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Daily Newsletter, Monday, 12/22/2008

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Table of Contents

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

Market Wrap

The Short of It

[Image 1] Monday Briefing

Today was another low volume high volatility session in the broader markets. The range was about 30 points on the S&P 500 (SPX), 45 points on the NASDAQ 100 NDX), and 230 one the Dow Jones Industrial Average (DJX). A quick recap of the open had the markets opening flat to slightly down due to earnings from Walgreens (see below), a loss warning from Toyota Motors (TM) and a possible downside revision to the International Monetary Fund’s economic forecast. In fact, the markets declined steadily into the last hour of trading on rumors of a credit watch or downgrade on Dow Jones component Alcoa (AA). However, program buying might have recognized the discounted market and bought into the close. At 3:30 PM. The S&P Futures were down almost 30 points. Suddenly, a catalyst was revealed and the futures closed down only 9.50 points. However, even with the bounce the end of the day had all 10 economic sectors down. Some of the bell weathers include stocks like McDonalds, United Technologies, and Merck. It appears as though stocks with dividends and strong balance sheets have been able to maintain their relative strength. Being a holiday filled week, there won’t be a lot of news other than what the media makes as such.

The market internals had decliners at a 3 to 1 advantage today. On the NYSE and NASDAQ Composite, four stocks posted new 52-Week Highs while 44 and 115 stocks achieved new 52-Week Lows on the NYSE and NASDAQ Comp, respectively. TRIN on both exchanges broke and closed above the 1.50 level that often provides exhaustive indications and a possible long trade at the close. These trades are supposed to be closed out at the open or at a stop equivalent to an average price range. Volume on both the NYSE and NASDAQ Comp were well below the average. That means that technicians might dismiss the downward move today as just end of year tax loss selling. However, the end of the day rally looked like window dressing. But I can’t imagine what stocks or assets Mutual Fund companies want to display as their top ten holdings in the fourth quarter reports.

Earnings News

Walgreens (WAG) reported that its profit fell 10 percent in its fiscal 1st quarter. WAG reports that its earnings fell short of the analyst’s expectation because of the 200 new store openings. The company earned $408 million or $0.41 per share versus the consensus estimate of $0.46. Tomorrow morning, American Greetings Corp (AM) reports earnings while after tomorrow’s close, FSI International and Micron Technology (MU) report. There are no earnings being released on December 24th and none of any substance on December 26th. As I mentioned in the Option Writer post today, I will be holding onto some cash this expiration cycle so we can trade some of the Earnings Volatility trade setups.

Economic News [Image 8]

As you can see from the graphic above, there were no economic releases today. But tomorrow is full of market moving data. I don’t believe that the third quarter GDP-Final matters, but the Existing and New Home Sales has had a lot of influence on market sentiment. I have a lot of friends in real estate. There have been reports that the true values of homes are the foreclosure price. After speaking to some of the more active agents, it has become my opinion that the foreclosure price can’t be the value since it is almost impossible to get a bank to release the home as a short sale. It is a lot like the pricing discrepancies of mortgaged backed securities and their derivatives. If there isn’t a lot of liquidity, rather than using a mark to market methodology you have to price it according to a pricing model similar to option pricing methodologies. In addition to the market sentiment gathered from the home sales report, the Michigan Sentiment for December is expected to be revised downward to 58.8 from 59.1. Finally, on Wednesday we get November Personal Income and Spending. The reaction from any reports on Wednesday should receive a thin response as many traders are away from their post.

S&P 500 (SPX)

On a daily basis, the SPX is consolidating after bouncing nearly 20% from the November 21st lows. However, on a Weekly chart it is still evident that the SPX remains in a sustained down trend. In the chart below, the black curve is the 200 week moving average. It began to curl down ward in October. On a longer term basis, I wouldn’t call an uptrend until the SPX broke above the 50% retracement level and held. The SPX has yet to break above the 23.6% retracement level. From past experience, it would be of no surprise to me if the SPX declined once more in the coming month before trying to break above the 23.6% and 38.2% retracement levels. The Weekly ADX is reaching oversold levels and has slowed its ascent. The Money Flow Index did breach the 20 last time the SPX was oversold. That is an indication of capitulation. I think we have seen the low; just not the end of the volatility.

SPX Weekly Chart [Image 2]

Moving onto the daily chart, as previously stated in past weeks, the 50 day moving average has become the newest resistance level to keep the SPX down. The daily ADX is declining from the lower high peak established on November 21st. The higher low on the trend indicator along with a lower low in the market is actually a positive divergence. The Money Flow Index hasn’t provided much help in determining whether or not the SPX is oversold or overbought. You can’t have every indicator work consistently and coincidentally. But if you have a few of them indicating the same, the probability of the move increases. As mentioned earlier, the 50 day moving average, currently at 897.54, has become heavy resistance for the SPX to break. Aside from the 50 day SMA, there is also price resistance at 916. Over and above that, the SPX has resistance from the November 4th high of 1007 and coincidentally the 89 day SMA (magenta line). The SPX has support at 851 and then at 818. If the 851 support is broken, another leg down to the November lows might be next. But today’s low (857) held the support. Depending on tomorrow’s reports and the attendance of traders, the market could retest those lows. The market tends to advance the day before a major holiday.

S&P Daily Chart with Moving Averages [Image 3]

The SPX is definitely consolidating over the last three weeks. Until today, we have seen higher lows but not higher highs. This was forming a positive flag formation on the daily chart. But today’s decline fell below the uptrend line and has therefore disregarded the positive bias. In addition, the RSI and the Slow Stochastics have broken below recent support. This indicated that further weakness can be expected. The RSI still has plenty of room to decline before becoming oversold. However, the Stochastics, at 27, is quickly approaching oversold territory. The Bollinger bands are squeezing together and indicating that market volatility is subsiding. The current reading of the Bollinger bands suggests that the market should trade within a 95 point range of the 21 day Exponential Moving Average (EMA). The 21 and 8 day EMAs continue to crisscross one another. Since the SPX can’t seem to remain above the 21 day EMA, I can’t confirm that the SPX is in a short term uptrend. As with the other charts, I think that we will see the market lower before breaking out above the 916 resistance.

S&P 500 Daily Chart with Oscillators [Image 4] Commodity Corner

Within the last two weeks, the Eurodollar Futures has broken out to the upside. The first resistance level was the 50 day SMA. Once that was breached, the Euro rallied straight through the 89 day SMA and up to test the 200 day SMA last Thursday. The contract closed at 1.39 and has support at the 89 day SMA, or 1.358. I don’t think the Euro is a buy until testing this support and I wouldn’t sell it until it ran up to the 200 day SMA again. Basically, the market feels that the value of the US economy is weakening versus other currency counterparts. I have been stating that the dollar will eventually devalue from the constant print of money and issuance of debt. The strange thing is that Light Crude Oil didn’t rally along with the Euro. I guess the two aren’t as pegged as I once thought. The US generally prospered with a weaker dollar. As the new safe haven, Japan’s strong currency might provide some problems for the countries trade export. We might see a long dollar short Yen as a good currency trade. How do we do this? I spoke of a trade last week with the Short FXY Calls. Another way to trade this is to sell short the actual ETF. But that doesn’t go along with the theme of this newsletter. The recent high of FXY is 114.61. The January 114 Calls are 1.10 – 1.35. There isn’t a lot of premium for a security that can move so much. When volatility (VEGA) is low, the better trade is to buy the option.

Eurodollar March Futures Contract [Image 5]

Crude continues to decline as the world economy slows. At some point, the demand will increase from here. One thing that is interesting is the weakness in the commodity while the DJ Oil and Gas Index (IEO or DIG) has maintained some price relative strength. If crude continues to decline, another trade idea is to pair off the USO and IEO by selling USO Calls and IEO Puts. Light Crude Oil is showing oversold tendencies, but is in a definite downtrend as indicated by the 8 day EMA well below the 21 day EMA. The RSI and Slow Stochastics are also indicating that there is room for further weakness before becoming oversold.

Light Crude January Contract [Image 6]

Finally, the other commodity I follow closely is Gold. Gold declined from its open but still maintained to gain about 3 points today. As the chart below shows, the commodity has found resistance at its daily 200 SMA. After such a strong and sudden move, I expect to see a little more profit taking down to the 89 day SMA. However, a break and close above the 200 day SMA might spur a buy signal which would allow for a run up to the all time highs near 1000. The recent low near 830 held the previous resistance from 11/24. That means that to go lower, gold must break the price support established from the high (old resistance becomes new support) and then travel down to the 89 or 50 day SMA at 789. I might short a break below the recent support at 830 from Friday with a price target at the 89 day SMA and a stop at a close back above 830 or today’s low of 840. Have a safe and happy holiday.

Gold January Contract [Image 7]

New Option Plays

Monday Night: No New Plays

Play Editor's Note: No New Plays Tonight.


In Play Updates and Reviews

Two Plays Triggered, Five Plays Closed


CALL Play Updates

Alcon Inc - ACL - close: 86.44 change: -1.63 stop: varies

Our new call play on ACL has been triggered. Shares dipped to $84.38 intraday. We had a suggested entry point at $85.25 and a stop loss at $83.45. Traders decided to buy the dip near ACL's 40-dma and the late day bounce looks like a new bullish entry point.

There is potential resistance at the 50-dma and at the $100.00 level. The Point & Figure chart is bullish with a $110 target. Our target is $99.00.

Chart:
ACL

Picked on December 22 at $ 85.25 *triggered     
Change since picked:      + 1.19
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       840 thousand 


Caterpillar - CAT - close: 41.78 change: -0.91 stop: 39.95

CAT made headlines today. It looks like the company is slashing salaries almost across the board and instituting a hiring freeze to deal with these tough economic times. The news didn't help the stock much. Shares dipped to $40.82 before bouncing late in the day. We're starting to see a little bearish curve to some of the short-term momentum indicators. I suggest readers wait for a new move over $43.50 or looks for a clean bounce from the $40.00 level before initiating positions.

Our target is $49.50. The Point & Figure chart is bullish with a $58 target.

Picked on December 16 at $ 43.80
Change since picked:      - 2.02
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      13.4 million  


Express Scripts - ESRX - close: 59.89 change: -1.46 stop: 57.95

ESRX temporarily dipped under its simple 10-dma this afternoon. The stock managed to recover but its failure to build on Friday's bounce is worrisome. Readers could buy this afternoon bounce but you may want to use a stop loss closer to $58.50 near today's low. The stock is still struggling with resistance near $62.00. Our target is $64.00.

Picked on December 06 at $ 59.36 /gap higher entry 
Change since picked:      + 0.53 /originally listed at $58.58
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       3.1 million  


Goldman Sachs - GS - close: 77.00 change: -3.73 stop: 77.95

GS pulled back from the $80 level to trade just under $75.00 and bounce sharply. This late day rebound actually looks like a tempting entry point for aggressive traders. We are going to wait and stick to our plan, which is to buy calls on a breakout above the simple 50-dma. Right now our entry point is $83.00. If triggered we will have two targets. Our first target is 89.85. Our second target will be $97.50. FYI: The P&F chart is bullish with a $112 target.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           03/18/09 (unconfirmed)
Average Daily Volume =      25.7 million  


Perini Corp. - PCR - close: 20.98 change: -0.96 stop: 19.95

PCR sank toward support and traders bought the dip near $20.00. The late day bounce looks like a new entry point to get long the stock although it is worth noting that the close under the 10-dma and 100-dma is bearish.

PCR could be a short squeeze candidate. The most recent data listed short interest at more than 11% of the small 27.7 million-share float. The P&F chart is bullish with a $36 target. We have two targets. Our first target is $24.90. Our second target is $27.00.

Picked on December 16 at $ 22.36
Change since picked:      - 1.38
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       1.0 million  


Research In Motion - RIMM - close: 41.59 change: -1.24 stop: 37.99

We did not have to wait very long for RIMM to pull back and hit our entry point. Over the weekend we added RIMM with a trigger to buy calls at $41.50. The stock hit a low of $40.81 before bouncing. Now that the play is open we have two targets. Our first target is $44.95. Our second target is $48.00. FYI: The P&F chart is bullish with a $56 target.

Chart:
RIMM

Picked on December 22 at $ 41.50
Change since picked:      + 0.09
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =        25 million  


Sunoco Inc - SUN - close: 41.94 change: -0.36 stop: 39.45

SUN spent most of the session trading sideways in spite of another sharp decline for crude oil futures. We are suggesting call positions here but readers probably have a good chance to buy a dip in the $40.50-40.00 range if you wait. The P&F chart is very bullish with a $54 target. Our target is $47.00.

Picked on December 20 at $ 42.30
Change since picked:      - 0.36
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       4.2 million  


PUT Play Updates

*Currently we do not have any put play updates*


Strangle & Spread Play Updates

*Currently we do not have any Strangle or Spread play updates*


CLOSED BULLISH PLAYS

Amazon.com - AMZN - close: 49.84 change: -1.72 stop: 49.45

The retail sector was hit hard today with a 3.8% drop in the RLX index. AMZN, an online retailer, followed suit with a 3.2% decline. Shares of AMZN slipped to an intraday low of $48.47 before traders decided to buy the dip near its 50-dma. The stock hit our stop loss at $49.45 closing the play.

Chart:
AMZN

Picked on December 13 at $ 51.25
Change since picked:      - 1.41
Earnings Date           01/28/09 (unconfirmed)
Average Daily Volume =      12.9 million  


FTSE/Xinhau China Index - FXI - close: 28.86 chg: -1.48 stop: 29.45

The Hong Kong Hang Seng index was down sharply on Monday following the bearish action on Friday. The Shanghai index also traded lower. This put pressure on shares of FXI and the ETF gapped open lower at $29.66 and then fell past the bottom edge of its recent trading range. FXI hit our stop loss at $29.45. We had been suggesting readers take profits for several days now but we were also expecting a spike toward the 100-dma and our secondary target at $32.50. Keep an eye on FXI to see if shares find support above the 50-dma.

Chart:
FXI

Picked on December 03 at $ 26.27 /gap down entry point
Change since picked:      + 2.59 /originally listed at $27.25
Earnings Date           00/00/00
Average Daily Volume =      51.2 million  


Google Inc. - GOOG - close: 297.11 change: -13.06 stop: 299.90

Monday turned out to be a bad day for GOOG. The stock broke down under round-number, psychological support at the $300 level and actually set a new two-week low. Today's action combined with last week's failure near the 50-dma is definitely ominous. Both our directional call play and our naked put play have been stopped out. If you sold the put short, when GOOG hit our stop you should have bought it back and closed the position.

Chart:
GOOG

Picked on December 13 at $315.76
Change since picked:      -18.65 /stopped out @ 299.90
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       7.2 million  


iShares Dow Jones US Real Estate - IYR - cls: 36.47 chg: -0.78 stop: 34.95

Monday proved to be another volatile session for the IYR, the REIT ETF. The security sank toward support near $35.00, dipped under it late this afternoon and hit $34.68, only to bounce back very sharply at the end of the day. Our stop loss was hit at $34.95 closing this play. More nimble traders may want to buy this late day bounce with a stop under today's low. We're going to wait and see if there is any follow through to the upside.

Chart:
IYR

Picked on December 20 at $ 37.25
Change since picked:      - 0.78 /stopped out @ 34.95
Earnings Date           00/00/00
Average Daily Volume =        49 million  


Texas Industries - TXI - close: 32.45 change: -2.42 stop: 32.45

TXi showed relative weakness. The stock broke down under its three-week trendline of higher lows and sank past the bottom edge of its two-week trading range. The stock hit our stop loss at $32.45 and closed with a 6.9% loss.

I would keep an eye on TXI since it remains a candidate for a short squeeze. The most recent data listed short interest at more than 20% of the very small 21 million-share float.

Chart:
TXI

Picked on December 13 at $ 34.43
Change since picked:      + 0.44
Earnings Date           01/08/09 (unconfirmed)
Average Daily Volume =       745 thousand 


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