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Daily Newsletter, Wednesday, 10/19/2005

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Table of Contents

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

Market Wrap

Fright Night

Foreign bourses created a fright night for U.S. investors, with bourses in Asia and Europe all declining, some more than two percent. The Nikkei 225 had dropped almost 280 points off its previous day's close at one point, although it managed to trim that loss to a mere 222 points by the close. Inflation fears, another hurricane, and hawkish talk by ECB members contributed to the deep declines on bourses that had been soaring and drawing in weak bullish hands.

Investors were also treated to reminders on CNBC that this was the anniversary of the 1987 crash. That increased the panic. However, our futures remained above last week's high, and some chart setups indicated the possibility for a gap lower and then a bounce. That's exactly what happened. The bounce was soon reversed, giving bulls another fright, but it was ultimately the bears who were going to be the most terrorized. Indices printed tall bullish engulfing candles on the daily charts, with the gains accelerating into the close as bears were desperate to cover.

It was a bullish day. However, most of the bounces were from predictable levels, into predictable retests of resistance, with a powerful short-squeeze contributing to those gains. Let's look at the evidence, beginning with the Dow. The Dow continued the predictable bounce that began after it tested the July low.

Annotated Daily Chart of the Dow:

The SPX bounce began from a level that's been identified for weeks, the weekly 72-ema.

Annotated Daily Chart of the SPX:

The SOX bounced from the weekly 200-sma, with that moving average a longtime S/R level for the SOX.

Annotated Daily Chart of the SOX:

Like the SPX, the RUT's bounce began from the weekly 72-ema.

Annotated Daily Chart of the RUT:

The Nasdaq bounced from a best-fit rising trendline off the July low, with that best seen on the weekly chart. The line is not shown in the chart below, but is at about 2027.

Annotated Daily Chart of the Nasdaq:

The fright-night effect was heightened by the opening of Saddam Hussein's trial on charges of murder and torture. As was widely expected, the one-day event resulted in a postponement, with most speculating that the postponement would be of at least a month and with the actual postponement until November 28. The trial's opening featured the one-time dictator demanding to know the identity and right of the presiding judge to do just that--preside over his trial. He talked over the judge and said he did not "recognize the body that has designated and authorized you, nor the aggression because all that has been built on false basis is false." After pleading not guilty, he scuffled with and yelled at guards who attempted to escort him out of the room. The trial, when it begins in earnest, may cause geopolitical upheavals, but it did appear to attract much notice or impact markets today.

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A Friedman Billings downgrade of Phelps Dodge (PD) to a market-perform rating from its previous outperform one added to the fright, sending PD sharply lower shortly after markets opened and adding to the slide in materials-related stocks. The API, the American Petroleum Institute, also delivered a fright to those hoping for the oil majors to help support the markets. September's deliveries dropped 4 percent, with the subsequent year-to-year decline the largest in more than a decade, one article noted. Crude output declined 22 percent from the year-ago level. Refinery capacity utilization dropped to its lowest September level in 20 years, at 82.7 percent, with that drop blamed on Katrina and Rita's impact. Later, the Department of Energy was to announce that U.S. crude inventories rose 5.6 million barrels, gasoline inventories rose 2.9 million barrels and distillates declined 1.9 million barrels. The results saw crude and gasoline inventories building more than expected, and distillates dropping less than expected.

The resulting dip in crude prices was enough to prompt an equity bounce, but bulls got another fright when indices rolled over again, perhaps when the impact of the API's statement was more fully absorbed. While the environmental impact of slower demand in petroleum products can be deemed a good one, the economic impact of American consumers parceling out their automobile usage so carefully might not be.

Ultimately, crude was to decline and markets were to rise.

Annotated Weekly Chart of Crude for December Delivery:

In general, early morning economic and earnings releases should have consoled those frightened investors, slowing their desperation to get out. Two early economic releases related to the much-watched housing market. The Mortgage Bankers Association released mortgage applications for the week ending October 14 at 7:00 EST. Applications rose. The Market Composite Index rose 6.1 percent, with this release measuring mortgage loan application volume. This number was adjusted due to the Columbus Day holiday. The Purchase Index rose 7.3 percent; the Refinance Index, 4.5 percent; the Conventional Index, 6.0 percent and the Government Index, 7.8 percent. This still keeps the four-week moving average for the Market Index down 1.2 percent; for the Purchase Index, up 0.2 percent and for the Refinance Index, down 3.0 percent. Refi share fell to 42.8 percent of all applications. The average interest rate for a 30-year fixed-rate mortgage increased to 6.09 percent from the previous week's 5.98 percent.

