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Daily Newsletter, Thursday, 05/31/2007

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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

Die Hard XX

The bulls are putting on their best Bruce Willis impersonation here. What they don't realize is that they're key players in "Sixth Sense". For those who didn't see that movie (which was outstanding), the bulls may not be seeing that they're already dead. OK, I exaggerate a smidge. It's probably the bears who think there's no life after death.

The other title I thought about for tonight's Wrap was "Belay My Last". For those who've served in the US Navy you'll remember that phrase to mean "ignore what I just said." Last Wednesday I called a top to the market, or at least I said it was a great setup for a top, and that you should be short the market against last Wednesday's highs. The DOW climbed above that high this afternoon and thereby negated the bearish setup on that index. Such is the life of one who tries to pick tops and bottoms.

Am I discouraged in all this? Yes and no. It's certainly been an exercise in frustration trying to find a top in what is turning out to be a blow-off top. These kinds of moves happen very infrequently and it's not something you can plan on happening. Clearly the best strategy has been to hold on and let the market tell you when it's done (by breaking below uptrend lines or important moving averages. The hard part in waiting for the break down is chasing a market lower after a support level is broken. We've all seen many times a head fake break only to be followed by another jam higher which spooks the shorts.

This is why my preference remains finding a setup that looks good for a top (or bottom in a decline). It enables me to have a clearly defined, and usually tight, stop level. The environment we're in has made that particularly challenging but it's been very successful for me over the years (by staying disciplined and stopping out as soon as the setup is busted--don't fight the tape). Whether I trade intraday or looking for a position trade on the daily/weekly charts, the technique is exactly the same. The difference obviously is where stops are placed and therefore how much I'll risk per trade.

For this newsletter I'm attempting to find swing/position trades because I know many of you trade option strategies that are not intraday trading and many of you don't stay glued to your screen during the day. Therefore, considering how risky I think the market is to the upside it has been my preference to look for potential tops rather than how to set you up for a long play. Intraday it's a completely different story but that's because day traders can jump out a lot more quickly. In my Market Monitor updates I often switch sides and recommend long trades. I'm less comfortable doing that in a once-a-week update.

So, the DOW has busted the bearish setup from last week but so far is the only index to have done so. The interesting thing here is that the DOW was the only index to spike to a new high last Thursday but was not followed by any of the other indices. Will it happen again? If the market sells off right away on Thursday then it will leave the DOW with a non-confirmation from the other indices. It's something to be aware of for tomorrow.

That means the bearish setups discussed last week and in the weekend Wrap still stand for the other indices. But it also means the market must sell off immediately Thursday morning. If it even hints of heading higher by going sideways then it's very likely the others will follow the DOW to new highs.

I had a lot of work to do to get charts updated for tonight in order to show the bullish potential and therefore I'm not going to spend a lot of time on other things--I'd rather get through the charts and be sure you know how the picture has potentially changed from what I presented over the weekend. But first, today's economic reports:

Economic reports

The only economic reports today were Crude Inventories and the FOMC minutes. There was no significant change to oil inventories and prices are still too high. Any questions?

The FOMC report had nothing new or unexpected so the market rallied. Any questions?

And with that exhaustive review of today's economic reports let's get to the charts. At the end of the report I'll talk about a few interesting numbers (interesting to me anyway) about dates and levels to watch in trying to determine what this market is up to.

Starting with the DOW's daily chart, even though you can barely see the new high, the short term pattern of the move up supports the idea that we'll see a little higher before either topping sooner rather than later (in a week or so) or is just the start of a larger move up.

DOW chart, Daily

Price action has been choppy and unfortunately that opens up several possibilities for what is playing out here. It could literally go either way from here and a rally or decline of 100 points could mean very little before we see a complete reversal of the move. That tells me that you shouldn't be looking for any big moves for at least another week. Price could consolidate sideways for another week, it could chop directly higher from here or it could first pull back to near 13400 before heading higher again.

Upside Fib projections for the 5th wave up, if that's what we have ahead of us, is first to 13726 and then basically 14K. If the DOW makes it to 14K, with so many calling for it, would likely be met with a lot of selling since that would meet the objective of so many analysts. But because so many are calling for it I have to wonder what the chances are that it'll happen. From a contrarian sense I don't think we'll see it but the bulls have proven me wrong once or twice before.

The bearish thing I see, and this is consistent across the board, is the bearish divergence at new price highs, something that's been true since the early May high. But we saw the same bearish divergence run for a few months into the February high. Getting in a little closer I'm going to use two separate 60-min charts to show some bullish potential.

DOW chart, 60-min, immediately bullish

I call this one immediately bullish because it's based on expectations that we'll see a choppy move higher that forms an ascending wedge. The reason it would likely form an ascending wedge is because of the way the rally started correctively (3-wave move). That's usually a good sign that this kind of pattern will develop. It's also a very common pattern for the last leg up after a long bullish run. It gets very choppy because more distribution starts to make it more difficult for the bulls to keep the rally alive.

And then when the selling becomes too much then the break down happens quickly and the entire wedge gets retraced quickly. I show a Fib projection to 13777 which is based on the 5th wave making it up to 62% of the 1st wave in the rally off the March low. This is also very typical for a 5th wave in an ascending wedge (ending diagonal). It takes a break below 13450 to negate this pattern.

This other chart shows some kind of pullback/consolidation before it rallies higher.

DOW chart, 60-min, bullish after pullback/consolidation

There are two possibilities presented here--the first is a harder decline to a new low below last week's that finds support above 13300. That would be an A-B-C pullback for a 4th wave correction before the rally in the 5th wave kicks into gear. This would suggest we'd see a rally into the end of June.

The other possibility is more of a sideways consolidation, as depicted in a sideways triangle. It's very common to see these 4th wave triangles as it signifies we're near the end of a run. This pattern says we'll chop sideways into next week and then rally out of it. The completion of the rally in this case could coincide with another bullish opex week (Friday June 18th).

Some of the numbers I'll review at the end support the idea that we could rally into mid month to finish off this rally so stay aware of this possibility.

SPX chart, Daily

SPX came within 2 points of exceeding last week's high. That's why the market must sell off immediately on Thursday if it's to maintain the possibility for a bearish resolution here. Don't hold your breath. Of course if another nasty surprise comes out of Asia overnight then one never knows how we'll open in the morning.

If the bulls can keep this going then upside Fib projections are to 1552 (coincidently at the March 2000 intraday high?) and then 1580 above that. A break below 1500 could be trouble but really not until a break of the May 10th low near 1491.

SPX chart, 60-min, potential triangle consolidation

I show the bearish wave count on the 60-min chart but obviously it needs to hustle to the downside immediately on Thursday otherwise the bearish setup will be busted on this one along with the DOW. Otherwise I think we'll get a sideways triangle consolidation as shown. From there we'd be due another rally in the final 5th wave.

I show the retracement levels for last week's decline but what I really wanted to show here is the Fib projection from that decline (those Fib levels above last week's high). It's very common to see price move to the 162% projection of the previous move and that's at 1549, very close to the 1552 Fib projection I showed on the daily chart (which is where the 5th wave = 62% of the 1st wave in the move up from March).

One thing I like to look for are fractal patterns. This is basically what EW patterns are so it's a common "exercise" I go through. The following two charts is an attempt to show one that points us higher.

SPX chart, 60-min, first fractal pattern

This shows price action from the firs high put in on May 4th. After that high we got some choppy price action to a minor new high followed by a steep sell off. That sell off was then followed by a continuation of the rally to the high labeled wave-(3) at the top right on May 21st. Also notice the pattern of the rally off the May 10th low and how it chopped its way higher at first and then took off from May 16th. Now look at the next chart of the past week:

SPX chart, 60-min, second fractal pattern

It's a little distorted in size but has the same general shape as the pattern in the chart above--the high on May 21st was followed by some choppy price action to a minor high which was followed by a steep sell off. That sell off has now been followed by a continuation higher. After initially choppy its way higher from last Thursday low it shot higher today. This is playing out just like it did earlier this month and the last time price made it a little higher than the 162% projection shown on this chart to 1549. A little higher might mean the same 1552 projection as on the daily chart.

So based on what I see now, and until I see something that changes this picture, I'm leaning towards seeing SPX rally up to the 1552 area. It would certainly make a good swing trade to the long side and I'd normally recommend it. But in this case, since it's the final 5th wave up that I'm looking for, which are notoriously unreliable, it would be a very risky play to get 20 SPX points. The downside risk is higher I believe. But if the SPX does manage to rally up there I'll be once again looking to nab the top.

This next 60-min chart of SPX is to show the more immediately bullish possibility that ties in with the fractal pattern I just reviewed above:

SPX chart, 60-min, potential bullish ascending wedge

Similar to the ascending wedge idea that I showed for the DOW, this shows SPX rallying up underneath its broken uptrend line from March, with the uptrend line from today's low pinching it into the apex. If I could get my wish as to how this rally will end, this is it. This would be one of the best short play setups I could ask for so if you see it play out this way over the next week or so, get yourself ready to try shorting it again. But not yet.

Nasdaq-100 (NDX) chart, Daily

The techs remain confusing to me and I can't quite figure out if they're getting ready to be more bullish or if they'll continue to be a drag on the market. The techs have been underperforming the blue chips and I expect that to continue. Based on that I think price will chop a little higher but probably not much, as depicted with the green wave count. A break of its uptrend line from March would say the rally is over, confirmed with a break below 1867.

Nasdaq-100 (NDX) chart, 60-min

You can see the dark red a-b-c bounce off last week's low. This view still fully supports the idea that we've already seen the high for the techs. After the sharp drop from last week's high we now have a 3-wave correction of it and if I looked at nothing else I'd say you need to be short the market. The bounce would achieve two equal legs up in the bounce at 1918.88 so a minor new high on Thursday morning could be followed by selling. If you want to play the short side I think picking on the techs (NQ for futures, QQQQ for stock/options) would be the better choice.

To keep things in perspective on the techs, here's the weekly chart for the COMP:

Nasdaq (COMP) chart, Weekly

Price is wedging higher up against the top of its long term up-channel from 2004. Bearish divergence as it reaches the top of the channel does not inspire me to get bullish this market and certainly suggests you be very careful with long positions here.

Russell-2000 (RUT) chart, Daily

The small caps give me the same impression as the techs--it's as though they're being dragged kicking and screaming higher by the blue chips. If another down-up sequence as shown in green plays out then it will likely finish the rally. A break of the uptrend line from March, currently near 825 would say we've seen the high. In the meantime this pattern says expect lots of chop and whipsaws.

Russell-2000 (RUT) chart, 60-min

Also like the NDX this pattern looks very good for a continuation lower. After the sharp decline last week the RUT has done a 3-wave bounce for what could be a 2nd wave correction to the 1st wave down. The bearish price pattern shows a decline to the uptrend line from March, a bounce and then a strong break down from there. The bullish wave pattern suggests we'll see price pullback but then chop higher again into June.

NYSE (NYA) vs. New 52-week highs in NYSE, Daily

This is becoming an old story--new price highs not being met with more new 52-week highs. Today's new-highs number was abysmal. This is not a timing tool but it tells you not to get excited about upside potential. This is telling us very clearly that this rally is closer to an end than even the middle. This kind of negative divergence always favors a break of the trend. It's just a matter of when.

BIX banking index, Daily chart

The banks broke the uptrend line from April and at best I see the possibility that this index will make one more run higher to test its February high. But I'm leaning towards the bearish depiction here and continuation lower, even if it bounces slightly higher first.

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

With the daily oscillators rolling back over it appears the housing index is ready to resume its decline. But I show the possibility that it will rally a little higher, maybe even making it up to the top of its bear flag pattern where it intersects its downtrend line from January 2006, just above 700. But I consider that to be less of a possibility than directly lower from here (or from slightly higher in its current bounce).

Oil chart, ETF (USO), Daily

Oil (USO) hasn't confirmed its bearishness with a break back below 47 but it's close. In the meantime it's in a downtrend so stick with the trend until proven otherwise.

