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Daily Newsletter, Wednesday, 03/09/2005

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Table of Contents

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

Market Wrap

The Numbers

The Numbers

Crude oil, bonds, yield, the dollar and the gold are all been blamed for today's bearishness in the stock market. Crude oil rose, bonds fell, yields rose, the dollar fell against foreign currencies and gold rose. However, I think the market was due for a short-term pullback and we are just in a mini correction for now and that we will see a higher high later on - but more on that later. However, anyway you look at it today was not a good day for the bulls. Bonds and index futures took an unexplained fall during the overnight session and never seemed to gain their footing once the cash markets opened at 9:30EST. Rising crude oil prices and a 10-year yield making new yearly highs certainly didn't help anything. The Dow Industrials lost 107 points (-0.98%) closing at 10805.62, giving the bulls a pretty big scare. The Nasdaq Composite Index slipped 12.26 to close at 2061.29. The S&P 500 index declined 12.42, almost as much as the Nasdaq, to close out at 1207.01. On the NYSE 1.7 billion shares traded and 683 stocks rose and 2,699 fell. On the Nasdaq Stock Market, where 1.9 billion shares changed hands, 1,047 issues rose and 2,059 declined.

Investors may be coming to grips with our huge deficit and debilitating trade gap and decided to just sell everything - stock and bonds. Of course a more immediate factor weighing on bonds and giving yields a significant boost could have been the sale of $24 billion in new five- and 10-year notes by the Treasury Department on Wednesday and Thursday. Here is a daily chart of the 10-Year yield hitting new yearly highs. 


 

The 5-year yield hit a high not seen since last July.


 

The News

A $2.57 trillion budget was proposed by House Republicans that would help cut $69 billion in spending. The committee said its plan would cut the federal budget deficit to $229 billion by the year 2009, compared with about $412 billion last year. The House plan includes the cost of increased military spending in Iraq and Afghanistan but does not include the cost of changing Social Security.

The plan also looks to delete $69 billion from benefit programs over the next five years and accrue savings from Medicaid, student loans, farm programs, veterans and perhaps welfare and unemployment insurance. The proposed plan would allow benefit programs to continue accommodating for inflation but at a slower rate. Programs such as national parks and food safety protection will be cut by 8%. Final decisions on exactly where the cuts will fall will be made in later bills.

Federal prosecutors arrested two friends of former chief executive of ImClone Systems, Samuel Waksal. Zvi Fuks, chairman of the department of radiation oncology at New York's Memorial Sloan Kettering Hospital, and Sabina Ben-Yehuda, who worked at an investment vehicle set up by Mr. Waksal, are accused of selling their ImClone stock in December 2001 after learning the Food and Drug Administration would not be approving the company's cancer treatment.

Today's Economic Reports

The first report out this morning at 8:30EST was the MBA's Mortgage Applications. This report is not usually a market mover but a very interesting one to watch. It is a leading indicator of home sales and consequently gives the financial markets an indication of where the housing market is heading. It is also used for gauging refinancing activity, which has a direct correlation to consumer spending.

The report for the week ending March 4, 2005 showed the MBA index decreased by 0.7% to 704.8. The composite index is 4% below its four-week-ago reading, and 21% below its year-ago reading as the demand for mortgages declined driven by the decline in refi applications. The refi index declined by 4.6% to 2,176.8 and is now 39% below its one-year-ago reading however, the purchase applications index increased by 2.7% to 451.7. Last week's decline in the 30-year fixed mortgage rate may account for some of the rebound in the purchase index but the most likely factor is just plain noise or weekly gyrations.

The next report was the Oil and Gas inventories out at 10:30EST. This report put out by the American Petroleum Institute (API) and the Energy Information Administration (EIA) has taken on a new importance since the price of oil has been mentioned almost every time you hear the words 'stock market.' But in particular this report is scrutinized by the Crude Oil market for unexpected changes in crude oil and gasoline inventories indicate changing market conditions and can provide insight into crude oil prices in the future.