Ninety minutes later, September's housing starts were released, with those increasing 3.4 percent, bringing the seasonally adjusted annualized rate up to 2.108 million. Expectations had been for an increase to 1.970 million on the annualized figure, but housing starts increased more than they had since February. Building starts increased, too, by 2.4 percent, to a seasonally adjusted annualized rate of 2.189 million. A Marketwatch.com article tagged this as the highest increase in 32 years. Single-family building permits rose 4.4 percent, hitting a record number, and starts of single-family homes climbed 2.6 percent. Looking specifically to the South, the hurricanes couldn't stop a 6.9 percent increase in housing starts.

Like many other indices, the DJUSHB, the Dow Jones U.S. Home Construction Index, ultimately saw strong gains for the day, but not before it dipped down to test the weekly 72-ema. It engulfed the previous day's candle, but, unlike many other indices, it could not bounce above Monday's high. Any further bounce would just bring it into stronger resistance, at the converging 200-sma and -ema's, at 911.62 and 897.84, with further resistance above that. It looks likely to roll over in the 900-950 range, if not earlier, although perhaps not until it engages in some typical right-shoulder-building choppiness. The DJUHSB closed the day at 869.05. A climb above the 50-sma, now at 950, would question that scenario, however.

The general tenor of earnings reports appeared soothing, too, at least those reporting before the bell. Earnings releases continue to be mostly solid, and about two-thirds of reporting companies are beating estimates. Reporting companies today, both before and after the bell, included ABT, MO, AMGN, BAC, GD, ETC, EK, EBAY, EFII, EMC, HON, ITW, JPM, JNPR, KRB, ODP, NTRS, QLGC, VRSN and WM.

Before the bell, BAC reported income rising 10 percent, helped by credit-card results. EK reported a loss. EMC beat expectations by a cent but matched revenue expectations. Defense contractor GD beat expectations by posting $1.84 a share compared with predictions of $1.76 a share. Revenue was higher than expected, too. HON appeared to beat expectations by a couple of cents per share, but guided revenue lower for the full year. ITW reported earnings of $1.43 per share against expectations of $1.36 a share in the fourth quarter and $5.12-5.18 for the full year, against expectations of $1.39 and $5.09 respectively. Trading revenue and investment-banking fees helped JPM's net income. The company appointed a successor to its CEO, due to retire at the end of the year. Jamie Dimon, now serving as president and COO, will take the reins about six months earlier than had previously been planned. MO appeared to beat expectations of Q3 earnings of $1.33 a share, reporting $1.38 a share. The company narrowed expectations for the full year from continuing operations, forecasting $5.05 to $5.10 a share, from the previous $5.00 to $5.10 a share, narrowing it to the top half of previous expectations. One of the reasons for that narrowing included repatriation of $6 billion in foreign earnings that would account for a $0.10 a share benefit. NTRS beat expectations by two cents. ODP reported a loss of 15 cents a share due to charges it had already announced. Outside of those charges, it beat expectations by a penny but sales were still shy of expectations. TER was characterized as beating expectations.

Before the bell, ETR raised guidance for Q3 earnings, to $1.64 per share from its previous $1.22 per share and above broker estimates of $1.58 a share. The company also increased its estimate of restoration costs associated with the two hurricanes hitting the Gulf region. The company kept open the possibility that the bankruptcy of its New Orleans unit and the hurricane-associated developments could materially change reported earnings and accounting disclosures.

Other pre-market news included the announcement that Thomas Weisel had filed for an IPO and that CSFB had upgraded auto-parts supplier DANA Corp. to a neutral rating after Tuesday's restatement. Before any of that--the general tenor of earnings, a company raising guidance, and other positives--could be digested and impact the markets, investors had to recover from their fright.

They were already doing so before the Beige Book release, with markets climbing into the release. The gains accelerated after that 2:00 release. Fed members have been warning lately of increased signs of inflation, and the Beige Book reiterated those concerns, with higher wages in a number of industries contributing to those pressures. All regions saw higher costs for energy, petroleum-based products, building materials and shipping. The FOMC members had prepared investors well to hear that news, however, with increasingly hawkish statements of late.

