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Daily Newsletter, Thursday, 04/10/2008

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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

Central Banks in Headlines, Bringing Dollar Concerns to the Forefront

Introduction

Amid generally disappointing same-store sales for U.S. retailers, Wal-Mart (WMT) raised guidance for the quarter this morning. Chip equipment makers were upgraded.

Neither the WMT news nor the chip news impacted futures to any degree although both were later credited with gains on the indices. Perhaps, although it's not as well covered on mainstream financial channels, the big players on the market had turned their focus a different direction this morning.

This week, central banks across the globe have been meeting ahead of this weekend's Group of Seven (G-7) meeting. Earlier in the week, the Bank of Japan met, keeping rates the same. The central bank lowered its expectations for the performance of the economy.

After three weeks of political maneuvering, a new governor, Governor Masaaki Shirakawa, has been named. Even then, the Bank of Japan might have remained rudderless, except that there was a push to name a governor ahead of the G-7 meeting. Although some believe that the new central bank head won't have much influence at that G-7 meeting, Japan certainly joins other G-7 participants in wanting to address currency issues. In addition, a recent article on Nikkei Net says that the G-7 members have invited (Would that instead be "commanded"?) the leaders of about ten financial institutions from around the globe to discuss ways that a global financial crisis might be prevented.

The new Bank of Japan governor said, as quoted in Bloomberg.com, that he's flexible about monetary policy. He's trying to avoid preconceptions this early in his tenure during such uncertain economic times. However, most financial observers believe him to be slightly hawkish, along the lines of his predecessor, Governor Fukui. Shirakawa is widely credited with stopping the Bank of Japan's policy of flooding the economy with cash to ease deflation and with advising the raising of Japan's overnight lending rate from zero.

However, recent news and television commentary has noted that growing economic weakness in Japan will cause the central bank to reassess its goal of gradually raising interest rates. Until it does reassess, a yen that shows strength against the U.S. dollar causes problems both in the U.S. and Japan. Although the dollar has strengthened again in recent weeks, Asian currencies in general are rising against the dollar, bringing pain to Asian exporters and pain to U.S. equities in some cases, too, as carry trades are unwound.

Today, the Bank of England lowered rates by a quarter point to five percent, a widely expected move. England is being impacted by some of the same concerns hitting the U.S. The housing market suffers there, too, and new applicants now have difficulty obtaining mortgages.

Across the globe, central bankers balance fears of rising inflation against the impact they expect to feel from a slowdown in the U.S. or on their own shores. With inflation soaring in Iceland, the central bank raised interest rates by a half point. Some look to Iceland as an example of what could happen in the U.S., with that country's central bank perceived as having ignored debt and rising inflation too long. The country's prime minister puts the blame on something else: debt traders and forex traders.

The European Central Bank (ECB) was expected to keep rates steady today, and that's the decision that was made. Wage pressures are joining other inflationary pressures in some parts of Europe, staying the hand of the ECB. Germany has reported some strong numbers. Some economists forecast, however, that there will eventually be a spillover effect from weakness in the U.S. In addition, not all European countries are performing as strongly as Germany.

Today, ECB President Jean-Claude Trichet spoke of short-term inflation pressures that were strong, but many economists still believe the ECB will eventually be forced to lower rates. Trichet did acknowledge today in his post-decision press conference that European economies have now entered a period of economic uncertainty, a period that might be protracted. This was a change in wording from earlier periods, but he still emphasized the ECB's main role as maintaining price stability.

Deutsche Bank appeared to agree with the "protracted" part of that statement. The bank said today that housing weakness might be prolonged and is now spreading. The IMF today also emphasized the difficulties that countries and central banks face. Referencing the "fire" of inflation and the "ice" of recession, the IMF's managing director said that not all policymakers can make the same decisions when balancing the fire and ice.

As the G-7 meetings begin tomorrow, these decisions and discussions gain weight. Currency issues always matter, whether all equity traders pay attention or not. Today, markets appeared to be waiting, producing daily candles showing indecision. Whether they're waiting to see what happens as a result of the G-7 meeting or whether equity bulls and bears are just still battling it out remains to be seen.

Charts

Annotated Daily Chart of the SPX:

The daily Keltner chart suggests that the SPX may be headed up toward an eventual test of the 1388-1390 zone, but a daily close beneath about 1350 will change that outlook.

Annotated Daily Chart of the Dow:

A daily close beneath the 10-sma suggests that a 30-sma test could occur. A break above this week's high suggests a test of the 200-ema, but doesn't promise that the Dow can scramble above that barrier where many forms of resistance converge. I would wait for a daily close above that 200-ema before feeling too comfortable in bullish positions and would definitely have profit-protecting plans in place for a test of that moving average, if it occurs.

A less traditional look is provided by the daily Keltner chart. That suggests that the Dow may be headed toward a test 12,711 and perhaps even 12,800, but a daily close beneath 12,575 suggests a test of 12,450 instead. The daily Keltner chart doesn't provide much of an outlook beyond that.

