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Daily Newsletter, Saturday, 05/28/2005

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Table of Contents

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

Market Wrap

We Can't Get No Market Action

Perhaps thanks to Bo Bice's cover of the Rolling Stone's song on an American Idol episode, even our younger readers will recognize the reference being made in that title. That old Rolling Stone's song could have served as the anthem for both bulls and bears as Friday's session opened. They could have gone right along singing it all day.

One aberration occurred in the Russell 2000. Just after the bond market close, the RUT and MID zoomed up.

Annotated Daily Chart of the RUT:

The RUT might be watched closely next week because either a rollover at the top of that channel or a breakout above it could lead the way for other indices. As noted on the chart, the RUT saw a strong surge in buying about the time of the bond-market close, although big-cap indices did not seem to participate.

The RUT seemed to take over for the SOX, with the SOX waning a bit Friday in its efforts to lead indices higher.

Annotated Weekly Chart of the SOX:

These two indices might be watched carefully next week for market guidance. Not all traders follow nested Keltner channels, but it might also be noted that Thursday ended with the SOX up against the upper boundary of a channel that it rarely violates for more than a couple of days on the daily chart. Friday, it turned down from that channel line. Further challenges might be possible, but so might a downturn toward central channel support. That central channel support is currently at about 409.80-412.70, although Keltner support also exists at a Keltner line currently at 422.81.

SOX bulls might have been taken aback by the lack of follow through on Friday. Although tech-related indices had performed well Thursday and did so in overnight sessions, U.S. futures showed little reaction to the Nikkei's strong climb. Perhaps China's Shanghai Composite's descent to almost eight-year lows tempered what might have been a positive reaction. After some initial volatility near the European open, U.S. futures showed little reaction to the early declines in the U.K., France and Germany, either.

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Big currency moves, expected by some to be a possible driver of markets next week and so on the radar screen pre-market, had not made an appearance overnight. Asian currencies are expected to strengthen against the dollar as the result of any Chinese move to un-peg the Chinese currency from our currency, but hopes of an imminent move by China have been waning. The euro was expected to weaken against the dollar as the result of a possible no vote on this weekend's referendum in France on the EU constitution, but the euro had already declined for a month. Ahead of the vote, euro shorts covered. During the overnight session, the euro continued its perhaps-technical bounce against the dollar, a bounce that continued throughout the trading day.

Those who had hoped that pre-market economic announcements would move the markets were to be disappointed, too. March's personal spending was revised higher to 0.9 percent against the previous 0.6 percent. April's personal spending rose a less-than-expected 0.6 percent as incomes climbed 0.7 percent. Perhaps more closely watched was the core PCE deflator, rising 0.1 percent and 1.6 percent year over year, showing tame inflation pressures. One key measure had shown gasoline prices pushing an inflation measure up 0.4 percent, but that core number excludes gasoline. I'm not so certain that most consumers would exclude it.

However, as one article noted, bonds barely budged after the announcements, and neither did equities. Most market watchers were reassured by the numbers, feeling that the threatened softness from March had been safely negotiated. Futures improved slightly, but only slightly and not for long.

Little note was made by television commentators of J.P. Morgan's reiteration of an underweight rating on stocks in the U.S. and globally. The firm reportedly feels that the earnings environment has deteriorated. The firm's analysts predicted 0.0 percent earnings growth for SPX stocks this year.

The open might have hinted at some movement as markets dipped ahead of the 10:00 release of the U.S. Michigan consumer sentiment index. That index fell to 86.9, down from April's 87.7, to the lowest number in more than two years, but still higher than the expected 85.3-86.0. Gasoline prices weighed on sentiment, as well as some statements from Fed members, including Greenspan's mention of froth in the housing market, one article concluded. The prospect of rising interest rates may also have been a factor. The current conditions component rose to 104.9 versus April's 104.4 and expectations fell to 75.3 from 77.

All in all, nothing prevailed to move the markets on a day that promised and delivered light volume. Action has been choppy or nonexistent lately, confusing traders. Perhaps it's time to step back and take a long-term view, one that will start with the Dow's monthly chart.

Annotated Monthly Chart of the Dow:

This chart makes evident some of the reasons for confusion in the markets. Bears might point to the strong resistance that will likely be encountered near the apex of that diamond formed at the Dow's all-time high. That resistance now coincides with the light red rising trendline that's been providing resistance, too. Bulls might point out, however, that the light red rising trendline might be the neckline for a large inverse H&S and that the Dow might be in the right-shoulder-building process. Bears might then counter that instead of a right shoulder, the Dow could be forming a small regular H&S beneath that bold red line.

