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Daily Newsletter, Monday, 10/10/2005

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Table of Contents

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

Market Wrap

The Bounce that Couldn't

Equities finished at their lows in a light-volume Columbus Day session. Bond markets and Fed/Treasury operations were closed for the day, and there were no economic reports released. The newswire was busy, however, as DPH and GM dominated headlines with fallout from DPH's Chapter 11 filing.

The markets had been strong all night and were gearing up for a gap up open until an earnings warning from chipmaker Xilinx (XLNX) landed. The company revised its fiscal 2006 September quarter sales guidance to a 1%-2% decline from a previously-anticipated projection of flat to 4% growth. Gross margins are expected inline with prior estimates. XLNX went on to close -16% for the day at 22.78. Combined with DPH's news and the headlines beginning to circulate, equity futures fell back to their overnight levels and were ticking red at the opening bell.

Volume was light, but it was mostly negative, particularly on the NYSE where declining volume outpaced advancing between 2:1 and 3:1 for most of the session, finishing 3.76:1 for declining shares. The Nasdaq was less negative, but could only hold in positive territory for short intervals and finished with declining volume outpacing advancing 2:1.

Daily Dow Chart

The Dow failed at an opening high of 10323 and tried again in the early afternoon, failing from a lower high. An afternoon low printed at 10237 just before the close, below Friday's low and within Thursday's downside doji spike. The bounces were heavy and unconvincing. The daily cycle downphase continues from a rollover last week on a failed corrective bounce to the broken rising trendline. Today's lower low and lower high further confirmed that daily downphase. Below 10250 support, the benefit of the doubt goes to the bears, with next light confluence support in the 10150 area, followed by 10000 and the 9700-9800 level. The Dow finished 1 point off its 10237 low, -53 for the day.

Daily S&P 500 Chart

The SPX printed a high of 1196.52 but didnt hold it for long, chopping its way lower to close 1 point off its 1186.12 low, down 8.57 for the day. As with the Dow, Fridays low was broken with authority, and the session finished within Thursdays lower doji shadow at the edge of an airball zone below 1180 to 1160-62. The cycle picture is similar to that of the Dow, with a weekly cycle downphase beginning to assert itself on the daily cycle, which is just now rolling over from last weeks abortive upphase.

Daily Nasdaq Chart

The Nasdaq failed at 2093, closing lower by 11.43 at 2078.92, less than a point off its 2078.11 low. After the 4PM bell, a series of new lows printed, with the Nasdaq Dec. 2005 future contract printing 1553 and QQQQ reaching a low of 38.06. The 2093 Nasdaq high is first resistance, confirming the overhang from 2100-2110, while 2075 remains immediate support. 2050-2060 is more significant, however, and I expect the real test of the current daily cycle downphase to occur at that level.

Daily TNX Chart

The bond market was closed today, as was the Fed's open market desk. The usual Monday 13- and 26-week Treasury bill auctions were postponed to tomorrow.

Ten year note yields (TNX) made a new high for their rally on Friday but failed again in the 4.44% area had that capped the July-August rally. Note that the daily cycle has already reversed down, in what is either a very steep bearish divergence against the higher TNX high, or a very weak/corrective downphase. The former would be as bearish as the latter would be bullish. Rather than struggle with the correct cycle interpretation, price can be our guide here- below 4.44%, TNX bears get benefit of the doubt, while a break above that level, particularly on a closing basis, could be explosive, targeting 4.5% resistance in a hurry.

Daily Chart of Crude oil

The first winter storms arrived as Breckenridge, CO. received 18 inches with some mountain areas expect to get as much as 4 feet. Some schools in Denver were closed. Crude oil traded negative all night and this morning, closing down 40 cents at 61.45. On the daily chart, the downphase that kicked off at the beginning of this month continues to deliver lower lows and lower highs, and descending linear support is down to 60.00. Should that fail, we would look for a possible daily cycle low in the 57-58 area. For the day, crude oil closed lower by .025 at 61.825, off a low of 60.375.

A dire situation worsened as the death toll from Pakistan's 7.6 magnitude earthquake broke 20,000 and chaos erupted in Mazaffarabad as victims resorted to looting and violence. Reuters reported that aid agencies estimated the number of people in need of urgent assistance at 120,000. As many as 40,000 were in need of medical attention, and officials estimated the number of dead as high as 40,000.

