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Daily Newsletter, Thursday, 06/09/2005

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Table of Contents

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

Market Wrap

No Decision Yet

No Decision Yet

OK, this is getting tiring--this was written two weeks ago and repeated last week--"For over a week now we've been in a relatively tight range that has worked its way slowly higher. Whenever we see price action chop its way lower or higher it's usually a sign that the move is running out of steam." Change the above to read three weeks now instead of one week. One look at the daily candles and it's like a blinking green and red light for go-stop-go-stop. There's been no follow through on an intraday basis as well as on a daily basis. This too shall pass and we'll get a couple of session's worth of a trend. In the meantime there's obviously a major battle between the bulls and the bears and I suspect whichever side blinks first will be a result to stops getting tripped and the move will likely be fast. Catch that move correctly and you'll probably get a good ride. On the other hand, if you're positioned wrong and you don't take the stop, you might feel some pain. Making it a little more difficult is the fact that different indices are giving very different pictures. It's a good time to lighten up your positions, trade lightly and quickly and don't get yourself caught stalled on the train tracks with a freight train barreling down on you.


Most of us have heard that when the mainstream media picks up on a trend, the trend is over. Typically magazines for example will publish a story about a trend after it is well recognized because that's what sells magazines. So by the time it's published, the trend has already reversed or is about to. Google (GOOG) has been on a tear and recently Bubblevision added a little "bug" on the screen in order to keep track of GOOG's price. This is highly reminiscent of the dot.com era and the result for GOOG might be the same. This is one powerhouse of a company but the hype around it is over the top, as is its valuation. Maybe it really is different this time but I have my doubts about that. Burn me once shame on you, burn me twice shame on me. Another area is the housing market. Have you noticed how everyone, and I mean everyone, is talking about the housing market. It has made prime time news. Time magazine ran an article titled "Home $weet Home: Why We're Going Gaga Over Real Estate." All of this attention almost always identifies the end of the trend, maybe not this week, but probably soon. The housing market needs to correct and wring out the total frenzy we're seeing around it and we can only hope that the air is let out of the balloon slowly but I'm afraid history is not kind in this regard. All bubbles pop, they don't fizzle.

So let's take a look at the charts and see what they say to us. As I mentioned, there's some confusion between the charts but we've got some pretty good levels to watch for confirmation which direction this market will head. Trade the direction of the break and in the meantime know that we're trapped in a relatively small range and it's making trading difficult.

DOW chart, Daily


It seems each time the bears or the bulls have the opportunity to run with the ball they decide instead to toss it to the other side. We're in the market's version of hot potato. Price continues to bounce up and down between resistance near the top of its down-channel and the April highs and support at its 200-dma. So again, support 10427) and resistance (10600) is easily identified (if not a little wide) and a break of either could get the market moving in that direction. The fact that stochastics is working its way down to oversold while price consolidates sideways is bullish.

SPX chart, Daily


The SPX has been slightly stronger than the DOW in that it has worked its way higher, versus sideways, while consolidating underneath its broken uptrend line. Like the DOW, the fact that stochastics is moving down towards oversold while price consolidates is typically bullish. Support is actually a little closer as far as signaling something bearish is starting--if SPX breaks below 1191, we could be starting something bigger to the downside. The upside is not quite as clear as far as identifying a break goes. The 60-min chart below shows the shape of the consolidation pattern and it's typically bearish.

SPX chart, 60-min


Drawing trend lines off the May 5th high has marked the highs and lows since that date. The last bounce failed to make it back up to the top trend line and that may be telling us something. But price did bounce off the lower line this morning and that's the support line to watch now--if we break below today's l191 low it could be good for a short trade that lasts more than a day.

Nasdaq chart, Daily


I have a headache after looking at this chart. The sellers certainly knew where to sell this index! The daily oscillators are hard over so we'll have to see how far this drops. The first support level is the uptrend line from October 2002 that price was able to recapture after falling below it in April. The 50% retracement of the March-April decline crosses this uptrend line at 2040 so watch this area for potential support.

SOX index, weekly chart


Sticking with the weekly chart of the SOX to give us a little longer term perspective also raises a warning flag for bulls since price has rallied up to the downtrend line from November 2004 which is the top of a potential flag pattern, and currently just above at 443 so only 5 points above today's closing price. The weekly stochastics is also hitting the top of its coiling pattern. The good news for this index is that it got back above its uptrend line (currently at 408) and its 200-wma (427) so support is fairly close.

