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Daily Newsletter, Wednesday, 06/20/2007

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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

The Bulls Blinked

After what appeared to be a slow sideways/down correction since Friday's high, price suddenly let go to the downside today. The shallow pullback looked like a bull flag and has been the typical kind of correction we've seen time and again during the rallies. Usually when these shallow pullbacks fail they fail hard and that's what happened today. Now we're left guessing as to whether or not it's a one-day wonder for the bears or the start of something more significant to the downside.

I unfortunately lost my internet connection at the closing bell (great timing for me to get my charts updated for this report). By the time I troubleshot the problem, waited for them to fix it and used a very slow dial-up connection in the meantime, it was all I could do to get charts updated and analysis written in time for this report. I didn't get time to add some additional information about what's happening in the markets in general and I apologize for that. But in the end it's important what the charts are telling us anyway.

It was a quiet day for economic reports so there's not much to cover there. The only report was for crude inventories.

Crude Inventories
Crude supplies increased by 6.9M barrels last week for a total of 349.3M, according the Energy Dept. Gasoline supplies also increased, up +1.8M barrels to 203.3M. Distillate stocks (which includes diesel fuel and heating oil) rose 100K barrels to 122.7M.

The sharp sell off today certainly gives the short term charts a bearish feel and even the big red candle on the daily charts doesn't look too healthy for the bulls, especially on the heels of the negative divergences that have been building on the charts. There's still a way to view today's price action as part of what could be a choppy rise to new highs and I'll show those potential setups and the important price levels we'll need to watch.

Before getting to the regular charts I wanted to show the daily VIX chart:

VIX chart, Daily

While I'm still holding out for the idea that the market has more to rally before topping out, the VIX chart tells me I might want to rethink that a little. Notice it has held its uptrend line from December. While it could be considered bullish when VIX is rising with the market (bulls are climbing the wall or worry) I have to wonder if at least short term a bounce in the VIX here spells trouble for the stock market. Something to keep an eye on.

I wanted to show the monthly chart of the DOW again because of the potential significance of where the rally has stopped so far:

DOW chart, Monthly

Forgetting about the EW (Elliott Wave) count for the move up from October 2002 it's important to understand how the market often rallies and declines in measured moves. It's why I so often refer to two equal legs in whatever direction--I would say most of the time that is when the market will turn. It may not be a big turn or it could be a major turn so it takes the study of the larger pattern to help discern which kind of turn it might be.

In the case of the monthly chart, two equal legs up from October 2002 could mark a very significant turn. As large as the rally has been in the past 4-1/2 years (nearly 5) it might have been only a bear market rally. I know that sounds silly but when measured in anything other than a deflated U.S. dollar, the DOW has not yet made a new high above its January 2000 high.

Therefore I've been watching for the 13712.60 level to potentially mark the end of the rally and then start the next bear market leg down. The high on June 1st was 20 points shy of that number. So there's a very real possibility that we've seen THE high as I look at this chart. We've got another week and half on June's monthly candle but it will be interesting to see where it ends--right now it's a hanging man doji at Fib resistance.

DOW chart, Daily

Price has been flopping around either side of the top of the parallel channel for price action since July 2006 and today's move down is getting close to that trend line again, currently near 13450. I've drawn in an ascending triangle as a speculative idea for what we could see if the bulls aren't done yet. They may have let the bears out of the cave to frolic in the sun today but they might have sprung a bear trap.

It's too early to tell but the reason I'm thinking there's still a chance we'll see additional upside is because of the pattern in the bounce from the June low. It looks like a 3-wave move and if true then it could be part of a larger move down with more highs yet to come. Or it could be part of an ascending wedge which I've drawn in. This would be filled with choppy whipsaw price action and they're tough to trade. It's also the kind of pattern that's been very common at previous highs.

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The bearish thing is the negative divergence we've seen since early May. Since the bounce to last Friday's high failed to take out the June 1st high, it's possible that bounce was merely correcting the first leg down of the new bear market decline. The bearish divergences are always a good warning but not necessarily timely when it comes to trading. But it's been a warning that the rally is running out of steam and to be careful about the long side and now the price pattern could be telling us the high is indeed in. If true then the bearish wave count (dark red) is the one we're in. A break below 13287 would tell me THE high is in and to short all rallies. But until that level is broken, and especially if it rallies back above 13700, then look for a potential move up to the Fib target of 13823 which is based on equality between the 1st and 5th waves in the move up from March.

