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Daily Newsletter, Wednesday, 07/27/2005

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Table of Contents

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

Market Wrap

Buyers show durability

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Buyers show durability

Stocks finished broadly higher with record home sales, upbeat durable goods data and the Fed's Beige Book showing economic growth in all 12 districts helping the very broad NYSE Composite (NYA.X) 7,465.44 +0.50% close at an all-time high.

The tech-heavy NASDAQ-100 Tracker (NASDAQ:QQQQ) $39.72 +0.76% edged above of its recent four-day range to close at its highest level of the year! Bears look very complacent, or think they know something as recent short interest data (07/15/05) released shows short interest rising to just over 213 million shares with days to cover building to 2.37. Current short interest readings come close to matching that found on February 15, 2005.


Volatility measures plunged with the widely followed CBOE Market Volatility Index ($VIX.X) 10.36 -5.73% looking to revisit last week's decade low reading of 9.88.

While some firmly believe the lower volatility measures are being created by bullish optimism, recent short interest readings may also hint that some overly complacent bears are looking to hedge some bets in the options markets.

U.S. Market Watch - 07/27/05 Close


The Dow Jones Home Construction Index (DJUSHB) 1,080.05 +0.71% would get my "turnaround of the day award" after testing its rising 21-day SMA at 1,055 in early session trade. The Commerce Department reported that single-family home sales jumped to a record annual pace of 1.37 million units in June, up 4% from May.

The report on new home sales did show new home prices declining for a second consecutive month in June with the median price dropping by 5.5% to $214,800 in June, down 0.4% from a year ago. New home prices had set a record at $232,600 in April.

Michael Carliner, senior economist at the National Association of Home Builders, said the decline in new home prices could be an indication that demand is strengthening in the lower-end of the market.

Early buying among the major Treasury maturities turned to selling as orders for big-ticket items posted a strong 1.4% increase last month, while this afternoon's release of the Fed's Beige Book (anecdotal) showed a number of the districts describing the current economic expansion as "solid."

The North American Telecom Index (XTC.X) 716.41 +1.43% was atop today's list of index gainers with Sprint (NYSE:FON) $26.37 +5.6% surging to a new multi-year high. Second-quarter earnings more than doubled and the wireless service provider raised its guidance for 2005. Nextel Communications (NXTL), with which Sprint is in the process of merging, rose $1.64, or 5%, to close at $34.15.

The Airline Index (XAL.X) 51.05 -1.19% reversed early morning gains, but finished just about in the middle of its day's range. Shares of Delta Air Lines (DAL) $2.99 -11.79%, which are also a component of the Dow Transportation Average (TRAN), plunged amid unconfirmed reports that recent cost cutting efforts would keep the company from filing for bankruptcy.

Toot! Toot! In last Wednesday's Market Wrap I thought Canadian National Railway (CNI) $65.22 +0.94% had sparked some renewed interest in the "rails." Wouldn't you know it! The very next day, shares of Dow Transport component Union Pacific (UNP) $69.10 +0.84% gapped higher from its closing price of $65.93.

Today, FreightCar America (RAIL) $28.88 +23.36% blew its horn to a post-IPO high after the designer and manufacturer of railcars reported Q2 earnings that easily outpaced expectations.

Energy equity sectors finished in the green, while the commodities traded mixed-to-higher. In today's Market Monitor, fellow analyst Tab Gilles noted that the Energy Department's latest weekly report showed crude oil stocks fell by 2.3 million barrels to 317.8 million barrels, or 7% above year ago levels. The supply of distillates grew by 3.1 million barrels to 125.8 million barrels, or 5% higher than last year. These figures could calm trader's fears who believe we are in a shortage. According to the DOE back in July of 2002 we had 304 MB in storage of crude oil, in July 2003 we had 283 MB in storage and the U.S. has 6% more supplies than '02 and almost 14% more inventories than '03 yet prices are doubled from the same time period.

