The Non-Farm Payrolls for June took a severely negative turn lower with a loss of 467,000 jobs. The consensus estimates were for -355,000 jobs and there were whisper numbers as low as -225,000 jobs. The accelerating losses suggest the recession may not be over as many hoped. Goods producing industries lost -223,000 jobs while service-producing industries lost -192,000 jobs. Even government payrolls fell by -52,000 jobs. The separate Household Employment report showed self employed jobs fell by 374,000 in June. Average hours worked declined by -0.3% and weekly wages paid for those hours declined.
The unemployment rate rose to 9.5% and a 26-year high and analysts believe it will get worse before it gets better. Most analysts including the White House believe the unemployment rate will rise over 10% by early 2010. Remember, the unemployment rate is calculated only from those who are still on the unemployment rolls and receiving unemployment checks. The real unemployment, which includes those who have exhausted their unemployment benefits and have fallen off the rolls now exceeds 16.5%. This counts workers who are unemployed and looking for work, those who have given up looking for work and those underemployed. Underemployed means those who have taken temporary jobs to keep food on the table while they continue to look for work in their field. The number of unemployed workers who have been out of work longer than six months is now 29%, up from 27% in May.
Given the number of workers currently unemployed it will take years to produce enough jobs to put them all back to work. That number is something around 22.6 million workers if you include all classes. Actually Bill Gross puts this number somewhere around 35 million workers. Obviously quite a few are simply slackers that will never be gainfully employed on a routine basis but 15 million or so want to go back to work. It will take a long time for that to happen at the pre recession job creation rate of adding 250,000 jobs per month. Even if we had a strong rebound and created 500,000 jobs per month for a year that is only six million new jobs. We will never get to zero unemployment and something in the 4.5% range is normally seen as an ideal target. To reach that level about 12 million workers would have to find permanent work. The U.S. is a consumer driven economy. Obviously it could be several years before that happens and that means those 10 million workers are going to be spending a lot less and the economy is not going to be growing very fast.
Non-Farm Payrolls Chart
The only other report of note on Friday was the Factory Orders for May. Orders rose +1.2% and well over the consensus for +0.8 and the prior month at +0.7%. This gain along with the gains in the regional manufacturing reports and the national ISM last week suggest the economy is rebounding. However, the job loss numbers suggest the rebound will be slow and painful. The June national ISM on Wednesday rose to 44.8 from 42.8 and the sixth month of gains but it is still in contraction territory.
National ISM Chart
The Factory orders chart for the last year paints an encouraging picture of the rebound in the economy. However, when viewed against the larger 15-year timeframe the amount of recovery is barely visible. The larger chart shows the magnitude of orders lost and just how hard it is going to be to return to the level of productivity and consumption we experienced several years ago. We have already more than doubled the drop in orders we saw in the 2001 recession.
Economy.com Factory Orders Chart - 12 months
Economy.com Factory Orders Chart - 15 years
For the coming week there is very little on the schedule. The ISM Services on Monday will be of interest but the numbers are usually ignored. I added the note auctions to the calendar because these are going to be the eventual straw that breaks the markets back. I have been warning for three months that odds were increasing for an auction failure. The government is trying to sell $2 trillion in debt and eventually it will run out of buyers. That is not expected to happen this week but we need to keep an eye on the 10-30 year auctions for sings of decreasing demand. $73 billion in notes will be offered. They will also sell $63 billion in 3-6 month bills.
The Treasury is selling the 10-30 year notes next week under what is called a "reopening" of a prior series. Basically if the original series was sold in January 2009 with a due date of January 2019 for a ten-year note then a reopening of that series today produces a 9.5-year note with a 10-year label. That shorter duration note produces a slightly higher yield for investors and is an added incentive to bid. Eventually the Treasury will run out of games to play to entice buyers and the auctions will fail. That will be an extremely serious event for the equity market.
However, in a strange twist of fate the sharp increase in job losses will actually produce more bidders this week on fears that the recession will linger. The auction will provide a safe haven for those who fear a double dip recession or a recession that does not recover until 2010. If the government could continue producing negative economic data they would have no trouble selling the debt. Conspiracy theorists beware.
Crude prices imploded on the higher than expected job losses. Crude prices fell -2.58 to close at $66.70. This is a major reversal from the $73.38 high on Monday. There are so many cross currents in the energy sector today that predicting the price of oil is best left to chimps with darts. On Wednesday we saw crude inventories fall by another 3.7 million barrels. This should have been good for a monster spike when reported in conjunction with more outages in Nigeria and rising tensions between Russia and Georgia. Instead there was an opening spike and sharp sell off that continued into Thursday.
Since the May 1st high for oil inventories at 375.3 million barrels we have seen a sharp decline in all but one week to 350.2 million barrels this week. On the surface that is bullish but the demand numbers are killing the price. Refinery production is higher than the demand rate for distillates. That demand for distillates including diesel is at the lowest level in over six years. While oil inventories are plunging the distillate inventories have risen ten of the last eleven weeks and are currently 28.4% over last years July 4th levels.