The 60-min chart looks a little closer at the move up from June 8th:

DOW chart, 60-min

The move down today came within a few points of overlapping the June 11th high at 13478. As long as that high doesn't get overlapped then it's still possible for the pullback from last Friday to be a 4th wave correction in the rally from June 8th. That calls for another leg up to finish the 5th wave. For the rally up from June 8th there would be equality between the 1st and 5th waves at 13708 (shown with the Fib projection from today's low). That's very close to the 13712 Fib target shown on the monthly chart.

So between what I've shown on the daily chart and 60-min chart we have a couple of different possibilities here. If we get a little choppy sideways/up kind of bounce, as shown with the dark red bearish wave count, which is then followed by another move lower then I would expect the bearish price depiction to play out. If the DOW drops below 13400 then I think that would be the heads up that something more bearish is happening, to be confirmed with a break below 13287.

But if we get another rally leg started on Thursday which looks strong then watch for the possibility of a new high. Then whether that new high turns into THE high or just one of another (as per the ascending wedge idea on the daily chart) we'll know only after the next pullback.

SPX chart, Daily

SPX also did not make a new high on June 15th and therefore leaves open the possibility that the bounce off the June 8th low was just a correction to the first leg down from June 1st, meaning THE high was on June 1. But I show, with the green bullish wave count, an idea for an ascending wedge to play out which will take SPX to new all-time highs. The 5th and 1st waves in the rally from March would be equal at 1561.12 so that makes for a good upside target if there's to be more rally.

But the 5th wave met its minimum objective when it hit 1533 where the 5th wave equaled 62% of the 1st wave. It found resistance at the top of its parallel up-channel for price action since July 2006. It also left bearish divergences since late April. There's every reason to believe we've already seen THE high. It's just those rascally bulls who won't take no for an answer that we have to worry about.

SPX chart, 60-min

Unlike the DOW, SPX did overlap its June 11th 1515.53 high. That removes the possibility that SPX has a 5th wave to go and that's what opens up some other possibilities. One is the ascending wedge idea that I show on the daily chart--this could conceivable head even higher than "just one more high" and it could take weeks to chop its way higher. These wedges are filled with 3-wave moves that overlap and make trading very difficult because there's no follow through and lots of whipsaws. Stay cautious about that possibility here.

The bearish possibility, shown in dark red, is that we've already seen the high (on June 1) and today's decline was the 3rd wave down in a new impulsive move down. If so we could chop around a little as we get ready for a steeper sell off after the July 4th holiday.

Nasdaq-100 (NDX) chart, Daily

I was hoping NDX would make it up to the top of its megaphone pattern, which is a bearish topping pattern, as it would have made a nice setup for the short side. It could still do that and if this turns around and rallies back up then watch for resistance around the 1972-1973 area--the top of the bullhorn and where the 1st and 5th waves in the rally from March would be equal.

Otherwise a drop below the bullhorn pattern, confirmed with a break below 1888, would be bearish and I suspect we'd see a harder sell off towards the uptrend line near 1850.

Nasdaq-100 (NDX) chart, 60-min

Today's pullback was just shy of the 38% retracement of the rally from June 8th, so no real harm done yet. By holding above its June 11th high at 1917.43, like the DOW, this still has the possibility to get one more leg up to finish its rally. Any continuation lower instead could take it down to the uptrend line from March and a 62% retracement at 1904.

Semiconductor Holder (SMH) chart, Daily

We've all heard it--as the semis go so goes the market. And with the semis having pushed back above the May high it has taken on a very bullish pattern. Of course if it rolls back over here then it will leave some nasty looking bearish divergences so it will need to continue its rally. It broke above its key bullish level at 38.35 so it's now in the bullish wave count. It takes a break below 35.54 to turn it back over to the bulls.

Russell-2000 (RUT) chart, Daily

The RUT has been in a very choppy climb since its March low and it has an ugly price pattern because of it (interpretation--hard to count). The choppy price action gives me the impression it's forming an ascending wedge for its 5th wave in the move up from July and that's what's drawn with the red trend lines. The high on June 1st was the end of its move according to the bearish (dark red) wave count. Otherwise another push higher to a high near 865 (two equal legs up from June 8th) is what I would expect to see for a top.