BKX banking index, daily chart


The banking sector has been doing the same thing as the broader market by consolidating above support, in this case the broken downtrend line from December 2004. However, it's been struggling underneath its 200-dma so we know what resistance level this index needs to break through.

This morning started with all eyes and ears on what Greenspan had to say before the Joint Economic Committee, with investors hoping to get a clearer picture on the outlook for long-term yields, inflation trends and whether the current round of Fed tightening is nearing an end. While waiting with baited breath for Greenspans words of wisdom the Labor Dept. showed that initial claims fell 21K to 330K (consensus was 335K). This was a level consistent with gains of 175K per month in nonfarm payrolls and roughly in line with the White House's recent estimate of 178K.

As the morning wore on, there was some volatility depending on how Greenspan's remarks were evaluated. He said it is difficult to forecast what the "so-called neutral rate is," implying that it may be premature to set a deadline for an eventual end to Fed tightening. Greenspan has said that we may be close--all part of his doublespeak. While the Fed Chairman has said that the economy is on a "firm footing," he has also reaffirmed that benchmark interest rates may keep rising at a "measured pace," challenging the hopes of many that Fed tightening is nearing an end. He also stated a "bubble" in home prices for the nation as a whole does not appear likely. I want me a pair of them rose-colored glasses he's wearing.

As seen in the above chart for the SOX, chip stocks got a lift today, helped by the earnings report from National Semiconductor (NSM 21.67 +1.77). Despite an 18.2% year-over-year decline in Q4 revenues to $467M as well as forecasts that Q1 revenues will be flat to down 2% from Q4 levels, investors liked the 40% increase in NSM's net income and the declaration of a $0.02 cash dividend. SOX was also helped from a 2.2% surge in shares of Intel ahead of its mid-quarter update. Broad-based strength in Internet stocks, after Smith Barney initiated coverage on Yahoo (YHOO 37.45 +0.82) and Google (GOOG 286.31 +6.75) with Buy ratings, also contributed to technology's solid advance.

With regard to sector strength and weakness, Energy paced the way higher, taking full advantage of a surge in oil prices. Crude oil futures ($54.28/bbl +$1.74) soared 3.3% amid news that the first tropical storm of the 2005 Atlantic hurricane season forced some large oil companies to remove personnel from oil platforms. The sector was helped by reports that ChevronTexaco (CVX 56.04 +1.21) and Unocal (UCL 60.19 +1.72) have reached a proposed settlement with the FTC to clear the way for their proposed $16.4B merger. After a strong bounce last week, oil pulled back this week but it looks like only a correction to last week's strong rally. Today's rally may be part of the back and forth it will do for a little while but it looks like bullish price action.

Oil chart, June contract, Daily


Oil had bounced from just above its uptrend line from early 2004 and stalled at the midline of the up-channel that has contained price the past year and a half. We may see some back and forth consolidation to work off the overbought indicators, but the pullback looks corrective and the rally in oil is expected to continue once it's finished correcting.

Oil Index chart, Daily


As mentioned above, the increase in oil's price today gave the oil index a shot in the arm and boosted it up to the top of its longer term up-channel. This index looks ready for a rest so I would expect a pullback from here. The 50-dma at 459 should act as support now that it's been able to get back above it.

Transportation Index chart, TRAN, Daily


The Trannies have been a big disappointment this week. After giving a buy signal on its P&F chart at 3650, and climbing up to 3670, it's been all downhill since then. This now looks like it was a bull trap (suck in the bulls on a buy signal and then drop hard, trapping those who don't use appropriate stop loss control). After stopping at its 200-sma yesterday, price dropped further and bounced off its 200-ema but closed below its 200-sma.

Shipping Rates chart, Daily


This is a copy of a chart that shows shipping rates and how theyre collapsing. Of course as shipping rates collapse so will the Transports. And Transports gives us a heads up as to how the broader economy is doing. This is not the picture of economic health and is a reason why following the Trannies is important.

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


As discussed at the opening, the housing market has been on fire--hot enough to fry shorts. But it needs to hold near its highs in any consolidation otherwise we might have another bull trap in the making. The daily oscillators are bending over so the depth of any pullback will be telling. In the meantime, this is clearly in an uptrend.

U.S. Dollar chart, Daily


The US dollar is hugging the top of its parallel up-channel and it looks like it's headed higher. The recent pullback was corrective and the recent rally looks like it might reverse the daily oscillators. There's also a likely chance that the dollar will consolidate further before heading up again but any consolidation would also be a strong indication that another rally leg is coming. The upside Fib target is just above $89 before it could see a more significant pullback.

