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Daily Newsletter, Wednesday, 09/27/2006

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Table of Contents

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

Market Wrap

A Whole Lot of (Premature) Celebrating

Within moments of the open, CNBC banners proclaimed, "Dow Nearing New Closing All-Time High." Perhaps it's wrong to quibble with a word choice, but that banner writer erroneously thought the close of the Dow was predictable within a few minutes of the open. The banner should have been written to say that the Dow was approaching the "prior" closing all-time high. The excitation felt premature, and, of course, it was.

A trio of CNBC commentators apparently agreed. Just after the open, with that banner displayed beneath the screen on which they appeared, they stood in a knot, worrying about the exuberance in the face of the troubling durable goods number that had just been released. Within a few moments, the banner had been revised, next proclaiming, "Dow Poised to Hit New Closing All-Time High." That was an improvement over the previous banner, but it also turned out to be premature. That banner was followed by others that tracked the Dow's approach to its previous closing and all-time highs. Worried voices were supplanted by excited ones, and it soon became clear that it would be a day when superlatives such as "best" would abound and assumptions would be made ahead of any confirmation. Many television and print banners, headlines and articles included phrases such as "best performance since."

At the end of the day, the excited voices remained although the Dow touched neither its all-time closing high or all-time intraday high. Price action on many indices had created doji or else small-bodied candles with upper shadows or wicks as prices either pierced or attempted to pierce next resistance and then fell back. Coupled with the previous day's tall white candles, such candles serve as the second in a three-day potential reversal signal. Bulls do not want to see a pullback tomorrow that confirms that reversal signal with a long red candle.

Perhaps those first banners weren't so premature, however. In the Market Monitor's live report, writer Tab Gilles noted this morning that if traders were to reconstitute the Dow's component list as it existed in early 2000, before replacements made in 2004, that reconstituted 2000 Dow's price would have already surpassed the 2000 high. I have not verified Tab's calculations, but you can see his report for yourself in his 10:38:06 post on the Market Monitor. I doubt those CNBC banner writers were keyed into this one caveat to the day's action, however.

The SPX was one of the indices producing a doji for the day's candle, and it did so at horizontal, historical resistance near 1340.

Annotated Daily Chart of the SPX:

That doji at the top of a strong climb, a climb that's been accomplished in a shape that could reasonably be called a rising wedge, could be the second of a three-candle reversal signal. The potential reversal signal has yet to be confirmed, of course, and traders shouldn't be too quick to jump on a potential signal before they know what they risk. A similar setup in the middle of August produced three consecutive days of small-bodied candles before there was any pullback at all, and that one was a minimal one. Daily RSI signals a stronger possibility of a pullback now than it did then, but RSI is one of those indicators that sometimes gives early signals.

A sustained break below about 1313 would be necessary before the SPX has broken its rally support, and that breakdown needs to be confirmed by an accompanying RSI break through its own rising trendline since early June. Sometimes the RSI breaks through first, so in the case of any downturn, watch the RSI.

On a short-term basis, 15-minute Keltner charts suggested the possibility at the close that the SPX could reach again toward 1338.38-1339.48, but if it opens below 1336.30, it might head instead toward support near 1334. An open below that might indicate that a drop toward 1328.31-1329.21 appears more likely.

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Unlike the SPX and many other indices, the Dow did not produce a classic doji, but rather a similar but small-bodied candle with upper and lower shadows. Intel (INTC) is of course a component of many indices, including the Dow, and INTC did its best to help the Dow achieve that new record closing high. INTC added to yesterday's gains after a federal judge dismissed much of the antitrust claims that Advanced Micro Devices (AMD) had leveled against the company. The judge limited the lawsuit, saying that foreign anti-competitive measures didn't apply in the U.S. INTC's daily candle left a long upper shadow, however, with prices not able to maintain their highs.

Another court-related development helped yet-another Dow component, Merck (MRK), after the company won a Vioxx-related case in New Orleans, the 10th Vioxx-related case that has gone to trial. Reports that GM had asked Renault and Nissan to pay up to the tune of many millions if they wanted to form an alliance helped Dow-component GM post a gain. McDonald's (MCD) shouldered some of the responsibility for Dow gains, too, with the company raising its dividend to $1.00 a share, up from its previous $0.67. Like INTC, the stock's daily candle left an upper shadow on its daily candle, although not as long or bearish a shadow.

Annotated Daily Chart of the Dow:

Although daily RSI is not shown on this chart, there's been bearish price/RSI divergence since early in September. Obviously, that's not a good market-timing tool, but it perhaps gains significance when the Dow continues to trade in the lower or less bullish half of its rising price channel. As with the SPX, it's possible to redraw this channel as a rising wedge, but since so many of these supposedly bearish formations have failed to be bearish over the last years and have instead just widened into a rising price or regression channel, I prefer to keep this interpretation on my charts for now. A break below about 11,531 is needed to break the Dow below this rising channel support, but it would need to be confirmed by the break of the RSI below its own rising trendline off its June low.