Both the EIA and API reported a sizable build in crude oil stocks for the week ending March 4. The API report showed crude oil inventories increased by 6.247 million barrels to 304.295 million barrels. The EIA reported a build of 3.2 million barrels to 302.6 million barrels. The API reported an increase of 239,000 barrels of distillate stocks to 114.518 million, while the EIA reported a draw of 800,000 barrels to 109.2 million barrels.

With inventories this strong you would expect the price of crude to fall but Crude-oil futures briefly spiked to $55.65 a barrel on the New York Mercantile Exchange, matching an intraday record, before settling just below $55.

Speaking of oil I would like to interject my own opinion here. Although we hear a lot of rhetoric about oil and the price of crude oil I don't think it had a lot to do with today's market swoon. Crude Oil, adjusted for inflation, is nowhere near as important or expensive as it was in the 1970s. And the price of oil has been high for months now so don't you think this has already been absorbed into prices.

Then last but certainly not least was the U.S. Department of Treasury's Beige Book out at 2:15EST. Economists analyze this report for future monetary policy by the FOMC. In particular economists and market watchers look for comments regarding regional labor markets, retail sales, real estate, banking and energy. The Beige Book can provide some of the timeliest data on the economy at the regional level.

The report revealed that after a record deficit of $413 billion in fiscal year 2004, which ended on September 30, it is possible this fiscal year's deficit will be somewhere near $400 billion, a slight improvement. This is due to personal income tax revenues starting to grow from the stronger economy and an end to legislated tax cuts. Also corporate income tax receipts are up sharply and should see continued gains due to the expansion and the expiration of the accelerated depreciation allowance. The report also revealed strong growth in spending, however, mostly for defense and healthcare based on a new transportation bill, the Medicare prescription drug benefit and Iraq and Afghanistan wars.

The Charts

On February 14th I posted an article in the OptionInvestor Newsletter called "Tighten that Wedgie." It was a piece on how to spot and then trade a bullish or bearish wedge. Here is what I said about the bearish wedge. The rising wedge is a bearish pattern that begins wide at the bottom and tapers as price moves higher and the trading range narrows. The rising wedge is both a reversal pattern and a continuation pattern as well. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend and as a reversal pattern, the rising wedge will slope up but with the prevailing trend. Whichever type you encounter - reversal or continuation - the rising wedge is bearish.

I would now like to take a look at the SPX daily chart and use the criteria from the article to first of all see if the formation I am seeing has the potential for a bearish wedge and if it does then how to trade it. (This chart was created on Tuesday so does not show the bearish day today)


 

  1. A bearish wedge needs to have a Prevailing Trend so the wedge forms after a rally. I have marked what I see as the prevailing trend on the chart with a red arrow.
  2. A resistance line is formed with at least two swing highs the second higher than the first.
  3. The support line is formed by joining at least two swing lows the second higher than the first.
  4. Both the resistance and support lines trend upwards but the slope of the support line is greater than that of the resistance so eventually they form a cone. I have marked the cone in green.

We definitely have the potential for a bearish wedge so I have drawn some red arrows within the green cone to show you where I think SPX will need to trade to complete the formation. Here is where I see the higher high I talked about earlier.

But even if it does complete you will not get a confirmation of this pattern until the lower support line is broken. It is sometimes prudent to wait for a break of the previous swing low because once support is broken there can be a reaction rally to test the newfound resistance level.

Here is a chart of the DOW and as you can see it has a similar pattern.


 

Do you also see the MACD negative divergence (marked in red) giving us more bearish information. A slight bearish divergence appears on the SPX chart as well (not shown).

Now take a look the charts of the Russell 2000 and the NDX.


 


 

Both are in neutral wedges that don't give a lot of hints as to direction but we can use them for trading the SPX and the DOW. Since SPX and the DOW are building bearish wedges I expect these two neutral wedges to break to the downside. But if they don't then it puts a little bit of a crink in the bearish picture I am building and I would not be as ready to open bearish positions on these SPX and the DOW. But on the other hand if they break downward in conjunction with the SPX and DOW bearish wedges breaking downward you have a very good confirmation and all the more confidence in your bearish positions.

Unfortunately trading is never this simple but this does give you a roadmap to follow albeit a bearish roadmap. If you are bullish you probably don't want to follow this roadmap.

