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Daily Newsletter, Monday, 12/12/2005

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Table of Contents

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

Market Wrap

Opex Opiate

December's option expiration week kicked off true to form, complete with extended drifts, trendline violations, whipsaws, failed chart patterns and reversals... all within stunningly slow, narrow range. Volume was light, and the clearest theme was neither bullish nor bearish, but sideways.

Volume breadth spent some time in negative territory, but the opening readings were very strong and persisted past the first hour. As usual, the downside readings as the market retreated weren't nearly as strong as were the upside readings. Advancing volume outnumbered declining volume 1.35:1 on the NYSE and 1.22:1 on the Nasdaq at the close.

Daily Dow Chart

The Dow closed 10.81 points from where it started and while the range looks wide, the action was slow. Old resistance to 10700 has become support, not yet tested, with today's 10735 low confirming initial support to 10725. So far, this daily cycle downphase has been less steep than the upphase that preceded it, and failing a break below 10700, the pattern off the year high could prove to be a bull flag.

Daily S&P 500 Chart

A doji star for the SPX in its recent range, adding 1.06 to close at 1260.43 after bouncing from a 1255.52 low. The range has been flat enough this month to suggest that op-ex week started 2 weeks early, and unfortunately for bears, this has been during the first third of a daily cycle downphase. If this pattern is a neutral pennant, the doctrine holds that these tend to be continuation patterns, which would imply an upside resolution. Today's high came at trendline resistance of 1263.86.

Daily Nasdaq Chart

The Nasdaq's print looks more bullish than it felt, because the initial gains were made overnight on no volume. The market gapped up, traded sideways, broke down to test Friday's highs, then bounced slowly, sideways-up back to where it started, all of which on low volume. The move was the first step toward stalling the daily cycle downphase, but then, this is op-ex week and an FOMC week to boot. Bulls need a break back above 2270-75, while the bears need a violation of 2225 and 2240 support, either of which could be neckline support on a possible head and shoulders top if today's 2266 high holds. For the day, the Nasdaq gained 4.22 to close at 2260.95.

Daily TNX Chart

At 1PM, the Treasury announced results of the $34 billion 13-week and 26-week bill auction, which refunded $31.76 billion in maturing paper and raised $2.24 billion of new cash. However, that minor drain to the market was more than offset by a big $10 billion paydown in 4-week bills announced this morning- the Treasury will auction $14 billion in 4-week bills tomorrow against $24 billion maturing.

The $34 billion in 13-week and 26-week bills auctioned today were taken up by foreign central banks to the extent of $9.53 billion. The 13-week bills sold for a high-rate of 3.82% and a median rate 3.79%, yielding 3.911%. The bid-to-cover ratio was 2.32. The high rate on the 26 week bills was 4.18%, yielding 4.33%, with a bid-to-cover ratio of 2.11.

The Fed did its part, with the open market desk refunding Friday's expiring $5.5 billion weekend repo with a $10.5 billion overnight repo. That resulted in a $5 billion net add for the day, but interestingly, demand for the money rose to new highs for the year. The repo was awarded at the highest rate submitted, 4.27%. If the Fed raises its overnight rate by 25 bps as expected tomorrow, then today's repo activity sees today's demand rising 2 bps above it. The 13-week bill rate held the low 3.8% range today, and so the overnight rate remains higher than the 13-week bill rate and very close to today's closing 4.547% yield for ten year Treasury notes.

At 2PM, the Treasury reported its November budget, which came in at a deficit of $83.1 billion, exceeding expectations for a deficit of $80 billion. This was a record November deficit, up from last November's $57.9 billion deficit. Receipts rose 3.2% to $138.8 billion for the month, while expenditures rose 15.3% to $138.8 billion. The administration expects the budget deficit to rise from $318.5 billion to $390 billion in 2005.