If the Dow lazily drops back in small-bodied candles to that trendline at about 11,531, the chance for another bounce from the trendline increases, especially if RSI also bounces from its own trendline. RSI moves sometimes precede price moves, so watch RSI closely.

The Dow's prior closing and intraday highs have to be acting as a price magnet with the prices so close, and I would expect that only a swift decline would weaken the power of that price magnet. If the Dow rises again, those levels listed on the chart are the ones to watch for next resistance, as is the top of the long-term price channel, at about 11,850 currently, but rising, of course.

On a very short-term chart, the 15-minute Keltner charts show a potential for the Dow to climb toward 11,708.20-11,714.75, but if it should open below 11,687.15, it might head instead toward support near 11,666.09 on 15-minute closes. Next Keltner support below that is just above 11,616.

A note about my comment about the excitement on the OEX, noted on the Dow's chart: While the OEX is far from exceeding its all-time high, yesterday it did close above a 50 percent retracement of the move from that all-time high to the 2002 low. That 50 percent Fib level is at 615.68. Since the drop was a long-term move, I would want to see a weekly close, at least, above that Fib level before I considered the OEX safely above it, and today's small-bodied candle at the top of a climb presents the possibility that the OEX, too, could be ripe for a reversal. Keep a watch on that 50 percent Fib level for this big-cap index that's a little broader than the Dow and slightly less likely to be pushed around. That Fib level is likely to be support on pullbacks, but bulls don't want to see the OEX pushed strongly back below it.

If the Dow and SPX are having trouble climbing above the midline of their price channels, the Nasdaq beats them on that measure, although it's lagging far behind them on others. The Nasdaq's prices are bouncing from the midline of that price channel. The Nasdaq wasn't immune from producing a potential reversal signal on its daily chart today, however, and it barely produced a positive close.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily chart shows bearish price/RSI divergence, although I have not placed the RSI on this chart so that it stays as simple as possible.

On a short-term basis, the Nasdaq's 15-minute Keltner chart shows a possibility of an early climb toward 2265.85 or 2269.90, with support trying to firm up from 2256.34-2261.10. If the Nasdaq should gap below this gathering support tomorrow morning, a test of the 2247-2248 level might be possible.

The Nasdaq didn't get much help from the SOX today. The SOX went negative and produced an ugly daily candle that rests on support that must hold.

Annotated Daily Chart of the SOX:

The SOX threatens to fall out of this rising price channel, where the 72-ema and 30-sma should be watched for potential support. The SOX should be watched for clues as to next direction for the markets.

A short-term 15-minute Keltner chart shows that the SOX could likely get pressured a bit lower tomorrow morning, perhaps toward 454.45, although it could rise toward 456-458.24 first. On that 15-minute chart, the SOX shows bullish price/RSI divergence, so a bounce attempt might be possible, but without a strong bounce, the SOX looks likely to be mired in resistance lines gathering overhead.

Although the Russell 2000 lags many other indices by some measures, it turned in a stronger performance today than did the SOX. That stronger performance was relative to a weaker index, however, with the RUT not able to effectively challenge last week's high, much less May's or its all-time high. Many have commented on the lack of confidence vote being given these small-cap stocks, so I won't belabor the subject, but you may hear comments about the RUT's out-performance today since it posted a larger percentage gain than some other indices. On the whole, however, this doesn't look like out-performance to me.

Annotated Daily Chart of the RUT:

This week, the RUT's daily RSI (14) slipped briefly below the rising regression line off the RSI's mid-July low. The RUT and the RSI popped right back up, but keep a watch on that RSI for the RUT.

On a 15-minute Keltner chart, the RUT was approaching next 733.30 and 734.24 resistance at the close. Next resistance, should the RUT begin running higher, was at 738.11 as of the close. Support was layered at 731.70, 730.12, and then at 726.41-727.79, with those last two numbers near the 50-percent retracement of the RUT's decline off its May high. Bulls want to see that Fib level hold on any pullback, if one should occur.

Showing too many charts lengthens this report too much, particularly on a day when there have been many economic releases, so here's a summary of some other indices. The TRAN pierced its 200-sma again but could barely sustain a close above it. The TRAN needs to sustain a move above that MA, now at 4477.24, if the markets in general are to have much hope of sustaining an upward move. The BIX, the S&P Banking Index, reversed all of yesterday's gains, and the BKX, the KBW Bank Sector Index, produced a doji after touching a new high. The RLX turned in a bearish candle after yesterday's doji, but it didn't drop midway into Monday's strong white candle, so the confirmation of the reversal signal wasn't strong enough for me to be entirely sure that the confirmation can be trusted. After an initial drop, treasury yields bounced, and crude bounced from an intraday low of 60.10 to a close of 62.92, breaking above the resistance that has held for a week as speculation swelled that OPEC would act to put a floor underneath prices. Gold bounced, too.

