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Daily Newsletter, Monday, 01/28/2008

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Table of Contents

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

Market Wrap

Rebound Takes Hold as Short Covering Builds Momentum

The major averages all finished in the green as market internals and price action suggests that bears continue to lock in gains in a volatile market environment.

After a choppy morning trade that saw the major averages oscillating between fractional gains and losses, buyers won out by the close.

Advancing issues outnumbered decliners by a 3:1 margin at the big board, while four and five-lettered stocks at the NASDAQ had advancers outnumbering decliners by a 2:1 margin.

Having recorded a hefty 1,099 new lows on Tuesday and 397 on Wednesday, new lows have been trying to stabilize at the big board with 79 on Thursday, 84 on Friday and 81 today. Again, some QUANTITATIVE look that shorts are doing some buying. During the same time (Tuesday - today), the number of new highs aren't much to write home about at 33, 30, 16, 21 and today's 22. These new high measures suggest to this technical analyst that BULL's aren't overly aggressive with individual names and remain more cautious.

NASDAQ new lows are also abating from Tuesday's hefty 982 total, but also show some sign of firming with 467 on Wednesday, 130 on Thursday, 114 on Friday and 119 today.

A bright spot for NASDAQ at the new highs. On Thursday, just 36 stocks managed to trade a new 52-week high. Wednesday's tally came in at 32, Thursday's total was 43, Friday's count was 42 and today's total was 45.

For the first time this year (2008), the 5-day NH/NL ratios at both they NYSE and NASDAQ have reversed up, in large part due to the lack of new lows. A sign to this market technician that short covering from bears is offering support.

NYSE NH/NL Ratio Chart - 2% box

As you can see, today's 13.6% NH/NL measure for the NYSE's "f"ive day ratio reverses from a very WEAK 6%. To even begin to think that we are starting to observe some BULLISH leadership resuming, the "f"ive-day NH/NL ratio would have to see a 34% measure on the chart. On a more intermediate-term basis, the 10-day NH/NL ratio (X's and O's) remains in a column of "O" and can only do so should the "f"ive-day NH/NL ratio continue higher.

It's just that simple.

NASDAQ NH/NL Ratio Chart - 2% box

NASDAQ tends to be a little more "volatile" and we can see that here with the "f"ive-day NH/NL ratio (see more columns of 'f'). Today's 17.8% measure gives us the 3-box reversal up to 16.00% on the chart. Meanwhile, the more intermediate-term 10-day NH/NL ratio (X's and O's) has fallen to 12% with tonight's closing measure of 15.00%. It would take an 18.00% measure for the NASDAQ's 10-day NH/NL ratio to reverse back up.

From an internal technical observation, it would take a 42.00% measure for the "f"ive day NH/NL ratio to give us the impression that BULLISH leadership is returning on a shorter-term basis, while it would take a 38.00% measure for the 10-day NH/NL ratio to suggest BULLISH leadership were returning on a more intermediate-term basis.

There has also been some "bull alert" signals among the major market bullish %!

S&P 500 Bullish ($BPSPX) - 2% box scale

On Thursday, I alerted traders and investors that the S&P 500 Bullish ($BPSPX) from StockCharts.com had reversed up to "bull alert" status. "Bull alert" status is depicted by a bullish % reversing UP from below the 30% measure.

Institutional traders and investors that will utilize these important supply/demand measures consider levels below 30% as being "oversold," while levels above 70% are deemed more "overbought."

If this were an American football field, then 30% and lower would signal "touchdown" for the bears. Gains on many bearish positions should be locked in (partial or full) as to not let this market take point, or gains from your account!

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Over the last couple of days, supply/demand traders and investors alike have noted that some of the major market bullish % indicators have reversed UP to bull alert status (bullish % reversed UP at measures below 30%), also a signal that some type of shift is underway and that demand for equities is starting to outstrip supply.

The very broad NYSE Bullish % ($BPNYA), the narrower S&P 100 Bullish ($BPOEX) and NASDAQ-100 Bullish ($BPNDX) also reversed up to "bull alert" status.

U.S. Market Watch - 01/28/08 Close

Ahead of this week's 2 day FOMC meeting, the S&P Banks Index (BIX.X) 276.36 +3.28% continued its torrid rebound from last Tuesday's intra-day and new multi-year low of 228.54. For those without calculators, the BIX.X has rebounded nearly 21% from last Tuesday's low! The BIX.X also close above its 50-day SMA (274) for the first time since falling below this more intermediate-term simple moving average (SMA) on October 12, 2007!

In this evening's wrap, we'll review this important sector as it begins to tie in with some other historic action regarding current FOMC actions and "stimulus" packages currently being reviewed in Congress.

Let's first review some of today's announced economic and earnings announcements.

Economic Data

New Home Sales: The Commerce Department said that new home sales dropped by 26.4% over the past year to 774,000 (consensus 645,000), marking the biggest decline on record (1980 saw sales plunge 23.1%). December's sales fell a rapid 4.7%, while the median price of a home fell by 10.4% last month.

The Commerce Department said that the median price of a new home barely budged in 2007, edging up just 0.2% to $246,900, the poorest showing since prices fell by 2.4% during the 1991 housing downturn. The supply of new homes stood at a 26-year high of 9.6-months.

The Dow Jones Home Construction Index (DJUSHB) 372.35 +5.95% recouped all of Friday's losses, but still resides under its 150-day SMA (388). We'd have to go back to last summer to see the DJUSHB close above its more intermediate-term 50-day SMA (310) for more than four (4) sessions.

DJ Home Construction Index (DJUSHB) - Weekly Intervals

"Trader Vick" has been quoted as saying "It's a buy when the 10-week moving average crosses the 30-week moving average and the slope of both averages is up."

Late last year (Q4) I had mentioned that in September of 2006 I was "disappointed" to learn that I wasn't able to fully utilize that year's mortgage interest deductions, and deduction of mortgage origination fees I had paid, and subscribers that might be looking to purchase a new home might want to wait until Jan'08.

As I look at the DJUSHB, we witnessed a STRONG start to 2007, similar to that this year.

Today's hefty 5.95% gain on such "bad news" for December data might make some sense if homebuyers do indeed wait for the New Year in order to make a purchase.

For my 2006 taxes, I ended up using the governments "standard deduction" as the interest and mortgage fees allowed for deduction was LOWER than the standard deduction.

Let's keep an eye on the DJUSHB. I think the MARKET has the seasonal "tax" action figured out. If this is "the bottom," then I'd have to think the DJUSHB doesn't fall back below its 10-week SMA like it DID DO in mid-February of last year!

Chicago Fed Midwest Mfg. Index: More regional economic data had the Chicago Fed saying its manufacturing index edged up 0.1% in December from 104.6 in November.

Chicago Fed / U.S. Industrial Production - Since 1998

I continue to monitor both REGIONAL and the broader economic reports. We can see that the more regional Chicago Midwest Mfg. Index has slipped 0.8% during the last quarter, while the US Industrial Production Index, which is compiled by the Federal Reserve has eased a more modest -0.3%.

It is difficult for this technical analyst to figure out why the CFMMI is so far off its "peak" from '2000, while the broader IPMFG is just off new highs.

While declines are "modest," the trends of both still suggest longer-term growth at hand.

Further weakness in the Chicago Fed data could begin to confirm my (Jeff Bailey's) 2008 forecast for a "modest recession."

Earnings:

The Dow Jones Transportation Index (TRAN) 4,523.33 +1.08% managed to post a gain today despite a negative trade in shares of YRC Worldwide (NASDAQ:YRCW) $16.05 -14.89% saying it posted a Q4 loss of $735.8 million, or $-12.99/share. YRCW said it would have earned $0.01/share excluding one-time charges. The $0.01 gain was viewed negative as analysts were looking for a gain of $0.54/share.

The Oil Service HOLDRs (AMEX:OIH) $165.75 +1.38% mirrored Halliburton's (NYSE:HAL) $33.55 +1.39% daily gain. The oil service giant said Q4 earnings rose 4.9% to $690 million, or $0.75 a share, which was better than Wall Street's consensus of $0.69. Revenues rose 19% to $4.18 billion, also ahead of the $4.06 billion consensus.

Dow component Verizon (NYSE:VZ) $38.11 +0.92% saw a wild day of trade. The communications behemoth said non-GAAP Q4 EPS came in at $0.62, which matched Wall Street's estimates. Including charges (GAAP) it earned $0.37/share on revenues of $23.8 billion. Wall Street was looking for sales of $23.96 billion. After trading as low as $36.25 just after 10:00 AM EST, buyers stepped in to drive the stock to its highs of the day.

