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Daily Newsletter, Thursday, 05/08/2008

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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

Standoff

Introduction

Beginning late yesterday afternoon, I believed that today might be a standoff day. Bulls and bears might pull back, panting, from yesterday's jousting tournament and reassess their stances. Bulls had been bloodied yesterday, but bears hadn't been able to bring about a complete victory. Most indices remained above rising trendlines off March's lows.

Since I expected today to be a reassessment day, I didn't anticipate the outcome to give us much information or materially change the impact of what happened yesterday. It didn't. Many indices such as the SPX ended the day with small-bodied candles indicative of indecision.

Bulls weren't going to be provided much help from their ally--a USDJPY that had been rising off the March lows. That currency pair had sometimes led and sometimes followed equity gains but was always right there to provide sustenance for U.S. equity bulls hoping for a reinstitution of yen carry trades or even signs that the U.S. economy might be strengthening in comparison to others.

Central bank action across the globe stalled the dollar's attempts to strengthen, at least for today. The USDJPY dropped below its rising trendline off the March low and closed the day there, too. If the USDJPY tends to lead the SPX, as it sometimes does, that prompted worry that the SPX and other indices could drop below their analogous trendlines, too.

What stalled the dollar? No one influence can be blamed, of course, but this week has offered several developments that impacted currencies. Australia's central bank met and kept rates steady. Today the Bank of England (BoE) and the European Central Bank (ECB) both made rate decisions, and that certainly influenced currencies. As expected, the Bank of England kept rates steady, striking what that central bank thought was the appropriate balance between concerns about a slowing economy and worrisome inflation.

Despite concerns about the British economy expressed in an article in THE LONDON TIMES edited by Anatole Kaletsky, the BoE's Monetary Policy Committee remains more worried about inflation. Kaletsky included comments by Sushil Wadhwani, former external member of the Bank of England's Monetary Policy. Wadhwani claims that the British economy is following the U.S. economy down a dark road, trailing about a year behind.

The ECB also kept rates steady. Recently, the ECB's president, Jean-Claude Trichet, has voiced opposing concerns. He has long remained adamant about the ECB's primary role in providing stability at a time when the inflation rate runs far above the ECB's comfort level. The recent moderation of that inflation rate to 3.3 percent from the 3.6 percent didn't ease those inflation concerns.

Recently, however, President Trichet has added concerns about the implications of a euro that has been at record highs against the U.S. dollar. Raising rates would tend to strengthen the euro against other currencies, causing problems for European multinational companies selling into the U.S. Some central bank watchers predicted a softening of his and the ECB's hawkish stance.

The central banks met mainstream expectations but not mainstream hopes. Recent troubling data had raised hopes among some that both the BoE and ECB would ease. Some market watchers believe they'll still be forced to do so before too long.

In his introductory statement at the press conference following the ECB's decision, President Trichet said that "inflation rates are expected to remain high for a rather protracted period of time." The ECB believes that although economic growth may be moderate, real GDP growth will occur. In a background of "turmoil in financial markets," the bank again emphasized its mandate: "maintaining price stability in the medium term." He affirmed the ECB's belief that "price and wage-setting behaviour could add to inflationary pressures." He warned against "schemes in which nominal wages are indexed to consumer prices," fearing that increasing wage pressures will add to other inflationary pressures.

On a good note, if perhaps contrary to other evidence, he mentioned continued strong loan growth outside the financials, suggesting "that the availability of bank credit to euro area firms has not been significantly impaired by the financial turmoil thus far." Those who would like to read the entire statement can find it at this link.

With small-bodied candles produced just above potential support, is there anything we can tell by the daily and intraday charts? Let's look.

Charts

Annotated Daily Chart of the SPX:

The SPX is literally trapped between a rock and a hard place, both here and on the daily Keltner charts. Today's close was the first since April 15 below the 9-ema, a moving average I prefer over the more frequently watched 10-sma shown above. The SPX closed back below the descending trendline that had marked resistance since October 11 after breaking above it over the last week. It attempted to push above the 50 percent retracement of that slide off the October 11 high but couldn't maintain values above that Fib level. All those levels should now be considered potential resistance again on daily closes.

Yet the SPX maintains its rising trendline off the March low. The USDJPY's action suggests that trendline might not be inviolate, however. Also, I'll show a VIX chart later that compares some things happening now with setups last occurring from October 5-11.

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Those comparisons don't prove anything other than that market participants need to spend some time tonight with their what-if plans in case the SPX and other indices roll down toward their 30-sma's, but they do at least suggest that. I do, too.

