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Daily Newsletter, Wednesday, 01/26/2005

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Deja Vu

Deja Vu

Market bulls felt a touch of deja vu Wednesday morning, and it caused them to swoon for a few hours. That deju vu occurred when early bullish sentiment sent indices up to Tuesday's highs, only to see indices stalling at the same place they had Tuesday. By the end of the day, however, tech bears suffered the worst of the swooning effects.

New long positions remain iffy ahead of the Iraqi election and OPEC meeting. Bears should be chary of positions, too, with at least one successful market analyst suggesting staying flat now until next week. Trading conditions remain tricky. Those bears determined to find a play might enter new positions on rollovers beneath the rising red trendline, but should be prepared to jump out if the SPX vaults higher instead. If the SPX moves down, prepare to protect profits at this week's low, the 100-dma and again at the 1140-1143 zone, with important Fibonacci retracement levels coinciding with those averages.

With techs bouncing strongly into the close, the Nasdaq's daily chart still gives bulls reasons for concern. The bounce may be technical, heading up to test last week's gap and violated head-and-shoulder neckline. Bulls in long positions should have profit-protecting plans in place for the test of those levels.

The Russell 2000 led the techs higher Wednesday. Of concern, however, is the Russell 2000's volatility after breaking above a neckline for a large inverse H&S on its weekly chart. Such volatility after an upside breakout proves worrisome. That neckline, in red on the chart below, coincides with the 19.1 percent retracement of the RUT's rally off the summer low and the 50-sma. Until the Russell 2000 moves above those resistance levels, the bounce remains suspect. Bears might watch for a rollover from below the 630 level while bulls want to see a thrust above it.

The gains made on the Dow and its sister index proved more tentative than any of the previous three, however. The TRAN produced a small-bodied candle at the top of its climb, almost a doji. The Dow did not produce a doji, but the day's trading left a long upper shadow behind.

In addition to tech-related indices, other sectors performing well included the retailers, biotechs, airlines, utilities, energy and homebuilders. The DJUSHB, the Dow Jones U.S. Home Construction Index had tacked on 2.12 percent by the end of the day.

With U.K. Central Bank member Barker bringing the U.K. housing market into focus, saying that there's a greater likelihood of housing prices declining than rising, perhaps U.S. investors had also turned to an examination of the U.S. housing market. The DJUSHB had been declining off its January 20 high, also hit as FOMC members spent last week alerting the markets that accommodative rates would not continue forever.

In that climate, the release of the Mortgage Bankers Association's usual Wednesday morning data might have begun garnering more notice than usual. For the week ending January 21, the seasonally adjusted index of mortgage applications prepared by the Mortgage Bankers Association fell 3.6 percent. The purchase index fell 2 percent, and the refinancing index dropped a heftier 5.7 percent.

These decreases occurred despite a lower rate for fixed 30-year mortgages, but occurred during a holiday-shortened week. Whether markets expected worse news or were more focused on last week's lower mortgage rates than on a decrease in mortgage activity, the strength in the homebuilders contributed to early bullish sentiment. The homebuilders climbed at the open, faltered when crude inventories were released, and then took off again, never looking back.

Also helping early sentiment was news coming out of ORCL's analyst day. ORCL's analyst day might have assumed more importance due to overnight developments in Europe. ORCL rival SAP's outlook on margins disappointed, with that disappointment at least partly responsible for erasing early gains in the DAX and damaging sentiment throughout Europe. SAP claimed that it had gained market share in the U.S., however, and ORCL investors likely wanted to know if ORCL would suffer ill effects from SAP's gained market share.

They were soon reassured. Pre-market, ORCL announced an earnings view that beat expectations for 2006, with ORCL saying that 2006's earnings would increase 22-28 percent above 2005 levels. The company set a target of 76-80 cents for 2006 when analysts had previously expected 70 cents. The outlook for 2005 matched expectations, rather than surprising to the upside, but the results cheered investors enough to help boost sentiment as markets opened. By the end of the day, however, much of that early sentiment and the early gains had been erased. ORCL closed higher by only $0.03, dropping from its opening highs throughout the day. In this tech stock, at least, investors sold into the highs.

