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Daily Newsletter, Monday, 04/04/2005

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Table of Contents

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

Market Wrap

The Day After

The Day After

It was a very quiet session, both price-wise and news-wise, following Friday's oil rally and equity plunge. That is, until 2PM, when the indices broke upward out of their ranges, reversing all of Friday afternoon's losses and retracing part of the morning plunge as well. There was a pullback into the close, leaving the indices with small gains but well back from the cliff's edge that beckoned this morning.

The run-up coincided with the release of the Semiconductor Industry Association's report that February's $18.1 billion total chip sales figure represented a 15.8% year-on-year gain from last February. Microprocessor sales rose 11% during the period, while DRAM sales were up 36%. Of course, the Nasdaq-led rally also coincided with a long base forming from Friday afternoon above daily cycle and sixty minute cycle lows.

Market breadth was solidly mixed, with advancing volume stronger higher than declining volume on the Nasdaq and AMEX but weaker on the NYSE and OTCBB. Volatility rose, with the OEX volatility index (VXO) finishing higher by .67% at 13.46 and the QQQQ volatility index (QQV) adding 4.01% to close at 17.1. Volume was strong overall, but lower than Friday's.

Daily Dow Chart



Today's bounce failed and retraced slightly from the high, resulting in a doji beneath Friday's tall bearish engulfing and leaving the Dow positive by a mere 16.84 points at 10421.14. The light gains off the lower low permitted the faltering daily cycle upphase to survive another day, but bulls will want to see to a higher low and higher tomorrow. With the 10-day stochastic holding on a possible bearish kiss so early in its upphase, a failure to regain 10475-10485 resistance would spell trouble. A decline from current levels will target first today's low at 10357, following which 10240-250 support comes into view.

Daily S&P 500 Chart



The SPX fared marginally better than the Dow, retracing more of Friday's decline, closing closer to the top of its range, and with the indicators looking stronger as well- no bearish kiss here. 1079 capped the afternoon bounce well within Friday's range, but unlike for the Dow, the SPX's low at 1168 was well above last week's low. Below 1168, last week's 1162 level is in play, below which there's light support at 1155, followed by the more substantial 1140-44 level. To the upside, 1180 is the key goal required to validate the daily cycle upphase, above which 1187-90 is in play.

Daily Nasdaq Chart



Despite leadership from QQQQ during the afternoon bounce, the Nasdaq outperformed the SPX only slightly. The morning low bounced from 1972, last week's low and within the 1970-75 confluence zone, while the high was capped at 1996. The daily cycle is still whispering bullishly, but it needs to clear the 2000-2010 confluence soon to avoid the buy signal's reversing in a bull trap.

Weekly TNX Chart



The Treasury auctioned $16 billion worth of 6-month bills and $18 billion of 3-month bills today, generating 2.24 bids for each accepted on the 6-month bills, at a high rate of 3.035%. On the 3-month bills, the bid-to-cover ratio was 2.42 at a high rate of 2.735%.

Ten year treasury bonds were strong today following a mixed open, but weakened again at the close with the ten year note yield (TNX) closing higher by 0.5 bps at 4.456%. The daily cycle downphase that started late last month has resistance currently in the 4.48% area, with next support at 4.4%.

The National Association of Realtors announced today that its new Pending Home Sales index rose 2.2% in February after declining 2.1% in January. The index tracks the signature (but not closing) of contracts for single-family homes, condominiums and co-operatives- distinct from the Existing Home Sales index which tracks closed, completed sales. Given that a strong upward move in mortgage rates could scuttle some pending sales, this new index is interesting but remains a secondary measure compared with the Existing Home Sales Index.

AIG



Following last week's news about Greenberg's ouster and new allegations about document shredding and destruction of meeting records, Morgan Stanley upgraded AIG this morning to "overweight." Analyst William Wilt told investors that even on a pessimistic analysis, there should be support in the $45-$50 area and went on to set a price target of $59. AIG had issued a letter to shareholders on Sunday from CEO Martin Sullivan, distancing the company from the document destruction allegations and asserting the company's cooperation with investigators on document security. Citigroup Smith Barney joined Morgan Stanley in upgrading AIG, stating that it sees the possibility of criminal prosecution as "extremely remote."