If many superlatives were attached to the actions of the indices, the various economic reports included some superlatives, too, and not all were of the "best" variety. A few of those releases included terms such as "worst."

At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending September 22. The headline number showed that mortgage loan application volume dropped a heavy 4.9 percent on a seasonally adjusted basis from the week-earlier level. If not seasonally adjusted, volume dropped 5.4 percent from the week-earlier level and 21.1 percent from the year-ago one. Other components dropped, too, with the purchase index now at numbers that were the worst in almost three years.

Four-week moving averages were either up or flat, still reacting to improvements seen in recent weeks. Refinancing activity increased its share of total application activity to 44.3 percent, up from the previous week's 43.7 percent. That refinancing activity was climbing back to relative levels that were the best seen since September 2005, and there's a reason why. Those ARMs are being refinanced, with ARMs falling as a percentage of total applications. The average interest rate for a fixed-rate 30-year mortgage also declined, a direct factor in the number of refinancing applications. That mortgage rate fell to 6.18 percent from the previous 6.36 percent. As someone--perhaps Jim--recently said, those with ARMs were saved in the nick of time by recent FOMC action. That close save was noted on CNBC today, too. Initially, the DJUSHB, the Dow Jones U.S. Home Construction Index, bounced, but it had erased all of yesterday's gains by the close, confirming a reversal signal of its own.

The 8:30 release of the August durable goods number knocked futures back. Forecasters had expected that number to rise 0.4-1.5 percent, with the range coming from predictions from different sources. Instead, orders for durable goods fell 0.5 percent, the first time since 2003 that durable goods orders have fallen in two consecutive months. Even more troubling, July's orders were revised lower to a drop of 2.7 percent, down from the previous 2.5 percent. Since this number is considered a leading indicator for activity in the manufacturing sector, this morning's release must have caused market watchers to wonder if last week's Philly Fed disaster was more to be trusted than yesterday's more optimistic Richmond Fed survey. With another district's report due tomorrow and the ISM due on Monday, any report that suggests that the ISM might show an economy that's slowing more than wanted was enough to dampen the bullish fever a bit. But only a bit and only for a short while. That fever was too strong to be quelled too long, not with that superlative "best" just waiting to be attached to the Dow's intraday or closing value.

Almost all sectors were hit in that August durable goods number, the Commerce Department noted, with the two exceptions being defense and autos. Orders for defense capital goods rose 6.1 percent. Orders for motor vehicles rose 4.4 percent, but didn't make up July's 6.9 percent drop. Some market watchers believe that while auto makers restructure, this manufacturing sector is not going to contribute greatly to the economy.

Pushed up by those orders for motor vehicles, orders for transportation goods rose 3.7 percent, but if those orders were excluded, new orders fell 2.0 percent, its greatest drop in a year. Orders for civilian aircraft dropped 21.9 percent.

Other component numbers revealed a drop of 0.3 percent in orders for core capital-goods equipment with shipments rising only a modest 0.3 percent. Orders for electrical equipment and electronics (excluding semiconductors) dropped 9.7 and 4.7 percent, respectively, with the drop in electrical equipment the worst in four years.

Other components measure shipments, unfilled orders and inventories, with those rising 1.9 percent, 0.4 percent and 0.2 percent, respectively. Year-to-date, orders for durable goods have risen 8.5 percent.

Markets did move lower at the open, but they didn't remain in a pullback mode for long during the morning session. They were already rising into the 10:00 release of another Commerce Department release that markets found more invigorating: August's new homes sales. Those sales had been expected to decline 3.4 percent to a seasonally adjusted annualized rate of 1.036 million. Instead, they rose 4.1 percent to a seasonally adjusted annualized figure of 1.05 million, the first time a month-over-month increase has been seen since March. Over the last year, however, sales have dropped 17.4 percent. When compared to peak sales, they're down 23 percent.

However, those who were salivating over these improved numbers might not have noticed at first that August's rise was in comparison to figures that were revised sharply lower in May, June and July, and July's number had already been the worst in three years.

Expectations for crude inventories were for a drop of about 1.6 million barrels in crude inventories, a rise of 1.1 million barrels in gasoline, and a gain of 2.0 million barrels in distillates. Crude inventories dropped less than expected, according to the Energy Department, falling only 100,000 barrels. Gasoline inventories rose 6.3 million barrels and distillates, 2.6 million barrels, the Energy Department also reported. Both were above expectations. Crude and natural gas prices dropped immediately after the report, but crude prices then formed a triangle on the intraday chart before breaking to the upside and shooting higher.