Earnings reports from TXN Tuesday afternoon and from SBC Communications (SBC), Eli Lilly (LLY), Altria Group (M0), and Eastman Kodak (EK) also sent those stocks higher in pre-market trading, boosting sentiment, while disappointments from Piper Jaffray Cos. (PJC), E Trade Group (ET), Diebold (DBD), AVX Corp. (AVX) and GlobalSantaFe (GSF) weighed against pre-market sentiment. Curiously, with the exception of GSF, almost all those stocks, both early sentiment leaders and early sentiment losers, closed off their highs of the day, and many in negative territory.

The morning stall that created such deja vu for bulls occurred ahead of the release of crude inventories. The release of crude inventories returned to their usual schedule this week, but with a cold snap hitting the Northeast, talk about a potential strike in Nigeria and Iraqi elections to be held this weekend, the release was anything but routine.

When the Department of Energy and American Petroleum Institute (API) released figures, that industry group characterized 2004's demand for oil in the U.S. as growing at its fastest pace in five years. Of particular interest was demand for on-highway diesel fuel as growing demand for that type fuel signals economic growth. Demand for that type of fuel soared seven percent.

The API's chief economist noted that current gasoline inventory levels appeared sufficient for summer needs, but the API also noted gasoline inventories dropping 5.4 million barrels for the reporting week. The Department of Energy had reported gasoline inventories down only 2.3 million barrels, with the usual disparity in their numbers. API reported crude inventories lower by 3.7 million barrels while the DOE claimed that crude inventories climbed by 3.4 million barrels. The API said distillate stocks declined 4.2 million barrels while the DOE noted a tamer decline of 2.3 million barrels.

Crude prices jumped immediately after the announcement, causing equities to falter, but then crude began its long slide off the high of the day. Many indices moved to new morning highs before slipping again. By the middle of the afternoon, however, when the OPEC minister assured the world that OPEC did not intend immediate production cuts, equity indices stopped moving in tandem. All rose, but the Russell 2000 and tech-related indices soared into the close, throwing the whole "technical bounce" theory into disarray.

Bulls experiencing deja vu might have been dizzied in the morning, but the afternoon's swift climb dizzied tech bears. The bifurcation in indices dizzied all. The SPX made a minimal new high before dropping slightly into the close; the TRAN almost made a new high, but the OEX and Dow never came close to new highs of the day.

Despite the gains in many indices, many market watchers remain unconvinced that the bounce is real. Reasons exist for caution. Intraday charts abound with chart formations that signal emotion-based trading and unhealthy climbs: broadening formations, diamonds, rising wedges. It was time for technical bounces in many indices and they arrived right on schedule. Now they have to prove they'll stick around long enough to do more than relieve oversold pressure.

One article title this evening trumpets the two-day gain on the indices. Those buying into this rally should be careful of experiencing another case of deja vu if the indices should behave as they did after the two-day gains posted January 14 and 18. Remain suspicious. Watch the levels pinpointed above. Be quick to take profits if offered. If conservative, consider remaining flat until next week and trying out paper trades using that indicator you always wanted to investigate.

After-hours developments included a disappointment on Verisign's sales (VRSN), but as this report was prepared, the company had raised guidance for the year during the conference call. JDS Uniphase's (JDSU) loss widened, but LSI Logic's (LSI) loss was less than expected and RealNetworks' (RNWK) narrowed from the year-ago period. Starbucks (SBUX) noted strong holiday sales, with profits better than expected. In after-hours trade, VRSN was last at $26.00, down from the $29.28 close; JDSU was last at $2.25, down from the $2.45 close; LSI was last at $5.45, up from the $5.35 close; RNWK was last at $6.04, up from the $5.95 close; and SBUX was last at $53.75, down from the $55.34 close.

Earnings tomorrow include those from Amgen (AMGN), Beazer Homes (BZH), Broadcom (BRCM), Caterpillar (CAT), Colgate-Palmolive (CL), Gateway (GTW), Guidant (GDT), Lockheed Martin (LMT), Microsoft (MSFT), Nokia (NOK), Phelps Dodge (PD), Reebok (RBK), SanDisk (SNDK), Sears (S), Seibel Systems (SEBL) and Verizon (VZ), among others. MSFT reports after the close.

The initial claims release returns to Thursday morning this week. Other Thursday releases include December's Help-Wanted Index at 10:00, the Natural Gas Inventories number at 10:30 and Money Supply at 4:30.

 
 




New Plays

Most Recent Plays

Long Plays
Short Plays
CYBXKSS
EAC
FTO

New Long Plays

Cyberonics - CYBX - close: 25.91 chg: +1.36 stop: 22.99

Company Description:
Cyberonics, Inc. was founded in 1987 to design, develop and market medical devices for the long-term treatment of epilepsy and other chronic neurological disorders using a unique therapy, vagus nerve stimulation (VNS). Stimulation is delivered by the VNS Therapy System, an implantable generator similar to a cardiac pacemaker. The VNS Therapy System delivers preprogrammed intermittent mild electrical pulses to the vagus nerve 24 hours a day. The Company's initial market is epilepsy, which is characterized by recurrent seizures. Epilepsy is the second most prevalent neurological disorder. The Cyberonics VNS Therapy System was approved by the FDA on July 16, 1997 for use as an adjunctive therapy in reducing the frequency of seizures in adults and adolescents over 12 years of age with partial onset seizures that are refractory to antiepileptic medications. The VNS Therapy System is also approved for sale as a treatment for epilepsy in all the member countries of the European Economic Area, Canada, Australia and other markets. To date, more than 28,000 epilepsy patients in 24 countries have accumulated over 79,000 patient years of experience using VNS Therapy. The VNS Therapy System is approved for sale in the European Economic Area and in Canada as a treatment for depression in patients with treatment-resistant or treatment- intolerant major depressive episodes including unipolar depression and bipolar disorder (manic depression). VNS Therapy is at various levels of investigational clinical study as a potential treatment for depression, anxiety disorders, Alzheimer's disease, and chronic headache/migraine. The Company is headquartered in Houston, Texas and has an office in Brussels, Belgium.
(source: company press release)

Why We Like It:
Shares of CYBX have and will see more volatility as it spars back and forth with the FDA over its VNS Therapy system. Yet currently the trend is a bullish one. Shares have ignored the market weakness for most of January and the stock just broke out over the $25.00 level on volume about three times the normal. We also noticed that its P&F charts shows a bullish catapult breakout buy signal with a $39.50 target. We want to target a move into the $28-30 range because our time horizon is less than three weeks. CYBX is due to report earnings on February 11th and we do not want to hold over the event. Thus, we would classify this play as more of a higher-risk endeavor.


Picked on January 26 at $25.91
Change since picked: + 0.00
Earnings Date 02/11/05 (unconfirmed)
Average Daily Volume: 600 thousand

Encore Acquisition - EAC - close: 35.80 change: +0.72 stop: 33.49

Company Description:
Organized in 1998, Encore is a growing independent energy company engaged in the acquisition, development and exploitation of North American oil and natural gas reserves. Encore's oil and natural gas reserves are in four core areas: the Cedar Creek Anticline of Montana and North Dakota; the Permian Basin of West Texas and Southeastern New Mexico; the Mid Continent area, which includes the Arkoma and Anadarko Basins of Oklahoma, the North Louisiana Salt Basin, the East Texas Basin and the Barnett Shale near Fort Worth, Texas; and the Rocky Mountains. (source: company press release)

Why We Like It:
Energy stocks are once again out performing the markets and with crude oil poised to breakout over $50 a barrel we would easily see another leg higher for the energy sector. EAC has been churning sideways in a bullish consolidation pattern with rising lows against resistance at the $35.50 level. The stock broke out above this level today but we want to see some confirmation. If EAC can trade above $36.00 again it will produce a new triple-top breakout buy signal on its P&F chart. We will use a TRIGGER at $36.10 to open the play. Our short-term target will be the $40.00 region. We need to be out of this play before EAC's earnings report due out some time around February 15th.


Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/15/05 (unconfirmed)
Average Daily Volume: 173 thousand

Frontier Oil - FTO - close: 27.00 change: +0.74 stop: 25.99

Company Description:
Frontier operates a 110,000 barrel-per-day refinery located in El Dorado, Kansas, and a 46,000 barrel-per-day refinery located in Cheyenne, Wyoming, and markets its refined products principally along the eastern slope of the Rocky Mountains and in other neighboring plains states. (source: company press release)

Why We Like It:
FTO is another play on the strength in the oil sector. Shares have been consolidating under resistance at the $27.00 level since late November. Now after several days of churning between $26.00 and $27.00 the stock looks poised to breakout to new all-time highs. We want to use a TRIGGER at $27.05 to catch the breakout and target a run toward the $30.00 region. We need to be out of the play before FTO's earnings on February 17th.


Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/17/05 (unconfirmed)
Average Daily Volume: 212 thousand

New Short Plays

Kohl's - KSS - close: 45.53 change: -0.53 stop: 47.01

Company Description:
Based in Menomonee Falls, Wis., Kohl's is a family-focused, value-oriented specialty department store offering moderately priced national brand apparel, shoes, accessories and home products. The company operates 637 stores in 40 states. (source: company press release)

Why We Like It:
Last year there was plenty of speculation that KSS could have a great year in 2005. There was plenty of talk about how the company would have easy year-over-year comparisons because late 2003 and early 2004 were so bad. Investors were betting that KSS would out perform in 2005 as it turned in strong earnings growth. Those expectations appear to be dashed as the company issued an earnings warning on January 6th. The lack of participation in the recent market bounce doesn't bode well and the stock is nearing support at a trendline dating back to April (see chart). We want to catch any breakdown under this trendline and round-number support at the $45 level. Our plan is to use a TRIGGER at $44.49 and target a move toward $41-40. The P&F chart already displays a sell signal with a $38 target.


 


Play Updates

In Play Updates and Reviews

Intel - INTC - short play

Oddly enough the 2.6 percent rally in the SOX semiconductor index did not have a very big impact on shares of Intel. The stock added just 16 cents and appears to have produced another failed rally near the $22.50 region. Readers can wait for a drop under the $22.00 level as a new bearish entry point.

BP Prudhoe Bay - BPT - long play

Traders bought the dip to $51.90 this morning and BPT looks poised to rally further tomorrow. Our short-term target is the $55.00 region but readers can prepare to exit if BPT trades over the $54 level.

Closed Plays

Closed Long

Raytheon Co - RTN - close: 37.00 change: +0.50 stop: 36.25

It looks like we had our stop loss too tight on the bullish RTN play. We can't explain the sharp intraday volatility but RTN gapped higher this morning and quickly traded over $37.00. Shares suddenly turned south and pierced the bottom of its trading range near $36.30 and hit our stop loss at $36.25. Then minutes later RTN quickly rallied and closed near its high for the day but still inside its four-week trading range. The MACD indicator remains positive but readers may want to wait for RTN to push through the $38 level before considering new bullish plays. Don't forget that RTN is expected to turn in earnings on February 3rd.

Picked on January 12 at $37.25
Change since picked: - 0.25
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 1.7 million


Closed Short

Applied Materials - AMAT - close: 16.12 chg: +0.47 stop: 16.11

We have been stopped out of our short play in AMAT at $16.11. A strong 2.6 percent rally in the SOX semiconductor index following Tuesday's oversold bounce was enough to fuel a breakout in shares of AMAT. The stock added three-percent to break back above broken support at $16.00, which should have been new resistance.

Picked on January 24 at $15.17
Change since picked: + 0.95
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 35 million


Emmis Corp - EMMS - close: 18.02 change: +0.23 stop: 17.85

EMMS does not appear to be working out for us. Shares have been caught by the recent bounce in the markets and the technical picture is improving with the MACD nearing a new buy signal. We were never triggered so the play remains unopened but we're dropping it with today's close over the $18.00 level. Traders interested in following EMMS' longer-term relative weakness can watch for a failed rally near the $19.00 level, where it should meet the trendline of lower highs.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/06/05 (confirmed)
Average Daily Volume: 478 thousand

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