To put these facts in perspective summer gasoline demand appears to have peaked, which is normal just before the July 4th holiday. Diesel demand is falling and that suggests lower shipment volume for goods shipped either by truck or by train. Lower goods shipments means lower consumption and signs that the recession may not be over. We heard from the railroads a couple weeks ago that shipments had picked up slightly but there has been no follow through on those reports.
Add in the sharp drop in employment and it suggests that demand will continue to slow. This means that oil prices are going to be more volatile until signs reappear of demand increases. One analyst was asked if he thought oil prices would hit $55 or $85 before year end and he said "yes" that he expected both to be hit. If we get any additional signals that the economy is not improving as expected then oil prices are likely to continue lower.
However, Baker Hughes reported another 11 rigs in the USA were put back into service last week. That is the third consecutive week for gains totaling 52 rigs put back to work. Considering the active rig count had fallen from 1,921 this time last year to 876 three weeks ago those 52 rigs are a drop in the bucket but at least a sign that activity is picking up and the decline may have bottomed. Unfortunately most of those rigs will probably be drilling for natural gas and gas prices have fallen about 21% over the last three weeks. Gas was trading for as much as $4.57 on June 16th and closed Friday at $3.61. That increase in the rig count was probably stimulated by the rise in gas prices from the $3.52 low back in May and now the price of gas has returned to those lows in a very short time. However, we know that the major producers are currently constrained and are producing well below their maximum capacity in order to maintain prices. With another 600,000+ workers filing for unemployment every week they may need to close those valves a little tighter to keep prices in range.
Only a year ago this month crude prices hit $147 per barrel. Unemployment was 5.6%. Over the last July 4th holiday U.S. gasoline prices were well over $4 per barrel. I remember paying $4.93 per gallon in California in late June. Consumers should celebrate these low prices this July 4th because they are not likely to return in our lifetime once the recession ends and the demand cycle returns. The IEA said last week that global demand was expected to exceed 89 mbpd by 2014 compared to 85.8 mbpd in 2008. This is a challenge since most geologists believe 87 mbpd is going to be the world's maximum production capacity. The IEA also said OPEC capacity will grow by 1.7 mbpd by 2014. That sounds reassuring except that that was a downgrade from their prior forecast for a gain of 3.2 mbpd. The lower outlook is based on reduced cash flow available for exploration and maintenance, geopolitical turmoil, increased resource nationalism and offsets for depletion.
When oil prices decline the OPEC producers have less money to spend on exploration and maintenance. They have huge bloated social budgets that are primarily funded by oil sales. When there are insufficient funds from sales the side that gets cut is exploration. Cutting social programs creates social unrest and monarchies and dictatorships will do anything to keep unrest low and remain in power. That usually means allowing production facilities to decline for lack of maintenance and infrastructure projects like pipelines and pumping stations are cancelled. With no way to get oil to market the amount of drilling declines pushing new production farther into the future. Meanwhile existing oil wells continue to deplete and production is slowing. This is all going to come back to bite consumers in the wallet once demand increases. Peak oil did not go away and will be back with an even greater ferocity very soon.
Natural Gas Chart
In stock news Oracle (Nasdaq:ORCL) told labor unions that it would layoff 850-1000 workers in Europe. These are the first job cuts for Oracle since the recession started. That is only 1% of its global staff of nearly 86,000 employees. Oracle recently reported earnings that showed revenue declined over the last quarter.
Airlines continue to decline with United (Nasdaq:UAUA) closing at $3.31 and very close to a 52-week low. The falling oil prices played havoc with their fuel hedges and cost nearly all the carriers tens of millions of dollars when they had to buy them back for a loss. Then passenger traffic died, especially the lucrative business traffic. Airlines continued to cut planes and routes in an effort to reduce capacity. Then fuel prices increased sharply again as passenger traffic fell even further. Additional charges for everything from baggage to peanuts and drinks temporarily filled in some of the revenue gaps. Now with two airlines considering charging for bathroom admission this shows you just how desperate the airlines are to raise money.
Delta (Nyse:DAL) is expected to post another year of substantially negative cash flow for 2009 according to a recent report. All the airlines are burning cash and stockpiles are dwindling. US Airways is down to $2.1 billion, American $3.3 billion, United $2.5 billion and Delta $5 billion. United sold $175 million in secured 3-year notes last week. The security was spare parts. That does not give you a good feeling about United's health if they had to borrow money on their parts inventory. The notes had a face rate of 12.75% but were sold at a discount that gave a 17% yield. The high yield is a representation of credit quality.
S&P analyst Phil Baggaley says the stocks are pricing in the potential of another round of bankruptcies. American (Nyse:AMR) and United are expected to lose $1 billion each in 2009 and that assumes oil prices remain flat. When the next oil price cycle pushes prices back over $75 these carriers are going to be bleeding cash at an even faster rate. Airlines are fighting things like swine flu that cost them a month of traffic losses before the headlines disappeared.