In news that was at least peripherally related to developments in crude's price, 7-Eleven reported today that it was severing its connection with CITGO gasoline, with CITGO being a subsidiary of the Venezuelan national oil company. In a statement to the press, 7-Eleven's spokesperson attributed the decision at least in part to the company's sympathy with Americans about Venezuelan president Hugo Chavez's recent comments about the U.S. and the current administration. CITGO had been the supplier for 7-Eleven for more than twenty years. Tower Energy Group, Sinclair Oil and Houston-based Frontier Oil Corp. will now supply 7-Eleven's own brand. Some commentators didn't believe the company's assertion that the decision was based in part on Hugo Chavez's recent statements, but rather believed it to be based on the company's desire to move to its own brand and to be supplied with the cheapest fuel.

In another economic release, the MBAA revealed the results of its quarterly survey of consumer loans. The number 30 or more days delinquent rose to 4.41 percent in the quarter ending in June, inching up slightly from the previous quarter's 4.40 percent. A spokesperson believes that delinquencies may ease in the third quarter as declining energy costs and interest rates make it easier for borrowers to meet their obligations.

After all those economic releases, rumors surfaced that Amaranth might either liquidate its entire portfolio or sell. This perhaps added to the afternoon's more bearish tenor, or perhaps some of the early excitement was deflating after the Dow had failed for a number of hours to beat those most-watched numbers.

Tomorrow's economic releases include two releases at 8:30: the usual jobless claims, this one for the week ending September 23, and the second-quarter GDP. The previous and consensus numbers for the GDP are the same, a 2.9-percent expansion. August's Help Wanted Index should be released at 10:00, followed thirty minutes later by the natural gas storage inventories for the week ending September 22. The Kansas City Fed Manufacturing Survey for September will be released at 11:00, and traders should evaluate whether they want to hold onto short-term positions ahead of that release. This report is one of the three key manufacturing surveys that Jim Brown mentioned as being important, especially after last week's worrisome Philly Fed number. Tomorrow's Kansas City Fed Manufacturing Survey is probably even more important now, given today's drop in the durable goods number.

Earnings tomorrow include those from Accenture (ACN) and (FDO), but are light. As others have said, companies warning or guiding expectations higher, if any, will likely have more impact.

So what's likely for tomorrow? Short-term charts show the possibility for slight upward moves from the day's closes, a suggestion that would be in tune with another attempt to push the Dow toward those often-quoted all-time intraday and closing highs. Those short-term charts don't promise anything better, though, and will reform themselves anyway after any initial push, if one should occur.

Daily charts are a different story, as they suggest that bulls either have to push indices higher or risk confirming reversal signals. Much will be at stake.

As others have said before me, it's time for window dressing for this quarter, and that and the magnetism of those Dow prices are going to work against anything seen on the charts. If you're in the markets, keep on your toes tomorrow. Especially if in bullish trades, be aware of the possibility of reversal signals being created tomorrow, if it's a down day, and keep stops tight. If you're not in bullish trades yet, be very leery of trusting an initial push higher, especially if it comes ahead of the release of the Kansas City Fed Manufacturing Survey. All should be evaluating tonight whether they want to stay in any short-term positions into the release of that number, given today's weakness in the durable goods number and its first impact on the futures this morning.

What about bearish entries? Some of our typical indicator indices confirmed reversal signals today, meeting yesterday's white candles with red candles that reversed yesterday's gains. The BIX and DJUSHB were among those indices. Many other indices show a potential for reversal signals to be produced tomorrow. While I haven't seen confirmation of a reversal yet, and personally preferred to wait for such signals when I was buying puts or calls and not trading spreads, I know many will have entered bearish positions today in the hopes that those signals will be confirmed tomorrow. Please remember that any potential reversal signal that's met with buying can result in a sharp and unexpected rise if shorts rush to cover. If you've entered a bearish trade already, ahead of tomorrow's Kansas Fed number, you need to keep those stops tight, too.

For now, indices remain in rising price channels. The SOX may bring our first test of these rising price channels, however, so definitely keep it on your radar screen tomorrow. A SOX breakdown out of its channel, particularly if it's a precipitous breakdown, might suggest that other indices could do so, too. Until they do, watch for resistance at the top or midlines of these prices channels and support at the bottoms. Keep a watch on the TRAN, too, still struggling to get back above its 200-sma. The TRAN tends to move quickly, and it sometimes leads the SPX, OEX and Dow the way that the SOX sometimes does the tech-related indices.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None CMG None
  MNST  

New Calls

None today.
 

