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Daily Newsletter, Tuesday, 03/15/2005

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Table of Contents

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

Market Wrap

The Uptrend Holds

There were many times during the day today that I wasn't sure the uptrend from October 2004 was going to hold (see daily DOW and SPX charts below). Just like the move down on February 22nd to that uptrend line, the move down on Friday also landed on the uptrend line (more so for the SPX than the DOW which had stopped just above the line). It looked like a bearish day on Friday but so far the bounce looks like it could stick. Friday's and today's lows need to hold in order for the uptrend to remain intact. There were no significant market news items today and most of the day was downright boring. Oil rallied strongly off its low of $53.45 and briefly poked its head back above $55 with a high of $55.05. Interestingly enough, both oil and equities rallied together this afternoon. It's just another example of how the market trades on emotions and often disregards negative/positive news, or reacts differently to the same news on different days. Friday the pundits said the market sold off because of the rally in oil. So why did the market rally today on a further rally in oil? They'll likely say because the market already priced in an oil price increase. What a bunch of phooey. (Can you tell I'm not a fundamental trader?).

Looking at some market and stock news from today, there were some downgrades of semis in overseas markets, and the drop in forecasts for testing equipment on Friday (a leading indicator of semi equipment weakness) caused semis to take a beating in the Nikkei and European markets. The SOX was basically flat today though it did close in the green with an end of day rally. IBM got a small lift today with its announcement to buy Ascential (ASCL) for $18.50/share equating to a 17.8% increase above its Friday close for ASCL. The merger is being viewed as positive since the two companies have more than 550 joint customers around the world already. Genentech (DNA) closed up $10.93 (21.7%) to $55.00 after announcing the effectiveness in testing of its Avastin in combination with chemotherapy in preventing death in "non-small cell lung cancer". Caterpillar CAT) dropped almost 2.5% to 96.54 after Legg Mason downgraded them based on valuation concerns and lowered earnings estimates. CAT tends to be a good company to follow as an indication of the health of our industrial complex. Disney (DIS) was up on the news that President Robert Iger was going to replace Michael Eisner this fall as Chief Executive Officer. But American International Group (AIG) dropped on reports that their CEO, Hank Greenberg, will be resigning this week. So these were essentially a wash for the DOW. The US Dollar got a good bounce today, up to $82.04 which wiped out the decline of last week. This depressed the metals with gold down $5.00 (-1.1%) from Friday's close. Silver lost almost $0.14 (-1.8%). Bonds rallied which knocked the 10-year yield down 0.019 to 4.52% and 30-year yield down 0.028 to 4.78%.

Taking a look at the market and some sectors shows that we're on the edge looking over and wondering if we should jump or pull back.

SPX chart, Daily

The SPX chart shows that the up-channel containing price since last August continues to hold. As mentioned above, price came down to the uptrend line from October 2004, just like it did on February 22nd, and we got a bounce today. It wasn't much but until that uptrend breaks, the trend is your friend and you should be looking to buy the dips. As it turns out, that "bounce" from the February 22nd low turned out to be a nice rally. The pattern of the rally from the January low and a potential Fib price target of 1233 and Fib turn date of March 18th (this expiration Friday) leads me to believe we have one more rally leg ahead to a minor new high. This could be setting up the mother of all put plays as an ex-OIN writer used to call these setups. But watch that uptrend line--conservative players should use that as their signal to start looking for opportunities to test the short side. Until then, buy those dips!

DOW chart, Daily

Just like SPX, the DOW is testing its uptrend line. There is a potential Fib price target of 11085 which would closely coincide with SPX 1233. I suspect that if price were to rally above 11,000, the party hats would be out but don't let it fool you--it could end up being the perfect setup sucking in the bulls and trapping them (if they don't use stops). As with the SPX, stay long above the uptrend line but start looking for shorting opportunities if it breaks.

Nasdaq chart, Daily

The Nasdaq continues to mark time by running sideways while SPX and DOW have pushed to new highs recently. This sideways triangle pattern shown on the chart, if it follows through with one more push higher, is a classic consolidation pattern and points lower as soon as it's done. I show a downside Fib projection of about 1914 which is very close to the October 2004 lows. A break of the lower trendline of this triangle pattern should be a good signal to get short. Until then, this always has the potential to rally higher out of this pattern, although I consider that a lesser likelihood.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing market is getting close scrutiny because of all the hand-wringing that's going on with it. Are we in a bubble or not, is it going to come crashing down, do we have enough demand to keep it going, etc. Rather than listen to pundits or wonder what the fundamental reasons are for what's happening, just watch the chart. It will always lead what happens in the fundamental world. Price has dropped fairly sharply from its high but is finding support at the top of its longer term up-channel that price has been in since 2002/2003. If it drops back inside then it may be headed to the bottom of the channel and I'd say the housing market will experience a large correction. However, it would have to drop over 30% from its high in order to break its longer uptrend. So there's a long way to go before the "bubble" is pricked. But it does look like the steeper ascent from October 2004 is over.

