PremierInvestor.net Newsletter Monday 10-14-2002 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: A Day Off Watch List: ABC, AIG, BBH, BGG, FRX, TXT, and more... Play of the Day: No Visibility? No Problem! ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-14-2002 High Low Volume Advance/Decl DJIA 7877.40 + 27.11 7915.00 7745.70 1380 mln 769/586 NASDAQ 1220.53 + 10.06 1221.60 1193.42 1200 mln 762/430 S&P 100 425.54 + 2.86 427.17 418.28 totals 1531/1016 S&P 500 841.44 + 6.12 844.39 828.37 RUS 2000 346.53 + 1.60 346.63 342.83 DJ TRANS 2138.75 - 15.92 2159.08 2130.36 VIX 42.12 - 1.32 44.05 42.12 VIXN 59.08 + 0.21 60.49 57.89 Put/Call Ratio 0.93 ****************************************************************** =========== Market Wrap =========== A Day Off by Steven Price Wake me up on Tuesday morning. Today was quite a sleeper, with the bond market closed. We are in earning's season, but most of today's releases were after the close, so the day's trading had very little to kick start it in one direction or another. There is one development that seems to be giving us some guidance as far as the current resistance level for the Dow. Any bear market will get its share of intermediate rallies, and figuring out just where they are going to run out of steam, or break higher, can provide some good long/short opportunities. The Dow lost 1879.52 points from its intraday high of 9077.01 on August 22, to its intraday low of 7197.49 last week. I highlighted last week that I would need to see a trade of 8012 intraday, or a close above 8000, in order to change my bearish sentiment and for the trend of lower highs to be broken. The other interesting development of the last two trading days, one a high-volume, enormous rally, and one a low-volume, up and down day, is the point at which the index found resistance. Both days, the move to the upside was halted right at the 38.2% Fibonacci retracement level of 7915.46. Friday's rally ran out of stem at 7901.26 and today's upside movement (I hesitate to call it a rally) ended right at 7915.00. Some could argue that this is a series of higher highs, given Thursday's high of 7560.93. However, a look at the bigger picture still shows a downward trend, with failure at a significant retracement level. Below are examples of the daily, weekly and monthly charts on the Dow. While I'd like to put a smile on readers' faces, these charts are not pretty. Cover the kids' eyes, and if you are sensitive to graph-ic violence, you may want to turn your head. Daily Chart of the Dow Weekly Chart of The Dow Monthly Chart of the Dow This week should give us a good look into the crystal ball of the fourth quarter. There are many large companies releasing earnings this week and should give commentary along with those releases in regard to outlook for the fourth quarter. Intel releases after the bell on Tuesday and Advanced Micro Devices releases Wednesday. Both should comment on PC demand outlook for the fourth quarter. The chip stocks have been trying to find some legs after a sell-off that saw the Semiconductor Sector Index (SOX.X) lose 41% of its value between August 19 and October 9. Chip stocks have been a short trader's goldmine in recent months and they finally appear to be trying to set a bottom. However, each rebound in the sector index has been turned away from breaking the trend of lower highs. The SOX has been in a descending channel since April and a trade over the recent intraday high of 263, or close over the recent closing high of 256 would help it break that channel. Chart of the Semiconductor Sector Index (SOX.X) This morning brought another automotive downgrade. Merrill Lynch downgraded both Ford and General Motors, citing deteriorating prices for both new and used cars. What I find most disturbing is that these companies were beat up for several reasons, including lowered earnings estimates, pension problems, poor debt ratings and the possibility of sales declines in 2003. Add pricing pressure, when they are already offering zero-percent financing and there is only one way to go. We'll be getting GM's earnings release on Tuesday, and should also get some insight into their fourth quarter and 2003 outlook. This weekend's bombing in Bali, which killed more than 180 people, only added to the rising price of oil futures, as war fears were further stoked. This, combined with OPEC's reluctance to raise output quotas, continues to filter down to companies' earnings reports. This morning, Airborne Express (ABF) announced that they would miss earnings expectations. The company cited $4 million in airplane related costs and a $2 million increase in fuel costs. We heard the same sentiment from American Airlines, and it is likely to be repeated until oil costs drop. That is unlikely to happen, with an Iraqi invasion looming. While those costs don't get much publicity, it undoubtedly affects the bottom line for everyone from airlines, to chemical companies (See Dow Chemical), to pizza delivery drivers. Crude Oil futures are now back over $30 per barrel, after trailing off for the last couple of weeks. Chart of Oil Futures Oil prices are one of many factors that will affect the economy if we do take action against Iraq. There is also concern consumers will be inside watching television reports, rather than shopping during the holiday season, and staying home out of fear of retaliatory strikes in public places. Recent statements attributed to Osama Bin Laden, praising terrorist attacks on U.S. soldiers in Kuwait and on a French supertanker off the coast of Yemen, threaten continued action against the U.S. if it continues its presence in Muslim nations. While it is not clear if the statements are from Bin Laden, they underscore the fear of retaliation for action in Iraq. The Nasdaq Composite (COMPX) is getting even closer to breaking the trend of lower highs, which was actually broken by the Nasdaq 100 (NDX). In the past, the NDX has given the first signals of a turnaround, and that pattern break occurred last week. Bears may want to watch this index, which contains some of the largest tech stocks, for signs of failure, before picking a top and going short. If it continues higher, it could be a sign that the Dow will follow. Chart of the Nasdaq Composite and Nasdaq 100 The slowdown in retail and PC demand has made it into the electronics manufacturing services sector (EMS), according to this morning's prudential downgrade. The research note stated," With demand for communications equipment continuing to be weak, enterprise hardware having recently weakened and PC demand trends mixed, we are concerned that there are very few 'legs' left supporting demand for electronics goods and consequently our companies' services." The note also cited weak end demand and customer credit concerns. Boeing got more bad news, as they were beat out for a commercial jet contract by Airbus. Easyjet, Europe's no-frills version of Southwest, ordered 120 planes, with options for 120 more. The deal was worth up to $6 billion, although Airbus offered a 30% discount, which would place the order closer to $4 billion. Up until now, Easyjet has had an all-Boeing fleet, and loss of the order casts additional doubt on Boeing's 2003 and 2004 projections. The company produced 527 commercial jets in 2001, 380 in 2002, and predicted 275-300 in 2003. Analysts now predict only 250-260 in 2004, as well as possibly fewer in 2003, as well. Boeing has complained for some time that Airbus, which is government subsidized, is able to win a price war, and those fears appear to be well founded. That doesn't mean there is anything they can do about it. Energy firm TXU Corp. cut its dividend by 80% this morning, announced it plans to significantly reduce capital expenditures at all of its divisions and put its European businesses up for sale. Morgan Stanley and CFSB downgraded the stock. The moves were made to try and free up cash to deal with serious debt problems created by European operations. TXU's debt ratings were lowered by Standard and Poor's and Fitch, which lowered its ratings on the European subsidiary to "CCC," which indicates a likelihood of default. The stock lost 31%, to close at $12.94. TXU traded as high as $40 on October 1. After the bell, forest and paper product producer Temple Inland (TIN) beat earnings estimates by $0.03. Profits were still down 66% from a year ago, due to low prices for lumber and the boxes it manufactures. The entire industry has been hammered to levels not seen since November 2000, but has rebounded the last few days with the broader markets. Mohawk Industries, which makes floor coverings for homes and offices, beat estimates by $0.01. That was an increase of 46% over the year ago period and reflected a reduction of shares, increased sales due to a merger and internal growth of Mohawk products, including a 9% increase in residential products. MHK's results seem to indicate continuing strength in the housing market, although that could change this quarter, if the homebuilding stocks are any indication. Volume was very light today and it is hard to make any momentum judgments based on that lack of activity. Although advancing volume outstripped declining volume by a small ratio, new lows beat new highs by a 3:1 ratio. Things should pick up tomorrow, with the earnings releases and continue for the rest of the week. Until then, make sure to keep an eye on the big picture, and the important resistance levels just overhead. Steven Price ================================================================== WATCH LIST ================================================================== The PremierInvestor.net watch list is not designed to be read as full fledged stock picks. Rather we would prefer to offer it as an extra tool in today's investor toolbox. Think of it as a radar screen with your own radar operator pointing out interesting developments, technical patterns or potential plays that you may or may not have seen on your own. Due to time constraints we do glance at the news but rarely do we have time to fully read pertinent news stories, due background research and other necessary screens that investors should do before making a decision. A common exercise is to read the entry, glance at the sector and other stocks in that industry and then compare what's happening in the stock to what's happening in the broader market indices. We hope you enjoy the Watch List and that it proves to be a useful tool for your own trading success. STOCKS WORTH WATCHING --------------------------------- American Intl Group - AIG - close: 58.30 change: -1.43 WHAT TO WATCH: With the exception of a large spike lower in July (and subsequent rebound), AIG has traded in a descending channel for nearly a year. Last week's broader market rally helped to send shares from the bottom of the channel to the upper band in just two days. Shares have begun to roll over from this level, which coincides with the 50-dma ($60.06). Further overhead resistance lurks at $61.00, location of the bearish p-n-f trend. Overall it appears as if the bulls will face an uphill battle in pushing AIG higher. Short entries could be gauged at current levels, with a stop above Friday's high of $60.37. The bottom of the channel at $53.00 offers a profit target for near-term traders. --- AmerisourceBergen - ABC - close: 74.93 change: +1.55 WHAT TO WATCH: A breakout might be looming for ABC. Shares have spent the better part of the past six weeks bouncing between $70 and $75. With the stock trading near the upper end of this range, bullish traders should be watching for a breakout above $75.00. This would create a triple-top buy signal on the p-n-f chart, and clear the way for an eventual retest of the June highs near $83.00. Those with a shorter-term strategy could target a move to the $80.00 level. The rising oscillators (on both the weekly and daily charts) suggest that ABC will continue higher in the near-term. --- Aeropostale Inc - ARO - close: 8.00 change: +1.17 WHAT TO WATCH: We're not about to recommend buying a stock that just posted a 17% gain, but ARO is definitely worth mentioning. The stock gapped sharply lower on October 1st after the company announced an earnings warning. Maybe "sharply" is an understatement...ARO lost more than half its value! The stock has since rebounded from the $5.50 region, and now it's beginning to fill in the gap. Although the stock could extend today's rally, we'd be very hesitant to chase it higher. Aggressive traders should instead be watching for a pullback to the $7.00- $7.50 area. ARO could quickly reach $10.00 if the current uptrend continues. --- Biotech HOLDRS - BBH - close: 85.89 change: +3.16 WHAT TO WATCH: Today's low volume action had most sector indices trading flat, but that wasn't the case with the BTK.X biotech index. Solid performances by BGEN, CHIR (who boosted their quarterly and full-year estimates), DNA, and AMGN helped to propel the BTK.X to an impressive gain of 5.4%. The BBH followed suit, tacking on 3.8% and distancing itself from the 50-dma at $82.40. A glance at the daily chart shows that the stock has broken to new relative highs. There aren't any significant levels of overhead resistance to prevent a retest of the August high of $93.00. The stock has also cleared bearish resistance on the p-n-f chart and is currently signaling a triple-top breakout. The BTK.X may still encounter some congestion in the 345-350 range, but today's relative strength suggests that the bears are on the defensive. In terms of action points, traders can watch for a pullback to $83.00 or a move above $86.00. --- Briggs & Stratton - BGG - close: 33.96 change: +0.88 WHAT TO WATCH: After suffering a painful week-long selloff, shares of this engine manufacturer managed a solid bounce from the July lows near $32.00. The stock bucked Monday's lackadaisical action in the broader market and posted a 2.6% gain. That relative strength bodes well for a sustainable rebound. The reversing MACD and daily stochastic oscillators indicate that a retest of the 50-dma ($37.45) might be just around the corner. Entries could be targeted at current levels or on another pullback to $33.00. Briggs announces earnings on Thursday morning, so traders may want to wait for the dust to settle before taking full positions. --- Forest Labs - FRX - close: 93.50 change: +1.27 WHAT TO WATCH: This drug stock is already looking quite strong, with shares trading at all-time highs. Monday's breakout above short-term resistance in the $92.50-$93.00 area has cleared the way for a rally to the $100 level. FRX already looks overbought, but the daily stochastics (5,3,3) have not yet reached the upper band. Johnson & Johnson reports earnings tomorrow morning. A positive reaction to their announcement could give the entire drug sector a bullish bias and send FRX to new highs. Long entries can be considered at current levels, with an initial target of $100. FYI, the current bullish vertical count is $96.00. --- Mid Atlantic Medical - MME - close: 42.08 change: +1.83 WHAT TO WATCH: Squeeeezze. Shorts ran for the exits today as MME extended Friday's breakout above the $40.00 resistance level. The stock is trading at all-time highs, and the strong volume indicates that this uptrend will have staying power. Although aggressive traders could think about going long at current levels, shares may be due for some backing and filling after the recent rally. Watch for a pullback to the $40.00 region to offer an entry point. Given enough time, MME could eventually make its way to the $50.00 level. A more realistic short-term target would be the current bullish p-n-f count of $46.00. --- Textron Inc - TXT - close: 34.86 change: -1.32 WHAT TO WATCH: Textron reports earnings on Thursday morning, and shares aren't likely to garner much buying attention ahead of the announcement. The company's Cessna unit (which makes business jets and small single-engine planes) recently announced 400 layoffs at its primary production plant in Wichita. This is an indication that the downturn in aircraft orders has spread from Boeing to the smaller players in the group. Technically, TXT is looking pretty weak. Friday's rally petered out just below the 50-dma ($37.13), and the stock is starting to roll over from the top of its descending regression channel. Short positions can be evaluated on a move under today's low ($34.72), initially targeting the bottom of the channel near $31.00. --- Wellpoint Health Ntwk. - WLP - close: 82.28 change: +1.44 WHAT TO WATCH: We've carried this one over from the weekend Watch List. WLP moved to another multi-month high on Monday and, more importantly, broke above previous resistance in the $81.50 region. It looks like shares could soon retest the June highs near $86.00. Short-term traders could target bullish positions on a move above today's high ($82.35). A pullback to $80.00 might also offer an entry point. ========================= Play-of-the-Day (BULLISH high risk/high reward play) ========================= Oracle Corp. - ORCL - close: 9.25 change: +0.20 stop: 8.19 Company Description: Oracle is the world's largest enterprise software company. (source: company press release) - ORIGINAL WRITE UP: October 10th, 2002 - 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. - Most recent update: October 11th, 2002 - Wells Fargo re-initiated coverage on Oracle with a lukewarm "hold" rating on Friday. The firm said that ORCL is over-priced in the $10-$12 region, based on continued IT spending worries, longer-term growth concerns, and competitive pricing pressure. On a normal day, shares may have been pressured by this news. But today was far from normal. The entire tech sector shot higher after IBM received some positive brokerage comments. The widespread short-covering that began on Thursday helped to propel the NASDAQ above 1200. ORCL traded in lockstep with the $GSO.X and finished with a 6.3% gain. Our long play was activated this morning at $8.73. The fact that shares closed near the highs of the day bodes well for a continued ascent next week, as do the rising daily stochastics and three-box p-n-f reversal. Of course, that pesky 50-dma ($9.26) looming overhead could pose a problem. Traders still looking to go long should wait for ORCL to clear this level before considering new positions. We've bumped our stop-loss up to $8.19, but more conservative types may want to use a stop just below the $8.50 level. - Play-of-the-Day Comments: October 14th, 2002 - Most impressive! ORCL led the NASDAQ higher on Monday and closed just one cent below the 50-dma. This was despite comments from Oracle CFO Jeffrey Henley, who said at a shareholder meeting that "our visibility going forward continues to be very minimal....we're quite hopeful we can start to see a turnaround." The fact that this prognostication did not lead to a sell-off is another indication that Wall Street has already priced in the lack of forward visibility. That's good news for our long play. ORCL is also looking strong on a technical basis. In addition to the uptrending oscillators, we're encouraged by the recent three- box reversal on the p-n-f chart. Possible resistance looms at $10.00, but we believe shares could eventually make their way to the $11.00 region. Traders looking for new entries could watch for a move above today's high ($9.30). We're leaving our stop unchanged, but those with less risk tolerance shouldn't hesitate to use a stop slightly below $8.50. Picked on October 11th at $8.73 Results since picked: +0.52 Earnings Date 12/17/02 (unconfirmed) ================================================================= 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. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock but an information resource to aid the investor in making an informed decision regarding trading in stocks. It is possible at this or some subsequent date, the editors and staff of PremierInvestor.net may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. PremierInvestor.net staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control. 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PremierInvestor.net Newsletter Monday 10-14-2002 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: Stock Bottom / Active Trader Stop Adjustments: ITMN (bullish) Triggered Plays: SHFL (bullish) Closed Bullish Plays: HLYW 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) ================================================================== Stock Bottom / Active Trader (AT) section ================================================================== =============== AT Play Updates =============== Stop Adjustments ---------------- InterMune Inc - ITMN - cls: 34.21 chg: +1.87 stop: 32.99 *new* ITMN easily outperformed the broader market on Monday and SHFcontinued to move towards our exit target at $34.94. The technical outlook remains positive (check out those rising oscillators!), but tomorrow's earnings report from JNJ might have a bearing on drug and biotech stocks. We're moved our stop up to $32.99 to protect ourselves from taking a loss in case shares reverse. Those looking to protect a larger gain could use a stop just below $34.00. Triggered Plays --------------- Shuffle Master - SHFL - cls: 20.94 chg: +0.84 stop: 18.89 *new* Breakout! SHFL blew through the $20.30 resistance level on Monday morning and hit our entry trigger at $20.36. Shares traded to an intraday high of $21.67 before pulling back to finish with a 4.1% gain. This is a very positive development for our play. The rally, which was backed by strong volume, created an ascending triple-top breakout on the p-n-f chart. The oscillators are pointing higher, and SHFL has no clear levels of resistance until the $24.00 region. We've upped our stop to $18.89, but more conservative traders could use a stop just below $20.00. Short-term traders may want to think about taking profits near $22.00. =============== AT Closed Plays =============== -------------------- Closed Bullish Plays -------------------- Hollywood Ent. - HLYW - cls: 19.00 chg: -0.48 stop: 19.39 The inability of HLYW to join the broader market in Friday's powerful rally indicated to us that the stock had possibly run out of steam. Business sure seems to be humming at Hollywood, but the stock is looking overbought on a near-term basis. Today's rollover from the $20.00 level seems to support that view. Shares spent most of today's session trading above $19.50, but then sold off sharply during the final hour. This play was closed for a gain of 7.3% when our stop-loss at $19.39 was violated. Although our exit target was never reached, we're more than happy with the quick pop we got from Thursday's positive news. We'll be keeping an eye on HLYW, as a bounce from the $18.00 might give us another chance to go long. Picked on October 9th at $18.06 Results since picked: +1.33 Earnings Date 10/22/02 (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
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