Russell-2000 (RUT) chart, 60-min

Today's drop came just shy of a 50% retracement of the rally from June 12th. If it drops a little lower before rallying then the Fibs between 832 and 835 should offer support. Any break below 831 will look more bearish but it takes a break below 820 to confirm the high is in.

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

Continuing to follow the NYSE and its new highs shows continuing bearish divergence in the lack of participation each time NYSE pushes higher. While there is the possibility, like the others above, for a minor new high (if it turns right around tomorrow and rallies), I suspect the bearish divergences will continue and a new high will be a gift to bears to short.

10-year Yield (TNX) index, Daily chart

The 10-year yield has pulled back sharply which is not a surprise. First, bonds were deeply oversold on a short term basis so the rally in bonds dropped the yield. Second, with yields spiking up to 5.3% it became enticing for some fund managers to lock in that return, especially if they believed bonds were oversold and could make some money on a bond rally. I think we'll see rates consolidate for a few weeks before pressing higher again.

BIX banking index, Daily chart

Last week I identified on the chart two key levels--the bullish one at 405 and the bearish one at 395. So far neither price level has been hit so theoretically it could still go either way. But today's candle will send shivers down the bulls' spines. At this point I expect 395 to break than that keeps the banks on a bearish price path. Any additional rally in the broader market without the banks will be highly suspect and just add to my bearish conviction about the market in general.

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

I thought housing might get a bounce but so far nothing. It looks like it will continue heading lower from here. After the generally negative news about housing and from home builder sentiment, not to mention the higher mortgage rates and all the added worries about mortgage resets, this index is finding few willing buyers. There have been fewer bottom calls recently. Of course if the sentiment gets too bearish then it will be ripe for a relief rally (only a relief rally). This is still a bearish chart--timber!!

Speaking of timber, the chart of lumber shows a nice short covering squeeze:

Lumber chart, July contract (LB), Daily

After the warning from bullish divergences at the new lows of April and May the traders who were short lumber got hammered as short covering spiked them out. Now we have bearish divergence at the June high and I expect the price of lumber to come tumbling back down. The slowdown in home building is still a fundamental lack of demand for lumber.

Oil chart, July contract (CL), Daily

Oil moves to the August contract this week so I'll show that chart next week. With the break of its downtrend it would appear oil is in its next leg up. I've drawn a parallel up-channel and put in the Fib projection for two equal legs up at 78.62 which crosses the top of the channel in the 1st week of August. That stays in play unless oil drops back below its May 31st low of 62.43.

Oil Index chart, Daily

While oil is trying to rally it would appear the oil stock traders are willing to take some profits. That's the biggest red candle this index has seen for a while. It's still in a bullish up-channel but today's selling was a change in character. Be careful if you're long these stocks. One of these highs, if not the last one, is going to lead to at least a much more significant pullback if not the start of a major decline.

Transportation Index chart, TRAN, Daily

After bouncing up and testing the broken up-channel for price action in May the Trannies have since been selling off. If the broader market has new highs to go then I suspect the Transports do as well. But any drop back below 5000 will say we've seen the top.

U.S. Dollar chart, Daily

There have been no bearish divergences in the US dollar's rally so I suspect the current pullback will lead to another rally leg and if so it should convincingly break its downtrend from March 2006. But so far the bounce off its low is only a corrective 3-wave move so any drop back below its June 5th low of 81.70 would leave it as a 3-wave bounce and strongly suggest the dollar is headed for another new low.

Gold chart, August contract (GC), Daily

Gold was held back at the 665 level I identified last week. I thought it might make it up to its downtrend line closer to 670 but it's now back below its 200-dma and looking bearish. The wave count that I have on it, with multiple 1st and 2nd waves (each in the next smaller degree pattern) is very bearish and I don't like to bet on these setups as they're often a corrective pullback instead. If it's a corrective pullback then we should see the dollar sink back down and gold break its downtrend line. That would be bullish and I'd be a buyer of gold in that event. But if the bearish wave count, with multiple 1-2 waves to the downside, is correct then we're about to get a hard sell off.

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

Tomorrow's reports should be relatively tame for the market. Sometimes the Philly Fed index will move the market, and even the LEI could spook some players if they think the Fed might react to them. At this point I think most are worried that the Fed will start talking about the need to raise rates. If they even hint so much that that's the way they're leaning then the stock and bond markets will see some serious selling.

SPX chart, Weekly

The weekly chart of SPX shows the oscillators in a clear sell signal although it could be argued that the MACD, which is even a faster setting than typically used, hasn't crossed yet. While MACD is more a lagging indicator than stochastics, it could still do just a kiss here and head back up if price does. And if it does rally a little higher then two equal legs up from October 2002 (similar to the discussion under the monthly DOW chart) is at 1562.80. Note that this is very close to the Fib projection I showed on the daily chart at 1561.12. That would be a sweet setup for a short play if it were to rally up to that level--pop the shorts out who have their stops at new all-time highs and then hit it short. But things are looking a little dicey for the bulls here so be careful if long.

The bullish patterns require an immediate rally on Thursday. If the market even consolidates for a little bit then it will look bearish. Any further drop in the DOW and NDX will have them joining SPX in overlapping the June 11th highs. Then the two possibilities from there would be a very choppy climb higher over the next several weeks or else we've already seen the highs and we're going to start selling off in earnest after the July 4th holiday.

We're on the edge here but in either case (bullish or bearish) I see the likelihood for some choppy price action at least for the next few days. Therefore if you're trying to trade this market intraday be aware of that possibility. If you're waiting for some swing trades then I see the better chance for you with a move down. We don't quite have the sell signal for that yet but we could be close. This time next week and we should have the answer to that question.

Good luck and I'll be back here next Wednesday. Hopefully this pattern will clear up sooner than next Wednesday in which case I'll identify it as soon as I can on the Market Monitor. See you there.
 


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

Ashland - ASH - cls: 62.44 change: -0.61 stop: 59.95

We have to issue a bearish reversal warning for ASH. The stock has produced a failed rally near its 100-dma and produced a bearish engulfing candlestick pattern with today's session. At a minimum we would look for a dip towards $62.00 and we wouldn't be surprised to see a pull back near $61.00. We're not suggesting new positions at this time. Our target is the 200-dma (currently at $64.48). More aggressive traders may want to aim higher but we would not hold over the late July earnings report.

Picked on June 10 at $ 61.49
Change since picked: + 0.95
Earnings Date 07/23/07 (unconfirmed)
Average Daily Volume = 657 thousand

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Avery Dennison - AVY - cls: 66.53 chg: -0.17 stop: 64.19

AVY actually held up relatively well. The stock only lost 0.25% versus the 1.3% drop in the S&P 500. We would still expect more weakness tomorrow. Look for a dip into the $66.00-65.75 zone. More conservative traders might still want to tighten their stops toward $64.80-65.00. Our target is the $69.75-70.00 range.

Picked on June 11 at $ 66.05
Change since picked: + 0.48
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 728 thousand

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BP Plc. - BP - close: 68.89 change: -0.82 stop: 67.85

Oil stocks were hit hard today. Investors seemed to over-react to a rise in oil inventories and crude oil slipped less than 70 cents to $68.85 a barrel. Shares of BP produced another failed rally at the $70.00 mark. We are sticking to our plan and waiting for a breakout over resistance at $70.00. We are suggesting a trigger to buy calls at $70.25. If triggered our target is the $74.85-75.00 range. We do see some resistance near $73.50. Friday's rally hit an intraday high of $70.05 and that move over $70.00 has produced a new triple-top breakout buy signal on the Point & Figure chart with a $90.00 target. More aggressive traders may want to aim higher than our $75 target but keep in mind that we plan to exit ahead of the late July earnings report.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 3.5 million

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Central Euro. Media - CETV - cls: 93.29 chg: -1.69 stop: 89.75

CETV could not escape the profit taking and shares lost 1.7% after hitting a new relative high at $95.87 this morning. Today's pull back was powered by above average volume as traders rushed in to lock in a gain after the recent rally. We would expect a dip toward the $91.00-90.00 zone. A bounce above $90 could be used as a new entry point for calls. The May 2007 highs in the $96-97 range look like resistance but we're aiming for the $99-100 range. The P&F chart is bullish with a $103 target.

Picked on June 17 at $ 92.75
Change since picked: + 0.54
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 124 thousand

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Chevron Corp. - CVX - close: 80.97 chg: -2.32 stop: 79.90

Investors appeared to over-react to the latest inventory numbers, which showed a rise in oil supplies this morning. Crude oil lost about 65 cents on the news, which is less than 1%. Yet the report this morning fueled a 2.4% loss in the OIX oil index. CVX shed 2.78% and did so on above average volume. It seems that with oil stocks trading near record highs investors rushed to lock in a profit. Today's move in CVX is definitely bearish but we are expecting a bounce near $80.00 and its rising 50-dma. Wait and watch for a bounce as a potential entry point for new call positions. The sharp pull back has turned the most recent P&F chart buy signal into a "bull trap" pattern.