Oil Index chart, Daily

The oil stocks continue to diverge from the commodity with oil stocks rallying while the price of oil drops. This will not continue as they should synch up soon. Considering where this index is in its wave count and channel I'm thinking it will tip back over soon and join oil in a move lower. But first I see the possibility for the oil index to make a stop up towards 750. A break below 717 would be bearish, confirmed with a break of its uptrend line from March.

Transportation Index chart, TRAN, Daily

With the TRAN up near the trend line along the highs from May 2006, and its choppy rise since the May 1st low, I'm getting the impression that the Trannies are finishing up their own little ascending wedge pattern here. If it makes a quick move up to around 5300 followed by a drop back inside the pattern, that would be a sell signal and suggest that the top is in.

U.S. Dollar chart, Daily

The bounce pattern in the US dollar continues to look overlapping and corrective and I keep thinking it will drop out of its small up-channel and head back down. But the uptrend line held again on the last pullback so the uptrend holds. As long as that stays true then the downtrend for gold should continue to hold as well.

Gold chart, StreetTrack Gold ETF (GLD), Daily

The down-channel for gold's (GLD) decline is taking on more of a descending wedge appearance would be bullish if true. This pattern suggests we could see it drop to uptrend support (from July 2005) and its 200-dma and then rally higher, as per the dark green depiction. If at any time the dollar breaks its uptrend we'll probably see gold break its downtrend (light green) but until that happens the trend is down so stick with it.

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

Thursday starts a busy two days for economic reports. If the market sells off right away on Thursday then likely as not one of these reports will get the blame (vice versa too). For example, if GDP were to come in very weak then I suspect that would scare a few bulls who became more worried about a slowing economy. The PMI number at 9:45 also has the potential to move the market. And then Friday are the big numbers that the Fed watches carefully.

SPX chart, Weekly, More Immediately Bearish

Not much of a change to the weekly chart--after last week's small red candle we've got another white one in a long string of them. Overbought is simply becoming more overbought. Chase it if you want to the upside but not me. I'll wait for the next shorting opportunity thank you very much.

Before wrapping things up here I just wanted to make a quick comment on the Chinese stock market, which tanked last night and was the reason our equity futures were so much in the red this morning. When bad news like this is quickly defended by those who believe the market will continue to rally you have to wonder if they're trying to convince themselves or others. Many analysts were coming out this morning to debunk the idea that we're in any way linked to the Chinese. While that's true literally it's not true relationally.

By that I mean all the world markets are now attached at the hip. We're all in synch and any analyst who doesn't believe that has simply refused to compare charts of the various stock market indices around the world. So to say the Chinese market doesn't matter is ludicrous. It may be the first one to break (or not) and it would be an indication that fear is entering their market. Trust me, when that happens I can guarantee you fear will also enter our market.

But I had to laugh at Bloomberg's report this morning where the writer referred to the conclusion of a number of international economists and former government officials (like I'd believe them anyway) where they stated the Chinese stock market has little correlation with its economy because "Chinese participation is limited to less than 10% of the population--means the effects of a bursting of the bubble would remain contained."

First of all, 10% of the Chinese population still puts the number of trading accounts at over 100 million. That's a lot of trading. Second, what people don't understand is that the popping of the stock market bubble will have a very significant negative impact on the spirits of the Chinese people, especially business people. It will not be contained I can assure you.

OK, onto some fun/interesting facts to consider:

Last week's high was SPX 1532 and May 22nd was 1532 days from the March 12, 2003 start of the bull market.

Ron Griess, from TheChartStore.com, compared the current market to the bull markets in 1942-1946 and 1982-1987. The final thrust higher in 1946 lasted 77 trading days. The final thrust in 1987 lasted 67 trading days. The current thrust higher, if measured from March 6th, the first spike low from the February high, would achieve 67 trading days on June 8th and 77 days on June 22nd. Right in between is June 15th.

Opex Friday is June 15th. The next Bradley turn date, which is supposed to be the first significant turn date for 2007, is June 14th.