Ten year note yields (TNX) had opened in negative territory but had reversed by mid-morning, breaking Friday's highs as they rose following the 1PM auction announcement to close +1 bp at 4.547%. The daily cycle upphase continues, not yet overbought, and bond bears/yield bulls will want to see TNX hold above rising trendline support in the 4.47%-4.48% area.

Daily Chart of Crude oil

Crude oil rose last night, and the headlines cited an OPEC decision to leave its 28 million bpd production quota unchanged. Kuwaiti Oil Minister Sheikh Ahmad Fahd al-Sabah and Saudi Arabia's Ali Naimi said that the cartel is considering reducing output at next month's January 31 meeting if demand weakens. Suprisingly little mention was devoted to this weekend's explosion and fire in Hemel-Hempstead, England. Europe's largest post-WWWII oil explosion received little space. Fortunately, only 2 people were reported seriously injured and only 43 were hurt, but the huge toxic cloud and risk of groundwater pollution from efforts to contain the blaze remained. Terrorism was immediately ruled out in the reports I saw this weekend.

Later in the day, the Energy Department increased its long-term forecast for global crude oil prices by $21 to $57 per barrel. By "long-term," the DOE is referring to 2025 and 2030, with oil prices expected at $54 per barrel in 2025 and $57 per barrel in 2030, (valued in 2005 dollars). A reader sent the following reaction after I posted the DOE's headline in the Market Monitor:

"Im not sure I follow those headlines. Just exactly how does the Energy Dept know what oil will be trading for in 2030? Im not sure we will even have any by then. ...If my math is correct thats 24 years into the future. In 1981 how many people could have envisioned the world we live in today and could have accurately forecast what we would be paying for goods and services? I dare say not many. The DOEs forecast and 7 Bucks might buy you a latte at Starbucks."

On the daily chart, crude oil has re-started the stalling daily cycle upphase, but holds within what could be a bearish rising wedge above 61.00 support. For the day, crude oil rose 1.925 to close at its session high, 61.325, a 3.24% gain. Session low was 59.30. Natural gas gained .525 or 3.67% to close at 14.825, off its 14.93 high.

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In other news, the Organization for Economic Co-operation and Development (OECD) reported that China surpassed the US in laptop, mobile phone and other info-communications technology exports in 2004. China exported $180 billion of these "ICT" goods in 2004, while the US sold $149 billion. In 2003, the US led with $137 billion to China's $123 billion worth of ICT exports. The OECD expects China to maintain or grow this lead in 2005, but expects the data to take months to collect.

Gold rose further this morning to 25 year highs, with wire services citing demand in Japan. While various media have discussed stepped-up jewellery demand and portfolio diversification, the Bank of Japan's near-zero percent overnight rate in place since 2001 could have something to do with it as well, with currency fears contributing to the move. Foreign central banks growing their monetary bases/devaluing their currencies are arguably the principal contributors to the rallies in "hard" assets, and I believe it to be a mistake to view the rally in gold as somehow isolated from the rallies in energy, or other metals, or real estate.

February gold futures printed a high of 544.20 before dropping steeply at 12:30PM EST. Unlike silver, which got clotheslined for a deep decline, gold held positive above 530, but only fractionally so. The break to new highs with a sharp intraday reversal would have been a gravestone doji had gold closed negative, but it was still a close call.

In corporate news, Burlington Resources (BR) took a rocket ride on news that it is in talks be acquired by the nation's third-largest oil company, ConocoPhillips (COP) for more than $30 billion. Reuters reported that both companies declined to comment on the story. COP closed lower by 2.89% at 61.25, while BR gained 8.42% to close at 82.50.

Canadian Pacific Railway (CP) lowered its 2006 EPS projection from CAD $3.70-$3.85 to CAD $3.60-$3.85. The revision was based on Fording Coal's (FDG) Dec. 7 outlook for a reduction in coal output as well as other factors. CP lost 1.78% to close at 41.35.

MRK took a hit this morning and a subsequent downgrade by Hillyard Lyons on news that federal judge declared Fallon a mistrial in a Vioxx case. The mistrial a motion by Plaintiff's counsel based on publication in the New England Journal of Medecine of a report that questioned the legitimacy of MRK's testing methods and protocols for Vioxx. MRK faces over 7000 Vioxx-related lawsuits. MRK lost 2.47% to close at 28.41.

This is scheduled to be a heavy week for economic reports. Tomorrow, we'll get Retail Sales, Business Inventories and the FOMC announcement at 2:15PM. On Wednesday, it's Export Prices ex-ag., Import Prices ex-oil, the Trade Balance, and the weekly Crude Inventories and Mortgage Bankers data. On Thursday, we get the Empire State Index, the CPI, Net Foreign Purchases, Industrial Production and Capacity Utilization, the Philly Fed, and the weekly Initial Claims data. On opex Friday, we'll get the Q3 Current Account.

The markets aren't easy to forecast or even to follow, and option expiration week, affectionately known by some as "scam week," is notorious for its false moves, roundtrips, whipsaws and extended ranges. FOMC announcements are known for miniscule volume followed by wide, unpredictable spikes and reversals. Tomorrow is lined up to be a fine day to take with a large grain of salt, and I will be very hesitant to draw conclusions from the intraday action. Protect your capital and your peace of mind as you follow the action, as there will certainly be easier and clearer sessions ahead. Join us in the Market and Futures Monitors, where we'll be sparing no effort to make sense of it tick-by-tick.
 

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

ANSYS Inc. - ANSS - close: 41.88 change: -1.35 stop: 40.89

ANSS continues to display volatility as it consolidates sideways under resistance at the $44.00 level. The big picture for ANSS is bullish and its P&F chart points to a $60 target. We are suggesting a trigger at $44.05 to open the play. If triggered we'll target a move into the $49-50 range by the end of January.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 153 thousand

---

Anglogold - AU - close: 46.93 change: +0.23 stop: 41.95

A big spike higher in the gold commodity helped many gold stocks, like AU, gap higher on Monday morning. The equity rally stalled and shares of AU drifted lower to effectively "fill the gap". Where AU goes from here is the question. Short-term the daily chart looks overbought and due for a dip but if gold keeps climbing then the stock is likely to follow. Our target is the $49.50-50.00 range.

Picked on December 06 at $44.81
Change since picked: + 2.12
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 904 thousand

---

Burlington Coat - BCF - close: 41.21 chg: -0.10 stop: 38.90

We didn't expect the market to do much ahead of the FOMC meeting tomorrow. BCF appears to have taken this to heart. The stock has traded sideways now for the sixth day in a row. We are not suggesting new positions and more conservative traders may want to exit right here! Our year-end target is the $43.50 level.

Picked on October 24 at $38.90
Change since picked: + 2.31
Earnings Date 01/04/06 (unconfirmed)
Average Daily Volume: 165 thousand

---

CE Frankline Ltd - CFK - cls: 14.12 chg: +0.43 stop: 11.98

Another strong day for crude oil and oil stocks in general helped push CFK to a 3% gain. The stock failed to produce any follow through on Friday's bearish engulfing candlestick but we don't believe the bulls are out of the woods just yet. Today's session would be considered an "inside day". Conservative traders should strongly consider exiting here for a gain. We are not suggesting new positions.

Picked on November 16 at $11.98
Change since picked: + 2.14
Earnings Date 10/27/05 (confirmed)
Average Daily Volume: 150 thousand

---

CenturyTel Inc. - CTL - close: 33.61 change: +0.56 stop: 32.39

CTL has been triggered. Friday's rebound continued into Monday and the stock broke through significant resistance at the simple and exponential 200-dma's and the $33.50 level. Our trigger to go long the stock was at $33.55. Now that the play is open we are targeting a run to the $36.00 mark before CTL's January earnings report. FYI: the P&F chart for CTL points to a $49 target.