Oil Index chart, OIX.X, Daily

The Oil index has a similar chart to the previous home construction index except it looks like it could be starting a smaller downward correction. If price pulls back to the top of its longer term up-channel, watch for the same thing though. See if it stays in the steeper up-channel or if it drops back into the longer term up-channel, in which case it will probably head down to the bottom of it.

Bank Index chart, BKX.X, Daily

The banks can give us a good heads up for what's happening in the broader market. If banks' profits are getting squeezed we will likely see a trickle down effect in the other industries. Right now price is bouncing between two uptrend lines--it broke down below a steeper uptrend from October 2004, bounced off its longer term uptrend from May 2004, briefly climbed back above the steeper one and lately found support at its 200-dma's. If price breaks below both the 200-dma's and the longer term uptrend line, it will look bearish for this index.

DJ Transportation Index chart, TRAN, 60-min

Like the banks, the Trannies are good to watch for signs of the overall health of our economy. When we produce, we ship, when we don't, the shippers feel the pain. It's also a good index to watch if you're a DOW Theory fan. So far the TRAN made a new all time high which has not been matched by the DOW. If the market starts breaking uptrends, we could have our non-confirmation indicating that all is not well with the market.

Generally speaking it was a quiet day in the market. The uptrends of importance are holding but I would say barely holding. Any drop below Friday's/today's lows could set off a lot of sell stops. If that were to happen, I would shift to sell the rallies from buying the dips. While I believe we have a little more upside to go, I don't believe there's that much left to the rally from last fall. I think if you're long, follow price up by keeping your stops just below the uptrend lines. If you're long the tech stocks, I think you run a higher risk but again, keep your stops just below Nasdaq 2000 and you will at least get out before the real sell off kicks in. And as a reminder, this is opex week which is known as "scam week". The pile gets pushed around a little more violently as positions are squared. It may not necessarily be trend setting, even on an intraday basis. Wednesdays of opex week are usually the most volatile.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None FLEX

New Long Plays

None today.

New Short Plays

Flextronics - FLEX - close: 12.36 chg: -0.22 stop: 13.01

Company Description:
Headquartered in Singapore (Singapore Reg. No. 199002645H), Flextronics is the leading Electronics Manufacturing Services (EMS) provider focused on delivering innovative design and manufacturing services to technology companies. With fiscal year 2004 revenues of USD$14.5 billion, Flextronics is a major global operating company that helps customers design, build, ship, and service electronics products through a network of facilities in 32 countries on five continents. This global presence provides customers with complete design, engineering, and manufacturing resources that are vertically integrated with component capabilities to optimize their operations by lowering their costs and reducing their time to market. (source: company press release)

Why We Like It:
The SOX semiconductor index doesn't look so hot. Merrill Lynch's comments today that the sector was likely to remain range bound between 450 and 380 sparked some selling and the technicals on the SOX are growing more bearish as if the group is headed toward the bottom of its "range". Shares of FLEX were already looking weak with the stock in a six-day trend of declines. A few days ago the company could not offer much visibility at an investor conference and traders turned defensive. The current decline has broken through support in its six-month trend of higher lows. Volume on the recent decline has also been above average. The P&F chart is currently bullish but poised to turn lower. If FLEX trades under $12.00 it will produce a new P&F sell signal. Normally after six days of declines we would expect a bounce so that's why we are going to use a TRIGGER to open the play. Our entry point will be $11.95. Our target will be the $10.00-10.25 range but we will not hold past FLEX's April earnings.


Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume: 5.5 million
 

Play Updates

Updates On Latest Picks

Long Play Updates

Benchmark Electronic - BHE - cls: 31.93 chg: -0.47 stop: 31.49

No change from previous update. Trigger to go long at $33.51.