If the SPX instead pushes higher, watch for rollover potential at any of the landmines drawn on the chart. A push toward 1424 or even 1430 remains possible but before the SPX can sustain values above such powerful resistance, it's only natural for it to sometimes pull back to stronger support.

Place these comments in the context of my own "it's still got to retest the bottom" bias. Not all share that bias, and it hasn't yet been proven to be the correct one.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner chart shows that potential support layered down to 12,600 looks much stronger on the Dow than the SPX's potential support on daily closes near 1389.40. Of course, Dow support on a daily close down to 12,600 allows for a 30-sma test, so even that stronger appearing support does not preclude that test. Often, however, when support appears that strong, it's difficult for prices to fall to far through the support layers, barring a strong push or a gap below them. Prices don't tend to drift through that kind of potential support.

So, SPX and OEX traders might watch the Dow to see how it's handling that support, if it's tested. Barring a strong push or a gap through it, the Dow might be the first of those three to attempt a bounce. Since AIG is a Dow component stock and AIG reported after hours tonight, the Dow's relative strength on a Keltner basis could disappear if investors react negatively to AIG's report this afternoon.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily Keltner chart suggests a slightly greater possibility that the Nasdaq will test 2421 than that it will close much above 2465, but it doesn't provide much more information than that, and that's just a judgment call. Two days of closes back below the 200-ema, coupled with an inability to push above that horizontal resistance, also keep alive the possibility of a retreat to the 30-sma, the bottom of the rising blue channel and the former red resistance trendline. Those setups don't promise such an action, of course, but if in bullish positions, I would prepare my profit-protecting plans just in case.

Another push up to green Fib level and even the declining 200-sma remain possible, but I would watch for rollover potential at those levels.

Annotated Daily Chart of the SOX:

The SOX was one of the first indices to break out of its congestion zone and lead others higher, so it should be watched for signs that the momentum has waned or, conversely, that new breakouts are occurring.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

The TRAN also often leads the SPX, OEX and Dow, so keep it on your radar screen. Equity bulls don't want to see the TRAN and the RUT breaking through their 30-sma's on daily closes.

My concern has heightened this week due to a VIX setup I've been pointing out to the subscribers to the live portion of the site over the last few days. That setup is seen on a daily nested Keltner chart.

Annotated Daily Keltner Chart of the VIX:

The setup and action as the VIX approached black-channel support on this Keltner chart are similar, although of course not identical. For example, October 12, the VIX's retest of its 9-ema resulted in a daily close just below that moving average, while today's violation looked a bit more pronounced. However, I pay attention to anything that's happening for the first time since October 5-11, when many indices were hitting their highs before sliding lower, and particularly when that "anything" has something to do with the VIX. Equity bulls don't want a repeat of the situation that followed the October 5-11 time period last year, when the VIX bounced from this channel and then kept bouncing.

I haven't included RSI on the chart, but the setup there is similar, too. RSI has been testing the 30 level for many days as the VIX approached and now attempts to bounce from that potential support.

This chart, along with the wedges seen on some other daily charts, leads me to be cautious. As noted earlier, I'm of the "needs to retest" ilk, so I tend to be cautious and on the lookout for rollover potential. For now, all indices are safely ensconced in their climbing price channels, so nothing untoward has happened yet. This VIX action rates the same way a bearish divergence would on another chart. It offers a warning to prepare your what-if plans, but it doesn't prove that they're going to be needed.

Today's Developments

Today's economic release calendar was light but that light release schedule was joined by another economic event: a speech by former Fed Chairman Alan Greenspan in New York at 12:30 pm ET. The markets did chop around a bit during the time that Greenspan would have been speaking, but that chopping around was typical of the entire day. I could find no mention of his discussion, no bullet points being issued on financial websites. Unfortunately, an Internet search for information on Greenspan turns up articles ranging from "I lost my house because of Greenspan" to "Greenspan is the man." Weeding through them to find anything relating to today's discussion proved impossible.

Weekly initial and jobless claims, once a throw-away number, have assumed greater importance in recent months. Economists predicted that claims would drop to 370,000 from the previous 380,000. They dropped further, to 365,000, falling 18,000 on a seasonally adjusted basis from a revised higher number for last week. That's been a trend lately: the previous week's initial claims being revised higher. The four-week moving average was reported at 367,500, remaining well above the benchmark 350,000 that signals a weakening labor market. These occasional one-week drops have not improved the four-week moving average. Continuing claims dropped, but the four-week moving average climbed.

RRetailers reported April sales throughout the early morning period. Wal-Mart Stores (WMT) and Costco Wholesale Corp. (COST) beat forecasts as some retailers benefited from warmer weather and an extra day to sell goods. Warehouse goods stores also benefited from consumer worries about the availability of grains and other staples. We were all hearing stories about customers hoarding rice and other grains last week, prompting Costco to institute a limit on the amount a customer could purchase. Some clothing retailers suffered from a tightening in discretionary spending, however, and even some lower cost stores such as JC Penney's did not fare as well as hoped.

March's Wholesale Trade, at 10:00 am ET, rose 1.6 percent. The prior report had shown a drop of 0.8 percent. Wholesale Inventories had been expected to rise 0.5 percent after a prior rise of 1.1 percent, but instead dropped 0.1 percent. The previous 1.1 percent climb was revised lower to 0.9 percent, too.

That drop in inventories can be viewed through different lenses. The bearish lens says that manufacturers are gearing down because they forecast continued drops in demand. Others say that any tick up in demand now will force a faster ramping up of manufacturing if inventories are low.

TThe Federal Reserve released weekly figures on outstanding corporate paper. Once again, outstanding commercial paper dropped with asset-backed paper again responsible for the bulk of the drop. As I've said every week lately, if outstanding corporate paper is used as a measure of how easy it is to obtain credit, these figures are not showing any easing in the credit crunch. Of course, other measures are used, too. Jamie Dimon, CEO of JPMorganChase & Co. (JPM) said today that banks have been able to raise capital. He said that financial crisis was mostly completed, with hedge funds already through a process of massive de-leveraging.

Bronwyn Curtis, Chair of the Society of Business Economists in the U.K., might dispute Dimon's assertions about credit crunch. THE LONDON TIMES, online version, reported Curtis' concern that the LIBOR rate (the rate at which banks loan to each other) "remains elevated relative to the policy rate." Curtis further claims that the credit crunch is expanding, not going away.

The last release of the day was the Energy Information Administration's report on weekly natural gas storage. Those inventories climbed 65 billion cubic feet, but attention soon turned back to another commodity in the energy complex: crude. By early this morning, crude for June delivery had reached a high of 123.90 at the NYMEX. Crude closed the NYMEX session at $123.69 according to the NYMEX site, off that high but not far off, but had traded above $124 in electronic trading as this report was prepared.

After the NYMEX close, it was reaching fresh highs. Many stocks and indices in the energy complex gained, too. Examples were the OIX and XOI for indices; XOM, CVX and SLB for individual stocks.

Companies reporting earnings included ATVI, PCLN and VRSN. AIG was due to report after the close. After a WALL STREET JOURNAL article disparaging the company's prospects, AIG traded lower ahead of earnings. The after-hours report noted a $7.81 billion or $3.09 a share loss for the first quarter. The adjusted loss was $3.56 billion or $1.41 a share against expectations of a loss of $0.76 a share. The company said it would raise $12.50 billion by selling new shares and other measures.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic events include the pre-market release of March's International Trade figures. Economists predict that the deficit will narrow to $60.8 billion from the previous $62.3 billion deficit.

TThe ECRI Weekly leading Index appears at 10:30. Although I know at least one fund manager follows this number closely, I've never noted any particular market reaction to its appearance.

Company's reporting earnings tomorrow include CCU.

What about Tomorrow?

All the indices typically covered in this section show similar characteristics, with all chopping around today between support and resistance on their 30-minute charts. I've set up each chart to show the conditions under which new targets might be set and those targets. When choppy sessions are set up between equally weighted resistance and support levels, however, it's impossible to guess in which direction the indices will break out.

AAnnotated 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:

Today is the last Thursday before option expiration week, and those Thursday's can be wild, setting up the action into the next week. Today's action wasn't wild at all, but we must still be aware that expiration-related activity can be influencing action. Maintain a bit of skepticism about what you're seeing.

What do I think? I don't know what I think because I try not to form prior opinions when the short-term and even intermediate-term setups are like these. I know what I fear: a sharp downturn that might hurt subscribers who buy too much into the "it's over now" theory and have too much risk on their plates or a sharp rally that hurts those who are sure markets are going to roll over and have risked too much on bearish trades.

I'll also confess that I'm out of all May credit spreads, and have so far only put on bear call spreads for the June cycle. I've been waiting for the downturn I expect to happen before I attempt the bull put portions of my condors. I may miss trades, but I'd rather miss them than be wrangling a going-wrong credit spread in an expanding-volatility environment, if such should occur.

I happened to have written the Wrap last October 11, and I went back to read what I had written then: "So, let's be moderate in our outlook," I suggested after warning of some troublesome signs, "recognizing possibilities but not getting too jittery just yet. . . . Make your just-in-case plans. Then you'll have them, whether you ever need them or not." That seemed like good advice then, and it does now, too.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AG None None
ESRX    

New Calls

AGCO Corp. - AG - close: 59.45 change: +1.40 stop: 57.75

Company Description:
Founded in 1990, AGCO Corporation (www.agcocorp.com) is a global manufacturer of agricultural equipment and related replacement parts. AGCO offers a full product line including tractors, combines, hay tools, sprayers, forage, tillage equipment and implements, which are distributed through more than 3,000 independent dealers and distributors in more than 140 countries worldwide. (source: company press release or website)

Why We Like It:
It has been a very volatile couple of weeks for AG. The stock has plunged from $70 to $55 and bounced back to $60 again. The sell-off followed its earnings report. The earnings were better than expected but management offered guidance that was below analysts' estimates. The stock is bouncing from support near $55 and its trendline of higher lows. We suspect the stock could bounce back toward $65 and maybe $70 if the agriculture stocks rally again. We're suggesting a trigger to buy calls at $60.40, which is just above Wednesday's high. If triggered at $60.40 our short-term target is the $64.90-65.00 range. FYI: The P&F chart is bullish with a $71 target.

Suggested Options:
Our trigger to buy calls is at $60.40. We're suggesting the June calls.

BUY CALL JUN 60.00 AG-FL open interest=708 current ask $3.90
BUY CALL JUN 65.00 AG-FM open interest=196 current ask $1.95

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 1.8 million

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Express Scipts - ESRX - close: 70.96 chg: +1.47 stop: 68.19

Company Description:
Express Scripts, Inc. is one of the largest pharmacy benefit management (PBM) companies in North America, providing PBM services to 55 million patients through facilities in 13 states and Canada. (source: company press release or website)

Why We Like It:
I mentioned ESRX as a bullish candidate in the MarketMonitor today. The stock is bouncing from the bottom of its bullish channel and breaking out from a two-week consolidation phase. We're suggesting readers buy calls now and we'd use a stop under the recent lows. We do expect some resistance at $74.25 but our target is the $77.00-80.00 range. More conservative traders will want to consider taking some profits off the table near $75.00. The Point & Figure chart is bullish with a $81 target.

Suggested Options:
We're suggesting the June calls.

BUY CALL JUN 70.00 XTQ-FN open interest= 421 current ask $4.10
BUY CALL JUN 75.00 XTQ-FO open interest=2333 current ask $1.80

Picked on May 08 at $ 70.96
Change since picked: + 0.00
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 2.8 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aracruz Celulose - ARA - cls: 82.03 chg: +0.69 stop: 78.75

It was a relatively quiet day for ARA. Traders continue to buy the dips and shares posted a 0.8% gain. The Brazilian stock market rebounded about 1% following yesterday's profit taking. We remain bullish on ARA. We had been suggesting a bounce near $80 as a new entry point but the low today was only $80.57. More conservative traders might want to tighten stops even further toward the $80.00 mark. Shares of ARA have already hit our first target at $84.50. Our second target is the $88.50-90.00 zone. As expected the rally over $80.00 did produce a new P&F chart buy signal, which currently points to a $94 target.

Picked on April 28 at $ 80.25 *1st target hit $84.50
Change since picked: + 1.50
Earnings Date 04/07/08 (confirmed)
Average Daily Volume = 481 thousand

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CNOOC - CEO - close: 180.67 change: +5.07 stop: 172.49

Oil and energy stocks were out performers today as crude oil hit another new high. Shares of CEO rebounded back above the $180 level, which we suggested would be a new entry point to buy calls. We would still consider new positions right here. Our target is the $199.00-200.00 range. FYI: We have to label this a more aggressive play because the option spreads are so wide!

Picked on May 06 at $183.47
Change since picked: - 2.80
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 548 thousand

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CF Ind. - CF - close: 137.47 chg: +1.78 stop: 126.45

The fertilizer group experienced a rebound today as bulls bought the dip this morning. CF got some positive comments on CNBC midday. The stock rallied from its lows near $132 and closed with a 1.3% gain. We see this as a new entry point to buy calls. More conservative traders may want to raise their stop loss toward $130.00 or toward today's low near $132.00. We are using a wide (aggressive, high-risk) stop loss under last Thursday's low. Our target is the $155.00-160.00 range. FYI: CF just announced that its annual shareholder meeting will be held on Tuesday, May 13th.

Picked on May 05 at $137.50 *triggered
Change since picked: - 0.03
Earnings Date 04/27/08 (unconfirmed)
Average Daily Volume = 3.1 million

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Cytec Ind. - CYT - close: 60.99 change: +0.49 stop: 57.95

The action in CYT today looks bullish. Traders bought the dip near its rising 10-dma and the stock closed just above technical resistance at its 200-dma. More conservative traders might want to consider a tighter stop near $59.00 or under today's low at $59.70. We have to label this a more aggressive play because the spreads on the options are pretty wide. There isn't much we as traders can do about that except try to minimize its impact with good entry and exit strategy. We're listing two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone.

