The day started with the futures up ahead of the Initial Claims, NY Empire State Index and Net Foreign Purchases economic reports. The Initial Claims came in pretty much in line at 371k versus the 370k expected. Todays number was a little higher than the 365k prior number. The big surprise was the NY Empire State Manufacturing Index for May came in at -3.2 versus the expected flat reading. The S&P futures declined to up 2 points above fair value. At the open the S&P and Nasdaq 100 quickly declined and bounced to trade near the flat line for about the first hour of trading. Actually the trading in stocks was fairly subdued with little to motivate investors to buy. At any point the market looks as though it could go either direction. However, once the equity markets got out of this initial congestion the advance was fairly steady up until the last hours surge.
The amount of volatility experienced today is normal around option expiration; especially on the Thursday prior to expiration. One reason is that cash settled indices like the SPX, NDX and RUT settle the price at tomorrows open price. So you have a bunch of institutions trying to adjust their positions and reposition for June expiration which causes the markets to act irrationally. Then theres the push at the close that is probably a play to get long prior to tomorrow mornings economic reports.
One of my favorite retail stocks, Tiffanys (TIF), helped the retail sector today by reporting their 1st quarter guidance and also increasing their quarterly dividend 13% to $0.17. The company is supposed to report earnings on May 30th. I find it strange that they couldnt wait another two weeks to announce this news with their earnings. I guess if I were a CFO of a company I would separate the news to try to get a double pump in price. It really makes sense to report good news in advancing markets.
Intel Corp. (INTC) got a boost midday after a Freidman Billings analyst recommended buying semiconductor stocks. Banc of America analyst, Sumit Dhanda, decided to join the party and reiterate that he too likes Intel because Intels new chip for low end and laptop computers could be the largest growth driver since the Centrino chip.
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Crude Oil seemed to be the initial reason for the broader markets to begin to advance. Oil dropping can be a double edged sword. While lower costs of energy can help the consumer related issues, the energy heavy weighted indexes can be dragged lower from the decline in oil related stocks. But today was a difficult day for short Crude traders that might have left the NYMEX early at 1PM to party only to find the volatile contract closing up $0.255. TransOcean Inc (RIG) closed up $9.71 on reports that US deep drilling is the place to invest. Perhaps that why Ultra Petroleum (UPL), Schlumberger Ltd (SLB) and Apache (APA) were either down or only slightly up while RIG was up over 6%.
Oh yeah, if you have been in a cave until now Billionaire activist investor Carl Icahn is making a play for Yahoo. He even helped the company by giving them 10 biographies of potential board nominees. YHOO closed up $0.61 at $27.75. Even though Microsoft is out of the way it appears YHOO is still in play. Last week the market thought Google might make a bid. I guess we have to see. I have been writing puts for the last few months in the Option Writer newsletter. The premium is especially high due to the uncertainty of a deal being completed and for what price.
After the Bell
In the gaming sector, Multimedia Games (MGAM) reports installed base of player
terminals and product mix at April 30, 2008. MGAM reports its total player
terminal installed base and product mix. The co had 2,006 Reel Time Bingo, 563
Legacy & Other, 2,569 Total Class II & Other; 5,312 Class III units, 4,338
Mexico Electronic Bingo Units; 2,369 Charity units for a total of 14,688 units.
Also in the consumer sector Nordstroms (JWN) beat the Q1 (Apr) earnings of $0.54 per share, $0.05 better than the First Call consensus of $0.49; revenues fell 3.6% year/year to $1.88 bln vs the $1.9 bln consensus. Same-store sales decreased 6.5% for the quarter, below the company's planned 3 to 5% same-store sales decline. Co issues in-line guidance for Q2, sees EPS of $0.65-0.70 vs. $0.69 consensus. Fo Q2 co sees same store sales of (5%-(7%). Co issues in-line guidance for FY09, sees EPS of $2.65-2.80, previous $2.75-2.90, vs. $2.76 consensus. For FY09 co sees same store sales of (4%)-(6%). I had thought the high line consumer that normally shops at stores like Nordstroms and Saks would be somewhat insulated from an economic slow down. I might be wrong in this assessment. It should be very interesting to see how this news is played out in tomorrows trading.
The $SPX continued to advance today into some serious resistance from the 200 day SMA at 1428 and from price resistance at 1430 from January 2008 intraday highs. There is a strong uptrend that was just successfully tested on last Friday. A break above this resistance would be very bullish. Especially since sentiment indicators like the $VIX continue to decline further to levels not seen since October 10th, 2007 (16.08). The $SPX still has momentum from the RSI and Slow Stochastics. But those can change very quickly if this is just a phantom rally into resistance.
The above chart is of the CBOE Volatility Index (VIX) and shows back to October. The black line drawn shows the October low mentioned above. Todays close, 16.30, is very close to that level. My take on this chart is that we should hold the low at +/- 16.00 level and move back up from it. This may be done tomorrow as option prices are being adjusted from the roll forward of the option sellers. Option writers generally cause option prices to decline from supply shrinking. The market may open strong and run into the resistance about 8 points higher and therefore force the VIX lower to its support. Once the VIX decidedly advances back up you could take a short position on the SPX or SPY.
The Nasdaq 100 (NDX) broke above the 200 day SMA two weeks ago and successfully tested the old resistance new support level. It had a strange day yesterday with a good intraday advance and a weak close. Today shrugged the close and moved up over 34 points to 2031. There is a gap that at 2040 that is acting like a black whole sucking the index up into it. Once that gap is filled the market could decline and take an exhaustion break. Both RSI and Stochastics are overbought.
Even though I am new to this I thought it would be fun to run through a fun strategy. It is the SPX expiration strategy. The reason there is a play is that the options actually expire tomorrow morning. Once settlement is calculated, usually around 12:00 PM EST the profit and loss and margin requirements are adjusted. This all probably seems confusing and you may wonder why someone would trade this strategy. The reason is that it is a way to make some quick bucks over night if you are on top of your execution platform.
Here are a few things to note. The settlement price isnt the actual Open print of the index. It is the index weighted market open price of all of the indexs components. Here is the trade setup for tomorrow. Toward the close you could have sold the $SPX May 1430/1435 Call Spread for $0.80 per contract and also the May 1415/1410 Put Spread for $0.50 per contract. This trade is called an Iron Condor.
It is essentially two vertical credit spreads. The total credit is $1.30 per contract or $130 credit per contract. In the above example, I am selling 20 contracts which produced $2,600 initial premium. That premium can help pay for the $10,000 margin requirement to do this trade (20 contracts multiplied by the 5 point spread multiplied again by the number of shares per contract 100). If this trade works, it will produce a 26% return on the margin. Thats pretty good money for having to hold over night. I start to give back premium if the settlement price is above 1430 or below 1415. But I have 7 points in either direction. 7 points used to be a lot last year. The trades biggest risk is foreign market turmoil and the Housing numbers due at 8:30 am EST. I will try to get tomorrows writer to post the conclusion of this trade at the end of Fridays Market Wrap. By the way, there is no way to trade this until next month. However, SPX and OEX options have weeklies. So if you all like this type of trade, we can try it next week.
Robert J. Ogilvie
Play Editor's Note: A few more stocks we're watching. Chinese oil and energy stock PetroChina (PTR) might be a bullish candidate with today's bounce from the $140 zone. The stock has filled the gap from April and looks like it could head toward $160 again. We already have two fertilizer stocks on the play list but readers may want to take a look at AGU and POT. AGU did well today and we'd consider buying calls on a breakout over $90.00 and target the $99-100 zone. POT looks like a potential play right now but you could wait for a rise over $205. Target the $219-220 zone.
AGCO Corp. - AG - close: 59.09 change: +1.58 stop: 57.75
AG is bouncing sharply from yesterday's seemingly bearish reversal. AG ended the day up 2.7%. More aggressive traders might want to jump in early now with a stop under yesterday's low. We're sticking to our plan with a suggested entry point to buy calls at $60.40. 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.
Picked on May xx at $ xx.xx <-- see TRIGGER
CNOOC - CEO - close: 193.70 change: +5.89 stop: 183.49 *new*
The rally in CEO continues. The stock added 3.1% and vaulted past potential resistance near $190. We're raising our stop loss to $183.49. Our target is the $199.00-200.00 range. More aggressive traders might want to aim for the highs near $215. FYI: We have to label this a more aggressive play because the option spreads are so wide!
Picked on May 06 at $183.47
CF Ind. - CF - close: 138.73 chg: +2.46 stop: 129.90
CF continues to bounce around its trading range. The stock was up 1.8% today. It might be less stomach churning to just wait for a rally over $142 before considering new positions. Our target is the $155.00-160.00 range.
Picked on May 05 at $137.50 *triggered
Carbo Ceramics - CRR - close: 48.54 change: +0.76 stop: 44.89
Investors bought the dip in CRR and shares closed up almost 1.6%. We don't see any changes from our previous comments in CRR. We're aiming for the $52.00-52.50 zone.
Picked on May 11 at $ 47.45
Cytec Ind. - CYT - close: 63.00 change: +0.78 stop: 59.49 *new*
CYT is still in rally mode and shares set another new relative high today. We're adjusting our stop loss to $59.49. We have two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone. 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.
Picked on April 27 at $ 60.64
Express Scipts - ESRX - close: 72.17 chg: -0.73 stop: 68.19
ESRX under performed the market today but traders did buy the dip near $71.00. We've been suggesting that readers use a dip as a new entry point to buy calls. 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.
Picked on May 08 at $ 70.96
Fortune Brands - FO - close: 71.18 change: +0.27 stop: 67.95
FO spent the day trading sideways as it digests yesterday's breakout over resistance near $70.00. We're still bullish but look for a dip near $70.00 as a new entry point. Broken resistance at $70 should be new support. 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.
Picked on May 07 at $ 70.05 *triggered
Foster Wheeler - FWLT - cls: 78.63 chg: +4.59 stop: 71.46 *new*
Wow! FWLT really out performed on Thursday. Wednesday's performance suggested we'd see more profit taking but FWLT shot to new two-month highs and closed up 6.19%. The intraday high was $78.88. Our secondary target is the $79.50-80.00 range, which could be hit tomorrow. We are raising our stop loss to $71.46.
Picked on May 13 at $ 71.46 *gap higher entry/1st target hit
Harsco - HSC - close: 62.89 change: +0.75 stop: 59.85
HSC continues to look strong. Shares made another attempt at a breakout over resistance near $63.00 today. Our target is the $64.50-65.00 range but more aggressive traders may want to aim higher.
Picked on May 01 at $ 60.38
Intl.Bus.Mach. - IBM - cls: 128.46 chg: +0.94 stop: 120.75
The rally in IBM continues. Shares posted another gain, their 7th in the last 8 trading days. IBM looks poised to challenge the $130 level soon. Our target is the $129.50 mark so prepare to exit.
Picked on April 30 at $120.75 */1st target achieved 124.90
iShares Russ.2000 - IWM - cls: 73.55 chg: +0.15 stop: 69.85
Hmm... it is interesting that the IWM Russell 2000 ETF only rose 0.2% while the Russell 2000 rose about 1%. Something doesn't look right. The trend in the IWM is still bullish but we're not suggesting new positions at this time. We would seriously consider raising the stop loss closer to $71.00, which should be short-term support. Our multi-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
Joy Global - JOYG - close: 80.30 chg: +3.30 stop: 74.99
Bulls were back in charge with JOYG. The stock soared 4.2% and closed near all-time highs. We're not suggesting new positions at this time. Our secondary, more aggressive target is the $84.00-85.00 range. 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 */ fist target exceeded
Mosaic - MOS - close: 128.93 change: +3.77 stop: 119.75
Like most of the fertilizer stocks shares of MOS produced a nice bounce but remain in their trading range. We would consider new positions here but honestly readers may want to wait for a new rise over $130.00 before initiating positions. Our first target is the $138.00-140.00 range.
Picked on May 05 at $126.75 *triggered/gap higher entry
Nucor - NUE - close: 81.44 change: +1.45 stop: 75.95
NUE added another 1.8% but the trend has been a sideways consolidation the last few days. We don't see any changes from our previous comments. NUE has exceeded our target near $80 several times but can't quite get to our second target at $84.00 - at least not yet.
Picked on April 22 at $ 74.63 /1st target exceeded 79.50
Oil Services HOLDRs - OIH - close: 209.24 chg: +6.62 stop: 199.00
Wow! The OIH had not one but two $6 swings today. Bulls bought the dip at $202.45 and the OIH ended at new three-week highs. Our current target is $219.00-220.00. FYI: The Point & Figure chart is forecasting a staggering $306 price target.
Picked on May 13 at $206.78
Reliance Steel - RS - close: 67.68 chg: +1.44 stop: 59.99
Steel stocks were strong again on Thursday and RS bounced from the $66.00 level. This might be a case where the stock is going to run away from us. Right now we're waiting for a dip. If we don't see signs of a dip soon we'll drop RS and move it to our internal watch list. Our suggested entry point is a pull back into the $64.75-64.00 zone. If triggered we're setting two targets. Our first target is the $69.50-70.00 range. Our secondary, more aggressive target is the $73.00-75.00 range. The P&F chart is bullish with a $73 target.
Picked on May xx at $ xx.xx <-- see TRIGGER
Aracruz Celulose - ARA - cls: 87.30 chg: +0.94 stop: 79.45
Target achieved. Intraday strength lifted ARA to $88.59. Our secondary target was the $88.50-90.00 zone. We remain bullish on ARA and will watch it for another potential entry point down the road.
Picked on April 28 at $ 80.25 *2nd target hit $88.50
Gilead Sciences - GILD - close: 52.95 chg: +0.39 stop: 51.90
GILD bounced from its lows today but we're still concerned about waning momentum. Yesterday we said that if GILD bounced we'd exit. It's possible we're being overly cautious here but there are other candidates to play that look stronger.
Picked on May 04 at $ 53.63
POSCO - PKX - close: 143.90 change: +11.90 stop: 122.35
Target exceeded. A strong day in the South Korean stock market helped fuel a huge 9% rally in shares of PKX. The stock gapped open higher at $137.35 and soared to $144.08 by the day's end. Our target was the $139.00-140.00 range.
Picked on May 05 at $125.55 *target exceeded 139.00
Since I'm toiling away in London for 3 weeks, I see and hear again the 'mind the gap' messages found in some London Underground stations. The meaning of those announcements is to watch for those open spaces that sometimes exist between the subway car and the platform; 'watch your step' is what you'd hear in the U.S.
Just as holes or 'gaps' are something you need to be aware of underfoot, so to is the space or gaps that sometimes occur between prices of stocks or stock indexes from one day to the next, which then form chart 'gaps' in technical analysis terms.
Stock or index price 'gaps' occur on overnight news or news occurring before the opening of the two major U.S. stock exchanges, the NYSE and Nasdaq. Such news can be specific to a stock or sector and can cause a select stock(s) or sector to fall or rise sharply on the market opening OR the news can be general and cause the entire market to 'gap' up or down if it occurred outside market hours; imagine "Fed lowers interest rates in a surprise weekend move".
A funny thing is that while you see price gaps that occur on daily chart graphs in STOCKS, you also ONLY see them appear on daily charts of the Nasdaq indices; e.g., the Nas Composite (COMP) or Nas 100 (NDX) Index. Why no daily chart 'gaps' in the S&P or Dow?
For the reason that if there are delayed openings in NYSE stocks due to order imbalances, those averages and Indexes will 'assume' an 'Open' that is equal to the prior night's Close and hence the index, not the stocks themselves, will show an opening that is in the SAME area as the prior day's close.
This way of calculating NYSE stock prices means that we have to go to hourly charts of the S&P and Dow to see where the chart gaps exist; S&P and Dow chart gaps will usually, I could almost say always, occur on the same dates when we see COMP or NDX daily chart gaps.
The implication and significance of chart GAPS?
These chart formations are worth noting because often, later on, overhead gaps tend to 'act as' areas of resistance and gaps below current prices tend to act as areas of support and areas of buying interest. My first chart will have an example of what appears to be overhead resistance coming in at a gap that is above the market.
Chart/price gaps happen when a stock or index Opens substantially higher than the prior day's high and climbs from there; e.g., due to a stock offer or buy out announcement such as occurred with Yahoo (YHOO) in late-January. Or, when prices open substantially lower than the prior day's low and fall from there, as can happen on earnings reports perceived as negative; e.g., GE stock 3 weeks ago.
Moreover, I'll show charts of some key stocks, as well as market sector indexes like semiconductors, energy, etc that can be big market influencers, sometimes tracing out a breakout, breakdown or stall AHEAD of the overall market; a term for such market influencers is 'bellwethers'. A good market predictor or bellwether can also be another stock index, often a less followed; e.g., the NYSE Composite Index (NYA) or the Dow Transports (TRAN).
MIND THE GAP!
In the case of the Jan 3-4 price gap, sellers might have wished to sell more in the 2040 area and cut their losses in a better fashion. Potential sellers get their chance to do so again when NDX comes back into its prior 'gap' area such as is happening currently per the chart below.
The price area of the downside prior 'gap', besides having a beginning of the sharp early-January market break (and start of a new down leg), is also an area of potential resistance implied by a fibonacci 62% retracement out to 2/3rds (66%) of the late-October to mid-March decline. Interesting how the market, when hitting this level yesterday in NDX, sort of ran into a brick wall. The index came strongly back today; we'll see what comes tomorrow. The market is getting more volatile as these prior areas of turbulence are hit again.
No doubt the chart gap shown on the NDX daily chart above seems minuscule, but gaps can be quite sizable in terms of the price range of prior weeks and months; an example of a stock that gets hit with some adverse news (disappointing earnings) is seen graphically below in the case of General Electric (GE). GE fell from just over 36 to a high of 33 the next day. The resulting downside chart gap area extending from 36.16 down to 33 can now be seen as a 3-point band of potential resistance or scale up selling interest.
GE is also a 'bellwether' stock, one that has been over many years, a good predictor-type stock, just as IBM was once also (much less so today). There's an instance shown in the GE daily chart above where the stock breaks above a well-defined down trendline AHEAD of the overall market, making GE a useful bellwether stock to chart for clues as to what trend shifts might lie ahead for the S&P or Dow. An example of this was seen when the GE pierced its down trendline on 3/17 and rallied sharply as highlighted on the chart above.
In the S&P 500 (SPX) daily chart below, we see that the same upside penetration of ITS down trendline didn't occur until 4/1. GE 'led' the market in its bullish breakout chart pattern. It matters less that the stock fell sharply (4/14) on a quarterly earnings report that was significantly under market expectations, as this news was specific to the stock and not generally related to the market. However, we could also wonder how long the S&P is going to continue to climb without also having much participation by bellwether GE.
While Yahoo (YHOO) is not considered a true bellwether Nasdaq stock (unlike Cisco: CSCO) it's an important one and the next chart below highlights the tendency for its prior upside chart gap to also highlight what is an area of 'scale down' buying interest into the YHOO gap area. Of course a stock in play tends to remain in play often, as reinforced by Carl Icahn's interest that has surfaced in the company, if only to force a sale.
So far at least, YHOO has only 'filled in' about half of its prior gap and the stock was up again today. As to whether all of this gap gets filled in by a decline all the way back to the $21 area or if dips toward levels above that continue to find willing buyers. By the way, that used to be a good rule of thumb on price gaps, especially sizable ones, try and buy at half-way back (or better) into the gap.
We often find that prior upside gaps get about half filled in or 100% filled in, followed by a tendency to rally; the same with upside price gaps when they act as resistance, even if only initially. Since we don't know if a rally will 'fail' in a gap area either temporarily or for some time to come, it's a good idea to take account of them (to 'mind the gap') and be sharp in assessing further price action to protect any existing positions or to not blunder into an ill-advised new position.
As I noted about my writing reflecting a local time that is 5 hours ahead of New York, my charts reflect a closing date of today, but only because I'm writing after 10 pm. Today, NDX (first chart) rallied back to an intraday high and a close today that puts it solidly back into its 2025-2040 gap. Acts like a bull market, talks like a bear. Stay tuned on the battle between the bulls and bears!
As anyone following the sector indices knows, oil/energy stocks have been the bright or 'sweet' spot in the overall market, as is seen in the very strong multiyear advance being made in the CBOE Oil Index (OIX). A steep bullish uptrend line is highlighted below in the weekly OIX chart and oils have been a key factor driving the S&P and the NYSE Composite Index (NYA) back up from the mid-March lows. The index has recently hit the top end of what may be some upper channel resistance as noted at the red down arrow. Either OIX pulls back from recent highs; or, in a contrarian view, breaks out to the upside and has another spurt higher, such as to the 1000 area.
The bellwether OIX sector index weekly channel interpretation I've drawn below would suggest that recent market highs could be at a key juncture, possibly meeting rising resistance. If any such technical resistance doesn't materialize and if there's renewed buying interest, I'd assume that there was going to be a final spurt before prices turn lower; a countertrend decline is overdue. It doesn't mean it comes tomorrow, only that we shouldn't be surprised if something occurs sometime soon that brings down oil prices.
A bellwether tech sector index has historically been the Philly Semiconductor Index (SOX) group of stocks. Strength in the semiconductor/chip stocks has been important for the staying power of rallies in the overall Nasdaq Composite or Nasdaq 100 indexes. It's a 'bellwether'!
Quite different than the significance of the very bullish oils (OIX) influence in the continued S&P recovery, the Semiconductor Index (SOX) had until today only made a 38% first-stage recovery retracement of the July to mid-March decline, as highlighted in the daily SOX chart below. Today, for the first time, a strong rally carried SOX decisively above the 38% retracement level, and sets up a target for the NEXT important fibonacci retracement of one-half or 50% of the prior move; i.e., to the 440 area.
The New York Stock Exchange Composite Index (NYA) has led the S&P and Dow higher in some past years and during those periods there was a persistent and broad-based rally going on; only in terms of the Dow or S&P it didn't seem like much of a bull market. You saw it in the broadest NYSE index, the NYA, making it a plus to keep an eye on this index for its bellwether function. Sometimes resistance or support is more obviously seen in NYA, or a breakout or reversal indication not obvious in the other indexes.
Currently, as seen in daily NYA chart below, today's rally pierced its down trendline decisively as part of a rally to a new high for the move. This price action sets up a bullish potential objective to the retracement levels of importance at 9608 to 9693. As the index so easily pierced its prior highs and down trendline and kept going today, a next objective could be 9600-9608 easily, with potential up to the 9690-9700 area.
The 13-day RSI is not following prices to a new closing high, giving a small divergent note to today's renewed rally. It may be NYA gets to near 9700 and a significant top made there.
My crystal ball is getting cloudy as it nears midnight in London. Time to write
the last words:
Today's Newsletter Notes: Market Wrap by Robert Ogilvie, Trader's Corner by
Leigh Stevens, and all other plays and content by the Option Investor staff.
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