NASDAQ-100 Tracker (NASDAQ:QQQQ) - Daily Intervals


The QQQQ dialed up a new 2005 closing high as buyers look to gain further ground against sellers. I was snooping around and noticed that short interest figures are starting to be posted on various securities. With QQQQ short interest at very similar levels found in February, but market internals as depicted by the narrower NASDAQ-100 Bullish % ($BPNDX) headed in a different direction (rising now, falling then) it shouldn't be assumed that IT IS JUST COMPLACENT BULLS BUYING. The short interest comparisons, at VERY SIMILAR PRICE levels would suggest some complacent bears may be picking up their short covering, or buying call options/selling put options, which can drive volatility measures lower to try and get squared up.

Upbeat earnings and the raising of guidance had online retailer Amazon.com (AMZN) $43.65 +15.65% a percentage gainer, which follows a big upside move from eBay (EBAY) $41.99 +3.88% last week.

Biochemical maker Sigma-Aldrich (SIAL) $64.96 +12.6% surged to an all-time high after reporting earnings late Tuesday.

Electronic manufacturer Sanmina (SANM) $4.64 -11.78% was a percentage loser among NDX/QQQQ components after Tuesday evening's earnings release suggested the company's turnaround was delayed as demand for its semiconductor manufacturing equipment remained anemic.

S&P Depository Receipts (SPY) - Daily Intervals


Same retracement shown in last Wednesday's Market Wrap, where I placed a "reverse head and shoulder" retracement, with a HORIZONTAL neckline at $121.76. Now... today's close above $123.70 would be deemed bullish at the close, as demand has finally been strong enough to outstrip supply (sellers) at that level.

But Jim Brown's trend drawings in (note the direction of these trend lines) had me wondering if my earlier analysis and use of retracement might be too BEARISH? Perhaps the neckline of the pattern isn't horizontal as I had depicted, but was ascending.

S&P Depository Receipts (SPY) - Daily Intervals


A little different look, but do you see how the "neckline" could be moved higher to Jim's ascending bullish resistance trend? Hey, if you were using my "bullish fitted 38.2% retracement technique" (anchor at a low/high point, then fit 38.2% at a relative high close), we can perhaps see where that comes in. "I like" that as it makes some sense with what the MARKET is doing.

What I don't like is how retracement doesn't "explain" whey the SPY stopped on that pullback to about $119.

What do you think? Using Jim's bullish resistance trend as a near-term projection to the future, and the above retracement, maybe $126.00 by the end of August?

Banks and healthcare haven't been participating of late, and that's actually WEIGHED on the SPY/SPX.X. If they get turned

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None RCL

New Long Plays

None today.
 

New Short Plays

Royal Caribbean - RCL - cls: 45.50 chg: -2.00 stop: 48.01

Company Description:
Royal Caribbean Cruises Ltd. is a global cruise vacation company that operates Royal Caribbean International and Celebrity Cruises, with a combined total of 29 ships in service and two under construction and one on firm order. The company also offers unique land-tour vacations in Alaska, Canada and Europe through its cruise-tour division. (source: company press release or website)

Why We Like It:
RCL is yet another company who exceeded Wall Street's earnings estimates but investors sold the news anyway. The stock has fallen through several levels of technical support in the last couple of days including the 200-dma, 40-dma, 50-dma, and exponential 200-dma. Plus, almost all the technical indicators on both its daily and weekly charts are negative. Volume was way above average on today's decline. This looks like the start of a new consolidation lower at least toward its April lows. Traders have a choice on how they want to open the play. One strategy would be to look for confirmation of today's breakdown with a new decline tomorrow under $45.50. Another strategy would be to wait for a possible oversold bounce back toward the $47.00 level near its 50-dma and use a failed rally there as a new bearish entry point. We, the newsletter, will merely open hypothetical shorts at current levels. Our target is the $41.25-41.00 range. We are starting with a wide (aggressive) stop loss because we do suspect an oversold bounce tomorrow.

Picked on July 27 at $45.50
Change since picked: + 0.00
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 1.3 million
 

Play Updates

Updates On Latest Picks

Long Play Updates

Kerzner Intl - KZL - close: 60.15 chg: -0.10 stop: 57.99

KZL did crack round-number support at the $60.00 mark today but managed a small bounce from its 100-dma to close right at $60.00. We would not be surprised to see KZL actually dip to the $59.00 level, which should be a secondary level of support, before turning higher. So far we still have not been able to confirm the company's earnings date. If it is August 1st we would not suggest new positions here as we don't want to hold over the report.

Picked on July 22 at $61.01
Change since picked: - 0.86
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 154 thousand

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Steel Dynamics - STLD - cls: 31.80 chg: -0.30 stop: 28.99

We suspect that STLD could be poised to dip back toward the $30.00 support level in the next few days. Even though we have a suggested entry point at 30.50-30.00 that doesn't mean you have to jump at the first dip into that region. Feel free to wait and watch for the rebound to begin. We are going to raise the stop loss to $28.99.

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

---

Vital Images - VTAL - close: 19.68 change: -0.06 stop: 17.99

No change from our previous update. We plan to exit on Friday afternoon to avoid the company's earnings report next week.

Picked on July 19 at $18.93
Change since picked: + 0.75
Earnings Date 08/02/05 (confirmed)
Average Daily Volume: 107 thousand
 

Short Play Updates

ATI Tech. - ATYT - close: 12.75 change: -0.27 stop: 13.41

So far so good. ATYT lost just over two percent today as it continues to suffer under a trend of lower highs with pressure being applied (short-term) at the simple 40-dma. This looks like a new bearish entry point for shorts. Our target for ATYT is the $11.50-11.20 range.

Picked on July 17 at $12.83
Change since picked: - 0.08
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume: 5.9 million

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Intl Game Tech. - IGT - cls: 27.98 chg: +0.69 stop: 29.01

Investors responded positively to news that IGT was buying online gambling and gaming company WagerWorks for $90 million. Considering the boom in online poker rooms this is probably a strategic move. Fortunately for short-term bears like us the rally stalled near short-term resistance in the $28.25 region. This may prove to be another entry point for shorts but watch for a dip back under $27.50 before initiating new plays. Our target is the $24.50-24.00 range.

Picked on July 21 at $27.21
Change since picked: + 0.77
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 2.3 million

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Juniper Networks - JNPR - cls: 24.13 chg: +1.03 stop: 25.61

JNPR spent the first half of the day stumbling around the $23.00 region. It wasn't until the afternoon market rally began that JNPR really began to take off. This looks like short-covering. Fortunately, JNPR still has overhead resistance at its exponential 200-dma near $24.17, plus more overhead resistance near $24.50, which would be the neckline to hits H&S pattern. Watch for a decline back below the $24.00 mark as a new bearish entry point.

Picked on July 21 at $23.90
Change since picked: + 0.23
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 7.5 million

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NS Group - NSS - close: 40.21 change: +2.26 stop: 40.01

No confirmation! Yesterday NSS produced a big bearish reversal pattern but there was no confirmation today. This puts our strategy in jeopardy. Fortunately, we remain on the sidelines without risk since we used a trigger to go short at $37.20. We'll leave the play open as a potential candidate for another day or two just to see if this bounce has any legs too it.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 353 thousand

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Sina.com - SINA - close: 27.30 change: -0.01 stop: 28.51

There was very little change in SINA today. The stock traded in a narrow 30-cent range (for two days in a row now). Our target is the $25.75-25.50 range (April lows).

Picked on June 30 at $27.90
Change since picked: - 0.60
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume: 1.4 million

---

Triad Hosp. - TRI - close: 49.70 chg: +0.20 stop: 52.31

No change from our previous update on 7/25/05. As long as TRI trades under $50.00 we would be short the stock. Our target is the $45.50-45.00 range.

Picked on July 25 at $49.20
Change since picked: + 0.50
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 967 thousand
 

Closed Long Plays

None
 

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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