Option Investor

Daily Newsletter, Wednesday, 10/05/2005

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Table of Contents

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

Market Wrap

Market Hangover Turns into Market Swoon

Markets had a hangover Wednesday morning, induced by a bear party Tuesday and not helped by foreign bourses that dropped through the night. Interior Secretary Gail Norton's update on hurricane damage to oil and gas facilities on Tuesday induced fear of the inventories number, and hawkish statements by three Fed heads Tuesday hit interest-rate sensitive issues. Feeling the headache, the Dow Jones Transportation plunged straight down to support before the inventories numbers, and then stumbled through another layer or two of support afterwards.

Annotated Weekly Chart of the TRAN:

The diamond pattern seen here indicates emotion-based trading and typically serves as a topping formation. We experienced traders and OIN subscribers know better to count on those "typical" outcomes, however. The trendlines shown on that chart should be watched for upside or downside breakouts, for guidance as to the TRAN's action and to that of the markets in general. The Fibonacci bracket anchored to the TRAN's rally low and high shows a strong correlation with consolidation zones as the TRAN was climbing, hinting that this bracket might be encompassing the total movement and that the TRAN's intermediate-term high might have already been seen. Based on this evidence alone, a downside breakout might be the most expected outcome, but a retest of the summer high cannot yet be ruled out.


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The TRAN closed below its 200-sma Wednesday, having bounced intraday but not able to sustain the bounce. As long as the TRAN maintains daily closes beneath the 200-sma, a trip down to the 200-ema at 3583.75 and the 19.1% retracement of the rally, at about 3566.55, might be indicated.

The declines in distillate and motor-gasoline supplies proved deeper than expected, driving the TRAN lower. According to the DOE, gasoline supplies dropped 4.3 million barrels while the American Petroleum Institute, the API, noted a similar 4.8 million-barrel decline. The DOE reported distillate inventories lower by 5.6 million barrels and crude down by 300,000 barrels. The API said distillates dropped by 5.6 million barrels, and crude, by 300,000 barrels.

While those figures failed to support the markets, the supply of crude is no longer the primary focus, but rather it's refining capacity, as detailed by Jim Brown last night in his Market Wrap. The impact of a possible hike to $5.00 in gasoline prices on consumers and businesses also remains a primary concern, particularly in the wake of those increasingly hawkish Fed head statements. This week's economic numbers finally showed some inflationary effects of higher energy costs. Those effects may work to decrease demand for petroleum products, some speculate, with the DOE figures noting a decline in demand. Most believe that the slackening in demand will not be enough to offset the effects of decreased production, and won't significantly depress prices, however.

That slackening in demand was enough to push the OIX sharply lower, however, knocking its recent support out from underneath the SPX. The materials-related issues such as Phelps Dodge also were hit, PD also suffering from an analyst downgrade.

Annotated Daily Chart of the SPX:

Some charts show the potential for follow-through tomorrow toward the 1190 level on the SPX, but that's a level that many have been charting for weeks. Dip-buyers could step in at any point. With a bearish formation, a failure to touch the top of the formation on the last approach to the top and the precipitous nature of the decline, bearish entries on bounces and rollovers might prove less risky than possibly countertrend long entries on bounces. Many do plan long positions on tests of that support, but those wary of potentially countertrend plays might think long and hard before considering long entries before that knife has stopped falling. Those in bearish positions should keep profit-protecting plans in place now, and should perhaps take profit on at least partial positions from Wednesday's closing level down to 1190, then look for new entries on tests of the 100-sma or the neckline of that H&S forming since May. Make sure there's a rollover in progress first before taking new bearish entries.

An SPX break below about 1188-1189 presents the possibility that it's breaking down out of that rising wedge. New bearish positions might be entered there, but only if traders keep tight stops. The possibility of a fake-out move exists. Exit if there's a quick reversal.

Unless the Dow just overran targets near the close Wednesday, it appears weaker than some other indices.

Annotated Daily Chart for the Dow:

While the bearish features of the previous charts prove easy to discern, the Nasdaq's charts offers more questions than answers.

Annotated Daily Chart of the Nasdaq:

Today, Mercury Interactive (MERQE) and ADC Telecommunications (ADCT) both trimmed earnings outlooks, perhaps offering a warning that not even techs are safe. Both were hammered early in the day, although ADCT managed to climb off its low of the day. Too many tech warnings like this, and the Nasdaq may swoon, too.

A study of the SOX's chart also presents as many questions as answers.

Annotated Daily Chart of the SOX:

Markets had to fend off the noisy clamoring of other troubling economic releases today, too, although the first releases of the day proved benign enough. The Mortgage Bankers Association released mortgage applications for the week ending September 30. The association deemed the data to show a steadying from the previous report, although some might question that conclusion, with the composite index decreasing 1.1 percent on a seasonally adjusted basis and 1.2 percent on an unadjusted basis. This index measures mortgage loan application volume. The purchase index dropped 1.9 percent and the conventional index fell 1.8 percent, but the government index rose 11.4 percent and the refinance index climbed 0.1 percent. The average contract interest rate for a 30-year fixed-rate mortgage climbed to 5.55 percent from the previous 5.44 percent of the week earlier. Even calling this data benign wasn't enough to rescue the DJUSHB, the Dow Jones Home Construction Index. It plummeted, too, although it showed relative strength in its bounce back to the 200-ema and almost to the 200-sma.

Challenger, Gray and Christmas released its monthly tally of planned layoffs by major U.S. corporations, also deeming their release as showing as steadying over the previous month's figures. For the year, layoffs climbed 8.2 percent, with about a third of the planned layoffs coming from the auto, airline, retailing, and accounting industries. Monthly layoffs fell 33 percent from the year-ago level and quarterly layoffs, 2.5 percent from the year-ago level. The outplacement firm said that the transportation and retail sectors led the number of planned reductions in work forces for September. Motorola's announcement today that it would trim 1,900 jobs across the globe perhaps also soured sentiment, but MOT's staff will actually remain stable, because the company intends to add staff in other areas.

The retailers may be leading in the number of planned reductions of workers, but the RLX did not produce a new low below September's, unlike the Dow, SPX and OEX. It's been rattling around between the 50% and 61.8% retracement of its rally off the spring low into the summer high for several weeks, and ended right on that 61.8% retracement. Its formation looks like a bear flag rising off the September low to retest a neckline for a H&S confirmed in September, so an eventual downside breakdown might be the best guess, with the RLX likely to carry the OEX with it, at least. An RLX break above its 200-sma at 441.32 might have more beneficial effects for the OEX and for other indices.

However, neither of those MBA and Challenger releases was as closely watched as the September ISM services index, and it hammered the headachy markets.

September's decline in the services ISM was the steepest ever recorded, one article noted. It plummeted to 53.3 percent from August's 65.0 percent, with the prices-paid component soaring to a record 81.4 percent from August's 67.1 percent. Fifty-eight percent of reporting firms claimed they paid higher prices in September, no surprise to those who have been watching the impact of higher energy prices. Terms such as "out of control" were used to describe the rising costs, especially those attributed to energy costs. New orders dropped to 56.6 percent from August's 65.8 percent. The employment component fell to 54.9 percent from 59.6 percent. Despite claims of "aberration" by the more optimistic among the market pundits, this was not welcome news to markets still reeling from too much hawkish Fedspeak yesterday.

Markets opened, hesitated a few moments, and then began the day's plunge. Internals worsened all day. By the end of the day, NYSE and Nasdaq adv/dec ratios stood at 693/2540 and 688/2281, respectively. Sectors were almost uniformly lower. The IUX had shown some bounce potential at one point, but ended lower. Big caps such as Caterpillar (CAT), General Motors (GM), and Hewlett-Packard (HPQ) had special reasons for declining, beyond the general market woes. Jim Brown detailed some of the pressures on HPQ in last night's Wrap so I won't detail those again. Speculation built that Delphi could declare bankruptcy this week, with all that's standing between Delphi and that event is the possibility that GM and the UAW could hammer out some kind of multibillion dollar bailout for the company. That possibility pressured GM.

Analyst upgrades did help financials Marsh & McLennan and AON (AOC) to post small gains, but both left spinning-top candles beneath resistance, so their charts don't prove particularly encouraging to bulls, either. Also in the financial sector, AIG, AXP, and FRE outperformed some other stocks, if not all showed gains for the day. In the restaurants, YUM moved sharply higher this morning after it beat analysts expectations but perhaps the in-line guidance for the fourth quarter and the full year failed to cheer investors. YUM closed in the red, leaving behind a long candle shadow that had pierced the 200-sma but a candle body that formed beneath it. Wendy's (WEN) did post a gain, and some other restaurants such as MCD and DRI at least outperformed the rest of the markets, if not all closed positive.

However, no effective palliatives were to be found for the hung-over markets. Tomorrow's economic releases begin with the usual 8:30 release of jobless claims. The DOE updates on natural-gas inventories tomorrow, with natural gas having hit a record $14.75 per million British thermal units today, so that number has the possibility of providing that palliative or hammering markets further. Many making predictions forecast a rise of between 41-45 billion, but one analyst suggested that the climb could be as low as 25 billion.

Charts present the possibility tomorrow for more follow through to the downside, with SPX 1190 and Nasdaq 2080-2100 perhaps serving as price magnets. All will be watching those numbers, however, and some choppy trading could ensue as those numbers are approached and dip-buyers get braver. Since there was no bounce by the cash close Wednesday, prevailing sentiment would be that the follow-through could happen tomorrow morning, but if markets instead bounce, watch for the bounce and rollover entries detailed above. An SPX drop straight through about 1188 could suggest that it's breaking through the rising wedge support, and tentative and risky new bearish positions could be entered at that point, but limit risk by limiting position size and keeping stops tight until the risk of a quick reversal has passed. My best-guess expectation is for some choppy, difficult to trade, attempts to rise, perhaps after an initial drop. If the advdec line (QCharts value) opens near -1600 and begins to drop rapidly, my best guess would be for an initial drop. If it opens near that and begins rising rapidly, my best guess would be for an initial bounce, followed perhaps by a rollover. This is speculation at its purest, however, ahead of tonight's events and a look at how futures behave overnight.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Mckesson - MCK - close: 46.38 chg: -1.10 stop: 44.85

MCK was not exempt from the market-wide sell-off today. Shares lost 2.3% on relatively heavy volume. The stock did manage to stall its descent above its simple 50-dma. Watch for a bounce from the $46.00 level. If MCK fails at $46 then we'll probably be looking for the exits.

