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Daily Newsletter, Saturday, 11/19/2005

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Table of Contents

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

Market Wrap

General Electric Brightened Pre-Market Sentiment

Before the sun had fully risen Friday morning, GE turned on the electricity, brightening the picture for early market action on an option-expiration day. Sunlight dimmed that GE-shed light, however, resulting in a quick pullback that was never fully retraced on some indices. At the end of the day, many indices again sported doji or small-bodied candles at the top of a steep climb.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Many developments contributed to the rise in the markets, including strong gains in bourses across the globe, but GE was often mentioned. Early Friday morning, GE raised earnings estimates for fiscal year 2006, increased dividends and its planned spending on its share buyback plan, and announced that it would sell most of its losing Insurance Solutions reinsurance division to Swiss Re, collecting $8.5 billion. Within the first forty-five minutes of trading, GE had zoomed up to a four-month high, pulled back and gathered energy for a last-minute punch up to a new high of $35.80, with a four-month closing high of $35.75.

Hewlett-Packard (HPQ) also brightened sentiment in the pre-market period, beating expectations and raising its profit outlook. Thursday, HPQ had broken to the upside out of a two-month long coiling formation on its daily chart. Friday's open brought an attack on $30.00, with a day's high of $30.71, a high HPQ hadn't tested since mid-2001. HPQ's early high was quickly reversed, however, with the day's strong volume and steep pullback off the high indicating that many have been waiting a long time to break even on their HPQ holdings. They'd been waiting since 2001, to be exact. HPQ will have to work through a lot of supply at that level, as the day's trading action clearly depicted. Before traders believe it can rise further, they want to see any pullbacks be accomplished through small-bodied candles with low volume, to indicate that demand is beginning to overwhelm supply. On Friday, the story was the opposite: supply overwhelmed demand. For an example of what should be seen, note February 9's action, comparable to Friday's, and then note the immediate decrease in volume as HPQ fell back and consolidated before another move higher.

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Other companies in the news included Walt Disney Co. (DIS), beating expectations on per-share profit but reporting fourth-quarter net income that fell more than 25 percent. The company blamed films that disappointed. On CNBC this morning, discussion centered on whether Disney's CHICKEN LITTLE release will help the company regain its status among makers of animated films. DIS shares were marked down in Friday's trading, but closed off their low on high volume, a possible sign of accumulation. Downward momentum can continue even when accumulation occurs. The stock perhaps still looks vulnerable to a test of its 100-sma, but if that's accumulation going on, there may be hope of that level holding.

Cisco Systems (CSCO) reported a deal to buy Scientific Atlanta Inc. (SFA), a cable television set-top manufacturer. CSCO dropped, but volume patterns (high volume on downdrafts into support and a spring off the low) may be indicating accumulation each time CSCO approaches the $16.80-17.00 region. Next week will tell.

Another deal in the works was Liz Claiborne Inc.'s (LIZ) offer to acquire J. Jill Group Inc. (JILL) for $18.00 a share, a premium to Jill's Thursday $12.79 closing price. JILL's stock opened near $18.00 and climbed strongly, holding most of its gains into the close. That high volume indicated some were taking the opportunity to unload positions they had acquired way back in the summer.

Telecoms helped lead the markets higher. On Friday, "Baby Bell" SBC Communications completed its acquisition of its former parent company AT&T, after the California Public Utility Commission removed the last roadblock in that deal. The new entity will have the stock-trading symbol of "T" and will assume the AT&T name, but California officials wrangled a deal that requires SBC to stop requiring DSL customers to use SBC's local phone service, too. Although SBC head Edward Whitacre argues that his company has the right to charge rivals to use SBC's lines to deliver their services to customers, California said that the company could not hinder the free flow of Internet traffic on their networks. California officials also cleared the way for Verizon Communications to purchase MCI Inc., with Verizon and MCI still waiting for approval from other states. California will require Verizon to meet some of those concessions, too.

Marvell's (MRVL) rise after earnings led to an improvement in the semi-related issues, with the SOX climbing 2.5 percent. GM rebounded, with car manufacturers across the globe performing well after yesterday's five-month low in crude. As crude drops, the Dow Jones Transports (TRAN) zooms, and Friday was no exception. Since October 19, the TRAN has risen from 3550.55 to Friday's closing high of 4027.52, almost 500 points in a month as crude continued its drop from August's high. Markets won't pause while the TRAN drives them higher.

