The major indexes witnessed strong gains to start the week with the S&P 500 Index (SPX.X) closing at a new six-year high as mergers and a sharp decline in natural gas prices helped offset weakness in drug giant Pfizer (NYSE:PFE) $24.90 -10.62%.
Advancers easily outnumbered decliners at the open and built toward the close. The big board reported 460 new highs in today's session, which greatly outnumbered the 390 new highs found on 10/26/06.
NASDAQ's 184 new highs, while an improvement from recent sessions, were fewer than the 289 found on 11/15/06 and 220 from 10/16/06.
Merger news had shares of Mellon Financial (NYSE:MEL) $42.78 +6.81% jumping higher by $2.73/share after the financial services company said it would be acquired by Bank of New York (NYSE:BK) $39.75 +12.03% for $16.5 billion. Upon completion of the merger, the combined entity will be among the world's asset managers with more than $1.1 trillion in assets under management and $16.6 trillion in assets under custody. The deal calls for Bank of New York stockholders to receive 0.9434 shares in the new company for each share they currently own, while Mellon shareholders will receive one share in the new company for each Mellon share they own.
The news gave a powerful lift to financials with the AMEX Broker Dealer Index (XBD.X) 241.61 +2.59% grabbing top spot in today's list of sector winners.
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Additional merger news had chip stocks as depicted by the Semiconductor HOLDRs (AMEX:SMH) $34.65 +1.85% gaining on news that LSI Logic (NYSE:LSI) $9.12 -13.63% offered to buy its rival Agere Systems (NYSE:AGR) $19.30 +8.48% for roughly $4.0 billion in stock. If consummated, the deal values Agere at $22.81 a share. Agere shareholders will receive 2.16 shares of LSI Logic for each Agere share held. The companies said combined sales during the prior 12 months ended September 30 totaled $3.5 billion.
Shares of Pfizer (NYSE:PFE) $24.90 -10.62% plunged as low as $23.50 intra-day and were today's most actively traded issue at just over 289 million shares. The drug giant said it decided to halt further development of its cholesterol treatment torcetrapib because of an unexpected number of deaths and other complications in the drug trial.
The news sparked speculation that Pfizer may now be set to make an acquisition(s), as drugs currently in the company's pipeline don't come close to filling the void torcetrapid was supposed to fill, when Pfizer's best-selling drug, cholesterol treatment Lipitor, loses patent protection, possibly as early as 2010. Other patent expirations will reportedly rob Pfizer of $14 billion in revenues annually between 2005 and 2007.
Some names that industry analysts gave as possible acquisition targets were Isis Pharmaceuticals (ISIS) $11.36 +9.12%, Medarex (MEDX) $14.28 +5.23%, Nektar Therapeutics (NKTR) $17.00 +5.06% and Sepracor (SEPR) $57.82 +4.55%.
Most analysts don't believe Pfizer would attempt to purchase a major drug maker due to the expense and complexities of integration. Analysts believe that with $51.3 billion in annual revenues, Pfizer needs more "blockbuster" drugs to fuel sales growth with patent expirations on some of its existing drugs looming in the next couple of years.
U.S. Market Watch - 12/04/06 Close
A warmer weather outlook had energy prices giving back some of last week's gains. January Natural Gas futures (ng07f), which traded as high as $9.049 last week, plunged to their lowest levels of the month.
After a sharp decline last week, the dollar was steady against a weighted basket of foreign currencies with the U.S. Dollar Index (dx00y) edging down 0.05 points from Friday's close of 82.47.
Comment's from Chicago Fed President Moskow
QCharts users may want to note that intra-day, QCharts changed their "symbols" for both the U.S. Dollar Index (CEC:DXY) and the CRB Index (CEC:CRY).
Gold and silver traded flat to higher with the iShares Silver Trust (AMEX:SLV) $140.85 +0.90% nearing its 05/11/06 intra-day high of $152.50.
Sign of weakness, yet repetitive pattern of strength!
