Robert Ogilvie and I (Keene Little) were to switch this week's Wednesday and Thursday newsletters but we got our wires crossed and Robert is unavailable to write tonight's. I will therefore fill in for tonight but use some of what Robert wrote up for today's report.
Today's price action was bullish and as I had mentioned yesterday, what the bulls needed today was an up day to create a reversal pattern off yesterday's doji candle. We got the up day and unless it's a beauty of a head fake (after all, we have some important economic numbers tomorrow morning) we've got a nice bullish morning star reversal pattern after yesterday's doji day. This comes after only a relatively short pullback from last week's high so it may only be good for a short term reversal but the bullish day clearly gives us some bullish upside potential.
Today's rally was assisted by the "good" news this afternoon about the downgrades on the bond insurers Ambak (ABK) and MBIA (MBI). S&P downgraded them and Fitch cut 31 of Lehman's (LEH) 71 classes of subprime transactions. S&P put some of Wachovia's (WB) 2005 mortgages on a WatchNegative rating. They all rallied (actually WB ended the day pulling back and closed down 2 cents at 21.54). I know, it doesn't make sense to me either. One could argue that rallying on bad news is bullish. Or one could argue that prices were manipulated today to thwart selling on bad news. But I won't go there tonight.
So we had a bullish day but the caution (as always) is that there are some clues on the charts that say today's rally may have been a last hoorah. I'll review all that in tonight's updated charts. After a review of my charts I'll include Robert's analysis and charts (two for the price of one tonight!). The above table is Robert's and you can see by some of the market breadth numbers it was a strong day today.
I started off with a monthly and weekly view of the DOW chart last night so I'll start with the SPX weekly chart tonight:
SPX chart, Weekly
The decline from the May high has the weekly MACD (a lagging indicator) rolling over but it hasn't quite crossed yet. If it were to flatten out and stay above the zero line it could be bullish. Looking at this chart I wouldn't know which way to place my short term bets since price is currently in between the recent high and low in May and could go either way. So down to the daily chart.
SPX chart, Daily
The May and June lows essentially found support on the broken downtrend line from October and today's strong bounce (big white candle) clearly looks bullish. This is not necessarily bullish but it sure looks it. The reason it might not be has to do with the fact that it could be the completion of an a-b-c bounce off the May 27th low. The 2nd leg up in that kind of bounce (wave c of the a-b-c) tends to be very strong and typically fools a lot of traders into thinking there's been a trend change. That's why I continue to show the possibility for a strong decline to follow (dark red).
But if the rally continues and the pullbacks are relatively minor then I've got upside Fib projections for the move to 1424 and then all the way up to 1460 if 1424 doesn't hold it down. The Fib projections that I have also match the 50% and 62% retracements of the October-January decline. I changed the chart a little tonight and added a parallel up-channel for price action since the March low. The Fib projection and retracement at 1423-1424 cross the mid line of the channel and the 200-dma early next week.
Key Levels for SPX:
SPX chart, 60-min
I mentioned the possibility of an a-b-c bounce off the May 27th low and it often achieves equality in the two legs up. In this case that's at 1403.37 which was tagged today. That's another reason I'm leaving the scenario for a possible decline to kick off tomorrow morning. Otherwise we should see the market stair-step higher up to its 1423-1424 target at a minimum.
DOW chart, Daily
The bulls got their wish today with that big white candle, the morning star reversal candlestick pattern and a bounce off the uptrend lines from 2002/2003. What more could they ask for? Well, for starters they need to see the rally continue and clear the downtrend line from October which the DOW was unable to do in late May. Assuming the rally can be kept alive I have a Fib projection to 12795 and any higher than that would be potentially much more bullish. Back below 12340 and it would be lights out for the market.
Key Levels for DOW:
DOW chart, 60-min
Two equal legs up for the DOW off the May 27th low is at 12623 so the bulls want to see a rally above that level. Any drop back below 12496 would likely mean an end to the bounce. The DOW has been weaker than SPX so watch it for some early clues if we get an early pullback in the morning.
