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Daily Newsletter, Wednesday, 07/20/2005

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Table of Contents

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

Market Wrap

Convoy! "Ah, breaker one-nine, this here's Rubber Duck."

Convoy! "Ah, breaker one-nine, this here's Rubber Duck."

Buyers stood their ground and sellers continued their retreat in the wake of a "disappointing" quarter from Yahoo! Inc. (NASDAQ:YHOO) $33.40 -11.47% and Intel (NASDAQ:INTC) $27.44 -4.42%. A "sure thing" for bears in the NASDAQ-100 Tracker (QQQQ) $39.46 +0.71% didn't pan out as heavyweight Amgen (NASDAQ:AMGN) $81.17 +15.10% provided the counterbalance, and then some.

Keene Little may have called it with his "full moon" commentary in last night's Market Monitor (see bottom of today's Futures Monitor 07/19/05 10:55:58). "I just realized Thursday is the full moon and that day is within the +/- 2 day window of Fib July 25th (next Monday) turn date.....

What the heck? Moonbeam Keene!

Sing it! "It was the dark of the moon on the sixth of June and a Kenworth pullin' logs...." ("Convoy" by C. W. McCall)

The moon! The moon! Zoom, zoom, zoom!

U.S. Market Watch - 07/20/05


At 3,650 they were lookn' iffy, but a startling earnings release and upped guidance from Canadian National Rail (NYSE:CNI) $64.70 +7.47% (not a component of the TRAN) gave economic bulls renewed reason to be bullish the Dow Transportation Average (TRAN) 3,769 +3.64% to one of its biggest daily point gains in history.

Gains among the transports were fueled by the weekly EIA data. Crude Oil inventories, while down 900,000 barrels for the week ended July 15, begin to stabilize after two weeks of greater-than 3.5 million barrels draws. Unleaded gas stockpiles fell by 1.3 million barrels, while distillate inventories rose by 2.2 million barrels. Their ninth-consecutive weekly build!

But look! See the price inversion taking place with Heating Oil (a distillate) and Unleaded Gas futures? My analysis/review of weekly EIA inventory figures (see tonight's Option Market Monitor 05:20:59) would suggest that refiners may me switching back their focus to unleaded gas. Relief at the pump may be just around the corner!

Dow Transports (TRAN) - Daily Intervals


Something was "said" today that brought a ferocious amount of buying into the transports. I didn't hear Fed Chairman Alan Greenspan say anything different than what he has said in recent months. Yes, better than expected earnings reports from AMR Corp. (NYSE:AMR) $14.47 +1.68% and Continental (NYSE:CAL) $15.90 +1.27% were a positive for the group, but both made it clear that jet-fuel prices remain a heavy burden.


Broker Bear Stearns is an excellent fundamental shop and we have "benchmarked" a bearish call on the truckers from several weeks ago, which weighed heavily on the TRAN has it tried to make a move above 3,650.

But I think it was a strong Q2 report and upping of guidance from Canadian National Rail (CNI) that had sector participants rethinking things.

CNI posted a 30% in Q2 profits, saying net income came in at C$416 million, or C$1.47 per share. That compared with the net profit of C$326 million, or C$1.13 per share, in the second quarter of 2004. ($1 = C$1.22)

CNI upped its 2005 per-share earnings forecast, saying it now expects to report a profit 20% to 25% higher than C$4.34 a share in 2004. The company had previously forecast a 10% to 15% rise.

CNI's board also authorized a new share buyback program of 16 million shares.

Canadian National Rail (CNI) - Daily Intervals


A quick look at CNI would depict a stock where market participants found themselves surprised. I've tied in some point and figure chart observations with the above bar chart. For me, the $65 level is a "prove it to me" level, where a trade at $65 would have the stock breaking to new highs, and supply should be limited. I anchored the base of retracement at the April low, and then pulled upper retracement (100%) to the bullish vertical count from the point and figure chart of $79.

Somebody sold the stock back in April from $59.48 to $57.45 on heavy volume of more than 1.5 million shares. Let's call that "smart money" for now. Today's 1.4 million shares and price action hints somebody wants back in. Perhaps bears want out!

Here's a snapshot of today's TRAN component action.