I've generated a 33-year logarithmic quarterly candle chart of AIG above, showing the violation of a very old and formerly reliable support line.

Later in the session, New York A-G Eliot Spitzer stated that he sees the possibility of a settlement between his office and AIG: "Based upon these efforts, and based upon our knowledge to date, we believe that a civil resolution with the corporation will ultimately be achievable." With many speculating over the weekend as to the possibility of criminal prosecutions, this statement no doubt caused many insiders to breathe a deep sigh of relief. It certainly did for bullish investors: Contrary to the multiple upgrades that generated a morning gap-up open that was quickly sold to the session lows, the Spitzer statement resulted in a strong blast upward for the stock, with AIG launching from 51 to peak at a session high of 54.95. For the day, AIG closed higher by 4.57% at 53.28.

Weekly chart of Crude oil



The financial press was headlining a "flat" open for equities early this morning, with Reuters noting that investors were "growing accustomed" to high oil prices. Crude oil prices broke to new (not inflation-adjusted) record highs this morning as OPEC President Sheikh Ahmad al-Fahd al-Sabah announced that the ministers have been discussing a possible additional 500,000 barrel per day quota increase. This is the secondary increase mentioned at the time of the mid-March 500,000 bpd increase that raised the production limit to 27.5M bpd at the time.

With actual production currently exceeding these quotas, it's unsurprising that the market ignored the comments for most of the session. The financial press attributed the recent strength in oil prices to a number of factors, including the Goldman report to a possible $105 price target and speculative fund buying. While short- and mid-term price action is no doubt influenced by such factors, the real story is increasing global demand on finite supplies. Friday's Venezuelan refinery outage due to a power failure only served to highlight the issue.

May crude oil peaked at a morning high of 58.275. On the daily chart, this represented a nominal new high, retesting the daily cycle high without violating it. However, the combined gains from late last week with today's strength were sufficient to stall the daily cycle downphase. A failure to break below 56 this week should see an upside reversal for the daily cycle, a very bullish development should it occur. For the day, however, May crude closed lower by .275 at 57 on the Nymex.

ChevronTexaco (CVX) announced its agreement to acquire Unocal (UCL) in a deal valuing UCL at $62 per share based on a purchase price of $18 billion in cash, stock and assumption of $1.6 billion in UCL debt. CVX stated that it expects the acquisition to be "broadly neutral" to earnings per share while adding to cashflow per share. CVX will pay UCL shareholders 1.03 CVX shares per UCL share, or $65 cash for each UCL share. Later in the session, Fitch reaffirmed CVX's "AA" debt rating, while Friedman Billings downgraded CVX to "market perform" from "outperform." Friedman expects the acquisition to be dilutive to the company's return on capital. CVX closed lower by 3.95% at 56.97, while UCL lost 7.38% to close at 59.60.

There was good news for debtors as AP announced a Supreme Court decision in Rousey v. Jacoway ruling individual retirement accounts unseizeable by creditors to personal bankruptcy. In a ruling permitting a bankrupt Arkansas couple to keep more than $55,000 in accrued savings, the Supreme Court decided that IRAs should be protected under bankruptcy laws.

This is set to be a very quiet week for economic data, with no major reports scheduled until Thursday, when we get Initial claims, Wholesale inventories and Consumer credit. Tomorrow is the Challenger layoff report, and the Petroleum inventory reports will be released Wednesday at 10:30AM. Last but not least, Chairman Greenspan speaks on tomorrow and on Friday, and will testify to the Senate Banking Committee on reforming GSEs on Wednesday.

Equities are attempting valiantly to firm under the influence of last week's daily cycle upturn. However, crude oil remains strong and interest rates, while pulling back, remain closer to this year's highs than to the lows. A strong showing from stocks tomorrow will do a great deal to bolster the uncertain daily cycle, which in turn should set the stage for a multi-day to multi-week upphase. Whether that bounce proves to be corrective or not is another issue, but it's a great deal more positive than what traders were contemplating this morning as the Dow broke beneath last week's low.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Egl Outftr - AEOS - cls: 29.55 chg: +0.80 stop: 26.85

AEOS has erased Friday's decline. No other changes from our previous update on 04/03/05.