Nasdaq-100 (NDX) chart, Daily
NDX has rallied up to the mid line of its parallel up-channel from March. At the same time RSI is showing negative divergence unless the rally can keep going. This could be setting up a double top for NDX against the May high near 2051. If the bulls can keep the buying going we should see NDX head back up to the top of its up-channel, perhaps up to about 2150. A break below 2000 would likely be a heads up that the key level at 1943 is in danger of breaking.
Key Levels for NDX:
Nasdaq-100 (NDX) chart, 60-min
The 3-wave bounce off the May 27th low for the DOW and SPX could be true for NDX as well (except NDX made its low on May 23rd). The 2nd leg up from Tuesday's low (June 3rd), wave c, will often form a rising wedge (or a descending wedge in a pullback) and that's what I've drawn on the chart. A brief rally in the morning, to perhaps the 2065 area, followed by a quick drop lower would be a sell signal so watch this one carefully in the morning for some clues. It's been a stronger index so a breakdown in it would be important. A continuation above 2065 should be bullish for a run above 2100.
Russell-2000 (RUT) chart, Daily
The RUT was the winner today of the four indices I track here--up 2.6%, a full point better than even the NDX. I changed the chart a little for tonight to show a potential rising wedge pattern for price action since the March low. Today's high poked above the top of that wedge which could be a throw-over finish for the pattern (typical). Any drop back down tomorrow morning would be a sell signal from this pattern.
But as shown in pink, if a pullback remains above 751 and then heads higher again it should be bullish for a run at least up to 775 for a 62% retracement of the October-January decline. As depicted in dark red, if the rising wedge pattern is correct then a relatively quick retracement of the entire March-June rally can be expected. I've raised the key level to the downside based on this to 732. A rally above 775 raises the upside target to at least 800 for a test of the December high.
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Key Levels for RUT:
There are no appreciable differences in today's bank (BIX) and home builders (DJUSHB) charts so I'll skip them this evening. Any questions on those please review yesterday's newsletter.
Transportation Index chart, TRAN, Daily
The Trannies had a good rally today as well. They topped last week's high but ran into the top of the parallel up-channel for price action from January. Right above that is of course the all-time high near 5537 in May. This one is bullish until it's not. I have the key downside level at 5121 but a break below Tuesday's low near 5308 would be a heads up it's probably gunning for that lower level.
The dollar pulled back fairly sharply today and that helped commodity prices (although oddly enough, not gold). Since I follow the euro as well I thought I'd show its chart tonight instead of the dollar (which can be seen in last night's newsletter).
Euro FX chart (June contract), Daily
My sense is that the euro chart is bearish but today's sharp bounce has me wondering about that. I've drawn in a descending triangle (descending tops, flat bottom) as well as a sideways triangle (using this morning's low). This bears watching for a little longer to see what's playing out here but if it's a triangle pattern (either one) it's bullish. That means bearish for the dollar and bullish for commodities. A break below the bottom of the triangle, so below the May 8th low at 1.5255, would negate the pattern and be a sell signal for the euro (bullish the dollar, bearish commodities).
Oil chart, Oil Fund (USO), Daily
Oil rallied strongly today (several factors including the Senate investigation into price manipulation--no findings, the decline in the dollar, and that uptrend line from April 1st. Even for the bearish case for oil I think we'll see a pullback and then another bounce before it rolls back over. More bullishly we may not have seen the end of the rally for oil yet.
Oil Index chart, Daily
Like oil I see the probability for the oil stocks to pull back and then bounce a little higher, perhaps tagging the trend line from August 2007 before rolling back over. Any break below today's low would be immediately bearish (and may result more from what the stock market is doing rather than what oil is doing).
Gold chart, Gold Fund (GLD), Daily
Gold dropped today even though the US dollar sank. Even silver rallied. So I'm not sure why gold dropped but in so doing it has broken its uptrend line from August 2007. If it recovers tomorrow back above the line (so back above 87) it would be no harm, no foul with today's break. But any further drop, and especially with a failed retest of that broken uptrend line, would clearly be bearish for gold.
Economic reports, summary and Key Trading Levels
Friday morning will have some potentially important economic reports that could move the market significantly pre-market. The ADP employment report showed potential for a 40K gain but expectations are for a 50K loss. If the number comes in positive instead, look out above. The Fed watches earnings for evidence of wage inflation and could spook the bond market if the number is a surprise.
The bottom line for me as I reviewed the charts and see the potential bearish setups, the bulls need to keep the rally alive on Friday. The bears on the other hand need to see immediate selling in order to fulfill the possibility that today's rally was a last hoorah before a big breakdown. Any early rally failure could be significant so be careful if your nursing a long play and hoping for higher. Bears got squeezed real good today and they might return the favor tomorrow for the bulls.
But if resistance levels give way early tomorrow, and especially if they hold on pullbacks, stick with the long side as upside potential is for another 200 points on the DOW. At this point I would suggest tightening your stops if long and let the market prove it's not going to rally any further. If you're looking for a short entry, use the key levels to identify a breakdown and then start looking for bounces for short entries.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT:
The following analyses and charts are from Robert Ogilvie. It's always great to get multiple perspectives on the market and tonight you get two.
The S&P 500 $SPX.X
The above chart shows that we are currently in a consolidation phase after an extended uptrend. The uptrend was broken on May 21st a few days after the $SPX failed to close above the 200 day Simple Moving Average (Red Line). The 200 day SMA is important to many traders in that it represents a widely viewed pivot point for many large money managers. The bigger they are the bigger they fall suggests that a large fund has to pick a lethargic moving average to build positions around because they cant possibly move in and out of stocks as simply as you and I. Some funds look to the 50 day Simple Moving Average (Blue line) as a confirmation to either enter or exit a trade. The dotted lines represent the 50 day Exponential Moving Average (Orange) and the 200 day Exponential Moving Average (Magenta).
I usually get the same question whenever someone sits down beside me for a strategy mentoring session; Why do you use so many indicators for the same stock and what are all of those lines? I like to see multiple views of support and resistance levels because it shows the various technical criteria that other technicians use. When multiple support or resistance levels align these are considered coincidence indicators. Multiple technical indicators that show the same signal represents stronger support than if there were only one technical reason to buy or sell at a price. Furthermore, if you have a group of moving average proponents looking at support at the 21 EMA while another group of Bollinger Band technicians, you have more traders willing to buy at these levels.
Yesterday the $SPX broke and closed below its 50 day SMA after trading above it for most of the day. That is a negative confirmation. Furthermore, todays action in the $SPX appeared to be an exhausted attempt to bounce; very much like a boxer in a late round trying to get up after getting knocked down to the mat. The $SPX moved higher intraday above both the 50 day SMA and EMA and closed strong just below the 200 day EMA. The next line of support is the 89 day SMA at 1363. The 89 bar Moving Average comes into play very frequently mainly because it represents approximately one quarter of trading. The Slow Stochastic (42.68) closed above its moving average confirming the strength of the bounce. Usually a good confirmation occurs at times the Slow Stochastic line closes below 20 and then moves back above 20 one or two bars later (very much like it did in mid May). This is commonly referred to as re-emergence.
The CBOE Volatility Index $VIX.X
Yesterday, the VIX bounced to the 200 day EMA and closed up a little on the day. Todays gap and run in the S&P caused the VIX to decline over 2 points. There is support at 17.54 from last weeks lows and also support at 18.42 from the May uptrend line. From way up here in the press box, volatility is still very low. These day to day gyrations only provide short term trade opportunities.
In last night's Market Wrap I covered that the CBOE $VIX has confirmed the Negative bias signal because the 10 day Moving Average of the Index crossed above the 20 day Moving Average. There was a short term short the market/long the $VIX trade setup on Fridays close. Usually short term trades are best taken on anticipation of a crossover and moving average change in direction. However, I normally present the $VIX and other contrarian investor sentiment indicators as reasons to change ones portfolio bias. The market advanced aggressively to the upside thus causing the inverse $VIX indicator to decline over 2 points. With the 10 day MA above the 20 day MA, I am looking for the $VIX index to move below the 20 day MA for a short confirmation. In summary: the crossover is the change in bias and not a trade signal. A move to or slightly below the 10 and 20 day MAs can be a short term trade signal. I may sell the S&P 500 Ultra Short Proshare (symbol: SDS) June 54 puts if the $VIX dips below 18.50 and spring backs up. Another was to trade the $VIX is to trade the actual VIX options. But be careful. These options operate on a different expiration cycle and track the VIX futures contract and not the CBOE Index. Hopefully we will get an opportunity to create a tradable example tomorrow.
Open Interest Analysis
Long ago we covered support and resistance from a different perspective. I spent a little time covering the concept of using open interest as an indicator. The above chart shows both Call and Put open interest (OI). On the left, Call OI peaks at the June 2000 Strike Price. The $NDX broke through that resistance level yesterday after opening just below 2000 and then launching up over 24 points. The current price of the $NDX is 2055.11. The next level of resistance is at the June 2100 Strike. Support is strongest at 2000 and then 2025. Open interest put/call ratios are at 0.47. Generally, readings below 0.5 are considered bearish and readings above 1 are considered bullish.
The $SPX June Calls and Puts are biased slightly positive. This is due to more Put open interest (OI) on the Puts than Calls. With the $SPX at 1405 it is just above the peak put open interest at the 1400 Strike. The next support level is down at 1375. On the resistance side, 1425 sticks out as the next level of extreme OI. The break above the 1400 Call strike is a positive. 1400 may come into play more next week as we closer to option expiration.
It is hard to escape the reality of oil. Even though the price per barrel sunk over 13 points off its highs the price of gas at the pumps is so expensive even Ben Bernanke noticed that it must be affecting households. The fact is that we are too dependent on petroleum based products. I could bore you with all of the stupid stuff we use each day that uses oil (and doesnt go beep beep) but I wont waste time because we cant make money from my rants. However, the chart below shows some signs of support at 119 from both the 50 day EMA and SMA. 120.47 is the 5/15 low that is hanging down as the nest line of downside defense. A break of these levels can take oil all the way down to $110.
The charts above show that both the Slow Stochastic and the RSI were at extreme oversold levels and calling for a bounce. With NYMX crude bouncing over 5 bucks a barrel I would say the indicators were both correct. What caught me off guard was the strength behind the move without any catastrophic event. Oil shot through both the 8 and 21 day EMAs. You could go short here and give yourself upside risk management at a break and close above the upper Bollinger band (131.6). Or you could go long and use the $122 price support from today and yesterday as your risk management level. How do we go long oil if we are option traders? I covered this topic a little before and found that using the Proshare Ultra Short DJ Oil & Gas Index (symbol: DUG) was a great way to go short. On the Option Writers newsletter we have a position in the DUG June 24 puts at $0.55/contract. As Oil appears to be getting oversold I sent out a trade to sell the DUG June 33 Calls for $0.50/contract. Selling Calls on a short ETF is bullish. To me this is a better trade setup than selling the Proshare Ultra DJ Oil & Gas Index (symbol: DIG). The reason is that DUG is priced at $27.45 while DIG is priced at $119.40. Option writing is based upon putting up as little collateral while receiving the max premium possible. DIG options will require too much margin collateral and DUG options are the inverse of DIG at a lower margin requirement.