United Airlines Chart
The states are not doing much better. California began paying its bills this week with IOUs. California has a $26.3 billion budget deficit. The "checks" are green but they can't be cashed until October. More than 28,000 IOUs worth $54 million were printed last week. Most of them were to people expecting tax refunds. The checks are dated Oct-2nd but some banks are cashing them early. BAC, WFC and JPM Chase have announced they will cash them now for existing customers. The IOUs have a 3.75% interest rate and anyone cashing them now will lose the interest and the banks will benefit since they will hold the checks until Oct 2nd before tendering them to the state.
In the "you can't make this stuff up" category Senate Democrats unveiled a bill on Thursday that fines anyone who does not have health insurance more than $1,000 a year per person. A family of four would pay over $4,000. Democrats expect to raise $36 billion a year from this plan. The fines would be set at a minimum of one half the cost of basic medical coverage. Kaiser Insurance said in 2008 employer paid coverage for a family averaged $12,680 a year for a family of four and $4,704 for an individual. The fines would be collected through the IRS income tax system. Unbelievable.
Just as unbelievable was the sudden resignation of Alaska governor Sarah Palin on Friday. No reason was given and she is turning over the reigns to the Lt Governor on July 26th. Palin had been expected to run for President in 2012 but this poses even more questions for the media to pick apart. Far as I can tell there was no mysterious trip to Argentina in her recent past. This story will be all over the news for weeks as the press tries to find out why she is dumping her job half way through her first term.
While in the political surprise category Colin Powell, who was credited with the last minute blessing of the Obama candidacy and guaranteeing his win, turned against President Obama in an interview on Friday. Powell said the ambitious Obama initiatives would create too much government and increase the Federal debt to a point where it could not be paid. Let's see, six months ago Powell thought President Obama was an important transitional figure and now he believes the president has overstepped his mandate and is going to bankrupt the country. Sounds like politics as usual.
One more YCMTSU note. In Britain the rage now is to hold a "swine flu" party. The theory is to have a party where people who are well mingle with people who have swine flue in an effort to catch the flu. The reason given is to catch the flu while it is less lethal and build up immunity to it before it mutates into a more lethal form. The current version of the swine flu is a new strain never before seen and humans don't have any natural immunity to it like we have built up from centuries of other types of flu strains. The mortality on the current strain of swine flu is very low and thus the incentive by the Brits to catch it now. I may be laughing at them now but if this new and improved version comes around next year with a 50% mortality rate the Brits will have the last laugh.
The FDIC wanted to take Friday off as well so they closed seven more banks on Thursday bringing the total for the year to 52. That is more than twice the 25 closed in 2008 and 16 times the total of 3 closed in 2007. The FDIC said the cost to the fund for all seven banks would total $314 million. Five of the banks were in Illinois, one in Texas and one in Oregon. Illinois is having a hard week. It was also reported that the number of confirmed and suspected swine flu cases in Illinois rose this week by 291 to 3,166. Time for a party!
Starting next week earnings will set the tone for the markets. Dow component Alcoa (Nyse:AA) will kick off the earnings cycle when it reports on Wednesday. So far we have seen the markets rebound nearly 35% from the March lows on hopes for a rebound in earnings and the economy. Traders are going to be watching the Q2 earnings to see if their hopes were justified.
It will be interesting to see how investors react to companies that post "less bad" earnings rather than something that shows definite improvement. Earnings are supposed to come in at -35.5% below Q2-2008 according to S&P. All 10 major sectors are expected to show declines. The energy sector will be the worst simply because the comparisons are so bad. Oil was over $125 in Q2-2008 and it was $65 in Q2-2009. That projects earnings in the energy sector to fall by -78.9%.
In Q1 companies got by with claims of drastic cost cutting and restructuring charges to give themselves a more positive outlook. Now three months later investors will want to see proof those draconian moves paid off with some better earnings. On July 14th Goldman Sachs (Nyse:GS) will kick off the financial reporting cycle. The financials are widely expected to post better than expected earnings because of the end of the mark-to-market rule and because of their sales of some high-risk assets. The banks are also going to disclose if they paid off the TARP loans and escaped the government bailout TRAP. They will also disclose how much it cost them to buy back their warrants and the dividends they paid on the loans.
The markets tanked hard on Thursday but we should not apply too much weight to the event. The volume on Thursday was the lowest day of the quarter and the rest of the week was not any better. Stops were hit on the knee jerk reaction to the jobs data and unlike normal days there was nobody around to reload those positions and buy the dip.
Market Internals Table
The Dow collapsed back to support at 8300 after coming very close to 8600 on Wednesday's spike. The Dow was handicapped by big losses in IBM (Nyse:IBM), Chevron (Nyse:CVX), Exxon (Nyse:XOM), United Technology (Nyse:UTX)and Travelers (Nyse:TRV). Remember, it was an extremely low volume day and there simply were no traders to buy the dip.
