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Daily Newsletter, Wednesday, 12/28/2005

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Table of Contents

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

Market Wrap

Will It or Won't It?

Market watchers might have applied that question to many aspects of market behavior as they prepared for the trading day on Wednesday morning. Will the yield curve invert again? Will the much-watched but narrow-based Dow close this week and year above its 10,800.30 close last year? Will any early bounce be sold again? they might have asked themselves.

The early bounce was nearly guaranteed. Futures moved higher, buoyed by yet another fresh five-year closing high in the Nikkei 225 and a strong overnight performance on the DAX after Germany's consumer confidence number beat expectations. Before the cash market open, the yield curve flattened, an improvement from an inversion. Strong pre-market upside moves in companies such as Celgene (CELG), Covad Communications Group (DVW) and Linens 'n' Things (LIN) hinted that some investors were ready to buy. Crude bounced, predicting that energy-related stocks might perform well in early trading.

When a slightly better-than-expected showing on December's consumer confidence number resulted in only a brief further bounce and then a sell-off to new daily lows, market watchers had their answer to at least one of the questions. Yes, the early bounce would be sold again. The Dow, SPX and OEX chopped most the day, while the Nasdaq, SOX, RUT and TRAN did a more credible job of bouncing off the day's lows, producing possible short-term and perhaps untrustworthy reversal signals. Almost all indices produced some sort of possible reversal signal, however, starting with the SPX.

Annotated Daily Chart of the SPX:

The SPX presents mixed chart evidence. The day's candle was the second of a possible three-part reversal signal formation, suggesting a possible bounce attempt tomorrow, but the day produced a second close below the 30-sma. A 120-minute chart may provide some insight tomorrow.

Annotated 120-Minute Chart of the SPX:

Those looking for new bearish entries will hope for a bounce and then a rollover beneath the midline of that regression channel.

The Dow also produced a potential reversal signal, suggesting that an attempt could be made to bounce this index tomorrow. The failure at the 30-sma today suggests that bounces remain suspect, however, unless there's a break above the descending trendline off the late November high, with that trendline now at 10,928.

Annotated Daily Chart of the Dow:

If the Dow bounces past the 10- and 30-sma's, watch for next resistance at the descending trendline off the late November high. An upside break there suggests a test of 11,000, but for now choppy trading conditions with resistance at the 10- and 30-sma's appears most likely.

The Nasdaq produced a doji, a possible short-term reversal signal, but this index chops around within a possible right-shoulder formation for a head-and-shoulder. Trade with care this week while it decides on final direction. For now, selling bounces appears the best tactic, but bears should be wary of any zoom that begins to invalidate the formation, whether or not we give full credence to these formations any longer.

Annotated Daily Chart of the Nasdaq:

The SOX again resisted dropping below the last gap higher on the daily chart, a likely exhaustion gap. Today it sprang up from the bottom of that early December gap, suggesting that there could be an attempt tomorrow to follow through on today's gains. If so, watch for potential resistance at the 10-sma, signified either by a rollover at that average or by a rollover back below it after punching through it. A daily close above the 10-sma suggests a test of the top of the descending regression channel, at 500. The flag-like pullback off the December high looks bullish; the potential head-and-shoulder formation inside that flag is not.

Annotated Daily Chart of the SOX:

The economic calendar was light, with the crude inventories release delayed until tomorrow. The Mortgage Bankers Association released mortgage applications for the week ending December 23 at 7:00 EST, the earliest release of the day, with the headline of that release already telling the tale. Mortgage application activity slowed again for that week. The market composite index fell 6.8 percent on a seasonally adjusted basis that included a holiday adjustment. On an unadjusted basis, the composite, measuring mortgage loan application volume, fell 17.0 percent, but it was up 3.1 percent when compared to the same week a year earlier. The purchase, refinance, conventional and government indices all declined on a seasonally adjusted basis, some by double-digit percentages. Four-week moving averages for the market, purchase and refinance indices weakened. The interest rate for a 30-year fixed-rate mortgage also decreased, to 6.21 percent from the previous week's 6.22 percent, and points fell. The DJUSHB, the Dow Jones U.S. Home Construction Index was to close negative, near its low of the day.