Picked on June 18 at $ 83.75
Change since picked: - 2.78
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 9.1 million

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Deere Co - DE - close: 121.50 change: -0.13 stop: 117.45

Warning! We have been triggered on what looks like a bull trap and failed rally pattern. DE broke out to new highs over resistance in the $123 area. Our trigger to buy calls was at $123.55. Unfortunately, when the afternoon market sell-off began, shares of DE turned tail and gave back all of its gains. The move today is a short-term bearish reversal. We're not suggesting new positions. Nimble traders can wait and watch for a bounce near $120, which should be short-term support. Our concern today is if the market continues to sell-off then DE will quickly hit our stop loss at $117.45.

Picked on June 20 at $123.55
Change since picked: - 2.05
Earnings Date 08/15/07 (unconfirmed)
Average Daily Volume = 2.6 million

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General Dynamics - GD - cls: 79.48 change: -0.88 stop: 78.35

GD has produced another failed rally under $81.30 again. The move today is yet another bearish reversal. We repeat our previous suggestion that more conservative traders may want to abandon ship. We're going to stick it out since GD should have support near $79.00 and again at the 100-dma. We're not suggesting new positions.

Picked on June 10 at $ 80.58
Change since picked: - 1.10
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 1.3 million

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Global SantaFe - GSF - cls: 72.08 chg: -0.68 stop: 66.65

Oil service stocks have been hitting new highs so the group was a big target for profit taking during today's sell-off. We're surprised that GSF didn't show more weakness. We're not suggesting new positions and we're repeating our previous suggestion that readers consider exiting early now to lock in a gain. Our target is the $74.50-75.00 range.

Picked on June 03 at $ 68.86
Change since picked: + 3.22
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 4.8 million

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China Life - LFC - cls: 51.76 chg: -0.55 stop: 47.95

Readers may want to try and lock in a gain with LFC pretty soon. The stock hit an intraday high of $53.35 but eventually reversed into a bearish failed rally pattern. We would expect a pull back toward the $50 zone. We're not suggesting new positions at this time. Our target is the $54.00-55.00 range.

Picked on June 14 at $ 48.25
Change since picked: + 3.51
Earnings Date 08/25/07 (unconfirmed)
Average Daily Volume = 1.0 million

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Manpower - MAN - cls: 91.49 change: -0.81 stop: 89.90

Warning! We've been triggered on today's intraday failed-rally bull trap pattern. This morning the stock broke through resistance at $94.00 and hit 94.32 before reversing and closing with a 0.8% loss. Our suggested trigger to buy calls was at $94.15. Unfortunately, this really does look like a bull trap and MAN looks poised to dip toward $90.00. If the market really sells-off this week we wouldn't be surprised to see MAN break the $90 level. We're not suggesting new positions at this time.

Picked on June 20 at $ 94.15
Change since picked: - 2.66
Earnings Date 07/20/07 (unconfirmed)
Average Daily Volume = 829 thousand

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PACCAR - PCAR - cls: 88.67 change: -1.60 stop: 85.95

The trading in PCAR today also looks like a bull trap, failed rally pattern. It sucked bulls in with the breakout to new highs and then quickly reverses. More conservative traders may want to exit immediately or raise their stops toward the $88.00 level, which looks like short-term support. We're not suggesting new positions at this time.

Picked on June 17 at $ 90.66
Change since picked: - 1.99
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 1.7 million

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Penn National Gaming - PENN - cls: 62.85 chg: -0.44 stop: n/a

We don't see any changes from our previous comments on PENN. We are speculating that there will be more suitors making bets to acquire PENN. It's a high-risk bet. If another bidder fails to show up then any out-of-the-money calls will evaporate pretty quickly. FYI: August strikes are now available.

Picked on June 17 at $ 62.12
Change since picked: + 0.73
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 1.0 million

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SanDisk - SNDK - cls: 46.45 change: -1.17 stop: 43.45

SNDK under performed the broader market with a 2.45% decline. Technically the move today is a bearish reversal given the bearish engulfing candlestick pattern. Watch for the $46.00 level or the $45.00 level to act as short-term support. We would wait for signs of a bounce before considering new bullish call positions. More conservative traders may want to raise their stops. We have two targets. Our conservative target is the $49.50-50.00 range. Our aggressive target is the $52.50-55.00 range, which might be too optimistic given our time frame. We don't want to hold over the mid July earnings report.