Annotated Daily Chart of the Nasdaq:

A daily Keltner chart suggests that the Nasdaq may be headed toward a test of 2400 and maybe even 2425-2435, but a daily close beneath yesterday's low suggests a test of 2300 instead.

Today, the Banc of America Securities raised its ratings for the electronic chip companies. Its analyst upgraded Intel (INTC), Analog Devices (ADI), National Semiconductor (NSM) and LSI Logic Corp (LSI). INTC and ADI were upgraded to buy from neutral ratings. The analyst said that he expected a move higher in chip stocks, saying that he believed the inventory oversupply has now been fully factored in. The analyst believed that chip stocks might still be impacted over the short term by overall economic factors.

In other news related to the sector, STMicroelectronics, a SOX component, said it would merge business with NXP.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

The daily Keltner chart suggests the possibility of a RUT test of 725, but it doesn't credit it as a probability but only a possibility. A daily close beneath about 699 suggests a test of 690 instead, but doesn't give much of a prediction beyond that.

Annotated Daily Chart of the USDJPY:

With this formation looking a bit like a bear flag, a rollover from presumed strong resistance at any of these Fib levels could occur. So could a climb to the next Fib level, but watch for rollover potential again now as the USDJPY rises to retest this first Fib level again.

Today's Developments

This morning started off with same-store sales from retailers. Although some retailers issued upbeat reports, most industry watchers felt that the reports were disappointing in general, showing a pullback by the American consumer. As WMT's report showed, the discount stores performed satisfactorily, but J.C. Penney produced a disappointing report. Stores targeting teens continued a downward trend as consumers continue to cut back on discretionary spending.

The International Council of Shopping Centers blamed rising gasoline and food costs, a weak job market, and trouble with housing and credit markets. Those various pressures undermined confidence and resulted in fewer discretionary purchases.

The next report was weekly initial claims, with a report that surprised. Initial claims fell 53,000 to 357,000. Comparing last week's 407,000 claims, I see that last week's figure must have been revised higher by 3,000 claims. That higher revision has become a trend.

Still, this week's reduction in initial claims was welcome, bringing about the hope that last week's rise above 400,000 was a fluke. The four-week average of claims, deemed more reliable, still rose 2,500 to 378,250, influenced by prior weeks of gains. The four-week average is its highest in more than two years. The benchmark for measuring when the job market might be negatively impacting the economy is when initial claims stay over 350,000.

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Continuing claims rose 3,000 to 2.94 million, the highest number in almost four years. The four-week moving average climbed 36,500 to 2.9 million, also the highest number in almost four years.

At the same time, February's International Trade figures were released. Forecasters had predicted a narrowing of the deficit to $57.5 billion from the previous $58.2 billion, but the deficit widened to $62.3 billion instead. That produced a 5.7 percent increase in the deficit. January's deficit was revised to $59 billion in the same report.

This time, economists didn't blame crude costs or imbalances of imports from China. Instead, record imports of capital goods, consumer goods, food and industrial supplies created the widening. Despite the fact the U.S. exported record amounts of goods to the EU countries, the weakening dollar has meant that we've paid more for imports.

The bright light in this report, if there is one, is that the U.S. is not showing a decline in demand for imports. Excluding services, imports rose to $180.2 billion, a 3.5 percent increase. Exports rose only 2.4 percent, to 104.7 billion. The petroleum deficit narrowed, the first narrowing after eight previous months of widening petroleum imports, but that wasn't particularly good news as it was brought about by a lowering of demand as the economy slows. The trade gap with China also narrowed, but a holiday-related effect was noted due to China's New Year celebrations.

The bad news, of course, is that this deficit might negatively impact the GDP.

Natural gas inventories this morning fell 14 billion cubic feet, bringing inventories below the five-year average. That wasn't the only news in the energy sector, however. Crude futures dropped after the Commerce Department reported that February's crude imports dropped to 286.5 million barrels, down from January's 322.2 million. Demand may be softening, but concerns about supply still exist, said an industry watcher. The Energy Information Administration (EIA) had on Tuesday provided figures that resulted in a downward revision of daily petroleum consumption. Crude ended the day down $0.89, at $109.98. Natural gas, however, climbed $0.014 to $10.07.

Beginning at 1:00 pm ET, Federal Reserve Chairman Ben Bernanke participated in a World Affairs Council forum in Richmond on the President's Working Group, the PWG, and financial stability. One topic this week has been the change from the "originate to distribute" business model adopted by corporations over the last twenty years from the previous "originate to hold" model. This would be the model employed by mortgage originators, for example, and all those who repackaged and distributed those mortgage-backed assets. While Bernanke agreed that the model fell apart in a number of key ways, it remains an effective model with some repairs, he said. He addressed concerns that the lack of credit was contributing to pressures that would stifle sustainable growth.