U.S. Chain Stores Sales was next on the economic release schedule, with the early morning release revealing that consumers produced a late surge in holiday spending. Procrastination and a late Hanukkah might have been responsible for the late surge. Those sales grew 2.8 percent for the week ending December 24 and 3.9 percent above the previous year's level for that week. The International Council of Shopping Centers' chief economist predicted that sales growth stayed on track for an increase of 3-3.5 percent for December and the holiday season. Target (TGT) reported strong December sales. Like the Dow, SPX and OEX, the RLX was knocked back from its high, but managed a slightly positive day.

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The Conference Board's December U.S. Consumer Confidence report showed a rebound to pre-Katrina levels, with the headline number rising to 103.6, above the predicted 103.1 and November's 98.3. Among component indices rising were the present situation index, the expectations index, the "plans to buy a car" index, the major appliances index, and the "jobs plentiful" index. In combination with a decline in the "jobs hard-to-get" index, the jobs outlook proved encouraging. The "plans to buy a home" component dropped back to its recent low, however.

Part of the improvement in consumer confidence could be attributed to the decline in crude prices seen recently, some economists concluded. With the Iranian Oil Minister Kazem Vaziri Hamaneh claiming that OPEC should consider trimming production by a million barrels a day when it meets January 31, some might have felt that the benefit endowed by lowered crude prices was temporary. That impression was seconded by a steady climb in crude prices. Crude closed up $1.65 at $59.80, and has moved to $60.05 as this report is prepared.

To keep this report as succinct as possible, individual company developments will be covered briefly, with the suggestion that traders delve deeper into relevant news if trading a stock or sector likely to be impacted by the news. Late Tuesday, Celgene (CELG) made several announcements: that the FDA had approved Revlimid, its drug for the treatment of transfusion-dependent anemia; its stock would split 2 for 1 and its chief executive would retire in May. Today, Bank of America increased its price target for CELG. CELG was to close more than six percent higher. Covad Communications Group (DVW) announced an agreement with Verizon Communications (VZ) that would settle all pending litigation and also expand DVW's current deal with VZ. VZ was to lose 0.62 percent by the end of the day. In addition, DVW announced its status as the preferred provider of local access and network services for MCI's DSL business customers. DVW closed sharply higher.

Linens 'n' Things (LIN) said late Tuesday in a regulatory filing that it should be able to satisfy conditions needed for Apollo Capital Management, a private equity firm, to complete its acquisition of the company. Shareholders will vote on the acquisition at a meeting January 30. LIN closed higher by 10.91 percent. Other news included a J.P. Morgan upgrade of Albertson's (ABS) to a neutral rating, with the failed takeover talks last week perhaps inviting shareholders to act. The board reportedly still stands behind the CEO. ABS gained 1.34 percent. Boeing (BA) received a contract worth $1 billion from the U.S. Navy. BA rose 0.60 percent. Additional news was that Microsoft (MSFT) and Yahoo (YHOO) might be talking about some kind of deal.

In a light-volume environment, tomorrow will offer several economic releases that could move the markets. Initial claims for the week ending 12/24 will be released at 8:30. At 10:00, December's Chicago PMI and November's Existing Home Sales and Help-Wanted Index will be released. Last week's November New Home Sales proved disappointing and today's MBAA information did, too. The DJUSHB, the Dow Jones U.S. Home Construction Index, has been climbing in a choppy fashion off October's low, but appears to be stalling beneath a 50 percent retracement of the decline off the July high and today's decline brought it almost to the 200-ema. Caught between 964 resistance and the 200-sma support, the index needs an impetus to push it one direction or the other. Crude inventories, typically released on Wednesday, will put in an appearance at 10:30 tomorrow instead.