Picked on June 17 at $ 46.40
Change since picked: + 0.05
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 7.6 million

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SunPower - SPWR - cls: 59.45 change: +1.77 stop: 52.49

SPWR displayed relative strength today. The stock spiked to an intraday high of $62.59 and eventually closed up 3% on very strong volume. The move appears to be fueled by news that Morgan Stanley (MS) has agreed to own and finance several SPWR solar energy systems to be used a multiple Wal-Mart (WMT) locations in Hawaii and California. That's the good news. The bad news is that today's trading produced a huge failed rally, intraday reversal, near the April 2007 highs. A quick glance at the chart and you can see what appears to be a bearish double-top pattern. We are not suggesting new positions at this time. More conservative traders may want to raise their stop loss toward the $55 level.

Picked on June 17 at $ 57.94
Change since picked: + 1.51
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 1.5 million

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Valero Energy - VLO - cls: 74.92 chg: -1.82 stop: 72.45 *new*

The weekly oil and gas inventory report showed an unexpected rise in supplies. This sparked a profit-taking sell-off in the energy stocks. VLO lost 2.3%. While we think the reaction today is way overblown we do not think the pull back is over yet. However, the bullish trend is still in place. We are going to be aggressive here and lower our stop loss to give VLO more room to maneuver. Our new stop is at $72.45. More conservative traders may want to move their stop the opposite direction and place theirs closer to the $74.00 level. We're not suggesting new positions at this time.

Picked on June 18 at $ 77.55
Change since picked: - 2.63
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 13.2 million

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XTO Energy - XTO - cls: 61.99 chg: -1.34 stop: 58.95

XTO could not escape the market-wide profit taking. Shares lost 2.1% and produced a technical bearish reversal pattern with today's bearish engulfing candlestick. We are not suggesting new bullish positions. We strongly suggest that readers do some profit taking of their own and lock in a gain. If you choose not to exit early but want to reduce your risk consider raising your stop toward $60.00 or $61.00. Our target is the $64.75-67.50 range.

Picked on May 27 at $ 57.63
Change since picked: + 4.36
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Allegheny Tech - ATI - cls: 108.27 chg: -2.83 stop: 112.15

Market weakness helped push ATI to a 2.5% loss but the bears were unable to pull ATI under technical support at the 100-dma or under the bottom of its recent trading range near $108. Aggressive traders may want to consider new put positions now. We have been suggesting that readers wait for a new decline under $107.75 or $107.50 before opening new put positions. More conservative traders may want to wait for a new decline under $106. We have two targets for ATI. Our first target is the $100.50-100.00 range. Our second target is the $95.50-95.00 range. More aggressive traders may want to aim for the simple 200-dma (currently near $92). Currently the P&F chart is bearish with a $94 target.

Picked on June 12 at $106.70
Change since picked: + 1.57
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.1 million

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Gilead Sciences - GILD - cls: 79.10 chg: -1.70 stop: 82.55

The BTK biotech index plunged 1.7% and GILD helped lead the way with a 2.1% reversal. After yesterday it looked like GILD was poised to rebound higher but the stock reversed under $81 and closed near its lows for the session. More conservative traders may want to tighten their stops. Our target is the $75.25-72.50 range but traders should be aware that the simple 100-dma nearing $77.50 might be technical support. FYI: The stock is set to split 2-for-1 on June 25th.

Picked on June 07 at $ 79.90
Change since picked: - 0.80
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million

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Las Vegas Sands - LVS - cls: 76.06 chg: -0.73 stop: 80.26

It was a quiet session for LVS. The stock churned sideways in a $1 range. More conservative traders may want to wait for a new relative low under $75.00 before buying puts. Our target is the $70.50-70.00 range. More aggressive traders may want to aim lower.

Picked on June 17 at $ 76.78
Change since picked: - 0.72
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.0 million

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Mettler Toledo - MTD - cls: 95.05 chg: -1.79 stop: 99.11

MTD continued to breakdown and closed near its lows for the session with a 1.8% loss. We don't see any changes from our previous comments. Our target is the $90.50-90.00 range. Traders will also need to keep an eye on the 100-dma, near $92.60, as possible support. It's worth noting that this looks like a significant breakdown from its long-term rising channel. FYI: The P&F chart has reversed into a new triple-bottom breakdown sell signal with an $89 target (was $91).