Picked on December 12 at $33.55
Change since picked: + 0.06
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

---

D.R.Horton - DHI - close: 36.09 chg: +0.65 stop: 33.75

DHI turned in a strong session with a 1.8% gain. Short-term technical oscillators continue to improve following last Thursday's intraday bullish reversal. DHI is currently testing resistance at its two-week trendline of lower highs, which also coincides with what looks like the top of a bull flag pattern. We'd wait for a move over $36.50 before considering new longs. Our target for DHI is the $39.75-40.00 range.

Picked on November 21 at $35.85
Change since picked: + 0.24
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

---

Forest Oil - FST - close: 48.50 change: +0.30 stop: 44.49

FST added another 0.6% following today's rally in the oil stocks. We don't see any change from our weekend update. If you're looking for a new bullish entry point we'd probably watch for a dip back toward the $47.50 region. Our target is the $52.50-53.00 range. We do not want to hold over FST's February earnings report.

Picked on December 02 at $47.01
Change since picked: + 1.49
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Corning Inc. - GLW - close: 21.39 chg: +0.23 stop: 19.99

GLW showed some strength today with an intraday bounce from the $21.00 level. The stock looks poised to make a run at the $22 region. Our target is the $21.90-22.00 range.

Picked on November 13 at $20.11
Change since picked: + 1.28
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million

---

K-Swiss - KSWS - close: 32.56 chg: -0.67 stop: 31.45

KSWS is struggling to maintain any sort of follow through. Friday's breakout has been reversed by today's decline. Furthermore today's session almost produced a new bearish engulfing candlestick. We are not suggesting new positions even though the stock has not broken its bullish trend of higher lows. More conservative traders may want to tighten their stop s even further. Our target is the $34.85-35.00 range.

Picked on November 29 at $32.09
Change since picked: + 0.47
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Levitt - LEV - close: 22.96 chg: -0.02 stop: 20.95

LEV spent the whole session consolidating sideways. We don't see any change from our weekend update. More conservative traders may want to tighten their stops. Our target is the $24.90-25.00 range. We do not want to hold over the February earnings report.

Picked on December 01 at $22.27
Change since picked: + 0.69
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

---

Nautilus - NLS - close: 18.45 change: -0.36 stop: 17.89

NLS is not off to the best start. There was no follow through higher on Friday's rally. Furthermore a look at the intraday chart shows that volume really started rising during today's late afternoon pull back and that's bearish! The overall pattern hasn't changed but more conservative traders may want to wait for NLS to trade over $19.00 before considering new long positions. A strong bounce from the $18.00 level could be used as an alternative entry point. We've tried to limit our risk with a tight stop under Thursday's low. We are going to target a rally to $21.50, which is just under a 38.2% Fibonacci retracement of its five-month decline. We will not hold over the February earnings report.

Picked on December 11 at $18.81
Change since picked: - 0.36
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 598 thousand

---

VCA Antech - WOOF - close: 27.90 chg: -0.16 stop: 25.90

We don't see any change from our weekend update on WOOF. If there is any good news it is the afternoon rebound from the $27.50 level today. We would not suggest new positions here but more aggressive players might consider it. Our target is the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.16
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

NeuroMetrix - NURO - close: 30.16 chg: -0.20 stop: 34.01

NURO did dip under the $30.00 level on an intraday basis and the stock remains under the simple 10-dma. However, we hesitate to initiate new positions right here. A move under $29.60 or a failed rally under the 50-dma could be used as a new bearish entry point to short the stock. Our target is a decline into the $22.75-22.00 range above its simple 200-dma. We do not want to hold over the late January earnings report.

Picked on December 06 at $29.59
Change since picked: + 0.57
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand
 

Closed Long Plays

Grant Prideco - GRP - close: 46.82 chg: +1.22 stop: 39.49

Target achieved. GRP continues to display amazing relative strength and another bullish day for oil just added more fuel to the fire. The stock added another 2.67% and traded into our $46.00-47.00 target range.

Picked on December 02 at $41.80
Change since picked: + 5.02
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 1.5 million
 

Closed Short Plays

None
 

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

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