With only two trading days left in the week and the year, some tape-painting effects should be expected to keep the Dow above the last year's close. That, coupled with potential reversal signals on many indices, may suggest some attempts to bounce the indices tomorrow morning, barring some development that gaps them below key support levels at the open. Chart characteristics suggest that indices will have difficulty breaking out to new highs and that rollover potential persists, but don't ignore such breakout attempts if they should occur. Volume is low and likely to get lower, and it will be easy to push markets one direction or the other, whether such a move is sustainable.

Watch the 120-minute chart of the SPX posted above for guidance. Watch GE. Today it moved through its 200-sma and hit its converging 50-sma and 72-ema, dipping down into the big gap higher produced in November but bouncing to close back above its 200-sma. GE perhaps produced one of the strongest potential reversal signal and this big-cap stock could pull others with it if it sustains a bounce. Look, however, for resistance near $35.25 as a sign that GE and perhaps some indices, could be stalling. Watch for next resistance at the converging 10- and 30-sma's.

My greatest expectation is for a bounce attempt, either right from the open or after a retest of today's lows, but the emphasis remains on "attempt" until resistance is broken. Watch for rollovers if you want new bearish entries, but remember the likely tape-painting effect before you enter a bearish play. Be quick to take profits on those bearish plays, if entered, unless markets cascade lower.

Remember the Nasdaq's possible head and shoulder when you're considering bullish trades. You'll need to see a strong invalidation of that formation before risk of a rollover is averted. It's possible that many traders might try to settle positions tomorrow and take off for a four-day weekend instead of the official three-day one, so a directional bias is possible, but so is chop, with many charts suggesting that as the strongest possibility.

Of course, with crude inventories tomorrow and with the TRAN often being a fast-moving index, it may lead a directional move. Keep an eye on it. By the way, here's what's happening based on the TRAN chart I've been posting over the last weeks.

Annotated Weekly Chart of the TRAN:

 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None NTAP
  SMTS

New Long Plays

None today.
 

New Short Plays

Network Appliance - NTAP - cls: 27.70 chg: -0.14 stop: 29.05

Company Description:
Network Appliance is a world leader in unified storage solutions for today's data-intensive enterprise. Since its inception in 1992, Network Appliance has delivered technology, product, and partner firsts that simplify data management. (source: company press release or website)

Why We Like It:
The rally from NTAP's lows this past fall has died. The stock just couldn't muster up enough momentum to push through resistance near $30.00. Now shares are breaking down below multiple levels of support. The P&F chart points to a $17.00 target. The last three days have offered new entry points to short the stock under its simple 50-dma. We are going to suggest shorts here with NTAP under the $28 level. More conservative traders may want to wait for a decline under $27.50 or under Friday's low near 27.37. Our target is the $25.25-25.00 range since NTAP appears to have long-term support near the $25 region. We do expect a bounce from the $27 level near its 200-dma.

Picked on December 28 at $27.70
Change since picked: + 0.00
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume: 4.3 million

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Somanetics - SMTS - close: 33.05 change: -2.60 stop: 35.05

Company Description:
Somanetics develops and markets the INVOS Cerebral Oximeter, which, since 1996, has occupied a unique position in U.S. hospitals as the only commercially available monitoring system that noninvasively and continuously monitors changes in a patient's regional brain blood oxygen saturation. Use of the INVOS Cerebral Oximeter helps medical professionals, such as surgeons, anesthesiologists, perfusionists and the critical care team, identify regional brain blood oxygen imbalances and take corrective action. Such action can prevent or reduce neurological injuries related to adverse events during surgery or in the critical care unit and reduce the associated cost of care. The device is used in situations where there is a high risk of brain oxygen imbalances, such as adult and pediatric cardiac surgeries, other major surgeries involving elderly patients and some intensive care unit applications. Somanetics also markets the CorRestore System, a cardiac implant used in cardiac repair and reconstruction, including an operation called Surgical Ventricular Restoration, or SVR, a surgical treatment for patients with certain types of severe congestive heart failure. (source: company press release or website)

Why We Like It:
SMTS looks like a bearish candidate. The stock's rally has stalled near the $37.00 level for the past six weeks. The late November sell-off rebounded from its 50-dma and the $30 level only to stall under $37 again. Today the stock lost more than 7% after news surfaced that it could be facing new competition for its device that measures brain oxygen levels. Today's decline put it under the 50-dma and on big volume! Today's move also helps the technicals on both its daily and weekly charts turn more bearish. The daily chart has a new MACD sell signal. We want to see confirmation that the stock's direction has truly turned bearish. Therefore we're suggesting a trigger to short SMTS at $32.45. If triggered we'll target a decline into the $27.50-27.00 range. The biggest challenge and risk here may be the time frame. We do not want to hold over the January 11th (unconfirmed) earnings report. We may have to consider an early exit near the 100-dma (currently near 28.50).

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/11/06 (unconfirmed)
Average Daily Volume: 158 thousand

Play Updates

Updates On Latest Picks

Long Play Updates

ANSYS Inc. - ANSS - close: 43.95 change: -0.26 stop: 40.89

During today's light-volume post-holiday trading session shares of ANSS produced some volatility and on above average volume. The stock did indeed turn lower following Tuesday's bearish engulfing candlestick pattern. Fortunately, there were some bulls ready to buy the dip near $43.00 (really 42.89). This could be used as a new bullish entry point. The bounce back to the $44 region is encouraging but we may not be out of the woods just yet. We would wait for a move over $44.50 (today's high) before considering new bullish positions. More conservative traders may want to put their stop loss under today's low near $42.89. Our target is the $49.00-50.00 range by the end of January. We do not want to hold over the early February earnings report.

Picked on December 22 at $44.05
Change since picked: - 0.10
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 153 thousand

---

Anglogold - AU - close: 48.80 change: +1.21 stop: 44.95

Gold posted another gain today and gold stocks followed. The XAU index added 2.4%. Shares of AU gained 2.5% and are nearing our target in the $49.50-50.00 range. More conservative traders may want to exit right here for a gain.

Picked on December 06 at $44.81
Change since picked: + 3.99
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 904 thousand

---

BMC Software - BMC - close: 21.08 change: -0.03 stop: 20.74

We have a relatively tight stop on our BMC play so it was a bit alarming to see shares dip back under broken resistance at the $21.00 level. Bulls bought the dip near $20.80 and the stock rebounded back above resistance at the $21 level again. This looks like a new bullish entry point but with the markets looking a bit unstable traders may want to wait for a move over $21.20 or $21.25 before considering new longs here. Our target now is the $21.85-22.00 range.

Picked on December 27 at $21.11
Change since picked: - 0.03
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 1.5 million

---

CenturyTel - CTL - close: 33.32 change: -0.01 stop: 32.75

We do not see any change from yesterday's update. CTL continues to oscillate sideways near the $33.50 level. The failed rally under the 100-dma today looks bearish so we're going to raise our stop loss to $32.75 just under the simple 50-dma. We are not suggesting new bullish positions here.

Picked on December 12 at $33.55
Change since picked: - 0.23
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

---

D.R.Horton - DHI - close: 36.15 chg: -0.11 stop: 35.75 *new*

We are turning defensive on DHI. The stock is still holding above support near the $36.00 level but shares look poised to breakdown below its two-month trendline of higher lows (support). More conservative traders may want to exit early. We're going to raise our stop loss to $35.75. There is a risk that DHI will dip to the 200-dma and bounce but we can always consider re-entering again later.