Picked on June 19 at $ 96.75
Change since picked: - 1.70
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 215 thousand

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QUALCOMM - QCOM - cls: 43.07 change: +0.38 stop: 44.05

Whoa! QCOM displayed some intraday strength. The stock rallied to overhead resistance near $44.0 before paring its gains and closing up 0.89%. We're not sure whether this strength was due to a new deal with VIA Telecom or news that the President of CTIA, a trade group for the wireless industry, had asked President Bush to veto the International Trade Commission's two-year ban on new phones with QCOM's 3G chips in them. The markets new that QCOM would eventually ask for a presidential veto but the White House has already said it would refer the decision back to the ITC. Whatever the reason behind QCOM's strength the close over $43.00 looks dangerous for the bears. We're not suggesting new positions at this time. Wait for a new decline under $42.00. More conservative types can wait for a decline under $41.00 before buying puts. We're aiming for the $37.00-36.00 range.

Picked on June 10 at $ 41.87
Change since picked: + 1.20
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 18.0 million

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Regency Centers - REG - cls: 71.29 chg: -1.54 stop: 77.76

REITs were weak again. REG lost 2.1% and closed at a new relative low. Our target is the $70.50-70.00 range. More conservative types may want to tighten their stops toward the $75 level.

Picked on June 11 at $ 74.68
Change since picked: - 3.39
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 374 thousand

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Weyerhauser - WY - cls: 80.68 chg: -0.53 stop: 82.05

WY is looking weaker. Shares produced a bearish failed rally today. Currently we're suggesting a trigger to buy puts at $79.49. If we are triggered our target is the $75.00-74.00 range. The $75 level is likely to be psychological support and the $74 level was support back in March. The Point & Figure chart looks very bearish with a $61 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/07 (unconfirmed)
Average Daily Volume = 2.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Bullish Sentiments and Double Tops

I wrote in my weekend INDEX TRADER column that we had to look at the real possibility that the leading Index in this market cycle, the S&P 500 (SPX) could be making a double top until or unless we see continued weekly closes that are above and over time, decisively above, 1530. This prompted a SUBSCRIBER E-MAIL QUESTION as follows:

"...you said that spx could be making a double top. if so what could that tell us about the downside potential? also you wrote abot the high bullish sentiment maybe signaling a top too. can you say more about this?"

The reference is to my Sat, 6/16 column, which can be seen by clicking here.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for my answer or feedback to me at Click here to email Leigh Stevens Support [at] OptionInvestor.com with my name ('Leigh Stevens') in the Subject line.

BACKGROUND:
I said in the aforementioned Saturday Index Trader's column relative to this past Friday's call/put volume ratio, where equities call volume was more than double equities put volume, that: "The spike up into the 'overbought' extreme area, to above 1.9/2 in my call to put indicator made me the most cautious in staying in calls over the weekend."

And, while showing a long-term S&P 500 (SPX) chart highlighting a possible long-term double top, I indicated that:
"Also helping me to rein in my bullish enthusiasm is the simple observation that the star index, the S&P 500 (SPX), could be forming a major top. We won't know until SPX gets well above and beyond the 1530 area. And, there's the question here as to whether, with this much recent bullishness, there is going to be a whole new up 'leg' from here. It can happen of course, but I'm cautious about big commitments at this juncture, either long or short."

MY 'SENTIMENT' INDICATOR:
When CBOE equities call to put volume ratios get above 2, and Friday saw this ratio at a bearish 2.1, highest seen in this advance, there is a tendency for a downside reversal to occur within 1-5 trading days; especially so when the market is 'overbought' as suggested by the 13 to 21-day RSI (or the same indicator on an 8 to 13-week basis). When I say that double the amount of call volume relative to put volume is 'bearish', I mean in the contrarian sense, as market tops often or most often come when there is heavy buying going on and there's a VERY bullish market outlook.

Now that I said the a top tends to follow within a few days of my 'CPRATIO' indicator spiking above 2, here are two examples above where that DIDN'T happen! The first example (December '06) saw a sideways trend develop for some time after the two times that the ratio was above 2, before there was a sharp fall.