After today's close, fellow Dow component American Express (NYSE:AXP) $47.40 +4.31% saw its shares trade lower at $46.03 in the extended session. The financial giant said revenues grew 10% vs. Q4 last year to $7.36 billion, which was below analysts forecast of $7.85 billion. Earnings per share were $0.71, which matched Wall Street's forecast.

AXP's chairman and CEO said "Results for the year met or exceeded all of our long-term financial targets, even though we saw clear signs of a weakening economy and business environment in December.

The Charts

As the $BPSPX reverses up to "bull alert" status last week, I want to begin noting a RANGE of the recent decline.

Let's take a quick look at the S&P Depository Receipts (AMEX:SPY) $135.42 +1.78%.

S&P Depository Receipts (SPY) - Daily Intervals

I've been "dragging down" my 0% conventional retracement as the SPY continued to see lower lows. Today's "support" and buyers at the resulting 19.1% suggests to me that a normal 38.2% retracement is in the cards.

In last week's Market Monitor at OptionInvestor.com, I began looking "back" at multiple declines in the major indices. Once we saw a CLOSE above the 19.1% retracement, we've seen "normal" retracement of a decline to 38.2% at a MINIMUM.

On the above chart, I show the Q S2 (Quarterly Support 2) level. The ABILITY for selling to have overcome this institutional computer level of support suggests that institutional computers will likely have some INVENTORY of stock back up at Q S1 (Quarterly Support 1).

It took "guts" to buy BELOW the Q S2, and the only way to profit from such a buy, or RISK taken is to take some profits at Q S1.

S&P Banks Index (BIX.X) - Daily Intervals

You know the "news." You also may know that the BIX.X have shown "moments" of strength where it looks like they've found a bottom, only to FAIL and get crushed to new lows.

Long-time OptionInvestor.com subscribers will know that the BANKS are probably the SINGLE BEST depicter of bullishness, or bearishness for the S&P 500 Index.

We're hearing a little more "nip away at some new bullish positions" for this beaten down group. Some positive comments even coming from some "old bears."

A 38.2% retracement would be "normal," but strength above there may signal a turning point for the group. A REAL sign of a turning point would be to see the BIX.X fall as it has, but ONLY back to 257, then chart higher again and take out the 286 level.

This would be the "key sector" in my opinion to monitor after this week's FOMC meeting.
 


New Plays

New Option Plays

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

Play Editor's Note: Monday did not go as planned. We stuck our neck out over the weekend suggesting Friday's bearish reversal would see some follow through this week. Instead a massive rally in the financials continued to lift the broader market. Just looking at today's action it would appear that the DJIA is headed for 12,500, the S&P 500 toward 1,370 and the NASDAQ Composite to 2,400. These levels are near last week's highs and should all be short-term resistance. Unfortunately, these are not going to be small moves and will be painful for the shorts. If the market breaks out past these levels then the short squeeze will really pick up speed!


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

United States Cellular - USM - cls: 71.10 change: +1.75 stop: 67.89

USM managed a 2.5% bounce today but I have to admit the action still looks a little weak. Some of the short-term technical oscillators are suggesting that USM is going to roll over again. I wouldn't be surprised to see USM retest $68.00 as support. If it does retest $68.00 a bounce from this level could be used as another entry point to buy calls. Our target is the $74.50-75.00 range. Our entry point was $71.00.

Picked on January 25 at $ 71.00 *triggered
Change since picked: + 0.10
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 153 thousand

---

United States Oil Fund - USO - cls: 72.35 chg: +0.44 stop: 68.59

Traders bought the dip in crude oil this morning. The USO managed a $2 bounce off its lows. This ETF looks poised to rally toward $74 and our target. Our short-term target is the $74.50-75.00 range. More aggressive traders could easily aim for the $77.50-79.00 region.

Picked on January 24 at $ 70.93
Change since picked: + 1.42
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Ambac Fincl. - ABK - cls: 11.13 change: -0.41 stop: n/a

The financial sector rallied more than 3.2% and yet shares of ABK closed in the red. This sort of relative weakness should be telling you something. We think ABK is going under and would still consider new put positions here. We are labeling this a speculative, higher-risk, lottery-ticket style of play. We will have to play it by ear when it comes to exiting but we're looking for a decline to $5.00 or less. We were suggesting the May puts.

Picked on January 27 at $ 11.54
Change since picked: - 0.41
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

Hartford Fin. - HIG - close: 78.16 chg: +3.03 stop: 81.01

HIG did not cooperate with us but it may work out. The stock looks poised to rally toward resistance near $80.00. Look for a failed rally at $80 as a new bearish entry point to buy puts. Our short-term target is the $70.50-70.00 zone.

Picked on January 27 at $ 75.13
Change since picked: + 3.03
Earnings Date 01/24/08 (confirmed)
Average Daily Volume = 2.4 million

---

Harley-Davidson - HOG - cls: 39.13 chg: +1.17 stop: 42.51

HOG managed a 3% bounce today, which is even more impressive considering it came back from an intraday low under $37.00. At this point we would wait on new put positions. The stock looks like it could rally back to short-term resistance near $42.00. Wait for a failed rally to show up before jumping in with puts. We have two targets. Our first target is the $35.25-35.00 range. Our second, more aggressive target is the $32.50-30.00 zone.

Picked on January 27 at $ 37.96
Change since picked: + 1.17
Earnings Date 01/25/08 (confirmed)
Average Daily Volume = 2.4 million

---

MBIA Inc. - MBI - close: 14.85 change: +0.65 stop: n/a

If MBI continues to bounce on hopes of a bail out then great! That just means we'll get a better entry point on puts. Right now the $15 level looks like short-term overhead resistance and a rally over $15 should send it straight to short-term resistance near $17.00. We would still consider buying puts now but a failed rally near $17 would even be better. Readers might consider buying the May $10 put instead of the $7.50 if this happens. We're not listing a stop loss. This is a lottery ticket play. We'll win big or it's going to go bust. This is one of the few times that we will hold over earnings. MBI reports earnings on Thursday morning before the bell. We will have to play it by ear when it comes to exiting but we're looking for a decline to $5.00 or less.

Picked on January 27 at $ 14.20
Change since picked: + 0.65
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million

---

Millicom - MICC - close: 100.55 change: +1.22 stop: 105.35

MICC under performed the market on Monday. While that is good news for the bears the bounce may not be over yet. Look for a failed rally in the $104-105 zone as a new entry point for puts. Our first target is the $90.50-90.00 range. We are going to list an aggressive target in the $86.00-85.00 zone but readers should plan on taking off most of their position near $90.

Picked on January 27 at $ 99.33
Change since picked: + 1.22
Earnings Date 02/13/08 (confirmed)
Average Daily Volume = 1.0 million

---

Perrigo Co - PRGO - close: 30.11 change: -1.57 stop: 32.11

Early this morning PRGO broke down under support at $30.00 and hit our suggested entry point to buy puts at $29.85. Unfortunately, the market rally pulled PRGO back above support at $30.00. If the market continues to rally then PRGO will likely make a go at the $32.00 level of resistance. We're not suggesting new puts until we see a failed rally at $32 or a new relative low under $29.70. Our target is the $25.50-25.00 zone. The P&F chart has turned bearish with a $23 target.

Picked on January 28 at $ 29.85 *triggered
Change since picked: + 0.53
Earnings Date 02/05/08 (confirmed)
Average Daily Volume = 1.3 million

---

Polo Ralph Lauren - RL - cls: 60.00 chg: +0.81 stop: 63.75

I hate to say it but RL's bounce from $58 today looks short-term bullish. The stock will probably retest overhead resistance at its 50-dma near $62.50. More conservative traders may want to tighten their stops toward the 50-dma. Wait for the bounce to roll over before considering new puts. We're listing two targets. Our first target is the $55.50-55.00 range. Our second, more aggressive target is the $52.00-50.00 zone.

Picked on January 27 at $ 59.19
Change since picked: + 0.81
Earnings Date 02/06/08 (confirmed)
Average Daily Volume = 1.7 million

---

Teleflex - TFX - close: 56.31 change: -0.29 stop: 58.51

Today's relative weakness in TFX is a good sign for the bears but we would still expect the stock to rally if the market continues to rebound. Look for resistance near $58.00. A failed rally near $58.00 would be a good spot for new puts. We're listing two targets. Our first target is the $52.75-52.50 zone. Our second target is the $50.50-50.00 range. The Point & Figure chart is bearish with a $43 target.

Picked on January 27 at $ 56.60
Change since picked: - 0.29
Earnings Date 02/28/08 (confirmed)
Average Daily Volume = 390 thousand
 

Strangle Updates

None
 

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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