Repairs don't necessitate radical reform, Fed Chairman Bernanke noted. The PWG has created a plan for dealing with repairing the problems that led to the current crisis. He also declared that the current climate is nothing like the one that led into the Great Depression.

Leading into tomorrow's G-7 meeting and after this week's many central bank decisions, the state of the credit markets assumes importance. Today, the Federal Reserve released its weekly figures on outstanding commercial paper. Once again, for the fourth week out of the last five and the second week in a row, outstanding commercial paper dropped. If credit woes are easing, it's not showing up in these figures. Outstanding paper, seasonally adjusted, dropped $10.8 billion. The drop was produced in financials, with non-financials eking out small gains.

However, there was supposedly better news in the afternoon as a result of the Fed's latest Term Securities Lending Facility. That action had a bid-to-cover rate below 1.00, at 0.68. The stop-out rate, the lowest rate the Fed would accept, was 0.25 percent. These two indicated that desperation felt by financial firms was easing, some concluded.

Housing remains in focus, too, here and in the U.K. Today a development focused on this country's housing woes. In a controversial bill opposed by the White House, lawmakers seek to provide tax breaks for corporations along with some help for homeowners. One version was approved by a House panel yesterday and another by the Senate today. In the Senate version, homebuilders could benefit from a temporary extension of a rule that allows businesses to count the losses they're experiencing now against prior years that were profitable. This is termed the net operating loss carry-back rule. The Senate version proposed today will cost $15 billion over ten years, but the House version does not include this extension.

The help to homeowners would come as a result of a $7,000 tax credit spread over a couple of years for those buying homes in or near foreclosure. It would also raise the limits of mortgages the FHA could insure to $550,000.

U.S. Treasury Secretary Paulson also spoke today. In a speech in Washington, he warned that the economy had, in fact, turned down sharply, repeating the tenor of his remarks from a week ago. He believes, however, that the fiscal stimulus checks and the efforts by Fannie Mae and Freddie Mac to raise capital, if successful, could help the economy. He wants legislation to reform Fannie Mae and Freddie Mac.

The last release of the day was the March Federal Budget, at 2:00 pm ET. Forecasters had predicted a deficit of $70.3-80.5 billion, depending on the source. The predictions were lower than the previous $96.27 billion deficit. Instead, the government posted a deficit of $48.14 billion.

In company-related news, Lehman Brothers Holdings (LEH) announced that it was liquidating three investments funds. LEH said disruptions in the market during the last half of last year and continuing into this year forced the liquidations. The funds had lost value. LEH gained and lost today, ending up with a doji that created a small loss for the day.

The attention grabber in the retail same-store sales was Wal-Mart (WMT), as noted earlier. WMT reported that March same-store sales rose 1.1 percent with fuel sales and 0.7 percent without them, missing expectations for sales without fuel. However, the company issued higher guidance for the quarter. The company said first quarter earnings per share from continuing operations should now be $0.74-0.76. The previous forecast had been $0.70-0.74.

When raising guidance this morning, WMT said strong Easter sales and performances in grocery, health and wellness and entertainment units were responsible for the better-than-expected performance. Apparel sales were weak, but the company blamed cold weather. Sales in the home unit remained weak, but we all know what to blame there: the continued softness in the housing market. That softness did not impact sales of flat-panel TVs, however, as those sales were strong, as were sales of other electronics such as GPS units, laptop computers, video games and digital computers. Being closed Easter negatively impacted year-ago comparables.

I looked at the year-ago comparables, and I'm not so sure that the Easter one-day closure could have impacted the sales so strongly. For example, with fuel sales, the year-ago period reported same-store sales that rose 4 percent compared to this period's 1.1 percent gains. Without fuel, the year-ago period reported same-store sales that rose 4.0 percent, as compared to this period's 0.7 percent.

The Sam's Club unit's sales showed some of the same trends, with fuel sales driving up the same-store sales figures and the Easter closure negatively impacting year-ago comparables. WMT company said it was pleased with international sales.

The Yahoo/AOL/Google/Microsoft drama continued today. As some subscribers may have noted yesterday, Yahoo (YHOO) tried to cook up a three-way deal with Time Warner's AOL and Google, but today The New York Times reported that Rupert Murdoch's News Corps might couple with Microsoft to acquire Yahoo. Many industry watchers believe that Microsoft will ultimately prevail in acquiring YHOO, but YHOO is reportedly close to deals to test outsourcing web search advertising to Google and fold AOL into a combined company.

The airline industry was also under the microscope as American Airlines announced more cancellations and the FAA warned that MD-80 jets could experience an explosion if the wires inside the wheel wells aren't bundled properly.

After hours, Genentech (DNA) reported earnings that beat year-ago levels but that were still termed below expectations by some financial writers. Sales of cancer therapies increased. Shares were lower in after-hours trading. PDL Biopharma said that it would offer investments in one of its operations to the public.

