The first three days of 2007 had more in common with a thrill park ride than a bull market. Some say the bull has gone into cardiac arrest and this volatility is evidence of fund managers applying the paddles to try and shock some life back into the corpse. Others claim this is just profit taking and the bull will regain its strength and charge higher before the month is out. Those of us watching from the trenches want this battle to be resolved before we venture back into the market. Adding to this volatility will be Q4 earnings, which begin next week. Several warnings suggest this could be a rocky earnings cycle so volatility may increase before it gets better.
Dow Chart - 180 min
Nasdaq Chart - 180 min
Friday started out with a bang after the employment report showed that +167,000 jobs were created in the US in December. This was well over the consensus estimate for a gain of +113,000. There was also an upward revision to November of +22,000 and +7,000 to October. The unemployment rate was unchanged at 4.5%. The continued low unemployment rate helped push average hourly earnings up by +0.5% to $17.04. The manufacturing sector lost -12,000 jobs and posted the sixth consecutive month of losses. Overall the report was long term bullish for the markets because it suggests the economy remains stronger than expected. On the flip side it was negative for short term Fed expectations and the bond market quickly moved any hint of expectation for a Fed rate cut out to July rather than the March meeting. Expectations had been creeping closer over the last couple weeks due to some weaker than expected economic reports.
Friday's employment report showed upward wage pressures and that will prevent the Fed from relaxing their tightening bias. Added to the stronger than expected ISM on Wednesday and the unusually low level of layoffs in Thursday's Challenger report Friday's jobs picture suggests the Fed may have to wait a lot longer to cut rates. The markets reacted negatively with a sharp opening drop and very little end of day buying. None of the economic reports next week are potential market movers.
Also depressing the markets on Friday was the earnings warning by Motorola (MOT). Motorola fell -1.61 after warning that its earnings would miss estimates due to an unfavorable mix of sales. Motorola said the product mix favored the low-end models despite strong sales of its RAZR phone and other high-end models. The KRZR and RIZR models, which are evolutionary versions of the RAZR have failed to catch on due to their high price. Motorola said expectations were now in the range of 13-16 cents on average sales of $11.7 billion. Their prior range was from $11.8 to $12.1 billion. Nokia also took a sharp -5% tumble on Motorola's news.
Helping Motorola push the Semiconductor Index lower on Friday were downgrades on several chip stocks. CSFB downgraded Intel saying the market had already factored in its Core 2 Duo chip line. They also cut Broadcom to underperform saying there was a product cycle lull for the Broadcom line. JP Morgan cut Dell to an underweight rating saying there were rough waters ahead for the box makers. Nvidia was cut to neutral by American Technology Research and lost -2.25 on the news. Openwave Systems (OPWV) was cut to a hold by Jefferies and Co after the company warned for the quarter. EBAY was cut by CIBC World Markets on fears of slowing auction growth and weakness in advertising results. This flurry of warnings and tech downgrades suggests there could be some rough spots ahead once the earnings cycle begins next week.
RIMM continued to buck the tech tide and moved higher gaining +2.73 for the day but ending the week at $141, nearly +17 points off the Wednesday low at $125. This came after news that two members of the options audit committee were recused. A Canadian pension fund cited conflicts of interest by the audit members prompting Douglas Wright and Kendall Cork to withdraw. The gains appear to be short covering and new buying by funds for 2007. Short interest had been very high after the +$80 rally from the August lows. On Wednesday RIMM did announce a licensing agreement with Kodiak Networks to offer a Push-to-Talk (PTT) option on the Blackberry.
Master them with Hotstix QQQ Trader. We'll show you exactly when to buy and sell the QQQQ and turn you into a master trader who knows how to cut your losses, nail short term gains and rack up some incredible profits.
