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Daily Newsletter, Wednesday, 04/18/2007

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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

Call Tech Support

The blue chips are having a great time right now--we've seen a very nice rally from the March low. So, is 13 going to be unlucky number? The DOW is now up 13 out of the past 14 days, truly a great performance. And in that time it has added 500 points. I just wish the techs and small caps were keeping up. I think the market needs some support from the tech stocks and small caps in order to give this a more bullish feel.

It also needs better volume support and market breadth--it's the second day in a row that the DOW has closed in the green with negative breadth (11 stocks were up while 19 were down). While one should never argue with price (the final arbiter), a look under the hood is showing some leaks and cracked belts. Even a look at the numbers in the above table shows the negative breadth today, which is a little worse than yesterday's numbers. The total down volume and declining issues beat out up volume and advancing issues. The lower than usual put/call ratio says people are feeling a little too bullish here (but this might be affected by opex activities).

When I see money rotating out of the higher-beta stocks like techs and small caps and heading for the blue chips, as we saw happening towards the end of the rally into February, it was a warning that many were getting defensive (easier to quickly bail from your long stock holdings if you're in large blue chips than the smaller high-beta stocks). So the question is whether or not we're seeing something similar again. The lack of total volume is another worrying factor. And speaking of market breadth, the NYSE a/d was .762 today which is worse than yesterday's .938, this while the NYSE close marginally in the green. Here's an update to the NYSE vs. volume chart I showed yesterday:

NYSE (NYA) vs. Total Volume chart, Daily

The NYSE put in another all-time high again today but it did it on lower volume, again. This can't continue. Today's candle is what's called a long-legged doji and indicates lots of indecision (a battle between the bulls and the bears). This follows yesterday's doji. This could be one reason for the lower volume so any move higher out of this, with volume, would be bullish. But what I see so far does not inspire bullishness in me. Looking a little closer shows the potential significance of the 9655 Fib level that I had pointed out in Tuesday's Wrap.

NYSE (NYA) chart, 60-min

Today the NYSE pressed up again for another test of that 9655 level, getting up as high as 9658.26. But after dropping into the close it's leaving a bearish divergence on the chart, especially if it continues lower on Thursday. The bulls will want to see this either continue higher (duh) or consolidate sideways/down for another day or two before resuming its upward journey.

And while we're looking over the NYSE, this daily chart shows another reason the current level is acting as resistance.

NYSE (NYA) chart, Daily

The old broken uptrend line from July and the trend line along the highs from May 2006 is where price stopped and closed so traders are still paying attention to these. We've seen price press up along the underside of broken uptrend lines before (think DOW most of the end of last year) so that's entirely possible here.

A phenomenon that we're seeing today, that's never been experienced before, has to do with the plethora of ETFs (Exchange Traded Funds). These basket-of-stock funds trade like stocks (except you can short them on a down tick, which could be trouble later) and hot money is chasing these ETFs instead of hand picking stocks of interest. It makes sense--just one order and you've purchased a bunch of stocks. But what this means is that all stocks in that basket are being purchased regardless of whether a stock in the fund deserves to be bought or not.

In other words you could have a lame stock within the ETF that deserves to be sold instead of bought but because someone buys the ETF that weak stock gets bought right along with the rest of them. This is creating a situation where very often top price is being paid for a crappy stock. Whether this explains the strong performance in a large index like the NYSE is hard to say. The bottom line is that the ETFs may be causing both buying panics on the upside just as they might cause selling panics on the downside.

When I look over the blue chippers I'm feeling bullish this market so it's time to sell (wink). After the February high and drop into the March low I've been looking for an end to the current bounce as an opportunity to get short again for the next ride down. Now that the market (blue chips anyway) keeps pushing higher I'm starting to feel downright bullish about all this. So from a contrarian sense this would be your signal to cover your longs and get short.

I'm only kidding of course (am I?) but you get the idea. This market has turned nearly everyone bullish and while I've seen some reports about excessive bearishness, such as the put/call ratios and fewer bullish advisors, I've also seen many of these sentiment indicators in neutral territory. Quite honestly I've never figured out a good way to time the market with sentiment indicators anyway. They're good for a heads up but I'll be dipped if I can trade off them.