Picked on April 27 at $ 60.64
Change since picked: + 0.35
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 556 thousand

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Deere & Co. - DE - close: 86.82 change: +1.85 stop: 82.75

DE out performed the market today. Investors bought the dip here too and shares rallied past their 100-dma to close with a 2.1% gain. We would still consider new bullish call positions at current levels. We have two targets. Our first target is the $89.95-90.00 zone. Our second, more aggressive target is the $94.00-95.00 range. Our biggest challenge is time. DE is due to report earnings on May 14th before the market open. That only gives us a few trading days.

Picked on May 06 at $ 86.08
Change since picked: + 0.74
Earnings Date 05/14/08 (confirmed)
Average Daily Volume = 5.3 million

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Fortune Brands - FO - close: 69.55 change: +0.75 stop: 67.95

The situation in FO is improving. There was no follow through on yesterday's ominous looking failed rally near $70.00. The stock rebounded and honestly it looks like a bullish entry point right now. However, we're sticking to our previous comments and suggesting readers wait for a new rally over $70.00 or $70.15 before initiating positions. If you're feeling a little aggressive you could jump in early above $69.75, which has been resistance in the past couple of weeks. Our target is the $74.00-75.00 range. The 200-dma is technical resistance near $75.00. The P&F chart is bullish with a $95 target.

FYI: Our original play description on FO listed the January calls option symbols in error. We are suggesting the June calls, specifically the June 65s (FO-FM), June 70s (FO-FN), or the June 75s (FO-FO).

Picked on May 07 at $ 70.05 *triggered
Change since picked: - 0.50
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 971 thousand

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Gilead Sciences - GILD - close: 54.11 chg: +0.88 stop: 49.99

The BTK biotech index eked out an extremely small gain today. GILD out performed its peers with a 1.6% gain and a new intraday high. The good news today was the lack of follow through on yesterday's potentially bearish reversal pattern. We don't see any big changes from our previous comments. We were suggesting readers buy dips in the $53.00-52.00 zone but we'd probably change that to the $53.75-53.50 zone. Our target is the $57.50-60.00 range. Don't forget that any time we play a biotech company it should be considered an aggressive, higher-risk trade. There is always risk of some FDA decision or clinical trial result surprising the market and sending the stock gapping one direction or the other.

Picked on May 04 at $ 53.63
Change since picked: + 0.48
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.9 million

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HSBC - HBC - close: 86.06 change: +0.45 stop: 84.90

The financial sector continued to under perform the market. HBC managed to out do its peers but the stock looks like it will test the $85.50-85.00 zone again. A dip near $85 can be used as a new entry point. We have two targets. Our short-term target is the $89.75-90.00 range. Our more aggressive, longer-term target is the $94.00-95.00 zone. The P&F chart is bullish with a $113 target.

Picked on April 28 at $ 86.19 *triggered/gap higher
Change since picked: - 0.15
Earnings Date 03/08/08 (confirmed)
Average Daily Volume = 1.7 million

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Harsco - HSC - close: 61.20 change: +0.33 stop: 59.45

It was a relatively quiet day for HSC. The stock spent the day trading sideways. Bulls can take comfort in the lack of follow through on yesterday's bearish reversal-like action. HSC is still facing a potential bearish double-top pattern but a bounce from here would be a big positive. More conservative traders may want to tighten their stops closer to the $60.00 level. Our four-week target is the $64.50-65.00 range.

Picked on May 01 at $ 60.38
Change since picked: + 0.82
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 613 thousand

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Intl.Bus.Mach. - IBM - cls: 124.92 chg: +0.78 stop: 119.75

IBM continues to look strong here. The stock appears to be coiling sideways as it gathers strength to spring past resistance at the $125.00 level. Shares actually hit $125.17 intraday. A new rise past $125.25 could be used as a new entry point for calls although if you open positions now we'd suggest aiming for the $130.00 level (and using a tighter stop). IBM has already hit our target at $124.90. Our second target is the $128.00-130.00 range.

Picked on April 30 at $120.75 */1st target achieved 124.90
Change since picked: + 4.17
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million

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iShares Russ.2000 - IWM - cls: 71.71 chg: +0.15 stop: 69.85

The small caps actually kept pace with the broader market. We are starting to see some conflicting short-term technical signals but the intermediate trend remains positive. Another dip or bounce in the $71.00-71.25 zone could be used as a new entry point. Our four to six-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.