Tomorrow's Economic Reports

Tomorrow's economic reports start with the Bureau of Labor Statistics' weekly Jobless Claims 8:30EST report. This report is watched as a secondary indicator of labor market conditions and as an advance indicator of the more widely monitored monthly payroll employment situation report. Consensus 310,000 and previous weeks 310,000.

Next we have the Bureau of Census' 10:00EST report on wholesale trade inventories and the inventories to sales ratio. These are important indicators of current consumption and of future manufacturing activity.

Then we have the 2:00EST Treasury Budget that is not a market mover but watched because longer term trends in the Federal Budget are important to financial markets.

Remember plan your trade and trade your plan.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
  CFC
  XLE

New Long Plays

None today.

New Short Plays

Countrywide Financial - CFC - close: 33.36 chg: -1.69 stop: 35.01

Company Description:
Founded in 1969, Countrywide Financial Corporation is a member of the S&P 500, Forbes 2000 and Fortune 500. Through its family of companies, Countrywide provides mortgage banking and diversified financial services. Mortgage banking businesses include loan production and loan servicing principally through Countrywide Home Loans, Inc., which originates, purchases, securitizes, sells, and services primarily prime-quality loans. Also included in Countrywide's mortgage banking segment is the LandSafe group of companies which provide loan closing services. Diversified financial services encompass banking, capital markets, insurance, and global operations, largely through the activities of Countrywide Bank, a division of Treasury Bank, N.A., a bank offering depository and home loan products; Countrywide Capital Markets, a mortgage-related investment banker; Balboa Life and Casualty Group, whose companies are national providers of property, life and casualty insurance; Balboa Reinsurance, a captive mortgage reinsurance company; and Global Home Loans, a U.K. mortgage banking joint venture in which Countrywide holds a majority interest. (source: company press release)

Why We Like It:
Mortgage giant Countrywide has been struggling the last few weeks or ever since it filled the gap from its October drop. Investors seem concerned over CFC's ability to maintain its profit margins. That's the reason Jefferies downgraded the stock this morning. Technically CFC has broken through its simple 200-dma and exponential 200-dma (as well as the $34.00 level) on very strong volume, which is normally consider a bearish development. The P&F chart is also bearish and currently points to a $22.00 target. We are suggesting shorts under the $34.00 level with a $30.50-30.35 target.


 

Picked on March 09 at $33.36
Change since picked: - 0.00
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 3.8 million

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Energy Select Spdr - XLE - close: 43.33 chg: -1.23 stop: 45.15

Company Description:
The XLE is an investment trust or ETF focused on oil, gas and energy-related equipment or service companies.

Why We Like It:
Crude oil may have flirted with a new record high today but it looks like the rally in the oil stocks is finally beginning to crack. The OIX oil index broke down through the bottom of its narrow rising channel and closed under its simple 10-dma for the first time in weeks. The OSX oil services index also looks weak with a new MACD sell signal. We are long-term bullish on oil and oil stocks but stocks don't go up in a straight line. Even in a bullish trend there will be corrections. We want to try and capture part of the pull back or profit taking in the oil sector before investors decide to buy the dip. Speaking of buying the dip we'll be one of them and when it appears that the oil stocks have bounced we'll be looking for bullish positions. However, in the meantime the group is very overbought and today's action is ripe with bearish reversals across the sector. Instead of trying to choose just one oil stock to play we're suggesting that investors consider shorting the XLE. The XLE has been steadily climbing since the January lows where it bounced from its simple 100-dma. Now the XLE is breaking down through the bottom of its very narrow rising channel and its simple 10-dma. Today's move also produced a classic bearish engulfing candlestick pattern, or a bearish reversal pattern, on very strong volume that was almost four times the average. Technically the XLE has also produced a new MACD sell signal from very overbought levels. We're looking for a quick drop toward the $40.00 region.


 

Picked on March 09 at $43.33
Change since picked: - 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 4.1 million

Play Updates

Updates On Latest Picks

Long Play Updates

Catellus Dev. REIT - CDX - close: 28.11 chg: -0.66 stop: 27.15

Yuck! The REITs were hit by today's decline just like everyone else (save gold stocks). CDX lost 2.29 percent with a sharp drop at the open. We would be cautious here. The stock "should" have support at the $28.00 level and again at its simple 200-dma and exponential 200-dma near $27.50. We would not consider new bullish positions at this time. Instead we'll watch for a significant bounce from support listed above.