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Economic reports

There was only one economic report scheduled for today and it was the Crude Inventories report. The big numbers that came out of today's report have to do with rising refinery capacity and very strong gasoline demand. While refineries are pumping more gasoline, the greater demand has caused a drop in supplies of 30M barrels over the past 10 weeks, with the level now 5.6% below the year-ago level. This caused gasoline futures to jump back up off the 3-week low yesterday. Refineries operated at 90.4%, up from 88.4% the week before. Crude and distillate inventories were also down a little from the previous week.

And with that let's look at the charts.

DOW chart, Daily

I had mentioned yesterday that the DOW had been struggling with the Fib projection at 12796 (which was also its previous high) but if it were able to push a little higher then the Fib projection at 12814 (two equal legs up from March 14th) should get tagged. The DOW ran up through this level but then settled back under it. If the bulls can keep this going then there's very little in its way up to the 13K area. In the move up from March 14 the 2nd leg would be 162% of the 1st leg at 12995 and that's the top of its steep parallel up-channel from the March lows (shown on the 60-min chart below).

As the dark red wave count shows, the current bounce off the March low can still be a b-wave in a larger A-B-C move down from the February high, but it will have to turn down right quick as they say in the south. If on the other hand, the DOW can press higher and follow something like the green price pattern, and especially if it continues on relatively weak volume and breadth, then this will clearly be a blow-off top.

DOW chart, 60-min

The closer view shows the 12814 Fib level and how price closed below it. If the DOW rolls back over from here it will leave a bearish divergence at today's high (which is not surprising considering the lack of market breadth today). The bears need to break this below 12593 to turn it more immediately bearish. If a pullback finds support around 12700 and then heads higher again, it will look bullish for a push to a new high (for a 5-wave move up from March 30th which is depicted on the SPX 60-min chart below).

SPX chart, Daily

While the DOW has tagged its Fib level for two equal legs up from March 14th, the equivalent level for the SPX is just under 1484. So SPX is relatively weaker than the DOW at the moment, which is not surprising since it appears the DOW is getting all the loving lately in an apparent effort to jam the most-public number higher this week.

SPX chart, 60-min

I mentioned for the DOW 60-min chart a possible 5-wave move up from March 30th if we get a corrective pullback shown in green. That would be followed by a new high (maybe tagging the 1484 level if not sooner) and then I'll be watch the following pullback after that to see if it's another corrective one or something sharper to the downside. The bears need to break below 1448 to confirm the rally is finished.

OEX chart, Daily

While the OEX also closed marginally in the green today, it also did it on negative breadth--46 stocks were up while 56 stocks were down. I discussed the Fibs when I use the March 2003 low as the end of the bear market leg down from the 2000 high. The 62% retracement of that move is at 675.97 and today's high was 675.93. The Fib zone that I'm interested in watching (explained in last night's Wrap with the OEX chart) is 676-680 so the lower end of it was tagged today. Whether that's it or not we'll soon find out but heads up here for a potential high for the bounce.

Nasdaq-100 (NDX) chart, Daily

While the NDX closed up from its low, it closed down on the day. The COMP did a little worse and demonstrated again that money seems to be rotating into the larger caps even if the tech large caps did not do quite as well as the blue chips. NDX could just consolidate though before pressing higher so there's nothing bearish about the daily chart yet.

Nasdaq-100 (NDX) chart, 60-min

If the NDX is to have a 5-wave move up from the April 12th low (for wave-C), then the 5th wave would equal the 1st wave just under 1850 (which would also be a retest of the highs in January and February). But very often the 5th wave only goes to 62% of the 1st wave and that's at 1839.53, which is shown on the chart. Today's high was 1839.31. Following that tag there was a sharp sell off into the close. It could be just part of a larger consolidation that we'll see into the end of the week, which would be bullish for a move up next week, or we saw the high this afternoon. It takes a break below 1815 to confirm the rally is finished.

It's finally time to review the SMH chart since it's at an important level.

Semiconductor ETF (SMH) chart, Daily

Here we are, 6 months almost to the day and SMH is back to where it was back in October. As shown on the chart SMH made it up to the top of the consolidation pattern and pulled back. Normally this is a very bullish pattern and I'm more than tempted to recommend buying a breakout. In fact a break above the line at 35.80 that is followed by a successful retest would be a great buying opportunity. Watch for that.