Tomorrow's Economic and Earnings Releases

Tomorrow's most important economic release is likely to be the April University of Michigan Consumer Sentiment, to be released at 9:55 am ET. Economists predict 69.0, down slightly from the previous 69.5. The current condition component is expected to decline to 83.5 from the previous 84.2, and the expectations component is expected to drop inch lower to 60.0 from the previous 60.1.

Any upside surprise might energize markets. This is especially true since some retailers today blamed a decline in consumer confidence for declines in their same-store sales.

Other reports for the day will include March Import/Export Prices. Import prices are projected to rise 2.0 percent, far higher than the previous 0.2 percent. Export prices are rise 0.5 percent, far less than the previous 0.9 percent. Soaring prices on imports and less significant gains on export prices don't sound like a good thing, but most people who know more than I do don't expect this to be a market-moving number.

Tomorrow, General Electric (GE) is slated to release earnings.

What about Tomorrow?

Annotated 15-Minute Chart of the SPX:

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the Russell 2000:

The last-minute decline and pop back higher today on all these indices turned the choppy consolidation that I had expected to see into potential bull flags, but bull flags that threaten to fall apart. So far, bulls weren't having anything to do with any last-minute drop and quickly bought the drop.

If you're a subscriber to the Market Monitor, the live portion of our site, you know that shortly before noon ET, I began warning that the indices could settle into tight consolidation ranges that lasted a day or more. Those driving indices lower and creating the last-minute dip and bounce attempted to break the indices out of those consolidation ranges, but weren't successful. The fact that the dip was bought so quickly actually looked more short-term bullish than bearish.

However, the fact remains that the indices ended the day back in those tight consolidation ranges that are themselves within consolidation ranges. Daily Keltner charts currently suggest that indices are slightly more likely to rise to test resistance on those consolidation ranges on daily charts, but only slightly more likely. Developments in the G-7 meetings, tonight's Corporate Price Index in Japan or tomorrow morning's GE earnings and University of Michigan Consumer Sentiment can undo that.

For now, try to avoid forming too strong opinions while prices hold mostly in the choppy zone from this afternoon, especially ahead of the release of the consumer sentiment number. Watch for a possibility of an upside break out of these formations, but don't count too strongly on it happening and, if it does, have profit-protecting plans in place for tests of the resistance levels indicated on the daily charts.

The SPX is attempted to repeat its old rally-days pattern of gaining strongly, consolidating sideways two-five days, dipping to the rising 10-sma and then repeating the whole process. There are differences, however. In those old rally days, today would have produced strong gains, not consolidation at the 10-sma. The SPX wouldn't have been locked in a months-long consolidation zone at the bottom of a steep decline. The G-7 members wouldn't be inviting representatives of the globe's big financial institutions to advise them on how a financial crisis can be averted. The dollar wouldn't have been near record lows against many other currencies.

My general impression is that the desire to drive markets higher is there and bulls are gaining just a little confidence, but that it's all still very tentative.

My longer-term view is that markets are still vulnerable to deep and scary downturns, so trade the upside if you're inclined and there's an upside break but keep vigilant and be quicker to take profits when offered than you would have been in the past.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BG None None
BHI    
JOYG    
UPL    

Play Editor's note: We found a lot of bullish candidates today. A few more stocks we would watch for potential plays are: BUCY, MTL, ECA, EOG, XOM, FCX, UNP, VMC, HAYN, ATK. Some you'll want to look for a breakout others for a dip.


New Calls

Bunge Ltd - BG - close: 104.92 chg: +3.67 stop: 99.90

Company Description:
Bunge Limited is a leading global agribusiness and food company founded in 1818 and headquartered in White Plains, New York. Bunge's over 22,000 employees in over 30 countries enhance lives by improving the global agribusiness and food production chain. (source: company press release or website)

Why We Like It:
Shares of BG are breaking out past numerous levels of resistance. Broken resistance at $100 has become support and shares look poised to rally through the top of its short-term trading range at $105. The stock has already cleared the 200-dma and is flirting with a breakout over its 50-dma. The Point & Figure chart is already bullish with a $129 target. We believe that if BG can rally past $105 it will run toward resistance near $115. We're suggesting a trigger to buy calls at $105.25. Our target will be $114.50-115.00. We do not want to hold over the April 24th (before the opening bell) earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the April 24th earnings report.

BUY CALL MAY 100 BG-ET open interest=1177 current ask $10.90
BUY CALL MAY 105 BG-EA open interest= 512 current ask $ 8.10
BUY CALL MAY 110 BG-EB open interest= 570 current ask $ 5.90

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 2.8 million

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Baker Hughes - BHI - close: 72.76 chg: +0.83 stop: 69.45

Company Description:
Baker Hughes is a leading provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and gas industry. (source: company press release or website)

Why We Like It:
We're adding BHI as a way to play the oil services sector. Shares have recently broken through the top of its trading range and its trendline of lower highs. The recent dip near $71 looks like a new bullish entry point to buy calls. The P&F chart is bullish as the stock has broken through resistance and points to an $89 target. We are suggesting call positions now with a target in the $78.50-80.00 range. We do not want to hold over the April 22nd earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the April 22nd earnings report.