 

Picked on March 07 at $28.76
Change since picked: + 0.65
Earnings Date 02/25/05 (confirmed)
Average Daily Volume: 397 thousand

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First American - FAF - close: 35.53 chg: -0.49 stop: 35.29

Red alert! FAF has broken down below support at the $36.00 level and technical support at its rising 50-dma. We are seriously surprised that today's decline didn't see more follow through and stop us out. Now in the last few months FAF has faked out the bears twice with a dip under support at the 50-dma. This could be one of them. However, we would strongly consider exiting here to minimize any losses but then again our stop loss is less than a quarter from here. We're going to let it ride. Nimble traders may actually want to watch for a possible bearish entry point if FAF breaks down under the $35.00 or $34.00 levels.


 

Picked on February 27 at $36.63
Change since picked: - 1.10
Earnings Date 02/16/05 (confirmed)
Average Daily Volume: 444 thousand

---

Tesoro Corp - TSO - close: 36.38 chg: -0.60 stop: 34.85 *new*

Danger! Today's market decline weighed heavily on the oil stocks. The OIX index lost 2.59 percent and closed under its simple 10-dma for the first time in weeks. The entire group could be heading for a significant pull back. We are going to try and minimize our risk by raising our stop loss to $34.85. Conservative traders may actually want to exit now to preserve any gains.


 

Picked on February 22 at $35.15
Change since picked: + 1.23
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 1.0 million

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Valassis Comm. - VCI - close: 36.61 chg: -0.67 stop: 34.75

Watch out! VCI has almost completely erased its recent gains and the stock is breaking down under its simple 10-dma. Technicals are bearish (like many stocks in the market today) but we are looking for VCI to find support at the $36.00 level.


 

Picked on February 23 at $36.12
Gain since picked: + 0.49
Earnings Date 02/22/05 (confirmed)
Average Daily Volume: 337 thousand

---

Waters Corp - WAT - close: 48.60 change: -0.72 stop: 47.75

Once again WAT is testing support at its 50-dma and the $48.00 region. We would be cautious if you're long. Those looking for new positions can wait for a bounce back above the $50.00 mark.


 

Picked on February 2 at $50.20
Gain since picked: - 1.60
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 643 thousand

Short Play Updates

Anheuser Busch - BUD - close: 47.76 chg: -0.17 stop: 50.11

The recent spike looks like yet another failed rally and thus a new bearish entry point. Just remember that BUD doesn't move very fast and traders need to be patient to let its bearish trend work in our favor.


 

Picked on February 7 at $48.32
Gain since picked: - 0.56
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

---

Nabi Biopharma - NABI - close: 11.59 chg: +0.13 stop: 13.11

NABI started the day very weak but traders bought the dip near the $11.00 mark, which we suspected could be support (see original update). The fact that NABI closed green on such a bearish day is reason to be cautious. There is still plenty of overhead resistance but this could be a possible bullish reversal. We're not suggesting new bearish plays at this time. Instead we will watch for a failed rally under the $12.50 level or a drop back under $11.35 as a new bearish entry point.


 

Picked on March 06 at $11.80
Change since picked: - 0.21
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 436 thousand

Closed Long Plays

CB Richard Ellis - CBG - cls: 35.20 chg: -0.87 stop: 35.39

CBG proved to be a dud. In the middle of the day CBG spiked lower on a sudden rise in volume (someone wanted out). Shares dipped to $33.50 before quickly rebounding but it was more than enough to hit our stop loss at 35.39. We cannot find any news to account for the spike.


 

Picked on March 07 at $37.15
Change since picked: - 1.95
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 466 thousand

Closed Short Plays

None today

Today's Newsletter Notes: Market Wrap by Jane Fox, all other plays and content by the Option Investor staff.

DISCLAIMER

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.

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Copyright Option Investor Inc, 2005
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Today's Newsletter Notes: Market Wrap by Jane Fox, all other plays and content by the Option Investor staff.

DISCLAIMER

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 "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

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