But what I'm worried about is a head fake break that finishes the consolidation followed by a price collapse. Let's face it, this pattern has everyone and their brother leaning long the semis and it wouldn't be the first time we've seen this kind of pattern fail. And when obviously bullish patterns like this fail, they fail hard. Let it prove itself before you get super bullish this sector. If it can break out then next resistance is 36.20 (62% retracement of the 2006 decline) and then 37.43 (downtrend line from January 2004 and the 2nd leg up from the July 2006 low will equal 62% of the 1st leg up).

Russell-2000 (RUT) chart, Daily

The RUT's daily chart looks similar to the NDX in that it could be in the process of finishing its rally in an ascending wedge. After a minor break above the broken uptrend line from August the RUT fell back down. If it consolidates then it should press higher again. But the minimums have been met to call this bounce complete so be careful.

Russell-2000 (RUT) chart, 60-min

As shown with the green wave count we could see a sideways/down consolidation lead to another push higher. The RUT should stay above its uptrend line from March 14th if that's to happen. Any break below 816 would confirm the rally is finished.

BIX banking index, Daily chart

Banks had a very strong day, thanks in large part to JP Morgan's strong earnings numbers this morning (and thanks to their trading team for their "risk-free" trading results). With the break of the downtrend line and the 50 and 200 moving averages, the banks suddenly turned much more bullish. Now the question is how high and what is the pattern. My first guess, based as much on the broader market as anything else, is that the current rally leg is wave-c of an a-b-c bounce from the March 14th low. If so then two equal legs up from that low is at 405.42 so that's what I'm showing. I'll have to see more price action before I can guess what else might be playing out here.

Brokerage (XBD) index, Daily chart

Countering the bullish picture that has suddenly developed in the banks is what I see in the brokers. Ideally we'd have these two indexes in synch for the market so it'll be important to keep a watch on this one. The brokerage index bounced up to its broken uptrend line from June 2006 and then pulled back. As with the banks, if the a-b-c bounce off the March 14th low gets two equal legs up then the upside target is 253.03. But the move up from March 30th can count complete after today's move and since it stopped at that broken uptrend line it has me thinking this may have finished its bounce. Keep the brokers and banks in view to help determine where this market is headed next. A break below its March 30th low, as with the banks, would be immediately bearish.

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

There were more analysts out today declaring we've probably seen the bottom in the housing sector. Bless their little hearts. I'm an optimist by nature but I have to hand it to these guys--they have the ability to look past any data (or common sense) that goes against their hope for a bottom. As this leg up develops I'll be watching closely to see how it develops but without getting into the details of what it will look like depending on what it is, it will probably fail at or below its 200-dma near 660.

It may never get to the 200-dma if the 50-dma, which has now crossed below the 200 and is coming down fast, stops the price rise. I'm actually glad to see a bigger bounce here since the bullish divergences were suggesting it was coming and this will relieve a lot of the oversold conditions. But as I've been saying for a long time, this index has an enormous amount of waste that must be cleansed from the system in order to give us back a healthy industry.

While the real estate and housing analysts look out over the horizon with their finger, um, in the wind, they should be looking at lumber prices.

Lumber chart, May contract, Daily

The price of lumber has tipped back over and is heading for its lows. It should easily break them. The traders in lumber do not see any demand on the horizon that the housing analysts are desperately trying to see.

Oil chart, ETF (USO), Daily

While the oil fund is breaking its uptrend line and 50-dma, the oil contract has held those support levels so it's a coin toss which way this headed next. I think it will break down and any further decline tomorrow would probably confirm it. Otherwise this could be just a corrective pullback that will lead to another push higher in which case the 200-dma would likely be hit.

Oil Index chart, Daily

The oil index is throwing out dojis which indicates indecision (battle) but I believe this will roll over and start heading lower. A break below 660 would confirm at least a larger pullback is in progress.

Transportation Index chart, TRAN, Daily

The Trannies got another nice boost today and they may not be quite done yet. The short term pattern of the rally would look best with a consolidation followed by another push higher in order to finish the wave count. However, there's another potential wave count that calls today's high the end of the rally so the next pullback will be key (as is true with the broader market). A corrective sideway/down consolidation will probably be bullish whereas a sharper decline below 5050 would likely be bearish. Certainly a drop back below 5000 would be a second failure to hold above the May 2006 high and would have people bailing.

U.S. Dollar chart, Daily

There's nothing like kicking a guy while he's down. That's probably how dollar bulls feel right now. Of course there are less than 10% that are bullish the dollar right now so there aren't many to be found. That sentiment number has now been below 10 for 3 days straight and the last time that happened was in May 2006 which marked a significant low for the dollar at the time. Price is currently "under-throwing" the bottom of the descending wedge pattern I have drawn on the chart so any rally back above 81.80 would be a buy signal. The only thing I'm wondering at this point is whether or not the dollar will hit the Fib projection at 81.03, either now or after a small bounce.

The euro hit resistance at the same time so it's looking ready for a reversal as well:

Euro chart, June contract, Daily

The trend line along highs since May 2006 is where the euro stopped today. As can be seen on the MACD, a turn back down here would leave a nasty bearish divergence. For you Forex traders, it looks like a good time to buy the USD/EUR pair.

The Canadian dollar also hit resistance today by a downtrend line from May 2006 and the 62% retracement of its drop to the February 2007 low. So it would appear that currencies are ready for a reversal. A bouncing US dollar would likely be depressive for gold.

Gold chart, StreetTrack Gold ETF (GLD), Daily

The US dollar has sold off fairly hard the past few days but gold has not been able to climb any further (nor silver). That could be suggesting some smart gold players are using this opportunity to unload some inventory to eager buyers once gold got above its downtrend line from May 2006. The bullish interpretation of the consolidation in gold is that we'll see an upside resolution, and that's the way I'd normally be leaning here on gold. But the currencies have me thinking we'll get a reversal there and that has me leaning bearish on gold. Therefore in this case I'm thinking the consolidation may be distribution and not accumulation. But I also recognize the potential for the currencies and gold to give a final burst in their current trend before reversing hard (common in the commodities and currencies).

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

The Leading Economic Indicators (LEI) and Philly Fed index could move the market if there are any surprises but other than that we're left to deal with opex. Today was relatively quiet and sometimes there's a flurry of activity on Thursday of opex but usually all positions have been squared by then and it gets very quiet and boring on Thursday and Friday. That could actually help the bulls since a consolidation into the end of the week would look bullish from an EW perspective.

Bottom line is we need to see what kind of pullback we get next. Sloppy choppy sideways/down and we should look for another leg up before potentially setting up a top or at least a larger pullback. But a sharp drop that takes out the key levels to the downside that I have marked on the chart will set us up for potentially the next big decline.

The market is still vulnerable to downside surprises (like what hit the market at the end of February) so don't get complacent here. If you're long and enjoying the ride, great. But know where your exit is and how you would handle a gap down over your stop. We're getting stretched so don't be bashful about taking profits and trade lightly and quickly right now.

If you can't watch the market intraday I'd be very tempted to just stand aside, or play the long side as long as you're comfortable knowing you'll be able to exit where you want (overnight trading will be your risk). Buying a few longer term puts (out beyond June) is not a bad way to at least hedge your position until you can start liquidating some positions during a decline. It's early to recommend an aggressive short play if you can't follow it closely. If we start to break down there will be plenty of time to recognize it and then use bounces to get short.

Good luck and I'll see you back here next Wednesday and on the Market Monitor tomorrow.
 


New Plays

New Option Plays

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

Play Editor's note: We wanted to add new bullish positions to the newsletter tonight. Yet the NASDAQ and the Russell 2000 are not participating in the rally. The strength and new multi-year high in the S&P 500 is very positive and we're not going to complain about a new all-time high in the DJIA. However, the thirty stocks in the Dow Industrials don't make the market and volume behind today's session was bearish.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Advance Auto Parts - AAP - cls: 40.00 chg: -0.20 stop: 37.95

The DJIA may have hit a new high thanks to several components with good news today but the rest of the market was undecided. Shares of AAP are still consolidating sideways. A bounce from here or above the $39.50 level can be used as a new bullish entry point to buy calls. Our target is the $44.50-45.00 range. We do not want to hold over the mid-May earnings report. FYI: The P&F chart points to a $48 target.