The Dow clung to initial support at 8300 until the final minutes of trading. Odds are good that we will see strong support at 8250 tested next week. This is a critical level that really needs to hold or the bears will begin to pile on for a push down to about 7750.
The S&P-500 fell to just over psychological support at 900 and held there until the close when the sellers overwhelmed remaining buyers to push it down to close at 897. The S&P has strong support at 880 and I expect that to be tested. The head and shoulders pattern on the S&P is so clear I wonder if a lot of traders may try to fade it instead of load up the truck with shorts. The H&S is not perfect with the right shoulder slightly weaker but it should be close enough for most traders to wait on the sidelines to see if it breaks to the downside. As long as the S&P holds at 880 the bulls will likely retain their confidence. A break under 880 could get ugly very fast.
The Nasdaq lost only -41 points for the entire week despite the -49 point loss on Thursday. It has pulled back to the support of the 30-day average and the psychological 1800 level. There were only two stocks on the Nasdaq composite that gained over $1 on Thursday (PEET, MTXX) but there were quite a few that finished in positive territory. Many of them were chips. (LRCX, LLTC, NVLS, BRCM, ATML) The gains were not large but at least they were gains on a bad market day. This is overall positive for the Nasdaq when the chips can hold their gains. From Thursday's close at 1796 decent support is 1760 followed by 1675.
The broadest market index now called the Dow Total Stock Market Index (previously Wilshire 5000) fell back to 9200 with strong support at 9000. This index eliminates the stock weighting problems of the Dow. Unfortunately it suggests there is some pain ahead as it pulls back to strong support at 9000.
Total Market Index Chart
Last week I warned the path of least resistance was down and given the bad news I was not surprised by the decline. We need to realize that the third quarter really begins next week. Volume for the last couple days has been almost nonexistent and the real trading won't begin until next week.
The problems to overcome will be the bond auctions and worries about weak bidding. While the market may worry about it I don't think it will be a problem once the smoke clears. The next biggest problem will be the start of earnings and a few lingering earnings warnings. There are bound to be a few who waited until the last minute to warn. I actually expected a couple to appear after the close on Thursday to try and sneak in when nobody was watching. It did not happen so maybe the worst warnings are behind us.
One analyst said on Friday the problem for the market over the next couple weeks was going to be the "gap trade." I immediately started looking at the charts for the unfilled gap but that is not what he was talking about. He said it was the gap between the reality of earnings and the expectations of traders. I thought that was a perfect explanation of how the earnings cycle will be interpreted. Traders are all "hoped up" with nowhere to go if those expectations are not met.
Also weighing on traders is the arrival of Death Valley days for tech stocks. I mentioned this on Tuesday that July begins the worst four months for tech stocks in a normal year. We have yet to see whether DVD will appear in 2009 after the crushing first quarter. I still believe the path of least resistance is down and the indexes closed either right on or just above strong support so either direction is possible next week. We have not seen any influx of retirement money yet so there is still the potential for a short-term blip.
Happy Independence Day one and all! I've just recuperated from a prolonged cold here on the chilly Monterey Coast but was feeling so good (finally) that I celebrate by updating my column. Hold for fireworks tonight!
The title of my last Stock Index Wrap two weeks ago (Saturday, 6/20) was "Losing Momentum". Loss of momentum is of course often followed by a breakdown in the trend. I wouldn't yet call recent weakness a trend reversal. To suggest a downside reversal in the intermediate trend, the S&P 500 (SPX) would have to pierce the 880 area, where a line of lows formed during May.
The Nasdaq Composite (COMP) is a little different in terms of its pattern as COMP would signal a bearish warning on a drop below the recent 1754 low and suggest a downside (trend) reversal if the index pierced 1675, at the line of its May lows.
Basically the technical 'rule' is that a downside trend reversal is 'signaled' or suggested when a key prior low (made before the top end of an uptrend) is penetrated on a closing basis. The one-day rule applies here as there should be a couple of consecutive closes below that prior low.
The break in COMP and NDX occurred on overnight downside price gaps, which often is the start of a greater decline to follow. There are possible Head and Shoulder Top patterns also apparent in the S&P and Dow charts. The Dow was the most 'clear' in that regards and the Dow tends often to trade more technically, so that section is where I've highlighted the potential downside implied by an H&S top.
Aspects becoming less bearish include: 1.) a healthy pullback in the Relative Strength Index (RSI) indicator. Although not into oversold territory by any means, an 'overdue' and balancing type correction appears underway. 2.) Traders have also become somewhat less bullish. Bullish expectations seemed too high before and we are seeing I think a more realistic view of the economy we're IN, not the one we hope to BE in.
Showing the influence of changeable psychology is that although the expectations have been that unemployment will keep rising as this is a well-known LAGGING indicator, traders and money mangers still get spooked with the actual event. Its one thing to intellectually 'know' the course of these things historically and another to not get spooked because of the 'facts' of it. Everyone by now must know someone who's gotten laid off, etc.