BUY CALL MAY 70.00 BHI-EN open interest=2831 current ask $5.50
BUY CALL MAY 75.00 BHI-EO open interest=5516 current ask $2.90
BUY CALL MAY 80.00 BHI-EP open interest=1405 current ask $1.25

Picked on April 10 at $ 72.76
Change since picked: + 0.00
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 4.7 million

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Joy Global - JOYG - close: 71.00 chg: +1.42 stop: 68.45

Company Description:
Joy Global is a world-wide leader in manufacturing, distributing and servicing equipment for surface mining through P&H Mining Equipment and underground mining through Joy Mining Machinery. (source: company press release or website)

Why We Like It:
Metal and mining stocks are still doing well and JOYG is poised to breakout to new all-time highs. Shares have resistance in the $72.00-72.50 zone so we're suggesting readers buy calls at $72.55. If triggered our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 70.00 JQY-EN open interest=1183 current ask $4.90
BUY CALL MAY 75.00 JQY-EO open interest=1321 current ask $2.60

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million

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Ultra Petrol. - UPL - close: 81.50 chg: +0.22 stop: 77.95

Company Description:
Ultra Petroleum Corp. is an independent exploration and production company focused on developing its long-life natural gas reserves in the Green River Basin of Wyoming -- the Pinedale and Jonah Fields. (source: company press release or website)

Why We Like It:
Another way to play the rally in oil and natural gas is UPL. The stock has broken through resistance in the $80-81 zone and traders just bought the dip near $80.00 this morning. The intraday bounce this afternoon looks like a new entry point to buy calls. Our target is the $89.50-90.00 zone. The P&F chart has broken through resistance and points to a $95 target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 80.00 UPL-EP open interest= 992 current ask $5.40
BUY CALL MAY 85.00 UPL-EQ open interest=2048 current ask $2.75

Picked on April 10 at $ 81.50
Change since picked: + 0.00
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aluminum Corp. of China - ACH - cls: 42.16 chg: +1.10 stop: 39.85

Chinese stocks bounced after yesterday's painful decline in the Chinese markets. Shares of ACH added 2.6% as traders bought the dip. Bulls might be in the clear if ACH can trade over $43.25 again. ACH has already exceeded our initial target at $44.85. Our second, more aggressive target is the $47.75-50.00 zone.

Picked on March 30 at $ 40.80 /1st target exceeded (44.85)
Change since picked: + 1.36
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

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Ashland Inc. - ASH - close: 51.17 change: +0.01 stop: 47.95

We've been suggesting that readers buy a dip near $50.00. Traders jumped in at $50.42 and we suspect that might be as low as it gets. We would consider new bullish positions at this time and if we had to complain it would be about the lackluster volume on the intraday bounce. More conservative traders might want to tighten stops even further. There is potential resistance at its 200-dma in the $54-55 zone. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.

Picked on April 06 at $ 51.25
Change since picked: - 0.08
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand

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Core Labs - CLB - close: 135.15 chg: +2.09 stop: 122.45

Sooner or later we're going to have to give up on CLB or change our strategy. We added it to the newsletter on April 2nd when shares were near $125 and we suggested readers wait for a dip. Unfortunately for us the dip never came. The stock has continued to rally almost non-stop and is up more than 10 points. Nothing goes up in a straight line for very long but the move over $130 is a bullish breakout from an inverse head-and-shoulders pattern. This forecasts a $155 target. More nimble, aggressive traders might want to jump in on a dip near $130. We are going to adjust our suggested entry point to the $126.00-125.00 zone and adjust our stop loss to $122.45. Our target will move to $139.00-140.00. We still do not want to hold over earnings in late April.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 240 thousand

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CONSOL Energy - CNX - cls: 77.90 chg: +1.13 stop: 69.49

Coal stocks and CNX have continued to run away from us as well. Right now we're suggesting readers buy a dip in the $73.50-72.50 zone but we're starting to wonder if that will happen. More aggressive traders may want to adjust their entry to a dip just north of $75.00 instead. The Point & Figure chart is very bullish with a $95 target. We are listing two targets. Our first target is the $79.75-80.00 range. Our second target is the $84.00-85.00 zone. More aggressive traders might want to aim for $90. Remember, we do not want to hold over the late April earnings report.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Fluor - FLR - close: 152.40 chg: +1.27 stop: 143.45

Traders continue to buy dips to FLR's rising 10-dma, which is normally a bullish sign. Volume continues to come in pretty low, which doesn't suggest a lot of confidence. The trend remains bullish and we would consider new positions here. We have two targets. Our first target is the $159.00-160.00 zone. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May. FYI: The P&F chart is bullish with a $184 target.

Picked on April 01 at $146.50 *triggered
Change since picked: + 5.90
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

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Hovnanian - HOV - close: 11.34 chg: +0.38 stop: *varies*

The homebuilders scratched out a bounce after two days of profit taking. HOV is trying to rebound from its 200-dma. We don't see any changes from our previous comments. The stock is nearing our suggested entry point in the $10.50-10.00 zone. Our readers might want to narrow that to $10.20-10.00 or $10.15-10.00. We are going to adjust our stop from 9.49 to $9.64. We are listing two potential entry points and stops for each entry. If HOV rallies from here we're suggesting readers buy calls at $13.25 with a wide stop loss at $10.99. If HOV pulls back from here then we suggest readers buy calls in the $10.50-10.00 zone with a stop loss at $9.64. If triggered at $13.25 our first target is the $16.90-17.00 range. Our second target is $19.85-20.00. If triggered near $10 our first target is $14.50-15.00 and our second target would be near $20. Remember, this is an aggressive play. The stocks have seen a lot of whipsaws over the last several weeks.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Lincoln Elec. - LECO - cls: 71.08 chg: +1.09 stop: 67.90

Entry point alert! As expected LECO filled the gap near $69.50 and bounced. If you missed the dip this morning we would still consider new bullish positions now. More conservative traders might want to ratchet up their stops toward $69. We have two targets. Our first target is the $74.85-75.00 range. Our second target is the $78.00-80.00 zone. The Point & Figure chart is bullish with a $91 target. We do not want to hold over the late April earnings report.

Picked on April 07 at $ 73.73 *triggered/gap higher
Change since picked: - 2.65
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand

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3M Co. - MMM - close: 80.35 chg: +0.76 stop: 78.45

MMM is bouncing again but we're going to stick to our plan and wait for a breakout. We are suggesting readers use a trigger to buy calls at $81.75. There is potential resistance near $85.00 and its 200-dma but our target is the $87.00-87.50 zone. We do not want to hold over the late April earnings report.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.9 million

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Arcelor Mittal - MT - close: 85.64 chg: +0.31 stop: 78.24

Steel and metal stocks remain pockets of strength in the market. MT continues to see traders buying the dips. Our target is the $89.00-90.00 zone. The P&F chart is very bullish and just saw its price target jump from $101 to $113 this past week.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 3.61
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Potash Corp. - POT - close: 178.10 chg: +2.21 stop: 154.95

Aggressive momentum traders might want to consider new bullish positions if POT can breakout over $180. We do not want to chase the stock here. Shares have been very bullish but we'd rather buy a dip. We are going to adjust our suggested entry point to $170.50-167.50 and adjust our stop loss to $154.95. We're adjusting our targets to $184.00-185.00 and $194.00-200.00. FYI: The P&F chart is bullish with a $218 target.

Picked on April 03 at $ xx.xx <--see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 7.7 million

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Research In Motion - RIMM - cls: 120.68 chg: +2.52 stop: 116.49

Strength in the NASDAQ certainly didn't hurt shares of RIMM. We remain bullish and today's bounce looks like a new entry point for calls. We're listing a short-term target at $125.00 and a secondary target in the $129.00-130.00 zone. FYI: The Point & Figure chart is bullish with a $130 target.

Picked on April 08 at $120.98
Change since picked: - 0.30
Earnings Date 06/26/08 (unconfirmed)
Average Daily Volume = 22.3 million

---

United States Oil - USO - close: 88.18 chg: -0.72 stop: 82.45

After yesterday's big rally oil and the USO took a break today. The trend remains higher. Our first target is the $92.50 mark. Our second, more aggressive target is the $97.50-100.00 zone.

Picked on April 07 at $ 86.49 *triggered/gap higher
Change since picked: + 1.69
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million
 

Put Updates

Ambac Fincl. - ABK - cls: 5.27 change: -0.38 stop: n/a

ABK is seeing some momentum to the downside. Shares lost 6.7% and are nearing their January lows near $5.00. We are not suggesting new bearish positions in ABK. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes).

Picked on January 27 at $ 11.54
Change since picked: - 6.27
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

Fannie Mae - FNM - close: 26.53 chg: -1.59 stop: 31.11 *new*

The sell-off in FNM is also picking up speed. Shares lost another 5.6% today and is down 8.5% since we added it to the newsletter. We are adjusting the stop loss to $31.11. We are listing two targets. Our first target is the $25.25-25.00 zone. Our second target is the $21.00-20.00 zone.