Gold chart, June contract, Daily


As the US dollar pulled back, gold rallied. It rallied up to its downtrend line from March and got close to retesting its broken uptrend line from early 2004. That was also the location of its 50-dma. Like the dollar we could see gold consolidate a little while before an attempt at its 200-sma, currently at 430.35 so about +$7 from its current position. We'll be switching to the August contract next week which closed at 426 today.

Sector action was mostly green today, led by the oil service index and the other energy indexes. The Financial sector also finished on a strong note. Health Care was also a bright spot for investors, getting a boost from continued momentum in HMOs (i.e. UNH, WLP, AET, CI and HUM) and strength in Biotech, after a Phase II clinical trial showed Rituxan was effective in treating rheumatoid arthritis (i.e. BIIB and DNA). The Materials sector, however, was the worst performing sector, as a strong dollar weighed on dollar-denominated commodities across the board.

Overcapacity concerns at Louisiana Pacific (LPX 23.56 -1.38), which prompted Smith Barney to downgrade LPX to Hold from Buy, also weighed on the sector. The Industrials sector also struggled on the day, after Morgan Stanley downgraded United Parcel Service (UPS 71.25 -1.11) and lowered its earnings estimates for FedEx Corp. (FDX 87.60 -2.10), citing higher fuel costs and competitive domestic parcel pricing.

Tomorrow will be relatively quiet as far as economic numbers go. We'll get Export and Import prices and Trade Balance numbers at 8:30 and then the Treasury Budget at 2:00, none of which should appreciably move the market. We'll have to see how the cash market reacts to the INTC earnings news. The reported that their Q2 gross margin is expected to be about 57% versus prior guidance of 56%, and Q2 revenue will be in the $9.1B-$9.3B range versus prior guidance in the $8.6-9.2B range. Both of these new estimates are better than previous estimates which is good news, right? That's why INTC sold off from its closing price of $27.68 down to $27.29 at its after-market close. It was a sell the new event since INTC had rallied into its earning's report. But equity futures are essentially flat in after hours so we'll have to see if the cash market has anything to say about INTC's news.

The market continues to be very challenging to trade on a short term basis because there's no follow through. Traders need to take profits quickly otherwise they've been giving them back. One look at the daily chart shows you that we've gone essentially nowhere for 3 weeks now. That will change but for the time being definitely take profits quickly!
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
XOM None

New Long Plays

ExxonMobil - XOM - close: 58.44 change: +1.71 stop: 55.90

Company Description:
ExxonMobil is the world's largest publicly traded energy company, operating in about 200 countries and territories. In 2004, the company had net income of $25.3 billion. (source: company press release)

Why We Like It:
The oil sector indices have broken through resistance at the top of their descending channels thanks to strength in crude oil and a bullish breakout in oil titan XOM. Now that the summer driving season is almost upon us the oil sector could be poised for another leg higher. The markets don't seem too concerned over next week's OPEC meeting so we'll use XOM's rally today as a new bullish entry point. It is true that XOM's P&F chart is currently bearish and that makes this play a bit more aggressive than normal. However, XOM's recent strength has pushed the stock above technical resistance at its 50-dma and the 100-dma. We're willing to go long at current levels but you the reader can choose to wait for a possible dip back toward $57 and buy a bounce or wait for XOM to push past minor resistance near $58.50 (or even the $60.00 mark). We are targeting a move into the $63.00-64.00 range. We will not hold over XOM's late July earnings report.

Picked on June 09 at $58.44
Change since picked: + 0.00
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 20.9 million
 

New Short Plays

None today.
 


Play Updates

In Play Updates and Reviews

Long Play Updates

Archstone-Smith - ASN - close: 38.00 chg: -0.03 stop: 36.26

No change from our previous update. Our target is the $38.50-39.00 range.

Picked on May 06 at $36.26
Change since picked: + 1.74
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand

---

Canon - CAJ - close: 54.66 change: -0.73 stop: 52.85

CAJ is showing a little bit of volatility after the Japanese stock market lost more than 100 points today. Thus far CAJ remains above short-term support at the $54.00 level. Watch for a move back over $55.00 as a new bullish entry point.

Picked on May 29 at $55.24
Change since picked: - 0.58
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand

---

Caremark - CMX - close: 44.40 chg: -0.00 stop: 41.95

No changes here. Trades can watch for a bounce from here and its four-week trendline of support - or - watch for a dip back toward the $42.00-42.50 range, which should also act as support.