Picked on September 18 at $46.47
Change since picked: - 0.09
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume: 1.5 million

Short Play Updates

Phazar Corp - ANTP - close: 14.35 chg: -1.25 stop: 16.51*new*

ANTP is off to a good start today with an eight-percent decline on very heavy volume. More importantly the stock has broken through what could have been potential support in the $15.25-15.00 region. We are lowering our stop loss to $16.51. The $15.00 level should now act as overhead resistance. Our target is the $12.50-12.00 range.

Picked on October 04 at $15.60
Change since picked: - 1.25
Earnings Date 08/11/05 (confirmed)
Average Daily Volume: 150 thousand


Anheuser Busch - BUD - cls: 41.80 chg: -0.53 stop: 44.01*new*

We see no change from our previous update. BUD hit a new low today and we'd still suggest readers consider exiting early (here) for a profit. Our late October target is the $40.25 mark. We are lowering the stop loss to $44.01.

Picked on July 28 at $44.77
Change since picked: - 2.97
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 2.3 million


Career Educ. - CECO - close: 34.17 chg: -1.02 stop: 37.01*new*

All systems are a go! CECO did produce a strong follow through to yesterday's breakdown. The stock lost 2.89% on average volume. We are lowering our stop loss to $37.01. Our target is the $31.00 level.

Picked on October 04 at $34.99
Change since picked: - 0.82
Earnings Date 10/26/05 (unconfirmed)
Average Daily Volume: 1.6 million


Cogent Inc. - COGT - close: 23.55 chg: -1.04 stop: 26.01

We see no change from yesterday's update. COGT fell under the $24.00 level, which remained strong resistance for the rest of the session (see an intraday chart). Our target is the $22.50-22.00 range.

Picked on September 22 at $25.21
Change since picked: - 1.66
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 874 thousand


Cost Plus - CPWM - close: 16.93 change: -0.77 stop: 19.26*new*

The sell-off in shares of CPWM is picking up speed. The stock lost 4.3% today on very big volume (about three times the daily average). Readers can choose to exit right here if they want. Our target is the $16.50-16.00 range. We're lowering the stop loss to $19.26.

Picked on September 20 at $19.78
Change since picked: - 2.85
Earnings Date 11/17/05 (unconfirmed)
Average Daily Volume: 390 thousand


Enzo Biochem - ENZ - close: 13.82 chg: -1.04 stop: 15.26 *new*

ENZ's 7% decline today appears to have consummated the breakdown of its head-and-shoulders neckline. We are lowering the stop loss to $15.26. Our target is the $12.25-12.00 range. Remember, we plan to exit ahead of the October 14th earnings report.

Picked on October 03 at $14.36
Change since picked: - 0.54
Earnings Date 10/14/05 (unconfirmed)
Average Daily Volume: 90 thousand


99c Only Stores - NDN - close: 9.07 chg: -0.25 stop: 10.01

NDN continues to under perform the market and the retail sector. Today the stock lost 2.68% and is nearing support near the $9.00 level. Our target is the $8.60-8.50 range.

Picked on September 27 at $ 9.40
Change since picked: - 0.33
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 581 thousand


Nautilus Inc. - NLS - close: 21.30 chg: -0.37 stop: 23.80

We see no change from yesterday's update. NLS lost another 1.7% today. More conservative traders may want to think about exiting here to lock in profits. Our target is the $20.50-20.00 range.

Picked on September 14 at $23.80
Change since picked: - 2.50
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 363 thousand


Toll Brothers - TOL - close: 40.48 chg: -0.92 stop: 44.55

The homebuilders continued to sink on inflation fears. The DJUSHB index lost 3.25%. Shares of TOL fell 2.2% and traded under the $40.00 level intraday. Our trigger to short the stock was at $40.95 so the play is now open. Our target is the $36.50-36.00 range.

Picked on October 05 at $40.95
Change since picked: - 0.42
Earnings Date 08/25/05 (confirmed)
Average Daily Volume: 4.6 million

Closed Long Plays

Motorola - MOT - close: 22.00 change: -0.32 stop: 21.78

MOT is a casualty of the market wide weakness on Wednesday. Shares dipped intraday under support at the $22.00 level and its rising, simple 50-dma. We have been stopped out at $21.78. However, we'll be sure to keep an eye on MOT for another entry point. A move over $22.75 could be a new bullish entry point or we could always look for a bounce from the $20 region.

Picked on September 25 at $22.79
Change since picked: - 0.79
Earnings Date 10/10/05 (unconfirmed)
Average Daily Volume: 19.2 million

Closed Short Plays


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


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