Picked on April 08 at $ 29.00
Change since picked: - 2.47
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

---

Humana Inc - HUM - cls: 44.18 chg: +1.42 stop: 46.21

HUM is displaying a lot of volatility. The stock was down up sharply Tuesday, down again Wednesday and now bouncing again, up 3.3% today. We did not see any specific news to account for today's strength. Watch for this bounce to roll over in the $44.50-45.00 zone and use it as a new entry point. Our target is the $40.50-40.00 zone. More aggressive traders may want to aim lower. Currently the P&F chart is so bearish it points to a target of zero ($0.00).

Picked on March 30 at $ 45.20
Change since picked: - 1.02
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 4.4 million

---

Juniper Networks - JNPR - cls: 23.31 chg: +0.34 stop: 24.55

JNPR received some relatively positive analyst comments today and the stock produced a 1.3% bounce, which was good enough to out perform the NASDAQ (barely) and the NWX networking index. Watch for a failed rally under $24.00 as a new entry point for puts. Our target is the $20.15-20.00 zone. The move under $23.00 has reversed the P&F chart into a new sell signal with a $16.00 target. We do not want to hold over the late April earnings report.

Picked on April 09 at $ 22.95 triggered
Change since picked: + 0.36
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 11.5 million

---

MBIA Inc. - MBI - close: 11.89 change: -0.08 stop: n/a

MBI did better than its rival ABK today but the trend is still down. We are not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes).

Picked on January 27 at $ 14.20
Change since picked: - 2.31
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million
 

Strangle Updates

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

---

Goldman Sachs - GS - cls: 170.55 chg: -3.59 stop: n/a

There were some headlines out of GS today with management quoted as saying we're in the last innings of the credit crisis game but that failed to save the financials. The financial stocks were the worst performers today and GS lost more than 2%. If GS bounces we are narrowing our suggested range to launch strangles to $173.00-177.00 and the closer to $175 the better. The options we suggested for this strangle were the May $190 calls (GPY-ER) and the May $160 puts (GPY-QL). Our estimated cost was $8.70. We want to sell if either option trades at $14.50 or higher.

Picked on April 06 at $175.40
Change since picked: - 4.85
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Current Short and Longer-Term Pattern Interpretations

I wrote last time (in the Wednesday 4/2 OI Daily) about some short and long-term INDICATOR patterns that can provide potential clues as to how stocks might fare in the period ahead. Today I want to concentrate on some short and long-term chart PATTERNS; things like 'flag' patterns, rounding bottoms and trend channels. If those terms are all Greek to you, that's why I'm here; i.e., to try to read some of the 'technical' tea leaves and how indicators and pattern recognition could help you make trading decisions. There are plenty of 'fundamental' factors to chew over and probably too many conflicting ones!

Before I get into the main topic of certain chart patterns I'm seeing currently, I'll briefly revisit one shorter-term indicator (from last week) that has been quite accurate this year in predicting areas where the major market indexes were topping out or bottoming. That indicator is the Relative Strength Index or 'RSI' applied to the hourly charts and using a 'length' setting of 21, a fibonacci number.

When RSI has gotten to between 60 and 60, the current bearish market has had trouble making further headway; 60-65 or above, has marked an 'overbought' area. Conversely, RSI readings down in the 30 to 35 area have defined a place where the major market indexes have been 'oversold' and having potential for a good-sized rebound.

As I wrote about in my weekend 'Index Trader' column, seen online at the Option Investor web site, there have been some short and longer-term chart patterns suggesting that this market could climb higher. Working against that notion was the early-April overbought readings as measured on a 21-hour basis in the major indexes; 21 hours of RSI calculations represents what occurs in about 3 days of trading.

The hourly Dow chart seen below reached overbought extremes at the red down arrows seen on the RSI portion of the graph. Moreover, at the last upside extreme in RSI, there was also a classic bearish 'divergence' between price action and the (RSI) indicator; i.e., as prices continued higher after the first INDU hourly peak, while RSI did not follow suit. The diverging slopes of the two trendlines tell the story.

As of today, the sideways to lower move had 'worked off' the overbought extreme as can be seen in the falling RSI line. The RSI doesn't have to fall to the oversold zone to suggest a rally (like today's) can happen, but an overbought condition does tend to suggest rally attempts will get capped by selling, as least that has been the case in the weak 2008 market.

Shifting to a focus on a chart pattern, the upside 'gap' area occurring between 3/31 and 4/1 also represents an area of potential or presumed support on pullbacks, as was apparent in yesterday's hourly lows. An indicator (RSI) can suggest one thing, possible tough going on further rally attempts and a gap pattern can tell us another, as in showing areas of support on pullbacks. Some other chart patterns also suggest bullish potential ahead.

The RSI indicator suggesting a recent hourly 'overbought' extreme and the hourly chart pattern suggesting that the Nasdaq Composite (COMP) could be finding support in the (upside) chart 'gap' area, is seen below. It's the same indicator and chart pattern, so there's not more for me to say about this chart except that it's fairly consistent with the Dow and S&P charts.

CHART PATTERNS SUGGESTING FURTHER UPSIDE POTENTIAL

SHORT-TERM: FLAG PATTERNS

You don't see this pattern in the stock indexes all that much, not nearly as much as in some stocks and widely in the futures markets (e.g., bond futures, oil, etc.), but a sharp rally, followed by a consolidation over a FEW days with a limited pullback from the high of the sharp rally, is called a bull flag pattern. The sharp run up is the 'flagpole', the pullback shallow (limited to about a third of the flagpole run up) and a sideways move of a few days typically traces out a 'flag' type formation. Hey, imagination helps!

The usual resolution of this pattern is a breakout above the top end of the flag (the 12700 area) and a next move that tends to tack on a further advance that is at least equal to the first spurt higher as measured from the top of the 'flag'. This upside projection for the bull flag pattern outlined below would suggest that a decisive upside penetration of 12700 would have the further potential of a move to the 13000 area.

A bull flag pattern is most often resolved in a FEW DAYS after the initial run up. If this doesn't happen and prices start falling below the low end of the flag (around 12500 in INDU), this pattern breaks down or devolves into a simple TOP.

INTERMEDIATE TO LONG-TERM CHART PATTERNS:

You'll see above in the Dow 30 (INDU) daily chart that I've traced out what could be a 'rounding bottom' pattern, sometimes referred to as a 'saucer' bottom. This pattern has a fairly good record of predicting the formation of an intermediate to longer-term bottom AS LONG AS subsequent pullbacks don't start breaking below the circular line; e.g., currently suggesting INDU support in the 12000 area.

If the Dow falls back to lower than 12000 or wherever the intersection of the circular line is at the time, this suggests that a bullish rounding bottom is not a valid chart interpretation. If prices retreated under Dow 12000, technically I'd then be looking to see if a decline held at or above the prior (11732) low. If a decline stopped AT the prior low, there's the possibility of a double bottom. It's not that patterns don't have predictive value. They do. But if a bullish pattern is negated, it confirms renewed bearish selling pressures.

There is a somewhat different pattern unfolding with the Nasdaq Composite daily chart seen next. There is not the same near-term bull flag pattern suggested for the Dow chart, but bullish potential IS seen in the stair-step climb of the higher (pullback) lows tracing out an up trendline currently and with one key pullback rebounding from support implied by the 21-day moving average. However, continuation of a further bullish chart is not 'proven' until and unless COMP pierces its prior highs at 2376 and then 2419. A downside penetration of 2300 would also suggest renewed selling pressures and a retreat of potential buyers.

The same rounding or saucer type bottom is traced out into the (unknown) future on the COMP daily chart above, but it is a 'flatter' circle, more broadly rounded. And there is yet to be a better 'definition' of the rounding formation. Better definition of a rounding bottom might take the form of another retreat to the low end of the circle, followed by another rebound; e.g., COMP retreats to 2200 around the middle of May and then rallies again vigorously. I've often seen the potential involved for a longer-term bottom (or top) in an index or stock when the rounding pattern unfolds. The rounding top is the reverse of the rounding bottom and forms an umbrella shape.

A broad rounding bottom formation is strikingly different than a 'V' shaped bottom or a (inverted 'V') top that goes up to a peak, followed by a steep decline; e.g., the March 2000 Nasdaq 100 (NDX) top especially apparent in the weekly (close-only) line chart. Rounding bottoms are somewhat more common than rounding tops. Buying takes place of a long period typically, whereas selling often gets concentrated as panic sets in.

LONG-TERM CHART (AND INDICATOR) PATTERNS:

I pointed out the still bullish long-term (multiyear) uptrend that remains intact for the S&P 500 (SPX) before, and the Nasdaq 100 (NDX) weekly chart suggests the same pattern and is seen below. Given the potential for rounding bottoms that may continue to evolve in the daily charts I've shown, the notion of being at or near a LONG-TERM bottom gets some added credence. NDX has recently rebounded from its 2002-2006 up trendline. I try to keep this 'objective' long-term chart pattern in mind so to not get locked into thinking that a recession means that stocks are going to be down for months (and years) to come.

If the worse is over in terms of the prospect for earnings, as projected out over the next 6 months or so, the NDX long-term chart may offer some tip off to that. With the current sort of gloom and doom, it's rather amazing to think that the market could still be in a long-term secular (over many cycles) bull market.

I'll finish by noting that the 13-week RSI (13 being another in the fibonacci number series) seen above, got to an 'oversold' level that is about as extreme as it gets before either a good-sized rebound or at least a bottoming type 'basing' (sideways) pattern. The RSI seen above is another indicator aspect to keep in mind, along with the bearish buildup seen in my sentiment indicator (not shown), with both extremes suggestive of a bottom or at least an interim bottom.

QUESTIONS/COMMENTS:
Please e-mail Click here to email Leigh Stevens support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

GOOD TRADING SUCCESS!
 

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

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