Option Investor

Daily Newsletter, Wednesday, 05/18/2005

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Table of Contents

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

Market Wrap

Bulls STEEL Today's Bullish Showing

Bulls STEEL Today's Bullish Showing

Bolstered by a merger in the steel sector with Metals USA (NASDAQ:MUSA) $21.12 +52% agreeing to be bought by private investment firm Apollo Management for $22 per share in cash, the Dow Jones Steel Index (DJUSST) 143.16 +5.23% was among today's top percentage sector gainers, where speculation of consolidation in the group found its way to Olympic Steel (NASDAQ:ZUES) $16.99 +24.5% and Insteel Industries (NASDAQ:IIIN) $11.08 +12.6% in the form of speculative buying and short covering.

I can't say that economic data out of China spurred buying in the steel sector, as pre-cash open reports regarding April industrial output went relatively unnoticed. The Chinese government said industrial output surged 16% in April to $68 billion U.S. (564.7 billion yuan), which is further acceleration from March's 15.1% on-year increase. Eight economists surveyed by Bloomberg had China's industrial production slowing, but at a still healthy rate of 14.6%.

A 0.5% increase in the April Consumer Price Index, which was driven by a 4.5% increase in energy price looked alarming just before this morning's cash open, but inflation fears were quickly calmed and had stock futures reversing pre-market losses when the core rate, which excludes the volatile food and energy components came in at unchanged. 

The core rate figures sent bonds markedly higher in Wednesday's session with the benchmark 10-year yield ($TNX.X) falling 4.9 basis points to 4.068%, its lowest yield since early February. The calming fears for inflation at the consumer level had broader equities putting together another impressive day of gains with the S&P 500 Index (SPX.X) 1,185.56 +1.00% jumping a healthy 11.76 points.

Volume is what I would consider "heavy" at the big board with more than 2.2 billion shares changing hands. Bears had been taunting bulls with the "light volume rally" and buyers look to have served up a helping of volume among 1, 2 and 3-lettered stocks. NASDAQ volume which has been running about 1.71 billion shares per day on average for the month of May was brisk at 1.96 billion shares.

Dow component Hewlett Packard (NYSE:HPQ) $22.81 +4.64% lead today's percentage gainers and sparked a strong round of buying in price-heavyweight IBM (NYSE:IBM) $76.36 +2.78%, with the Dow Industrials (INDU) 10,464.45 +1.28% gaining more than 130-points to close above both its converging 200-day SMA and 50-day SMA resistance of 10,390.

Dow Industrials Components - Sorted by Price Weighting

Some "not as bad as feared" words from Hewlett Packard (HPQ) in last night's quarterly earnings report continued to spark interest from bulls in broader technology with the NASDAQ-100 Index (NDX.X) 1,509.26 +1.28% extending gains after closing above its 200-day SMA (1,485) on Tuesday. 

On a Wednesday-to-Wednesday monitoring (5DyNet%), it would appear that Home Depot (NYSE:HD) participates with the Building Products (BUIL) sector bullish % action noted in last Wednesday's "Sector Bell Curve" from Dorsey/Wright and Associates. 

Watch out Wal-Mart (NYSE:WMT) bears should consumer sentiment rebound with lower unleaded gas prices.

Early buying in June Crude Oil futures (cl05m) soured quickly below the $49.42 level (see Wednesday's wrap) with this contract putting in a floor trade high of $49.40 before sellers showed up to push the contract lower ahead of this morning's 10:30 AM EDT weekly inventory report. The Energy Department said U.S. crude oil supplies rose by 4.3 million barrels in the week ended May 13. June Crude futures (cl05m) settled down $1.72, or -3.51% at $47.25, its lowest settlement since February 10.

While the bulk of sectors followed in my U.S. Market Watch were green, the Oil Service Index (OSX.X) 126.23 -0.66% was a percentage loser Wednesday, and for the week (5DyNet%). The Energy Select Spyders (AMEX:XLE) $39.24 -0.20% showed up once again in the daily top-20 most actives with near-term inflection high/low very round at $40.00 and $38.00.

Closing U.S. Market Watch - 05/18/05

Airlines as depicted by the Airline Index (XAL.X) 48.40 +5.56%% was an additional sector winner in Wednesday's session, and it 8.56% Wednesday-to-Wednesday gain didn't hurt the Dow Transports (TRAN). I thought the economy was "going into the tank on Thursday" didn't you? 

Dow Transports (TRAN) - 10-point box

Jack Lemmon? Tony Curtis (Some Like it Hot)? Dustin Hoffman (Tootsie)? Robin Williams (Mrs. Doubtfire)? All four actors could change roles quicker than an ex-hedge fund manager could tell his/her clients to switch industry groups based on new "dynamics" taking place in the market. 

The "trannies" as they are sometimes called have exploded from a Friday kiss of their May lows, when on Friday it would have looked as if the economy, and perhaps the markets were about to make a second-leg lower. However, a powerful 3-day rally now sets the stage for a major collision at 3,650.

I think the TRAN will work its way higher with this strong 3-day build of demand showing somebody has "thrown the switch" to the bull side. While United Parcel Service (NYSE:UPS) $74.90 +1.32% may be seeing some May "Max Pain Theory" in play at the $75.00 strike, I liked the UPS Oct. $75 Calls (UPS-JO) in today's Market Monitor as a TRAN exposure. Not unlike Federal Express (NYSE:FDX) $89.11 +1.80%, UPS is also starting to build gains after a successful test of its longer-term bullish support trend.

Dow Transports (TRAN) - Daily Intervals

You can almost see the collision between bulls and bears at the 3,650 level and what can happen if bears give way like they did in late March. MACD is rising toward zero and 3,650 looks to be the intersection. I don't have tonight's sector bullish % readings from Dorsey/Wright and Associates, but yesterday's reading was unchanged at 37.21%, up from last Wednesday's 35.29% reading. Both UPS and FDX point and figure charts have "buy signals" associated with their PnF charts. You can view FREE PnF charts at www.stockcharts.com

Is that a wolf in sheep's clothing? Or a guy dressed like a girl? Is that a head and shoulder formation? Yes!... on both counts.

S&P 500 Index (SPX.X) - Daily Intervals

The "trannie" theme takes hold in the SPX's bar chart. Bulls could make the case that April's lows was a "head" of a reverse h/s pattern. Bears will hold their convictions that it isn't over until the "fat lady sings" around 1,211.

Tonight, I also make a benchmark dating back to February 3 when the SPX's MACD oscillator was approaching the zero level. That day, the SPX closed 1,190, which I think traders can use along with the TRAN at 3,650.

Now hold on a minute! Let's step back and review some VERY SIMILAR things we saw last summer. 

I REMEMBER outlining a possible reverse head/shoulder pattern in May of last year, when the SPX fell to 1,080. While we saw a strong rebound from that level to 1,145, that "head" failed, or should I say the "right shoulder" (1,087) failed and the SPX went on to make a new relative low at 1,061. Now take notes to my "same level of risk" from the 05/04/05 wrap when we looked at the SPX Bullish % ($BPSPX) chart.

Here... let's take a look at the SPX bar chart on a WEEKLY Interval. We'll use retracement, and compare the past to the present. 

S&P 500 Index (SPX.X) - WEEKLY Intervals

Starting from the left of the chart, I show in GREEN reverse head/shoulder pattern what I alerted traders to in April as a possible reverse head/shoulder pattern developing. Now that one FAILED at the "Fail" right shoulder as the SPX went on to trade a new relative low to 1,060. But I wouldn't give up and not soon after, I alerted traders to ANOTHER possible reverse head/shoulder pattern developing, along with my "short squeeze" alert on a break much above 1,145 (late October). I wish we could go back and review some archives from the October-November of 2004 time frame. If memory serves me correct, there were also alerts to a head/shoulder top formation building on a DAILY interval bar chart. The right shoulder was around 1,125 I think.

OK... things look, perhaps feel just like they did last summer.

Now, the CURRENT bullish % indications, are PRETTY DARNED CLOSE today as to those levels found when the SPX hit that low of 1,060 in August, and the rally that took hold then did take the SPX just shy of its PINK 80.9% retracement, before the pullback to BLUE right shoulder developed and undercut the PINK 38.2% retracement.

My (Jeff Bailey's) mindset at this point is that in combination with TRAN observations, an honest SPX bear is probably looking pretty hard at the 1,211 level right now, and starting to think "I may have to concede strength to 1,200 if 1,190-94 doesn't hold, then I'll pressure 1,211 looking for a "right shoulder" for the H/S top, with a target back to 1,171, which... if history repeats, could be the setup for the inverse/reverse head and shoulder. Hey... that keeps us in the "summer range."

Note the current position of PRICE relative to the 10-week SMA (50-days) and 40-week SMA (200-day). To me, current PRICE relative to SMA's looks a little stronger.

We will see that reflected in the MACD oscillator on the WEEKLY interval chart, relative to when MACD oscillator dipped below its zero value as the SPX made that relative low back in early August of last year.


New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

Editor's note:

We are very encouraged by the bullish breakout in the major stock averages (DJIA, S&P 500, and the NASDAQ Composite). However, with the Dow up three hundred points in three days the market is looking a little short-term overbought. We would like to add new bullish candidates to the play list but we will wait until tomorrow to see if there is any profit taking and thus a better entry point. 

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone-Smith - ASN - close: 36.32 chg: +0.40 stop: 34.85

Today's move over the 36.00-36.25 region looks like a new bullish entry point.

Picked on May 06 at $36.26
Change since picked: + 0.06
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand


Brookfield Homes - BHS - close: 46.63 chg: +0.53 stop: 42.95 

This is a surprise. The housing sector soared with a 4.5 percent gain on Wednesday yet BHS only added 1.1 percent. We would have expected BHS to perform better. Fortunately, it looks like traders are buying the late afternoon dip toward the $46 level. 
Our target is the $50 region. 

Picked on May 05 at $45.05
Change since picked: + 1.58
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 100 thousand


Caremark - CMX - close: 43.73 chg: -0.89 stop: 40.95

CMX stumbled into some profit taking today after gapping higher to hit another high. The move looks somewhat like a bearish engulfing candlestick but bulls where there to buy the dip near $43 and its simple 10-dma. 

Picked on May 09 at $43.30
Change since picked: + 0.43
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million 


First Bancorp - FBP - close: 41.23 chg: +0.59 stop: 38.49 

No change from our previous update on 05/16/05.

Picked on May 05 at $40.37
Change since picked: + 0.86
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 280 thousand


Greenhill & Co - GHL - close: 35.59 chg: +0.50 stop: 33.40 

No change from our previous updates. Today's bounce could be used as a new bullish entry point but if so we'd use a tighter stop loss.

Picked on May 09 at $34.11
Change since picked: + 1.48
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 70 thousand


Humana - HUM - close: 36.47 chg: +0.69 stop: 32.95

No change from our previous updates.

Picked on May 09 at $36.33
Change since picked: + 0.14
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 1.3 million 


Motorola - MOT - close: 16.90 change: +0.48 stop: 15.75 *new*

It was a big day for shares of MOT. The stock added 2.9 percent on very strong volume. The move was partially fueled by news that the company has authorized a three-year $4 billion stock buy back program. We're raising our stop loss to $15.75. Our target is the $17.45-18.00 range. 

Picked on May 15 at $16.21
Change since picked: + 0.69
Earnings Date 04/20/05 (confirmed)
Average Daily Volume: 13.2 million 


Yahoo! Inc. - YHOO - close: 35.68 change: +0.23 stop: 33.95

Ding! We have been triggered in this bullish play. Shares of YHOO broke out over resistance at the $36.00 level and hit our entry point at $36.05. The bad news is that the stock was unable to maintain its gains and shares closed back below the $36 level with volume coming in above average. This looks like a potential short-term top. Readers may want to step back to see if YHOO consolidates back toward the $35 level before initiating positions. We would definitely wait for another move over $36 before going long. More aggressive traders might consider a bounce from $35. In the news YHOO announced free phone calls with its Yahoo Messenger (instant messaging) service. 

Picked on May 18 at $36.05
Change since picked: - 0.37
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 20.9 million 

Short Play Updates

A.S.V.Inc. - ASVI - close: 34.87 change: +0.57 stop: 35.31

We are still waiting for ASVI to trade under short-term support at the $34.00 level and hit our trigger at $33.99. 

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 122 thousand


Ball Corp - BLL - close: 37.85 chg: +0.72 stop: 40.05 

No change from previous update on 05/15/05. As expected BLL is struggling with resistance near the $38.00 level.

Picked on May 05 at $38.98
Change since picked: - 1.13
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 611 thousand


Biomet - BMET - close: 38.76 chg: +0.91 stop: 39.01 

Red alert! The broad-based market rally has helped fuel a 2.4 percent gain in BMET. The stock is breaking out over technical resistance at its simple 50-dma and the top border of its descending channel. Almost every indicator is suggesting that BMET is reversing course. We strongly suggest that more conservative traders exit now to avoid further losses. We're leaving the play open only because the market looks short-term overbought and due for a pull back. 

Picked on May 10 at $37.45
Change since picked: + 1.31
Earnings Date 03/22/05 (confirmed)
Average Daily Volume: 2.4 million 


Liz Claiborne - LIZ - close: 38.03 change: +0.24 stop: 38.25

Bears should probably run for the exits here too. The market rally lifted LIZ and the stock is breaking out over the $38.00 level and its trendline of resistance dating back to the March high. We expect the stock to hit our stop loss tomorrow!

Picked on May 15 at $37.14
Change since picked: + 0.89
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 718 thousand


Mylan Labs - MYL - close: 15.60 change: +0.10 stop: 16.51

No change from our previous update on 05/17/05. We do not believe the stock had any reaction to the press release out today about MYL's beta-blocker compound. 

Picked on May 16 at $15.85
Change since picked: - 0.25
Earnings Date 05/12/05 (confirmed)
Average Daily Volume: 1.6 million


UST Inc - UST - close: 43.54 change: -0.33 stop: 46.01

No change from our previous update on 05/15/05. UST's relative weakness today bodes well for the future.

Picked on May 10 at $44.12
Change since picked: - 0.58
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 1.0 million 

Closed Long Plays


Closed Short Plays

Catalina Mktg - POS - close: 25.39 chg: +0.96 stop: 24.85 

This could be a short-squeeze in POS. The company reported earnings this morning that missed Wall Street's expectations by 9 cents. By all accounts the stock should have tanked. Shares did gap down and trade to $23.29 before bouncing. The sharp rebound quickly pushed POS through our stop loss at $24.85 and shares closed above technical resistance at its exponential 200-dma on volume several times the average. 

Picked on April 22 at $23.80
Change since picked: + 1.59
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 468 thousand

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


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