So it's interesting that the dates are around June opex week and I've got some Fib/price projections showing the possibility for a consolidation this week followed by more rally into mid-June. It's certainly been typical for us to see a bullish opex week and a final stop run to get SPX up to 1552 is quite possible. We've got several things now pointing to that possibility for the last fling for the bulls.

For the short term I see the possibility for a lot of choppy price action through the rest of this week and into next. I showed a more immediately bullish possibility for the DOW and SPX but a bearish set up for NDX and RUT. While everyone was in synch last week, that is no longer true. That says watch out for chop.

If we sell off immediately on Thursday morning then it would certainly add to the possibility that NDX and RUT will lead us to the downside. But even there we might only get a relatively small drop followed by another choppy move higher. Therefore my best recommendation as of today's price action is nothing, as in do nothing. There are many times in the market where flat is the best position and that's what I'm recommending here. Don't trade until you like the setup and there are enough questions for me tonight to not like the setup. Once the picture clears up then I'll look for the setup again.

I've laid out the key levels on the charts and discussed the important support and resistance levels. Use those to help make decisions about where this market may be headed next. There will be plenty of busses to come pick you up when you're ready so don't force a trade just to trade. Good luck over the next week and I'll be back next Wednesday. As always, I'll try to keep up with this changing environment on the Market Monitor. See you there.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CHAP None None
SUN    

New Calls

Chaparral Steel - CHAP - cls: 73.69 chg: +1.32 stop: 69.95

Company Description:
Chaparral Steel Company, headquartered in Midlothian, Texas, is the second largest producer of structural steel beams in North America. The Company is also a supplier of steel bar products. In addition, Chaparral is a leading North American recycling company. (source: company press release or website)

Why We Like It:
The market is experiencing merger-and-acquisition fever right now. The media reminds us daily that companies and the market is awash in liquidity. With that in mind the steel stocks might see more speculation again about future consolidation in the industry. CHAP has already announced, back on April 25th, that they have retained Goldman Sachs (GS) to explore all of their strategic alternatives. Now that could be an acquisition in which case shares of CHAP will probably drop on any announcement but then again it might mean CHAP is a takeover target. Given the stock's upward trend it looks like investors are betting on a takeover. We are suggesting call positions now with CHAP above $70.00. More conservative traders might feel more comfortable waiting for a breakout over resistance at the $75.00 level or the high at $75.60. We're going to set two targets. Our first target is the $79.50-80.00 range. Our aggressive target is the $84.00-85.00 range. The P&F chart currently points to a $99 target.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 70.00 ZHQ-GN open interest= 520 current ask $6.60
BUY CALL JUL 75.00 ZHQ-GO open interest=2322 current ask $3.50
BUY CALL JUL 80.00 ZHQ-GP open interest=1826 current ask $1.75

Picked on May 30 at $ 73.69
Change since picked: + 0.00
Earnings Date 07/10/07 (unconfirmed)
Average Daily Volume = 801 thousand

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Sunoco - SUN - cls: 79.46 chg: +1.76 stop: 75.95

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, nearly 4,700 retail sites selling gasoline and convenience items, approximately 5,500 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. Sunoco is a significant manufacturer of petrochemicals with annual sales of approximately five billion pounds, largely chemical intermediates used to make fibers, plastics, film and resins. Utilizing a unique, patented technology, Sunoco also manufactures approximately 3.9 million tons annually of high-quality metallurgical-grade coke for use in the steel industry. (source: company press release or website)

Why We Like It:
Memorial Day was the unofficial start of summer but the official start of the summer "driving season". Gas prices are near record highs and are likely to remain very high throughout the season. The refiners are likely to benefit from that dynamic. SUN is bouncing strongly from a test of the $76 level and looks poised to breakout over resistance near $80.00. We are suggesting a trigger to buy calls at $80.26. More conservative traders may want to wait for a breakout past the August 2006 high at $80.45 before initiating positions. We will have two targets. Our first target is the $84.00-85.00 range. Our second target is the $88.00-90.00 range. The P&F chart displays a spread triple-top breakout buy signal with a $94 target.

Suggested Options:
We are suggesting the July calls although August calls would also work well.