Picked on April 28 at $ 72.55 *triggered
Change since picked: - 0.84
Earnings Date 00/00/00
Average Daily Volume = 84.6 million

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iShares DJ Transports - IYT - cls: 93.42 chg: +0.31 stop: 91.48

Yesterday the situation was looking grim for the transports. The sector had produced a couple of bearish signals. While today's lack of follow through lower is encouraging we're not out of the woods yet. We're not suggesting new positions. Our eight-week target is the $98.00-100.00 zone. IYT has already surpassed our first target in the $94.85-95.00 zone.

Picked on April 27 at $ 91.48 /1st target exceeded
Change since picked: + 1.94
Earnings Date 00/00/00
Average Daily Volume = 1.4 million

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Joy Global - JOYG - close: 77.50 chg: +1.83 stop: 74.45

JOYG enjoyed a nice rebound with a 2.39% gain. The trend is still up so we don't see any changes. Our target has been the $79.50-80.00 range. We're not suggesting new positions. We do have a secondary, more aggressive target in the $84.00-85.00 range. However, we will plan to exit ahead of the late May earnings report. The P&F chart is already bullish with an $88 target.

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 4.95
Earnings Date 05/29/08 (confirmed)
Average Daily Volume = 2.3 million

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Mosaic - MOS - close: 127.08 change: +2.43 stop: 115.49

MOS, like most of the fertilizer stocks, rallied sharply from their intraday lows this morning. MOS ended the day up 1.9% and looks poised to move higher tomorrow. We see this bounce as a new entry point to buy calls. More conservative traders might want to tighten their stop loss toward $120.00 or today's low near $121.00. Our first target is the $138.00-140.00 range. We are playing with a very wide, aggressive stop loss at $115.49, just under last Thursday's low.

Picked on May 05 at $126.75 *triggered/gap higher entry
Change since picked: + 0.33
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 7.4 million

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Arcelor Mittal - MT - close: 96.02 chg: +3.88 stop: 89.99*new*

Steel stocks were market leaders on Thursday. Shares of MT helped lead the charge with a 4.2% gain on decent volume. More conservative traders might want to lock in some profits right here. We're not suggesting new positions at this time. Please note we're adjusting the stop loss to $89.99. Our target is the $99.00-100.00 zone. The P&F chart is very bullish with a $116 target. Don't forget that we want to exit ahead of the earnings announcement (still unconfirmed but sometime this month).

Picked on May 05 at $ 90.25 *triggered
Change since picked: + 5.77
Earnings Date 05/14/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Nucor - NUE - close: 81.87 change: +3.30 stop: 75.95 *new*

NUE is another steel stock that is soaring to new highs. Shares of NUE rallied toward the $82.00 level and closed the day with a 4.2% gain. We suggest that readers consider taking some money off the table here. We're not suggesting new positions at this time. Our new stop loss is $75.95. NUE has already exceeded our target at $79.50. Our second, more aggressive target is the $84.00-85.00 zone. The Point & Figure chart is bullish with a $93 target.

Picked on April 22 at $ 74.63 /1st target exceeded 79.50
Change since picked: + 7.24
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million

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POSCO - PKX - close: 128.69 change: +5.60 stop: 119.75

PKX erased yesterday's losses with a 4.5% rebound today. A number of steel-related stocks are trading at new highs and PKX has plenty of room to try and "catch up" with its peers. The 100-dma near $131 might offer some overhead resistance but readers can use dips near $125 as a new entry point. Our target is the $139.00-140.00 range. NOTE: We would consider this a slightly more aggressive play for two reasons. First, PKX is prone to gap openings as the U.S. traded shares adjust to trading overseas the night before. Second, the spreads on the options are pretty wide and that immediately puts us, as option traders, at a disadvantage.

Picked on May 05 at $125.55 *triggered
Change since picked: + 3.14
Earnings Date 07/16/08 (unconfirmed)
Average Daily Volume = 907 thousand
 

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Trader's Corner

Is it Over?

I'm not referring to any political campaign or the like, but to the prospects that the 6-week old rally from the mid-March low had run its course. The answer: probably YES.

As John Hussman, a well-respected mutual fund manager, said the other day: "Investors really have no sense of market dynamics if they believe that a recession-linked bear market comprises a single decline of less than 20% followed by a V shaped rebound into a new bull market." He could be right!

The daily chart patterns in the case of the Nasdaq 100 (NDX) does resemble a "V" bottom and the S&P 500 (SPX) that of a similar bottom type pattern, that of a "W" shaped bottom; the "W" pattern simply has one low, followed by a second low later on, made more or less in the same price area.