Taylor Devices (TAYD), manufacturer of earthquake protection technology such as seismic dampers, was up 2.71% at 3.03, jumping as it did last December following the Sumatran earthquake and tsunami that it caused. For the day, TAYD gained 16.5% to close at 3.53.

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In other corporate news, Northrop Grumman (NOC) warned that 2005 EPS will suffer by 25-30 cents to $3.55-$3.65 as a result of Hurricanes Katrina and Rita. Revenue for the year is expected at $30.5-$31 billion. Previous guidance had been for EPS of $3.90-$4.00 on revenue of $31-$31.5 billion. However, NOC said that it does not expect the hurricanes to impact its overall financial health. 12,500 of its 19,800 workers were back on the job in Louisiana and Mississippi. NOC closed lower by 1.05% at 53.48.

Delphi (DPH) finally filed for bankruptcy protection under Chapter 11, the largest bankruptcy in US automotive history. As Chairman and CEO Robert Miller put it, "We took this action because we are determined to achieve competitiveness for Delphi's core U.S. operations, and the key to accomplishing that goal is reducing these costs as soon as possible. We simply cannot afford to continue to be encumbered by high legacy issues and burdensome restrictions under current labor agreements that impair our ability to compete." The company said that it expects global operations to continue uninterrupted. Without going into the company's balance sheet, a significant "legacy issue" is the company's collective agreements and pension commitments, the latter estimated to be underfunded by $4.5 billion. Marketwatch reported that wages will be cut to $10 per hour and cost-of-living allowances will be eliminated, as well as a host of other such reductions.

Not all personnel will lose, however. The UAW said that "Delphi's decision would be extremely disappointing under any circumstances, but it is all the more so in light of the company's announcement on Friday -- just one day before filing bankruptcy -- that it had sweetened the severance packages for Delph's 21 most highly compensated executives because the old severance package was -- as a Delphi spokesperson put it -- 'uncompetitive.' Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers, engineers, administrative and support staff, mid-level managers and others. All of them deserved better from Delphi's senior executive leadership."

Reuters reported that the company intends to offer executives a 10% stake in the reorganized entity as a further incentive to stay. No doubt, this approach to "legacy commitments" is a warning shot to all who might be counting on managerial beneficence or even contractual corporate pension plans to assure their financial future, particularly in industries beleaguered by tightening margins and international competition.

DPH plunged 49.09% in premarket trading to 1.12, while former parent, GM, was down 3.36% to 27.34 before the bell. GM was downgraded on the news due to its exposure to DPH and the possibility that it too could file for protection. Banc of America's analyst estimated that possibility at a 30% likelihood. DPH will host a press conference on Wednesday to discuss its reorganization. A press release is expected to be issued prior to the press conference, on Tuesday evening.

Later in the day, S&P downgraded DPH to "D", citing an "uncompetitive business structure with high fixed costs, primarily because of the rich wages and benefits given to its US hourly workforce." Given the extremely wide gulf separating North American wage and benefit levels from those of our Asian counterparts, one could conceivably impute this type of reasoning to a large number of North American employers. S&P also cut GM's long-term debt rating deeper into junk status, from "BB" to "BB-" with the observation that DPH's bankruptcy could further impede GM's ability to turn its ailing operations around. DPX finished lower by 65.18% at $0.39, off a 33 cent low. GM lost 9.93%, closing at 25.48, new 6-month lows.

After the bell, Alcoa (AA) announced Q3 net earnings that declined from $460 million or 52 cents in the year-ago quarter to $283 million or 32 cents per share. Revenue rose 13% from $5.98 billion to $6.57 billion. Estimates were for EPS of 29 cents on revenue of $6.61 billion. The company attributed its miss to high energy input costs and softer prices for aluminum. AA closed -1.65% at 22.66 for the day.

There were no economic data released today, but this is scheduled to be a heavy week. Tomorrow, we'll get the FOMC minutes from the September 20 meeting, followed by the EIA petroleum report on Wednesday. On Thursday, it's Export Prices ex-ag and Import Prices ex-oil, the Trade Balance, and Treasury Budget. On Friday, we'll get Retail Sales, the CPI, Industrial Production and Capacity Utilization, Michigan Sentiment and Business Inventories.

