PremierInvestor.net Newsletter Wednesday 02-12-2003 section 1 of 2 Copyright ) 2003, 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: Point of No Return? Watch List: ABT, C, JNJ, NTES, UTH, and more... Play of the Day: A Mirror Image ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-12-2003 High Low Volume Advance/Decl DJIA 7758.17 - 84.94 7854.62 7753.71 1474 mln 277/1170 NASDAQ 1278.97 - 16.49 1301.11 1278.74 1191 mln 189/956 S&P 100 413.61 - 4.97 419.95 413.45 totals 466/2126 S&P 500 818.68 - 10.52 832.12 818.49 RUS 2000 355.38 - 4.58 360.50 355.38 DJ TRANS 2100.67 - 27.61 2136.02 2100.67 VIX 39.10 + 1.75 39.42 38.11 VIXN 47.49 + 0.59 48.84 47.48 Put/Call Ratio 0.90 ****************************************************************** =========== Market Wrap =========== Point of No Return? by Steven Price We continue to ratchet down in the broader markets, as buyers continue their strike in the face of war fears. Alan Greenspan continued his testimony before Congress, sparring mostly over the how the President's tax-cut plan will affect the economy. By mid- morning, we had taken out relative lows and each day continues to bring signs of a further weakening stock market. It was not a massive sell-off and volume remained on the light side, but we continue to push the envelope to the downside and today brought further evidence that the bounces we are seeing on a technical basis continue to be short entry opportunities. The last couple of days have been a prime example of the short- entry theory. The news out of Iraq on Monday, that the country would allow U2 fly-overs (old news now) gave us a big rally as we tested new lows. That rally continued on Tuesday ahead of Alan Greenspan's testimony. As the Fed Chairman spoke, the rally eventually faded, possibly due to the comments that the President's dividend tax-cut plan, while fundamentally sound, would be a better idea if it did not result in deficit spending to finance it. The rally may have also faded as short-covering that began on the Iraq announcement on Monday afternoon, finished off when Greenspan didn't say anything earth-shatteringly positive, or imply further immediate rate cuts. After all, if he doesn't necessarily think we need a stimulus package before we know just how much the geo-political concerns are affecting us, it seems unlikely that he would be in a rush to lower rates below already historically low levels. His take on the deficit that would result from the dividend tax cut did not sound supportive, even though we continued to hear that the cut was a good idea on a policy basis. Greenspan said he did support the President's plan, but his comments about deficit spending in general did not echo that sentiment. He talked about it being possible to maintain flat debt to GDP ratios while running small deficits of of 1-2%, but the president's plan exceeds that, likely crossing over the 3% mark. Greenspan said, "But if we get into a position... where we are finding that the debt-to-GDP ratio begins to accelerate, we have to be very careful because there is no (self-correction) mechanism when that is occurring, because a rise in the debt increases the amount of interest payments, which in turn increases the debt still further, and there is an accelerating pattern after you reach a certain point of no return." His description of a point of no return certainly does not sound like he thinks the president's stimulus plan requiring larger deficits than he is comfortable with is such a hot idea, in spite of his statement of support. President Bush spent some time on air defending his plan, but there is no doubt the damage was done and the democrats will have plenty of ammo to counter with. That certainly could be another reason we are seeing selling over the past couple days, when combined with the ever- present geo-political problems. The rally ahead of his testimony on Monday and Tuesday, however, was enough to turn the point and figure charts back up into columns of "X," which represent significant upward movement. A reversal requires three-boxes in the opposite direction of the downtrend and therefore is supposed to represent a reversal in sentiment. However, we have now seen the last four Dow reversals up indicate contrary profitable short entry levels. The last five reversals in the SPX and OEX have been short entry opportunities. What's even more impressive is that the last reversals on Tuesday not only failed, but failed at a lower level and were unable to move back above the previous breakdown levels. We continue to set lower lows, and we are approaching territory not seen on the way down since September, when were on our way to setting lows below even those seen in July. After consolidating between 7950 and 8150 in the Dow, we ratcheted down a notch and have been trading between 7800 and 8000. That is, until today. The lows of the last few days had been 7830, 7801 and 7806, indicating the bulls were staunchly defending the 7800 support level. This morning, we broke down below 7800, reaching a low of 7753, and eventually finished the