PremierInvestor.net Newsletter Wednesday 03-19-2003 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: Not So Calm Before the Storm Watch List: BAX, CD, FRX, MXIM, PENN, and more... Play of the Day: Pullback To Support ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 03-19-2003 High Low Volume Advance/Decl DJIA 8265.45 + 71.22 8277.64 8141.50 1706 mln 1086/585 NASDAQ 1397.07 - 3.48 1401.24 1378.57 1679 mln 712/924 S&P 100 444.84 + 4.46 445.48 437.72 totals 1798/1509 S&P 500 874.02 + 7.57 874.99 861.21 RUS 2000 368.51 + 0.51 368.56 365.10 DJ TRANS 2149.15 + 20.13 2151.01 2121.02 VIX 36.18 + 0.40 36.39 34.87 VIXN 48.20 + 0.18 49.51 47.62 Put/Call Ratio 0.74 ****************************************************************** =========== Market Wrap =========== Not So Calm Before the Storm by Steve Price With just hours to go before the deadline set by the U.S. for Saddam Hussein to leave Iraq, or face military action, the markets showed plenty of indecision early on. The techs found sellers following Oracle's cautious guidance, while the Dow headed higher, building on gains of the previous five sessions. However, it wasn't long before war jitters took some shine off the recent gains and bulls took some profits. There have been may theories offered for the recent rise in the markets. I've heard that shorts began covering last week at the conclusion of head and shoulders objectives and then institutional money flowed in this week when war became imminent. I've heard there was selling into the rallies overseas in case a war does not go as quickly as some are predicting. I've heard plenty of explanations, but it is interesting that with all the reasons offered for movement, the recent movement continues to find pivotal technical levels as support and resistance. Granted, his morning's rally was fighting an uphill battle after disappointing guidance accompanying Oracle's earnings release on Tuesday night, but we did head into the green, stopping only at levels that have continued to play a big part in the movement over the past several months. We can conclude that the Dow, OEX and SPX did form classic bearish head and shoulders formations from October through January, resulting in a breakdown that fulfilled their objectives last week. Our big bounce came when the OEX and SPX hit their bearish objectives almost to the point. Now that we have bounced much higher, we have run right into bearish resistance on the point and figure charts. Those charts show bearish resistance in the Dow at 8300, SPX at 870 and OEX at 442.50 (on the 2.5 point box), while the OEX traditional chart registers that resistance at 448. Today's highs came in at Dow 8277, SPX 874.99 and OEX 445.48. We broke above that resistance on a closing basis in the SPX and OEX and fully through it in the OEX on the 2.5 point chart, although we are right up against it on the traditional chart. The SPX top at 874.99 came within 0.01 of a breakthrough. The next box level is required for a complete breakthrough, as can be seen on the chart below. Daily Chart of the Dow Point and Figure Chart of the SPX The Nasdaq struggled to hold the achievement of the 1400 level it made on Tuesday pretty much from the open. After Oracle said demand had softened near the end of the third quarter (fiscal) due to anxiety over a war in Iraq, calling it a "wild card" for customer demand, the reminder that the economy is still in neutral weighed across most of the techs sectors. What was also a concern was that some of the profits that the company posted were due to some outside issues, such as unusual cost of service savings and currency translation to U.S. dollars and even the estimate beat for the past quarter suddenly looks less convincing. In the afternoon rally that took the Dow, SPX and OEX all to new highs, the COMP was still unable to hold its late day test of 1400, eventually falling to 1397 on the close. Chart of the COMP In the area of conundrum, we got some results from Bear Stearns that further muddy the equity waters. Financial stocks are a good place to start any rally - or any market drop. BCS actually seems to have found the best of both worlds. It released earnings that beat expectations, citing record profits from its bond trading operations. Those operations turned into a big winner as investors fled the stock market and shifted back into fixed income instruments. So if financial stocks are turning profits on a market decline, will they lead us higher? Keep n eye on the BKX, BIX and XBD as we get earnings tomorrow morning from Goldman Sachs, Lehman and Morgan Stanley. Those indices have all bounced over the past week along with the broader markets, but are within points of their 50-dmas, which coincide with resistance from early and mid-February. Speaking of bonds, it appears that much of last week's rally was fueled by asset allocations between treasuries and stocks. Watching yields, which are a good indicator for where stocks are headed as they trade inversely to bonds (as bond prices rise, the yields from the purchase of those bonds drops and vice versa), also gave us a good indication of a possible market bottom last week. In fact, while the equities were testing July lows, and the bond market was rallying with the cash flow out of equities and into treasuries, yields had already dropped below July levels. The yields also took out their December and November lows and headed toward October levels. It was when the yield hit the October low that the broad markets all bounced. A look at the weekly chart of the ten-year note index shows big reversal off that level. Now that we are on the upside, we are also seeing some key levels tested by the yield. The five and ten year yields both broke above their 50-dmas on Tuesday and then gapped higher to start the day on Wednesday. The