In last week's Market Monitor, I noted that the major indexes and trackers (INDU/DIA, SPX/SPY and NDX/QQQQ) had all traded at, or even notably below their pivot analysis WEEKLY S2s. In basic terms, a WEEKLY Support Level 2 had been violated, or traded for the first time in several months.
This was a NOTABLE observation as it relates to how institutional computers (that manage inventory of stocks) saw supply (selling) on a near-term basis beginning to outstrip demand (buying).
One test I thought traders and investors needed to monitor for early this MONTH (December), was the past pattern of a major index I track in the MONTHLY Pivots (INDU, SPX, OEX, NDX and RUT) to see if a dip to, or just below the MONTHLY Pivot (deemed a mid-point of the prior month's trade by mathematical algorithm) finds buyers and drives price back higher.
Suffice it to day, on Friday, December 1, the first day of the MONTH, the S&P Depository Receipts (AMEX:SPY) $141.29 +0.76% traded UNDER its MONTHLY Pivot for 30-minutes, and that has been it! Today's merger news in the financials certainly helped!
I don't want traders, or investors to make this overly complicated. Just make the observation. All YOU need to do is imagine, or BELIEVE that institutions utilize COMPUTERS to manage stock inventory. Just like a grocer uses a computerized inventory system to order MORE product when inventory becomes low, or DELAYS an order when product isn't moving off the shelves and inventory builds, institutional computers manage stock/equity inventory the same way.
In a following chart, I'll show a 60-minute interval chart of the SPY, but I want to show you a MONTHLY Pivot Matrix, where you will see 5 different levels. The mid-point is what is called the "pivot."
Here are three MONTHLY Pivot "matrix." That is, October's MONTHLY Pivot Levels (S2, S1, Pivot, R1, R2). See if YOU can pick up on how computers have been managing inventory of the different securities.
Major Index MONTHLY Pivot Levels - For Oct, Nov and Dec
At the top of the MONTHLY pivot matrix you find the pivot levels for the month of October. Those levels are derived from October's high/low and close. Not how ONLY the NDX/QQQQ as well as the SMH and RUT.X traded lower to their respective MONTHLY PIVOTS, but also trade as high as MONTHLY R2 for the NDX/QQQQ as well as the RUT.X.
In the middle we find the MONTHLY pivots for the recently completed month of November. With RED and GREEN circles, I approximate where the November High/Low was found not only in the SPY, but also the S&P Banks Index (BIX.X), which is a "key sector" for financials, and represents one of the largest weighting for the S&P 500 (SPX.X) and SPY.
Noting how the BIX.X did trade a MONTHLY S1 is important in my opinion, as is the BIX.X just about "pegging" its November MONTHLY R1 to the penny, as if institutional computers were determined to sell at BIX.X MONTHLY R1.
Now, let's take a look at a 60-minute interval chart of the SPY, as this is where we actually do some PIVOT analysis.
S&P Depository Receipts (SPY) - 60-minute intervals
The "W"eekly pivot levels shown are those derived by my trading software from QCharts. Week's help divide up a month.
In PINK I've place (from lower left) October, November and now the December Monthly Pivots (see MONTHLY Pivot Matrix above).
"So what?" you might ask. What does this tell you, or I?
What I (Jeff Bailey) utilize from the above is simply this. Last week I saw something I haven't seen in several weeks. A TRADE AT/BELOW a WEEKLY S2. Weekly S1 and Weekly R1 isn't all that uncommon. One (1) level either side of the Pivot (think of a Pivot as a "neutral level" and S1/R1 a support1 and resistance1 either side of that pivot.
With last week's trade at a Weekly S2, that is DIVERGENCE from the past.
Now the TEST FOR STRENGTH, or SIMILARITY to the past has been found. See where I also mark SIMILARITY and "Boom!" as the SPY trades sharply through its WEEKLY Pivot? Just as it did on November 6th when the SPY shot above $137.00.
What do traders want to be on the alert for? SIMILARITY, or DIVERGENCE to the past?