CHART OF THE WEEK: S&P 100 (OEX) DAILY
I also wrote a 'Trader's Corner' article on Thursday (7/2) that featured the following chart of the S&P 100 (OEX), which I've left unchanged in terms of how I had highlighted a broad rectangle formation with potential upside OR downside objectives, depending on whether there's a decisive upside OR downside penetration of the upper or lower lines of this 'box'.
A rectangle is just a trading range. When back and forth rallies and declines occur that form multiple tops and bottoms in the same areas or approximate same areas, drawing two horizontal lines form a rectangle pattern. We draw 2 vertical lines to close off the rectangular pattern. I also assume that when a rally PRECEDED the rectangle formation the pattern is a rectangle top. The trade benefit however is to see WHICH way a breakout goes, above or below the lines.
[Any recent Trader's Corner article can be viewed and reviewed on the OIN web site by clicking the 'Trader's Corner' index tab at the top of any Option Investor.com web page.]
My first chart should be clear enough without much more than the explanation that the price range between the highs and lows of the rectangle is ADDED to the top or SUBTRACTED from the bottom to give a 'minimum' target for an extension of that move. Such 'minimum' objectives provide one idea of where the index or stock could get to; MORE than that is of course also possible.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is neutral in its pattern until the sideways trading range is resolved. My expectation has been that resolution will come to the upside, but this is more of a subjective hunch. In reality, on a breakout above or below the highlighted prior price range is what is predictive. The sideways range could of course go on. There is a tendency for the longer a sideways 'indecision' trend goes on, the stronger should be a next breakout (up or down) move.
I've highlighted support in the 880 area, then down at the prior 827 low. It will be interesting to watch also to see if the 200-day moving average is penetrated. Oftentimes, the first upside move above a long-falling 200-day average doesn't last long.
Resistance is apparent first in the 930 area although I didn't arrow it on the chart. Key technical resistance is around 950, with fairly major resistance expected in the 1000 area.
The 13-day RSI seen above is showing declining momentum and I'm watching to see if this indicator gets to an oversold reading again. This is a likely scenario as the market tends to go eventually from extreme to extreme. Bullish sentiment seems likely to fall further, meaning of course that the inverse is happening, bearishness increases. At this juncture I'm waiting for an 'oversold sentiment' reading before anticipating a next bottom.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index pattern is in the same 'neutral' sideways pattern as the S&P 500. You can see my highlight below of the well-defined OEX uptrend channel that OEX was in for some time.
Extending those 'broken' trendlines out into the future was telling; the first rally after the trendline break stopped cold at resistance implied by the prior support trendline and I've noted continued resistance along this line which is also in the area of prior highs around 440/441. (I've also projected an upper resistance at the extended upper line which intersects around 470 currently.)
Support is projected at the prior lows around 412, and then down in the 383-387 area.
Looking again at bullish sentiment on the OEX chart above provides a closer up view as well as adds a 5-day moving average. I'm really going to have to migrate this same (sentiment) indicator over to the Nas Composite, as displaying it always on the S&P charts suggests that this indicator somehow pertains ONLY to the S&P or the NYSE market (since so many S&P stocks trade there versus the Nasdaq).
It's the one-day spikes into 'oversold' territory that is key to this indicator as suggesting a bottom is near. Once that happens, assuming some bottoming chart action is ALSO seen, upside reversals tend to follow within 1 to 5 trading days.
DOW 30 (INDU) AVERAGE; DAILY CHART:
I said 2 weeks back that "The Dow 30 (INDU) looks like it will continue its recent correction and head lower, such as back to a retest of support around 8400-8370 or down to prior lows around 8215." Maybe I should stretch out my comments to every 2 weeks! The tip off that the INDU rally was not going to have 'legs' was the failure to pierce the 21-day average; sure enough this was followed by a break below the longer-term 50 and 200-day moving averages.
Resistance is at 8600, then up around 8850. A key technical support is at the cluster of prior lows at 8215. Below the 8200/8215 area, there's nothing but 'air' between 8200 and 7800 in terms of prior lows to key off from and bring in possible buyers.
The pattern in the Dow and which is somewhat more clearly defined than on the S&P charts, is that of a possible Head & Shoulder's Top, with a 'neckline' at 8215. Based on this pattern and assuming there is a break of 8215, an objective implied by the H&S top is for an eventual drop to the 7550 area. If there's a steep fall like that bearish sentiment will build up and 'set up' the next rally so to speak.
As could be anticipated with the lagging INDU, the average looks like it may get oversold first or the most, in terms of the 13-day RSI.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart looks bearish in that the break of its well-defined up trendline in late-June set up this same line as (per one Street of Dreams mentor of mine) the 'kiss of death trendline'. Meaning, prices come back up TO that line but can't get back above it. At some point there's a sharp break from what is now a stubborn line of resistance. Moreover, with the rally back close to the prior high, we're looking at an approximate double top as well.
The double top idea gains more credence if the prior low at 1754 is pierced. Stay tuned on that. A break of the 1750 area could lead to a further fall to the 1670/1675 area.
