to-sales ratio the same at 1.26. A record low of 1.25 was in May. Both sales and inventories increased 0.6%. Businesses are doing a good job at keeping a tight lid on inventory builds and interestingly this is often a result of concern about the future economy. So business leaders are carefully monitoring their builds. Tight inventories are watched carefully by the Fed since it could lead to tight supplies and in turn drive up prices (inflation concern).

The auto industry saw inventories increase even while trying to move cars out of the showrooms. The manufacturing sector saw flat sales while inventories climbed 0.6% which caused their inventory-to-sales ratio to climb from 1.16 to 1.17, still very tight.

Let's move to the charts and see what this week's rally has done to them since last Thursday.

DOW chart, Daily

The bearish ascending wedge (my interpretation) broke last week but that was a head fake (nicely engineered by the Boyz who wanted to suck in some bears for their ramp higher this week). But price is still finding resistance at the top of the wedge and the bearish divergences are growing. By stepping a little higher the DOW has come very close to a Fib projection at 11583 (2nd leg up from July equals 162% of the 1st leg up from June). I'm liking the bearish setup more and more. The caution I have here is that the move up might need a slight pullback for a couple of days and then a final minor new high. If we get that then I'll be all over it looking for a short entry. In the meantime, it's looking like another throw-over and a drop back down from here would be sell signal #1.

SPX chart, Daily

SPX is also back to the top of its ascending wedge, with more negative divergences. Like the DOW this may give us a small pullback and then a final high. A retest of the May high could set up a double-top failure. I don't like the fact that so many bears are looking for that failure since it would be easy to run the stops above there but sometimes the obvious setup is the one. If we do see a push higher, we're back to the same upside targets I had mentioned back in May--SPX 1345.

Nasdaq chart, Daily

The COMP has run right into the middle of the resistance zone of 2200-2240. This is where we have a 50%-62% retracement of the April-July decline, the 200-dma and the broken uptrend line from August 2004. Along with the DOW and SPX, I like the setup here for a short play.

The chart for the QQQQ looks very similar. It tagged its 200-dma today at 40.08. $40 is a strong resistance level for opex as well. $40.18 is a 62% retracement of the April-July decline. So I would expect at least a pullback from here. Or worse we could be ready for the next big leg down.

SMH index, Daily chart

The semis got a boost this week although they didn't participate in yesterday's or today's rally attempt. That could be our heads up that not all is well with the rally. The higher beta stocks are usually a good indicator for the appetite for risky stocks. In a bullish environment they will give you the most bang for the buck. But in a bearish environment you can lose a lot of money in these stocks quickly. Remember the dot.com bust? I know, long time ago. Clean the cobwebs out since we're due for repeat performance in other sectors and commodities.

BIX banking index, Daily chart

The banks got a nice bullish bounce this week and in so doing have muddied the waters a little. The larger pattern here is a mess and I can't quite figure out if this is a bullish continuation triangle or something very bearish setting up. If this breaks out to the north that could be a big impetus behind seeing SPX make a run for 1345. This bears close watching here. But not unusual the brokers are giving the opposite impression.

Securities broker index, Daily chart

The rally this week looks downright bullish but I'm betting bearishly here. In fact Jeff Bailey and I have a little wager as to who will be right on this one. He and I are, what you would say, making a market. I'm willing to sell him all that I own in this sector (which I don't so I'll have to short sell it) while he's looking for a dip to 210 to buy. Jeff's a great analyst so I don't discount his opinion lightly but the reason I'm bearish is due to the pattern of the bounce from June. It has formed a bearish ascending wedge (common pattern in the market these days and that in itself could be telling us something). These wedges have a total of 5 waves--labeled a-b-c-d-e on the chart. Each of those 5 waves is a 3-wave move (or something more complex but still corrective) and this is what identifies them as corrective patterns. In other words, if something bullish were happening here I should see more impulsive 5-wave moves inside this wedge. I do not see them. This tells me it's a bearish pattern and not a bullish one. Today's price action gave it a little throw-over above the wedge and we should see a drop back down inside it, perhaps tomorrow. That would be sell signal #1 and I'd take it. Then we'll just have to wait and see what happens if and when it gets back down to 210.

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

The sideways/up consolidation fits the wave pattern here (4th wave correction) so I don't see anything yet to change my opinion of what's coming next. Once this correction is finished, which should stay below 700, we'll get another leg to new lows. The collapse of the housing market has been discussed at length by me in the past year. It will have significant negative ramifications that the stock market hasn't considered. Once people figure it out the stock market will follow right behind. Here's another chart I found that shows the relationship between the housing index and consumer spending (PCE is personal consumer expenditures).

Housing Index vs Consumer Spending chart, courtesy contraryinvestor.com

Note the very close correlation between housing and consumer spending. I've shown charts in the past showing the close correlation between consumer spending and the stock market so what this chart is showing us is that consumer spending is about to go on freeze and obviously that won't be good for our economy. That in turn will cause the stock market to follow. The chart I showed two weeks ago of the housing market and the S&P 500 (lagged 12 months) shows us right on the edge of the cliff, ready for an Acapulco swan dive. All these tie together nicely and leave little doubt in my mind as to what's next for our market.

Oil chart, October contract, Daily

Bombs away! When commodities move they tend to move big. All that speculation that drove oil higher is leaving in a hurry. Iran is quiet (maybe not for long but for now it is), hurricane season is quiet, demand is down and the press is hyping new discoveries. All the betting on $100 oil by the end of the year vanished in a hurry. What you see is the result. We're way overdue a bounce but the pattern now suggests we'll only get a sideways/up bounce before continuing lower.

Oil Index chart, Daily

The oil index sliced right through its 50-dma and then tried to bounce up and give it a kiss goodbye. It's looking like the same thing might be happening at the 200-dma. There's a possibility we'll see this turn right back up as happened in June after undercutting the 200-dma but I don't think so. The decline from April was very choppy and I fully expected a continuation higher after that pullback. This one is different--we have an impulsive decline and that says a top has been put in. It means short the bounces. I'd be surprised if this bounced over 600 before continuing lower again but we are due for some consolidation.

Transportation Index chart, TRAN, Daily

The Trannies were beneficiaries of the opex push this week but today saw a pullback from its 50-dma. It's possible the 3-wave bounce from the August low is complete and we'll get a resumption of the decline. But the oscillators support a continuation higher so it's a tough call for the short term here. Longer term this should continue to new lows once the current consolidation is finished.

U.S. Dollar chart, Daily

The choppy sideways/up bounce in the US dollar since early August does not look bullish. I expect the dollar to turn back down and head for $83.

Gold chart, December contract, Daily

Gold broke down from the triangle we've been watching for several weeks and it happened a little sooner than I thought it would. But the downside resolution doesn't surprise me so now it's a matter of determining where support might be found. It has dropped to the bottom of a parallel down-channel for price action since the July high. If it continues to drop hard through the 580 level then I'll know that we're only in the middle of a sharp drop that will look like the drop in oil. Bounces will probably be flat and corrective so I don't see a reason to try to buy this. Shorting the bounces makes more sense for now.

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

We will have a couple of big reports tomorrow morning that have the potential to move the market. The CPI numbers could spook the market depending on how it thinks the Fed will react to them. We know the Fed is targeting 1-2% annually and therefore anything more than 0.2% will have the Fed boxed in a corner and needing to raise rates further. We've even been getting some jawboning by some of the Feds who have been warning us this could happen. The rally this week says the market doesn't believe that. Or more likely, if the mega banks got wind of the data, which I'm convinced they do, then driving the market higher this week provides more of a cushion for a sell off--all in the name of market stability you know (cough). Capacity utilization falls in the same category for the Fed--too little capacity causes inflation worries.

The other number can certainly move the market as well, especially if they come in significantly different than expected. Going back to the chart of the housing index vs. consumer spending, a turn down in consumer sentiment will mean a consumer who is less likely to go out and spend. The drop in the housing market will very likely be followed by a drop in consumer spending and a coincident drop in sentiment. Therefore a drop in the number tomorrow could have a negative impact on the market.

One last chart tonight is the weekly update to the SPX weekly chart showing progress towards how I think the market will play out this fall and next year.

SPX chart, Weekly, More Immediately Bearish

There's not much of a change from a weekly perspective. Weekly stochastics is overbought and MACD and RSI continue to negatively diverge with price. There are some strong forces holding the market up and it's one of those irrational times--the market can remain irrational far longer than you can remain solvent fighting it. But there are too many stars aligned against this market and it's just a matter of time before the selling overwhelms even the market masters holding this up. They'll then probably turn around and sell it hard in hopes of driving it down to the point where they can buy it back cheap. You'll want to follow their example. And make money to the downside in the meantime!

Just be careful shorting a market that doesn't want to tip over yet. Keep those stops tight and use good risk management. It's the only way to stay in the game. All those little losses will be wiped out in a heartbeat with a couple of good wins. But you've got to stay in the game to get those wins.

Tomorrow should see a continuation lower but it's too hard to tell from a short term perspective if this week's high was it or if we'll get one more new high, perhaps next week. By driving the market higher this month they're sucking in the bulls who are beginning to pound the table about what a great buying opportunity this is for an end-of-year run. I said it would happen and it's happening. Don't believe them. If you're long, enjoy the ride. But keep those stops chasing this higher and protect your profits. Look at the commodities, housing and all the other symbols that were propped up on fluff while the negative divergences built up. There are usually lots of warning signs but traders forget to heed them.

There's an analyst, Mike Paulenoff, who said the following, "The fact that the VIX has plunged to near historical lows during September likely is very unusual--when stock price weakness (not strength) and VIX strength (not weakness) is much more the seasonal norm. The apparent complacency and confidence exhibited by the bulls (evidenced by the plunge in the VIX), coupled with an investment environment that would appear to be priced for goldilocks perfection, could be a prescription for any measure of not-so-good news or (heaven forbid) bad news." Nuff said. Buyer beware here.

