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Daily Newsletter, Saturday, 12/17/2005

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Table of Contents

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

Market Wrap

Trade Your Plan

The markets played out pretty much as expected last week and the game plan I laid out last Sunday produced gains for those who followed it. The major hiccup in the middle was the court news for Altria (MO), which produced a significant Dow/SPX spike on Thursday's open and shocked the other indexes into paralysis. The decline from Wednesday's high was interrupted but only temporarily. The indexes closed at the lows on Friday just as we expected.

Dow Chart - Daily

Nasdaq Chart - 30 min

SPX Chart - 60 min

NYSE Composits Chart - 60 min

Friday lacked any market moving economic reports and the indexes were left to digest the combination of a triple witching expiration, Nasdaq reconstitution and S&P rebalancing. For most of the day the markets remained in neutral with the Dow in the green, Nasdaq red and the S&P walking the flat line. As the close approached and rebalance volume increased the Dow gave up its gains and all the indexes finished in the red but the losses were minimal. All in all this was a bullish week for the markets despite the mixed results listed above.

The game plan I left you with last Sunday was to remain long into Wednesday morning and then short a Wednesday bounce and hold it into Friday's close. That would have been a textbook plan except for the court news on Altria at Thursday's open. Dow component MO spiked nearly $5 at the open on Thursday, which equates to roughly +40 Dow points. This interrupted the Dow's decline from Wednesday's high but the decline reappeared before days end. Option expiration sent the Dow and S&P back to the highs at Friday's open but the rebalancing activity again weighed on the indexes knocking the S&P and NDX back to close at the post Wednesday lows.

Using my recommendations for the last ten days you would have waited to enter long positions until the Friday after the Intel update around SPX 1255. I suggested exiting those longs on any post Fed spike on Wednesday, which came at 1275. The plan was to hold that short into the close on Friday, which we now know, was 1267. The MO spike on Thursday interrupted that plan but otherwise it worked as expected. I was personally stopped out on the Friday morning spike but was able to reenter and hold into the close.

SPX Game Plan Chart - 20 min

Expiration and rebalancing activity was especially harsh for the energy sector. Despite strong draws from storage the gas stocks and big cap oils were hammered severely. The combination of all the expirations and rebalancing was too much for the sector to bear. The big cap oils were hit with a double whammy by falling oil prices and by the S&P changes. Big cap oils have been buying back billions of dollars of shares and that lowers their market cap. The S&P rebalancing forces funds to lighten up on those stocks whose market cap has shrunk and add to positions of those who have grown. Exxon, Conoco and Chevron all lost about -$1.50 on Friday to end a week of an oil related slide. Oil prices fell to $58 and a two week low despite a record cold snap and more cold weather on the way. The three day expiration related slide in oil prices saw it fall from the $61.95 high on Tuesday to $58 on Friday. This -6% drop should be temporary but I would not look for any new highs this month. I told you on Tuesday night I expected a sell the news event when the gas storage levels were announced and that is exactly what we got. There was a -202 bcf drop in storage and much higher than the official estimates. It was simply profit taking related to expiration and the approaching year end.

Crude Oil Futures Chart - Daily

Natural Gas Futures Chart - Daily


To highlight the impact of options expiration we only need to look at gold prices. Gold hit a high on the December contract at $538.50 on Monday and then the bottom fell out to settle at $503.50 on Friday. It was a great run as the contract matured and profits needed to be taken.

December Gold Chart - Daily

Volume on Friday was huge at 5.352 billion shares and a full billion over Thursday's levels. It was weighted slightly 3:2 to the downside but that was a function of expiration/rebalancing pressures. The A/D line was nearly flat with decliners edging out advancers only slightly at 38:33. Given all the negative undercurrents I consider this a bullish day.

I believe the market strength we saw this week in the face of heavy selling pressure suggests next week will be bullish. The Dow and SPX are very close to their recent highs with better internals than we have seen in the last two weeks. The Nasdaq is dormant at 2260 but should wake up next week once the NDX rebalance pressures fade.

Next week is a full week of trading and while there are some major economic reports I believe they will be ignored as long as there are no surprises. The markets are closed for the Christmas/Chanukah holiday on Monday 12/26. Volume will be anemic ahead of the holidays with many institutions running only a skeleton staff for the rest of the year. This bodes well for the indexes since program trades will be scarce after Monday. This is the two weeks of the year where retail traders thrive and push the markets higher. Those year end bonuses will be put to work and the odds are very good we will see new highs on the Dow and SPX.

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Late on Friday Time Warner announced that Google was in talks to buy 5% of AOL for $1 billion. Time Warner said Microsoft was no longer a contender and a deal with Google on AOL and an increased advertising presence was near completion. This helped to power Google to a new intraday high at $432.50. Google was also added to the Nasdaq-100 this week and buying for that index produced a +$13 gain over the last two days. I would be cautious on Google next week as arbitragers dump any excess stock they could not sell to funds as Friday closed. Offsetting any dumping could be late buying by those funds that refused to buy at the new high on Friday. Typically the index funds have three days to complete index adjustments but most are either early or done at the close on rebalance days.

Acquisitions in the energy sector continue to make the news with Southern Union (SUG) paying $1.6 billion for Sid Richardson Energy Services. This adds 4600 miles of pipeline to Southern's network bringing their total to over 22,000 miles in 17 states. Because of the high price paid for SR, Southern bought $45 million in gas options to hedge against gas falling below $11. Energy analyst Kenneth Stern of FTI Consulting did not expect the price of gas to crater and said more deals were in the pipeline. Earlier in the week Conoco agreed to pay $35.6 billion for Burlington Resources adding to Conoco's already growing gas reserves. Constellation Energy spiked on Wednesday's news that FPL Group was in talks to acquire them for $11 billion. CEG has 10 power plants and is trying to get permission to build a giant nuclear reactor as a showcase for a new generation of reactors they hope to build around the country. FPL needs more capacity as more than 100,000 new customers move into its Florida power base every year. That will increase substantially as boomers begin to retire.

AMR Chart - Daily

The falling price of oil helped push American Airlines (AMR) and Continental Airlines to new highs. Both charts resemble an Internet chart from 1999 or maybe the flight path of the new 787 Dreamliners from Boeing. The Indian Cabinet announced on Friday that it had approved the purchase of $8.2 billion for 68 Boeing planes. Boeing had a good week also signing a deal with Cathay Pacific for $2.85 billion and Qantas for $15 billion.

Software was in the news as Oracle posted disappointing results and took a sharp dip at Friday's open. Revenues rose +19% but profits fell -2.1%. Adobe jumped +3.89 or +11% after posting stronger than expected results.

The potential economic bumps next week are the PPI and New Home Construction on Tuesday, GDP on Wednesday and CFNAI and Mass Layoffs on Thursday. Friday closes with Durable Goods, Consumer Sentiment and New Home Sales. We are expecting a drop in the PPI of something in the -0.4% range due to falling energy prices. New Residential Construction is also expected to fall slightly to 2.01 million units, down from 2.014 in October. The GDP revision on Wednesday is not expected to change at +4.3%. Consumer Sentiment on Friday should rise slightly to 89.0 from 88.7 due to the improving stock market, falling gas prices and the holiday season. New Home Sales could be the challenge for the week. They are expected to fall to 1.3 million annual units, down from 1.424 in October. This is a material drop and could put the pop back into the housing bubble conversation after weeks of talk about a less damaging slow deflation.

The game plan for next week is simple. Buy any opening dip on Monday and hold it the rest of the week. The week after the December triple witching expiration has been up 10 of the last 13 years with Wednesday and Thursday the strongest days of the week. The first three days of the following week are typically bullish but Friday the 30th has a skull and crossbones on my calendar. The last nine years has seen some serious losses on four of those years. 1996 -101, 1997 -8, 1998 -93, 1999, +44, 2000 -82, 2001 -115, 2002 +9, 2003 +29, 2004 -20. The more recent trend over the last three years has been neutral with an average gain of +6 points. While you can't count on any specific day repeating past performance you can expect long term trends to exert pressure on the present. For this reason I would look to either be flat or have really tight stops should any post Christmas/Chanukah bounce appear tired late in the week.

BTU Chart - 30 min

If you are looking for something to trade next week I would look at healthcare, specifically United Health (UNH). That sector typically outperforms during this period. I would also look at Whole Foods Markets (WFMI), which has a 2:1 split after the close on the 27th. This is a retail trader favorite and there is a strong potential for a pre-split rally. Valero would be another option after splitting 2:1 after the close last Thursday. The $110 high flyer is now affordable at $52 after the two day expiration related decline in oil prices. Peabody Energy (BTU) would also be a potential winner with a steep expiration decline and strong support at $80. I hesitate to recommend any other energy stocks due to the potential for profit taking into year end. If the selling this week was really related to options/futures expiration as I expect then we could see a new uptick begin on Monday. I bought energy on the close on Friday with that expectation. If you see futures rise on Monday then energy stocks would be back in play. Gas plays like Ultra Petroleum were crushed late in the week on the sell the news gas storage numbers and expiration pressures. With gas still hovering just under $14 a new high is not that far away. I would look at UPL as a way to capture a rebound in gas prices. The drillers are less susceptible to oil prices as their revenue is derived from day rates for drilling. Diamond Offshore gave up about -$3 as oil declined but managed to hold the high ground. Diamond (DO) and Nabors (NBR) would be my choices in that sector.

Streettracks Gold Trust Chart - 30 min

One last suggestion would be the gold ETF, GLD. GLD appears to have found support at $50 and nothing has changed in the global picture for gold. Sorry, no options but it would work in retirement accounts where options are not allowed. Optionable gold stocks with a strong trend include Freeport McMoran (FCX). You could also use the $XAU.x Gold/Silver Index with the shorter month strikes. Farther months tend to be expensive. Watch the spreads and use limit orders only.

This is going to be a short commentary this weekend and far less than the nearly 5000 words I penned last Sunday. Sometimes there is a lot to talk about, sometimes very little and there is no reason to add useless market trivia as filler. The trading next week is going to be the same. There is little to motivate the markets other than good old investor sentiment. Volume will decline as the week progresses but it should not inhibit any gains as retail traders leave early for the holidays and find themselves in front of their home PC trying to find a home for that holiday bonus. Plan on capturing the gains from that scenario but being out of those trades before year end.
 

New Plays

Most Recent Plays

New Long Plays

None today.
 

New Short Plays

Danaher - DHR - close: 55.79 change: -1.58 stop: 57.35

Company Description:
Danaher Corporation is a leading manufacturer of Professional Instrumentation, Industrial Technologies and Tools and Components. (source: company press release or website)

Why We Like It:
Ouch! This past Thursday night DHR reaffirmed its 2005 guidance and gave a positive 2006 forecast. Yet investors reacted by selling the stock with big volume more than twice the daily average. The Friday sell-off (-2.7%) broke down below its narrow rising channel and support at the $56 level. The move also produced a new MACD sell signal did some damage to the weekly technicals as well. Given the big volume numbers over the past two days we don't think the selling is done yet. We are suggesting shorts here with DHR under $56. However, there is a good possibility there will be an oversold bounce next week. The $57 level should act as resistance and a failed rally under $57 could be used as a new bearish entry point. Traders should weigh their need to be in the market (and short) against the possibility of a Santa Claus rally showing up. Our target for DHR is the $51.25-51.00 range.

Picked on December 18 at $55.79
Change since picked: + 0.00
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 1.5 million

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Waters Corp. - WAT - close: 38.60 chg: -0.37 stop: 40.01

Company Description:
Waters Corporation holds worldwide leading positions in three complementary analytical technologies: liquid chromatography, mass spectrometry, and thermal analysis. These market segments account for $4.5 - $5.0 billion of the overall $20+ billion analytical instrumentation market. (source: company press release or website)

Why We Like It:
WAT is actually lumped in the same sector as DHR - scientific and technical instruments. Yet WAT is showing a much more bearish pattern on its daily chart. The stock gapped down on December 5th after being downgraded. Since then shares have rebounded by the bounce is failing (again) under its four-month resistance trendline of lower highs (see chart). Wednesday's failed rally at the $40.00 level was the last test of this resistance. The P&F chart for WAT points to a $25.00 target. We think the stock could sink to the $35.00 level by its earnings report in January. We'll use a $35.25-35.00 target range.

Picked on December 18 at $38.60
Change since picked: + 0.00
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 901 thousand
 

Play Updates

Updates On Latest Picks

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Long Play Updates

ANSYS Inc. - ANSS - close: 42.33 change: +0.55 stop: 40.89

Is ANSS going to make it this time? The stock has been bouncing around in its $40.75-44.00 trading range for over a month now. Currently shares are bouncing off the bottom of this range and Friday's volume came in way above the average. We suggested on Thursday that aggressive traders might want to scalp a couple of points. Our strategy is based on catching a breakout over resistance at $44.00 with a trigger to go long the stock at $44.05. 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

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Anglogold - AU - close: 47.43 change: +0.76 stop: 43.95 *new*

Gold stocks continue to rebound even though the commodity has not begun to recover yet from last week's sell-off. The XAU gold & silver index added 1.25% on Friday and AU out performed its peers with a 1.6% gain. We remain hesitant about launching new longs in AU with the commodity showing no signs of a bounce yet from the recent profit taking. Our target is the $49.50-50.00 range. We are going to raise our stop loss to $43.95.

Picked on December 06 at $44.81
Change since picked: + 2.62
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 904 thousand

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Burlington Coat - BCF - close: 40.50 chg: -0.03 stop: 39.90

We have little to report on with BCF. The retailers seemed to stall on Friday after new concerns rose that the holiday sales season was just so-so. Shares of BCF are still consolidating above round-number support at the $40.00 level but the upward momentum has definitely disappeared. If there is a Santa Claus rally, which usually shows up in the last week of December, then maybe BCF can revive itself. As it stands now we're not suggesting new positions and more conservative traders may just want to exit early. Our year-end target is the $43.50 level.

Picked on October 24 at $38.90
Change since picked: + 1.60
Earnings Date 01/04/06 (unconfirmed)
Average Daily Volume: 165 thousand

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CenturyTel Inc. - CTL - close: 33.76 change: -0.13 stop: 32.39

CTL continued to consolidated lower on Friday but managed an intraday bounce from the $33.50 level and its 200-dma. This bounce from support looks like a new bullish entry point. However, the major averages still look vulnerable to more selling and we'd rather not initiate new positions with the market showing weakness. You, the reader, can decide to buy a bounce from $33.50 or look for a new move over $34.00 and initiate longs there. Our target is the $36.00 level. The P&F chart for CTL points to a $49 target.

Picked on December 12 at $33.55
Change since picked: + 0.21
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

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D.R.Horton - DHI - close: 37.81 chg: +0.27 stop: 34.75 *new*

Homebuilder KB Homes (KBH) reported earnings on Thursday night and blew away the estimates. The company also issued relatively positive comments about 2006. Yet this event failed to energize the homebuilding stocks on Friday. The group churned sideways waiting for options expiration to end. Then again maybe investors were waiting for Monday's housing starts and building permits data. DHI turned in a solid performance this week and we're surprised there hasn't been more profit taking. Overall the pattern looks bullish with the recent bull flag breakout. We are not suggesting new long positions at this time. Our target for DHI is the $39.75-40.00 range. We are raising the stop loss to $34.75.

Picked on November 21 at $35.85
Change since picked: + 1.96
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

---

Duke Energy - DUK - close: 27.28 change: -0.12 stop: 25.99

The utility stocks were the only green spot in the energy sector on Friday. Yet DUK failed to close in the green. News that an ice storm left almost 700,000 without power (from DUK) in the Carolina states may have undermined any buying interest in the stock. Elsewhere DUK and CIN filed a proposal to get approval for their planned merger in Ohio. Technically the action on Friday for DUK is bearish. The stock produced a failed rally under the 100-dma and this turned into a bearish engulfing candlestick pattern. Traders should prepare for some consolidation probably into the $27.00-26.50 range. We would not suggest new longs at this time. Our end of January target is the $27.95-28.00 range but we may have to adjust our target as DUK nears the six-month trendline of resistance (see chart below).

Picked on December 13 at $26.89
Change since picked: + 0.39
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 3.9 million

---

Forest Oil - FST - close: 46.32 change: -1.68 stop: 44.49

Oil stocks were hit hard with profit taking on Friday. A new forecast for warmer weather this winter sent crude oil prices down more than 3% making the commodity's recent bullish breakout look like a bull trap pattern. Shares of FST were hit equally hard down 3.5%. The selling stalled near the 100-dma around the $46 level. This looks like short-term support but we hesitate to buy the dip. Wait for a bounce from here or potentially the $45 level before considering new long positions. More conservative traders may actually want to exit early right here to avoid further losses. The weekly chart has produced a new bearish engulfing candlestick pattern, which is typically seen as a bearish reversal. 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: - 0.69
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Corning Inc. - GLW - close: 20.99 chg: -0.12 stop: 20.45

Heads up! GLW is looking more and more vulnerable to profit taking. Volume has been rising and its upward momentum has stalled. More conservative traders may just want to exit right here! We are not suggesting new longs. Our target is the $21.90-22.00 range.

Picked on November 13 at $20.11
Change since picked: + 0.88
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million

---

K-Swiss - KSWS - close: 33.83 chg: +0.48 stop: 31.99 *new*

KSWS produced some relative strength on Friday. The stock added 1.4% on above average volume to close at a new three-month high. This looks bullish but we wouldn't get our hopes up. The stock has consistently churned higher in a narrow range for weeks so the next move should be down toward the bottom of its rising channel. As long as you monitor your stops the play should work out well. We are raising our stop loss to $31.99. Our target is the $34.85-35.00 range.

Picked on November 29 at $32.09
Change since picked: + 1.74
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Levitt - LEV - close: 22.88 chg: -0.12 stop: 20.95

The technical picture on LEV is starting to deteriorate, especially on the daily chart. The stock is struggling to break through resistance at its 100-dma. Odds are growing that it will consolidate back toward the $22.00 level. We would not suggest new positions at this time. 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: + 0.61
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

---

Nautilus - NLS - close: 19.93 change: +0.10 stop: 17.89

NLS displayed some relative strength on Friday. After a bullish week we're surprised there wasn't more profit taking but then the market makers probably did their best to keep NLS close to the $20.00 strike price. Overall it does look like NLS has bottomed and its P&F chart points to a $24 target. Our biggest concern now would be the potential for tax loss selling between now and year's end. We would not suggest new positions here. Our target is the $21.50 level. We will not hold over the February earnings report.

Picked on December 11 at $18.81
Change since picked: + 1.12
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 598 thousand

---

VCA Antech - WOOF - close: 27.74 chg: +0.07 stop: 26.74

WOOF continues to churn sideways. The stock has certainly lost its upward momentum but neither is it seeing much selling pressure. We are not suggesting new long positions here. We will plan to exit ahead of the late January earnings report. Our target is the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.00
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

New River Pharma. - NRPH - close: 49.21 chg: +0.23 stop: 50.01

Nothing much has changed for NRPH. We do see mixed technical signals. The upward trend has been broken and its weekly chart shows a new MACD sell signal. Yet on the daily chart NRPH still has strong support at the 100-dma and its MACD is nearing a new buy signal. The P&F chart, which normally eliminates a lot of the noise, shows a sell signal pointing to a $39 target. Thus far we remain on the sidelines. Our trigger to short the stock is at $45.45. If triggered we'll target a drop to the $40.00 level. Currently the P&F chart points to a $39 target, which more closely coincides with the H&S pattern target.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/14/05 (confirmed)
Average Daily Volume: 86 thousand

---

NeuroMetrix - NURO - close: 31.68 chg: +0.57 stop: 34.01

NURO turned in a strong session on Friday adding 1.8% yet the rally couldn't push past short-term resistance at the $32.00 level and its 21-dma. This is an important test. A failed rally here and we could get another entry point to short it. The stock is certainly giving mixed signals. Short-term technicals have turned bullish again but weekly chart shows a sell signal. The P&F chart also shows a sell signal with a $20 target. Plus, the daily chart shows a broken bullish trend and a double-top pattern. NURO may have to retest broken support at the 50-dma as new resistance before it turns lower. Furthermore we now have to deal with the quarter-end phenomenon of window dressing and NURO is probably a good target given its YTD performance. We are not suggesting new shorts at the moment.

Picked on December 06 at $29.59
Change since picked: + 2.09
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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