Market sentiment or outlook, according to my daily equities call to put volume ratio, did get extremely bearish during the 4/9 to 4/15 period. In a contrarian sense, this extreme set the stage for the second leg up in SPX from 1324 up to the recent 1423 high, for a gain of nearly 100 points. However, readings of this type don't necessarily set the stage for new bull markets. A good trading 'signal' yes, a harbinger of a renewed bull market, probably not.

The key to whether a substantial rebound from a deeply oversold condition (as measured on a long-term weekly chart basis) is usually seen in HOW MUCH a recovery rally retraces of the overall decline or the last big down 'leg'. Only if that retracement has gone beyond a 62-66 percent retracement can I be convinced that the rebound is a turnaround and major trend change OR is only a counter-trend rally within a still existing downtrend.

FIBONACCI RETRACEMENT ANALYSIS

I've written about and use extensively myself in making trading decisions, the so-called 'fibonacci' retracements. I'll go into the Fibonacci number sequence and what that is at the end of this article for those of you who haven't heard this all before or want to review the concept(s).

First is to discuss a general observation made by many traders and investors over many years: a 'weak' recovery in a stock or major market index, will rebound at least 38% of its prior decline; a common, we could say typical or even 'normal', recovery move will retrace about one-half or 50% of its prior decline; a very strong rebound will retrace around 62% to 2/3rds (66%) of a prior decline.

When a stock or index gets very oversold, as measured by the 13-week RSI indicator applied to a weekly chart, it becomes more common to see at least a 50% retracement and a bit more even. A 'bit' more being an 1/8th more (12%) or so. Or 'so' is often just a few percentage points more than 62%, so that it ends up being around a 66% retracement. I'm going to show chart examples of a 'fibonacci' 62% retracement in SPX and the Nasdaq Composite (COMP) to date and a retracement to date of 66%, which is the case with the Dow 30 (INDU).

The rule of thumb on retracements and the reason that they are so useful in trading is that once a 38% retracement is EXCEEDED, we can take as our next upside objective a retracement that would equal a 50% recovery move. If there is more than a 50% retracement, I look for a 62% retracement or a little bit more; i.e., 66%. When a retracement exceeds 66% of the prior decline, then it becomes a reasonable expectation that the rebound could carry all the way back to the prior high; i.e., a 100 percent retracement.

Once one of these retracement levels is reached and the stock or index starts to stall and seem unable to make further upside progress, we have to figure that further upside progress may not happen. Moreover, patterns like a 'key' downside reversal, which is a new high for the move or close to a new high, followed by a Close under the prior day's Low, which is especially telling as a top indication as happened yesterday in COMP.

Now, I have made the bullish technical case and wrote last week in this space about 4 bullish patterns that were associated with an intermediate-term rally or rally prospects; or, even chart patterns that could be construed as making the case that SPX and NDX hit long-term lows at their last major bottoms; i.e., they 'held' their long term up trendlines. I should also note that trendlines can be a little tricky in the sense that they can be drawn with varying degrees of variance and interpretation.

Retracements are quite objective. A starting point is either the all-time high, or the high at the start of the last major down leg, and an end (measuring) point is the absolute low. I generally use the intraday (or intraweek) highs and lows, versus the Close only high or low. A level that is half way (a 50% retracement) between those two points is clear-cut. Either a recovery rally makes it to that point or beyond, or doesn't.

Any anticipation or expectations I might have, or have had, for a major turnaround in the current bear market trend, is absolutely prefaced on the assumption that there will be MORE than a 62% or 2/3rds retracement of the prior decline or down leg at some point; that the market will recover ALL of its prior decline and then eventually go beyond and above that prior top. (A move simply TO the area of a prior high, but not beyond it, becomes of course a double top.)

In the case of the leading current market index, the S&P 500 (SPX) per the chart highlights below, the SPX retracement of the (December to early-March) decline to date has been exactly a fibonacci 62%, which has been followed by several days of sideways to lower movement; yesterday, the index made a 3-day low. Time will tell what's going to happen finally but the retracement pattern suggests that this run up has run its course; only a close above 1423 and the index climbing from there, makes for another analysis.

A related technical indicator that suggests the market may have made at least an interim top is supplied by the recent RSI extreme as seen on the lower portion of the SPX chart above.

As I noted already, when a retracement goes beyond 62%, the most common, slightly higher, retracement is 66% before there's a resumption of the dominant trend. We have to assume that the dominant trend is down until the market starts climbing above a 2/3rds retracement.

The past history of retracements suggests that 13066, the 62 percent retracement level, in the Dow 30 (INDU) is a pivotal point; only a close above it would suggest that the INDU rally keeps going. Near support implied by the 21-day moving average is holding up to date, so stay tuned on how this resolves itself. If I had to bet it would be in Dow Index puts.