Good luck and I'll see you next Thursday or on the Market Monitor tomorrow.
 


New Plays

New Option Plays

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

Play Editor's note: The markets did not move much on Thursday as investors digested the recent gains and waited for tomorrow's important CPI data. We are choosing to wait on adding new positions until we see how investors react to Friday's economic reports.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 43.95 chg: +0.06 stop: 39.95

The rally in tech stocks paused for a second day on Thursday but the NASDAQ, the SOX and CYMI all managed to squeak out a very minor gain. CYMI is still struggling with technical resistance at its 100-dma, directly overhead. We would probably wait for a pull back toward the 10-dma before considering new bullish positions. Our target is the $47.00-48.00 range.

Picked on September 06 at $ 42.55
Change since picked: + 1.43
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Hartford Finc. - HIG - close: 85.88 chg: -0.92 stop: 82.99

After four days of gains HIG is seeing a little bit of profit taking. A bounce near $85.00 and its 200-dma can be used as a new entry point but we'd prefer to wait for another move over $86 before considering new positions. 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: - 0.41
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Manpower - MAN - close: 61.52 chg: -0.86 stop: 57.99

Shares of MAN also experienced some profit taking on Thursday following two days of strong gains. A dip to or bounce near the $60.00 level, which should now act as support, can be used as a new entry point to buy calls. Our target is the $65.00-66.00 range.

Picked on September 12 at $ 60.28
Change since picked: + 1.24
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand

---

Mettler Toledo - MTD - close: 64.68 chg: +1.02 stop: 59.99

MTD continues to show relative strength. The stock added another 1.6% following the recent bullish breakout. The rising in volume today is another bullish sign. We do not see any changes from our new play description from Wednesday. 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.

Picked on September 13 at $ 63.66
Change since picked: + 1.02
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

---

Omnicom - OMC - close: 92.37 chg: -1.07 stop: 88.84

OMC received some positive analyst comments today with a new "out perform" rating but that didn't stop traders from profit taking after six days of gains. Don't be surprised if OMC dips back toward the rising 10-dma (unfortunately, near $90). We would wait for any dip towards $91-90 before considering new positions. Our target is the $96.00-96.50 range. The Point & Figure chart for OMC is very optimistic with a $131 target.

Picked on September 10 at $ 90.97
Change since picked: + 1.40
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

United Ind. - UIC - close: 53.76 change: +0.21 stop: 49.99

UIC is still creeping higher in spite of some profit taking in the defense sector on Thursday. Volume came in relatively low. We don't see any changes from our previous updates. 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: + 1.99
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand
 

Put Updates

EOG Resources - EOG - close: 58.72 chg: -2.06 stop: 64.15 *new*

Yet another decline for crude oil and natural gas futures undermined the energy sector today. Shares of EOG fell 3.38% and closed at a new two-month low. EOG is nearing our target in the $57.50-55.00 range. We are lowering our stop loss to $64.15. More conservative traders may want to take profits right now!

Picked on September 06 at $ 63.85
Change since picked: - 5.13
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

---

Express Scripts - ESRX - close: 82.87 chg: -0.65 stop: 82.51

ESRX is slipping lower from the recent test of resistance near the top of its trading range. We're still sitting on the sidelines waiting for a breakdown under support near $80.00. Our suggested trigger to buy puts is at $79.85. If instead shares of ESRX breakout higher then nimble traders might want to consider calls on a move past the $85 level.

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

---

Fluor - FLR - close: 78.99 change: -2.09 stop: 84.05 *new*

Yesterday's failed rally near $82.50 got some follow through today. The stock broke down under the $80.00 level again, which is a new entry point to buy puts. This is a new six-month low and the next level of support appears to be the $75 region. Our target is the $75.50-75.00 range. Please note that we're adjusting our stop loss to $84.05.

Picked on September 10 at $ 81.74
Change since picked: - 2.75
Earnings Date 11/06/06 (unconfirmed)
Average Daily Volume = 863 thousand

---

Johnson Controls - JCI - close: 72.95 chg: +0.04 stop: 74.16

There is no change from our previous update on JCI. The stock is trying to creep higher but the bounce seems to be running out of steam. We're not suggesting new positions at this time. If we do not get stopped out tomorrow this week's bounce has still produced a bullish engulfing candlestick pattern on the weekly chart and that's bad news for the bears. More conservative traders might want to think about cutting their losses early right here.

Picked on August 22 at $ 72.96
Change since picked: - 0.01
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Radian Group - RDN - close: 60.95 chg: +0.05 stop: 61.16

There was not much of a rally today in RDN but the intraday high was enough to stop us out at $61.16. This might be a case of us having our stop loss too tight since shares are still trading near their six-week trendline of resistance (lower highs). Keep an eye on RDN for another decline under $60-59-58 as a potential entry point for more put plays.

Picked on September 06 at $ 58.99
Change since picked: + 1.96
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 722 thousand
 

Dropped Strangles

None
 

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