With that both Robert and I wish you a great evening and we'll be with you on
the Market Monitor tomorrow and back here next week. Robert will be taking
Wednesdays and I will be taking Thursdays.
Play Editor's Note: After a day like today you can't help but find bullish candidates. However, both the NASDAQ Composite and the S&P 500 have rallied toward their recent highs or short-term resistance. Combine that with the jobs report tomorrow and we don't feel like chasing today's rally. Since we're not adding many new plays I'm listing some stocks we're watching.
DE - Shares of Deere Co (DE) appear to have built a short-term bottom near technical support at its 200-dma. Today's bounce might be a new bullish entry point. Use a tight stop.
IBB - This is the iShares Biotech ETF and it just broke through resistance near $80.00 and its 200-dma.
EGN - Energen is a natural gas play. The stock looks poised to breakout higher from its two-week consolidation pattern.
ESI - ITT Education also looks ready to breakout from its consolidation. Consider an $80 target or the exponential 200-dma.
FSLR - This would be a very aggressive, higher-risk play but First Solar is bouncing from its trendline of higher lows. Considering buying calls now with a stop loss under this week's low.
DRYS & EXM - These are the shipping stocks and both of them look ready to bounce again. Shipping rates just went up again.
COF - Considering its exposure to consumer debt, Capital One would not be my first choice for bullish positions, but shares are bouncing from its trendline of higher lows.
TRA - Terra Industries and the rest of the fertilizer stocks are rebounding. TRA is close to breaking through its trendline of lower highs.
Valero Energy - VLO - close: 49.64 change: 0.26 stop: 47.99
Why We Like It:
BUY CALL JUL 47.50 VLO-GW open interest=1065 current ask $4.20
Picked on June 05 at $ 49.64
Peabody Energy - BTU - close: 77.00 change: 2.95 stop: 72.89
It has been a rocky week for coal. BTU rebounded with the market as traders bought the dip at its rising 21dma. Shares closed up almost 4%. More conservative traders might want to raise their stop toward yesterday's low (73.41). BTU has already exceeded our first target near $80.00. We're now aiming for the $84.00-85.00 zone. Today's bounce could be used as a new entry point, especially if you use a tight stop.
FYI: BTU was trading higher afterhours around $78.15.
Picked on June 01 at $ 73.92 /1st target exceeded 79.75
iShares Russ.2000 - IWM - cls: 76.20 chg: 1.90 stop: 72.95 *new*
Small caps out performed their peers yet again. The IWM rallied 2.5% and broke through resistance near $75.00. The intraday high was $76.29. We're adjusting our stop loss to $72.95. Please note that we're also adjusting the target to $77.00. More aggressive traders may want to aim for $80.00. FYI: The Point & Figure chart's bullish price target has moved to $99.
Picked on April 28 at $ 72.55 *triggered
Priceline.com - PCLN - close: 137.34 chg: 2.51 stop: 129.90
PCLN posted another gain. This time shares hit an intraday high of $139.16. That was almost enough to hit our target in the $139.50-140.00 zone. More aggressive traders may want to aim higher. We're not suggesting new positions at this time.
Picked on May 27 at $132.75 *triggered
Molson-Coors Brewing - TAP - cls: 59.26 chg: 0.93 stop: 55.95
It was a positive day for TAP. The U.S. antitrust division approved the SABMiller-Coors joint venture after an eight-month investigation. SABMiller's U.S. operations combined with Molson-Coors will have annual sales of $6.6 billion and would compete more strongly with Anheuser-Busch (BUD). Shares of TAP rallied 1.49 but failed to breakout over its recent highs. We remain bullish here but readers may want to wait for a new relative high before buying calls. Our target is the $64.00-65.00 range. FYI: The P&F chart is bullish with a $69 target.