When I see competing bullish and bearish formations like these, I know that bulls and bears might not yet have worked out which group is going to prevail. Whether that's the right shoulder for an inverse H&S or entire regular H&S, the monthly view shows that the Dow still chops around within that formation. The outcome--either bullish or bearish--has not been decided and neither has final direction.

The daily chart view provides no more clarity, with the two horizontal red lines on this chart representing the apex zone of that diamond visible on the monthly chart.

Annotated Daily Chart of the Dow:

The SPX's weekly chart shows a possible bullish interpretation of the SPX's action, but also points out that the SPX ended the week jammed against potential strong resistance.

Annotated Weekly Chart of the SPX:

The top of that channel is near 1201 on a weekly closing basis. The daily Keltner chart (not shown) reveals upside resistance at about 1210, but Keltner-style bearish divergence has been showing up on the last several swing highs. If that's to continue, the SPX will only graze that upper level or perhaps not touch it. If that 1210-ish upper line is breached, the bearish divergence is erased. If in bullish positions, traders should have profit-protecting plans in place at the current level, up to that 1210 level, and remain on guard for a potential rollover.

The daily Keltner chart suggests about equal possibility for the SPX to drop back toward 1188 or charge up toward 1210, with a slight weighting toward a pullback first. The range-bound trading late last week neutralized the information to be obtained on intraday Keltner charts, so that they don't augment the picture on the daily chart, not giving a preference for a climb or a decline. As long as the SPX maintains daily closes above 1188, it might still be presumed to be moving up toward an eventual test of that channel line now at 1210, but a close below the line currently at 1188 suggests a pullback toward Keltner support now at 1177.

The SPX faces resistance at the top of its descending regression channel, but the Nasdaq broke out of a descending regression channel.

Annotated Daily Chart for the Nasdaq:

The Nasdaq attempts a breakout from daily Keltner resistance, the analogous configuration that the SOX currently tests. A daily close back below the Keltner line currently at 2067.74 suggests a possible pullback toward support currently at 2043.24 and a daily close below that support suggests a deeper pullback, to 2000.50-2018.20. Support at that lower level looks strong enough to hold on the first test, at least as currently configured. No rollover has yet occurred and may not, of course, but it's natural to see a retest of broken long-term resistance, to see if it holds as support. As long as support holds, that's not a bearish development, but instead a necessary one.

The Nasdaq was to gain only 0.21 percent Friday and other indices made similarly small moves. One index moving more than 1 percent was the XOI, the Amex Oil Index. Pre-market news included a Financial Times report that China National Offshore Oil's non-executive directors have hired independent advisors to scrutinize management's contemplation of bidding against ChevronTexaco for Unocal (UCL), to the tune of more than $16 billion. UCL was to post a gain of 2.25 percent Friday.

Pharmaceuticals also came under scrutiny pre-market after Caremark RX and the Justice Department were reported as being close to reaching a settlement that would require Caremark Rx to pay more than $100 million, in a case that might have broader implications for other PBMs, or pharmacy benefit managers. Investigations have centered on whether the PBMs have aided manufacturers in encouraging the use of higher-priced drugs.

Pharmaceuticals were to stay in the news all day. In other news related to the sector, the FDA has begun looking into reports that about 50 men suffered permanent blindness after taking Viagra. Some information suggested that the blindness occurred in men who were suffered from diabetes or heart disease. The company acknowledged that it was discussing changing the label with U.S. regulators. The company also reiterated the drug's safety. Viagra accounts for three percent of Pfizer's (PFE) sales, accounting to a CNBC report. PFE was to drop 1.90 percent in Friday's trading.

Merrill Lynch did its best to provide a further boost to the semiconductor sector pre-market by upgrading LSI. Baird initiated coverage of TXN with a neutral rating. LSI climbed 2.52 percent, and TXN dropped 0.71 percent.

While some indices might have moved glacially if at all on Friday, individual stocks sometimes showed stronger moves. Telecommunications equipment company Ditech Communications Corp. (DITC) saw its stock lose more than a third of its value, 38.12 percent, after Thursday's earnings report beat expectations for earnings but lowered expectations for Q1 revenue to less than half what analysts expected. The company's president and CEO blamed a decline in orders from Nextel as a result of Nextel's merger with Sprint. The company collected several downgrades Friday morning. TiVo (TIVO) beat expectations by narrowing its Q2 loss more than expected, but received a downgrade and dropped 3.02 percent. Chico's FAS (CHS) achieved an all-time high after it also beat forecasts in its Thursday-night report, closing higher by 8.42 percent. Esterline Technologies (ESL) jointed the list of those companies beating expectations, soaring higher by 10.01 percent.

Markets will remain closed for the holiday Monday. Tuesday's economic releases are light, but Wednesday's and Thursday's calendars prove heavy, with much information on the manufacturing sector, housing sector, retailers and the employment situation all due. With Greenspan's "froth" statement about the housing market still bubbling through the markets and Fed Vice Chairman Roger Ferguson admitting Friday that housing prices in many U.S. markets might be "relatively high" and subject to a slowing, information about the housing sector might be closely watched. Many of next week's announcements will be.

Tuesday's numbers include the National Association of Purchasing Management-Chicago May survey results, to be released at 10:00 am. This survey measures business conditions in the Chicago area in both the manufacturing and non-manufacturing sectors. Some consider it a leading indicator for the ISM manufacturing index to be released the next day. Reportedly, the FOMC committee members watch this Chicago number. Also, US-Farm Prices will be released Tuesday afternoon, at 3:00. The Department of Agriculture releases this index of prices received by farmers.

Wednesday's releases begin early with the usual 7:00 release of the MBA's figures for loan applications, this covering the week of 5/27. ICSC-UBS store sales for the week of 5/28 will follow shortly, released at 7:45. At 8:55, the Redbook survey will provide additional insight into sales at chain stores, discounters, and department stores. Together with the more consistent ICSC-UBS indicator, the Redbook survey helps economists gauge consumer spending habits. The RLX has been on a tear lately, but slowed to a 0.19 percent gain Friday. It faces January's huge gap lower, as yet unable to move into that gap last week. A downturn here might be important, but if the RLX climbs, gains might be tempered by gap resistance.

Investors may brush aside many of those releases to get a better look at the May ISM Manufacturing Index to be released at 10:00. This number can be market moving and is also one that the Federal Reserve watches closely. Motor vehicle sales for May will begin being released about 4:00.

Thursday will be another full day of economic releases. At 6:00 am, Monster releases its employment index for May. The Thursday release of jobless claims will come as usual at 8:30 along with Q1 productivity and unit labor costs. Because of this release's importance in measuring inflationary pressures, it, too, will be closely watched. The April job report surprised to the upside, so this report should garner attention. The 10:00 release of the Challenger Job-cut Report for May will provide further insight into the employment situation, but it's likely to be overshadowed by the coincident release of April's factory orders.

At 10:30, the Department of Energy give updates on crude, gasoline and distillate inventories. The day's releases conclude with the 4:30 update on the U.S. Money Supply for the week of May 23.

Friday rounds up the week, with the U.S. employment situation for May released at 8:30, a potentially market-moving release. Termed the most comprehensive report on the employment situation, this report is also one that Greenspan watches. By that point, market watchers might be exhausted, but the week finishes up with a bang, with the May ISM non-manufacturing index, expected at 10:00.

Market action might have lulled traders this week, but some predict that it won't do so next week. I've pointed out many indices breaking out or attempting to break out over long-term resistance, but still subject to a downturn beneath that resistance. Some indices consolidate in broadening or other consolidation patterns. The choppy action has chopped up chart signals, too. Longer-term charts harbor signs of impending breakouts but also include warnings of strong resistance.

Not to be ignored is Sunday's referendum in France on the EU constitution and its possible impact on currencies and equities. A no vote, likely according to some polls, might crater the euro against the dollar, although some speculate that "crater" might be too strong a word, especially since the euro has already trended down against the dollar for the last month in anticipation of a negative outcome. Friday's move higher was either a validation of the sentiment that the euro has been oversold this month or else just a technical bounce that relieved some of the pressure. Some feel the euro has enough support to withstand such an action, but U.S. multinational companies who do business in Europe might not benefit from a surge in the dollar against the euro if that occurs.

The dollar's move might be choppy as the U.S. ratchets up pressure on China to un-peg its currency from the U.S.'s, perhaps leading to a strengthening of that currency against the dollar. Like a see-saw, one event might send the dollar higher and another, lower, with the relative effects difficult to weigh from this vantage point. No one knows whether or when China will take that action. Will the U.S. economy suffer more from paying higher prices for imports from China if our dollar slips against the yuan or from seeing our multinational companies' earnings fall due to the effect of a falling euro against the dollar? Will our interest rates rise if China dumps U.S. assets that it had held to keep its currency undervalued against ours, and will those rising rates blow all that froth off the housing market?

Although Treasury Secretary John Snow assured senators this week that a revaluation of China's currency would not lead to a dumping of U.S. securities, or that such a dumping wouldn't affect large U.S. capital markets much if China did just that, others differ. Some speculate that large currency moves could impact our markets and could be one of the biggest market movers next week, if such moves occur.

It would be nice to predict as this report is prepared how the referendum will turn out in France, how the euro and dollar will react, what secret plans China makes for its currency and how the dollar would react to that, but those predictions are impossible to make. It might be important to watch how the dollar reacts Sunday night and then how our futures react to a dollar move, if there is any. If there's a strong surge one direction or the other in the markets, that might get some equity movement going. Otherwise, I'm not sure that the bulls and bears have yet settled who is going to win the sweepstakes as we head into summer trading conditions.

Be particularly careful and remain aware of undercurrents that might impact market action next week. Watch the SOX and RUT for clues as to whether rollovers or breakouts have begun. Watch that CCI ghost on the Nasdaq to see if it confirms or is invalidated. If rollovers begin, watch carefully the breakout levels for potential strong support on a pullback.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
CAJ None

New Long Plays

Editor's note:

We are bullish on stocks in general but remain wary about adding new bullish candidates at current levels. The major stock averages remain short-term overbought and due for a correction.


Canon - CAJ - close: 55.24 change: +0.79 stop: 52.85

Company Description:
Canon produces and markets products and solutions for homes, offices and industries worldwide, with a focus on enhancing the quality of life. Our global strategies are implemented through our Three Regional Headquarters system with bases in the U.S., Europe and Asia. In 2003, the Canon Group's consolidated net sales were approximately 3,198 billion (U.S.$29,888 million), of which about 75% was generated outside Japan. (source: company press release)

Why We Like It:
We are bullish on stocks but expect the U.S. markets to correct from overbought status sooner rather than later. That's why CAJ looks like a safer bet for bullish traders. Shares of CAJ should be somewhat insulated from a pull back in the U.S. markets since it is a Japanese stock traded as an ADR here in the states. Looking at CAJ we see that the stock has been stuck in a trading range between $51.00 and $54.40 since it peaked in late December. Friday's 1.4 percent rally is a bullish breakout through the top of its trading range. Friday's move also helped CAJ produce a new triple-top breakout buy signal on its Point & Figure chart, which now points to a $71.00 target. CAJ isn't the fastest climbing stock so we're only going to target an eight-week move into the $58.00-59.00 range. Readers can choose to go long CAJ at current levels or hope for a pull back toward the $54.50 region and buy the dip.

Picked on May 29 at $55.24
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand
 

New Short Plays

None Today.

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone-Smith - ASN - close: 36.45 chg: +0.17 stop: 35.35

ASN continues to slowly consolidate higher. Unfortunately, we have to emphasize the word slowly. Shares have not seen the sort of rally we were expecting back in early May. We remain bullish on the stock but any sort of significant market pull back would put ASN in danger of hitting our stop loss. Now that shares have filled the gap from May 19th bullish traders may want to consider new positions but do so carefully. Our target remains the $38.50-39.00 range.

Picked on May 06 at $36.26
Change since picked: + 0.19
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand

---

Brookfield Homes - BHS - close: 46.90 chg: -0.11 stop: 43.49*new*

The homebuilding sector continues to look strong, especially after Thursday's big Toll Brothers inspired rally. Meanwhile BHS is still consolidating with a bullish trend of higher lows. Unfortunately, the momentum indicators for BHS have stalled and some have already turned bearish. We are not suggesting new bullish positions at this time. Our target remains the $49.50-50.00 range. We are upping our stop loss toward the simple 50-dma with the new stop at $43.49.

Picked on May 05 at $45.05
Change since picked: + 1.85
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 100 thousand

---

Caremark - CMX - close: 44.21 chg: -0.04 stop: 40.95

Bullish traders need to go to yellow alert here with CMX. The stock gapped higher on Friday morning on word that the company may have come to settlement terms with the Feds over the business practices for one of the companies CMX has previously acquired. Yet the action in the stock price, with its quick sell-off, suggests a short-term top. Of course we've been expecting a pull back toward support near the $42.00 level so that's not so alarming. What is potentially alarming is a new announcement Friday afternoon that four states are alleging fraud against CMX for some of its Medicaid billing procedures. We didn't see any after hours trading in CMX but odds are that Monday could be a down day for the stock. We are not suggesting any new bullish positions. Let's wait and see if CMX dips toward the $42 level like we thought it might and look for a bounce.