The Beige Book went on to console investors, saying that although the Atlanta and Dallas regions were impacted substantially by Katrina and Rita, most of the U.S.'s economic activity hadn't been significantly impacted. Mining, financial services, manufacturing and commercial real estate were performing well in most regions. Only Atlanta and St. Louis failed to see an increase in manufacturing activity, for example. Although auto sales were weaker in all regions, most reported a moderate increase in retail sales. Housing was mixed, with four regions reporting strong or growing housing markets while six reported weakening markets.

The bulls were through being frightened and it was time for the bears to experience their own version of fright night. Indices surged, with financials leading the way as they had attempted to do in the first aborted bounce. By the end of the day, reporting financial companies BAC, JMP and NTRS had gained 1.07, 0.99 and 1.53 percent, respectively. The energy sector provided help, with the OIX gaining 2.05 percent and the OSX gaining 2.72 percent. MO received a reward for its earnings report, gaining 1.37 percent. EBay, due to report after the bell, posted a 3.93 percent gain.

However, eBay was not to hold those gains after hours, when the company's report that full-year profit would be less than expected sent it as much as six percent lower in after-hours trading. Its acquisition of Skype Technologies would send its full-year sales above estimates. Earnings for the quarter were 18 cents a share on revenue of $1.11 billion, against expectations of 20 cents on revenue of $1.1 billion.

Amgen (AMGN) suffered a similar fate in after-hours trading, also dropping as much as 6 percent as of the preparation of this report. The company's earnings for the third quarter were 77 cents a share, or 85 cents on an adjusted basis, on revenue of $3.15 billion against expectations of 83 cents a share and revenue of $3.26 million.

While not dropping as deeply as EBAY and AMGN, QLogic (QLGC) also fell in after-hours trading, more than 3 percent at one point, after earnings from continuing operations appeared to come up shy by a cent. Netflix Inc. (NFLX) fell almost 5 percent at one point after an item related to the settlement of a lawsuit resulted in earnings of 11 cents a share on revenue of $174.3 million against expectations of 15 cents on revenue of $175 million.

Not all companies reporting after the bell declined. Other reporting companies included JNPR, rising after reporting revenue that beat expectations, but earnings per share that appeared to miss, if the reports I found were correct. Expectations had been for earnings of 18 cents a share on revenue of $531 million, but were 14 cents on revenue of $546.4 million if those reports were correct. VeriSign Inc. rose after meeting eps estimates on higher-than-expected revenue and reporting that profits grew 11 percent over the year-ago period.

It all starts again tomorrow. Tomorrow's earnings include ACS, BRCM, COF, CLS, CY, LLY, F, FDRY, GNSS, GOOG, MCD, NOK, PFE, DGX, SNDK, TQNT, UPS, XLNX and XTO. Thursday's economic releases begin with the usual 8:30 release of jobless claims, but also include September's Leading Indicators at 10:00 and the October Philly Fed report at noon. Previous numbers include 389,000 jobless claims, with the predictions mostly between 364-368,000 but ranging up to 395,000. Leading indicators were down 0.2 percent in August, with most predictions for a further decline of 0.3-0.5 percent for September. The Philly Fed is expected to push higher in October, with predictions ranging all over the place, mostly from 9.4-10.4, but as low as 7.5.

The advdec parameters I watch show a potential for a pullback tomorrow morning, but don't preclude a gap higher first and don't give an indication as to whether it will be a minor pullback or a deep downdraft. Any early move higher is likely to bring the SPX up to approach its 200-sma and the Nasdaq to test 2097-2103 resistance. Until otherwise proven, today's gains, as strong as they were, are just part of predictable bounces up to test predictable resistance levels. You can expect them, but when they occur, they certainly feel different and more bullish than you'd expected them to feel, and that may be happening now. This argues against charting evidence that my own favored index, the OEX has approached downside targets, so I'm cautious about these conclusions.

Because of the setup for at least a pullback in early trading, be aware of the possibility of a rollover beneath those levels noted in the charts and in the previous paragraph if in bullish positions or if looking for bearish ones. This would be especially true if the advdec line opened at or above 1800-2300 (QCharts symbol and value), perhaps climbed a little, and then reversed sharply in the second or third 15-minute period of the day. If the rollover begins but is soon reversed and some of these known resistance levels are breached, it's time to revise the scenarios.

Until then, remain suspicious of bounces from predictable support to predictable resistance, especially on a day when there was every reason for market forces to combine to prevent a steep downdraft on the anniversary of a market crash.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

Editor's note:

Earnings season can be a tough time to add new plays. We normally do not want to hold over a company's earnings report. There are too many unknown variables that can turn against us no matter if we're long or short the stock. We want to wait and see if there is any follow through on today's market rally so look for new plays tomorrow and this weekend!
 

New Short Plays

None today.
 


Play Updates

In Play Updates and Reviews

Long Play Updates

Network Appl. - NTAP - close: 26.25 change: +0.46 stop: 22.99

Traders were there to buy the dip toward $25.00 this morning, which proved to be a strong entry point for new longs. The afternoon rally pushed NTAP above the $26.00 mark and technical resistance at its 100-dma and exponential 200-dma. Our target is the $29.00-30.00 range.

Picked on October 16 at $25.12
Change since picked: + 1.13
Earnings Date 11/16/05 (unconfirmed)
Average Daily Volume: 5.9 million
 

Short Play Updates

Abercrombie & Fitch - ANF - cls: 48.30 chg: +1.12 stop: 50.01

Wednesday's widespread market rally was a surprise as was the 2.8% rally in the RLX retail index. Today's gain in ANF certainly does change our enthusiasm for the play but the bearish pattern remains intact. However, we would hesitate to consider new shorts in the stock at this time. Another failed rally under the $50.00 level might work as a new entry point. We would keep a close eye on the RLX retail index, which is trading just underneath resistance at the 440 level and its 200-dma's. A breakout there for the RLX and it may be prudent to exit early in ANF.

Picked on October 18 at $47.18
Change since picked: + 1.12
Earnings Date 11/15/05 (unconfirmed)
Average Daily Volume: 2.5 million

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Corning Inc. - GLW - close: 18.38 chg: +0.28 stop: 20.01

Uh-oh! It may be time to start looking for the exits! GLW produced a bullish engulfing candlestick pattern today and its MACD indicator is nearing a new buy signal. We will seriously consider exiting early if GLW trades over minor resistance at $18.60 and its 21-dma. We're not suggesting new short positions at this time.

Picked on October 09 at $18.54
Change since picked: - 0.16
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 11.9 million

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Trinity Ind. - TRN - close: 36.50 chg: +0.75 stop: 38.26*new*

Today's bounce in TRN and the Dow Transportation index might be a clue that conservative traders should consider exiting early right here! The weekly pattern on TRN remains bearish but short-term we would expect the stock to rally towards the $37.50-38.00 region. If you don't want to take that kind of heat consider exiting and then re-entering if the stock turns lower again. We're going to just lower our stop loss to $38.26, above resistance at $38 and its 50-dma. We are not suggesting new plays at this time.

Picked on October 11 at $36.88
Change since picked: - 0.38
Earnings Date 10/31/05 (unconfirmed)
Average Daily Volume: 385 thousand
 

Closed Long Plays

Sun Microsystems - SUNW - close: 3.97 chg: +0.05 stop: 3.90

The early morning weakness today was enough to send SUNW lower toward the stock's simple 50-dma. It was also enough to stop us out at $3.90.

Picked on October 17 at $ 4.05
Change since picked: - 0.08
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume: 40.4 million

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Vertex Pharma - VRTX - close: 22.76 chg: +0.21 stop: 21.90

In hindsight we may have been too cautious with our stop loss at $21.90 but yesterday the major averages looked pretty vulnerable to more selling pressure. The morning dip under the $22.00 level in VRTX was enough to stop us out at $21.90. Traders might want to keep an eye on VRTX for another bullish entry point if the stock can breakout over the $23.00 or $23.25 levels.

Picked on October 13 at $22.13
Change since picked: + 0.63
Earnings Date 10/26/05 (unconfirmed)
Average Daily Volume: 1.4 million
 

Closed Short Plays

BEA Systems - BEAS - close: 8.55 chg: -0.30 stop: 8.51

BEAS started off on the right foot with an early morning dip but almost immediately turned bullish on us. Oddly enough we don't see any catalyst to account for BEAS' sudden show of strength so much earlier than the rest of the market. The bad news is that we've been stopped out at $8.51 after the stock broke through technical resistance at its 10-dma and 200-dma.

Picked on October 18 at $ 8.25
Change since picked: + 0.30
Earnings Date 11/11/05 (unconfirmed)
Average Daily Volume: 5.0 million

---

99c Only Stores - NDN - close: 9.73 chg: +0.50 stop: 9.56

There are no surprises here. The late afternoon rally in the markets and the big relative strength in the retail sector helped push NDN above resistance at the $9.50 mark. We had planned to exit today anyway to avoid the company's earnings report. We've been stopped out at $9.56.

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

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

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