As Jim Brown has mentioned, the TRAN's climb should not be attributed only to the decline of crude, although a clear correlation with crude exists, as an improving economy also benefits the transports. UPS, although not a TRAN component, probably contributed to the TRAN's climb on Friday, for example. UPS announced that it will initiate higher shipping prices in 2006. Still, some have worried that the Dow is not following quickly enough in its sister index's path, however, leaving some of speculate about the implications of the divergence.

Late last week, the TRAN showed no indication of pausing. It confirmed a continuation-form inverse H&S with an upside target of about 4290-4320, depending on how it's drawn. A long-term envelope that the TRAN has never violated for more than a few points intra-week has resistance just above 4200. It was this resistance that turned the TRAN back late in 2004 and then again in late February, and it may well do so again, if tested. Target and resistance, it indicates that the TRAN may still have upside, but limited upside that may be met this week. Traders should keep the TRAN on their radar screen.

AAnnotated Weekly Chart of the TRAN:

It's been my contention for a while that the indices are going to keep going north as long as the TRAN drives them there.br>
Earnings slow further next week, but include Albertson's Tuesday report, with that view of consumer's habits. Next week's economic releases are light on the holiday-shortened week, including October's leading indicators on Monday; FOMC minutes from the November 1 meeting on Tuesday; and the revised October Michigan sentiment, October help-wanted index, and crude inventories on Wednesday. Thursday will be a market holiday, with Friday's closing an early one, at 1:00 EST. Volume will be light all week, with many taking the entire week for travel. Such light volume typically produces two types of market action: choppy, unpredictable movements or a slow sideways movement. Either can be deadly to trade. This would be a good time to let the TRAN complete its upward drive, if it hasn't already done so, and wait for pullbacks on other indices to the 10-sma's, watching how those pullbacks occur and judging whether it's safe to make new bullish entries at those averages or whether it's time for bulls to step aside.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
CREE
DHI  
EBAY  

New Long Plays

Cree Inc. - CREE - close: 26.89 change: +0.69 stop: 24.89

Company Description:
Cree is an advanced semiconductor company that leverages its expertise in silicon carbide (SiC) and gallium nitride (GaN) materials technology to produce new and enabling semiconductors. The company's products include blue, green and near ultraviolet (UV) light emitting diodes (LEDs), packaged LEDs, power switching devices, and radio frequency (RF) and microwave devices. The Company is currently developing near UV lasers. Targeted applications for these products include solid-state illumination, power switching, wireless infrastructure and optical storage. Cree understands the important convergence of science, technology and creativity, placing high value on ideas, as well as the energy and ability of its people. (source: company press release or website)

Why We Like It:
The semiconductor sector is on the verge of a significant breakout and doing its part to help is CREE. Shares of CREE broke through resistance near the $26.00 level this past week and has more than filled the gap from its August drop. Short-term technical indicators are bullish but CREE's P&F chart has not yet reversed into a new buy signal. We believe the stock is poised to make a run towards the summer highs near $31.00. We're going to suggest long positions with CREE above $26.00. Traders have a choice to either look for a dip back into the $26.00-26.50 range or look for a move over short-term resistance at $27.00 as their entry point. Our target will be the $30.00-31.00 range. Be sure to keep an eye on the SOX index, which has a tendency to fill gaps. The index gapped higher on Friday and a pull back to fill the gap will probably weigh on shares of CREE.

Picked on November 20 at $26.89
Change since picked: + 0.00
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume: 1.2 millioni

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D.R.Horton - DHI - close: 34.81 chg: -0.15 stop: 32.45

Company Description:
D.R. Horton, Inc., America's Builder, is the largest homebuilder in the United States, delivering more than 51,000 homes in its fiscal year ended September 30, 2005. Founded in 1978 in Fort Worth, Texas, D.R. Horton has expanded its presence to include 74 markets in 25 states in the Midwest, Mid- Atlantic, Southeast, Southwest and Western regions of the United States. The Company is engaged in the construction and sale of high quality homes with sales prices ranging from $90,000 to over $900,000. D.R. Horton also provides mortgage financing and title services for homebuyers through its mortgage and title subsidiaries. (source: company press release or website)