BUY CALL JUL 75.00 SUN-GO open interest= 139 current ask $6.80
BUY CALL JUL 80.00 SUN-GP open interest=2077 current ask $3.80
BUY CALL JUL 85.00 SUN-GQ open interest= 708 current ask $1.85

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.3 million

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New Puts

None Today.

New Strangles

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

Freeport McMoran - FCX - cls: 77.77 chg: +1.93 stop: 71.95 *new*

The widespread market rally on Wednesday kept the rally going in FCX. The stock rose another 2.5% to another new high. We are raising our stop loss to $71.95. More cautious traders might want to do a little bit of profit taking here. Our target is the $79.50-80.00 range.

Picked on May 27 at $ 74.61
Change since picked: + 3.16
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 12.3 million

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OM Group - OMG - cls: 62.24 chg: +0.30 stop: 59.85

OMG managed to post a 0.48% gain but the rebound in the stock lagged behind the broader markets. The overall trend is still positive but it's struggling to keep the upward momentum going. Volume continues to come in below average. We're still tempted to open new call positions here but a dip back toward the 10-dma or the $60 zone would not be a surprise to us. Our target is the $68.50-70.00 range. The P&F chart is bullish with an $86 target.

Picked on May 27 at $ 62.44
Change since picked: - 0.20
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 801 thousand

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Vangard Emergy Mkts ETF -VWO- cls: 87.00 chg: +0.85 stop: 83.95

Renewed investor optimism today fueled a 0.98% gain in the VWO, which also produced a bullish engulfing candlestick pattern. Volume continues to come in low, which is a surprise. Our target is the $89.85-90.00 range.

Picked on May 16 at $ 86.15
Change since picked: + 0.85
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand

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XTO Energy - XTO - cls: 58.51 chg: +1.34 stop: 54.99

Oil stocks rebounded strongly on Wednesday. Shares of XTO rose 2.3% and on decent volume. The move today looks like a new entry point to buy calls. The P&F chart is very bullish with a $76 target. We are aiming for the $62.50-65.00 range. More conservative traders may want to use a tighter stop loss under the 50-dma or under $56.00. FYI: Readers should note that XTO is due to present at a conference on May 31st. It's an opportunity for news to move the stock.

Picked on May 27 at $ 57.63
Change since picked: + 0.88
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million

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Put Updates

Anixter Intl. - AXE - cls: 71.95 chg: +1.31 stop: 72.05

Hmm... the action in AXE is starting to look more bullish. Traders bought the dip at its 50-dma yet again. Short-term technical indicators are improving with the bounce. We have to admit that the stock now looks more poised to rally to the $75 region than breakdown. We'll keep AXE on the newsletter for now. Our suggested plan was to buy puts on a breakdown with a trigger at $68.49. If triggered we have two targets. Our conservative target is the $65.15-65.00 range. Our more aggressive target is the $62.00-60.00 range.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 520 thousand

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Gilead Sciences - GILD - cls: 82.26 chg: +0.30 stop: 82.55

Biotech stocks were green today but they under performed the S&P 500. Shares of GILD also fell behind the rally but shares are starting to look more bullish with a bounce from the bottom of their trading range. The stock looks ready to rally toward the $84.40-85.00 zone. We'll keep GILD on the newsletter for now. Our suggested plan was to buy puts on a breakdown with a trigger at $79.90. If triggered we will have two targets. Our conservative target is $75.25-75.00. Our aggressive target is the $72.50-70.00 range. Readers should note that GILD is due to present at a conference on May 30th. Plus. the stock is set to split 2-for-1 on June 25th. FYI: The P&F chart is still bullish with a $97 target but a drop under $80 should reverse it into a new sell signal.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 4.1 million

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Las Vegas - LVS - cls: 76.91 change: +0.28 stop: 81.15

LVS struggled to join the rest of the market's bullish tone today but the stock did post a minor gain. Downward momentum is stalling a bit and will continue to struggle with the market making new highs. More conservative traders may want to tighten their stops toward the $80.00 level. Our target is the $71.50-70.00 range.