Dow Transport Components - Sorted by Daily Net %


Again... CNI is NOT a component of the TRAN and there are three (3) "railroad" stocks in the TRAN. But look at the reaction the truckers got today. Convoy!

Here's what the TRAN components looked like on 06/08/05 (see Market Wrap that night) and we might be seeing a "rethink" reaction from Bear Stearns' call that day.

Dow Transport Components - 06/08/05 Close


Hmmm... UPS is trading just about where it was on 06/08/05, FDX is lower. But look at the "truckers" and the "rails." Does this say anything about the strength of the economy? CNF is up $7 from 06/08 benchmark, JBHT is up $1, YELL is up $4, LSTR, which was a focal point of Bear Stearns on 06/08 has reclaimed it ground.

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


Jim Brown pointed out a wedge in the SPX in last night's wrap. I just wanted to follow up with the reverse head/shoulder pattern that looks to be "in play." For months we were warned by bears of the head/shoulder top. If it didn't look "hunchbacked" to bears at $122.00, then maybe today's 4-year high might get their attention. Note the volume spike (London terrorist bombing). Yes I shorted that in the QQQQ that day (head/shoulder top was in play). Looks like "smart money" did some buying, and buying continues.

Oh... speaking of reverse head/shoulder patterns.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals


What INTC and YHOO declines took away, AMGN gains added. The sky was falling last night.

The QQQQ was rather calm in tonight's extended session. Hey, heavyweight AMGN excerpted a lot of energy today, and it may take several sessions for things to "calm down" with INTC and YHOO.

After the closing bell, shares of eBay (NASDAQ:EBAY) $34.87 -1.41% jumped to $39.84 (last tick in extended session) after the online auctioneer said it earned $291.6 million, or $0.21 per share, for the three months ended in June, a 53% increase from $190.4 million, or $0.14 cents per share at the same time last year.

If not for accounting charges unrelated to its ongoing operations, eBay said it would have earned $0.22 per share. That topped the mean analyst estimate of $0.18 cents per share.

eBay also presented investors an optimistic outlook for the rest of the year and forecasted 2005 revenue of $4.3 billion to $4.4 billion, including as much as $1.05 billion in the current quarter. Excluding accounting items unrelated to it ongoing business, eBay expects 2005 earnings of $0.82 or $0.83 per share, which is above current consensus of $0.79 per share.

Google (GOOG) $312.00 +0.67%, which is not a QQQQ component, but quickly becoming a "bellwether" for internet/media, closed at an all-time high, then added $4 to $316.00 in tonight's extended session.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
STLD AXL

New Long Plays

Steel Dynamics - STLD - cls: 31.47 chg: +1.97 stop: 27.99

Company Description:
Steel Dynamics is a growing Indiana-based mini-mill producer of hot rolled, cold-rolled and coated sheet steel, wide-flange beams, bar steel, rails, and steel building systems. (source: company press release or website)

Why We Like It:
It's amazing when a company can miss earnings estimates by 13 cents a share and still see its stock go up. That's what happened to STLD. The company reported earnings on July 19th and missed analysts' estimates. Yet the stock is in rally mode with above average volume pushing the stock higher. Actually it looks like the entire steel industry is seeing their stocks rise this week. We like STLD's because the stock has broken through resistance at the $30.00 level after building a new base between $25 and $30 over the past three months. The rally has also produced a new Point & Figure chart buy signal that points to a $42.00 target. Our plan is simple. The $30.00 level should now act as new support. We want to buy a dip into the $30.50-30.00 range. Our target will be the simple 200-dma currently at 34.04 (we'll adjust the target as the 200-dma moves). Readers will note that our recent buy the dip strategy didn't pan out with Home Depot (HD). It's up to you if you want to chase STLD here. With the major averages looking overbought we'd prefer to buy a dip in STLD.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 1.4 million
 

New Short Plays

Amer. Axl & Mfg - AXL - close: 26.01 chg: -2.60 stop: 28.01

Company Description:
AAM is a world leader in the manufacture, engineering, design and validation of driveline systems and related components and modules, chassis systems and metal formed products for light trucks, sport utility vehicles and passenger cars. In addition to its locations in the United States (in Michigan, New York and Ohio), AAM also has offices or facilities in Brazil, China, England, Germany, India, Japan, Mexico, Scotland and South Korea. (source: company press release or website)