Picked on April 11 at $ 40.05
Change since picked: - 0.05
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand

---

Apple Inc. - AAPL - cls: 90.40 chg: +0.05 stop: 87.45

We continue to grow concerned over the lack of strength in AAPL. Shares are just barely holding on to support near $90.0 0and its 50-dma. More conservative traders will want to strongly consider an early exit now or maybe a tighter stop loss. We are very concerned and we're not suggesting new positions until we see a rally past $92.00 again. Our target is the $97.50-100.00 range. We do not want to hold over the April 25th earnings report.

Picked on March 19 at $ 91.01
Change since picked: - 0.61
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

---

Amgen - AMGN - cls: 60.01 change: -0.09 stop: 55.74

Thus far AMGN is holding on to the $60.00 level but momentum is stalling. If you are looking for a new entry point we'd watch for a dip back towards $58.00, which might be short-term support. Our target is the $62.40-62.50 range, which is very close to the 38.2% Fibonacci retracement of the January-April decline. We do not want to hold over the earnings report so we plan to exit at the closing bell on April 23rd if AMGN hasn't hit our target by then.

Picked on April 12 at $ 57.64
Change since picked: + 2.57
Earnings Date 04/23/07 (confirmed)
Average Daily Volume = 16.6 million

---

Allegheny Tech. - ATI - cls: 114.10 chg: -0.24 stop: 109.85

Bulls are buying the dip near ATI's simple 10-dma for now. We suspect that shares will dip toward the $112-111 range if the broader market doesn't show some new strength soon. Our target is the $117.00-120.00 range. More conservative traders may want to consider taking some money off the table right now with an early exit. FYI: The P&F chart points to a $123 target. We do not want to hold over the late April earnings report.

Picked on April 03 at $110.26
Change since picked: + 3.84
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 2.6 million

---

Boeing - BA - close: 93.88 change: +3.43 stop: 89.35

Our new play in BA is now open. A Reuters story that BA was the only company to bid on a twenty-plane, $2.5 billion deal to build fighters for S. Korea helped shares of BA breakout higher. BA rocketed higher and broke through resistance near $92.00 on big volume. Our trigger to buy calls was at $92.35. Now that the play is open our target is the $97.50-100.00 range.

Picked on April 18 at $ 92.35
Change since picked: + 1.53
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 4.1 million

---

Cigna - CI - close: 151.99 chg: -0.06 stop: 144.95

It was a quiet day for CI. The stock traded sideways and closed virtually unchanged on the session. We're not suggesting positions at this time. Our target is the $154.50-155.00 range. Don't forget that CI could see some volatility following earnings from rival UNH on April 19th before the market open that day. We do not want to hold over CI's earnings report in early May.

Picked on April 05 at $147.75
Change since picked: + 4.24
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 910 thousand

---

Seacor - CKH - cls: 97.84 chg: -0.11 stop: 96.49

Technical indicators continue to look bearish for CKH. More conservative traders may want to cut their losses early. Technically, a bounce from here near the 100-dma, could be used as a new entry point. You might want to wait for a breakout over $100 again before buying calls. We want to caution traders again that this is probably an aggressive entry point with clear overhead resistance in the $102.50-103.25 range. It would not surprise us to see CKH fail on its first try to breakout past $103. Our target is the $107.00-110.00 range. The P&F chart points to a $115 target. We do not want to hold over the late April or early May earnings report.

Picked on April 12 at $100.15
Change since picked: - 2.31
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 227 thousand

---

Core Labs - CLB - cls: 86.99 chg: -1.11 stop: 83.45

Caution! CLB slipped 1.2% and broke down under its rising 10-dma. That's a bearish development. It looks like broken resistance and what should be support near $86.00 is holding for now. Given what's left of our time frame more conservative traders may want to exit early if CLB breaks down under $86.00. Our target is the $92.00 level. We plan to exit ahead of the April 23rd earnings report.

Picked on April 08 at $ 87.25
Change since picked: - 0.26
Earnings Date 04/23/07 (confirmed)
Average Daily Volume = 275 thousand

---

Chicago Merc.Exc. - CME - cls: 558.60 chg: +0.40 stop: 544.75

Our aggressive, high-risk play in CME isn't moving much. Shares have spent the last couple of days churning sideways. A bounce near $554 and its simple 10-dma could be used as a new entry point. However, we are feeling a bit more cautious given the market's technicals. The DJIA might be at new highs but the rest of the market seems unsure of itself. Our short-term target for CME is $574.00-575.00. If we had more time we could aim for the January highs. Remember, this is a high-risk play and we don't have a lot of time but if the market moves higher then CME could really run. One of the biggest challenges for the bulls would occur if investors suddenly decided to wait and see ahead of CME's earnings report and the stock just bounced around sideways.

Picked on April 16 at $557.50
Change since picked: + 1.10
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 733 thousand

---

ConocoPhillips - COP - cls: 69.84 chg: -0.59 stop: 66.19

We reiterate our previous suggestions that more conservative traders may want to lock in gains now with an early exit. COP has broken down under the $70.00 level and it might see more weakness before it attempts a new relative high. We're aiming for the $74.00-75.00 range in COP. We do not want to hold over the late April earnings report.

Picked on March 20 at $ 66.31
Change since picked: + 3.53
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 12.1 million

---

HESS Corp. - HES - cls: 56.23 chg: -0.72 stop: 54.75

Today's 1.2% decline in HES is a technical breakdown under its simple 10-dma. We suspect that shares are headed for the $55.00 level. More conservative traders may want to exit early right here. We do not want to hold positions over the April 25th earnings report.

Picked on April 15 at $ 57.87
Change since picked: - 1.64
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 3.0 million

---

Joy Global - JOYG - cls: 47.65 chg: +0.53 stop: 43.89

JOYG continues to show relative strength. The stock rose 1.1% and hit another new relative high. Yet volume continues to come in light, which is somewhat worrisome. We are suggesting two targets. Our conservative target is $49.85-50.00. Our aggressive target is the $52.25-55.00 range.

Picked on April 12 at $ 46.48
Change since picked: + 1.17
Earnings Date 05/30/07 (unconfirmed)
Average Daily Volume = 2.5 million

---

McKesson Corp. - MCK - cls: 60.02 chg: +0.39 stop: 57.99

Our bullish play in MCK is now open. Traders bought the dip near $59 and its rising 10-dma. The move was fueled by positive analyst comments on the stock. The close over $60 is positive and volume came in at a healthy level. Our suggested trigger to buy calls was at $60.15. Our target is the $64.00-65.00 range.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume = 1.7 million

---

TEREX - TEX - close: 76.95 chg: -0.08 stop: 69.89

We do not see any changes from our previous comments on TEX. The stock might dip back toward the $75.00 level, which could be used as another entry point. More conservative traders may want to tighten their stops! We do not want to hold over the April 25th earnings report. Our target is the $79-80.00 range.

Picked on April 15 at $ 73.95
Change since picked: + 3.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.4 million

---

Wynn Resorts - WYNN - cls: 103.24 chg: +2.45 stop: 97.49

The casino stocks were up today. News that gaming revenue in Macau surged 45 percent fueled the sector's strength. The rebound from the $100 level looks like a new entry point. We plan to exit ahead of the early May earnings report. Our target is the $108.00-110.00 range. More conservative traders may want to exit early near the late February highs around $106.60.

Picked on April 15 at $102.44
Change since picked: + 0.80
Earnings Date 05/05/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

Put Updates

None
 

Strangle Updates

None
 

Dropped Calls

Nucor - NUE - cls: 65.78 chg: -0.95 stop: 65.74

We would have been stopped out of NUE at $65.74. The stock opened lower and broke down under its simple 10-dma before closing with a 1.4% loss. The intraday low was $65.50. We had already planned to exit today but at the closing bell to avoid tomorrow morning's earnings report. Wall Street expects NUE to report earnings of $1.24 a share.

Picked on April 09 at $ 67.55
Change since picked: - 1.77
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 3.8 million
 

Dropped Puts

F5 Networks - FFIV - cls: 69.55 chg: +3.48 stop: 70.55

It's time to go and go quickly. Shares of FFIV should still have some resistance near $70.00 but today's rally was very strong. News that an analyst firm started coverage on FFIV with a "buy" and a $100 target must have spooked the shorts into a short squeeze. The stock posted a 5.2% gain and a 7.9% rally from its lows of the session on the news. This looks like a bullish reversal and we're suggesting an early exit before we're stopped out.

Picked on April 01 at $ 66.68
Change since picked: + 2.87
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.0 million
 

Dropped Strangles

None
 


Trader's Corner

A Look Outside, A Look Inside

I thought I would take a look at a key indicator I use along with chart patterns and technical indicators; one that has been very good at measuring trader 'sentiment' and I use to assess trader psychology. I've always been interested in the mood of the market or how bullish, or how bearish, market participants are. Charles Dow was the first to realize that when the predominant or pervasive outlook for a further rise or a further decline in stock prices was always, at SOME point, a CONTRARY type indicator; hence the term 'contrary opinion' as in contrary opinion surveys or the theory of contrary opinion. Dow notices that at market bottoms, most or nearly all of the public investors and this would include public fund managers, are bearish. Coming into major or even intermediate-term tops, nearly everyone is bullish. The exception tends to be very savvy professional type traders and private fund managers. They tend to be buying at bottoms and selling at or near tops.

On the weekend, in my INDEX TRADER column seen online, I noted that I was bullish for a rise to AT LEAST the prior highs in the S&P with some likelihood for a move to 1480 (or higher) in the S&P 500 and to 690 (or higher) in the S&P 100 (OEX). One of the things that made me fairly confident of this view on Friday was my reading of trader sentiment. I was helped considerably in this view by sentiment indicator, a simple ratio of total CBOE daily equities volume (only excluding index volume) relative to total CBOE daily equities put volume. On this past Friday, while the major indexes broke out to a new 30-day high and the PATTERN looked like a bullish run to the prior top, my sentiment indicator rose only slight; i.e., more bullish (falling is toward more bearish). In fact why I divide call volume BY put volume is to get the numbers just this way; a rising indicator is MORE bullish, a FALLING indicator is more bearish.

Before I rattle on any further let me set up a LINK to my most recent Index Trader for those who might want to peruse that and didn't already, for shame. You can click here to see this.

I have to make good use of my time as I have to get off soon to make one of my rare appearances at a Market Technicians Association (MTA) meeting, as I know the speaker, Charlie Kilpatrick; I gave him his first Charles H. Dow Award, which I originated when toiling for Dow Jones years ago.

Anyway, I'll note with my first chart what I mean about the LACK of much of a rise in bullish sentiment keeping me bullish. And why aren't most traders more bullish on a day when the market, to me anyway, looks clearly like it is breaking out? It's because we tend to follow the crowd and the opinions of too many rather than trusting our own instincts; I would say we don't rely enough on what we SEE.

I turned to TECHNICAL analysis years ago as a commodities trader because I found analysts leading me too often down the wrong path too often and I was looking for a more OBJECTIVE way to measure market trends and possible impending trend reversals. I look at price and volume, that's it. What's the market actually doing! I do follow fundamentals of course, but not others opinions. You may find it hard to believe, but I only use my TV for DVD's and don't have any broadcast or cable feed. Well, I got broadband and internet of course.

On to the chart I showed in my aforementioned Saturday column, with some changes in notations and this one updated through today of course. You'll note below the move to new highs in the S&P 100 (OEX), which of course was mirrored in the bigger S&P 500 (SPX) index and by the Dow 30 (INDU); NOT by the Nasdaq or the Russell (2000) which should keep us from getting too carried away in bullish enthusiasm. Actually, for this recent move into new high ground, a SIMILAR move by the lower indicator ("CPRATIO") to move up into what I call the 'overbought/extreme bullishness' zone as you can see. That indicator rose only slightly on Friday; Friday's price range or bar is outlined in yellow; meanwhile my sentiment indicator barely rose. Then, it actually dipped into yesterday (Tues) just because the market paused it seemed. As long as my fellow traders DON'T get wildly bullish, I'm keeping some of my OEX calls a while longer. Why not(!) since I'm playing on the house's money so to speak, as the profits I already took already are well over what I paid for the options. Ah, the beauty of calls and puts, relative to index futures!

