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Daily Newsletter, Monday, 04/30/2007

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Table of Contents

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

Market Wrap

Run on Mouthwash Due to Bull's Bad Breadth?

The major indexes finished the month of April on a sour note with decliners outnumbering advancers by a hefty 3:1 margin at the big board, while NASDAQ breadth wasn't much better with just over 2 decliners for every advancing issue with four or five letters in its stock symbol.

Despite Friday's new 52-week and multi-year high, the very broad NASDAQ Composite's (COMPX) 103-point, or +4.2% rise in April, today's 101 new lows are the most since March 14, when the NASDAQ recorded 27 highs and 182 new lows.

The also-very broad NYSE Composite ($NYA.X), which rose 366 points, or +3.95% in April, and recently set an all-time high last Wednesday (4/25/07) with NH/NL breadth of 400:17, finished down for a third-straight session. The last time the NYSE Composite had a 3-day losing streak was from March 1 to March 5 when the broad list of 1, 2 and 3-lettered stock symbols closed at 8,837.97, its lowest close of 2007.

The also-broad small caps, depicted by the Russell 2000 (RUT.X), which last traded an all-time high on Thursday on NH/NL breadth 100:26 (4/25/07 NH/NL breadth was stronger at 128:16) finished the month of April with a 14-point, or 1.7% gain. NH/NL breadth today was almost flat with new highs edging out new lows by a very narrow 64:61 ratio, but this also-broad list of stocks finds its 5-day NH/NL ratio reversing lower at 73.4% (76.00% was the reversal point). Of the major indexes followed in my U.S. Market Watch (see below), only the RUT.X 814.57 closes below its rising 21-day SMA (819.32).

The benchmark S&P 500 Index (SPX.X) finished up 61.5 points, or +4.3% in April. With the SPX's 5-day NH/NL ratio having recently measured 99.6% on Thursday with daily NH/NL measure of 81:0, today's 37:2 closing measure not overly concerning to bulls, but suggests profit taking at a minimum.

The narrower S&P 100 Index (OEX.X) finished up 30.8 points, or +4.7% in April, while the also-narrow NASDAQ-100 Index (NDX.X) gained 95.39 points, or +5.4%, while its tracker QQQQ jumped $2.43, or +5.6%.

The very narrow Dow Industrials (INDU) surged an eye-popping 708 points, or 5.7%!

Consumer products giant Procter & Gamble (NYSE:PG) $64.40 +2.25%, which makes Scope mouthwash, was Monday's percentage gainer among the Dow 30 components, while the price-weighted index's most heavily weighted stock, International Business Machines (NYSE:IBM) $102.21 +1.02% closed at a new 52-week high.

NYSE, NASDAQ Comp, SPX and RUT NH/NL Measures

I was going to "lead" tonight's Market Wrap with some NH/NL observations when I reviewed some of the major market NH/NL indications at Friday's close, and a post from Jane Fox in today's OptionInvestor.com Market Monitor regarding a Dow Jones MarketWatch piece "Technical evidence emerges that rally getting old" has me even further-alert to some recent measures.

I've always kept a watchful eye on the very broad NYSE Composite and NASDAQ Composite NH/NL daily readings, then created my own 5-day and 10-day NH/NL average ratios. These data are equivalent to what I feel are great measures of BULLISH leadership, or conversely, BEARISH leadership.

Now, there are some observations outside the NH/NL data that will catch a trader and investor's attention of late, but I want to simply note that we want to keep a close eye on things when we consider an observation from Michael Burke and John Gray, and their mentioning of "a high number of buying climaxes" last week.

Burke? Mike Burke? Where have I heard that name? "I know that name," I thought to myself.

Yes! Only tonight is my memory jogged. That's the very Mike Burke mentioned in Tom Dorsey's book Point and Figure Charting. A supply/demand chartist to be certain!

The MarketWatch article went on to describe what Mr. Burke and fellow analyst John Gray were monitoring last week.

"Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are sign of distribution and indicate that stocks are moving from strong hands to weak ones."

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While Burke and Gray mentioned that "buying climaxes readings over 100 are somewhat worrisome, and the current level at twice that is a further sign of topping action. We usually see at least 200 buying climaxes before the market makes a top, although very often there are 500 or 600. The current readings are a cause for increased nervousness."