New Puts

Chipotle - CMG - close: 49.80 change: -2.58 stop: 52.61

Company Description:
Chipotle Mexican Grill offers a focused menu of burritos, tacos, burrito bols (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. Through our vision of Food with Integrity, Chipotle is seeking better food not only from a variety of fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for the animals, the land, and the farmers who produce the food. Chipotle opened its first restaurant in 1993 and operates more than 530 restaurants. (source: company press release or website)

Why We Like It:
We are going to try again with CMG. The stock's bullish breakout attempt on September 21st has stalled and now reversed. CMG failed to push pat its five-month trendline of resistance (see chart). Today's relative weakness was fueled by strong volume and the close under a cloud of moving averages and round-number support at the $50.00 mark is bearish. The P&F chart has been bearish for a while and shows a bearish reversal under resistance. We are still a little worried that stocks may try and make one last attempt to hit new highs before the third quarter ends so more conservative traders may want to sit out until next week. We are going to suggest a trigger to buy puts at $49.45. If triggered our target is the $45.50-45.00 range. We do not want to hold over the late October earnings report. FYI: Traders may want to note that McDonalds (MCD) is trying to shed its stake in CMG and is offering a stock swap for its shareholders. MCD will allow investors to swap their MCD for shares of CMG at a 10% discount.

Suggested Options:
We are suggesting the November puts although Decembers, which have more open interest, would also work well.

BUY PUT NOV 50.00 CMG-WJ open interest= 67 current ask $3.80
BUY PUT NOV 45.00 CMG-WI open interest= 99 current ask $1.65

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 459 thousand

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Monster - MNST - close: 35.28 change: -2.30 stop: 37.55

Company Description:
Founded in 1967, Monster Worldwide, Inc. is the parent company of Monster, the leading global online careers property. Headquartered in New York with approximately 4,200 employees in 36 countries, Monster Worldwide is a member of the S&P 500 Index and NASDAQ-100. (source: company press release or website)

Why We Like It:
Is this end-of-quarter flushing in MNST? The stock lost just over 6% on Wednesday on strong volume, which is normally a bearish sign. The stock has already struggled under a bearish pattern of lower highs for the last several weeks. The Point & Figure chart is bearish with a double-bottom breakdown sell signal and a $28 target. MNST has definitely been under performing the broader markets lately and we expect more weakness to come. Shares have significant support in the $35.00 region. The June 2006 low was $34.75. We are going to suggest a trigger to buy puts at $34.65. If triggered our target is the $30.50-30.00 range. If you study the weekly chart you'll notice a long-term trendline of support stretching out just above the $30 level. More conservative traders might want to exit earlier near $31.00. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November puts but the Decembers, which have more open interest, would also work well.

BUY PUT NOV 40.00 BSQ-WH open interest= 58 current ask $5.50
BUY PUT NOV 35.00 BSQ-WG open interest= 99 current ask $2.25
BUY PUT NOV 30.00 BSQ-WF open interest= 13 current ask $0.65

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
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 45.32 chg: +0.53 stop: 41.95

The SOX index failed to rally again even though its largest component, Intel (INTC), managed to breakout over technical resistance at the $20.00 level on some positive legal news. Shares of CYMI out performed its peers with a 1.18% gain. More importantly the stock actually closed over resistance at the $45.00 level for the first time in months. This relative strength is good news for the bulls! Our target is the $47.00-48.00 range.

Picked on September 06 at $ 42.55
Change since picked: + 2.77
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

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General Dynamics - GD - close: 71.45 change: -0.61 stop: 69.94

Shares of GD witnessed some early strength this morning with a surge to $72.67, which was a new all-time high for the stock. Unfortunately, the rally quickly failed. Impeding GD's upward trek may be the DFI defense index, which is testing potential resistance near the 1150 level. Looking back to GD we're concerned that today's session is a short-term bearish reversal/failed rally pattern. We are not suggesting new call plays at this time. Our target is the $74.00-75.00 range. We do not want to hold over the mid October earnings report.

Picked on September 24 at $ 70.61
Change since picked: + 0.84
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Mettler Toledo - MTD - close: 65.59 chg: +0.65 stop: 63.45*new*

MTD continues to show relative strength. The stock added 1% on strong volume but bulls were unable to push MTD convincingly past last week's highs. Currently our target is the $68-69 range. We do not want to hold over the late October earnings report. Please note that we're raising the stop loss to $63.45.

Picked on September 13 at $ 63.66
Change since picked: + 1.93
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

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Omnicom - OMC - close: 94.10 chg: +1.27 stop: 89.89

The rally in OMC has now made it three days in a row. On a technical basis the bounce from $90 has seen improving volume with today's volume coming in pretty strong, which is definitely positive. More conservative traders may want to take some money off the table right now. We continue to aim for the $96.00-97.00 range.