Picked on March 28 at $28.19
Change since picked: + 1.36
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million

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Fresh Del Monte - FDP - close: 30.48 chg: -0.03 stop: 29.89

No change from our previous update dated 04/03/05.

Picked on March 22 at $30.82
Change since picked: - 0.34
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand

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Forest Oil - FST - close: 42.62 chg: +0.62 stop: 38.49

Crude oil tagged another new all-time high today but was unable to maintain its gains. The strength in crude helped push FST to a new three-week high. Volume was above average on today's gain. If FST surprises us with a dip look for support in the $40-41 range. A bounce from support could be used as a new bullish entry point.

Picked on April 03 at $42.00
Change since picked: + 0.62
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 1.0 million

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Innovative Solutions. - ISSC - cls: 33.90 chg: +2.30 stop: 29.49

Positive broker comments and a new "buy" rating helped fuel a 7.2 percent rally in ISSC today. Volume came in above average and the rebound certainly improved the technical picture. Our target remains the $35.00 level.

Picked on March 22 at $31.50
Change since picked: + 2.40
Earnings Date 01/19/05 (confirmed)
Average Daily Volume: 193 thousand

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Technical Olympic - TOA - cls: 24.10 chg: -0.36 stop: 23.45

No change from our previous update dated 04/03/05.

Picked on March 22 at $24.36
Change since picked: - 0.26
Earnings Date 02/16/05 (confirmed)
Average Daily Volume: 135 thousand

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Talbots - TLB - close: 32.25 chg: +0.83 stop: 30.49

No change from our previous update dated 04/03/05.

Picked on March 31 at $31.98
Change since picked: + 0.27
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 408 thousand
 

Short Play Updates

Anheuser Busch - BUD - close: 47.16 chg: +0.03 stop: 48.41

No change from our previous update dated 04/03/05.

Picked on February 7 at $48.32
Gain since picked: - 1.16
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume: 2.4 million

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Countrywide Fncl - CFC - close: 31.54 chg: -0.26 stop: 34.05

Almost there! CFC came within four cents of hitting our exit range of $30.50-30.35. CFC fell sharply near the opening bell and crawled back toward the 31.80 level by late afternoon only to begin fading lower again. Be cautious. The intraday chart looks like CFC will trade lower but the daily chart shows a "hammer" style candlestick, which can signal a bullish reversal. The stock appears to be ricocheting between the upper and lower boundaries of a descending channel.

Picked on March 09 at $33.36
Change since picked: - 1.72
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 3.8 million

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Flextronics - FLEX - close: 11.95 chg: +0.05 stop: 12.55

No change from our previous update dated 04/03/05.

Picked on March 16 at $11.95
Change since picked: - 0.00
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 5.5 million

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Symyx Tech. - SMMX - close: 22.23 chg: +0.14 stop: 24.51

No change from our previous update dated 04/03/05.

Picked on March 21 at $23.79
Change since picked: - 1.56
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 173 thousand

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West Marine - WMAR - close: 20.49 chg: -0.07 stop: 23.11

No change from our previous update dated 04/03/05.

Picked on March 17 at $21.20
Change since picked: - 0.71
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
 

Closed Long Plays

Cox Radio - CXR - close: 16.93 chg: -0.42 stop: 16.45

Uh-oh! CXR has almost erased Friday's breakout. Shares lost 2.4 percent on Monday to close back under the $17.00 mark. The two-day candlestick pattern looks like a bearish reversal. We're suggesting traders exit now to avoid any follow through lower.

Picked on March 01 at $16.53
Change since picked: + 0.40
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume: 334 thousand
 

Closed Short Plays

United Industrial Crp. - UIC - cls: 30.29 chg: +0.68 stop: 31.51

We are going to call it quits on UIC. It is true that the stock does still have plenty of technical resistance overhead with the 21-dma and exponential 200-dma near $31.00 and additional resistance with the 40, 50 and simple 200-dma's near $31.85. Unfortunately, we don't feel comfortable holding short positions with today's rally and close back above the $30.00 level and its MACD producing a new buy signal (actually the MACD turned positive on Friday).

Picked on March 17 at $29.23
Change since picked: + 1.06
Earnings Date 03/16/05 (confirmed)
Average Daily Volume: 181 thousand
 

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

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