Picked on February xx at $xx.xx <-- see TRIGGER
Gain since picked: + 0.00
Earnings Date 02/08/05 (confirmed)
Average Daily Volume: 453 thousand

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Catellus Dev. REIT - CDX - close: 28.40 chg: -0.46 stop: 27.15

Uh-oh! CDX managed to rally towards the 100-dma but then quickly failed. This didn't help the technicals much and given the bearish market performance lately we would be very cautious with CDX. Watch the $28.00 level to see if it holds as support, especially with the 50-dma underpinning this area. Conservative traders may want to exit early if CDX trades under $28.00.

Picked on March 07 at $28.76
Change since picked: - 0.36
Earnings Date 02/25/05 (confirmed)
Average Daily Volume: 397 thousand

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Cox Radio - CXR - close: 16.97 chg: -0.03 stop: 15.99

No change from previous update.

Picked on March 01 at $16.53
Change since picked: + 0.44
Earnings Date 02/23/05 (confirmed)
Average Daily Volume: 334 thousand

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Valassis Comm. - VCI - close: 36.35 chg: -0.80 stop: 34.75

Investors did not like hearing that VCI is under an FTC investigation. The FTC is looking into VCI's latest price increases for its newspaper inserts. Authorities are looking for anything suggesting that VCI and a competitor designed a price-fixing scheme. Shares fell back toward support near the $36.00 level. As long as VCI holds above $36.00 we're okay but once it breaks down conservative traders may want to exit. VCI still has some support at the $35.00 level.

Picked on February 23 at $36.12
Gain since picked: + 0.23
Earnings Date 02/22/05 (confirmed)
Average Daily Volume: 337 thousand

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Short Play Updates

Anheuser Busch - BUD - close: 47.47 chg: -0.46 stop: 50.11

No change from previous update.

Picked on February 7 at $48.32
Gain since picked: - 0.85
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

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Countrywide Financial - CFC - close: 33.71 chg: +0.25 stop: 35.01

Looks like today's bounce in CFC was due to some positive spin the company dished out at the Piper Jaffray conference today. The rally failed near the $34.00 level and its exponential 200-dma. Look for a new drop under the $33.00 level before considering shorts. Aggressive traders can look for a failed rally under $34.75 as an alternative entry point.

Picked on March 09 at $33.36
Change since picked: + 0.35
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 3.8 million


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Nabi Biopharma - NABI - close: 12.21 chg: +0.15 stop: 13.11

The biotech bounce from Monday is already reversing and the sector index (BTK) looks poised for more declines tomorrow. Meanwhile NABI tested overhead resistance at its 40-dma, which coincides with its descending trendline of resistance. Watch for a drop back under the $12.00 level as a potential failed-rally entry point for bearish positions.

Picked on March 06 at $11.80
Change since picked: + 0.41
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 436 thousand

---

NY Times - NYT - close: 36.75 chg: +0.15 stop: 37.35

No change from previous update.

Picked on February 20 at $37.20
Gain since picked: - 0.45
Earnings Date 01/25/05 (confirmed)
Average Daily Volume: 516 thousand


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ScanSource - SCSC - close: 56.76 chg: -1.03 stop: 62.01

No change from previous update.

Picked on March 13 at $ 57.58
Change since picked: - 0.82
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume = 95 thousand

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Energy Select Spdr - XLE - close: 42.51 chg: -0.60 stop: 45.15

It looks like the oversold bounce is over and the XLE has produced a failed rally in Tuesday's session. Traders can use this as a new bearish entry point for our short-term target near the $40.00 level.

Picked on March 09 at $43.33
Change since picked: - 0.82
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 4.1 million
 

Closed Long Plays

Arkansas Best - ABFS - close: 43.98 chg: -0.67 stop: 41.49

Heads up! We suspect it is time to head for the exit in ABFS. The Dow Transportation index is still out performing the rest of the market but it looks overbought here. If the major averages turn lower then traders are likely to do some quick profit taking in their winners like the transports. We want to exit now and still try and claim a small victory in ABFS. If you are willing to handle the volatility some traders might want to sit tight and look for ABFS to find support near the $42.50 level. We'd rather exit here and then consider jumping in again if ABFS bounces.

Picked on February 28 at $42.51
Gain since picked: + 1.47
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 259 thousand

---

Waters Corp - WAT - close: 47.85 change: -0.85 stop: 47.99

Ding! WAT has finally thrown in the towel with its battle at the $48.00 level. The bears appear to have won and shares are likely to consolidate towards the $46 area and its 200-dma. We were stopped out at $47.99.

Picked on February 2 at $50.20
Gain since picked: - 2.35
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 643 thousand
 

Closed Short Plays

None today.

Today's Newsletter Notes: Market Wrap by Keene Little and all other plays and content by the Option Investor staff.

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