My next chart of the Nasdaq Composite (COMP) is similar to SPX in its retracement pattern, although COMP didn't exactly hit the fibonacci 62 percent level but did come close to it. The sideways to lower trend after it did, is suggesting that the index could have reached its rally peak. I don't expect that the market will necessarily fall sharply but could start drifting lower from recent highs.

The retracement theory gives an idea of the key level that COMP must pierce (2506) to suggest that the index could climb still higher, such as (ultimately) back up to its highs in the 2727 area.

DIVERGING (DUELING?) TRENDLINES

You can take your pick:

# 1.) That of an apparent bullish long-term weekly up trendline as seen below with the weekly S&P 500 close-only line chart, shows the recent rebound from this line....OR, see the following chart for a different idea, one that suggests that recent highs could be hitting some long-term resistance.

# 2.) I don't recall seeing this kind of divergence before between the S&P 100 (OEX) and the SPX long-term chart trendline patterns. The two green arrows highlighted on my next and last chart, suggest two areas where OEX rebounded from major chart support implied by this trendline established by 2-3 lows forming a straight line.

A well-known technical analysis principal suggests that support, once broken, 'becomes' resistance later on. If we look at the recent weekly closing high (last week's) it appears that OEX may have stopped climbing precisely at resistance implied by its previously broken up trendline.

Stay tuned on how this tale of two charts works out! Starting with my original premise, it will be an unusual bear market turn if the decline is behind us already.

RETRACEMENT THEORY

We owe some debt to Charles Dow for his observations that an intermediate trend often will retrace (give back) around 1/2 of the distance covered by the major or primary trend, before the major trend resumes. There were further refinements on retracements made by W.D. Gann, a famous stock speculator of the early to mid-1900s.

But the origins of one of the most useful retracement theories for stocks and other markets came from someone who lived in the middle ages and was studying the population growth of rabbits.

Leonardo Fibonacci was an Italian mathematician doing such work in the early 1200s. The number sequence that is named after Fibonacci is where each successive number is the SUM of the two PREVIOUS numbers; i.e., 1, 2, 3, 5, 8, 13, 21, 34, 55, 144, etc. Any given number in this sequence is 1.618 times the preceding number and .618 times the following number.

There are some technical indicators whose formulas rely on the Fibonacci number sequence, but the main application is to look at price moves in stocks or index and use the fibonacci retracements of .382 or 38 percent, .50 or 50 percent and .618.

Looking at the number progression of 1, 2, 3, 5, 8, 13, 21, etc. where each succeeding number is the sum of the two before it, there are certain arithmetic relationships that exist: .618 is the percent that each number is OF the next higher number; .382 is the inverse of .618 (100 61.8 = 38.2). Sticking to shorthand, I round off .382 and .618 to an even 38 and 62 percent.

Imagine a stock that in 12 months goes from 10 to 20, up $10 dollars. The stock has had a fantastic double but you think it could go still substantially higher. You wished you had owned it at 10 but still would like to buy it, just cheaper than 20. The stock starts to trade lower. At what level could you hope to buy the stock?

Considering what would constitute the 38, 50 and 62% retracements of the 10 to 20 dollar advance would suggest the following:

1.) If the demand is really strong for the stock, you might not be able to buy it cheaper than 16.25 (.38 of the 10 gain subtracted from the 20 high point)
2.) If the demand was average, you could hope to buy the stock at 15, which is a give-back of .5 or one-half of the 10 point run-up.
3.) If demand turned out to be weak on the way back down from the high point of $20 (e.g., after some news stories about the company die down or change), you might anticipate or wait to see if you could buy the stock at 13.75 (representing a 62% retracement of the ten dollar advance from 10 to 20).

Useful in trading index and individual equity options is to track what would constitute the 38, 50 and 62% retracements, after a short-term to intermediate price swing.

There is a simple pragmatic reason for the popularity of 'fibonacci' retracements. Buying or selling in these retracement areas has often resulted or come close to realizing a buy at a correction low or shorting near the top and end point of a rebound occurring within an a larger decline. Maybe the saying of buy low, sell high, owes something to the common retracements.

You can set most charting applications to calculate retracements ranging from 25, 33, 38, 50, 62 and 66 percent or whatever levels in between, but these are the common retracement levels in use. If a retracement approaches 62%, I also add to my retracements charting tool, a line showing the 66% retracement level. In a correction (fall in price) within a larger uptrend, use of the retracement 'tool' is by first pointing at the low, then the high; in a correction (fall in price), first point at the high, then the low.

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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