In the early-March example of 'CPRATIO' spiking up above 2/2.1, a minor top was still about 3 weeks away and prices trended strongly higher in the meantime. These are exceptions to the rule. There are always exceptions to such rules of thumb.

I also should note that extremes in my sentiment indicator are best used in conjunction with OTHER indicators and pattern analysis that suggest a breakdown to the trend; e.g., a key reversal down, a break of a support trendline, a move up to resistance implied by a previously broken up trendline or the top end of an uptrend channel, etc. Support for the idea of an impending top can also be guessed at by what is happening with prices relative to other technical indicators, such as prices spiking up to and briefly through the upper Bollinger band, etc.

The flip side: extreme BEARISH sentiment seen in the daily equities call to put volume ratio (e.g., around "1", where put volume equals call volume) suggests potential for an upside reversal within 1-5 trading days.

DOUBLE TOP PATTERNS:

It is worthwhile to review the double top pattern, because they can be reliable in forecasting tops especially in the indexes, just as double bottoms have been useful in forecasting the end of big declines. Again, this is more true in the major stock INDEXES than in individual stocks.

We see double tops (and double bottoms) somewhat often in the universe of stocks. The pattern has the appearance of two well-defined price peaks, separated in time but at nearly the same price level. Double tops are typically short-term (up to 3 months) bearish reversal patterns. The average decline after a double top forms in a stock is 20%, with the most likely decline being between 10% and 15%.

The second top can be viewed as a low risk shorting opportunity; low risk in the sense that you have a defined stop or exit point just over the second top. The odds of the second peak being a double top increases if the stock is overbought, according to a 13 or 21-day RSI; even more so when overbought is based on an 8 or 13-week RSI (weekly chart) extreme. The odds of a double top also increase if the daily volume on the second top is LESS than the volume levels seen with the first top.

Double tops in STOCKS are more likely to have larger losses than those with peaks spaced further apart. With peaks close together, traders are more likely to recognize a double top and try to take advantage of it.

I tend to put the most store in double tops that develop in major stock indices, especially if they occur after a long run up. There is a tendency in tops in general and in double tops in particular for there to be DECLINING 'relative strength' over the period when a top forms or appears to be forming, as seen in the Relative Strength Indicator or RSI highlighted below with the S&P 500 (SPX) chart.

The apparent double top in SPX has offered, as already discussed with stocks, a 'low risk' trade in the sense that an exit point for SPX puts is just above 1540; assuming put entry was made near to the recent 1540 SPX top. This is the advantage of a prior top showing you the way. You can ASSUME a top is forming after 2-3 instances of failure to pierce the prior high and enter a trade with some probability of a favorable risk to reward as you an exit point close to trade entry. This strategy on a risk to reward basis is quite different than waiting for signs of a 'breakdown' where the obvious exit point (just over 1540) is 5-15-20 points from your entry (in the case of SPX).

Of course there is a tendency for double tops to form in similar indexes, so you want to look for that situation to help determine if a top is forming in the overall market. Note that the declining RSI seen in the Dow chart below is quite pronounced while prices make a second top.

There is a tendency for a prior top that was made many months or years prior to a current peak that forms in the same area in the INDEXES, to offer a good indication that a second top could be a major one. Conversely, the ability to go through a top from many weeks, months or years ago tends to suggest a major new up 'leg' or major additional advance to come.

Some weeks of market action may have to unfold to see if SPX has formed a major top or to see if this recent pause is just a minor consolidation. One clue to whether a major top is unfolding is sometimes provided by the 8 or 13-week RSI. In the 2000 top, the 13-week RSI was in a steady decline and a bear market followed. In the 2004 minor top the RSI got into 'overbought' territory, but there was only a minor pullback that followed in a big picture sense.

What you did NOT see on the way to that (2004) top was a DECLINING Relative Strength Index. The indicator spiked up with prices and then pulled back with prices. DIVERGENCES with price, with price and RSI trending in the opposite direction, is one of the most potent uses of this indicator to suggest that a top is forming, including a second top.

The possible double top above is an obvious one. Joe Granville used to say about the market: "if it's obvious, it's 'obviously' wrong". Well, that's the thing with double tops and double bottoms: they are seemingly obvious to everyone.

You would think they would be trading 'traps' so to speak. But often they suggest just what is implied: that the market is back in an area of major resistance (or major support) and a bullish or bearish market swing or cycle may repeat just as before. Stay tuned on the outcome of this!

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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