PremierInvestor.net Newsletter Wednesday 12-22-2004 section 1 of 2 Copyright (c) 2004, 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: Higher Highs Watch List: Electronics to Financials and more =============================================================== MARKET WRAP (view in courier font for table alignment) =============================================================== 12-22-2004 High Low Volume Adv/Dcl DJIA 10815.89 + 56.46 10822.68 10739.19 1.75 bln 1694/1129 NASDAQ 2157.03 + 6.12 2163.48 2145.18 1.80 bln 1676/1376 S&P 100 575.34 + 1.98 576.04 571.85 Totals 3370/2505 S&P 500 1209.57 + 4.12 1211.42 1203.81 SOX 424.05 - 0.35 427.13 422.39 RUS 2000 648.46 + 2.26 649.75 645.68 DJ TRANS 3790.62 - 1.47 3803.75 3786.24 VIX 11.45 - 0.10 11.71 11.37 VXO (VIX-O)11.81 + 0.29 12.18 11.58 VXN 17.15 + 0.21 17.38 16.44 Total Volume 3,556M Total UpVol 2,191M Total DnVol 1,306M Total Adv 3370 Total Dcl 2505 52wk Highs 390 52wk Lows 19 TRIN 0.82 PUT/CALL 0.91 =============================================================== =========== Market Wrap =========== Higher Highs Jonathan Levinson The Dow and SPX hit new highs for the year as the Nasdaq trailed behind. An unexpected rise in oil inventories saw crude oil drop sharply, a move that was credited by some reporters for the higher high in the Dow and SPX. Breadth was positive, with advancing volume nearly doubling declining volume on the NYSE and the Nasdaq. Volatility remains very low, with the VXO going out at 11.81 and the QQV dropping another 1.46% to close at 15.48 Daily Dow Chart The Dow blasted higher in a move that kicked off at 10AM, reaching a 42 month high at 10822.68 before 11AM and held for a minor correction to 10786 before resuming its upward march to close the day at 10815.89. Support below is at 10780, 10740, 10640 and 10575. While the daily oscillators are vulnerable to a bearish divergent downphase, that will only occur if the Dow reverses hard from here. The more likely scenario would see a minor pullback to one of the supports I've drawn as the bull flag breakout in the Dow continues to play out. A move below 10430- 10440 support would invalidate that bullish scenario. Daily S&P 500 Chart The SPX reached a new year high at 1211.42 on the 10AM runup, and the pullback bounced from a double intraday bottom at 1207 to stall out at 1210, closing the day at 1209.57. Support from 1205-07 is followed by 1189-92 and 1172. As with the Dow, the daily cycle oscillators suggest caution, but only the bears can drill the price below the 1172 level from here. Daily Nasdaq Chart The Nasdaq missed the party, touching a high of 2163.48 on the morning pop, below its Dec. 15th high of 2171.27. The afternoon bounce was weaker as well, failing below 2158 to close at 2157. The bearish divergence is steeper for the Nasdaq as well, but the question remains as to whether it's a bearish divergence or a corrective bullish consolidation. Provided that 2070 doesn't get violated on a closing basis, it should prove to be the latter. Weekly TNX Chart The Mortgage Bankers Association reported that the Mortgage Index was flat at 689.3 for the week ended December 17, following the previous week's 1% decline. The Refinancing Index rose 5.7% to 1958.2 following the previous week's 2% decline, while the Purchase Index declined 3.6% to 471.1 following the prior week's 0.4% decline. The sideways drift of the ten year note yield (TNX) in recent weeks has the weekly cycle upphase faltering. Provided that the 4.0%-4.02% rising wedge support line doesn't fail, the upphase should begin to get traction on a break above 4.26% resistance, above which 4.4% is the next significant confluence. For the day, TNX rose 3.3 bps to close at 4.201%. Interested readers can follow the daily action of the TNX in my nightly Futures Wraps. Weekly chart of Crude oil The Energy Department reported today that crude oil inventories rose by 2.1M barrels, catching analysts off guard on their expectation of an 800K barrel decline. Gasoline inventories rose 1.8M barrels against expectations for inventories to remain unchanged. Distillate supplies rose 600K barrels vs. expectations for a 1.13M barrel decline. The American Petroleum Institute confirmed the increases in supply, reporting increases of 2.9M, 4.2M and 315K barrels for crude oil, gasoline and distillate supplies respectively. Crude oil futures got slammed on the news, dropping from an intraday high of 45.95 to a low of 43.65 before bouncing to a range in the low 44's. On the one-year daily chart, the move kicked off what might prove to be the right shoulder of a head and shoulders top with a horizontal neckline at 40 or a hunchback neckline at 41. Using the 40 neckline, the implied target would be as low as 25. While I would be personally surprised to see levels even approaching 25, that's the implied target of the formation. A move above 50 would invalidate the pattern, but 46 is a confluence that has acted as support and resistance this year, and the failure 5 cents below it fit well with a relatively symmetrical h&s pattern. For the day, crude oil closed lower by 3.17% at 44.30. The big news of the day landed overnight as FNM announced the resignation of CEO Franklin Raines and CFO J.T. Howard, as well as a number of smaller management changes, following last week's announcement that the SEC would require to amend prior accounting "errors". Those errors allegedly resulted in the overstatement of $9B worth of past profit. FNM owns 25% of current US mortgages and is the countries largest GSE. It's currently defendant to a number of class action suits and under criminal investigation by the Justice Department, investigation by the SEC and an ongoing probe by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). The company also announced the dismissal of FPMG as its auditors. Raines was replaced by interim CEO Daniel Mudd and Howard was replaced by Robert Levin. The Washington Post reported that the OFHEO alleges that FNM "systematically manipulated accounting estimates, ignored accounting requirements it had lobbied unsuccessfully against and operated with weak internal controls that helped obscure the other problems." The OFHEO has been aggressive in its call for Raines' removal, blaming him for promoting a corporate culture that prioritized "stable" earnings rather than accurate disclosure. The OFHEO stated last night that FNM is "significantly undercapitalized". To get an idea of the potential enormity of that statement, consider that FNM has outstanding debts to bondholders totally 957B and guarantees the principal and interest on 1.9T of mortgage-backed securities. These are significant percentages of the total amount of US debt in circulation, a particularly worrisome situation as the media began to utter names like "Enron" and "Worldcom" in the same breath as "Fannie Mae". Others however, note that FNM aptly qualifies for the phrase "too big to fail". To make up for the 9B shortfall, FNM would likely have to sell part of its portfolio, issue new stock or reduce its dividend. Traders following this story will recall that FNM had previously been ordered by the OFHEO to increase its capital reserves by 5B no later than mid-2005. What's important for traders to note is that while the situation continues to unfold, it is not a new one. Bears have been discussing FNM and FRE for years, and for years the sky has not fallen. Given the size and breadth of FNM's commitments, the issue is, if anything, as political as it is financial. Regardless of the financial outcome, the departure of Raines, a self-made man, a Rhodes scholar and former director of the Office of Management and Budget, raises all the old issues of corporate governance and ethics that continue to plague our markets. FNM gapped higher at the open and traded a high of 73.81, bounced from a low of 71.61 and settled into a range around 72 to close +2.32% at 71.98. On a lighter note, at 8:30, the Commerce Department announced the final Q3 GDP results, which came in at 4% vs. the 3.9% previously reported. The 4% expansion of the economy for Q3 exceeded estimates for an unrevised 3.9% and Q2's 3.3% growth rate. The core personal consumption expenditure index (PCE), which nets out food and energy costs and is the Fed's preferred measure of inflation, rose at a .9% annual rate vs. the .7% expected, the smallest rise since last year's .9% increase, which was a 32 year low. Corporate profits were low as well, however, with domestic profits decreasing by 59.3B in Q3 compared with an increase of 28.3B in Q2. That 59.3B decline was comprised of a 68.7B drop in profits of domestic financial corporations (which dropped 7.9B in Q2) and a 9.4B rise in profits of non-financial corporations (which had increased by 36.2B in Q2). The personal savings rate declined to a low of .5% in Q3, down from 1.3% in Q2 and 1.0% in Q1. In other news, Marketwatch reported that SNE has won injunctions against 2 Hong Kong companies allegedly engaged in producing counterfeit PlayStation products. However, SNE declined to comment on a report in the Financial Times to the effect that investigations have revealed significant networks such counterfeiters- one story covered a container that left one such sub-contracting factory, entered a prison in Shenzen, China loaded with parts and remained for several days, long enough for the inmates to assemble them. The issue of intellectual property between the West and East remains critical and unresolved. SNE lost .66% to close at 37.80. MSFT lost an appeal in the European Union to delay an order requiring it to immediately release a stripped-down version of Windows and amend its business practices. The EU's Court of First Instance had upheld the European Commission's sanctions imposed on MSFT in March, and today's failed appeal leaves the original decision intact, along with the finding that MSFT had abused its monopoly. MSFT's General Counsel Brad Smith said that the company would comply with the decision. Consumer groups applauded the decision, and the fact that MSFT will now be required to share its protocols and offer a version of Windows that contains no multimedia apps, deemed to prejudice competitors such as RealNetworks. The fine upheld totals 497M euro. For the day. MSFT closed lower by .37% at 26.97. For tomorrow, there's a full slate of economic reports as the markets prepare for the long weekend. At 8:30AM, we get November Durable Orders, Personal Income and Personal Spending, as well as initial claims for the week ended 12/18. At 9:45 it's Michigan Sentiment for December and at 10AM, November New Home Sales. Volume should continue to thin out ahead of the weekend, and with the headlines reporting the bullish new highs, we can expect retail traders to adopt that as the theme. After today's dismal intraday downphases following Tuesday's strong rise, the environment should remain decidedly unfriendly for bears even in the shortest timeframes, at least above today's lows. As I watch the hail outside my window, I'd like to take the opportunity to wish everyone a warm and happy, healthy and prosperous holiday season. ================================================================= 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 --------------------------------- Electronics Boutique - ELBO - close: 40.76 change: +0.93 WHAT TO WATCH: We strongly considered adding ELBO to the play list tonight as a bullish play. Shares have been consolidating sideways the last few weeks with support near $37 and resistance at $40.00. ELBO broke through the $40 level today as its MACD indicator nears a new buy signal. The P&F chart is bullish with a $58 target but we would probably pick the $44-45 region as a short-term target. --- Providian Financial - PVN - close: 16.32 change: +0.35 WHAT TO WATCH: PVN looks like an attractive candidate with its consistent long-term up trend and bullish technicals including a new MACD buy signal . Today's move over four-week old resistance at $16.25 could be a new bullish entry point. We hesitate to play it because it would need to be a three or four-month investment given its current rate of climb to make it worthwhile. Short-term traders could use the 100-dma as support. Long-term traders could put their stop under the 200-dma. --- Citigroup Inc - C - close: 48.31 change: +1.12 WHAT TO WATCH: C is no stranger to the watch list. We've been highlighting the stock for a breakout over major resistance at $48.00 and that's exactly what happened today. The new all-time highs in the BKX and BIX banking indices bodes well for the entire financial sector and the markets in general. We also like C's P&F chart with its bounce from support and new buy signal with a $59 (long-term) target. Traders can use today's rally as a new entry point. Our eight-week target would be $52 --- Concord Communications - CCRD - close: 10.58 change: +1.10 WHAT TO WATCH: We cannot find any news to account for CCRD's 11.6 percent rally today. Volume was very strong up about 150 percent more than normal. More importantly CCRD has bust through major resistance at the $10.00 mark and its simple and exponential 200- dma's. The P&F chart shows a new buy signal with a $16 target. ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- CLE $21.05 +0.90 - CLE surged more than 4.4 percent and it looks like this could be the beginning of a decent rebound attempt. AM $27.91 +0.56 - After seven weeks of consolidating sideways under resistance at $28.00 shares of AM look ready to break out. PLCE $35.99 +1.41 - PLCE has been rallying higher with rising volume. The recent strength has pushed through resistance at $34 and produced a new MACD buy signal. ========================================================== 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 2004 PremierInvestor.net. and The Premier Investor Network. 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PremierInvestor.net Newsletter Wednesday 12-22-2004 section 2 of 2 Copyright (c) 2004, All rights reserved. Redistribution in any form is strictly prohibited. The entire newsletter is best viewed in COURIER 10 for alignment ================================================================= In section two: Stop Loss Adjustments: PDCO, STJ, BMS, USB Stock Splits Announcements: None 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) ================================================================== Stop Loss Adjustments ================================================================== PDCO - non-tech long play - PDCO added another 1.44 percent and broke out over resistance at the $43.00 level. STJ - non-tech long play - STJ is looking strong with another 1.5 percent gain and another all-time high. BMS - non-tech long play - BMS added another 0.9 percent to breakout over the $29.00 level on volume that was about four times the average, which is very bullish. USB - non-tech long play - Newly added USB long play added another 2 percent on very strong volume ================================================================== Stock Splits ================================================================== Announcements ------------- None ================== 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 C Citigroup 48.31 +1.12 FRE Freddie Mac 72.44 +0.64 MWD Morgan Stanley 55.08 +0.58 WYE Wyeth 42.36 +0.58 KMB Kimberly Clark 65.30 +0.56 ALL Allstate Corp 51.25 +0.70 --------------------------------------- Breakout to Upside (Stocks $5 to $20) --------------------------------------- HOTT Hot Topic 17.16 +1.34 INTV Intervoice-Brite Inc 14.02 +1.19 UTG Reaves Utility 19.98 +1.28 ZICA Zi Corp 6.74 +1.44 CCRD Concord Communications 10.58 +1.10 PROX Proxim Corp 5.27 +1.09 --------------------------------------- Breakout to Upside (Stocks over $20) --------------------------------------- SBUX Starbucks 61.14 +2.18 TMX Telefonos De Mexico 37.47 +1.31 GRMN Garmin Ltd 59.98 +1.75 ENDP Endo Pharmaceuticals 21.20 +1.49 PENN Penn National Gaming 59.87 +4.25 GPRO Gen Probe Inc 45.00 +1.16 FDS Factset Research 56.33 +2.67 ------------------------------------------- Breakout to Downside (Stocks over $20) ------------------------------------------- ABC AmerisourceBergen 57.09 -4.92 FFH Fairfax Financial 164.44 -2.23 IVC Invacare Corp 46.25 -1.16 IMGC Intermagnetics 25.03 -1.70 ROG Rogers Corp 42.35 -1.05 MPX Marine Products 24.07 -3.18 ----------------------------------------- Recently Overbought With Bearish Signals (Stocks over $20) ----------------------------------------- SUN Sunoco Inc 81.85 -1.03 SNA Snap-On Inc 33.40 -0.53 ================================================================= 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 (c) 2004 PremierInvestor.net. and The Premier Investor Network. Do not duplicate or redistribute in any form.
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