Key overhead technical resistance is at 1880-1882. Major resistance comes in around the 2000 level. The further downside move that may have kicked off this past week comes after COMP completed a 50 percent retracement of the August '08 to March '09 decline. A 50% retracement isn't 'resistance' in the sense of a prior high, but a 50% retracement is significant as being a 'normal' recovery rally BEFORE the prior trend resumes again which in this case is down.
I also mentioned two weeks back that I wouldn't feel comfortable buying into a dip/correction unless the index got to or near an oversold reading again. The Composite RSI may be heading to such a low again before this correction runs its course.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) pattern repeats that of the Composite so I'll just go straight into support/resistance levels. I would note that a 'double top' pattern didn't form to the same close degree seen in COMP.
Key resistance is at the prior high in the 1515 area in NDX, with next resistance projected at 1550. Very near resistance can be assumed to lay at the top end of the recent overnight (downside) price gap at 1480.
Near support can be assumed at the prior low in the 1413 area. A Close below this prior low that's NOT reversed back to the upside the following day, suggests a next lower objective to the 1350 area in a retest of the line of prior lows.
It will be surprising to many if NDX pulls back as far as 1350-1300. I anticipate that such a pullback would bring in many willing buyers of the key big cap tech stocks. I've got some stocks in mind if NDX digs into buying interest in that zone; e.g., AAPL around 120 again.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) remains mixed to bearish in its pattern, reflecting of course the underlying NDX index.
Volume patterns and the On Balance Volume (OBV) indicator support a bearish chart. Thursday's sharp break came with above average daily volume in the Q's, supporting the idea of more weakness ahead as at least some of those long the stock get spooked further. Q2 earnings coming out ahead will be a sizable influence also.
Near QQQQ resistance: 36.8
Key next overhead resistance: 38.0
Near QQQQ support: 34.8
Next support: 33.1
First area of major support: 32.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart pattern, like the Nasdaq which it most closely tracks, has the same look of a possible second rally collapse. More so in RUT as the recent high was well shy of the first top seen in the 530 area, which wasn't the case in the Nasdaq.
Near RUT resistance is at 519/520, then at 532/535.
Near RUT support is at 489 as implied by the prior (down) swing low, extending down to 483, the area of the 200-day moving average. Next chart support comes in at 470 with next support below that seen another 20 points lower around 450.
GOOD TRADING SUCCESS!
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.
New Option Plays
The S&P 500 has yet to break support but a lot of individual stocks are breaking down. You could throw darts at a wall of stock symbols and come away with more bearish candidates than bullish ones. I'm adding several candidates but don't try to play them all. Pick which ones look the most appealing to you.
Autozone Inc. - AZO - close: 150.00 change: -2.76 stop: 155.25
Why We Like It:
BUY PUT AUG 150 AZO-TJ open interest= 339 current ask $6.10 BUY PUT AUG 145 AZO-TI open interest= 167 current ask $4.10 BUY PUT AUG 140 AZU-TH open interest= 280 current ask $2.70
Costco - COST - close: 44.64 change: -1.15 stop: 46.10
Why We Like It:
BUY PUT AUG 45.00 PRQ-TI open interest=2214 current ask $2.15 BUY PUT AUG 42.50 PRQ-TV open interest=1127 current ask $1.10 BUY PUT AUG 40.00 PRQ-TH open interest= 345 current ask .50
Freeport McMoran - FCX - close: 49.72 change: -0.85 stop: 53.01
Why We Like It:
BUY PUT AUG 50.00 FCX-TJ open interest=4460 current ask $4.90 BUY PUT AUG 45.00 FCX-TI open interest=4956 current ask $2.62 BUY PUT AUG 40.00 FCX-TH open interest=5315 current ask $1.22
MetLife Inc. - MET - close: 28.04 change: -1.72 stop: 30.35
Why We Like It:
BUY PUT AUG 30.00 MET-TF open interest= 485 current ask $3.50 BUY PUT AUG 27.00 MET-TH open interest= 294 current ask $1.95 BUY PUT AUG 25.00 MET-TE open interest=2186 current ask $1.20
NII Holdings - NIHD - close: 18.61 change: -0.98 stop: 20.10
Why We Like It:
BUY PUT AUG 20.00 QHQ-TD open interest= 601 current ask $2.50 BUY PUT AUG 17.50 QHQ-TW open interest= 137 current ask $1.25
Weyerhaeuser - WY - close: 29.51 change: -1.26 stop: 31.51
Why We Like It:
BUY PUT AUG 30.00 HYW-TC open interest= 97 current ask $2.50 BUY PUT AUG 28.00 HYW-TE open interest=193 current ask $1.55 BUY PUT AUG 25.00 HYW-TY open interest= 72 current ask .70
In Play Updates and Reviews
You may have noticed that the S&P 500 index appears to be building a bearish head-and-shoulders pattern. The neckline to this pattern is near the 880 support area. Should the S&P 500 breakdown under this neckline then the H&S pattern would forecast a drop toward the 810-800 zone, which comes close to the 50% retracement of its bounce from the March lows.