For tomorrow, with the return of normal volume and the resumption of trading in the bond market, equity traders will be faced with a possible retest of Thursday's spike lows. With the indices going out at their session lows, there's the higher likelihood of followthrough, with a gap down open. The key test will come at Thursday's lows, however, as the success or failure of those levels will determine whether or not the bounce since Thursday has been a bear flag, or a more complex accumulation pattern. With nearly untradeable chop between Thursday's low and Friday's highs, a bounce from that low will likely result in more chop, as the market continues to struggle with the accumulation - distribution dilemma near the bottom of last week's vertiginous slide. Because of the weakness in the daily and weekly cycles noted above, my bias remains bearish here, but that could change on a move above today's/Friday's high. We'll be following the action live in the Market and Futures Monitors. See you there!
 

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

EMC Corp - EMC - close: 13.12 change: -0.09 stop: 12.95

EMC popped higher at the open this morning and traded back above its simple 200-dma but it could not hold its gains in the face of another market sell-off. The stock looks poised to retest support near the $13.00 level. Readers may want to step back and wait for a bounce from $13 before considering bullish positions.

Picked on October 09 at $13.21
Change since picked: - 0.09
Earnings Date 10/19/05 (confirmed)
Average Daily Volume: 12.8 million
 

Short Play Updates

Career Educ. - CECO - close: 34.20 chg: -0.16 stop: 36.51

CECO did post a loss on the session but Monday's intraday trend looks bullish. We would not be surprised to see CECO rally back towards the $35.00-35.50 level before turning lower again. Readers can use a failed rally under $35.50 as a new bearish entry point. Our target is the $31.00 level.

Picked on October 04 at $34.99
Change since picked: - 0.79
Earnings Date 10/26/05 (unconfirmed)
Average Daily Volume: 1.6 million

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Cost Plus - CPWM - close: 16.92 change: -0.40 stop: 19.01

Almost there! CPWM dipped to $16.60 this morning and shares closed with a 2.3% loss on the session with above average volume on the move. Our target is the $16.50-16.00 range. Readers may want to strongly consider exiting right here. The stock is very oversold and due for a bounce!

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

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Cree Inc. - CREE - close: 23.24 chg: -0.14 stop: 24.01

Semiconductor company Xilinx (XLNX) issued an earnings warning today that helped push the SOX semiconductor index through the bottom of its trading range with a 3.2% loss. We are amazed that shares of CREE did not sell-off more sharply today. The stock did hit a new relative low but has not yet hit our trigger to short the stock at $22.99. Thus we remain on the sidelines.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/05 (confirmed)
Average Daily Volume: 1.3 million

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Enzo Biochem - ENZ - close: 13.50 chg: -0.27 stop: 15.01

ENZ lost another 1.96% on Monday closing at a new five-month low. Our target is the $12.25-12.00 range but we plan to exit this Thursday at the closing bell to avoid the company's Friday earnings report.

Picked on October 03 at $14.36
Change since picked: - 0.86
Earnings Date 10/14/05 (unconfirmed)
Average Daily Volume: 90 thousand

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Corning Inc. - GLW - close: 18.25 chg: -0.29 stop: 20.01

GLW lost just over 1.5% on Monday but volume came in very low due to the Columbus day holiday where many traders extended their weekend. Don't be surprised to see a bounce from the $18.00 level on the initial test. We see no changes from our weekend update.

Picked on October 09 at $18.54
Change since picked: - 0.29
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 11.9 million

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99c Only Stores - NDN - close: 9.15 chg: -0.03 stop: 10.01

We see no change from our weekend update. Our target is the $8.60-8.50 range.

Picked on September 27 at $ 9.40
Change since picked: - 0.25
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 581 thousand

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Toll Brothers - TOL - close: 38.19 chg: -1.72 stop: 42.51*new*

Homebuilders continued to sink on Monday and shares of TOL lost another 4.3%. The stock closed at a new four-month low and looks poised for more weakness. Our target is the $36.50-36.00 range. We're going to lower the stop loss to $42.51.

Picked on October 05 at $40.95
Change since picked: - 2.76
Earnings Date 08/25/05 (confirmed)
Average Daily Volume: 4.6 million
 

Closed Long Plays

Mckesson - MCK - close: 44.81 chg: -0.79 stop: 44.85

Yet another decline for the major stock averages was too much for shares of MCK. The stock continued last week's sell-off and broke down under support at the $45.00 level. We've been stopped out at $44.85.

Picked on September 18 at $46.47
Change since picked: - 1.66
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume: 1.5 million
 

Closed Short Plays

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

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