Mr. Burke and Mr. Gray noted that last week, according to their calculations, there were 206 buying climaxes.

The MarketWatch article went on to note that Burke and Gray are not "perma bears" simply looking for evidence to justify their pre-determined caution. Their model portfolio of U.S. equity funds, for example, was 80% invested this past week.

As soon as Jane Fox alerted us to that article, I thought about this weekend's Trader's Corner article.

I also thought about last week's CBOE Market Volatility Index (VIX.X) action, where the rise was somewhat "counter" to the S&P 500 Index (SPX.X) 9.7-point, or +0.65% rise.

I didn't have time to check more than 6,000 stocks (NYSE and NASDAQ Composite combined), or 2,000 stocks from the Russell 2000, or 500 stocks of the S&P 500, let alone 100 stocks of the S&P 100, or NASDAQ-100, but running through the Dow 30 was easy enough.

Of the Dow 30, I could only come up with two (2) stocks that would have fit Burke/Gray's "buying climax" price action description.

What does a potential "buying climax" look like? I've heard the term so many times, but what does it look like?

One was AT&T (NYSE:T) $38.72 +0.20%.

AT&T (NYSE:T) - Daily Interval Chart

I placed a BLUE horizontal line at a Friday (4/20/07) close of $39.87, then marked a NH of $40.14 from Monday of last week PINK DASHED, where last Friday's (4/27/07) would have T closing at a week's low (solid red), after a recent 52-week high.

Coca Cola (NYSE:KO) $52.19 +0.13% was the other Dow component that would have fit the Burke/Gray "buying climax" depiction, but KO traded another new high again today.

Anyway, I wanted to see what a "buying climax" might look like in at least one of the 206 stocks that Burke/Gray mentioned.

AT&T (T) doesn't carry all that much weight by itself in the price-weighted Dow Industrials (INDU), as it is the 21st largest-weighted stock.

However, AT&T (T) is a "big gun" in the S&P 100 (OEX.X) as it ranks #5 in this market cap-weighted index!

Verizon (NYSE:VZ) $38.18 +0.76% is #21, but birds of a feather can flock together. Verizon carries the 24th-largest market capitalization in the S&P 100 (OEX.X).

Today, Verizon (VZ) reported quarterly earnings of $0.56 per share before special items (non-GAAP), which was above consensus of $0.53. The company said quarterly revenues came in at $22.6 billion, which was ahead of consensus estimates for $22.49 billion.

Verizon (VZ) currently needs to trade above $38.95, found on 10/30/06 for a new 52-week high.

Closing U.S. Market Watch - 4/30/07 Close

Only the Dow Industrials (INDU) and S&P 100 Index (OEX.X) managed to trade new 52-week highs today, but after doing so, start the week out on a negative note.

With Burke/Gray outlining a "buying climax" and using AT&T (T) as an example of what they may be talking about, or following over time, I'll make note of the S&P 500 new high and new low measures, as a broader S&P indication of bullish/bearish leadership.

Suffice it to say the leadership has been BULLISH. To think otherwise, a new low measure below 12, or 3/14/07 is a good benchmark.

I want to also make a quick note that today was expiration for the May Unleaded (NYMEX:rb07k) contract. In the above U.S. Market Watch, you can see the bullish impact that refinery outages have had compared to the now front-month June Unleaded (NYMEX:rb07m) contract, which settled down fractionally at $2.2594.

Just as May unleaded settled, we witness a decline in June Crude Oil (NYMEX:cl07m), which reversed course from $66.50 to settle down $0.75, or -1.13% at $65.71.

As I type, June Crude (cl07m) is down an additional $0.40 at $65.31.

I maintain a bullish stance on oil as depicted by the U.S. Oil Fund (AMEX:USO) $51.24 -1.14%, but have scaled back to 1/4 bullish position.

While unleaded inventories have seen sharp declines due to refinery outages, oil inventories have steadied due to the lack of refinery draws. My "key level" of resistance for the USO is currently $52.00. Current stop for 1/4 long positions is $48.80.

