PremierInvestor.net Newsletter Monday 11-11-2002 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: Between the Lines Watch List: AU, BGEN, GE, GR, MERQ, PCAR, and more... Play of the Day: Reliably Weak ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 11-11-2002 High Low Volume Advance/Decl DJIA 8358.95 - 178.18 8535.88 8349.53 1310 mln 163/1130 NASDAQ 1319.19 - 40.09 1355.10 1319.07 1260 mln 125/1126 S&P 100 447.63 - 9.76 457.39 446.77 totals 288/2256 S&P 500 876.19 - 18.55 894.74 874.63 RUS 2000 369.14 - 9.86 379.00 369.14 DJ TRANS 2271.47 - 75.41 2353.58 2268.22 VIX 36.11 + 2.55 36.21 35.06 VIXN 55.71 + 3.70 56.93 52.47 Put/Call Ratio .78 ****************************************************************** =========== Market Wrap =========== Between the Lines by Steven Price It's tough to draw any conclusions on a light volume day, when the bond markets were closed for Veterans' Day, but there were several significant developments. We saw previous support/resistance levels fall and it appears we are back into our previous range in the broader indices. Interestingly, we may also be forming another pattern similar to the one we saw earlier this year, but at a lower level. On Friday, the possibility of war with Iraq helped start the markets rolling down hill. The U.S. proposal on weapons inspections was approved and the Iraqi ambassador responded that it was simply the will of the U.S. and was crafted in such a way as to prevent inspectors from entering the country. That rhetoric continued today, as the Iraqi parliament took up consideration of the U.N. proposal. The opening speaker expressed the opinion that the proposal be rejected, indicating that we may be skipping inspections and heading to war sooner, rather than later. One interesting non-development the last couple of days has been the price of oil. While there has been quite a bit of saber rattling, oil futures have increased only slightly. They are nowhere near levels from earlier this fall, when war with Iraq seemed even further off. Even then, most pundits predicted we wouldn't be able to enter the country until winter, simply due to the extreme heat. However, now that we are getting closer, with Iraq apparently ready to reject the U.N inspections proposal, oil is hanging down around $26 per barrel. Oil futures traded almost $31 per barrel a month ago, but have dropped as OPEC member countries have overproduced by about 15% over stated quotas for the last few months. This bodes well for our economy, as it is apparent that where there is potential profit, supply will follow. And since an increase in oil prices makes its way to almost every product in the U.S., an increase in fuel cost is the quickest way to put the pinch on our economy. While Iraq certainly produces a significant percentage of the Middle East's oil supply, it is apparent that "quotas" will not restrict supply as much as we have been led to believe, if prices start to rise again. War in the Middle East will certainly lead to some increase in price, as Iraqi production is restricted, and transportation in the region may see interruptions, however it may not be as bad as we thought. A look at the December futures shows a slight increase the last three days, since the U.N. began contemplating the U.S. proposal. While we may not see a huge price increase, it is apparent that oil prices have stopped descent Chart of Crude Oil Futures The Dow, S&P 500, and OEX all formed classic head and shoulders formations from July through September. When those patterns concluded themselves with a neckline breakdown in the middle of September, the downside measuring objectives were achieved in less than a month. Once we achieved those levels, we skyrocketed up almost as quickly as we fell. Both moves seemed extreme and certainly the business environment has not changed so dramatically for the worse and then so dramatically for the better in less than three months. However, as illogical as these moves may seem, the patterns have been reliable. We now have begun to form what looks like a possible repeat of the summer- fall head and shoulders. The pattern is only two thirds complete and could certainly turn out to be something completely different, but as we observe the market from this point forward, we should look out for history repeating itself. Since the patterns are similar on all three, I'll post only the Dow chart for illustration. Chart of the Dow After the recent rollover, the Dow is also back in familiar territory. The 8200-8550 range has contained the average several times recently, and now that we are right in the middle, my guess is that we will test at least that lower end (8200) before the next move out of the channel. Of course, moving almost 200 points at a crack, that advice may not be good past Tuesday. Which brings me to another point. Picking levels in the current environment does not have the same impact as it did just a couple of years ago. We seem to move in triple digit jumps almost daily. I had to go back to September 20 to find a day in which the Dow did not trade in at least a 100-point range intraday and even then it was 95 points. So we need to be aware of these levels and be very nimble, attempting to trade the top of the range short and then the bottom long. The move may only last a day or two, (or even happen intraday) before reaching the next support/resistance level and reversing itself. Chart of the Dow Range We are also seeing a major tech pullback, now that the Nasdaq achieved its August highs. The pattern is not the same as the Dow, but certainly the rejection is similar. It appears that the August high around 1425 in the COMP will be our gauge for whether the tech bear market can break out of its slump. While a break above that level certainly does not indicate we will return to 5000 in the Nasdaq, a repeated failure there may indicate that the downside still has plenty of room. The logical bounce point on the last pullback would have been 1360, after filling the gap from last Monday. However, that held for only a day, on Friday, before today's action took us lower. A re-test of 1300 now appears likely. Chart of the Nasdaq One of the groups that helped the Nasdaq to its recent highs, but has now rolled over dramatically, is the chip sector. Led by a downgrade to Taiwan Semiconductor (TSM), the Semiconductor Sector Index (SOX.X) gave up 5.7%, dropping 16.79 to 283.12. After gaining more than 50% in a month, the pullback is beginning to look like more of a major breakdown. AMAT's earnings report on Wednesday should have a pronounced effect on the sector, although it is hard to imagine anything good coming out of the announcement, since the company already announced it was cutting jobs to combat the two year chip slump. In addition, the Semiconductor Industry Association (SIA) said that global chip sales are expected to grow 8-10% in coming years, compared to annual rates of 16% in the past. That 50% reduction, on the low end, was not totally unexpected, but seemed to leave investors wondering why the sector had exploded in value recently. AMD chairman, who also sits on the SIA board, said," We can no longer count on the proverbial rising tide that lifts all boats." The group also cut its global sales forecasts again for 2002, saying it expects growth of only 1.8%; a drop from the 3.1% mid year forecast. SIA also reduced its forecast for 2003 from 23.2% to 19.8% and raised 2004 estimates from 20.9% to 21.7%. Chart of the SOX Single stock futures (SSF) began trading on Friday, and although there has not been much volume to this point, they may actually provide more options liquidity. Right now, market makers with short stock positions are held back from filling large in-the- money call orders on the buy side, or large in the money put orders on the sell side, as getting off a short hedge requires an uptick in the stock. A stock that may be pulling back only drops further when a specialist on the NYSE sees a large number of short sellers enter the picture. Therefore, there are option orders that go unfilled, as market makers are not willing to take on the added risk of trying to sell short. However, without a similar rule in the futures, short selling is no longer a problem. If the SSF market can draw enough futures market makers, there may be enough liquidity for options traders to increase the size of their bids and offers, since they will have an easier time hedging their trades. With the bond markets back open tomorrow, we should see heavier trading and get a better feel for direction. However, now that we are in the center of the current Dow range, there are only 150 points to the downside before testing support. In the Nasdaq, there are only 19 more downside points before the next test. Right now the prevailing trend is down, so until something changes, that is the way I'll play. However, as I said earlier, given the current wide intraday trading ranges, I won't hesitate to close positions and play a bounce as soon as we get one at the above mentioned support levels. That seems to be the best strategy until we cross another line, at which point we have a new range to bounce within. While this makes long term direction tough, we can only trade what the market gives us, and right now trading inside the lines seems to be our best opportunity. ================================================================== 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 --------------------------------- Anglogold - AU - close: 28.31 change: -0.48 WHAT TO WATCH: Our list of sector indices was completely negative today. Even the XAU.X gold/silver index (which often finds defensive buying when the broader market sells off) gave back 1.7%. That might not come as a surprise to point-and-figure enthusiasts, who would point out that the index has reversed from bearish resistance. This correlates with the long-term trend of lower highs on the daily bar chart and the 200-dma at $69.84. Today's violation of the 50-dma ($67.91) could portend a retest of the October lows near $60.00. AU is a stock to keep an eye on if the sector does break down. Shares have started to fall from the $29-$30 area of resistance. Short entries can be considered at current levels, with an initial profit target near the 50-dma ($25.90). Other possible gold shorts include HGMCY and NEM. --- Biogen Inc - BGEN - close: 38.26 change: -0.71 WHAT TO WATCH: The BTK.X biotech index has given back all of its early-November gains and is approaching support in the 340 area. BGEN looks like a good short play if the sector continues to weaken. The stock has started to roll over from its 200-dma ($41.22), while the descending oscillators are pointing towards a pullback to the next level of support at $35.00. The point-and- figure chart is looking somewhat bullish, but that strength would be largely negated if BGEN breaks under $38.00. This would create a three-box reversal and take the stock below bearish resistance. --- General Electric - GE - close: 24.21 change: -0.89 WHAT TO WATCH: Last week's rollover from resistance at $27.00 and the subsequent violation of support at $25.00 earned GE a slot on our weekend Watch List. With the stock giving back another 3.5% today, we thought it was worth another mention. Traders looking for short entries can watch for a failed rally at $25.00 or a move below $24.00. A trade at $24.00 will create a three-box reversal on the p-n-f chart. A breakdown could take GE to the October lows near $22.00. --- Goodrich Corp - GR - close: 14.63 change: -1.06 WHAT TO WATCH: Goodrich announced today that it intends to float a $200 million public offering to help fund its $1.5 billion acquisition of TRW's aerospace division. Investors reacted negatively to this news and hit GR for a 6.7% loss. Shares are now resting precariously above the all-time low of $14.55. A breakdown below $14.50 would create a double-top p-n-f sell signal, offering a possible action point for bearish traders. Another failed rally at the top of the stock's descending regression channel (currently near $16.00) might also present a shorting opportunity. Those with a short-term timeframe could target a decline to the $12.00 area. --- Intel Corp - INTC - close: 17.42 change: -0.73 WHAT TO WATCH: The lack of any fundamental improvement in the chip sector had many traders questioning the sustainability of the latest rally in the SOX.X. The semiconductor index gained roughly 60% in less than a month and erased a healthy chunk of its August/September decline. That's one heckuva rebound, but the technical picture has been rapidly deteriorating over the past few sessions. Looking at the daily chart, we see that the SOX maintained its multi-month pattern of lower highs. The index has broken out of its intermediate-term ascending channel (check out the 60-minute chart) and wasn't able to find support at 300. Sector giant INTC is experiencing a similar rollover and could be headed for a test of the 50-dma ($15.66). The rolling oscillators and three-box p-n-f reversal bode ill for the bulls. In terms of action points, traders can watch for either a failed rally at $18.00 or a move under $17.25. Those seeking more bearish confirmation may want to wait for shares to fall below support at $17.00. Remember that chipmaker AMAT announces earnings on Wednesday. --- Mercury Interactive - MERQ - close: 25.03 change: -1.45 WHAT TO WATCH: Citing valuation concerns, UBS Warburg cut their ratings on several infrastructure software stocks last Friday. Having been targeted by this downgrade, MERQ continued to distance itself from the 200-dma ($29.51). Shares underperformed the NASDAQ on Monday and broke through support at $25.00 on an intraday basis. The stock is now threatening to fall below late- October support at $24.50. A break below this level could clear the way for a move to the 50-dma at $22.63. Technically, bears can be pleased with the rolling oscillators and recent p-n-f reversal. --- Molex Inc - MOLX - close: 25.32 change: -1.22 WHAT TO WATCH: Shares of this electrical component manufacturer have declined for five straight sessions. Although the stock may be due for a rebound after several down days, the oscillators are not yet at oversold levels. The daily MACD in particular is looking weak, having just produced a bearish crossover. The last crossover occurred in late August before a substantial sell-off. MOLX fell below the 50-dma ($25.27) today and reversed into a column of "O's" on the p-n-f chart. These bearish technical developments, combined with a violation of psychological support at $25.00, could send the stock plummeting towards $20.00. --- PACCAR - PCAR - close: 41.21 change: -2.17 WHAT TO WATCH: PACCAR's latest quarterly report included tripled earnings on a year-over-year basis. Unfortunately for shareholders the truck manufacturer also said it was anticipating weak demand in 2003. The stock managed to trade higher despite the negative news, due in large part to a rally in the Dow Transports. However, PCAR has now started to retrace its October gains. Today's close under the 200-dma ($42.30) could bring more sellers out of the woodwork. The bearish MACD crossover and falling daily stochastics add to the technical negativity. PCAR could be headed for the 50-dma ($37.34), but watch out for possible support at $40.00. --- Hotels.com - ROOM - close: 61.21 change: -1.48 WHAT TO WATCH: Shares of ROOM gained roughly 50% over the past month, thanks in large part to a strong quarterly earnings announcement. The company reported an 83% in revenues and beat consensus estimates by three cents. In addition to these strong numbers, Hotels.com also benefited from an explosive rally in competitor EXPE. However, ROOM's strong upside momentum faded as the stock approached resistance at $65.00. Shares are now beginning to retrace the rally and the sinking broader market certainly isn't helping the bulls to hold on to their gains. Short entries could be evaluated at current levels, with a stop just above $65.00. Short-term traders could look to capture a move back to the 50-dma ($52.18), which corresponds with the 50% retracement from October lows to November highs. ========================= Play-of-the-Day (BEARISH Active Trader play) ========================= Superior Ind. - SUP - cls: 40.73 chg: -0.83 stop: 44.31 Company Description: Superior supplies aluminum wheels and other aluminum automotive components to Ford, General Motors, DaimlerChrysler, BMW, Volkswagen, Audi, Land Rover, MG Rover, Toyota, Mazda, Mitsubishi, Nissan, Subaru and Isuzu. (source: company press release) - ORIGINAL WRITE UP: October 24th, 2002 - Why We Like It: As you can see from the above description, SUP earns its money by selling wheels and other components to the major auto manufactures. That fact could weigh heavily on the stock in the weeks to come. Although zero-interest financing had cars zooming off the lots over the past year, this brisk pace seems to be subsiding. The Beige Book data released on Wednesday indicated "motor vehicle sales generally slowed from very high levels." This does not bode well for Superior Industries. The company recently announced some new contracts, but future revenue still largely depends on strong auto sales. On a technical basis, we like SUP as a short play because of the way shares have rolled over from resistance at the converging 50-day ($45.41) and 200- day ($45.07) moving averages. This level is also the location of descending resistance on both the bar chart and the point-and- figure chart. The falling daily stochastics (5,3,3 setting) provide more ammunition for the bears. The last four times the stochastics fell out of the overbought region, shares were met with heavy selling. We're optimistically targeting a retest of the recent lows near $36.00. Shares bounced from just under whole-number support at $43.00 today, so we're going to place an entry trigger at $42.97. If this play is activated we'll use a stop at $46.01, above the relative high and the aforementioned moving averages. Shorter-term traders could use a tighter stop and target a decline to the $40.00 area. - Most recent update: November 8th, 2002 - As was the case on Thursday, trading in SUP closely reflected the action on the Doe Jones. Following this morning's quick spike above $43.00, shares pulled back to $41.50 and traded sideways for the rest of the session. Technical bears will note that the MACD and daily stochastic oscillators have gone from flat to slightly negative. It's a little early to read much into this rolling action, but we're encouraged by the continued decline from the 100-day and 50-day moving averages near $44.00. The longer-term downtrend is intact and we think the stock will continue to drift lower with the broader market. However, more sideways trading above the relative low ($41.16) might lead us to drop this play. - Play-of-the-Day Comments: November 11th, 2002 - It's not the fastest mover, but you have to admire SUP's reliability. The stock has fallen from its October 21st high in a steady pattern of lower lows and lower highs. Monday's action was especially encouraging from a technical standpoint, as shares dropped under $41.00 and closed at the worst levels of the session. Investors paid little heed to Superior's announcement that it plans to expand its annual manufacturing capacity by approximately 25% over the next two years. That might be considered a positive sign for future growth, but Wall Street seems to be more concerned with underlying economic weakness dragging on the automotive industry. As far as our short-term goals are concerned, we're very pleased with the way SUP has continued to retrace its mid-October rally. Today's weak close is a good sign that shares will continue lower on Tuesday. New short entries can be considered on a move below psychological support at $40.00. At the current rate of descent, the stock would retest the $36 level within the next 3-4 weeks. Picked on October 28th at $42.97 Results since picked: +2.24 Earnings Date 10/17/02 (confirmed) ================================================================= 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 11-11-2002 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: 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) ================= 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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