Why We Like It:
A negative reaction to GM's earnings disappointment could prove to be bad news for parts provider AXL. GM turned in a terrible quarter in spite of huge sales from their employee discount marketing plan. GM would not offer any earnings guidance going forward and Wall Street hates uncertainty. That's one of the reasons why an analyst downgraded shares of AXL today to an "under perform". The combination of GM's negative report and the downgrade helped send AXL to a 9% loss on volume three times the average. Shares were already testing a long-term trendline of resistance dating back to February 2004 and today's decline looks like a bearish reversal. AXL was already looking overbought and extended with its rally from the $18.50 region back in May just two months ago. We would qualify this as an aggressive play because we are essentially calling a short-term top on the stock. However, to reduce our risk we're going to use a TRIGGER under today's low. The selling paused at technical support near the simple and exponential 200-dma's (just under $26.00). We're going to suggest a trigger at $25.60 to open the play. More aggressive traders may want to look for a bounce and failed rally tomorrow under the $27.50 region as an alternative entry point. Once the play is triggered we will lower our stop loss to something more conservative. Our target would be a quick drop to the $23.00 region near the 50-dma. One of the biggest risks here is our time frame. AXL is due to report earnings on July 28th and we do not want to hold over the report.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 1.1 million
 

Play Updates

Updates On Latest Picks

Long Play Updates

Vital Images - VTAL - close: 19.69 change: +0.76 stop: 17.49

No change from our previous update. VTAL added another four percent on Wednesday with volume coming in very strong at more than three times the average. This is very bullish but traders may want to consider waiting for a dip before evaluating an entry now. Our target is the $21-22 range. Our biggest concern is that the NASDAQ reverses at resistance in the 2190-2200 region and it is a significant possibility.

Picked on July 19 at $18.93
Change since picked: + 0.76
Earnings Date 08/02/05 (confirmed)
Average Daily Volume: 107 thousand
 

Short Play Updates

ATI Tech. - ATYT - close: 13.19 change: -0.11 stop: 13.41

As we expected investors sold the news on Intel's earnings report and shares of INTC lost 4.4 percent. Surprisingly the SOX semiconductor index managed to power higher to a 1.7 percent gain in spite of INTC's loss. The net affect on ATYT was a small decline. This display of relative weakness in ATYT is encouraging but traders should use caution opening new positions. A reversal in the NASDAQ under the 2200 level would be good news for shorts. Our target for ATYT is the $11.50-11.20 range.

Picked on July 17 at $12.83
Change since picked: + 0.36
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume: 5.9 million

---

Par Pharma. - PRX - close: 29.57 chg: -0.24 stop: 32.01

No change from our previous update. PRX remains under round-number resistance at the $30.00 mark. Our target is the $27.00-26.50 range.

Picked on July 14 at $29.96
Change since picked: - 0.39
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 661 thousand

---

Sina.com - SINA - close: 26.91 change: -0.38 stop: 28.51*new*

Good news! SINA hit a new two-month low this morning and closed under the $27.00 level. This relative weakness in the face of such strength in technology sector is encouraging. We are lowering our stop loss to $28.51.

Picked on June 30 at $27.90
Change since picked: - 0.99
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume: 1.4 million
 

Closed Long Plays

Cameco - CCJ - close: 48.32 chg: -0.27 stop: 44.95

Target achieved. It looks like we didn't have to adjust our target after all. CCJ hit an intraday high of $50.46 this morning before fading lower again. The weakness is probably due to an analyst downgrade to sector perform. Our previous target was the $49.50-50.00 range but we're closing the play at $49.00 - our new target from last night.

Picked on June 27 at $44.14
Change since picked: + 4.18
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 989 thousand

---

Home Depot - HD - close: 43.95 chg: +0.75 stop: 38.75

The rally in the home improvement stocks like HD and LOW is just on fire. Our strategy to wait for the dip proved to be a dud this time. The stock is looking pretty overbought here and shares have hit our suggested target even though we never got a chance to enter it. We're closing the play unopened but will keep an eye on HD for future opportunities.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/16/05 (unconfirmed)
Average Daily Volume: 7.4 million
 

Closed Short Plays

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

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