Picked on September 10 at $ 90.97
Change since picked: + 3.13
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Caterpillar - CAT - close: 65.68 chg: -0.22 stop: 67.36

We find it VERY interesting that CAT was unable to produce any sort of follow through higher. The stock's two-day bounce on Monday and Tuesday looked like a big bullish reversal after its recent breakdown under support. Today's relative weakness is encouraging but bears and put holders are not out of danger yet. We're not suggesting new positions with CAT above $65.00. More conservative traders may want to tighten their stops. Our target is the $60.25-60.00 range but more aggressive traders may want to aim lower. The P&F chart does point to a $48 target.

Picked on September 21 at $ 64.59
Change since picked: + 1.08
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

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Express Scripts - ESRX - close: 76.78 chg: -0.93 stop: 82.51

Shares of ESRX continue to under perform. The stock lost 1.19% but after the initial weakness this morning the stock consolidated sideways in a narrow range. The overall pattern is still bearish but we're not suggesting new positions at this time. We're aiming for a decline into the $75.50-75.00 range. We do not want to hold over the late October earnings report.

Picked on September 21 at $ 79.85
Change since picked: - 3.07
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Joy Global - JOYG - close: 36.20 change: +0.82 stop: 36.55

The rebound in CAT stalled out today but not so for JOYG. Shares of JOYG added another 2.3% and came relatively close to hitting our stop loss at $36.55. If there is any market strength tomorrow we would expect JOYG to participate and we'll be stopped out.

Picked on September 20 at $ 34.95
Change since picked: + 1.25
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

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Las Vegas Sands - LVS - close: 66.57 change: -1.33 stop: 70.05

Hmm... the trading in LVS on Wednesday was interesting. The stock lost 1.95%, which took a big chunk out of Tuesday's gains. Lack of follow through higher is obviously a good sign for us but we hesitate to suggest new positions right here. The technical picture is blurry. We do not want to hold over the early November earnings report. Currently our target is the $60.50-60.00 range.

Picked on September 19 at $ 65.99
Change since picked: + 0.58
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

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Maxim Integrated - MXIM - close: 27.73 chg: -0.25 stop: 30.05

It looks like the bounce in the SOX is failing and that creates a bit more comfort with adding new put plays in MXIM. However, traders need to be careful here. The SOX index is still inside its two-month rising (bullish) channel. The technical picture is suggesting that the SOX is headed lower tomorrow but we need to be wary of another bounce from the bottom edge of this rising channel. Meanwhile, MXIM is under performing the NASDAQ and the SOX, which is a positive sign for put traders. Today's relative weakness looks like another entry point to buy puts. Currently our target is the $24.00 level although we would expect a bounce near $26 and traders may want to do some profit taking at $26 to take some money off the table. We do not want to hold over the early November earnings report.

Picked on September 25 at $ 27.90
Change since picked: - 0.18
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

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Nucor - NUE - close: 49.14 change: -0.33 stop: 50.01

We are seeing a bit of a roller coaster ride in the steel stocks. On Tuesday the group soared higher after Reliance Steel (RS) raised its earnings outlook. Yet last night after the closing bell Worthington Industries (WOR -8.9%) missed its earnings estimates and issued cautious comments about business going forward. You may recall that on Monday morning one analyst firm downgraded a couple of stocks in the industry and issued a warning about rising inventory levels. Shares of NUE spiked lower at the open but recovered from its lows. Shares of NUE remain under resistance at the $50 level and its 50-dma. We would wait for another decline under $48.00 or Wednesday's low of 47.27 before considering new put plays. Please note that there seems to be a data malfunction for most of the quote services. If you look up NUE your service will probably say that the stock was up 27 cents to $49.14. Yet if you check the historical prices NUE closed at $49.47 yesterday, which means the stock fell 33 cents today.

Picked on September 25 at $ 45.95
Change since picked: + 3.19
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

FreightCar Amer. - RAIL - close: 54.74 chg: -0.52 stop: 56.32

RAIL is still under performing its peers in the railroad sector, which is good news for bears and put traders. However, we remain cautious especially with the rally in railroad stocks today. We're going to list two targets. We suggest selling half or more of your position at our first target in the $50.25-50.00 range. Sell the rest at our second target in the $46.00-45.00 range.

Picked on September 21 at $ 54.50
Change since picked: + 0.24
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 353 thousand

---

SanDisk - SNDK - close: 54.17 chg: +0.12 stop: 60.05

SNDK did manage to close in the green on Wednesday but overall the trading looks bearish. The stock produced a failed rally under $56.00 and we believe this is a new entry point for bearish positions. We will freely admit this is a tough market to consider buying puts with the major averages trading near new relative highs or all-time highs for the DJIA. If you do open new positions in SNDK you may want to use a tighter stop loss (suggestions would be near $58 or $56). Bear in mind that the DJIA may try and tag a new high before the end of the week so it might pay to just sit on the sidelines and watch for a couple of more days. Our target is the $51.50-50.00 range. We do not want to hold over the mid October earnings report so that only gives us about four weeks.

Picked on September 22 at $ 56.69
Change since picked: - 2.52
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 9.9 million

---

Textron - TXT - close: 84.69 change: +0.43 stop: 84.01

There is no change from our previous updates on TXT. We are still sitting on the sidelines waiting for a breakdown under the $80.00 level. More aggressive traders might want to consider plays on a failed rally under $85.00. If triggered at $79.85 we're suggesting two targets. Our first target is the $75.50-75.00 range. Our second target is the $71.00-70.00 region. Plan on selling half or more at the first target to lock in a gain. We do not want to hold over the mid October earnings report.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 829 thousand

---

U.S.Steel - X - close: 58.18 chg: +0.61 stop: 60.05

The game in shares of X is not over yet. Bears were in control a few days ago but bulls staged a big recovery in the last two sessions thanks in large part to positive earnings revisions from Reliance Steel (RS) on Tuesday morning. Yet the rally stalled today due to Worthington Industries (WOR) missing earnings and issuing cautious comments last night. We would wait for a new decline under $56.00 before considering new positions. Conservative traders may want to cut their losses. We still see overhead resistance near $60 with its 50-dma and 200-dma.

Picked on September 22 at $ 55.95
Change since picked: + 2.23
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 4.4 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Southern (Peru) Copper - PCU - cls: 92.50 chg: +1.61 stop: 92.51

We have been stopped out of PCU at $92.51. The rally in mining stocks continued on Wednesday and PCU traded above the $92.50 level to stop us out. The overall pattern continues to look bearish with the double-top formed in August and September but if PCU closes this week out near current levels it will have produced a big bullish engulfing candlestick on the weekly chart, which is typically seen as a bullish reversal pattern. We warned readers from the start that PCU could be volatile and the stock showed us why this week.

Picked on September 22 at $ 86.50
Change since picked: + 6.00
Earnings Date 10/16/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Dropped Strangles

None
 


Trader's Corner

More on 'High Potential' Chart Patterns

Last Wednesday I wrote on some of the key chart patterns with the most predictable outcomes. There was an MIT study that I cite in my (Essential Technical Analysis) book that found, after an extensive statistical study, 5 patterns with an unusually high potential of predicting trend direction after the pattern forms, as well as price objectives in some cases.

An idea of a price objective is the holy grail of trading, especially for option traders. If you can project a price target with some degree of probable success that it will be achieved, this can lead to a very profitable trade. Moreover, you have the possibility of trading a larger position than usual, such as double; assuming of course that you always set and adhere to, as much as market conditions will allow, a pre-set risk, exit or stop point (however you do it, you get out when the index or stock goes a certain amount against your entry price).

By the way, my last Wednesday's Trader's Corner article is found in your 9/20 saved Option Investor Daily e-mail, assuming you keep them (a good idea, at least for awhile) or which can be seen online by clicking here.

I'm continuing on with this topic of 'high potential' price or chart patterns as I didn't cover the #5 pattern noted below, the 'broadening' formation yet AND because something interesting happened in the intervening week regarding developments that related to whether an implied Head & Shoulder's (pattern 1 below) upside objective would be realized in the S&P 500 (SPX) index OR whether a possible Double Top (pattern 2) was setting up in the same index.

It wasn't that the patterns were in 'conflict' or anything, only that it wasn't clear (as of last Wednesday) whether the Double Top would be 'confirmed' or whether there would be another move up through the prior price peak and the 'minimum' upside objective implied by the Head & Shoulder's bottom would be realized. On balance, you have to assume that a trend in motion will STAY in motion, but an overbought market at a prior significant high is a toss up choice as to stay with a position or not particularly in a time sensitive and limited instrument like options or futures.

The 5 chart patterns in discussion are:
1. The Head & Shoulder's (H&S) pattern, especially the H&S top pattern
2. The Double Top
3. The 'rectangle' top
4. The 'rectangle' bottom
5. The 'broadening' formation

THE S&P CHARTS AND H&S UPSIDE OBJECTIVES:

When the triple bottom pattern of a low, a lower low, followed by another higher low forms, this could be the classic Head & Shoulder's bottom. A 'confirming' indication that this pattern is a major bottom is a rally that pierces the so-called 'neckline', the down trendline noted on the S&P 100 (OEX) chart below.

When the neckline/down trendline is pierced, the price distance from the bottom of the Head (H) to the neckline is added to the bottom of the Right Shoulder (RS). This distance measured up the vertical price scale comes out to 612 in the OEX; this then becomes a 'minimum' upside objective. Of course the move can continue, as it's done. The 'measured' objective is a guideline or rule of thumb; an objective that is often realized and then some, which has happened with the strong further move up in the OEX to the 620 area today.