S&P 100 Index (OEX.X) - Daily Intervals

Since we're alert to some NH/NL observations and a potential "buying climax," or at least know what that might look like, I'm going to place a fibonacci retracement on the S&P 100 Index (OEX.X) from the March 5th relative low close of 630.77, to Friday's 52-week high close of 684.42.

We can perhaps look back at T's chart, then look at the OEX's chart and think, "protect bullish gains!"

I've marked the S&P 100 Bullish % (BPOEX) from Dorsey/Wright and Associates when it reversed back up to "bull confirmed" status on 4/09/07 and signaling this market was seeing demand begin to outstrip supply with 74% (74 of the 100 components) showing point and figure "buy signals" associated with their charts. At tonight's close, this market of 100 stocks is still "bull confirmed," at 85% bullish, with no net change from Friday's close.

I'll be filling in for Jim Brown in tomorrow's Market Wrap and will cover additional indexes, but I really wanted to update some of today's "news" and recent observations regarding new highs, new lows, and the term "buying climax."

 


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

Advance Auto Parts - AAP - cls: 41.20 chg: -0.47 stop: 39.90

AAP continues to consolidate lower after last week's big spike higher. We are not suggesting new positions at this time but a bounce from here, near $41.00 and its rising 10-dma, could be used as a new entry point. Our target is the $43.90-45.00 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: + 1.15
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand

---

Armor Holdings - AH - cls: 71.50 chg: +0.69 stop: 68.99

Our new bullish play in AH is now open. The stock actually gapped down on Monday morning but traders bought the dip at $70.00. AH really surged higher midday after it was announced that the company won a new $32 million contract from the United Kingdom. Volume behind today's rally was big, which is normally a bullish sign. Our suggested entry point to buy calls was at $71.51. We would still consider new positions now although patient traders may want to wait for a potential dip towards $71.00 again. We have two targets. Our first target is the $74.75-75.00 range. Our aggressive target will be $77.50-80.00. The P&F chart is bullish and points to a $73 target.

Picked on April 30 at $ 71.51
Change since picked: - 0.01
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 482 thousand

---

Abercrombie - ANF - cls: 81.66 chg: -1.73 stop: 79.85

Uh-oh! ANF under performed the market and the RLX retail index on Monday. Shares broke down under the 10-dma and closed with a 2% loss. The stock looks poised to dip toward what should be support near $80.00. Our target is the $89.00-90.00 range. We do not want to hold over the late May earnings. FYI: The Point & Figure chart suggests a $109 price target.

Picked on April 22 at $ 83.51
Change since picked: - 1.85
Earnings Date 05/23/07 (unconfirmed)
Average Daily Volume = 1.9 million

---

Ctrip.com - CTRP - cls: 70.92 chg: +0.29 stop: 67.45

CTRP tried to rally this morning with a gap higher and a new three-month high at $72.42 but the afternoon market sell-off weighed on the stock. A bounce from here or near $70 could be used as a new entry point. Our short-term target is the stock's highs in the $74.50-75.00 range. The Point & Figure chart forecasts a $93 target. We do not want to hold over the May 16th earnings report.

Picked on April 29 at $ 70.63
Change since picked: + 0.29
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

---

General Dynamics - GD - cls: 78.50 chg: -1.77 stop: 76.45

As we were writing the weekend's newsletter we debated on whether or not to wait for a breakout and use a trigger above $81.00 with GD. It looks like the decision to jump in now might not work out. Shares fell sharply, down 2.2%, toward the bottom of its recent trading range and under what should have been short-term support at the simple 10-dma. We would normally expect some support near the bottom of the gap around $78, which is also underpinned by the 50-dma. A bounce above $77.00 can be used as a new entry point and we may get a bounce sooner than you think. Today, after the closing bell, it was announced that GD had won a $244 million order from the U.S. Marines. This had shares trading higher near $79.00 in after hours markets. More conservative traders may still want to wait for a breakout over $81 before initiating positions. Our target is the 84.75-85.00 range. More aggressive traders may want to aim higher. The P&F chart has produced a triple-top breakout buy signal with a $96 target.

