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Daily Newsletter, Tuesday, 02/20/2007

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Table of Contents

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

Market Wrap

A Quiet Day in the Market

It was a very quiet day today as far as major economic reports go--there were none. So the market was left to its own issues and market participants showed which direction they wanted to take the market--nowhere. It started off with a relatively large spike down which got the bears all excited and they started jumping in and laying on some more shorts. Then a couple of buy programs lit the fuse which sent the bears scurrying for cover, creating quite a sharp v-bottom this morning. Prices were driven to marginal new highs (yes, another all-time high for the DOW) but then the market just stalled for the rest of the day once we entered the lunch period.

I (Keene Little) will be filling in for Jim one more time as he got pulled away from the market today. It'll give me an opportunity to update some road maps I've shown recently and I'll also use this time to discuss the OEX and NYSE since they could be signaling we're at or near an important high. Either that or the OEX is getting ready to blast higher and I'll show why that's a possibility as well. Because of the amount of time it has taken to put the few charts together for this evening's report I'll update the rest of sector charts tomorrow.

This market has been choppy and testing highs and lows and stopping out traders on both sides of the market. It seems intent on pushing aside the retail traders who are trying to day trade this market but instead I think it's just a normal sign of a top being put in place--lots of battles between the bulls and the bears and between those who want out and those who want in. In the meantime it's making it very difficult to get a bead on where it's headed.

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While the longer term patterns suggest topping action, tell that to those who keep buying the dips. Those who have been doing well are the ones who keep their noses plugged and stay long, waiting for support to break. In that regard certainly nothing has changed as of today and you'll want to stay long until bigger cracks in the foundation start to appear. You just need to be ready to bail before the rest of the crowd, before the exit doors get very tiny. I'll try to show where those cracks would develop.

Before proceeding further I did want to update the chart that shows calculated M3 money supply. After last week's ramp higher in the stock market I was sure I'd see a ramp in money creation as well. But it shows just the opposite as of the end of last week.

Calculated M3 money supply, courtesy nowandfutures.com

As you can see in the chart, both the money supply (bold black line) and the rate of change (light blue) dropped last week. One other time that I recently saw the money supply head in the opposite direction from the market was when it had spiked up for the week but the market was flat. The following week saw a big rally. That has me wondering if the lack of new money coming into the market last week will result in more selling this week. Without that false propping the market could be vulnerable to some selling. That obviously remains to be seen.

Looking at the OEX over the past week, and making some posts on the Market Monitor, I thought I'd share some things that show why the 670 area, where the OEX has been stalled for the past month, is so important. A break above could be significant but a failure at this level would be logical. I'll start with a weekly chart and move in closer to show how the Fibs are lining up at this level.

I'm starting with the premise that the move up from the 2002 low is a correction to the 2000-2002 decline. I can say that with a fair amount of certainty because of the corrective wave structure and because of the total lack of impulsiveness in the techs, not to mention a whole slew of sentiment indicators for this rally that fits the "personality" of a b-wave. A new all-time high for the DOW doesn't change that since an A-B-C correction can have the b-wave (the 2002-2007 rally) make it higher than the previous high--it's called an expanded flat correction in that case.

OEX chart, Weekly

First we have a 62% retracement of the 2000-2002 decline at 671.21. Because of the wave count I'm using the October 2002 low instead of the July 2002 low which is slightly lower (and lowers the Fib retracement to 670.13). For the "bounce" from 2002 we have a complex correction in that it's basically a double zigzag up (two A-B-C's separated by an x-wave). There are several ways to label it and not be wrong and this chart shows my preferred count. After the pullback into August 2004 we've had the 2nd A-B-C move up the second leg up (wave-C) = 162% of the first leg (wave-A) at 673.13. Nice correlation with the 62% retracement.

OEX chart, Daily

As a c-wave the leg up from July needs to be a 5-wave move and I've labeled it as such. Typically the 5th wave equals the 1st wave in an impulsive move like this. That projection shows equality at 670.23. Again, nice correlation with the longer term Fibs.

Since the pullback into the low at the end of November we've been in an ending diagonal 5th wave. This is the same ascending wedge I've been showing on the other major indices for what seems like months now. The bearish divergence shown on the daily RSI supports the bearish interpretation of the ascending wedge.

OEX chart, 240-min

Within the ascending wedge is where the wave count gets a little tricky. As most of you know I've been attempting to pick a top in this market and that's been based on each move back to the top of the wedge where it's possible to call the wave count complete. Because it's a corrective wave structure it can morph into a larger corrective count and that's what it's been doing.

I show another Fib projection based on the size of the first wave up in the wedge--the rally from the end of November to the December high. Because it looks larger than the other waves (an extended wave in EW terminology) a common Fib relationship is for the rest of the waves to equal 62% of the extended wave and that's what I show at 670.01 (hard to see amongst all the lines and Fibs but it's the Fib projection in the middle of the chart). Once again, good correlation with the other Fibs.

Each of the waves inside the ending diagonal is a corrective move (so a 3-wave move or something more complex). The move up from February 12th looks like it will be an a-b-c move. So zooming in on that move this 30-min chart shows how it's developing:

OEX chart, 30-min

It's possible the next leg up could head for 677 to achieve equality with wave-A up from February 12th. But the other common Fib relationship between waves A and C is C = 62% of A. That's at 672.72 and puts it in the same Fib window with the others. As I also show on the chart, it's possible we'll get a pullback, perhaps immediately tomorrow, that then leads to another push higher into mid March. This ascending wedge has certainly done a good job hiding its ending pattern and so far there's no reason to believe strongly that it's either ending here or that it will pull back and head higher again. We'll have to let price lead the way.

The bottom line is that the setup is there for a major top to form, either this week or in a couple of weeks. The Fib zone of 670-673 is very strong and it's not at all surprising to see the OEX stalled here for the past month. These Fibs do an uncanny job at showing where support and resistance are located and we humans react to the patterns and relationships without even thinking about it.

The reason I mention the possibility for the market to head higher into mid March is because some cycle studies point to the likelihood that that will be a cycle turn date (around March 13th). As I'll show on several charts, it could mark a high for the market or it could mark the end of a wave-2 bounce. In other words if we were to top out this week and decline through some support levels, the first big bounce to correct the decline could take us into the middle of March. From there we'd be due a strong 3rd wave down and that's why that turn period could be significant one way or another.

I want to move on and take a look at the 4 major indices before I close with a look at the NYSE, doing a similar study as for the OEX above. I'll probably be out of time at that point and will need to hit the send button after that. I'll then update the rest of the charts tomorrow.

DOW chart, Daily

I show the ascending wedge that price has been in since the beginning of time. OK, it just feels that way. Since the pullback into the end of November the choppy rise in price is indicative of an ending pattern, hence the name for this being an ending diagonal 5th wave for the move up from July. We got a little throw-over above the top of the pattern today and the candlestick (hard to see on this small chart) is a hanging man doji. That needs a red candle tomorrow to confirm the potential reversal signal. But it could lead to another push higher into mid March as I had explained above. A break below 12536, the last low, would indicate the top is very likely already in.

DOW chart, 120-min

Zooming in a little closer to the ending diagonal pattern I show a potential wave count and the DOW got close today to the Fib projection at 12805, which is where we'd have two equal legs up from the low on January 26th. A rally much above that would suggest the ascending wedge is probably not the correct interpretation and I'd abandon short positions. Otherwise this is yet again another potential top in the making and it's a good setup to try the short side. One of them is going to stick soon and the drop from this pattern will be fast. I wouldn't be at all surprised to see this pattern that has taken almost 3 months to build get taken down in less than 2 weeks, certainly before the end of March. There's the potential for that anyway.

SPX chart, Daily

Ditto for SPX what I said for the DOW. Same pattern, same expecations. Same little throw-over, same hanging man doji. These two remain like two peas in a pod. Unlike the DOW though, which has broken its downtrend line on RSI, the SPX has not done that. The bearish divergences on this chart are a screaming short, but so what else is new. It takes a break below 1417 to tell us the bears have finally recaptured the ball (and probably won't let it go for a very long time).

SPX chart, 120-min

Looking closer at the price action over the past 6 weeks shows a couple of ideas for where this could be headed. Two equal legs up from January 26th is at 1466.81 and is at the top of a small parallel up-channel for the A-B-C move up from the end of January. But with the small throw-over today, if price drops back down tomorrow morning then that will be a sell signal. Whether it leads to only a pullback and another push higher into mid March or instead starts to take out support, we'll have to wait and see. As above, the setup is there for a top to have been put in today and I think these highs continue to warrant testing in case the decline starts. Just understand the risk and you'll need to be able to watch the market closely.

Taking out the uptrend line, and then 1431 to confirm, will give us a heads up that 1417 will likely be next on the bears' list of things to do. A choppy pullback that holds at or above 1440 would be a good time to try the long side for another run higher into March (scalp play). If you're long, that's also what I would watch for to see if you're comfortable staying in your long positions.

Nasdaq-100 (NDX) chart, Daily

The NDX chart looks messy because I'm leaving in the trend lines that seems to still have an influence over this index. Price action since the sharp move down from the January high looks very corrective. That suggests the decline will continue but again, tell that to the bulls who keep buying the dips. If we're going to see the techs form its own ending diagonal move then all the choppy price action would be fitting. A new high with choppy price action would simply look like the other indices at that point. So the bearish wave count is still a possibility until price gets above the January high at which point we'll start the same process as the others in trying to figure out where the next high will be. The green price path shows a potential rise in its own ascending wedge. But a break below 1763 would say we've seen the top.

Nasdaq-100 (NDX) chart, 60-min

This 60-min chart shows more clearly all the choppy price action. This is what gives it a bearish feel. But any rally through 1838 would have me abandoning all hopes for a bearish outcome, at least for a little longer. At that point price could make a run up towards 1870 or pull right back and find support at the bottom of its ascending wedge (currently near 1790) before heading higher again.

Russell-2000 (RUT) chart, Daily

The RUT has been in a parallel up-channel since the July low but has been struggling underneath the mid line of that channel since January. Today it pushed a little above that mid line and if it can hold above it then it has a chance to rally back up to the top of the channel and a Fib projection at 845. But the strength of the current rally makes me thing that's not going to happen. I just wanted to show you the potential in case you're in some short positions such as bear call spreads.

Russell-2000 (RUT) chart, 60-min

The 60-min chart shows an interesting setup, but only if price turns around and starts heading south tomorrow. If the ascending wedge pattern is correct then there's a good chance it topped out this afternoon. A drop below 815 would be a heads up, a drop below 810 would be dangerous if you're long, and a drop below 802 would say the bears are in control. But any continuation up through 828 would say the bulls want to charge higher. In that case it's not clear whether support will be at the top of the longer term parallel channel (near 821) or back down to the bottom of the larger ascending wedge.

The last charts for tonight will be for the NYSE. I was looking at the NYSE over the weekend since it's clearly in blue sky territory and you can't find "normal" levels of resistance to determine where it could be going. After studying various time frames and patterns I'd have to say it's quite possible we're seeing the high get put in around the current level.

Starting with the weekly chart I show price action since 2000:

NYSE chart, Weekly

I placed a Fib retracement on the 2000-2002 decline that shows the projections above that decline. The first thing to notice is how price reacted around the various Fib levels (tells me whether or not these Fibs are showing influence over the market) and I see good correlation. Next thing I see is that the move up from 2002 is exactly twice the decline at 9455 (the 200% projection at the top). This kind of "measured move" is very common (162% projection is also very common).

I then put in a Fib projection for the leg up from July based on the first leg up off the October 2002 low (hard to see in this scrunched chart) and that shows a 162% projection at 9451. Nice Fib correlation there. And with today's high at 9458 one has to wonder if that's going to do it for this rally.

NYSE chart, Daily

Drilling down, the daily chart shows price action since July (that short leg down in July was actually a truncated finish to the pullback correction from May). I again show a projection for the last leg up (wave-5) based on the first one (wave-1) and it shows they'll be equal at 9489. So if NYSE has not finished rallying then that's the next level I'd watch to see if it tops out there. It's only a stone's throw away at this point. Today's candle is another hanging man doji at Fib resistance. Could be interesting and once again I like the setup on this daily (and weekly) chart for a short play.

NYSE chart, 120-min

Drilling down a little further to look more closely at that 5th wave, which is the leg up from the January low, this 120-min chart shows how price is unfolding in that leg up. Based on the 3-wave start I'm thinking another ascending wedge (ending diagonal 5th wave which allows for overlap between the 1st and 4th waves) and the 5th wave of this pattern is typically 62% of the 1st wave. I show that projection at 9434. This is still relatively close to those longer term Fib levels at 9455 and 9489 and says the rally could end at any time since the minimum Fib projection for the final leg up has been met. Price is also at the top of its ascending wedge.

As I point out on the chart this wave count would be violated (and probably mean something a lot more bullish was going on) if it rallies above 9499. That would cause the 3rd wave of wave-5 on the chart to be the shortest and that violates one of the more important EW rules. It would mean we might have a 1-2, 1-2 to the upside in which case we would probably be blasting off to the upside. Based on several readings, including waning market breadth, I don't think the more bullish pattern is unfolding. But getting above those longer term Fib levels mentioned above would also be bullish.

It takes a break of the uptrend line, currently near 9330, to give bulls a heads up that something more bearish is starting. A break below 9243 would suggest the bears have the ball and I'd start looking for bounces to get short.

The market continues to be a challenge for both sides at the moment if you're trying to trade this sucker. The setups I've shown above continue to have me testing the short side--get in and if drops and comes back against me I get out. One of these is going to stick but as I mentioned, prepare for the possibility that we have another 3 to 4 weeks of this before topping out in mid March. On the other hand, if prices start taking out key levels that I identified, then the short side will be the right side. Until then the bears are fighting to swim upstream. Don't be trying so hard that you run yourself dry of capital and not be able to participate in a nice run back down the hill.

There were no major economic reports today but tomorrow's reports include the following:

The CPI numbers, leading indicators and then FOMC minutes all have the ability to move the market. This market is already feeling jumpy enough so be careful out there. While bear markets are difficult to trade because of the short covering spikes, it will be a lot more fun than this choppy mess we've been in since November. We'll get some clean impulsive moves down and the price action will give us cleaner trade setups. Right now, frankly, it's just a bunch of donkey dust that's being offered to us. Don't waste your money unless you can watch this market like a hawk.

I'll continue to stress the vulnerability the bulls have in this market. Upside potential just isn't worth the risk in my opinion. But clearly it's been shown over and over just how difficult it is to get short and stay short. That will change but if you like picking tops just realize this is a major top we're putting in. As such we should expect the topping action to be a real battle and that will chop traders to pieces. Even the early going to the downside will be full of buying spikes so it will be a challenge to hold onto your trade. As always I'll do my best to point out what I think the pattern is and help trade around the noise. Good luck and I'll see you tomorrow.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Allegheny Tech - ATI - cls: 102.99 change: +0.40 stop: 97.45

Steel stocks turned in a mixed performance on Tuesday and ATI's 0.38% gain actually looks like relative strength compared to the sector. The stock dipped this morning but traders stepped in and bought the dip near $100.80. We remain bullish and don't see any changes from our weekend comments on ATI. The Point & Figure chart is forecasting a $108 target. We are suggesting bullish call positions with the stock above $100 although more conservative traders may want to wait for a breakout to a new high over $105. Our target is the $109.00-110.00 range.

Picked on February 18 at $102.59
Change since picked: + 0.40
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.8 million

---

Boeing - BA - close: 91.03 change: +0.09 stop: 87.99

BA experienced some volatility this morning. Shares spiked toward $91.70 and then plunged to under the $90.00 level before bouncing back by noon. BA spent the rest of the session trading sideways in a relatively narrow range. We couldn't find any specific news to account for the weakness this morning. We remain bullish and we're sticking to our plan to use a trigger to buy calls at $92.51. If triggered our target is the $99.50-100.00 range. More aggressive traders may want to jump in early on a bounce near $90 or a move over $92.00. FYI: The P&F chart shows a fresh triple-top breakout buy signal with a $107 target.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 3.9 million

---

Diageo - DEO - close: 81.99 change: +0.61 stop: 78.45

DEO continued to rebound and shares posted a 0.7% gain on Tuesday. Volume came in a little bit above the daily average, which is positive. Our only concern was how shares struggled with resistance at the top of its gap higher from last week. DEO looks like it's coiling for a breakout higher if you look at the intraday chart. Our short-term target is the $84.75-85.00 range although more aggressive traders may want to aim higher. FYI: The P&F chart points to an $89 target.

Picked on February 14 at $ 81.04
Change since picked: + 0.95
Earnings Date 02/15/07 (confirmed)
Average Daily Volume = 452 thousand

---

Chinese iShares - FXI - close: 107.21 chg: +0.31 stop: 103.99

This looks like another bullish entry point. After some initial indecision this morning shares of FXI began to rise, which helps confirm last week's breakout over its short-term trendline of resistance. Today's gain also contributed to a new MACD buy signal on the daily chart. We are suggesting calls with the FXI above $106.50. Our target is the $114.00-115.00 range. We do expect some resistance near $110 so expect a short-term pull back after testing the $110 region.

Picked on February 18 at $106.90
Change since picked: + 0.31
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 1.9 million

---

OM Group - OMG - close: 51.89 change: +0.53 stop: 48.05

We do not see any changes from our weekend comments on OMG. The stock continues to trade sideways and looks like it's coiling for a bullish breakout over resistance at the $52 level. We are not suggesting new bullish call positions at this time although a breakout over $52 could be used as a new entry point. If you choose to buy a new breakout consider raising your target. We're only aiming for the $54.00-55.00 range. FYI: More conservative traders may want to exit early now and lock in a gain.

Picked on January 25 at $ 48.05
Change since picked: + 3.84
Earnings Date 03/02/07 (unconfirmed)
Average Daily Volume = 770 thousand

---

Research In Motion - RIMM - cls: 141.62 chg: +2.80 stop: 132.39

Our call play in RIMM is now open. The stock broke out from a two-week trading range and broke through resistance near $140.00. Our trigger to open call plays was at $140.51. There is potential resistance near $142.50 and $145.00 at the November and January highs but we suspect that given the current bullishness for stocks that RIMM can trade higher. Our target is the $149.00-150.00 range. We do have a wide stop loss placing it under last week's low. The P&F chart has reversed into a buy signal that points to a $176 target.

Picked on February 20 at $140.51
Change since picked: + 1.11
Earnings Date 03/22/07 (unconfirmed)
Average Daily Volume = 9.1 million

---

RTI Int. - RTI - close: 86.98 change: +3.14 stop: 79.75

RTI displayed plenty of relative strength today with a bullish breakout from its two-week trading range and a breakout over resistance near $85.00. Many of the metal-related stocks turned in a lackluster session but RTI rose 3.7% to post a new all-time high. We are not suggesting new positions and more conservative traders may want to exit early right now to lock in a gain. Our target is the $88.00-90.00 range.

Picked on January 31 at $ 81.75
Change since picked: + 5.23
Earnings Date 03/12/07 (unconfirmed)
Average Daily Volume = 737 thousand

---

Rio Tinto - RTP - cls: 221.97 chg: +1.17 stop: 212.45

We do not see any changes from our weekend update on RTP. The pattern continues to look bullish. Readers need to choose between opening call positions here or waiting on a potential dip toward the 10-dma (near $216.5). Technical indicators on both the weekly and daily charts are turning positive. RTP will probably have some resistance at its November 2006 highs near $230 but our target is the $237.50-240.00 range. FYI: RTP is a high-dollar stock and is bound to see some bigger swings (volatility) and this makes the options somewhat "expensive". Consider this a more aggressive play.

Picked on February 14 at $221.15
Change since picked: + 0.82
Earnings Date 02/01/07 (confirmed)
Average Daily Volume = 437 thousand

---

Sears Holding - SHLD - cls: 189.08 chg: +1.82 stop: 179.89 *new*

Positive comments and a strong performance from retail titan Wal-Mart (WMT) helped push the RLX retail index to a new all-time high. Shares of SHLD followed with a 0.9% gain and its own new all-time high. This morning's dip and bounce near the $185 level in SHLD looked like a great entry point for new positions. The $190 level might be short-term resistance so don't be surprised to see a pull back from here. More conservative traders might want to consider taking some money off the table. We are going to tighten the stop loss to $179.89. The Point & Figure chart points to a $228 target. We are aiming for the $195.00-200.00 range. We do not want to hold over the mid March earnings.

Picked on February 14 at $183.64
Change since picked: + 5.44
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 1.2 million
 

Put Updates

Harley Davidson - HOG - cls: 69.81 chg: +1.77 stop: 70.11

Warning! We warned readers over the weekend that a late day announcement on Friday about a potential settlement between HOG and its striking workers would send the stock higher. Shares gapped open at $68.70 and traded to $70.10 before pulling back. You can't get any closer to being stopped out. Today's gain is a bullish breakout over HOG's trendline of resistance so traders may want to exit early now. Odds are good that HOG will see some follow through tomorrow and stop us out! We're not suggesting new positions unless we see a very clear failed rally under $70.00.

Picked on February 11 at $ 67.80
Change since picked: + 2.01
Earnings Date 04/19/07 (unconfirmed)
Average Daily Volume = 2.3 million

---

MarineMax - HZO - close: 23.50 change: +0.98 stop: 24.25

We cannot explain the reason behind the rally in HZO today. Shares bounced from the $22.00 level on Friday and the rebound continued today. The sharp move higher this morning and the dip buying late this afternoon looks a bit like a short squeeze. HZO does have a high amount of short interest. More conservative traders may want to exit immediately following today's breakout over short-term resistance near $23.00. Our target is the $20.25-20.00 range.

Picked on February 11 at $ 22.59
Change since picked: + 0.91
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 300 thousand

---

Meritage - MTH - close: 43.33 change: -0.23 stop: 45.26

There was no follow through buying in MTH today after last week's big bounce. The stock continues to struggle under short-term resistance near $44.00. We would wait for a new decline under $42.00 before considering new positions. More conservative traders might want to tighten their stops. The P&F chart has produced a triple-breakdown sell signal with a $37.00 target. We are aiming for the $37.50-37.00 range.

Picked on February 11 at $ 41.99
Change since picked: + 1.34
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 473 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

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