30-Day FREE Trial:
The big news for the week was the collapse in commodity prices. Metals and energy were literally slaughtered over the holiday-shortened week. Copper captured the headlines in the metals sector with a close at a 9-month low of $2.53. This was a -35% drop from the May high of $3.95 and an acceleration of the sell off that started in November. Analysts were trying to pin the blame on many things but I believe it is simply profit taking from an overblown rally. Most people fail to realize that copper traded as low as .69 cents in 2003. 50% of that rally to $3.95 came in March/April of 2006 and was begging for a correction. There has been no material change in copper demand over the last six months only a change in the number of investors who wanted to invest at the top. There is also more supply coming to market to offset the rising demand. When prices moved higher so rapidly, +400% gain, the mining companies quickly moved to bring new production online to capture those prices. Now that production is catching up with demand it is only normal for prices to seek a new level. There were also the tax implications that kept many funds invested until the start of the 2007 tax year.
The second hottest topic this week was the implosion in oil prices. Crude fell from the Dec-29th close at $60.85 to Friday's intraday low of $54.90 in less than three days of trading. This -$5.95 drop or -9.7% came on top of a -$3.30 (-5%) drop the prior week. Unlike copper there is no flood of new production coming to market until 2008. This was strictly a profit taking event now that the 2006 tax year is over. Funds managed to hold over support at $60 for two months as 2006 expired. Once that clock struck 2007 there was no further need to risk their gains and everybody headed for the exits. The press was talking about the failed OPEC production cuts but it is more a temperature problem at this point. OPEC will cut production by Feb-1st and while it may not be the full -1.7 mbpd they advertised it should do the job. The problem is still the weather. December in the US was the warmest December in 111 years. There was little need to burn heating oil and natural gas inventories remain near record levels. Until this mismatch between winter fuel supplies and warm weather ends there will continue to be weakness in prices. However, that was only a side note to the selling this week. Fund managers simply protected their gains until 2007 began and then ran to the exits. Never forget we are only one truck bomb away from sharply higher oil prices.
February Crude Oil Chart - Weekly
The key for oil is what happens next week. The OPEC basket of crude fell to $53 and below their stated support level. This should bring the OPEC hawks out of the closet and we should start hearing about actual production cuts being made. Oil supplies are well above what is needed for the rest of the winter and quick action by OPEC will be needed to prevent any further declines as we head into the Feb/Mar demand slump. I believe $55 is a critical support point for light crude and I bought the dip on Friday. Those taking profits should be done by now and the bottom fishers should be moving in to cleanup the leftovers. Don't forget Iran is still simmering on the nuclear issue. China issued a call on Friday for Iran to quit playing the rope-a-dope and get back to the bargaining table. Of course it was ignored but the fact China went public with a demand for Iran to sober up is a major event. China has been an ally of Iran so that suggests there could be increasing tensions ahead.
Another impact to oil prices was the rising dollar. Assuming the value of a barrel of oil remains fairly constant the rise/fall in the value of the dollars used to buy that oil will cause volatility in prices. If a barrel of oil cost $50 today and the dollar doubled in value that same barrel would only cost $25. If the dollar lost 50% of its value that $50 barrel would then cost $100. While nobody expects that kind of volatility in the dollar the example is still valid. A sharp drop in the dollar's value will cause oil prices to rise. Over the last month several nations have said they were decreasing dollar denominated reserves, which are used to buy oil. This pressures the dollar and theoretically raises oil prices. The stronger ISM and Employment report produces a stronger dollar on feelings that the US economy is stronger than previously expected. This week's jump in the value of the dollar also contributed to the falling price of oil. The dollar has appreciated nearly +2.5% over the last four weeks and produced a corresponding drop in the price of oil but it is only one of the factors moving the price.
There was also a lot of airtime given to the falling emerging market indexes. "The global boom is over, commodities are showing us that demand is dropping sharply. Run for the hills!" That may not have been the exact words but that was the general sentiment. The Emerging Markets iShares (EEM) dropped -5% from its historic high of $116.41 set on Wednesday. The FTSE China/25 iShares (FXI) tumbled -13 (-11%) from its high of $118 also set on Wednesday. These sharp drops were given as evidence that emerging markets were dying. This is total crap. An entire economy does not turn around from record highs to recession in three days. The FXI was up +79% for the year! An -11% drop in the first three days of a new tax year is simply profit taking. Economies don't conveniently implode on the first tax day of a new year. I never cease to be amazed by the stupidity of some analysts and reporters.