Picked on May 07 at $ 79.85
Change since picked: - 2.94
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 2.1 million

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Vital Images - VTAL - cls: 28.06 chg: +0.05 stop: 30.05

VTAL under performed the market most of the day, stuck under the $28.00 level. Yet bulls made a last ditch rally late in the session. A bounce toward the $29.00 level would not be a surprise. More conservative traders may want to adjust their stop closer to the $29.00 level. Our target is the $25.15-25.00 range. The Point & Figure chart displays a descending triple-bottom breakdown pattern with a $23 target.

Picked on May 16 at $ 27.99
Change since picked: + 0.07
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 191 thousand

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Strangle Updates

None Today.

Dropped Calls

None Today.

Dropped Puts

None Today.

Dropped Strangles

None Today.


Trader's Corner

THE ARMS INDEX (TRIN)

Last week in my usual Wednesday Trader's Corner I wrote about the ins and outs of using a technical indicator in wide spread use, Bollinger Bands. This is not an indicator that I use all that much but at times in the Indexes, Bollinger Bands will tip off upcoming trend reversals. Before I move on to a discussion of another popular indicator, the Arms Index, mostly known as "TRIN" I will circle back briefly to a Bollinger Band update.

Last week's article and its full discussion on the construction, use and trading tips involving Bollinger Bands may be seen by clicking here.

What I notice with the Bollinger Band indicator when applied to the stock index charts, and to some degree with individual stocks, at least the bellwether equities, is that 1-3 or more spikes above and below the volatility lines that are the Bollinger Bands (see last week's article), will often precede a trend reversal or at least a tradable correction.

I'll use the S&P 500 Index (SPX) and Nasdaq Composite (COMP) charts as examples, as updated of course through today now. First the SPX daily chart seen first with the upper and lower Bollinger Bands:

Back in December, as highlighted with the yellow circle, the 3 successive day's penetration of the upper Band occurred before a pullback, although it was short lived. In late-January to early-February, there were several times where prices pierced the upper Bollinger Band, but the lag time before a significant reversal developed was just over a week. Still, it was an input suggesting some risk to the existing (UP) trend lay ahead.

The repeated intraday piercing of the LOWER Bollinger Band in late February/early-March was an accurate forecaster of the powerful upside reversal that developed in early-March.

Most recently SPX pierced the topmost Band with some of its intraday highs, suggesting an alert regarding a possible downside reversal of the powerful and seemingly unstoppable advance; and, of course we all know that every trend has a beginning, middle and an end! Some trends do go on for above average durations without ANY significant countertrend move, applying the alert that not ALL trends are the same.

In answer to the e-mail I got on this subject, since any single indicator is not conclusive for a change in trend, I use the 21-day moving average to confirm a directional change in the intermediate trend of the major stock market indexes. Remarkably, in terms of the consistency of this current bull market trend, once above the average SPX daily price swings that fell back toward its 21-day moving average have led to resumptions of the dominant (up) trend in EVERY instance since late-March as noted at the green up arrows.

The Nasdaq of course has not been the market that has been the powerhouse in this rally. On the other hand it's trend changes have been forecast quite well with the tendency for multiple spikes above or below the upper and lower Bollinger Bands, to be a pretty useful forecaster or at least to put us on alert for trend reversals. The most recent instance provided by the spike up through the upper Bollinger Band last week may or may not now prove to an bearish alert.

An telling measure of the ability of the weaker market to hang tough is what has been happening multiple times that Nasdaq Composite (COMP) has closed below its 21-day moving average, only to be followed by a next day rebound back above it. Here comes the well known (well, you've heard it a lot from me!) 'two-day rule'; i.e., the day following a close above or below a key moving average (or a prior high or a prior low, etc.) is generally the determinant as to whether such technical price action relative is significant for a breakout or breakdown.

The number of recent instances of a sole 1-day COMP close BELOW the 21-day moving average have all been followed by the Index clawing its way back higher and managing to CLOSE back above the average; even if that was only by a bit, it's been suggesting that the momentum remains UP.

ARMS INDEX

Another indicator that's useful in our arsenal of technical indicators is the Arms Index or Trading Index, usually known more by the letters 'TRIN', for TRading INdex. The Trading Index was invented by Richard Arms in 1967 and he is still around, although I haven't had contact with him since 2002 when he spoke to the Market Technicians Association. This calculation has usually been applied only to the New York Stock Exchange stock group, although there is a Nasdaq Trin. I'll stick with the NYSE, as that is what Dick Arms talks about in terms of how to use it.

Anyway, TRIN is widely seen, followed and commented on. Most every data feed and charting application will show it. The Arms Index (TRIN) is a simple calculation that compared the number of stocks up to the number of stocks down in a given time, and relates that to the advancing and declining volume at the same instant. The Index serves to ascertain if the advancing stocks are receiving more or less than their 'fair share' of the volume. In this way you are able to sense the internal pressures of the market. Used in various ways it becomes a useful tool in predicting probably market direction over different time spans.

THE CALCULATION

The formula for the Arms Index or TRIN is (Advances/Declines) / (Advancing Volume/Declining Volume)

Suppose today:
NYSE Advances: 2,326
NYSE Declines: 1,014
Advancing Volume: 1,220,762,920
Declining NYSE Volume: 315,909,930

Dividing advances by declines we get 2.29
Dividing advancing volume by declining volume equals 3.86
Dividing the first result by the second, equals an Arms Index/TRIN of .593, which is a very bullish Arms Index. A result or any single snapshot of the Arms Index that is 1.00 is a 'standoff'. Numbers below 1.00 are bullish in general and an Arms Index or TRIN above 1.00 is bearish.

LOW numbers are bullish ('good'), HIGH numbers are bearish ('bad'), just like a golf score. In most trading days, the Index will range between .75 and 1.25. OUTSIDE of this range indicates heavy pressures one way or the other; buying or selling. There have been recorded days of an Arms Index/TRIN as low as .19 and high as 10.00.

My next chart is that of the New York Composite Index (NYA), which of course is an index of all the NYSE stocks. We could plot the TRIN indicator below the S&P 500 or even the Dow 30 as they are highly correlated to NYA, but the NYA is of course a perfect correlation.


As you see above, the 1-day readings fluctuate widely, above and below the 1.00 'neutral' line. A good way to look at TRIN in terms of the TREND is to smooth it out with a moving average, which I'll get to in my last chart. However, I should also note that the (Arms) Trading Index was originally developed to spot INTRADAY changes of direction and it's still very helpful in that way.

THE REASONING

The Arms Index is telling us whether the up stocks are getting an equivalent share of the volume or not. If, for example, at any particular point in time there are the same number of stocks advancing (up) on the day as there are declining (down) on the day, it looks as though buying and selling are evenly balanced; a standoff. But, if the volume at the same time shows TWICE as much volume for the declining stocks as on the advancing stocks, then it's apparent that the pressure is heavily on the sell side. In this example, the Arms Index would is 2.00.

There may be more stocks down than up, suggesting a bearish market, but the volume figures will be showing more up volume (total stock volume where the last sale was on an UP tick) than down volume. A bullish TRIN or Arms Index is thereby generated and traders are alerted that, under the guise of a decline, there is really underlying accumulation.

Quite often the index is used as a longer-term indicator of an overbought or oversold market using a moving average of end-of-day TRIN numbers. OR, a moving average of the Arms Index is used as a confirming indicator of a trend change in the market when the average crosses above or below 1.00. Dick Arms indicated that the 5-day or 10-day moving averages were useful in sensing when to buy or sell for moves that last a few days or few weeks, as highlighted in my last chart:


Note that today saw the 5-day TRIN, which appeared about to cross above the 1.00 line into bearish territory, flip back down and remain at a bullish reading. The 10-day Arms Index has been pretty much consistently bullish since April 12th, with one minor 'whipsaw' from 5/9 to 5/14, when the 10-day TRIN got into bearish territory. Whipsaw moves of course are something that will occur from time to time with the use of any moving average.

An unusual exception to the 'whipsaw' tendency was described in my first chart as the S&P has so consistently held, in terms of its intraday Lows (let alone its Closes!), above its 21-day average.


** 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 support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

GOOD TRADING SUCCESS!


 

Today's Newsletter Notes: Market Wrap by Keene Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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