Picked on May 23 at $ 58.51 *triggered
Emerging Markets 50 ADR - ADRE - cls: 55.79 chg: 1.92 stop: 56.85
The massive market rally on Thursday prompted a sharp 3.5% bounce in ADRE. Volume was below average on the rebound, which is not bullish. The ADRE still has a short-term trendline of lower highs. More conservative traders might want to inch their stop down a little (maybe 56.50 or near 56.35). A failed rally near $56.00 could be used as a new entry point for puts. We are aiming for the $51.00-50.00 zone. FYI: The P&F chart is still bullish.
Picked on June 03 at $ 54.69
Electronic Arts - ERTS - close: 49.54 chg: 0.61 stop: 50.25
ERTS continues to bounce. Since we are sitting on the sidelines it's safe to leave it on the play list. The mini, inverse head-and-shoulders pattern in the intraday chart is suggesting a rebound back toward $51.00 and at least the late May highs around $50.60. More aggressive traders could try a bearish position on a failed rally there but use an extremely tight stop and we would not buy puts if the major averages are in rally mode. Currently we're suggesting readers use a trigger to buy puts at $47.75. If triggered our target is the February lows in the $44.50-44.00 zone. We do consider this a more aggressive trade because ERTS still has a trendline of support it could bounce from. The P&F chart is still bullish.
Picked on June xx at $ xx.xx <-- see TRIGGER
3M Co. - MMM - close: 77.50 chg: 1.14 stop: 77.01
MMM added almost 1.5% but remains in a bearish pattern of lower highs and under its 50 and 100-dma. We don't see any changes from our prior comments. We are still waiting for MMM to breakdown under support near $75.00. Our suggested trigger to buy puts is at $74.95. If triggered our first target is the $70.25-70.00 zone. Our secondary target is the $66.00-65.00 range. The P&F chart is bearish with a $69 target."
Picked on June xx at $ xx.xx <-- see TRIGGER
(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.)
Amgen Inc. - AMGN - close: 44.93 chg: 0.43 stop: n/a
The market rally didn't hurt the biotechs. The BTK added 2.4%. AMGN only added 0.9% as it nears the $45.00 mark. The June $45 calls hit an intraday high of $0.90 and are currently trading at $0.81bid/0.85ask. That's a 44% jump in value above our estimated cost for the June strangle. We are not suggesting new strangle positions at this time. We have suggested a July strangle and a slightly more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56. We want to sell if either option hits $1.10 or more. June options expire in less than three weeks.
Picked on May 22 at $ 42.77
McDonald's - MCD - close: 58.05 chg: 0.45 stop: n/a
Dow-component MCD under performed the broader market with a 0.7% gain versus the S&P 500's rally of 1.9%. The stock was struggling under its trend of lower highs. We are not suggesting new positions. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10. We want to sell if either option hits $1.65 or higher. More aggressive traders may want to raise their target. Keep in mind that June options expire in less than three weeks and will see their premium erode more quickly.
Picked on May 18 at $ 60.53
Tyco Intl. - TYC - close: 45.26 change: 0.41 stop: n/a
TYC still isn't moving much. If you are considering a new strangle position we would narrow the entry range to $45.25-44.75 and the closer to $45.00 the better. After tonight's closing bell TYC announced it would buy its franchisee of its Sensormatic anth-theft division for $90 million. Our biggest risk is that TYC just bounces sides in a $5.00 range the next several weeks. The options we suggested were the July $47.50 calls (TYC-GW) and the July $42.50 puts (TYC-SV). Our estimated cost was $1.30. We want to sell if either option hits $1.95 (50% gain).
Picked on June 03 at $ 44.89
Avalonbay - AVB - close: 105.09 change: 4.87 stop: 102.85
The almost always volatile shares of AVB exploded higher today. The stock rallied more than 4% and broke through multiple levels of resistance. When you catch a move in AVB it can be great and when it moves against it can move big. The stock hit our stop loss at $102.85 about 10:30 this morning.
Picked on June 01 at $101.20 /stopped out 102.85
Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.
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