I think traders and investors want to be on the alert for DIVERGENCE. DIVERGENCE to the past is what can signal CHANGE and an SPY reversing back below its MONTHLY Pivot ($139.30) and continued weakness below its WEEKLY S1 ($138.56) would be DIVERGENCE within the MONTHLY Pivot levels, and would follow some DIVERGENCE of last week's trade below a WEEKLY S2.
What the pivot levels do is give traders and investors a mathematically derived set of support and resistance levels.
The biases (bullish, or bearish) are established from SIMILARITY to the past, or DIVERGENCE from the past.
Last week, all equity indices tracked in the MONTHLY Pivot Matrix, traded BELOW their respective WEEKLY S2s, just like the SPY did, so there was SIMILARITY across the board.
This week's WEEKLY S1s for the INDU/DIA are 12,086/$129.91 and would be deemed important levels of support, or levels to be on the alert for DIVERGENCE to the past. Weekly R1s were traded today at
This week's WEEKLY S1s for the SPX/SPY are 1381/$138.54.
This week's WEEKLY S1 for the narrower OEX is 641.75.
This week's WEEKLY S1 for the NDX/QQQQ are 1,751.50/$43.08.
This week's WEEKLY S1 for the SMH is $33.20.
This week's WEEKLY S1 for the BIX.X is 389.50.
This week's WEEKLY S1 for the RUT.X is 769.50.
I do believe the bulk of last week's weakness in the equity indexes was "dollar related," but the ability to violated their WEEKLY S2s should have traders and investors alert to weakness.
But today's STRENGTH and SIMILARITY to early November, and POWERFUL moves back above the MONTHLY Pivots, so early should have bears showing GREATER caution.
Burlington Nor.SantaFe - BNI - cls: 77.26 chg: +2.34 stop: 73.99
Why We Like It:
BUY CALL JAN 75.00 BNI-AO open interest=5576 current ask $4.20
Picked on December 04 at $ 77.26
Biosite - BSTE - close: 49.81 change: +1.17 stop: 47.49
Why We Like It:
BUY CALL JAN 45.00 BQS-AI open interest= 747 current ask $5.80
Picked on December xx at $ xx.xx <-- see TRIGGER
L-3 Comm. - LLL - close: 83.81 change: +2.89 stop: 79.99
Why We Like It:
BUY CALL JAN 80.00 LLL-AP open interest=2461 current ask $5.30
Picked on December 04 at $ 83.81
B.P.Prudhoe Bay - BPT - close: 75.90 chg: -0.17 stop: 72.45
Crude oil suffered some profit taking on Monday and that weighed on the oil sector. However, the bullish market environment helped the oil stocks rebound from their lows of the day. The dip in oil is likely to be temporary and we'd use it as a buying opportunity. Meanwhile the pull back in BPT can also be used as a new buying opportunity. Our target is the $79.75-80.00 range. The P&F chart is bullish with an $85 target. FYI: More conservative traders may want to consider tighter stops.
Picked on November 29 at $ 75.25
Centex - CTX - close: 55.81 change: -0.08 stop: 52.45
Housing stocks were one of the few sectors to close in the red today. The relative weakness appeared to be due to the October report on pending home sales, which fell about 1.7%. In spite of the poor report shares of CTX managed to rebound from its lows of the session. We remain bullish here but a dip back to $55.00 or even $54.00 might be in CTX's short-term future. The P&F chart has produced a spread triple-top breakout buy signal with a $71 target. We have two targets. Our conservative target is the $59.50-60.00 range. Our aggressive target is the $63.50-64.00 range. Be aware that the bottom of CTX's April 2006 gap down near $57.25 might be resistance as may the to of its gap near $60.00.
Picked on December 03 at $ 55.89
Diamond Offshore - DO - close: 78.82 change: -1.77 stop: 75.75
Monday's profit taking in crude oil drug shares of DO to a 2.19% loss. The stock dipped back to broken resistance and what should be new support at its 200-dma and the $78.00 level. We're suggesting readers use the dip as a new buying opportunity. Our target is the $85.00-86.00 range near its early July high. The P&F chart points to a $92 target.
Picked on December 03 at $ 80.59
Enerplus - ERF - close: 46.03 change: +0.03 stop: 43.85
It wasn't much but shares of ERF displayed some relative strength. Most of the energy stocks trended lower due to a decline in crude oil. ERF bounced from its morning lows to close back in the green. We remain bullish with the stock above $45.00. More conservative traders may want to consider a tighter stop loss. Our target is the $50.00-51.00 range.
Picked on November 29 at $ 46.01
EOG Resources - EOG - close: 69.17 change: -1.46 stop: 67.99
It's the same story, different stock, with EOG. As an oil company the stock dipped (for EOG -2%) as crude oil ticked lower. Traders bought the dip in EOG multiple times in the $68.65 region. The afternoon rebound from its lows looks like a new bullish entry point to buy calls. More conservative traders may want to wait for a new rally past $71.00 before starting new positions. Conservative traders may also want to raise their stops. Our target is the $78.00-80.00 range. The P&F chart has a very bullish pattern called a bullish triangle breakout that points to a $94 target
Picked on November 29 at $ 72.06
General Dynamics - GD - cls: 75.30 chg: +0.49 stop: 71.90
Defense stocks did well today with the DFI index breaking out to a new all-time high. Shares of GD responded with a bullish breakout back above the $75 level. Our target is the $78.00-80.00 range. The Point & Figure chart points to an $82 target. More aggressive traders might want to aim higher than $80 (or $82) given the breakout in the sector index.
Picked on November 29 at $ 74.35
KLA-Tencor - KLAC - close: 51.70 chg: +1.05 stop: 49.49
Semiconductor stocks rallied strongly today thanks to some M&A activity in their sector. The SOX rose 1.9% and shares of KLAC surged 2%. The rebound in KLAC today is certainly encouraging and helps reinforce the stock's rising trend. Currently our target is the $54.50-55.00 range.
Picked on November 14 at $ 50.81
KB Home - KBH - close: 51.42 change: -0.62 stop: 47.99
Homebuilders struggled to build on last week's gains after an October report showed that pending home sales slipped about 1.7%. Peering at KBH's chart it looks like shares managed a minor bounce from broken resistance and what should be support at its 200-dma. However, we would not be surprised to see a deeper dip toward the $50 level, which we'd use as a new entry point to buy calls. Traders can choose to open positions now or wait for a potential dip back towards the $50 region. Our target is the $57.50-60.00 range. The P&F chart looks pretty bullish with a spread triple-top breakout buy signal with a $73 target.
Picked on December 03 at $ 52.04
Lockheed Martin - LMT - cls: 92.14 change: +1.79 stop: 87.65
The DFI defense index broke out to new all-time highs. Leading the charge was LMT, which bounced from a test of the $90 level to rally 1.98% and close at its own record high. We don't see any changes from our previous updates and remain bullish. We're going to alter our exit strategy and set two targets. Our conservative target is unchanged in the $94.85-95.00 range. But we're officially adding a secondary, more aggressive target in the $99-100 range.
Picked on November 29 at $ 90.62
Merck Co. - MRK - close: 44.70 change: -0.36 stop: 43.29
Shares of MRK actually started the morning off strong but eventually gave in to selling pressure in the drug index. Weighing on the drug sector was bad news from Dow-component Pfizer, who said that they were ending research on their latest cholesterol drug still in development. Today's session in MRK looks like a bearish failed rally but studying the daily chart you'll note a new MACD buy signal. We would wait for another rally past the $45.00 level before considering new call positions. Our target is the $49.50-50.00 range.
Picked on December 03 at $ 45.06
Petroleo Brasileiro - PBR - cls: 95.58 chg: +1.68 stop: 88.85
PBR bucked the trend in energy stocks today and rallied 1.7% to a new three-month high. The move in PBR was a reflection of the very strong Brazilian markets, which rose more than 3% today. Our target is the $98.00-100.00 range.
