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.
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>
New Long Plays
Cree Inc. - CREE - close: 26.89 change: +0.69 stop: 24.89
Why We Like It:
Picked on November 20 at $26.89
D.R.Horton - DHI - close: 34.81 chg: -0.15 stop: 32.45
Why We Like It:
Picked on November xx at $xx.xx <-- see TRIGGER
eBay Inc. - EBAY - close: 44.67 change: +0.87 stop: 42.45
Why We Like It:
Picked on November xx at $xx.xx <-- see TRIGGER
New Short Plays
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
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
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
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
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
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
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.
October xx at $xx.xx <-- see Trigger
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
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
Short Play Updates
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
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
Today's Newsletter Notes: Market Wrap by Linda Piazza and all other plays and content by the Option Investor staff.