Picked on April 29 at $ 80.27
Change since picked: - 1.77
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

---

Holly Corp. - HOC - cls: 63.60 chg: -0.55 stop: 59.49

HOC briefly traded above the $65.00 level midday and then sold off with the rest of the market later this afternoon. The trend remains bullish but HOC could be poised to dip toward $62.50-62.00. Our target is the $67.50-70.00 range. The P&F chart is bullish with a $74 target. We do not want to hold over the May 8th earnings report.

Picked on April 22 at $ 62.30
Change since picked: + 1.30
Earnings Date 05/08/07 (confirmed)
Average Daily Volume = 669 thousand

---

Wynn Resorts - WYNN - cls: 102.21 chg: -2.31 stop: 99.95

Ouch! Today's 2.2% decline just erased any potential gains in WYNN. The stock was doing okay until about 1:30 p.m. this afternoon - that is when it began to stumble. Today's breakdown under the simple 10-dma is bearish. We would expect a pull back toward the $100 level. More conservative traders may want to exit early right now to cut their losses. Readers should note that the gaming sector will have lots of news this week with ASCA reporting earnings on Tuesday, LVS reporting on Wednesday, and MGM reporting on Thursday. WYNN is due to report earnings on or near May 5th. We plan to exit ahead of the early May earnings report. Our target is the $108.00-110.00 range. FYI: WYNN's P&F chart points to a $120 target.

Picked on April 15 at $102.44
Change since picked: - 0.23
Earnings Date 05/05/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

Put Updates

AvalonBay - AVB - cls: 122.26 chg: -3.69 stop: 130.05

The sell-off in AVB continued on Monday and shares broke down from their trading range. AVB lost 2.9% on big volume, which is bearish. We were suggesting a trigger to buy puts at $124.45 so the play is now open. Traders should prepare for a possible bounce near $120 since AVB is starting to look short-term oversold. Our target is the $112.50-110.00 range. The P&F chart points to a $110 target.

Picked on April 30 at $124.45
Change since picked: - 2.19
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand

---

British Airways - BAB - cls: 101.18 chg: -0.24 stop: 104.26

BAB is still drifting lower. The stock produced yet another small (bearish) failed rally near its sliding 10 and 50-dma's today. We don't see any changes from our weekend comments. More conservative traders may want to wait for a decline under $100. We'll use a $96.00-95.00 target range. More aggressive traders may want to aim for the rising 200-dma near $92. We do not want to hold over the mid-May earnings report.

Picked on April 29 at $101.42
Change since picked: - 0.24
Earnings Date 05/18/07 (unconfirmed)
Average Daily Volume = 65 thousand

---

Ceradyne - CRDN - cls: 58.85 chg: -0.23 stop: 62.51

CRDN produced a small oversold bounce this morning but the bounce began to fail this afternoon. Any sort of failed rally under $60 or the 10-dma can be used as a new entry point for puts. Our short-term target is the $55.25-55.00 range. Watch out for potential support at the rising 50 or 100-dma.

Picked on April 29 at $ 59.08
Change since picked: - 0.23
Earnings Date 04/27/07 (confirmed)
Average Daily Volume = 667 thousand

---

Lockheed Martin - LMT - cls: 96.14 chg: -0.55 stop: 97.51

Bears got a reprieve on Monday with a lack of follow through on LMT's rally from Friday. We're not out of the woods yet. After the bell tonight LMT got some news about another Airforce contract and LMT was trading slightly higher after hours. We're not suggesting new positions until we see a new decline under $95. We still see potential resistance near $97.50 and its 50-dma near $97.84. More aggressive traders may want to place there stop above the 50-dma.

Picked on April 24 at $ 94.82
Change since picked: + 1.32
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.7 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

---

Lockheed Martin - LMT - cls: 96.14 change: -0.55 stop: n/a

Lack of movement is the kiss of death for a strangle play. We need LMT to pick a direction and go. If the stock doesn't break one way or the other soon more conservative traders may want to abandon this play early. We're not suggesting new strangle plays at this time. The suggested options we had listed were the May $100 calls (LMT-ET) and the May $90 puts (LMT-QR). Our estimated cost was $1.50. We want to sell if either option rises to $2.25 or more.

Picked on April 22 at $ 95.40
Change since picked: + 0.74
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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