FTSE China/25 iShares ETF Chart - Daily
In the case of the FXI the reporters gave the new reserve requirements for Chinese banks as the cause for the implosion. I heard it reported twice that China raised the bank reserve requirements by +50% to reduce liquidity. It was not +50% but +50 basis points or 1/2 of one percent to a 9.5% reserve requirement. It was also the fourth time in the last seven months they raised the rate and their economy did not implode on the first three. China is just trying to slow its 11% growth rate to something a little less obscene but raising the reserve rate by 50 basis points is only a political move not a material long term impact to Chinese banks or consumers. The move was already expected after China's central bank telegraphed it in a statement in its last quarterly monetary report. China's A-shares market doubled in 2006 making it the top performing market on the planet. This prompted a surge of bank deposits into the equity market and fears of an asset bubble is prompting the central bank to tighten the liquidity in hopes of cooling this trend. Credit Suisse and ABN Amro said they expected no impact to the growth of the Chinese economy and any impact to the Chinese markets would be short-term only. The major Chinese banks fell limit down in a knee jerk reaction on Friday sending the major indexes and ETFs to strong losses. This should be seen as a buying opportunity as the first quarter gets underway.
Our own central bank, the Federal Reserve, is probably more confused about what to do in the US that the Chinese central bank is about China. The different economic reports continue to send Fed funds futures on wild swings from no cut to quick cut and back again. The futures for March were showing a 20% chance of a March rate cut before the employment report and that was down from over 30% before the ISM earlier this week. By Friday's close that was reduced to only a 6% chance of a March cut suggesting that the Fed was still on the fence as to whether the next move would be a cut or a hike. Bill Gross of Pimco said on CNBC that he expected four rate cuts by the Fed before the year was out with a year end Fed rate of 4.25%. Bill may have an inherent bias since he manages the largest bond fund in the world. He also should have a pretty good idea of where rates are going. The indecision by investors about general Fed direction could be a continuing problem for the equity markets.
When reviewing the indexes the Dow looks like it changed its character at the close on Dec-29th from a mild mannered blue chip index to a small cap index with Attention Deficit Disorder. The calm rolling trends turned into sharp volatility spikes and direction was filled with numerous reversals. A new historic high was made at 12580 on Wednesday morning followed by a support test just above 12350 on Friday morning. Friday's close at 12400 was near the low end of the range for the week but did not necessarily indicate that the market is going lower.
Dow Chart - 60 min
Nasdaq Chart - 120 min
The Nasdaq chart looks like the Dow chart on speed. The upper end of its range was tested twice with a test of the monthly low in the middle. Friday's loss of -19 points came the day after a close at a three week high. The Nasdaq was extremely volatile and that volatility was accented by the numerous warnings and downgrades on the tech sector. For next week support remains 2400 and it has been tested four times in the last six weeks.
The Russell-2000 was the weakest performer with a Friday close right on support at 775. There appears to be no buying interest by funds as we begin the new tax year and that is normally the kiss of death for the broader markets. Unless the Russell rises from the dead on Monday this could be an ugly week. Joining the Russell was the NYSE Composite, which closed right on support at 9020 and a five-week low. This compares to its new historic high of 9209 set on Wednesday. That is a -189 point drop in three days! The collapse of the Russell and NYSE Composite is not a positive sign for equities.
Russell-2000 Chart - Daily
S&P-500 Chart - Daily
I was on vacation the week after Christmas and the last commentary I wrote
before leaving for a week was Tuesday 12/26. The S&P-500 had closed at 1418, our
directional indicator at the time. I advised remaining long over 1418 for only a
short-term trade and suggested going short on any weakness
just below 1430. Over
the next three days the S&P tried three times to tag 1430 and failed on each
attempt. Wednesday's failure at 1429.42 was a perfect opportunity to get short
in 2007 ahead of funds exiting their winning positions and dumping their end of
December window dressing choices. For next week I would retain that short bias
under 1420 with the potential to test support at 1385. Once the funds start
putting end of year retirement contributions to work we should
see the Russell
and NYSE Composite begin to catch a bid and we can start thinking about long
positions once again. Without any material economic reports to muddy the water
next week the markets should be focused on any remaining earnings warnings and
the beginning of actual earnings with Alcoa on Tuesday. The real flood of
earnings won't begin until the following week (15th) so that leaves the week
ahead as a cleanup week for whatever portfolio changes the funds have in mind.
trying to trade the volatility and look for major support points like S&P
1385 as a potential buy target and a breakout or failure at 1420 for a
directional decision on the upside.
Sepracor - SEPR - close: 61.89 change: +0.54 stop: 59.65
We Like It:
BUY CALL FEB 60.00 ERU-BL open interest=1064 current ask
Picked on January 07 at $ 61.89
Cummins Inc. - CMI - close: 116.06 change: -1.98 stop: 118.15
Why We Like It:
BUY PUT FEB 115.00 CMI-NC open interest= 79 current ask $3.90
Picked on January xx at $ xx.xx <--
Group 1 Auto - GPI - close: 49.81 change: -1.28 stop: 52.01
Why We Like It:
BUY PUT FEB 50.00 GPI-NJ open interest=130 current ask $2.45
Picked on January xx at $ xx.xx <-- see TRIGGER
Vornado Realty Trust - VNO - cls: 119.55 chg: -2.45 stop: 122.65
Why We Like It:
BUY PUT FEB 120.00 VNO-ND open interest=336 current ask $3.60
Picked on January 07 at $119.55
Lockheed Martin - LMT - cls: 92.02 change: +0.33 stop: 89.75
Defense stocks were unable to avoid the market-wide profit taking on Friday but LMT did manage to close in the green. Yet the stock continues to trade sideways and the lack of upward momentum is pulling the technical indicators toward bearish signals. The stock should have support near the $90.00 level, which is bolstered by its rising 50-dma. Unfortunately, we are seeing a bearish divergence between price and the MACD indicator and the weekly chart shows a large bearish wedge pattern. We hesitate to suggest new long or call positions at this time. A strong bounce from the $90 level might change our mind. More conservative traders may just want to exit early. Currently we have two targets. Our conservative target is the $94.85-95.00 range. Our aggressive target is the $99.00-100.00 range.
Picked on November 29 at $ 90.62
Altria Group - MO - close: 87.15 change: -0.50 stop: 84.75
We do not see any significant changes from our new play description on Thursday night so we're reposting it here:
Now that it appears the legal troubles for the tobacco industry are finally beginning to diminish many equity analysts are betting that MO will finally spin-off their Kraft business. Spin-off expectations and improving trends for cigarettes overseas is pushing MO to new all-time highs. Volume behind Thursday's rally was significantly above is average, which tends to be a bullish signal. Traders can choose to buy calls now or wait for a potential dip back toward the $86 region. Broken resistance in the $85.00-85.60 region should offer support. We are targeting a rally into the $92.50-95.00 range. Expect some round-number resistance near $90.00. The P&F chart currently points to a $114 target. We do not want to hold over the late January earnings report. FYI: The stock has been getting some positive analysts comments recently and just yesterday LEH raised their price target on the stock.
CALL FEB 85.00 MO-BQ open interest=6382 current ask $4.70
Picked on January 04 at $ 87.65
Reynolds American - RAI - cls: 64.11 chg: -1.64 stop: 64.90
Friday's session looks pretty negative for RAI. The stock lost 2.49% and under performed its peers and the major market indices. Furthermore Friday's sell-off was fueled by above average volume and RAI broke down under the 50-dma and is flirting with a breakdown under technical support at its 100-dma. The only news we could find that might account for Friday's weakness was an extension of the company's exchange offer for its R.J.Reynolds senior secured notes. Fortunately, we're still just spectators at this point. It's our plan to buy calls on a breakout over resistance in the $66.00-66.50 range. Our suggested trigger to open call plays is at $66.55. If triggered our target is the $69.90-70.00 range. More aggressive traders may want to aim higher. FYI: If RAI doesn't rebound soon we'll drop it as a bullish candidate.
BUY CALL FEB 65.00 RAI-BM open interest=3549 current ask $1.90
Picked on January xx at $ xx.xx <-- see TRIGGER
3M Co. - MMM - close: 77.42 change: -0.53 stop: 80.01
This might be a new entry point to buy puts on MMM. The stock's three-week consolidation above its 200-dma has finally been broken. Shares lost 0.6% on Friday and closed at a new two-month low under its 200-dma. The weekly chart's MACD is nearing a new sell signal and short-term daily indicators are turning lower again. While we are suggesting plays here more conservative traders may want to wait for a drop under the exponential 200-dma (near $77.00) or the 100-dma (near $76.35). Our target is the $72.50-70.00 range. The P&F chart points to a $47 target.
BUY PUT FEB
80.00 MMM-NP open interest=1058 current ask $3.40
Picked on December 17 at $ 78.31
NewMarket - NEU - close: 56.21 change: -1.42 stop: 60.35 *new*
NEU continues to sink and the stock lost another 2.4% on Friday. We're not suggesting new positions since shares are quickly approaching our target in the $55.00-54.75 range. We're concerned that NEU might find support at its rising 200-dma, which is nearing $55.00. Please note that we're adjusting our stop loss to $60.35, which is just above the recent highs. FYI: More aggressive traders may want to aim lower.
Picked on December 14 at $ 59.11
Sears Holding - SHLD - cls: 166.04 chg: -0.96 stop: 171.55*new*
Retail stocks continued to see more selling pressure. The RLX index lost 1.1% while SHLD slipped 0.5%. The stock stalled right at its rising 100-dma. The trend for SHLD still looks bearish but be prepared for a potential oversold bounce from here. The $170 level should act as short-term overhead resistance. Readers can use another failed rally under $170 or a new decline under $165.00 as a new entry point. The Point & Figure chart points to a $152 target. Our target is the $162.00-160.00 range. We're going to adjust our stop loss to $171.55.
Picked on December 22 at $167.90
YUM Brands - YUM - close: 58.19 change: -0.51 stop: 60.26
YUM is inching lower toward the bottom of its trading range and looks poised to breakdown next week. More aggressive traders may want to consider new put positions now. We would wait for a decline under $58.00 or its December low near $57.82 before opening new put positions. Our target is the $55.75-55.00 range but keep an eye on the rising 100-dma as potential support. FYI: A decline under $57.00 would reverse the P&F chart into a new sell signal.
BUY PUT FEB 60.00 YUM-NL open interest=168 current ask $3.10
Picked on December 12 at $ 58.49
(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.)
Blue Nile - NILE - cls: 38.53 chg: +0.52 stop: n/a
We are down to our last two weeks for this January strangle play on NILE. January options expire soon. The bad news is that NILE has rebounded almost back to where we picked it. Odds are that the slow and steady buying in NILE is due to funds picking up shares before NILE is added to the S&P smallcap index, which was announced a few weeks ago. We're not suggesting new positions. We are adjusting our target to breakeven at $2.40, which was our estimated cost. 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
Biosite Inc. - BSTE - close: 55.06 change: +3.86 stop: 48.65
Wow! We thought BSTE was going to run but we didn't think it was going do it all in one day. We added BSTE as a bullish call candidate on Thursday night following the breakout over resistance. The stock shot to our target on Friday with a big rally on huge volume. Our target was the $54.85-55.00 range and BSTE hit an intraday high of $55.50.
Picked on January 04 at $ 51.20
After analyzing our cell phone usage recently, my husband and I made a change in carriers, choosing one that allows us to call our five "fave" numbers without them counting against our allotted anytime minutes. We're allowed to change our "faves" once a month, a helpful tool when our contact list might change from time to time.
"Fave" websites for technical traders might change from time to time, too, and mine have. What might my current "fave" sites be?
Through the years, I've tended to simplify the indicators that I use, narrowing them down to a few indicators that I trust, but now and then, new information impresses me. That brings me to the first of my faves, the experts from www.tradeguider.com.
This site promotes an expensive subscription service that offers automatic indicators. I am not a subscriber and have not tested their automatic indicators, but I do go to the free part of the website at least every couple of weeks and listen to any free webinar I can find that's offered by Todd Krueger or Tom Williams. Listening to those webinars requires a free registration on their site. Krueger and his cohorts promote a style of trading that they call volume spread analysis. The use of the word "volume" indicates that this style of trading would be most useful for those who trade a security whose volume can be measured, such as individual equities and futures. Their methodology examines both the volume that accompanies a particular bar or candle and the price spread. As examples, they include charts on equities, futures and currencies.
Listening to their webinars and clicking on their free "chart of the week" sessions proved a revelation when I first discovered it. They teach traders to see the footprints of the big-money institutions and funds. As they often suggest, individual traders do not want to be buying if those big-money people are selling, or vice versa. Several of their statements run counter to the supposed truisms we traders have always been taught--for example, it is not always a good thing when an upside breakout is accompanied by huge volume as we've been taught in the past--but prove so logical when explained that I'll never forget the information I've learned on those webinars.
As this article was being roughed out, upcoming webinars included "Surviving a Trading Blow-Up," "Developing an Annual Trading Plan," and "Exploiting Order Flow and Liquidation Pressures." As should be apparent, the webinars range from those addressing the necessary business of trading to those introducing specific trading ideas. Webinars address ideas appropriate for such diverse markets as the grain markets, metal markets, options, and the good old Dow. Some are appropriate for the beginning trader; some discuss tools that only the experienced trader would be ready to use. Presenters discuss technical trading tools such as ADX, volatility indices, candlesticks, order flow, and many others.
The webinars require a broadband or high-speed Internet connection, but even computer klutzes can figure out the setup and attend these webinars. The site offers more than webinars. It offers simulators and tutorials on trading agricultural markets, argricultural options markets and Dow futures.
For those who want information that's focused on options, www.cboe.com offers that focus and is another of my faves. The "Learning Center" of the CBOE's site offers important help to newbies, and the "Products" portion educates newbies and refreshes the memories of experienced traders who can't quite remember the settlement date on the index options they're considering trading. The CBOE has just developed a new Virtual Trading Tool that allows traders to try out new strategies.
Screenshot of the CBOE's New Virtual Trading Tool:
A perennial fave for me when I'm looking for information on a technical trading tool that I haven't yet investigated is www.stockcharts.com. Although it's a bit lower tech, without the bells and whistles in the form of webinars and virtual trading platforms, this site's "Chart School" is often the first place I visit when I want to review an indicator. For example, do you want to know how the Aroon indicator system is calculated? Chart School provides the formula as well as a history of the indicator's development and a short course on the basics of using the indicator.
When I set up my five faves on my new cell phone, I left one empty in case my calling patterns changed. Other than the information provided on our site and our sister publications such as Mike Parnos' Couch Potato site, I don't have a current fifth fave to list in this article. I thought I'd found a fifth fave, but there turns out to be a problem: cost.
I discovered that STOCKS and COMMODITIES magazine provided a list of webinars, seminars and videos, found at this link.
Among the webinars,
seminars and videos listed there, I found a video titled
"Advanced Candlestick Charting Techniques Video" by Steve Nison's
Candlecharts.com Inc. I'd love to review this video. It is not free, however,
costing $379.00. Want to learn about Gann forecasting techniques? You can find a
seminar for that, too, but it's even more costly. I did locate some as low as
$99.00, but when the CBOT offers more webinars than I can finish and offers them
for free, I think I'll leave
that fifth fave free for now.
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc