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Daily Newsletter, Wednesday, 03/21/2007

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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

It's How You Say It

And of course how you define "it". The bulls may have received a little help from their friends at the Fed this afternoon. They certainly seemed to like the language change that ever so slightly hinted that maybe, perhaps, possibly there could be a relaxing in the vigilance of the Fed on inflation and move towards becoming more accommodative in an economy that appears to be slowing down. Could the Fed have done a timely injection of new money into the market through their megabank partners at the same time? It certainly helps their effort to keep the stock market from scaring away investors just at a time they're needed most.

If the stock market drops then many people become depressed about their financial well-being. It won't be anything like if the housing values drop but that will be later (not much later). So the Fed knows that the key to a healthy economy is a happy consumer who is willing to get further into debt up to his eyeballs and keep spending. So the injection of a few hundred million dollars, timed to be used, oh, let's say around 14:15 in the afternoon, could do wonders for peoples' spirits. Is that the way it happened today? It's anybody's guess and other than Jim Cramer spilling the beans on hedge funds, no one else is talking.

Speaking of Jim Cramer, and his now famous interview back in December on street.com, the news of it spreading around the internet on YouTube made the business section of the NY Times yesterday. Assuming the market is in for a big correction ahead, once people get angry again and start looking for someone to blame, you can bet the hedge fund industry will feel the pain of Congressional and SEC oversight. Abuses of the system are easily overlooked when the market is rallying but as we saw in 2000-2002 when all the lawsuits were flying, people become very intolerant when they're losing money. We can also expect to see massive changes in the banking industry after millions of people suffer in the housing market.

Back to the Fed, which was the only economic report of significance today (there was a crude inventories report but oil barely made a blip on the charts today), the language was what the market was looking for. The FOMC announcement had rates holding steady at 5.25% (no surprise there) but they dropped the phrase "additional firming may be needed." They said its "predominant policy concern remains the risk that inflation will fail to moderate as expected." They acknowledged recent data that shows both higher inflation and a weaker economy. Hmm, that smells like stagflation to me.

But don't confuse facts with emotions. The market heard what it wanted today, which was the Fed might, maybe, perhaps, could think about possibly relaxing their hawkish stance on interest rates. It's all a bunch of phooey of course and when you think logically about this (but we of course know we can't go there since a logical market is an oxymoron), there is nothing whatsoever bullish about a weakening economy. I had mentioned last night that by the time the Fed recognizes a slowing economy the market will already be much lower than it is today.

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As the words are further digested tonight, and reported on tomorrow, it may start to look a little less bullish. As one economist noted, "This is a grudging removal of the tightening bias." But the FOMC committee made it quite clear that they have heightened their concern about inflation and suggested that it is still leaning toward raising interest rates should inflation not come down sooner rather than later. As the Fed said, "Recent readings on core inflation have been somewhat elevated. The high level of resource utilization has the potential to sustain those pressures."

J. Alfred Broaddus, the former president of the Richmond Fed noted that the Fed is "not satisfied with the progress they are making long-term in bringing inflation back down to 1-2% level." Most believe the Fed will simply do nothing until the mixed data (slowing economy, higher than desired inflation) starts to sort itself out. This should not have been that bullish for the stock market. But don't confuse emotion with facts. And certainly don't argue with the Fed when they're stuffing the money channels.

Speaking of money creation, it's been a few weeks since I last showed the calculated M3 money supply chart.

Calculated M3 Money Supply chart, Weekly, courtesy nowandfutures.com

After a dip in the early part of the year the Fed has been busy again and the money supply is making new highs. But the rate of increase (light blue line) remains below its peak so it remains to be seen if the Fed will be forced to start draining some liquidity (through a forced program due to credit tightening by banks). This report comes out at the end of the day each Friday so it'll be interesting to see if the Fed was active this week since we've seen such a strong rally from a week ago Wednesday.

Back to the Fed, they also downgraded their assessment of the economy, something that's not exactly bullish. The bulls conveniently skipped over that part. It's called selective listening. For the housing market, the bulls again interpreted as bullish the Fed statement about seeing a continuing softening in the housing market. As discussed here many times, a slowing housing market will clearly be depressive for the economy and stock market. Consider today's rally a yeeha moment that will probably cause some hangovers for bulls buying this bull.

While the bond market is pricing in a couple of rate cuts this year there have been have been a larger number of economists and strategists saying the Fed is more likely to raise rates to stop inflation than lower them to stoke the economic fires.

Even the reaction out of the bond market today was somewhat muted as compared to the reaction out of the stock market. Bond rates changed less than half of what stock prices changed. They even pulled back after the initial post-FOMC drop (in rates, rally in bonds). This is the daily chart on the 10-year yield that I showed yesterday.

10-year Yield (TNX) chart, Daily

I had mentioned yesterday that the important level to watch is 4.4% since a drop below that level would be a break of longer term support and it would mean the bond market sees the Feds a lot closer to cutting interest rates. Follow the bond market's cue here. If support continues to hold here and then rally, that will be our cue that the Fed will either stay at 5.25% much longer or might even be forced to raise rates. I suspect by then the stock market will already have gotten a whiff of the same thing and be making some new lows.

Let's get right into tonight's charts and see what today did to them.

DOW chart, Daily

Today's big white candle took price right up to the DOW's 50-dma. It would be a logical place for the rally to finish but as I show on the 60-min chart below, there's still a chance a pullback could be followed by another push higher and tag its 62% retracement of the decline from the February high (12509). Bottom line here is that this correction could very well be over and therefore be very careful if you're even thinking about chasing to the long side.

DOW chart, 60-min

In yesterday's chart I showed a more bullish short term pattern where the DOW could jump up to the top of a parallel up-channel for price action since the March 14th low. This coincided with the 50-dma so it was a natural target and resistance level. That could be it for the rally and tomorrow we'll kick start the next leg of the decline. But that would leave the wave pattern looking a little unfinished. I think we'll get some consolidation in a 4th wave pullback and then a final 5th wave push to a minor new high that will finish the c-wave up from March 14th.

There are many people, especially after today's rally, and most especially after the strong rally from the March 14th low. Who are yelling from the roof tops that the market successfully tested the low, the correction is over and it's time to buy this market for the ride to new highs. I said last week to watch for this to happen. Certain waves have "personalities" and it's a good time to mention two of them.

A 2nd wave correction (labeled wave-2 on the daily chart where price stopped today) is typically identified as having an even higher sentiment reading than the previous move, the February high in this case. People become convinced that the correction is over and that we're on to new highs (in this case, the other way around in a rally after a 2nd wave pullback). From the initial low on March 5th we've had an A-B-C correction and the personality of c-waves is such that I like to call them sucker waves. They suck people in going the wrong way. In this case we're getting the big rally leg and it's sucking in the bulls.

This excessive bullishness, in the case of a 2nd wave bounce, is what sets up the strongest move in the EW pattern--wave-3. They're such strong moves because of the "disappointment" in the bulls who bought the bounce. By the time they realize they're in serious trouble they bail at any cost and the selling intensifies. I must say this c-wave of the 2nd wave has me doubting my interpretation here as well. It sure seems awfully bullish. But I'm sticking with the pattern that says this is just a correction to the initial decline, albeit a strong one. Once it's finished we will see prices drop hard as per my daily chart. Finding the top of the bounce, as always, will be the hard part.

SPX chart, Daily

SPX was stronger than the DOW all day--it was inching higher most of the day while the DOW ran along the flat line. It also rallied much stronger in the afternoon, already well exceeding the 62% retracement of the decline from the February high and getting above its 50-dma. This one will have the bulls yelling from the roof tops to come join them. The reason I have 1442 as the key level where the bearish count is in serious jeopardy is because that's the 78.6% retracement. I call this the "line in the sand" because rarely will you see a retracement exceed that level that then doesn't go all the way and completely retrace the previous move (meaning new highs in this case). So that's the bears' last line of defense--any higher and you should abandon all bearish bets.

I redrew the down-channel again based on today's high but I suspect I'll have to redraw it one more time if we get a pullback and one more minor push higher as per the short term bullish count shown below. Price by no means has to follow this down-channel and it's only an initial guide but if price does follow it then we're now looking at the end of the first larger degree wave-(1) down in late June/early July.

SPX chart, 60-min

SPX poked its head above its parallel up-channel and I think that's the end of the 3rd wave for wave-c, the move up from March 14th. C-waves are made up of 5 waves and therefore I'm now looking for a 4th wave pullback (1-2 days) followed by another final push higher which may or may not tag that 1442 level. This is actually a nice wave pattern and if it follows the green path it will greatly aid in identifying where the top will be and therefore where and when to get short for the big 3rd wave decline. Keep your powder dry for that one.

OEX chart, Daily

OEX tagged its 62% retracement of the decline from the February high to the March 5th low today (655.74) with an intraday high at 656.76. It also hit its 50-dma at 656.41. Seems like a good place for resistance to hold and give us a pullback and that's what I'm thinking we'll get tomorrow. But for the same reason as shown on the DOW and SPX 60-min charts I think we'll get a consolidation to today's rally followed by a push to a minor new high. That will change the down-channel once again, redrawn here from yesterday's, but these channels are just an initial guide to give you a time frame for a normal move.

The trouble is the next leg down will not likely be "normal". It's quite possible we'll see price drop below the bottom of the channel which would obviously tell us the move has a lot of selling strength. We can only speculate at this time what it will do but I just wanted to mention it so that you don't think price has to follow this channel. The more shallow this down-channel gets, the more likely price will bust through the bottom of it in the next decline.

Nasdaq-100 (NDX) chart, Daily

The NDX looks very similar to the SPX now--stronger rally than the DOW. It has rallied marginally above its 62% retracement of the decline from the February high. It also poked above the top of its parallel up-channel for price action from March 14th (shown on the chart below) and I strongly suspect we'll get at least a pullback tomorrow. I had mentioned the 78.6% retracement for SPX above and for the NDX that's just under 1822. But in this case, with its gap only 8 points above that, I wouldn't be surprised to see that gap get closed before this turns back down. There's nothing that says it will get closed but stay aware of that level if you try to short this index (the QQQQ or NQ). I redrew the down-channel based on today's high but I suspect I'll have to redraw it one more time if we get a pullback and another minor high.

Nasdaq-100 (NDX) chart, 60-min

The same discussion for the DOW and SPX applies here--today's rally could have finished the correction, as per the red wave count, and now down we go. But I think the wave pattern would look better with a pullback followed by one more push higher in order to give us a cleaner 5-wave move up off the March 14 low. Finishing up early next week near 1822, at the mid line of the channel, with bearish divergences between the new high and today's high is the setup you want to identify. If you see it set up that way, back up the truck and load up some short plays.

Russell-2000 (RUT) chart, Daily

There's not much to add for the RUT charts. I've redrawn its down-channel but again I suspect I'll have to redraw it one more time if we get a pullback and then another minor push higher. The downside price projections don't change much but the longer it takes to complete this 2nd wave correction, the longer it potentially extends the rest of the move down, which is projected off the 1st and 2nd waves of the move. If the move breaks below the channel then a new parallel channel is created once the end of wave-3 is identified.

Russell-2000 (RUT)chart, 60-min

The same EW labeling belongs on this chart as for the others. Ideally we'll see a sideways/down pullback over the next day or so and then a final push higher. The RUT tends to over-throw its Fib levels but I'd rather not see it get beyond 815, its 78.6% retracement. A rally back up to the mid line with bearish divergences would be a good short entry. It's possible, like I had shown for NDX's wave count, that today's high was the end of the bounce, and a break of its uptrend line would be the first warning (true for the others as well) so watch them for support for a scalp long play if the pullback looks choppy and support holds. But only a scalp play and even that could be risky. The 5th waves are sometimes truncated (don't make new highs) and are generally unreliable to trade.

BIX banking index (BIX), Daily chart

The banks saw some serious buying today. Obviously investors think the banks will benefit from a rate cut that they just know is coming. It's right around the corner, they're sure of it. Once reality settles in I don't think investors are going to like the banks so much. This sector has become very volatile, more so than the broader market, and I suspect the next leg down is going to be an eye opener. Between some Fibs around 404 and the broken uptrend line currently at 406.80, watch for a short play to set up in the banks. A kiss goodbye against its uptrend line would be ideal. If we get a minor pullback and then another push higher, the bulls just might be able to accomplish that.

Broker index (XBD), Daily chart

The brokers aren't quite as strong, or volatile as the banks, although they too had a good day today. If the bulls can drive this up to its broken uptrend line and 50-dma just under 246, find your favorite broker to short as it'll be a sweet setup.

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

The home builders got a little lovin' today too. Unless the market has a lot more rally left to it (I don't think so), I don't think this index will make it back up to its broken uptrend line as I depict on the chart. Two equal legs up in its current bounce is just under 661 and the 200-dma is coming down to 665. That could be the extent of the bounce for the home builders before they tip back over. Maybe up to 669 for a 38% retracement but I have my doubts about that.

It depends on what interest rates do. I showed the chart for the 10-year yield and mentioned the importance of 4.4%. If the yield drops below that level then the home builders will probably benefit from that. If yields reverse back up then the home builders will be a good short sooner rather than later.

Crude Inventories
Crude supplies rose 5.7M barrels for the previous week, as reported by API (American Petroleum Institute) whereas the Energy Department reported a 4.0M increase. API reported gasoline supplies up 753K barrels while the government said supplies dropped by 3.4M. And distillate supplies were down 168K barrels according to API but down 1.7M by the government's count. Somebody needs to get these people in the same room and give us some good numbers. The net result is that oil basically went nowhere today.

Oil chart, May contract, Daily

Oil is still holding above its 50-dma and if it can get another rally leg started it should be bullish for at least a run back up to $65. The larger pattern is not clear at the moment and therefore hard to tell where it's going next. I have a bearish sense about oil and am thinking it's going to break down.

Oil Index chart, Daily

The oil stocks rallied with the broader market today and came right up to its downtrend line from December. It's possible this index is going to consolidate in the triangle shown on the chart but that's just a guess. If that were to happen it would likely be bullish. A break of the downtrend line would have this rallying at least up to 660 but if the broader market turns lower within the next week then I don't see these stocks being immune to the selling. A rollover from here, unless it's going to stay within the triangle, would leave a potentially very bearish EW pattern and a break below its uptrend line just above 600 would likely be followed by some very fast selling.

Transportation Index chart, TRAN, Daily

I thought the Trannies would struggle with the 20 and 50-dma's near 4852, especially with the 20 getting ready to cross down through the 50. If it can manage a shallow pullback over the next day or two it should get another leg up with the broader market. From there I believe the next big sell off will begin. But any rally back above 5000 would suggest the bulls may not be done yet.

U.S. Dollar chart, Daily

The US dollar got hurt on the FOMC news. This should have helped the commodities, including gold and silver, but they barely budged today after the initial morning rally. So the reaction in the dollar may have been a little too much and may find a bottom here. Then we'll get to see if it will start another leg up or instead do a shallow choppy rise in preparation for another leg down (as depicted on the chart). If the dollar does bottom, at least short term, that would likely put some pressure on the commodities and that would start to fit with what I see setting up in the metals.

Gold chart, April contract, Daily

I had mentioned yesterday that gold looks ready to tip back over after a small a-b-c bounce off its March 5th low. Fib resistance is in the 663-664 area and gap close from March 2nd is at 664.80. This afternoon's high, which was a new high for the day, was 665 for the e-mini futures (YG). It could still press a little higher but I believe it's vulnerable to a sell off. A break below 657 would likely signal the breakdown is in progress. If the US dollar starts to rebound watch for the metals to head lower. I still think shorting the shiny metal up here is a good trade but recognize that there is potential now for it to tag 665 (there as of tonight) up to 667.

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

The only two reports tomorrow morning are unemployment numbers and Leading Indicators. The LEI report has the potential to move the market, especially if there's any reconsideration about today's rally. If the LEI shows some continued softening in the economy then there may be a little less bullish enthusiasm.

SPX chart, Weekly, More Immediately Bearish

This week's big rally has given us a large white candle on the weekly chart. It also has the weekly oscillators hinting about turning back up. This actually looks pretty bullish right here and if the rally manages to keep going much higher there will be no question about new highs right around the corner.

But right now SPX is back at the top of its parallel channel, which it broke above in December and then dropped back down below in the sell off from February. Is this going to be a kiss goodbye? Based on the shorter term pattern that's the way I see it setting up. But as discussed with the shorter term charts, any rally above 1442 would have me cancelling all bearish bets until this clears up. In the meantime we've got a very nice setup developing that calls the current bounce just about done, if not done today.

As I pointed out on the few 60-min charts above, the EW pattern would look much better if we get a 1 to 2-day pullback followed by another push higher. That would give us a clean 5-wave move up off the March 14th low, which it needs to be for wave-C of an A-B-C correction off the March 5th low. We'll know if that's setting up by the next pullback. Assuming we'll start a pullback tomorrow, which I believe we will, if it turns into a sharp and impulsive decline (no overlap between the highs and lows within the move down) then that will raise the odds that today's high was it (or perhaps a minor new high first thing in the morning). If the uptrend lines from March 14th start breaking like twigs then we'll want to start looking to get short.

But the better setup would be a pullback that is more of a choppy sloppy sideways/down move that eats up more time than price. It might even form a sideways triangle. That kind of pullback/consolidation would be pointing to another push higher which would be the 5th wave. The new high for that move should leave clear bearish divergences against today's high (or tomorrow morning's if we get one).

That kind of bearish divergence is the confirmation that it's very likely the last move up and it would be the one you want to short. Even if it's only going to be good for a pullback before the market heads higher again, a 5-wave move will be followed by a correction. More bearishly, and the way I continue to lean, is that the 5-wave move will complete the correction of the decline from the February high. The next leg down is the one bears want to grab hold of.

So don't be over-anxious to trade tomorrow as it is likely to be a pretty boring consolidation kind of day. And that might continue right into Friday. Then watch for a new high out of it and start getting itchy fingers to short it. That's what I'll be watching for on the Market Monitor. I was hoping we'd be on our way back down by this time but it looks like the market will once again test my patience. It should be rewarded so keep those stops tight and don't get crazy short yet if you're looking to play the downside. Hopefully it'll set up nicely and give you the ability to keep your stop nice and tight.

Good luck and I'll see you this time next week. Join us on the Market Monitor if you can and we'll try to nail this bad boy and get ourselves a wild pony for the ride back down. See you there.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BA None None
CAI    
JCI    

New Calls

Boeing - BA - close: 90.80 chg: +0.64 stop: 88.95

Company Description:
Boeing is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. (source: company press release or website)

Why We Like It:
BA is marching its way back toward resistance in the $92.00 area. If the markets continue to bounce then BA has a strong chance of breaking out. The P&F chart is already bullish and points to a $107 target. We are suggesting a trigger to buy calls at $92.15, to catch a breakout over resistance. If triggered our target is the $99.50-100.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls. Our suggested trigger to open plays is at $92.15.

BUY CALL MAY 90.00 BA-ER open interest=8275 current ask $3.60
BUY CALL MAY 95.00 BA-ES open interest=9360 current ask $1.40
BUY CALL MAY 100.0 BA-ET open interest=6917 current ask $0.45

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 4.2 million

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CACI Intl - CAI - cls: 48.36 chg: +1.06 stop: 46.64

Company Description:
CACI International Inc provides the IT and network solutions needed to prevail in today's new era of defense, intelligence, and e-government. (source: company press release or website)

Why We Like It:
CAI suffered a huge gap down back in January after issuing an earnings warning. The stock has spent the last three months consolidating sideways following that revelation. Now it looks like shares are finally poised to recover some if its losses. Today's 2.2% rally produced a breakout over short-term resistance near $48.00 and a breakout over technical resistance at its 50-dma. We're suggesting call positions now although more conservative traders may want to wait for a move over the January 18th high near $48.90 first. Our target is the $52.50 mark. We do not want to hold over the late April earnings.

Suggested Options:
We are suggesting the May calls. Traders might want to consider using April calls, which have more open interest.

BUY CALL MAY 47.50 CAI-EB open interest= 0 current ask $2.85
BUY CALL MAY 50.00 CAI-EJ open interest= 5 current ask $1.60

Picked on March 21 at $ 48.36
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 517 thousand

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Johnson Controls - JCI - cls: 96.03 chg: +0.74 stop: 93.99

Company Description:
Johnson Controls is a global leader in automotive experience, building efficiency and power solutions. The company provides innovative automotive interiors that help make driving more comfortable, safe and enjoyable. (source: company press release or website)

Why We Like It:
JCI has spent the last four weeks consolidating sideways after an impressive run up. The consolidation took a neutral stance with lower highs and higher lows. It's not uncommon for a stock to breakout from a neutral pattern and continue with the preceding trend, in this case that's upward. The technical indicators are suggesting the next move is higher and the P&F chart is already bullish with a $102 target. We believe that today's rally looks like a bullish breakout from JCI's consolidation. Our short-term target is the $99.75-100.00 range. More aggressive traders may want to aim higher! We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls although Aprils might work and have more open interest.

BUY CALL MAY 95.00 JCI-ES open interest= 0 current ask $4.50
BUY CALL MAY 100.0 JCI-ET open interest=25 current ask $2.05

Picked on March 21 at $ 96.03
Change since picked: + 0.00
Earnings Date 04/20/07 (unconfirmed)
Average Daily Volume = million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 93.87 chg: +2.39 stop: 88.85*new*

It was a strong day for tech stocks and AAPL helped lead the way with a 2.6% rally albeit on below average volume. Shares also got a boost from positive reviews for the company's new product AppleTV. The next challenge for AAPL is potential resistance near $95. We are adjusting our stop loss to $88.85. Our target is the $97.50-100.00 range.

Picked on March 19 at $ 91.01
Change since picked: + 2.86
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

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Allegheny Tech. - ATI - cls: 108.58 chg: +2.59 stop: 99.99*new*

Prepare to exit! The rally in ATI continued and the stock rose another 2.4%. Volume remains light and shares are nearing resistance at the $110 level. ATI hit an intraday high of $108.83. Our target is the $109-110 range. More conservative traders may want to strongly consider an early exit right here to lock in a gain. We're inching up our stop to $99.99.

Picked on March 14 at $101.50
Change since picked: + 7.08
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

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Celgene - CELG - close: 54.64 chg: +1.73 stop: 49.95 *new*

Biotech stocks enjoyed a strong day with the BTK index surging 2.6%. CELG out performed its peers with a 3.2% gain and a bullish breakout over the $54 level and its simple 50-dma. The next challenge is potential resistance at $100 and its $55 level. If you're looking for a new entry point wait for a dip. We are adjusting the stop loss to $49.95. Our target is the $57.50-60.00 range. We do not want to hold over the late April earnings report.

Picked on March 19 at $ 52.65
Change since picked: + 1.99
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million

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ConocoPhillips - COP - cls: 67.17 chg: +0.86 stop: 64.85

Oil stocks continued to rally although crude oil turned in a very lackluster session. Shares of COP continued to bounce after testing support earlier this week. The next hurdle for COP is resistance near $69.00. More conservative traders can remain on the sidelines and wait for a breakout over the $69.00 level. Our target is unchanged at $74.00-75.00. We do not want to hold over the late April earnings report.

Picked on March 20 at $ 66.31
Change since picked: + 0.86
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million

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ESSEX Prop. - ESS - cls: 133.37 chg: +1.82 stop: 127.49 *new*

ESS continued to rally following its recent breakout over $130. Volume was relatively low on today's session, which should be a cautious sign for the bulls. The stock stalled right at potential resistance at its 100-dma. If you're looking for a new entry point wait for a dip. We're going to adjust our stop loss to $127.49. Our target is the $137-140 zone.

Picked on March 12 at $130.26
Change since picked: + 3.11
Earnings Date 02/07/07 (confirmed)
Average Daily Volume = 196 thousand

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Holly Corp. - HOC - cls: 60.25 chg: +1.61 stop: 54.95

HOC helped lead the rally in the oil stocks. The stock rose more than 2.7% and broke out over the $60.00 level, which could have been round-number resistance. Volume on today's rally was above average, which is bullish. Our target is the $62.00-62.50 range. The P&F chart is bullish with a $74.00 target.

Picked on March 14 at $ 57.87
Change since picked: + 2.38
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand

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Accredited Home Lenders - LEND - cls: 11.97 chg: +1.20 stop: n/a

LEND is still seeing a short squeeze with the sub-prime sector escaping any bad news today. The stock rose 11.1%. We're not suggesting new positions since our exit range is $14.00-15.00. This remains a very high-risk play. More conservative traders may want to exit any call positions early to lock in a gain.

Picked on March 14 at $ 6.04
Change since picked: + 5.93
Earnings Date 05/16/07 (unconfirmed)
Average Daily Volume = 3.0 million

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New Century - NEWC - close: 1.67 chg: -0.02 stop: n/a

NEWC managed to avoid the widespread market rally today. We are not suggesting new positions since the odds look greater that the company may fold versus someone stepping in to buy them out, which was part of our (speculative) exit plan

Picked on March 11 at $ 3.21
Change since picked: - 1.54
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million

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Sunoco - SUN - close: 69.39 chg: +0.90 stop: 63.95

Oil stocks remain strong and SUN broke past its November and December highs to challenge resistance at the $70 level. Volume came in above average on the rally, which is bullish. Given the test of potential resistance at $70 we would not be surprised to see a dip tomorrow toward $68, which readers could use as a new entry point. The P&F chart is very bullish with an $82 target. As a refiner, SUN, should do very well over the summer driving season and investors should eventually begin buying ahead of the summer quarter.

Picked on March 20 at $ 68.15
Change since picked: + 1.24
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million

---

Molson Coors - TAP - cls: 90.75 chg: -0.08 stop: 84.95

TAP experienced some profit taking this morning but traders bought the dip at $89.78 and the stock almost turned green by the closing bell. We're not suggesting new positions. More conservative traders may want to exit early. Our target is the $92.50-95.00 range. We're adjusting the stop loss to $84.95. The P&F chart is very bullish with a bullish triangle breakout buy signal that forecasts a $134 price target.

Picked on March 14 at $ 87.15
Change since picked: + 3.60
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 782 thousand
 

Put Updates

Bausch Lomb - BOL - cls: 49.55 change: +0.49 stop: 52.51

BOL could not avoid the market-wide rally and shares rose almost 1%. Watch for a failed rally near $50.00 or its 200-dma as a new entry point to buy puts. More conservative traders can tighten their stops. Our target is the $44.00-42.50 range but we want to warn readers that BOL may find some support near $47.50 and its December 2006 low.

Picked on March 18 at $ 49.51
Change since picked: + 0.04
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume = 678 thousand

---

Beazer Homes - BZH - close: 33.99 chg: +1.29 stop: 36.25

The FOMC policy announcement not only sparked a rally across the markets but it fueled some heavy short covering in the homebuilders. Shares of BZH were quiet until the FOMC decision was announced and then shares shot higher to close up almost 4%. This looks like a bullish reversal and we expect the bounce to carry BZH toward $35.00 and probably higher. Currently broken support near $35.00 is the next level of resistance. More conservative traders may want to exit now to avoid or limit any losses or consider tightening your stops toward $35. We're not suggesting new positions at this time. Our target is the $30.50-30.00 range. FYI: Traders should note that BZH does have a relatively high amount of short interest (17% of the float) and that does raise the risk of a short squeeze.

Picked on March 12 at $ 34.20
Change since picked: - 0.21
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.2 million

---

Electronic Arts - ERTS - cls: 50.66 chg: +1.33 stop: 51.55

It might be time to run for the exits in ERTS. The market rally fueled a big move in the tech stocks and ERTS managed a 2.69% gain. Shares broke out above the $50 level and its 50-dma and are now challenging technical resistance at the 200-dma. More conservative traders may want to exit early or tighten their stops toward $51. We're not suggesting new positions at this time.

Picked on March 18 at $ 48.92
Change since picked: + 1.74
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 4.0 million

---

Harman Intl - HAR - close: 99.67 change: +1.31 stop: 102.01

The positive market environment helped lift HAR to a 1.3% gain but shares failed to breakout over the $100 level and its 50-dma. The stock certainly looks poised to breakout higher tomorrow and we're not suggesting new positions at this time. More conservative traders may want to exit early or tighten their stops.

Picked on March 04 at $ 97.49
Change since picked: + 2.18
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 614 thousand

----

MarineMax - HZO - close: 21.59 change: +0.14 stop: 22.26

We do not see any change from our previous comments on HZO. More conservative traders may want to exit now. We're not suggesting new positions at this time. FYI: It may be worth noting that HZO has a high amount of short interest. The latest data (February) puts short interest at almost 24% of the stock's 16.8 million-share float. That definitely increases the risk of a short squeeze should the stock unexpectedly rally and breakout higher.

Picked on February 11 at $ 22.59
Change since picked: - 1.00
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 300 thousand

---

Ryland Group - RYL - close: 46.10 chg: +1.13 stop: 46.77

The short covering in the homebuilders following the FOMC news helped lift RYL past short-term resistance at its 10-dma. The stock closed up 2.5% and on strong volume. The MACD indicator on its daily chart has produced a new buy signal. More conservative traders may want to exit immediately. We're not suggesting new positions. The stock does have a high amount of short interest at 24% of the float and that raises the risk of a short squeeze.

Picked on March 13 at $ 44.75
Change since picked: + 1.35
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Two Other Indicators Useful In Pinpointing the Recent Bottom

Strong day today! I hope you were not waiting for this moment to arrive...the 'moment' being Fed standing pat on rates; if you waited until today to capitalize on this move using options, you could have done better than just reacting to the event. So what is better? ANTICIPATING events! How on earth could you do that? Stevens, do you pretend to be psychic?! No way. I propose the radical hypothesis that the MARKET anticipates events ahead of time most every time. The market fell anticipating events or anticipating the worst and then rallied anticipating that prices had fallen too low and that the news ahead would be ok to bullish.

In my last week's Trader's Corner I wrote about some of the key technical indicator OR patterns that suggested that the low of that day (3/14) was a likely 'final' low for the correction; certainly it was a very TRADABLE bottom for call purchases. The indicator or patterns I discussed were:
1. The common corrective pattern of a second lower low; an a-b-c corrective wave or pattern (down-up-down).
2. Establishing a low at a prior bottom.
3. Retracement considerations: a correction retraces 38 percent of the prior major move, not more usually in a dominant bull market trend.
4. An 'extreme' low, suggesting an 'oversold' condition, finally established in the RSI Indicator on a 13-day and 8 week basis.
5. My market 'sentiment' indicator reaching a bearish extreme just prior (3/5 + 3/13) to both recent lows in the market.
6. A 'bear trap' reversal creates a spike or 'V-Bottom' low.

I don't want bore faithful readers of this column, and I know there are a few besides me and a few trader friends, by repeating these points and these examples cited from last week. BUT, if you didn't happen to have read this column LAST Wednesday, you can go back to your Option Investor Daily Newsletter of 3/14 OR see it online by clicking here.

What I will write on today with what time I have is on two other technical indicators I didn't mention last week:
1.) Moving Average Envelopes and
2.) The 10-day average of total exchange volume as a sometimes predictor of market bottoms.

These two indicators were helpful with certain of the major indexes in pinpointing the likelihood that last week's low was it as far as the downside.

With all the indicators save one, it was harder to predict the STRONG upside rebound that followed. I would just note however about the 'oversold' consideration with the RSI (#4 above) is that early-March was the first time that the 13-day Relative Strength Index (RSI) was at or below 30 since July. This was accompanied by the RSI on an 8-week basis also registering at or under its oversold 35-40 zone (it got to 39) since June. Oh yes, 'oversold' on a WEEKLY chart basis in a strong uptrend has to be defined at a higher level than on the daily chart. Well the 8-week RSI did get to 29 for the week ending 8/6/04; yes that 2004.

The meaning of 'over' in oversold or overbought implies 'overly' much or an extreme in ONE direction; e.g., the market has gone down 'too' far so to speak. The market tends to go from extreme to extreme, but also over time reverts to the mean or middle ground. To witness the market getting more overdone on the downside according to the average or norm, suggests some likelihood that it will SNAP back. A snap is not just a gentle rise, but its fast and sharp.

This facet of market behavior doesn't answer the question about whether anyone could have anticipated favorable Fed action a week AGO; the answer is probably that most individuals couldn't or it would be a guess usually, but the market has a whole could and did anticipate a bullish unfolding of events from the date of the recent low. This current rally began a week ago, but the market found a further 'reason' to ACCELERATE to the upside today is all. Spoken like a true 'technician' or true believer!

RSI Indicator:
In case I assume too much for those new to technical indicators: 'length' or the number of 'bars' that any technical indicator or study will take into account is something YOU can set in the RSI indicator. If you call up a daily chart of an index or stock and add the RSI study to that chart, in order to duplicate what I am describing, set 'length' on that chart to 13. If you then change your time frame to WEEKLY, re-set length from 13 to '8'.

** E-MAIL QUESTIONS/COMMENTS **
As you can see I don't have any good ideas of my own that a Subscriber doesn't put in my head! Please send any technical and Index-related questions for answer in any of my articles to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

MOVING AVERAGE ENVELOPES:
The following chart of the S&P 500 Index (SPX) is reprinted from my most recent Index Trader column written at the end of last week as illustrating the moving average envelope study/indicator:

You can see that through this past Friday SPX had dipped to under the lower green line, a so-called moving average 'envelope' line, the value of which here is set to equal a value that is 3 percent below the 21-day moving average of closing prices. The centerline is the average, the upper red line is X percent above that average and the lower green line is X percent below that average.

For the S&P, my starting point is always a 21-day moving average for the INDEXES. The envelope lines starting point are at 3 percent above and 3 percent below the average. More on this in a minute as to why the UPPER line here in the S&P chart is TWO percent.

The point to be made here is that the stock indexes in a 'normal' market, not a raging bull or bear market, tend to trade back and forth in a range between 3 percent above and below this particular moving average; the upper/lower envelope lines are more like 4-5 percent above/below the same (21-day) moving average with the Nasdaq.

In a strong bull market, ONLY a major correction will tend to reach the LOWER 3 (or 4) percent lower envelope line. Also, in strong bull market, prices will 'hang' above the center moving average most of time and maintain a rising trend, but a more gradual one, so the upper envelope line may narrow in; e.g., to 2 percent.

In a strong bear trend, only the major corrective rallies will tend to get near or above the upper envelope line.

Trading wise, the moving average envelope study might have little practical use for MONTHS, which has been the case and that is also the reason why the use of the above-referenced moving average envelope indicator all but went away from my charts and what I was using to study the market. However, after the big scary correction happened, this indicator and how to use it comes right back in as possibly relevant.

My most recent, Saturday 3/17 Index Trader article can be seen online by clicking here.

Updating the S&P 500 (SPX) chart through today as shown below can illustrate some other points on using this indicator. You'll note on the rise from September through February, besides the fact the upper envelope line 'containing' SPX trade so to speak, narrowed in to 2 percent and the index highs sometimes just 'hugged' that line on the way up. There's an important point beyond this: the 21-day moving average tended to act as support on pullbacks, with occasional although short-lived exceptions.

Just as the 21-day average tended to define support on pullbacks, even more significant support can be anticipated on pullbacks to the lower envelope line. (Declines to the lower envelope line is my favorite way to see where the market is 'oversold', because it gives a LEVEL at which that index or stock is oversold.) When SPX pierced its 21-day average, then fell to the lower envelope line but found support in that area twice, followed by a strong rally, the center moving average becomes key again: defining potential resistance.

Yesterday's SPX close ABOVE the 21-day average was suggesting good market strength; it could have been used as a 'signal' to buy Tuesday's close or to add to call positions. A strong rebound from the lower envelope line after months of a bull trend that barely saw even shallow corrections, with follow through that carried prices decisively up through the moving average line, is not surprising for those with familiarity with moving average envelopes applied to the indexes.

If SPX retreated to THREE percent below its 21-day average, we can now anticipate upside potential to 3 percent ABOVE the 21-day (average); I've added in that envelope line in the chart below. The area where the uppermost envelope line intersects around 1460 is also the prior high of course. Upside potential is suggested back to this prior top at a minimum.

Next is to show the moving average envelope study for the Nasdaq 100 (NDX) Index using the 21-day moving average envelope lines, upper and lower, of again 3 percent; somewhat unusually, as the Nas Composite often ranges 4 percent above/below the average. Note how close the double top was to the upper envelope line, suggesting resistance. The recent decline found support on dips to under the lower envelope line. The two lows formed a minor double bottom, just as a double top formed beforehand; I wish that all indexes traded this 'technically' ALL the time.


ANOTHER INDICATOR FOR BOTTOMS ONLY:

The contraction of the 10-day average of total Advancing or UP volume for the two major exchanges, NYSE and Nasdaq, to certain reoccurring levels is significant for bottoms. (Not so with certain levels for declining or Down Volume as a predictor for tops.) Up volume measures market strength and buying interest perfectly. If you are willing to buy stock on up ticks and there are willing buyers in an environment of rising prices, the market is in good shape.

It also seems to be true that a 10-day average of total advancing volume tends to precede or mark significant bottoms. Why this is the case is hard to pin down. The market dips to a value level where the buyers come back in and this tends to be shown extremely well by this indicator at key junctures as demonstrated on the following chart of the S&P 500:

The green up arrows indicate the points where the contraction of the 10-day average of total NYSE Up volume was considered to be the significant 'bottoming' baseline figure. The 10-day average of Up volume occasionally lends powerful credence to a bottom having been made after significant corrections or at the start of a major up trend as was the case back in July. Sometimes the contraction of volume to the level, 600 million shares on a 10-day basis for the NYSE, marks a lesser low as was the situation back in January. It was still a decent rally from there and the added input of this model as an indicator was valuable.

Sometimes the Up Volume indicator seems to 'work' for one of our major exchanges, that is it 'signals' an upside reversal about to happen or lie ahead, but not for the other. I have found that Up volume indication of certain 'baseline' bottom levels for the S&P has been the most consistent in recent years.

You can see for yourself in the case of the Nasdaq, which is my last chart:

The contraction in prices to the 2350 area seemed significant in the Nasdaq Composite (COMP), at least a good-sized rally has followed, but the 10-day average of Up Volume has NOT contracted to a level where I would fully trust that a prolonged or new up 'leg' was underway in COMP.


GOOD TRADING SUCCESS!

** 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 Keene H. Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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