In a related note, it VERY often true that early stage prolonged rallies, as opposed to prolonged BULL MARKETS, are characterized by the ABSENCE of extreme bullishness; this aspect is seen above in my 'sentiment' indicator, a ratio of CBOE daily equities call volume relative to daily put volume. You'll note the lack of an extreme 'bullish' reading, which would be the case if the (blue) ratio line got to a reading that reached or exceeded the upper horizontal (red) line; this occurs when daily equities call volume is at least double daily put volume.

This aforementioned phenomena is what is meant by the saying that the market climbs a 'wall of worry'; e.g., the economy is slowing which will act as a drag on earnings, but this against the background effect of the Federal Reserve ceasing to raise interest rates. This implies a soft landing and this hope starts a process of institutional money coming in to raise stock weightings, against the backdrop of individual investors' worry about future earnings. It has most typically been true that markets don't top out in a major way until 'main street' and the individual investor gets quite bullish on equities. You see the attitude of individual market participants best in my estimation in equities options activity.

THE S&P 500 CHART AND A POSSIBLE 'DOUBLE TOP'

The S&P 500 (SPX) Index has been the lead index for the recent market cycle and SPX went up to its prior high and stalled. This presented the picture of a POSSIBLE double top. I emphasize the 'possible' aspect of this, because there is a confirming event that must occur to suggest that a double top is in place, just as there is a 'confirming' breakout action that must occur to suggest that a Head & Shoulder's bottom has developed.

In the SPX daily chart below, note the first high at the red down arrow and its notation of a 'possible double top'. SPX dropped back to the pivotal 21-day moving average but quickly rebounded, which was bullish. For a double top to be 'confirmed' so to speak, the decline would have needed to continue lower and at some point pierce the last/prior downswing low at 1290. This level was noted in my recent market musings as the double top 'confirmation' point or level. Never happened.

Instead of course SPX shot right back up and decisively penetrated the prior highs (the possible double top) and keep going. It kept going in fact until the SPX index ALSO reached the 1335 'minimum' H&S bottom upside target; an objective that was based on the upside measuring rule of thumb that I described for the OEX H&S bottom above. That is, once the neckline was pierced, a 'minimum' upside objective was equal to the distance from the Head to the neckline ADDED to the Right Shoulder and measured up the vertical price scale. This came out to 1335. You might not have thought this back when SPX was trading in the 1270 area!

Carrying this thought further on the double top. IF a decline in the SPX had carried to below 1290 on a closing basis, this event would 'confirm' the likelihood that the intermediate trend had reversed (from up to down). Any measuring implications for a down side objective?

First, the possible double top should be several weeks to a year apart. This fit the SPX certainly. Second, top reversals, such as the double top, perform poorly in a bull market. There must be a wait until prices fall under the confirmation point.

With index options, I always wait for this confirmation to think about going short or buying puts. However, if I am in Index calls bought at the breakout point (at the H&S neckline) OR when I see the 3rd low (RS) form (a good bet), I will tend to exit all of most of my calls as soon as it appears that a double top may form.

A good defensive move, as the further upside from the breakout above the prior pair of highs is probably equal to a third or less of the move that has already occurred; AND the risk of a shakeout grows, OR just that a sideways or lateral move will develop, which also tends to be the kiss of death when holding calls when trading for the intermediate moves or the intermediate trends.

I didn't note if there is a rule of thumb on the percent decline IF there is a 'confirmed' double top. No, but the average decline of 'successful' double top patterns is around 20% in stocks.

BROADENING BOTTOMS (AND TOPS):

The broadening formation - a broadening top or broadening bottom, is of interest as a chart pattern we see sometimes in the indexes and more often in stocks, although its not the most common pattern either. The broadening top or bottom are both made up of a series of higher highs and lower lows and the two trendlines that can be drawn give the appearance of a megaphone.

An example of a broadening top from my chart archive, in this case that of an hourly Dow chart:

Another historical example was seen in my book (Essential Technical Analysis) involving an individual stock at the time and shows the measuring implications of the broadening pattern, which is to add the price distance covered by the widest part of the pattern to the 'breakout' point; this becomes a 'minimum' upside objective.

The broadening 'megaphone' shaped pattern can suggest either a top or bottom and which it is, is dependent on which way the breakout goes, up or down. However, like the rectangle top or bottom, when its a trend REVERSAL pattern, the direction of the trend going INTO the formation of the trend usually provides the dominant clue; this was UP into the broadening TOP seen in the hourly Dow chart above and DOWN into the broadening BOTTOM see in the chart of the late-90's stock chart example:

If this pattern was more common I would spend more time on examples. I will however look at my individual stock charts in the coming weeks for any other examples I see of either the broadening top or bottom; given a rising market, I would of course anticipate more examples, if any, of the broadening bottom than the broadening top.

** 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.
 

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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