Picked on November 29 at $ 91.51
Research In Motion - RIMM - cls: 136.36 chg: +0.68 stop: 129.99
Hmmm... we are starting to grow concerned with the trading in RIMM. The NASDAQ Composite soars 1.45% and RIMM under performs with a 0.5% gain. The trend is still bullish but momentum is definitely slowing down. We'd hesitate to open new plays at this time. Our target is the $142.00 level.
Picked on November 28 at $134.29
Sepracor - SEPR - close: 57.82 chg: +2.52 stop: 53.61
Monday proved to be a strong day for SEPR. The stock got an upgrade to a "buy" this morning. Plus, there was chatter today that after Pfizer's disappointment with their latest cholesterol drug the company might go on a shopping spree to buy new medicines. SEPR was mentioned as a potential target for PFE. SEPR's market cap is around $6.3 billion while PFE has about $13 billion in cash (source: AP). Our target for SEPR is the $59.50-60.00 range.
Picked on November 19 at $ 54.69
Thomas & Betts - TNB - close: 52.74 chg: +0.68 stop: 49.90
TNB jumped higher this morning and closed with a 1.3% gain. The rally today is a bullish breakout over short-term resistance at the 10-dma and its two-week trendline of lower highs. The move looks like a new entry point to buy calls. The next hurdle is resistance at the $54.00 level. Our target is the $56.00-57.00.
Picked on November 12 at $ 51.36
Valero Energy - VLO - close: 55.69 change: -0.16 stop: 52.85
Traders were very quick to buy the dip in VLO this morning near the $55.00 level. We see the afternoon bounce from $55 as a new entry point to buy calls. Our target is the $59.50-60.00 range. Keep an eye on the 100-dma near $56.25 since it might act as short-term overhead resistance.
Picked on December 03 at $ 55.85
Genzymme - GENZ - close: 63.27 change: +0.50 stop: 66.05
Monday's market action proved to be rather bullish with a widespread rally including a 1.3% gain for the BTK biotech index. Shares of GENZ produced an oversold bounce and a 0.79% gain. However, the afternoon strength in GENZ began to fade under the $64 level. This may prove to be a failed rally and a new entry point to buy puts. However, we would suggest a high-level of caution before opening new put plays with the major averages showing so much strength. The P&F chart has already produced quadruple-bottom breakdown sell signal with a $55 target. We are suggesting puts with GENZ under $64.00. Our target is the $58.00-56.00 range. We're setting the initial stop loss at $66.05 but more conservative traders might want to try with a tighter stop (maybe around 64.85).
Picked on December 03 at $ 62.77
NewMarket - NEU - close: 62.14 change: +1.82 stop: 62.25
A broad-based market rally and a drop in oil helped fuel a 3% oversold bounce in NEU. NEU was challenging support so we're not surprised by the bounce. We wanted to see more confirmation and that's why we're suggesting a trigger at $58.25 to open positions. IF NEU continues to show a lot of strength we'll drop it as a bearish candidate. Currently we're just spectators at this time. If triggered at $58.25 our target would be the $52.50-52.00 range.
Picked on December xx at $ xx.xx <-- see TRIGGER
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Caterpillar - CAT - close: 61.49 chg: +0.30 stop: n/a
We are not suggesting new positions at this time and don't see any changes from our previous updates. Our estimated cost was about $0.75. We want to exit if either options rises to $1.50. The options in our strangle are the December $65 call (CAT-LM) and the December $55 put (CAT-XK).
Picked on November 08 at $ 60.10
Blue Nile - NILE - cls: 33.69 chg: +0.29 stop: n/a
NILE is trying to bounce but it struggled to hold any gains over the $34.00 level. We're not suggesting new positions at this time. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).
Picked on October 29 at $ 38.92
Kohl's - KSS - close: 70.74 change: +1.65 stop: 72.05
Monday's 2.38% gain in KSS might just be a temporary bounce but we're suggesting an early exit to cut our losses now. There was no follow through lower on Friday's failed rally. Plus, today's push past the $70 level and its 50-dma and 10-dma looks a bit too strong for us. We would keep an eye on KSS for a breakdown under $68.25 as a potential entry point for new bearish positions.
Picked on December 03 at $ 69.09
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