Picked on May 09 at $43.30
Change since picked: + 0.91
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million

---

General Electric - GE - close: 36.88 chg: -0.06 stop: 34.95

GE is one of new buy the dip plays we added earlier this past week. We really like the bullish breakout over resistance at $36.50 for GE. The move pushed the stock through what looks like the top of a three and a half month trading range. However, the major market averages all look short-term overbought and due for a minor correction. GE should follow (or lead) the pull back. We are counting on the market's tendency to over-react or overdo any move so we're looking for a pull back below the $36.00 mark. We're suggesting that readers use a trigger in the $36.00-35.50 range to go long the stock. Our target is the $38.50-39.00 range before GE's mid-July earnings report. As a reader you have the luxury of waiting to see how deep any dip will be. You do not have to immediately go long on a dip to $36.00. Consider being patient. Who knows GE might dip toward the 200-dma near $35.25 instead. More conservative traders can definitely wait to buy a bounce.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/16/05 (unconfirmed)
Average Daily Volume: 18.7 million


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Greenhill & Co - GHL - close: 36.69 chg: +0.59 stop: 34.99*new*

Almost there! GHL added 1.6 percent on Friday and hit an intraday high of $36.97. That was almost enough to hit our target range of $37.00-38.00. More conservative players may want to seriously consider exiting now. Monday could prove interesting as GHL either breaks out or reverses at the $37.00 level. This close to our target we are not suggesting new bullish positions. We are going to raise the stop loss to $34.99, just below the May 25th low.

Picked on May 09 at $34.11
Change since picked: + 2.58
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 70 thousand

---

Humana - HUM - close: 36.89 chg: +0.24 stop: 32.95

HUM continues to trade near its recent highs but we're not convinced that HUM won't correct with the major averages. The DJIA, S&P 500 and the NASDAQ all look short-term overbought and due for a multi-day dip. We would much rather initiate new bullish positions in HUM on a pull back. This, of course, would probably send HUM's momentum indicators into bearish signals but the stock should find support near the $34.00 level. Wait for the dip! We're going to adjust our target to the $39.75-40.00 range.

Picked on May 09 at $36.33
Change since picked: + 0.56
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 1.3 million

---

Microsoft - MSFT - close: 26.07 chg: +0.17 stop: 24.60

Readers might be thinking that we missed the entry point on MSFT's recent dip toward the $25.50 level. While that is certainly a possibility we believe it's a stronger possibility that shares of MSFT will dip again. The NASAQ composite is now up 10 out of the last 11 sessions. This is an unsustainable pace. The GSO software index also looks a little extended. We would much rather try and catch a dip in shares of MSFT than buy what could be a short-term top. There is almost always another entry point down the road if we're patient. We are going to maintain a trigger to go long shares of MSFT on a dip into the $25.25-25.00 range. Our two-month target is the $27.00-27.50 range.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 70.8 million

---

Sirius Satellite Radio - SIRI - cls: 5.97 chg: +0.18 stop: 5.28*new*

We are certainly pleased with SIRI's relative strength. The stock added another 3.1 percent on Friday. Yet the rally stalled at the $6.00 mark, which is proving to be round-number resistance. That's okay. We're expecting SIRI to experience some profit taking when the NASDAQ composite index eventually consolidates. Readers can choose to buy a dip back toward the $5.80 level or we'd prefer to buy a dip into the $5.50-5.60 range. Meanwhile we are raising our stop loss to $5.28.

Picked on May 22 at $ 5.65
Change since picked: + 0.32
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million

---

Yahoo! Inc. - YHOO - close: 37.27 change: +0.13 stop: 33.95

Normally we might consider a bullish breakout through the top of a five-day sideways consolidation as a new entry point to go long. Our biggest concern is the NASDAQ and how extended the index is. The NASDAQ composite is up 10 out of the last 11 sessions. Odds of a pull in technology stocks are growing so we hesitate to suggest new longs in YHOO here. We'd prefer to watch for another dip toward the $36.00 level and then buy the bounce. Our target is the $39.00 level.

Picked on May 18 at $36.05
Change since picked: + 1.22
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 20.9 million
 

Short Play Updates

Ball Corp - BLL - close: 37.96 chg: +0.16 stop: 39.05

There has been little change in shares of BLL over the last few days. As we mentioned on Thursday the stock is consolidating under resistance at the $38.00 level but with a trend of higher lows, which is bullish. Everything seems to be pointing to a bullish breakout over the $38.00 level so we are not suggesting new bearish positions at this time. More conservative traders may want to significantly tighten their stop losses.

Picked on May 05 at $38.98
Change since picked: - 0.76
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 611 thousand
 

Closed Long Plays

None Today.

Closed Short Plays

None Today.

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

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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.

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