PremierInvestor.net Newsletter Thursday 10-10-2002 section 1 of 2 Copyright ) 2002, All rights reserved. Redistribution in any form is strictly prohibited. The entire newsletter is best viewed in COURIER 10 for alignment ================================================================= In section one: Market Wrap: Key Reversal Day? Play-of-the-Day: Eyeing A Breakout Market Sentiment: Pop Goes the Market ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-10-02 High Low Volume Advance/Decline DJIA 7553.95 +247.68 7560.93 7197.49 2341 mln 1804/ 963 NASDAQ 1163.37 + 49.26 1165.83 1108.49 1833 mln 1998/1249 S&P 100 405.91 + 13.22 407.10 387.80 totals 3802/2212 S&P 500 803.92 + 27.16 806.51 768.63 RUS 2000 336.18 + 9.14 324.90 336.18 DJ TRANS 2096.77 + 83.75 2111.72 2008.31 VIX 46.29 - 3.03 50.48 46.17 VIXN 62.82 - 1.20 64.38 60.18 Put/Call Ratio 0.97 ************************************************************* =========== Market Wrap =========== Key Reversal Day? Traders woke to a full basket of news to be digested before planning their trades. Much of that news at first appeared to be positive. Television networks trumpeted the announcement that Iraq had invited the U.S. to inspect weapons sites. They did, but they accompanied that invitation with a taunt. Futures at first reacted positively, but a close reading of news articles left little reason to believe that weapons inspectors would soon be packing their bags. After Bush's Monday speech, the White House released satellite photographs of two former weapons sites, showing evidence that Iraq was rebuilding them. The Defense Intelligence Agency later released information about two more. The so-called invitation to visit those sites came accompanied by a challenge from Iraq's Minister of Military Industrialization, Abdel Tawab Mullah Huweish. Claiming that he's in charge of weapons programs, he denied developing weapons of mass destruction, but threatened, "If the Americans commit a new stupidity, we will teach them a lesson that they will not forget." The White House announced that Iraq didn't make those decisions. The U.N. did. Suddenly, the headline news didn't sound quite so positive, a conclusion reinforced by later news that U.S. and U.K. planes had fired on Iraqi planes in the no-flight zone, a common occurrence these days. To add to negative sentiment, newscasts later referred to an FBI alert that terrorists may have planned other U.S. attacks. Also, the French tanker that exploded in Yemen contained fragments of another ship, seeming to confirm one eyewitness report that a fishing vessel had drawn up to the tanker before the explosion. This lends credence to the theory that the explosion was a deliberate act of terrorism. Later in the day, the House passed a resolution authorizing an attack on Iraq, if needed. The Senate will begin deliberations this evening. More positive were YHOO's earnings and Aetna's pre-announcement. Futures steadied. Initial jobless claims were released. Those claims fell 40,000, to 384,000 versus the expected 405,000, and continuing claims fell, too. These numbers buoyed the markets, even though that surprise jobless claims number perhaps wasn't so great a surprise. Before the announcement, a Bloomberg television commentator mentioned that the first week of a quarter often surprised to the positive side. Bloomberg also mentioned that Q3 earnings growth expectations for U.S. companies had been lowered significantly to 5.5%, and that this lowered expectation would dampen enthusiasm for stocks. Also tempering the enthusiasm were the Merrill Lynch downgrade of GE, the news that the ECB and Bank of England had maintained their benchmark rates, and the news that the Nikkei had closed below 8500 for the first time since June 1983. Although the Nikkei closed down 99.72 points, at 8439.62, it had briefly moved below 8200 and bounced from that area. Little did traders know that our markets would stage a similar rebound. Early on, it looked as if the big C-day (capitulation) had finally arrived. Sellers drove the SPX below July lows of 775.68, to 768.63. The DJ Industrials dipped below 7200, and the COMPX came dangerously close to 1100, at 1108.49. The long- dreaded break of those S&P 500 July lows instead triggered a wave of buying that kept adv/dec lines positive all day. Perhaps coincident with a Fed announcement of a net infusion of $4.5 billion; a strong dip in gold; an announcement of share buy-backs by several companies, and a sell-the-rumor, buy-the-fact reaction to weak retail earnings, markets bounced. Hard. The DJ Industrials climbed more than 100 points in twenty minutes, and zoomed up 250 points within an hour. At its highest level, the Industrials were 363.50 points higher than the lowest, although the Industrials closed a bit off that high. Was this buying yet-another bear market rally or the start of a new trend? Recently beaten-down sectors proved to be some of the biggest gainers. Usually that hints at short covering, and the markets were certainly long overdue for a short-covering rally. Those previously beaten-down sectors included the banks, brokerages, semis, utilities, and telecom equipment companies. Even retailers gained, despite rather dismal outlooks for most. Gaming stocks, which had been doing well, were among the biggest losers. By the end of the day, some traders were talking about a key reversal day. What is that? A key reversal day comes at the end of a long trend, such as our current down trend. Markets move quickly to new lows (or highs, if it's a reversal of a move up), but then reverse from there. Technicians say big price ranges characterize key reversal days. Prices may move as much during the first two to four hours as they do during several days' worth of trading. Today's action met that test, although big price swings aren't so uncommon lately, and not uncommon at all in a bear market rally. An explosion of volume also usually accompanies a key reversal day. Volume was higher today than in recent days, with NYSE volume at 2.05 billion shares and the Nasdaq 1.83 billion shares. Although this was moderately heavy volume, I'm not sure I'd qualify it as an explosion of volume, so today's action might not have met that part of the test of a key reversal day. Let's see if the charts can clarify today's market action. Tonight, I'm going to use the OEX candlestick chart as a proxy for all the major indices, since their charts look similar. One reason for using the OEX chart rather than the SPX chart is that the OEX has not yet tested its July lows, unlike the other indices. On the chart, I've indicated another big-range day on October 1. That October 1 candle seemed to be forming the third candle in a morning-star pattern, another reversal pattern, yet the next day saw the sell-off continue. Like the October 1 candle, today's candle kept the OEX firmly within the descending channel that has been forming since mid-August. As bullish as today's action seemed, it hasn't yet proven that the overall trend has changed. While the RSI and stochastics appear to be showing bullish divergence (lower prices on the OEX while RSI and stochastics reach equal or higher lows), the RSI also appeared to be showing bullish divergence at the time of the October 1 bullish candle. In my opinion, the jury is still out on a trend reversal. I'll watch for a rollover or a (sustained) breakout when OEX hits that upper trend line again before I change my mind about the overall trend. OEX Daily Chart with RSI and Stochastics: Tomorrow may tell the tale. Potentially market-moving events include GE earnings, expected before the bell. In late September, GE affirmed that it expected to meet third-quarter earnings projections of $.40 per share. However, the company soon revealed that the proceeds of the sale of Global eXchange Service unit helped the company to meet those projections. Within days, several brokers cut their outlooks for GE. Merrill Lynch cited concerns over the finance and short-cycle plastics units, and they projected their outlook concerns into 2004, when turbine sales are expected to fall. On Wednesday, Scott Davis at Morgan Stanley joined the band and lowered 2003 earnings projections to $1.70 a share from $1.79. Like the Merrill Lynch broker, he mentioned short-cycle businesses, and noted problems in power and aerospace businesses and losses in GE Capital's portfolio. His use of the term "perfect storm" with relationship to this bellwether stock didn't bode well for the future outlook. Today, Merrill Lynch's analysis led them to downgrade GE to neutral from buy. Even with today's slight bounce, this stock has lost 5.40 points since late September alone. Tomorrow morning also sees the release of important economic numbers: PPI and retail sales (September numbers, released at 8:30 ET) and preliminary Michigan sentiment (October number, released at 9:45 ET). Forecasts are for PPI of 0.1% (previous 0.0%), core PPI of 0.1% (previous -0.1%), retail sales of -1.0% (previous 0.8%), retail sales ex-auto of 0.4% (previous 0.4%), and preliminary Michigan sentiment of 85.5 (previous 86.1). Since the PMA lockout of the dockworkers occurred on Sunday, September 29, those September retail sales figures will not reflect the majority of the damage inflicted by the lockout, but that doesn't mean the numbers will be rosy. Evidence of weakness mounted this week. In Monday's Market Wrap, Steven Price reminded us that that retailing giants repeatedly missed same-store sales numbers throughout the summer. Also on Monday, the August Consumer Credit report showed $4.2 billion in credit, rather than the expected $11 billion, perhaps another indication of a slowdown in consumer spending. Tuesday, Redbook reported that its chain store sales index fell 0.7% in September. Wednesday, retailer American Eagle warned for Q3 and Q4. Although AEOS mentioned the problems caused by the West Coast lockout, they also blamed the weak retail environment. This morning, CIBC downgraded the company. Also this morning, Talbots reduced its outlook for Q3 and Q4, citing a customer research study that indicated "a significant increase in customer concern regarding the turbulent economy and volatile stock market." Federated Stores lowered their outlook. BJ's Wholesale and Men's Wearhouse both guided below consensus. Wal-Mart met same-store sales figures, but those figures had been previously lowered. Costco topped earnings, but revenues were shy. Dillard's September same-store sales were down 5%, and Ann Taylor reported weak September sales. Gap's and Brown's Shoe Stores same-store sales were down. Kohl's same-store sales fell and they warned that earnings would be lower than expectation. Eddie Bauer same- store sales were down significantly. J.C. Penney's reported a 3.1% decrease in comparable-store sales. I list these numerous results to emphasize how troubled this sector remains. I could list more. The question remains whether this grim outlook has already been priced into the market. The daily RTH (Retail HOLding Company Depository Receipts) chart shows the damage done by the lockout, but it also points out the difficulties the retailers were experiencing even before the end of September. The double top predicted a minimum downside target of 70 in this index, a target that has now been exceeded. However, the chart also indicates a gap that occurred in the middle of the movement down from the second of the double tops. Such gaps are often called measuring gaps, because the movement that occurs after these gaps is often roughly equal to the movement before the gap. If that's true in the case of the RTH, this holder may have reached the target indicated by that measuring gap. RTH Daily Chart with RSI and (5)(3)(3) Stochastics: Continued warnings of lower same-store sales from retailers offer a gloomy prospect, but this week's earnings have already presented most of the gloomy picture. I wouldn't be surprised to see some rebound with upward resistance tested, but the retailers are going to have a hard time breaking through that overhead resistance. As Jim commented last week, the temporary resolution of the PMA lockout of the dockworkers doesn't undo the damage. First, the judge hasn't yet approved the use of Taft-Hartley. Second, even Taft-Hartley is a temporary resolution. Also, the backlog of containers still needs to be unloaded, and perishables may already be spoiled. The CEO of Mega-Toys was on television today, and commented that he didn't see a single container on the road when he drove into work this morning. The lockout occurred because of a slowdown, and nothing ensures that dockworkers won't stage another slowdown. Beyond these concerns lies another. We haven't yet had an all- out capitulation day. Why do our markets need a capitulation day? Because Art Cashin says so. Well, it's not just Art Cashin. On Bloomberg television this morning, one fund manager confirmed that he wasn't buying equities until the VIX moved strongly over 50. While I tend to trust my own studies and instincts, I've learned to pay attention to people who've survived several market turns. There's a more prosaic reason, too: until seasoned participants believe that all weak hands have been flushed out of the system, they will continue selling into rallies. While we may see a rally for a day or two, and I recognize that one of these rallies will be THE rally that changes the trend, I'm still waiting for the markets to convince me that they've begun a new trend. Linda Piazza lpiazza@OptionInvestor.com =============== Play-of-the-Day (New BULLISH tech play) =============== Verizon Communications - VZ - cls: 32.95 chg: +0.80 stop: 31.24 Company Description: Verizon Communications is one of the world's leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 135.1 million access line equivalents and 30.3 million Verizon Wireless customers. Verizon is also the largest directory publisher in the world. (source: company press release) Why We Like It: It's no secret that telecom and wireless stocks have taken a severe beating. The IXTCX combined telecom index and YLS.X wireless index (which have both been trending lower for two years) are trading near all-time lows. Things are looking pretty bleak, but the group is not without its stronger performers. Just take a look at QCOM, which has proven to be incredibly resilient. The stock has bounced around in the $25-$30 range since June, seemingly oblivious of the plummeting NASDAQ. Shares of VZ have shown similar strength in recent months. That's especially impressive, considering the difficulties that have plagued Baby Bells such as BLS and SBC. Verizon has aimed to protect itself from local market competition by introducing new sources of revenue such as long-distance service in New Jersey and New York. This strategy appears to be working. The company announced on October 1st that it was maintaining its earnings estimates for 2002, and shares have been trading with a bullish bias ever since. VZ is now threatening to slice through resistance in the $33.50- $34.00 region. Rather than waiting for shares to actually move above that area, we're initiating this paper trade at current levels. The stock's recent tendency to outperform the NASDAQ and double-top buy signal on the point-and-figure chart are indications that a breakout will occur in the near future. If our expectations prove to be incorrect, we've limited our downside risk with a relatively tight stop at $31.24, one cent under today's low. More aggressive traders could use a stop just below the 50-dma at $30.73. In terms of upside potential, we're looking for a rally to the $38-$39 region, under the 200-dma. This is also the location of the descending trendline formed by the pattern of lower highs on the daily chart. We'll set an official exit price if/when shares approach our objective. Picked on October 10th at $32.95 Results since picked: +0.00 Earnings Date 10/29/02 (confirmed) ================ Market Sentiment ================ Pop Goes the Market by Steven Price Guess that SPX intraday low was pretty significant. Wednesday's sell-off looked ominous, with the Dow, S&P 500 and OEX all breaking down through significant support levels. The one nagging indicator that gave an inkling of bullish sentiment was the fact that the SPX had stopped dead at its July 24 intraday low of 775. This morning, the sell-off continued, with the Dow reaching its downside-measuring objective, based on the head and shoulders formation it had formed over the last couple of months. That measuring objective was around 7180-7190 and this morning's bounce came right at 7197. And what a bounce. The Dow rallied 336 points from its bottom, to burst back above the 7500 mark, which had served as previous support. So now all must be well; children (or possibly investment bankers) will be singing in the streets, rays of sunshine will fall upon our shoulders and maybe we'll even get a little manna from heaven. NOT! We may in fact be forming the bottom for a continued rally, but until we break above 8000 in the Dow and 1223 in the Nasdaq Composite, there will still be a series of lower highs and lower lows. Of course, we can still play a bounce for a few hundred points to the long side, but I wouldn't be thinking triple digits for Yahoo just yet. In fact the NYSE saw 569 new lows, to only 18 new highs. The Nasdaq saw 413 new lows, with only 15 new highs. While it's awfully hard to achieve a new high after an 1800-point Dow sell- off, these numbers do demonstrate just how far we have to go. With bullish percentages falling into the low double and single digits, the risk has definitely been mounting for bears, as this can be seen as a sign of market compression. The NDX fell to 12%, the Dow to 8%, the SPX to 18% and the OEX to 17%. This reading is a measure of the number of stocks in an index currently giving point and figure buy signals, and anything under 30% is considered oversold condition. The fact that we just broke the 775 mark in the SPX, trading down to 768, and came within 3 points of the OEX intraday low of 384, tells me we may have simply seen a round of short covering by bears who were aiming at those levels since late August. After giving up almost 1800 points since the end of August, a bounce seems in order. After all, even shorts need to take their profits at some point. The news after yesterday's bell that Yahoo beat forecasts could have been the catalyst for a rally; however, we didn't get that rally until after a morning sell-off. Economic data this morning showed a decrease in initial jobless claims, but a 4-week moving average that remained over 400,000. We also got a slew of retail data, including earnings warnings from Kohl's (KSS) and Federated (FD), the parent of Macy's and Bloomingdale's. A number of other retailers also saw a decline in same store sales and those that saw increases, like Wal-Mart, still did so on lowered expectations. The message seems to be that consumers are cutting back on discretionary spending and that is not good news heading into the holiday shopping season. GE also received another downgrade this morning, but rode the tide higher by the end of the day. A look at the weekly chart of the Dow shows that we are in the seventh straight down week, until today. This afternoon's rally actually puts the average up 5 points for the week. President Bush announced that the House of Representatives had passed a resolution by a margin of 296-133 that authorizes him to use military action against Iraq. The Senate is expected to approve the measure tonight. While Bush has said on several occasions that he would be open to weapons inspectors being allowed to do the job of disarming Saddam, this certainly opens the door for what many expect to be a military exercise at some point. Treasury Secretary Paul O'Neill said that it is possible the administration will implement another stimulus package that would allow further tax cuts for investors. While republicans are focusing on cuts, democrats are pushing to extend unemployment benefits that will expire just after Christmas. It is unlikely anything will happen before the elections and passage of the bills will likely depend on the results. Crude Oil Futures fell below $29 a barrel to $28.97, as expectations are that next week's petroleum inventory numbers will show an increase in reserves after six weeks of declines. If there had been good news for the economy (the drop in jobless claims was positive, but not enough to signal a bottom in the stock market), the rally could have been attributed to something concrete. However, it appears that shorts simply took some profits and covered their open positions after we broke the July 24 SPX intraday low. Tomorrow's retail sales and preliminary Consumer Sentiment numbers should give us a look at just how willing consumers may be to spend in the next few months. We have already seen what the retail numbers will most likely bring, but a positive surprise in the confidence number could keep the rally going. The last time a Friday ended higher than it opened was a month ago. Even if the rally does continue, I'll look for a higher high before putting on my horns. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7286 Current : 7533 Moving Averages: (Simple) 10-dma: 7597 50-dma: 8299 200-dma: 9432 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 803 Moving Averages: (Simple) 10-dma: 810 50-dma: 877 200-dma: 1024 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 849 Moving Averages: (Simple) 10-dma: 833 50-dma: 912 200-dma: 1216 ----------------------------------------------------------------- The S&P Retail Index (RLX.X): The retailers were all doom and gloom this morning, as earnings warnings came from Kohl's and Federated. There were a slew of negative same-store sales reports, indicating that consumers are spending less heading into the holiday season, rather than more. The challenge appears to be finding someone to buy all those goods that will finally be unloaded on the west coast. Surprisingly, however, the Retail Index bounced once again from the 250 level, reaching an intraday low just under 245 and finishing at 258. It appears to be short- covering, and the previous intraday of 249 did fall. Tomorrow's preliminary Consumer Sentiment number should give us an indication of just how willing the consumer will be to pony up for gifts in a couple of months. As we head into the holiday season, we will keep an eye on November's weekly sales data. If we still see more declines, we'll put on our shorts and get out of the way. 52-week High: 366 52-week Low : 253 Current : 265 Moving Averages: (Simple) 10-dma : 264 50-dma : 283 200-dma: 325 ----------------------------------------------------------------- Market Volatility It is interesting that on the day when the VIX finally broke through the 50 level, after failing there for three straight days, we got a rally of over 300 points from the low of the day. I was looking for a VIX in the high 50s before we got a continued rally, so we may still have some downside. However, if this is the start of the big one, at least the pattern of hitting 50 first will remain in tact. The index actually dropped 3 points on the day, to finish at 46.48, however, it topped out this morning at 50.48 intraday. Friday should once again bring in weekend premium sellers, so watch for a VIX drop toward the end of the day, unless today's rally turns out to be short covering and we head lower tomorrow. CBOE Market Volatility Index (VIX) = 46.29 -3.19 Nasdaq-100 Volatility Index (VXN) = 62.82 +0.44 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.97 710,404 692,244 Equity Only 0.67 505,627 339,484 OEX 1.07 52,003 55,826 QQQ 1.07 55,118 58,902 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 25 - 2 Bull Correction NASDAQ-100 15 + 0 Bear Confirmed Dow Indust. 10 + 0 Bull Correction S&P 500 18 - 2 Bear Confirmed S&P 100 17 - 3 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.08 10-Day Arms Index 1.37 21-Day Arms Index 1.47 55-Day Arms Index 1.36 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1804 963 NASDAQ 1998 1249 New Highs New Lows NYSE 18 331 NASDAQ 11 337 Volume (in millions) NYSE 2,341 NASDAQ 1,833 ----------------------------------------------------------------- Commitments Of Traders Report: 10/01/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 There has not been much change in the positions of Commercials, who reduced both longs and shorts by about 2,000 contracts each. Small traders are also relatively unchanged, with reductions of about 1,000 contracts to both the long and short sides. Commercials Long Short Net % Of OI 09/10/02 426,230 470,537 (44,307) (5.0%) 09/17/02 476,224 503,268 (27,044) (2.7%) 09/24/02 425,276 442,661 (17,385) (2.0%) 10/01/02 423,661 440,133 (16,472) (1.9%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 09/10/02 166,696 85,259 81,437 32.3% 09/17/02 182,243 116,377 64,866 21.7% 09/24/02 124,232 73,506 50,726 25.7% 10/01/02 123,371 74,704 48,667 24.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced both longs and shorts, but by a relatively small percentage, giving up 600 long contracts and 1,700 shorts. Small Traders also made few changes to their overall positions, getting slightly longer overall, by about 600 contracts. Commercials Long Short Net % of OI 09/10/02 53,309 58,745 (5,436) ( 4.9%) 09/17/02 72,522 75,815 (3,293) ( 2.2%) 09/24/02 46,637 54,613 (7,976) ( 7.9%) 10/01/02 46,000 52,976 (6,976) ( 7.0%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 09/10/02 14,024 10,494 3,530 14.4% 09/17/02 15,288 14,142 1,146 3.9% 09/24/02 11,163 9,421 1,742 8.5% 10/01/02 11,896 9,575 2,321 10.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials left long positions unchanged, while reducing shorts by 10%. Small traders reduced longs by 1,000 contracts, while adding the same amount to the short side. Commercials Long Short Net % of OI 09/10/02 22,946 14,936 8,010 21.1% 09/17/02 26,863 21,187 5,676 11.8% 09/24/02 18,951 10,074 8,877 30.6% 10/01/02 18,969 8,903 10,066 36.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 09/10/02 7,568 10,129 (2,561) (14.5%) 09/17/02 13,393 11,637 1,756 7.0% 09/24/02 7,939 9,453 (1,514) ( 8.7%) 10/01/02 6,809 10,503 (3,694) (21.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ================================================================= To stop receiving this PremierInvestor.net Newsletter, send email to Contact Support ================================================================= DISCLAIMER ================================================================= This newsletter is a publication dedicated to the education of stock traders. 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PremierInvestor.net Newsletter Thursday 10-10-2002 section 2 of 2 Copyright © 2002, All rights reserved. Redistribution in any form is strictly prohibited. The entire newsletter is best viewed in COURIER 10 for alignment ================================================================= In section two: Net Bulls New Bullish Plays: VZ Stock Bottom / Active Trader Bullish Play Updates: HLYW, ITMN Bearish Play Updates: NEU, RYL Closed Bearish Plays: KMB High Risk/Reward New Bullish Plays: ORCL Trading Ideas Value Plays With Bullish Signals Breakout to Upside (Stocks $5 to $20) Breakout to Upside (Stocks over $20) Breakout to Downside (Stocks over $20) Recently Overbought With Bearish Signals (Stocks over $20) ================================================================== Net Bulls (NB) Tech Stock section ================================================================== ============ NB New Plays ============ ----------------- New Bullish Plays ----------------- Verizon Communications - VZ - cls: 32.95 chg: +0.80 stop: 31.24 Company Description: Verizon Communications is one of the world's leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 135.1 million access line equivalents and 30.3 million Verizon Wireless customers. Verizon is also the largest directory publisher in the world. (source: company press release) Why We Like It: It's no secret that telecom and wireless stocks have taken a severe beating. The IXTCX combined telecom index and YLS.X wireless index (which have both been trending lower for two years) are trading near all-time lows. Things are looking pretty bleak, but the group is not without its stronger performers. Just take a look at QCOM, which has proven to be incredibly resilient. The stock has bounced around in the $25-$30 range since June, seemingly oblivious of the plummeting NASDAQ. Shares of VZ have shown similar strength in recent months. That's especially impressive, considering the difficulties that have plagued Baby Bells such as BLS and SBC. Verizon has aimed to protect itself from local market competition by introducing new sources of revenue such as long-distance service in New Jersey and New York. This strategy appears to be working. The company announced on October 1st that it was maintaining its earnings estimates for 2002, and shares have been trading with a bullish bias ever since. VZ is now threatening to slice through resistance in the $33.50- $34.00 region. Rather than waiting for shares to actually move above that area, we're initiating this paper trade at current levels. The stock's recent tendency to outperform the NASDAQ and double-top buy signal on the point-and-figure chart are indications that a breakout will occur in the near future. If our expectations prove to be incorrect, we've limited our downside risk with a relatively tight stop at $31.24, one cent under today's low. More aggressive traders could use a stop just below the 50-dma at $30.73. In terms of upside potential, we're looking for a rally to the $38-$39 region, under the 200-dma. This is also the location of the descending trendline formed by the pattern of lower highs on the daily chart. We'll set an official exit price if/when shares approach our objective. Picked on October 10th at $32.95 Results since picked: +0.00 Earnings Date 10/29/02 (confirmed) ================================================================== Stock Bottom / Active Trader (AT) section ================================================================== =============== AT Play Updates =============== -------------------- Bullish Play Updates -------------------- Hollywood Ent. - HLYW - cls: 19.65 chg: +2.16 stop: 18.04 *new* Wow...Talk about immediate results! In our play description last night we talked about the positive business outlook for HLYW. This point was really hammered home today when the company raised its guidance for both the fourth quarter and fiscal 2003. Hollywood Entertainment said it expected same-store sales growth of about 10% for Q4, compared to previous estimates of only 4%. Growth expectations have been raised from 2%-3% to 12%-14%. The company also boosted its earnings growth guidance from 15% to 20% for 2003. Sounds like business is really humming along! Wall Street applauded this news with a 12.3% gain. Shares gapped higher this morning, so our long play was activated at the opening trade of $18.06. In light of today's huge move, we would not be surprised to see an orderly pullback. Our stop loss (one cent under today's low, two cents under break-even) will take us out of this play if the profit-taking turns into a full-fledged reversal. Traders looking to protect a small gain could use a stop just below intraday support at $18.82. Also note that we've set an official profit-target at $20.74, slightly below April/May resistance. Shorter-term traders should be looking to take profits near the $20.00 level. Picked on October 9th at $18.06 Results since picked: +1.59 Earnings Date 10/22/02 (unconfirmed) --- InterMune Inc - ITMN - cls: 32.19 chg: +1.00 stop: 29.98 *new* So far, so good. ITMN held firm on Wednesday, despite bearish action in both the NASDAQ and Dow Jones. The stock responded nicely to today's broader market rally and continued to distance itself from the 200-dma at $30.05. In a positive development, shares outperformed the DRG.X pharmaceutical index and added 3.2%. Uptrending action in the MACD and daily stochastic oscillators bodes well for a rally to the next area of psychological resistance at $35.00. Our official exit target is set just below this level, at $34.94. Our stop has also been raised to $29.98, slightly below the 200-dma. Short-term traders looking for new entries can watch for a move above Monday's high at $32.75. Picked on October 8th at $31.39 Results since picked: +0.80 Earnings Date 10/23/02 (unconfirmed) -------------------- Bearish Play Updates -------------------- Neuberger Berman - NEU - cls: 24.99 chg +1.89 stop: 25.51 *new* The beleaguered financial sector rebounded sharply today, thanks to a broad-based rally in the equity market. The worries that have been plaguing the group haven't suddenly disappeared, but nothing goes down in a straight line. The XBD.X broker/dealer index looks like it's trying to find a bottom, having bounced from the 320 level four times in the last four sessions. This line in the sand is critical. A failure of support could send the index spiraling down to the 300 region. Unfortunately the rising oscillators indicate that the XBD may continue to rise. NEU shot higher by 8.1% on Thursday but couldn't muster a close above psychological resistance at $25.00. This gives us some hope for a reversal, but (much like the XBD) the bullish daily stochastics and MACD are hinting towards more upside. In light of the strengthening technical picture, we've moved our stop down to $25.51. Although this doesn't give us much more wiggle room, it should limit potential losses to a manageable 6.2%. Picked on October 5th at $24.01 Results since picked: -0.98 Earnings Date 10/22/02 (confirmed) --- Ryland Group Inc - RYL - close: 33.86 change: +2.27 stop: 35.60 After getting hammered on Wednesday, the DJUSHB home construction index bounced back with a 5.7% gain. Better-than-expected jobless data from the Labor Department seemed to spook the bears into short-covering. RYL briefly dipped to the $31.00 level this morning, but quickly moved back into positive territory. Shares finished with a 7.1% gain after uptrending for most of the session. A solid victory for the bulls...But will it last? The recent pattern has been for the market to sell off on Friday, because nervous investors are unwilling to take positions ahead of the weekend. If this is the case tomorrow we could see RYL rollover from current levels and gravitate towards our profit- target at $30.06. Short-term traders could target new entries on a move below intraday support at $33.00. Should the stock continue to rebound, we'll be watching for the $35.00 level to act as resistance. Our stop remains set at $35.60, but those seeking to eliminate risk could use a break-even stop at $34.65. Picked on October 4th at 34.65 Results since picked: +0.79 Earnings Date 10/22/02 (confirmed) =============== AT Closed Plays =============== -------------------- Closed Bearish Plays -------------------- Kimberly Clark - KMB - cls: 54.00 chg: +0.78 stop: 53.51 With the Dow Jones and FPP.X forest/paper product index both looking due for a bounce, we elected to challenge this play with a very tight stop. That level was eclipsed when KMB gapped slightly higher on Thursday morning and opened at $53.85. Our paper trade was closed for a gain of $3.00, or 5.2%. Shares wound up underperforming the Dow, but bulls will be encouraged by the fact that shares bounced just 27 cents above the July lows. As could be expected after a sharp sell-off, the oscillators are showing signs of reversing from oversold levels. KMB may have more downside remaining, but for now it appears as if the bears are on the defensive. Picked on September 20th at 56.85 Results since picked: +3.00 Earnings Date 10/22/02 (unconfirmed) ================================================================== HIGH RISK/HIGH REWARD (HR) section ================================================================== ============ HR New Plays ============ ----------------- New Bullish Plays ----------------- Oracle Corp. - ORCL - close: 8.51 change: +0.44 stop: *text* Company Description: Oracle is the world's largest enterprise software company. (source: company press release) Why We Like It: A lot of Wall Street observers have been made to look pretty foolish by attempting to call bottoms, and we're not about to make the same mistake. Does the NASDAQ have more downside remaining? Probably. Is the climate for IT spending beginning to improve? Not that we can tell. As a matter of fact, Oracle's CEO commented last week that the European tech sector is starting to face the same difficulties that have become all-too-familiar to U.S. investors. He did mention that a domestic turnaround might be forthcoming in 2003, but long-term institutional investors will probably want to see some concrete evidence of an IT upturn before they vote with their cash. Against this backdrop of fundamental uncertainty, we're adding ORCL as a bullish play. What's up? Simply put, the short-term technical picture is looking strong. ORCL has spent the past three weeks trading in a sideways consolidation pattern. Shares moved higher by 5.4% today and came within just 15 cents of setting a new relative high. If today's tech rally has legs, a breakout could quickly send shares to the $10-$11 region. Rising action in the MACD and daily stochastics (5,3,3) bodes well for the bulls. The overall IT spending environment may not be improving anytime soon, but we think ORCL will nonetheless trade higher over the next 1-2 weeks. By waiting to enter this play until ORCL trades above $8.72, we'll ensure that any possible levels of near-term resistance have been cleared. The 50-dma at $9.27 could throw a wrench in our plans, so we'll be watching closely to see how the stock behaves near that level. This play will be initiated with a stop at $7.99, slightly under today's low. We'll probably move our stop higher if shares close above $9.00. Click here for an annotated chart of ORCL: Picked on October xxth at $xx.xx <- see text Results since picked: +0.00 Earnings Date 12/17/02 (unconfirmed) ================== Trading Ideas ================== This section contains stocks that meet criteria which may make them of interest to long and short side traders. These are not recommendations, nor have they been reviewed by PremierInvestor editors for investment potential. However, each of them has technical and fundamental characteristics that make them worthy of further review by traders and investors looking for fresh ideas. New stocks will appear daily following the market close. Value Plays With Bullish Signals --------------------------------- Ticker Company Name Close Change SI Siemens Aktkien 34.40 +2.94 BRL Barr Labs 60.12 +1.28 --------------------------------------- Breakout to Upside (Stocks $5 to $20) --------------------------------------- Ticker Company Name Close Change YHOO Yahoo! Inc 12.27 +2.29 PSFT PeopleSoft Inc 15.15 +1.04 HCBK Hudson City Bancorp 17.39 +1.48 CHS Chico's FAS Inc 17.45 +1.45 HLYW Hollywood Entertainment 19.65 +2.16 APPX American Pharmaceutical 17.87 +1.323.34 --------------------------------------- Breakout to Upside (Stocks over $20) --------------------------------------- Ticker Company Name Close Change LLY Eli Lilly 60.90 +1.10 AMGN Amgen Inc 48.24 +2.62 UNH Unitedhealth Group 92.18 +1.20 RY Royal Bank of Canada 32.90 +1.42 COST Costco Corp 32.20 +1.75 HDI Harley-Davidson 48.46 +1.91 FDC First Data Corp 29.86 +3.26 ------------------------------------------- Breakout to Downside (Stocks over $20) ------------------------------------------- Ticker Company Name Close Change BBBY Bed Bath & Beyond 30.16 -1.08 HET Harrah's Entertainment 43.08 -1.62 WEN Wendy's International 31.96 -2.04 CEC CEC Entertainment 29.00 -1.61 WGOV Woodward Governor 43.80 -1.48 SURW Sure West Comm. 21.45 -3.72 ----------------------------------------- Recently Overbought With Bearish Signals (Stocks over $20) ------------------------------------------- Ticker Company Name Close Change
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