Picked on November 21 at $35.85
Change since picked: + 0.30
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

---

Duke Energy - DUK - close: 27.60 change: -0.09 stop: 26.89

We do not see any change from yesterday's update on DUK. Our target is the $27.95-28.00 range. We are not suggesting new positions here.

Picked on December 13 at $26.89
Change since picked: + 0.71
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 3.9 million

---

JDS Uniphase - JDSU - close: 2.41 change: -0.08 stop 2.39

There is no change from our weekend update on JDSU. We remain on the sidelines. Our trigger to go long/buy the stock is at $2.65. If triggered we'll target a rally to $2.98. We would qualify this as an aggressive play. If JDSU closes under the simple 50-dma we'll remove the stock as a bullish candidate.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 50.0 million

---

Levitt - LEV - close: 23.51 chg: +0.59 stop: 21.95

LEV continues to show relative strength. The stock added more than 2.5% today and confirmed yesterday's bullish breakout over the 100-dma. The stock is now challenging its three-month highs near 23.69. Our target is the $24.90-25.00 range.

Picked on December 01 at $22.27
Change since picked: + 1.24
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

---

LifeCell Corp. - LIFC - close: 19.21 change: -0.35 stop: 19.24

We do not see any change from our weekend update on LIFC. Currently we are on the sidelines. Our trigger to go long the stock is at $20.65. If triggered we'll target a rally into the $24-25 range.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 598 thousand

---

Norfolk So. Corp. - NSC - close: 44.95 chg: +0.14 stop: 42.34

The transportation sector bounced higher today despite a significant rise in crude oil prices. Technically we remain bullish on NSC but if you remember Jim's wrap from a few days ago we don't have a bullish bias for transports in January. A bounce from the $44.00 level would look like a new bullish entry point but do so cautiously and watch your stops! The stock remains a candidate to benefit from any end-of-quarter window dressing. Our end of January target is the $48.50-49.00 range. The Point & Figure chart for NSC currently points to a $64 target. We do not want to hold over the late January earnings report.

Picked on December 22 at $44.35
Change since picked: + 0.60
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 2.2 million

---

Outback Steakhouse - OSI - close: 41.49 chg: +0.49 stop: 40.49

OSI bounced back above its exponential 200-dma today. We would wait for a move over $41.70 before considering new bullish positions. More conservative traders may want to wait for a move over the 200-dma before considering new long positions.

Picked on December 23 at $41.55
Change since picked: - 0.06
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 789 thousand

---

VCA Antech - WOOF - close: 28.13 chg: +0.28 stop: 26.74

WOOF is showing some strength today and its technical picture is certainly improving. A move over resistance near $28.50 would be a new all-time high. 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: + 1.39
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand

Short Play Updates

Danaher - DHR - close: 55.46 change: +0.18 stop: 57.35

We do not see any change from our previous update on DHR. The stock is still trading inside its short-term range between $55 and $56. More conservative traders may want to wait for DHR to trade under short-term support near $55.00 before considering new short positions. Our target for DHR is the $51.25-51.00 range.

Picked on December 18 at $55.79
Change since picked: - 0.31
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 1.5 million

---

NeuroMetrix - NURO - close: 27.16 chg: +0.25 stop: 31.05

NURO produced a bit of an oversold bounce today. We don't see any change from our weekend update on NURO. Our target is $25.25. We are not suggesting new plays at this time.

Picked on December 06 at $29.59
Change since picked: - 2.43
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand

---

Waters Corp. - WAT - close: 38.23 chg: +0.33 stop: 39.25

WAT also bounced today but the stock remains under its multi-month trendline of resistance. More conservative traders may want to wait for a new decline under the December 20th low near $37.55 before initiating positions. Our target is the $35.25-35.00 range. We do not want to hold over the late January earnings report.

Picked on December 18 at $38.60
Change since picked: - 0.37
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 901 thousand

Closed Long Plays

None
 

Closed Short Plays

None
 

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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