Anyway, the type of thing I LOVE to when I'm profiting from my own little contrary opinion play, is the market going sideways in an 'obvious' (well, it seemed so) consolidation, while trader sentiment dips or becomes more bearish. This you can see in the direction of the opposing lines above designating the directional move of prices relative to my daily sentiment indicator, plotted below the OEX chart.

By the way, I consider the real 'test' to come for the strength of the current market is hot just the move to a new high, which seemed fairly obvious at some point, but what happens when and if the Index gets back up to its previously broken up trendline, as noted by the red down arrow in the 690 area currently (see above). Getting back to this trendline, and it sometimes acts as a rally stopper (the 'kiss of death' trendline), is where an index or stock gets back to its prior rate of change or upside MOMENTUM. An inability to get back to the same rate of price increase is sometimes a key event. A stock or index may go to a new high, but momentum is slowing some relative to past months. Such subtle shifts are part of watching what you SEE, not just what you hear from others.

On a final analytical note, we see the same prior trendline, as well as a prior high, acting as a possible stopper in the Russell 2000 (RUT) chart, which is my next chart. If we keep looking at everything, not just our favorite index or indicator, we will SEE more. There's not a lot to say here and this (chart) picture is worth tons of words, at least accompanied by the level line highlighting the prior top AND apparent resistance at the longstanding and previously 'broken' bullish/up trendline.

Stay tuned of course on what happens next, but this index has reflected a previous favorite theme of small to mid cap stocks and either this theme will start finding less favor or it marks something else. The something else might be to not to get TOO bullish, which is maybe why trader sentiment HASN'T reached a bullish extreme. My sentiment indicator probably will reach such an extreme however before this market comes down much; enough at least to make a downside option play worth doing.


THE LOOK 'INSIDE'

Too rarely do we really take stock of ourselves and look INSIDE at what might be keeping us from profiting in our trading and even what we are looking to get out of options trading. I've known many who trade 'as if' it is gambling and just throw the dice. Such folks rarely admit that this is the way they see the market. Or, they use the toughness of figuring out market trends and when to get in or stay OUT and may use their view that the 'random' nature of the market makes consistent profiting in the options game too tough for most of us who are up against professionals and the like. Some traders I've known are into speculative trading for the 'action' and thrills it can provide. These folks are pretty sure long-term losers in the profit and balance sheet at the end of each year.

I don't often recommend books about the market and trading, but an old friend from this web site actually, Mark Whistler, wrote an interesting and different sort of book that's only recently out. His book focuses on getting straight with our internal motivations and our own pitfalls in attitude that work against us. This is not a new theme, but one we look at rarely if at all. Mark's book is called "Trade with Passion and Purpose; keys to becoming a TOP TRADER". The book is published by Wiley and I brought Mark to the attention of my Wiley Editor on his first book idea which became "Trading Pairs", about arbitraging similar or dissimilar-acting stocks or indexes.

Mark begins Chapter 1 of his new book with 'finding your purpose-center' or looking at the kind of success you want to achieve in trading. He guides people through putting some thought and writing down, a trading-purpose statement. He is right in knowing that the primary step in ensuring our success in trading (and in life) is knowing precisely why we're doing what you're doing. Trading brings a lot of stress at times and it helps to have an answer to why you trade. For example, if you determine that losses are eminently worthwhile, which has guided many great traders, rather than kick yourself for failure in the market, you could make a determined effort on any and every loss to see what you missed outside in the market, or inside, in yourself; e.g., I was too greedy; I didn't listen to my instincts; I couldn't admit I was wrong in the trade and cut the loss quickly; etc., etc. etc.

Mark has chapters on self-honesty, being humble (hey, the markets humble us all), being courageous, forgiving, about fear, anxiety, intuition, gratitude, stress and relaxation. An interesting read. A quote: "When life blows up, make a change!" He interviews many successful people, among them major traders such as Joe Richie, whose CRT firm was the world's largest options trading operation in the world in the 80's. Joe has some good insights and advice, as do many of those interviewed by Mark. A sample quote from Joe Richie: "...don't get cocky. If you're starting to think you're hot stuff just because you're making a lot of dough, then you'd better hope you lose it all and get your soul back in the bargain."

Thats it for me today. Be well and ...
GOOD TRADING SUCCESS!
 

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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