Why We Like It:
The homebuilders were able to shrug off negative news this past week and the group is pushing higher over its three-month trendline of resistance. DHI helped stage the breakout with a very strong earnings report and raised guidance. Shares of DHI have broken through resistance at its 50-dma, 200-dma and its three-month trendline of resistance. Readers have a choice. They can look for a dip back toward $33.50 and buy a dip there or wait for confirmation of DHI's breakout with a move over its 100-dma. We're going to suggest the latter strategy. We'll use a trigger at $35.85 to open the play. If we are triggered we'll target a rise into the $39.75-40.00 range over the next eight weeks.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

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eBay Inc. - EBAY - close: 44.67 change: +0.87 stop: 42.45

Company Description:
eBay is The World's Online Marketplace, enabling trade on a local, national and international basis. With a diverse and passionate community of individuals and small businesses, eBay offers an online platform where millions of items are traded each day. (source: company press release or website)

Why We Like It:
In the past couple of weeks EBAY has broken out from a two-month trading range. Currently the stock is still trading under resistance at the $45.00 mark but shares do look poised to breakout and hit new highs for the year. The Point & Figure chart, which eliminates a lot of the noise we see on a daily chart, is bullish with a buy signal pointing to a $57 target. We are going to suggest a trigger at $45.10 to open the play. Until EBAY trades at or above our trigger we'll sit on the sidelines. If triggered we'll target a run into the $49.90-50.00 range by year's end.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume: 17.2 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Burlington Coat - BCF - close: 40.48 chg: -0.09 stop: 37.45

Some of the retail stocks stumbled on Friday after an earnings warning from the Gap (GPS). Fortunately, traders bought the dip in BCF near round-number support near the $40.00 mark. The afternoon bounce looks like a new bullish entry point. Our target is the $43.50-44.00 range.

Picked on October 24 at $38.90
Change since picked: + 1.58
Earnings Date 10/06/05 (confirmed)
Average Daily Volume: 165 thousand

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Csk Auto - CAO - close: 15.50 change: +0.00 stop: 14.95

Shares of CAO did manage to breakout over its two-week trend of lower highs on an intraday basis but failed to maintain any of its gains. We are very hesitant about suggesting new bullish positions here with only two weeks left before we plan to exit. CAO is due to report earnings in early December and we do not want to hold over the report. If CAO doesn't breakout over resistance at the $16.00 level in the next five or six trading sessions we're going to exit early!

Picked on November 02 at $15.58
Change since picked: - 0.08
Earnings Date 12/02/05 (unconfirmed)
Average Daily Volume: 388 thousand

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CE Frankline Ltd - CFK - close: 12.23 chg: +0.23 stop: 9.99

Another down day for crude oil didn't stop the rally in CFK. The stock pushed over resistance at the $12.00 mark but we noticed that volume was relatively light. We remain bullish but more patient traders might want to think about waiting for a dip back toward the $11.50 region and consider an entry there. Of course there's no guarantee that CFK will dip that low any time soon. Our target is going to be the $14.75-15.00 range over the next eight weeks. We are suggesting a stop loss at $9.99 but more conservative traders might want to consider something tighter.

Picked on November 16 at $11.98
Change since picked: + 0.25
Earnings Date 10/27/05 (confirmed)
Average Daily Volume: 150 thousand

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Corning Inc. - GLW - close: 20.95 chg: +0.10 stop: 18.99

The rally in GLW has temporarily stalled under resistance at the $21.00 level but shares appeared to be coiling for a breakout higher on Friday. We're not going to suggest new positions at this time. A pull back toward the $20.00-20.25 range might offer a new entry point for longs. Our target is the $21.90-22.00 range.

Picked on November 13 at $20.11
Change since picked: + 0.84
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million

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Intel Corp. - INTC - close: 25.30 chg: +0.19 stop: 23.45

The SOX semiconductor index turned in a big 2.5% gain on Friday but shares of INTC lagged behind its peers. INTC continues to struggle with overhead resistance at its simple 100-dma near the $25.50 level. We are not suggesting new positions at this time. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 1.31
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million

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Komag - KOMG - close: 30.50 change: +0.13 stop: 26.99

Disk drive and storage device stocks turned in a big session on Thursday. Shares of KOMG soared through resistance at the $29.00 level, its 50-dma, and then the $30.00 mark on Thursday. Friday shares spent the session churning sideways above the $30 mark. The pattern looks pretty bullish and we would consider new longs here over $30.00. However, patient traders might want to wait and look for a dip back to the $29 level and/or its 50-dma (29.33), which should now act as new support. There have been some recent comments that KOMG could be seeing a short-squeeze. The latest data does put short interest at 27.3% of its 29.8 million shares outstanding. Our target is the $34.00-35.00 range.

Picked on November 17 at $29.21
Change since picked: + 1.29
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 1.3 million

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Mentor Graphics - MENT - close: 8.68 chg: +0.05 stop: 8.49

MENT remains stuck inside its four-month trading range between $7.85 and $9.00. We suspect that if the market's produce their seasonally bullish year-end rally that MENT can breakout to the upside from this consolidation. Our strategy involves a trigger to go long the stock at $9.05. If triggered we'll target a run into the $9.95-10.00 range.

Picked on October xx at $xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume: 713 thousand

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Verifone Holdings - PAY - close: 23.70 chg: +0.03 stop: 21.95

PAY is not off to a very strong start but the pattern remains bullish. We don't see any changes from our Thursday night play description so we're reposting it here:

Last month PAY broke out from a multi-month consolidation pattern and set a string of new yearly highs. After testing round-number resistance near $25.00 traders have spent the last several days locking in profits. Today looks like a new turning point for PAY. The stock dipped back toward previous resistance, now new support near $22.00, which also happens to be near technical support at its simple and exponential 200-dma's. The sharp intraday bounce from the $22 level looks like a short-term entry point for new longs. We're going to suggest longs with the stock above $23.00. More conservative traders may want to plan an exit at the $25 level, which is resistance. We suspect that PAY could breakout over the $25 level especially if the broader market continues higher with expectations of the seasonal Santa Claus rally. We are going to set an optimistic target in the $26-27 range. The biggest challenge with this play is the time frame. We want to exit ahead of PAY's December 1st earnings report. That gives us less than two whole weeks. If we do not see a move over $24.00 in the next two or three sessions we'll probably exit early.

Picked on November 17 at $23.67
Change since picked: + 0.03
Earnings Date 12/01/05 (confirmed)
Average Daily Volume: 304 thousand

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VCA Antech - WOOF - close: 27.74 chg: +0.23 stop: 25.90

WOOF was still inching higher on Friday with a 0.8% gain. The stock is nearing short-term resistance at the $28.00 level. Friday's gain actually marks a new closing all-time high for the stock. WOOF's Point & Figure chart is pretty bullish with a $44 target. We are targeting a move into the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.00
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

None
 

Closed Long Plays

Patterson Companies - PDCO - cls: 35.01 chg: -7.19 stop: 39.99

We try and limit our risk by using stop losses but a gap down event like Friday makes our stops seem useless. Before the opening bell on Friday PDCO issued a surprise earnings warning. The company lowered its forecast from 35-37 cents a share to 32 cents a share. Wall Street's estimates were at 35 cents a share. The market reacted with PDCO gapping lower to open at $34.89 and closing at the $35 level. We would have been immediately stopped out at the open for a significant loss. There is no guarantee but more aggressive traders who still have long positions might want to hold them for a day or two and see if PDCO produces any sort of dead-cat bounce to exit on!

Picked on October 30 at $40.85
Change since picked: - 5.84
Earnings Date 11/23/05 (confirmed)
Average Daily Volume: 1.2 million
 

Closed Short Plays

Sanderson Farms - SAFM - close: 31.70 chg: -1.10 stop: 35.01

Target achieved! After Thursday's failed rally and lower high shares of SAFM continued to show relative weakness on Friday. The stock lost another 3.3% on above average volume and fell below our target at the $32.00 mark. We are closing the play but as we have mentioned before more aggressive traders may want to use a lower target. The $30.00 level could act as round-number support. The Point & Figure chart for SAFM points to a $21 target.

Picked on October 23 at $35.17
Change since picked: - 3.47
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume: 257 thousand
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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