Picked on May 09 at $43.30
Change since picked: + 1.10
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million

---

Greenbrier Co - GBX - close: 28.32 change: -0.32 stop: 25.49

The Dow Transportation index under performed the market again today and that weighed on shares of GBX. We would step back and wait for shares to dip into the $27.50-28.00 range before considering new bullish positions. Actually traders may want to wait for signs of a bounce from this region before initiating plays.

Picked on June 01 at $28.67
Change since picked: - 0.35
Earnings Date 06/29/05 (unconfirmed)
Average Daily Volume: 227 thousand

---

General Electric - GE - close: 36.79 chg: -0.01 stop: 34.95

No change here. We're still waiting for GE to dip into the $36.00-35.50 range before going long the stock.

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

---

Georgia Gulf - GGC - close: 34.08 change: -0.37 stop: 30.95

No change from our previous update.

Picked on June 05 at $34.33
Change since picked: - 0.25
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 598 thousand

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Humana - HUM - close: 38.56 chg: +1.06 stop: 34.99 *new*

Healthcare stocks showed a lot of strength today and HUM added 2.8 percent on average volume. The bounce from yesterday's pull back could be used as a new bullish entry point but keep in mind that our target is the $39.75-40.00 range. We are raising the stop loss to $34.99 but more conservative traders could probably get away with a tighter stop than that.

Picked on May 09 at $36.33
Change since picked: + 2.23
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 1.3 million

---

Microsoft - MSFT - close: 25.51 chg: +0.11 stop: 24.60

No change here either. We're still waiting for MSFT to pull back into the $25.25-25.00 range before going long the stock.

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

---

Marvel Enterprises - MVL - close: 21.28 change: +0.13 stop: 20.45

MVL produced a decent rebound from today's low at the $20.80 mark. We would consider this a new bullish entry point but more conservative traders may want to wait a day or two to confirm the bounce is going to see some follow through.

Picked on June 01 at $21.86
Change since picked: - 0.58
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 911 thousand

---

Nova Chemicals - NCX - close: 30.51 change: -0.24 stop: 29.99

This is it. This looks like do or die time for NCX. The stock has pulled back toward support in the $30.00-30.50 region. If shares don't bounce from here tomorrow we look for the stock to breakdown and stop us out at $29.99.

Picked on June 01 at $33.03
Change since picked: - 2.52
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume: 660 thousand

---

Sirius Satellite Radio - SIRI - cls: 5.83 chg: -0.01 stop: 5.45

Traders may want to turn defensive on SIRI. We've been expecting a potential dip toward the $5.75 level and that's what we got. Shares actually hit a low of $5.60 this afternoon as SIRI tested technical support near its 21-dma and 100-dma. We would not suggest new bullish positions given what looks like an impending sell signal in the MACD indicator. We suspect that today's weakness in SIRI is due to the drop in shares of larger rival XMSR, who announced a $300 million sale of common stock in another public offering.

Picked on May 22 at $ 5.65
Change since picked: + 0.18
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million

---

Yahoo! Inc. - YHOO - close: 37.45 change: +0.82 stop: 35.99

It looks like YHOO bulls have been saved by another broker upgrade for YHOO. Actually Smith Barney started new coverage on the stock with a "buy" rating. This helped propel YHOO's 2.2 percent rebound following the previous two days of declines. We hesitate to suggest new plays here given the negative slant to the technical indicators but if you were looking for a new short-term bullish entry point in YHOO this is probably it. Our target is the $39.00 level.

Picked on May 18 at $36.05
Change since picked: + 1.40
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 20.9 million
 

Short Play Updates

Ball Corp - BLL - close: 37.53 chg: -0.02 stop: 38.15

No change from our previous update.

Picked on May 05 at $38.98
Change since picked: - 1.39
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 611 thousand

---

ManTech Intl - MANT - close: 29.13 change: +0.88 stop: 30.05

The volatility continues in MANT. The stock continued with yesterday's bounce and pushed back above its 10-dma. At this point in time we'd probably look for shares to retest the $29.75-30.00 level. Remember, we were longer-term bullish on MANT but were trying to capture a short-term pull back in the stock following Tuesday's reversal. At this time we would not suggest new bearish positions.

Picked on June 07 at $28.42
Change since picked: + 0.71
Earnings Date 08/15/05 (unconfirmed)
Average Daily Volume: 165 thousand
 

Closed Long Plays

Greenhill & Co - GHL - close: 36.95 chg: +0.31 stop: 34.99

Target achieved. Shares of GHL finally popped above resistance at the $37.00 level around lunchtime today. We are exiting per our game plan at $37.00.

Picked on May 09 at $34.11
Change since picked: + 2.84
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 70 thousand
 

Closed Short Plays

None
 

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

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