Should the S&P 500 break that neckline I would exit any bullish positions that don't get stopped out in the process. Traders may want to start planning now how they can take advantage of this bearish formation. An easy way to play it would be puts on the SPY or calls on the SDS (double short ETF).
Alcon Inc. - ACL - close: 116.03 change: -1.86 stop: 111.90
The action in the market on Thursday was bearish and ACL gave up its Wednesday gains. The stock tested support near $115.00 again. Upward momentum is slowing. Traders need to turn more defensive. I'm raising our stop loss to $113.45. More conservative traders might want to adjust their stop closer toward $115.00. Even though ACL held the $115.00 level I hesitate to open new bullish positions at this time. Our first target is $119.90. Our second target is $124.50.
Becton Dickinson - BDX - close: 69.05 change: -1.65 stop: 67.75
The early morning market weakness was enough to push BDX back under support at $70.00. The stock has also fallen back under its 10-dma and exponential 200-dma. My previous update cautioned readers to expect a dip into the $69-68 zone. Look for a bounce near its simple 200-dma in the $68.50-68.00 region as a new bullish entry point. I would keep a tight stop as the action last week looks like a bearish reversal, especially on the weekly chart.
Our first target to take profits is $74.90. Our second target is $79.00. Currently the Point & Figure chart is bullish and forecasts an $86 target.
Bunge Limited - BG - close: 60.07 change: -1.52 stop: 58.49
Some of the momentum indicators in BG are suggesting the next move will be lower. More aggressive traders might want to consider bearish strategies if BG breaks the June lows near $57.50. The longer-term trend is still bullish and we're suggesting readers buy calls on a breakout over resistance at $62.55. If triggered at $62.55 our first target is $67.45. Our second target is $69.95. More aggressive traders may want to aim for the $74-75 zone but we plan to exit ahead of the late July earnings report.
Covance Inc. - CVD - close: 48.50 change: -0.28 stop: 45.90
CVD held up reasonably well. The stock lost 0.5% versus 2.9% in the S&P 500. Traders were quick to buy the dip this morning. What worries me is that the rebound was just enough to fill the gap from this morning. If CVD rolls over from here it could be bad news! Traders need to decide do you keep your stop loss under clearly defined support at $46.00 or do you adjust your stop for the bullish trend of higher lows. If you choose the trend of higher lows then you may want to raise your stop loss to $46.45ish or toward Thursday's low near $47.15. I am not suggesting new bullish positions at this time. Our first target is $52.40. Our second target is $57.00 but we may run out of time.
Quest Diagnostic - DGX - close: 55.00 chg: -1.73 stop: 53.40
DGX has erased three days of gains with Thursday's profit taking. We can expect a dip back toward broken resistance and what should be support near $54.00. Wait for a dip or a bounce near the $54.00 level before considering new call positions. Our first target to take profits is $58.25. Our second target is $59.90. More aggressive traders may want to aim higher. The Point & Figure chart has a new triple-top breakout buy signal with a $75 target. We do not want to hold over the late July earnings report.
Express Scripts - ESRX - close: 66.25 change: -1.82 stop: 63.75
ESRX also suffered some profit taking that erased several days of gains. I would expect a dip back toward the $65.00 level, which should be support. More conservative traders might want to consider a stop loss closer to $65.00. Our first target is $69.90. Our second target is $74.75.
Edwards Lifesciences - EW - close: 66.12 change: -0.92 stop: 64.85
EW was not immune to the market-wide sell-off. Shares traded sideways near $66 most of the session. I am suggesting readers buy calls near the $66.00 or $65.00 levels so this dip is an entry point. However, bear in mind that if the S&P 500 really begins to breakdown I do not expect EW to hold the current up trend. More conservative traders might want to raise their stop toward Thursday's low near $65.80.
The Point & Figure chart is bullish with an $84.00 target. Our target is $74.00. We will plan to exit ahead of the July 20th earnings report.
Euro Currency ETF - FXE - close: 140.00 chg: -1.44 stop: 137.90
The U.S. wasn't the only one with a disappointing jobs number and rising unemployment. The 16-nation euro zone also saw unemployment rise to new multi-year highs. The U.S. dollar managed a bounce and the euro dipped back to the $140 level. The larger trend is still bullish. I would use the dip as an entry point. Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.
Lorillard Inc. - LO - close: 67.95 change: -1.39 stop: 67.30
Hmm.... being a high-dividend yielding defensive stock did not save LO from the market's widespread weakness on Thursday. The inverse H&S pattern is still there. Really nimble traders might want to try buying a dip or bounce near $68.00. Officially our plan is to wait for a breakout over $70.00.
I'm suggesting readers buy calls at $70.10. Our first target is $74.00. Our second target is $76.75. FYI: The Point & Figure chart is very bullish and currently forecasts a $92 target.
BUY CALL AUG 70.00 LO-HN open interest=1182 current ask $2.30 BUY CALL AUG 75.00 LO-HO open interest= 313 current ask .85
Millicom Intl. - MICC - close: 56.54 change: -0.75 stop: 53.95 *new*
I am surprised that MICC did not show additional weakness. The European markets were hit pretty hard on Thursday. MICC gapped down and retested short-term support near $56.00 again. I expect that shares will continued to slip toward $55.00 and its rising 50-dma. I am raising the stop loss to $53.95. More aggressive traders may want to keep their stop loss under the June low of $52.93. Look for a bounce from $55.00 as a new entry point. Our first target is $59.95. Our second target is $64.50. We only have about two weeks before MICC's earnings so we may not reach the second target.
Agrium Inc. - AGU - close: 40.37 change: +0.96 stop: 41.65
The fertilizer-potash stocks were showing relative strength on Thursday. There were a couple of news items out suggesting there might be a bounce in demand and potentially some pricing strength for potash products. AGU dipped to $38.91 and bounced back over $40.00. The trend is still down and I'm sticking to the plan, which is to buy puts at $38.75. If triggered our target is $31.00.
FYI: Readers should note that AGU is trying a hostile takeover for CF Industries, which is itself trying a hostile takeover of Terra Industries.
Core Labs - CLB - close: 82.80 change: -1.73 stop: 88.30
Oil service stocks continue to look weak and shares of CLB actually gapped open lower at $83.16 on Thursday. We've adjusted our entry point. I could see a little oversold bounce toward $85-86 so more patient traders may want to wait for a bounce before opening new put positions. Not only does CLB has a bearish trend of lower highs and a breakdown under its trendline but I can also see a bearish head-and-shoulders pattern. Our first target is $80.25. Our second target is $76.00. FYI: The P&F chart is bearish and forecasts a $71 target.
BUY PUT JUL 85.00 CLB-SQ open interest=131 current ask $4.10 BUY PUT JUL 80.00 CLB-SP open interest=473 current ask $1.50 BUY PUT AUG 85.00 CLB-TQ open interest= 25 current ask $6.30 BUY PUT AUG 80.00 CLB-TP open interest= 26 current ask $3.80
Compass Minerals Intl. - CMP - cls: 55.40 change: +0.20 stop: 56.26
CMP has spent the last two and a half weeks consolidating sideways. On a very short-term basis the technical indicators are starting to turn positive. Longer-term the trend looks very negative. I am still waiting for a breakdown with a trigger to buy puts at $52.25. Our first target is $47.50. Our second target is $43.00.
L-3 Comm. - LLL - close: 65.75 change: -2.88 stop: 73.55
Target achieved! LLL really under performed the market on Friday with a 4.1% loss and a new three-month low at $65.51. Our first target to take profits was at $66.00. I'm not suggesting new positions at this time and we're lowering the stop loss to $70.25. Our second target is $61.00.
United Parcel Serv. - UPS - close: 50.85 change: +0.86 stop: 51.55 *new*
The Dow Jones Transportation index was a relative strength loser with a 3.6% loss. The Wednesday-Thursday action is a failed rally pattern. While the path of least resistance should be down the question is whether or not the transportation index will break support near 3000 and its 100-dma.
Meanwhile shares of UPS rolled over under resistance at their 200-dma. This looks like a new entry point to buy puts if you haven't done so yet. Please note the new stop at $51.55.
Our first target to take profits is $45.50. We do not want to hold over the late July earnings report.
Wynn Resorts - WYNN - close: 33.41 change: -1.98 stop: 37.65
The DJUSCA U.S. gambling index gave up 4.3% on Thursday putting an end to a rather dour week for the sector. Shares of WYNN led the way lower with a 5.5% decline. My only concern is potential support at the 100-dma near $31.25. Our first target is $30.25. Our second target is $26.00.
Deckers Outdoor - DECK - close: 68.29 change: -3.30 stop: 67.75
I believe it's time to abandon ship in DECK. Thursday's breakdown under $70.00 is bearish. At best the stock will probably retreat toward $66.50. At worst it has begun a new down trend or at least a larger correction. More nimble and aggressive traders could buy puts right here with a stop above Wednesday's high and a target near the rising 50-dma.
Murphy Oil - MUR - close: 51.70 change: -2.94 stop: 49.90
I am growing more concerned about the trend in oil and the oil stocks. While MUR still has support near $50.00 and its 100-dma I don't want to count on that support holding at this time. Exit early now so we can look for a different entry point later.
Symantec - SYMC - close: 15.70 change: +0.07 stop: 16.10
The NASDAQ posted a 2.6% loss on Thursday and yet SYMC managed a gain. It wasn't a very big gain but we don't want to see any relative strength in our put plays. The stock continues to have overhead resistance near $16.00 and its 50-dma. More aggressive traders may want to keep the play open. I'm suggesting an early exit so we can reapply our capital elsewhere.
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