early indications from those 50-dma breaks are bullish. However, we are also entering some heavy resistance on both yield charts that could be tough to break. That could indicate a reallocation back in the other direction and should put bulls on alert. Chart of the Ten Year Yield One of the other indicators that I often use is the Market Volatility Index (VIX). The VIX has been a reliable indicator of market bounces and pullbacks at its extremes. Readings of 40% have indicated it is time for an equity bounce and readings of 34-35% have indicated it is time for a market pullback. The last decisive breakthrough of these levels came in January, when the VIX was finding resistance at 35%, rather than support and eventually took out that resistance on the head and shoulders neckline break between Dow 8200 and 8300, depending on how you draw the neckline (I have it at 8220). We have now rallied all the way back into that territory and once again the VIX is testing 35%. If we do manage to breakthrough the recent bottom, it will likely coincide with a move back above Dow 8300. The first close below 8300 was the domino that signaled a trip much lower and a close back above it may signal a true reversal higher. However, note that a trade of 8350 will be required to break through the bearish resistance line noted above on the point and figure chart. What is interesting here is the divergence in the VIX from the action in the equities. Although we saw a VIX decline early in the day, it was higher once again by the close, in spite of late day gains in the equities. Usually we see the opposite and it was the second time this week we've seen this divergence. Obviously, there are plenty of institutions holding up premium levels in the OEX that are still concerned about the downside possibilities that a messy war could bring, or the possibility that the rally is not for real. While the VIX is at the low end of the recent range, it is still historically high and if the big boys really thought we were headed higher, I would expect them to take advantage of the high levels of premium by shorting them. Chart of the VIX The crude oil futures, which have also been a reliable indicator of equity action, with a consistent inverse relationship, continued to drop further again today. Certainly if the oil fields in Iraq began flaming, we could see a reversal in that market, where the per barrel price has fallen 21% since March 12. I heard an analyst yesterday commenting that a drop in the price of oil from $31 per barrel to $24 could amount to a 1% increase in GDP from the fuel cost savings to Americans and U.S. businesses. That would seem to support the consistency we have seen in the inverse relationship between the equities and oil prices. Let's see, what have I left out? Oh, yes, the bullish percents. The bullish percents - the number of stocks giving point and figure buy signals in a particular index - have all been in free fall mode since the middle of January. That is until the past couple of days. Each prior rebound attempt was not quite enough to turn these indicators higher and they remained in oversold territory in the Dow, SPX and OEX, with the NDX just making it to the oversold line at 30%. In the past couple of sessions we have finally seen a rebound that was strong enough to reverse some of the indicators. The Dow bounced from a reading of 10% all the way up to a reading of 20%. The NDX bounced from 30% to 44% and the SPX which tends to lag because of the amount of stocks in the index, has now bounced from 28% to 34%. Those bounces should be a warning sign to bears and may indicate the beginning of a move higher, rather than an exhaustion of a bear market rally. While I am not ready to declare the bear market over, since these also reversed up on other bear market rallies, I am conscious of the fact that this bear market rally may still have some legs left in it. The rebounds from July and October took these percents up to 60% and 72% in the Dow; 50% and 82% in the NDX; and 58% and 68% in the SPX. So there is plenty of upside to this indicator if we are able to continue the breakout. Once all of these reached oversold territory, the risks began to shift out of the bears favor and now that they are on their way up, they are no where close to overbought at 70%. Bullish Percent of the Dow So we now have a number of technical indicators all converging at the current levels. The VIX, the bond market, the bearish resistance lines, the head and shoulders breakdown levels - all testing just how much strength the bulls have left after a gain of almost 900 Dow points in 6 sessions. Combine that with the possible start of a war in the next day or two and it appears that the spring is wound awfully tight right now. We saw bulls in charge in the major indices, but the techs unable to overcome the Oracle news. If the U.S. launches an attack tonight after the 8 p.m. deadline passes we should have a clearer picture of just whether the pre-war rally will stick. So far, it appears we will get a quick war - that is if today's unsolicited surrender of 17 Iraqi soldiers is any indication. There were also reports that the U.S. had already conducted air strikes on Iraq artillery that boosted the market late in the day. If the rally does stick, then traders who have been on the sidelines may want to go long if we complete those bearish resistance breakthroughs and a move above resistance in the yields I highlighted above. If we fade, then a higher level of support that doesn't reverse the bullish percents back down may also be a long entry point. However, defining a pullback will be tough and we have to remember that we have yet to see an economic recovery. After six straight up days in the Dow there is bound to be a pullback at some point, but wait for that pullback to show some support before jumping in long. If the rally isn't for real, traders may find themselves picking one bottom after another, all the way back to last week's levels Trade what you see, and keep your risk level comfortable. ================================================================== 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 --------------------------------- Baxter Intl. - BAX - close: 21.00 change: +0.57 WHAT TO WATCH: Shares of Baxter moved sharply lower last week after the pharmaceutical company said it expected to earn only $2.10-$2.20 per share in 2003. Analysts had been looking for a result of $2.24 per share. First-quarter estimates were also reduced. BAX largely blamed its shortfall on increased competition in the blood plasma market. The resulting sell-off took the stock from $27.50 to $19.50 in a matter of days. But now that shares have started to rebound, aggressive bargain- hunters might want to consider legging into bullish positions. BAX has ample upside potential with a large fast-move region created by the recent decline. Rather than targeting a complete retracement of last week's sell-off, we'd be aiming for a test of psychological resistance at $25.00. --- C.R. Bard - BCR - close: 61.40 change: +0.35 WHAT TO WATCH: BCR looks like a possible bullish play if it pulls back to $60.00. That level of stubborn resistance was finally broken on Tuesday as shares rallied to new 52-week highs. The breakout created a quadruple-top buy signal on the point-and- figure chart. Bulls will now be targeting a retest of the all- time highs just below $65.00. Aggressive traders might want to chase this one higher, but the most prudent strategy would be to wait for a pullback and successful test of $60.00, which should now provide support. --- Cendant Corp. - CD - close: 13.05 change: -0.05 WHAT TO WATCH: Cendant provides services in both the real estate and travel businesses. Shares did not see a substantial reaction to Wednesday's news that USAI Interactive (USAI) will buy out the remaining shares of Expedia.com (EXPE). Instead, CD traded an Inside Day and held firm near its relative highs. The weekly chart shows an impressive multi-month uptrend that has taken the stock above resistance at $13.00. Overhead resistance looms lies at $14.75 and $15.25. Depending on your trading strategy, either level would provide a reasonable short-term profit-target. Longer-term traders could aim for an eventual retest of the 2002 highs near $20.00. Point-and-figure chartists will note that a trade at $13.50 would create a double-top buy signal. --- Forest Labs - FRX - close: 53.10 change: +1.96 WHAT TO WATCH: On Tuesday FRX bulls won a key technical victory when the stock powered through resistance at $50-$51 and the 50- dma at $50.63. Driving the breakout was news that Forest expects the FDA to approve Lexapro, an existing anti-depressant drug, for the additional treatment of general anxiety disorder. This breakout triggered a wave of short-covering that propelled FRX to another 3.8% gain on Wednesday. Now that shares are trading at multi-month highs, the bulls will be aiming for a test of the all-time highs near $56.50. So how to play FRX? As impressive as the current wave of buying is, the stock does not have a historical tendency to rise sharply for several days in a row. Instead, we'd expect a pullback and test of previous resistance at $51.00 before the uptrend continues. This would pose an attractive buying opportunity for traders looking to enter long positions. --- Maxim Integrated - MXIM - close: 39.56 change: -0.28 WHAT TO WATCH: All things considered, chip bulls can be pretty happy with how the semiconductor index traded today. Tech sector weakness inspired by a sell-off in ORCL and the broader software group dragged the SOX.X towards its 200-dma at 315. Additional profit-taking could have been expected in light of the past week's steep gains. However, buyers moved in above the 200-dma and made their presence felt throughout the rest of the session. The SOX.X finished near break-even after recouping its early losses. A renewal of bullish momentum could send the index towards the next region of resistance at 340-350. Such a move would probably push MXIM above its own overhead resistance at $40.00. The stock shrugged off a brokerage downgrade today and finished with a fractional loss. A breakout through $40.00 would clear the way for a possible test of the November/December highs in the $44.00 range. Maxim is currently showing a double-top buy signal on the p-n-f chart. --- Penn National Gaming - PENN - close: 18.26 change: +0.30 WHAT TO WATCH: Along with the rest of the market, gaming stocks have been moving nicely higher over the past week. Leading slot machine maker IGT is trading at all-time highs, and sector giants MGG and HET are looking strong as well. PENN looks like an attractive long play within the group because it's trading at multi-month highs after breaking above resistance at $18.00. The point-and-figure chart shows a number of bullish developments as well, with shares moving above bearish resistance after a successful test of ascending support. The recent breakout produced a double-top buy signal. A glance at the daily chart shows possible resistance at the late-November highs near $19.00. But given enough time, PENN might be able to make it to the $21.00 region. --- Sealed Air - SEE - close: 39.59 change: +0.30 WHAT TO WATCH: That huge November 29th gap on SEE's daily chart stemmed from a favorable court decision related to the company's asbestos liabilities. Since that move higher, the stock has traded in a tight five-dollar range. The past week's broader market rebound led to a steep rally from support at $35.00. Shares are now approaching resistance at $40.00. This has set up two scenarios that might provide action points. Should SEE continue its ascent, a move above $40.00 could trigger another upward leg. Other than the 200-dma at $42.91, there is no substantial overhead resistance until the $46.00 region. But because SEE is already sitting on some large gains, buying a breakout would be better suited to aggressive traders. On the other hand, a failed rally near $40.00 would offer a bearish entry point. A favorable risk/reward ratio could be created by using a stop slightly above resistance. We'd be targeting a pullback to the 50-dma at $37.25. =============== Play-of-the-Day (BULLISH high-risk/high-reward play) =============== Black Box - BBOX - close: 30.08 change: -0.74 stop: 28.69 Company Description: Black Box is the world's largest technical services company dedicated to designing, building and maintaining today's complicated network infrastructure systems. Black Box services clients through 117 offices in 132 countries throughout the world. (source: company press release) - ORIGINAL WRITE UP: March 18th, 2003 - Company Description: Black Box is the world's largest technical services company dedicated to designing, building and maintaining today's complicated network infrastructure systems. Black Box services clients through 117 offices in 132 countries throughout the world. (source: company press release) Why We Like It: As Albert Einstein once pointed out, opportunity can often be found in the midst of great difficulty. That piece of wisdom applies particularly well to the recent trading in BBOX. Shares of the networking company lost roughly a third of their value on March 12th after Black Box reduced its fourth-quarter earnings expectations to 53-54 cents/share. Analysts, on average, had been expecting an EPS result of 74 cents. Explaining the shortfall, BBOX said "overcapacity in just about all vertical markets...continues to have an impact on our business." They also cited the continued war and terrorism concerns as reasons for the weakness, but of course that could be said for the entire economy in general. Investors were not pleased with these bearish comments regarding IT demand. BBOX gapped from $39.14 to $26.78 on extremely high volume of 7.5 million shares. The stock continued to decline and bottomed out at $25.58 during the following session. Things were looking awfully bleak as BBOX fell to multi-year lows, but the bears finally decided to call it quits when they were confronted with Thursday's broader market rally. Although there have been no fresh news developments for Black Box since last week's earnings warning, bargain-hunting and short covering have pushed BBOX sharply higher over the past two sessions. Obviously yesterday's market rally played a big factor in those gains. Shares continued to trade strong on Tuesday and outperformed the NASDAQ with a gain of 7.4%. That relative strength is a positive sign for the bulls. Point-and-figure chartists will also note that BBOX has reversed into a column of "X." And while a case could be made for some consolidation of the recent bounce from the $26.50 region, we feel the stock is poised to continue higher as it fills in the March 12th gap. An entire retracement of those losses would take BBOX to the $39-$40 area. This might be a realistic goal for longer-term traders. Because we have a shorter-term timeframe, our objective will be to capture a rally to our official exit target at $34.94, just below psychological resistance. The action trigger to enter this play is set at $30.86. Should we be triggered, we'll use a stop- loss at $28.69, five cents under today's low. Those looking for less downside risk might want to use a stop slightly below $29.50, which acted as a price magnet during the middle of today's session. - Play-of-the-Day Comments: March 19th, 2003 - BBOX extended its recent gains on Wednesday morning and quickly reached our entry trigger at $30.86. Shares initially moved higher with the NWX.X networking index and briefly outperformed the NASDAQ. An intraday high of $31.38 was reached before a wave of profit-taking dragged the stock back to psychological support/resistance at $30.00, which acted as a price magnet for the duration of the trading day. On Thursday we'll be watching for BBOX to move through intraday resistance at $30.30. A breakout above that level would give aggressive traders an opportunity to enter new long positions. Those who are seeking more upside confirmation will want to wait for a move above today's high. Our stop for this play is set at $28.69. Picked on March 19th at $30.86 Results since picked: -0.78 Earnings Date 05/08/03 (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. 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 03-19-2003 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: High-Risk/High-Reward Triggered Plays: BBOX (bullish) ================================================================== HIGH RISK/HIGH REWARD (HR) section ================================================================== =============== HR Play Updates =============== --------------- Triggered Plays --------------- Black Box - BBOX - close: 30.08 change: -0.74 stop: 28.69 BBOX extended its recent gains on Wednesday morning and quickly reached our entry trigger at $30.86. An intraday high of $31.38 was reached before a wave of profit-taking dragged the stock back to psychological support/resistance at $30.00, which acted as a price magnet for the duration of the trading day. On Thursday we'll be watching for BBOX to move above intraday resistance at $30.30 and move back towards $31.00. Our stop for this play is set at $28.69. ================================================================= 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.
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