day at 7757. The pattern is becoming clearer each day. While we are getting bounces in the broader markets, those bounces continue to come at lower levels. We take out the floor of the previous consolidation range, get a bounce and then eventually collapse below that floor, establishing a lower range as bounces come at successively lower levels. This pattern has continued ever since the bullish percents began rolling over in December and January. Those percents measure the number of stocks in a given index currently giving buy signals. Right now the Dow bullish percent is the most extended to the downside, registering only 20%. The SPX sits at 42%, coming off a December high of 68% and the OEX sits at 38%, coming off a December high of 75%. The NDX sits at 38%, after coming off a December high of 82%. The Dow is the only index of these to have entered oversold territory below 30%, however we need to keep in mind that the last two bottoms came at 4% (July) and 8% (October)in the Dow, so it is still a ways from support. The sinking bullish percent has been a good indicator that bounces would be only temporary on the way down, just as a rising bullish percent in October and November was a good indication that pullbacks were temporary on the way up. Still, we must note that we are getting closer to the extreme bottom end of the range we have traded in over the last year and risks will begin to shift less in favor of bears as we continue to drop. It is true that the October drop took us below the drop in July and we certainly could be headed to sub-7000 Dow range on this drop. However, as we reach those bottoms, shorts would be best advised to tighten stops and take some chips off the table. Point and Figure Chart of the SPX Point and Figure Chart of the Dow Dow Bullish Percent We spent some time talking about head and shoulders patterns over the last couple of months and so far those patterns are bearing fruit to the downside. We saw the similar pattern over the summer and fall end up very close to its downside objective before bouncing, with the Dow actually coming within just a few points of its objective on the July drop. The target of the current Dow head and shoulders pattern is 7500, while the SPX is targeting a low around 785. Those would both be higher than the October lows and if we get there we can then decide just how significant a higher low would be. Daily chart of the Dow Daily Chart of the SPX Notables: The COMP closed well below previous support at 1300, finding resistance there once again on an intraday basis. Its mid-morning rebound high was 1301. The VIX is again testing the 40% level that has signaled short-term rebounds, although those rebounds have continued to eventually fail. The ten-year yield took out recent lows, but has yet to approach the low from late January or late February. The five-year yield finished up on the day, in contrast to the ten and thirty year. This morning's testimony from CIA chief George Tenet that North Korea has an untested ballistic missile capable of reaching the U.S. and likely has as many as two plutonium based nuclear weapons, which came alongside the International Atomic Energy Agency's 35-nation executive board's citation of Pyongyang for being in breach of U.N. safeguards, also weighed on markets. In the end, it turns out the news of the missile had been known to U.S officials for a couple of years, but the splash across the news screens certainly made buyers think twice about buying a dip. Most of the blame for today's drop has fallen on concerns over a war in Iraq. Whatever the reason the market continues to be sold, the Iraq concerns are as good a reason as any. However, we are not exactly getting positive news from the corporate sector either. General Motors saw its price target cut at Banc of America Securities from $32 to $28. B of A cited a lower rate of free- cash-flow growth, saying the new target reflects 23% downside from current levels. It also said that if GM's pension fund assets were marked to market right now, the price target would drop to $24. The big concern for investors is also B of A's assertion that the company will be forced to cut its dividend. GM finished down $2.03 on the day. The analyst cited cash-flow growth problems at all big three U.S. automakers, which are being hurt by increased foreign capacity in the truck market. He mentioned increases for Toyota pickups specifically. Ford's price target was lowered from $13 to $11. Viacom also released earnings that showed improved profits, after a year ago loss, but also found only sellers. In spite of beating estimates by three cents per share, the company's cable and video results fell short of expectations. The lower than expected cash flow in those areas gave bears all the ammo they needed in a market that seems to be looking for the bad news in just about any earnings release. We have seen a slew of stocks sold-off in spite of beating forecasts and this was no exception. The stock started off the day sinking over $2 before rebounding to show a loss of $0.98 for the day. One sector that showed surprising strength was the semiconductor group. Last night, AMAT missed profit and revenue estimates, as well as said, "In the near term, we do not expect to see a significant upturn in capital spending and will continue to implement cost-cutting measures, as necessary, to better align our operations with business conditions." It also said it would shut down for two weeks this quarter. These comments followed a warning at the end of January and only added to the bearish evidence piling out of the sector. However, the Semiconductor Index (SOX) actually spent most of the day in the green, as investors were apparently expecting even worse things from AMAT. The SOX eventually gave in with the broad market sell-off, dropping two points on the day, but if not for that heavy pressure, very well could have ended positively. After the bell, TMP Worldwide, parent of Monster.com, pulled its guidance for 2003, saying, "The fragile economy and the unpredictability of world events make it imprudent to discuss specific guidance. Any prior guidance is therefore not applicable." While we have seen nothing to make us anything but bearish, we have to start thinking about a bottom. Things looked awfully ugly before big rebounds in July and October, as well. Those bounces both eventually failed, as we are approaching the lows once again, but after a sell-off of over 1000 Dow points, a bounce making up less than 1/2 of that drop can whip us around by 500 points very quickly. I am not predicting that bounce in the immediate future, but the possibility grows greater with each leg down. Bears can be comforted by the fact that we did consolidate for a while in the 7950-8150 range and that could have been our bounce. If that is the case, then the drop could be much steeper than the H&S patterns indicate. However, my guess is that when it comes, it may run a little more than 200 points. For right now, any short-term rallies have been good shorting opportunities and until that trend changes then we should go with it. Traders should continue to watch the bullish percents, because if we do reverse up at the same time we begin to bounce, then that may be our first signal that the tide may be turning. Until then, lean short, but stay cautious. ================================================================== 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 --------------------------------- Abbott Labs - ABT - close: 35.41 change: -0.76 WHAT TO WATCH: On Tuesday Abbott announced the European launch of its Dexamet heart stent. This news came a day after S&P raised the company's outlook from "negative" to "stable." These developments, however, weren't enough to keep ABT above support at $36.00. The recent breakdown through this level and the corresponding double-bottom point-and-figure sell signal are indications that ABT could extend (or even accelerate) its multi- week downtrend. Shares are currently trading in a fast-move region that was created by the quick bounce from the July lows near $30.00. That level presents a reasonable downside target for short-term traders. Bearish entries could be targeted on a move under today's low ($35.34), using a stop just above the descending 21-dma at $37.63. The 21-dma has provided resistance over the past three weeks. --- Citigroup - C - close: 31.42 change: -0.63 WHAT TO WATCH: Weakness in the financial sector has weighed heavily on the Dow Jones. On Wednesday the BKX.X index (which represents the large money-center banks such as Citigroup and JP Morgan) joined the Industrials in falling to new multi-month lows. There were some rumors that the two companies might be held responsible for additional Enron-related liabilities. C is looking particularly weak as it fills in its October 15th gap and moves towards the October lows near $26.00. The stock gave a triple-bottom p-n-f sell signal at $34.00 and is now threatening to move through bullish support. A trade at $31.00 would confirm a violation of this trend. In light of the sector weakness, we think C looks like a good short play at current levels. A failed rally back to the $32.00 area might also offer an entry point. Other possible bearish trades in the financial group include BSC, GS, LEH, MER, and MWD. --- Johnson & Johnson - JNJ - close: 50.00 change: -2.00 WHAT TO WATCH: JNJ has been marching steadily lower ever since it rolled over from its converging 50-day, 100-day, and 200-day moving averages in January. This was followed by a violation of bullish p-n-f support at $53.00. The downtrend accelerated today after SurModics' CFO resigned. SRDX provides the polymer technology that Johnson & Johnson uses for its Cypher drug-coated heart stent. There was speculation that the resignation could be a sign of trouble for SurModics, which obviously would not be a positive development for JNJ. The resulting 3.8% decline took JNJ to levels not seen since late-July. Psychological support at $50.00 will probably be violated tomorrow if the market opens with a bearish bias. The stock is trading well above its next level of daily chart support at the July lows ($42.00). The July sell-off resulted from an overreaction to reports of accounting irregularities at one of the company's factories. While a retest of those lows might be a little optimistic for short-term traders, a move to the $45.00 area would not be out of the question if the Dow Jones continues to weaken. --- Mohawk Industries - MHK - close: 48.19 change: -1.31 WHAT TO WATCH: It's been all downhill for Mohawk ever since the stock gave a triple-bottom p-n-f signal up at $55.00. The bears got another shot in the arm last week when the carpet manufacturer announced an earnings warning. The resulting breakdown below $50.00 earned MHK a spot on Friday's Watch List. Shares spent the following two sessions gravitating towards that level before today's 2.6% decline dragged Mohawk to new relative lows. The daily chart shows no clear support until the October lows near $44.00. Watch for a move below $48.00 or another rollover from $50.00 to provide a bearish entry point. --- Netease.com - NTES - close: 13.00 change: -0.81 WHAT TO WATCH: Shares of this Chinese internet portal company experienced an astonishing explosion from the October lows of $1.80. By mid-January NTES had moved above its all-time high of $17.25 (which was set shortly after the stock IPO'd) and maxed out at $17.90 - increasing by a factor of ten in roughly four months! To say that Netease was overdue for some profit-taking is a vast understatement. Shares have spent most of the previous three weeks trending sharply lower from the $18.00 area. What's technically interesting about this pullback is that NTES is now trading at its 50-dma ($12.87). This moving average acted as a price magnet during the stock's initial upward movement in October. If shares manage to rebound from the 50-dma, there isn't much overhead resistance to prevent a retest of the $15.75- $16.00 region. Aggressive speculative traders could target entries at current levels, with a stop slightly under $12.75 or $12.50 (depending on your risk tolerance). --- Rohm & Hass - ROH - close: 29.15 change: -0.60 WHAT TO WATCH: Shares of this chemical manufacturer have tumbled to new 52-week lows in the wake of last week's earnings announcement. The company reported a net loss and missed analyst expectations by one penny. Rohm's CEO characterized the quarter as disappointing. This fundamental weakness has led to a violation of support at $30.00. ROH now appears to be headed for a test of the 2001 lows in the $25-$26 region, which is the next level of clear support on the weekly chart. Bearish traders can watch for either a move under today's low ($28.90) or a failed rally near $30.00 to offer a potential entry point. --- SBC Communications - SBC - close: 23.07 change: -0.64 WHAT TO WATCH: Still falling! SBC garnered some unwanted negative brokerage comments after the company revealed it was in talks to buy Direct TV from GM Hughes. The stock has dropped below support at $23.50 and might be headed for the October lows near $20.00. Shares have also fallen below bullish support on the p-n-f chart. Note, however, that previous resistance at $22.00 may now provide support. --- Tech Data - TECD - close: 20.55 change: -0.22 WHAT TO WATCH: TECD gapped sharply lower last Friday after the company said that its fiscal 2004 profit would be significantly less than the results for 2003. The stock has since managed to claw its way back from the 52-week low of $19.07. Shares seem to have stabilized now that the bad news has been released. Assuming that TECD gets some assistance from a NASDAQ rally (yes, that's a pretty big assumption), it looks like the stock could break out of today's Inside Day pattern and fill in a larger chunk of the Friday gap. Aggressive traders can think about going long on a move above $21.15. We'd categorize this as a highly speculative high-risk/high-reward play. --- Utilities HOLDRS - UTH - close: 56.61 change: -2.09 WHAT TO WATCH: The utility sector absorbed another blow this week when El Paso (EP) announced management changes (including the resignation of its CEO), resulting in its credit rating sinking closer towards junk status. The resulting sell-off has spread to other pipeline companies (such as DUK) and the broader utility group. Much like the UTY.X utility index, the AMEX-traded UTH is trading at fresh multi-month lows after falling under the November lows. This breakdown has cleared the way for a possible test of the next support region at $50-$52. Even though shares might be due for some short-covering after moving sharply lower over the past two sessions, it'll be hard for the sector to find a bid if the overall market extends its losses. Point-and-figure chartists will also notice that today's decline produced a double-bottom sell signal. Aggressive entries can be targeted at current levels, while more conservative types may want to wait for a failed rally back to the $59.00-$59.50 area. ========================= Play-of-the-Day (BULLISH high-risk/high-reward play) ========================= Cytyc Corp. - CYTC - close: 12.39 change: +0.32 stop: 11.20 Company Description: Cytyc Corporation develops, manufactures, and markets products for medical diagnostic applications primarily focused on women's health. The ThinPrep. System consists of the ThinPrep. 2000 Processor, ThinPrep. 3000 Processor, and related reagents, filters, and other supplies. (source: company press release) - ORIGINAL WRITE UP: February 5th 2002 - Why We Like It: CYTC was booted from the NASDAQ-100 in December after the stock was hammered by concerns of increased competition in the cervical cancer screening market. The stock was also plagued by talk of accounting issues. Most of the damage was done in the first half of the year. By August, shares had stabilized near $10.00. Over the past six months CYTC consistently gravitated towards that level, trading in a clearly-defined range between $8.00 and $12.00. It wasn't until today's session that shares finally poked their head above the upper resistance level. As you might expect, there was some positive news behind this breakout. Cytyc's earnings report last Tuesday included a 5.4% increase in year- over-year revenue and a net profit of 15 cents per share. Analysts had been anticipating only 13 cents per share. Those positive results suggest that the concerns about competition eating away at CYTC's market share may have been overblown. Investors have taken a very positive view of Cytyc's improving fundamentals. The stock had a clear buy-side bias over the past week, in spite of weakening broader market. That relative strength bodes well for a continued rally. And although bears might argue that stock is near-term overbought, we believe a move above resistance could trigger a short-covering rally that takes CYTC towards $14.00. This area, which acted as support in May and turned back a rally attempt in June, presents a possible challenge for the bulls. Our profit-target is set just below that level at $13.94. More significant resistance is at $16.00, but that's a bit too ambitious for our relatively short-term strategy. We're placing an entry trigger for this play at $12.11, one cent above today's high. If the play is activated we'll use a stop at $11.20. This would set up a risk/reward ratio of 1:2. Traders looking for less downside exposure could use a stop near $11.65, under the recent trend of higher lows on the 15-minute chart. - Last Update: February 11th, 2003 - It took awhile, but CYTC finally managed to trade up to our action point on Tuesday. The recent pattern of relative strength was a sign that shares could soon be trading at new multi-month highs. With the NASDAQ moving slightly higher this morning, the bulls had no problem pushing Cytyc above both our entry trigger ($12.12) and the mid-June high of $12.20. The intraday move above the latter level bodes well for an eventual rally to the next area of resistance at $14.00. We also like how shares held firm while the NASDAQ ticked lower in afternoon trading and closed above $12.00 for the first time since June. Barring a steep broader market sell-off tomorrow, it looks like CYTC is well-positioned to attack new relative highs. New entries can be targeted on a move above $12.25. Our stop-loss is set at $11.20. - Play-of-the-Day Comments: February 12th, 2003 - A 2.6% gain never looked so good. On Wednesday CYTC extended its breakout above resistance at $12.00, seemingly oblivious to the broader market's steady decline. As a matter of fact, a 5-minute chart of the NASDAQ and CYTC almost look like mirror images of each other - especially the second half of the session, when the stock ignored a steep selloff in the Composite and powered ahead to another multi-month high. While there was no company-specific news to explain this relative strength, strong earnings from fellow medical device-maker Medtronic (MDT) may have helped to induce more short-covering in CYTC. The fact that shares closed near the highs of the day bodes well for more upside action on Thursday morning. We think the stock is poised to continue towards our initial profit-target at $13.94 - especially if the major indexes manage to recoup some of their recent losses. Aggressive short-term traders can watch for a move above today's high ($12.39) or another intraday pullback to the $12.00-$12.10 region to offer an entry point. Picked on February 11th at $12.12 Results since picked: +0.27 Earnings Date 01/28/03 (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. Please read our disclaimer at: http://www.optioninvestor.com/page/oin/aboutus/disclaimer.html ***************************************************************** ADVERTISING INFORMATION For more information on advertising in PremierInvestor.net Newsletter, or any Premier Investor Network newsletter please contact Contact Support. ***************************************************************** Copyright ) 2003 PremierInvestor.net. and The Premier Investor Network. Do not duplicate or redistribute in any form.
PremierInvestor.net Newsletter Wednesday 02-12-2003 section 2 of 2 Copyright ) 2003, 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc