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Daily Newsletter, Wednesday, 01/04/2006

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Table of Contents

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

Market Wrap

Out of Breath, Job Done, Santa Flies Home

On the last day of the official Santa Claus rally period, Santa appeared slightly out of breath. He wrapped up pretty packages, but left off the labels indicating whether they were for bulls or bears. He flew home leaving some questioning where indices might go next.

After a volatile session Tuesday sent some indices into their biggest one-day gains in months, this second day of trading in the new year and last day of the typical Santa Claus rally was primed to produce a choppy consolidation session. The choppy action was dutifully delivered.

Annotated Daily Chart of the SPX:


Annotated Daily Chart of the Dow:


Annotated Daily Chart of the Nasdaq:


Annotated Daily Chart of the SOX:


Santa tied all his packages with the same ribbons and bows. Indices moved up to key resistance and MACD hooked up, but the indices shown here did not cleanly break through that resistance nor did MACD's produce a bullish cross. Similarly, MACD on the Russell 2000's daily chart hooked up, but did not produce a daily cross. The Russell 2000 broke above a descending trendline off the December high, but did not close above a flag that began forming in late November.

There are no labels on those similarly wrapped packages, so that market participants are going to have difficulty deciding whether Santa intended those packages for the bulls or the bears. This proves particularly troubling given the import of Friday's jobs report ahead of January's FOMC meeting. Charts usually give some idea of next most likely direction, but these give few clues.

Action across various sectors contributes to the confusion. The financials, as represented by the BIX and BKX, produced doji at the top of climbs, essentially capping gains today. Homebuilders and other stocks in their food chain couldn't help Santa wrap those presents in cheerier papers, either.

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The Mortgage Bankers Association released mortgage applications for the week ending at 7:00 EST. Once again this week, the composite measuring mortgage loan application volume fell, this time by 1.5 percent on a seasonally adjusted basis. On an unadjusted basis, volume dropped 20.8 percent from the previous week's volume and 9.9 percent from the year-ago level. The purchase, refinance, conventional and government indices all dropped. Four-week moving averages fell 4.2 percent in the seasonally adjusted market index, 3.3 percent in the purchase index and 5.9 percent in the refinance index. Refinances did increase as a percent of total applications, to 42.7 percent from the previous 40.2 percent.

The average contract interest rate for a 30-year fixed-rate mortgage fell to 6.15 percent from its previous 6.21 percent, but points increased. The volume of adjustable-rate mortgage (ARM) applications fell to 28.8 percent of all applications, down from the previous week's 32.5 percent. None of that was good news for homebuilders, and the DJUSHB, the Dow Jones U.S. Homebuilders Index, dropped 0.75 percent.

Another economic release may not have been a cheerful as it appeared on the surface. At 10:00, November's factory orders followed the mortgage information. The forecast was for a gain of 2.4-2.6 percent, depending on the source, and the actual number came right in line with expectations, higher by 2.5 percent. Inventories rose 0.2 percent, with the inventory-to-sales ratio remaining steady at 1.18. Motor vehicle orders dropped 7.8 percent. Another component, transportation orders, rose 15.8 percent, driven higher by new orders for airplanes. Boeing (BA) garnered 148 new orders in November, up significantly from October's 36 and contributing to a record 806 aircraft orders for the company through December 12.

However, Bloomberg posited that if orders for transportation equipment had been backed out of the factory orders number, that number would have been flat. Without aircraft orders, orders for capital goods fell 2.1 percent. Unfilled orders rose three percent to a record $621.4 billion, and preliminary data from early December indicated a possible leveling off of manufacturing growth.

The TRAN had risen into the 10:00 release, and was waiting just below a descending trendline off its December 27 high. With Frontier Airlines (FRNT), Jetblue Airways (JBLU), Pinnacle Airlines (PNCL) and Skywest Inc. (SKYW) among its components, a further climb was fueled by gains in airlines. Many non-airline components gained more than 1.5 percent in early trading, some more than two percent, with some of the trucking companies perhaps benefiting from an early pullback in crude prices. After the factory orders number was released, the TRAN broke above a descending trendline off its December 27 high, but had pulled back below that trendline by the close, coiling just beneath it.

The usual crude inventories release was delayed for a day due to Monday's holiday, but crude slipped lower before cash markets opened due to developments overseas relating to natural gas. European gas supplies had been disrupted by a dispute that arose Sunday between Russia and the Ukraine, with Russia stopping most of its shipments to the Ukraine. Since Europe receives about a fourth of its supplies through Ukrainian pipelines, that hit Europe's supply, too. Before the market opened, Russia's Gazprom and the Ukraine reached a five-year agreement in which it will pay more than previously for the gas it receives from Gazprom.

Crude costs weren't to stay down, however, and crude's daily chart shows the battle going on between crude bulls and bears.

Annotated Daily Chart for Crude for February Delivery:


While Santa was working his last day before winging off on vacation, analysts busied themselves unveiling upgrades and downgrades. Bear Stearns upgraded Google Inc. (GOOG) to an outperform rating, up from its previous peer perform. The analyst raising the rating coined a new term, the "Google ecosystem," when praising the company's increasingly interactive business community, but he also referenced the company's long-term fundamentals when upgrading the company and raising its price target to $550 from its previous $360 target. This analyst could be termed conservative, it seems, when compared to the Piper Jaffray analyst who upped the target to $600 yesterday. In addition, two newspapers this week, the Los Angeles Times on Sunday and the New York Post today, reported that Google might sell an inexpensive computer through Wal-Mart with this computer reportedly not using the Microsoft operating system. GOOG was to gain 2.27 percent, closing up 9.90 points at $445.13.

Banc of America Securities upgraded Exxon Mobil (XOM) to a buy rating from its former neutral rating, but the firm downgraded Citigroup (C) and General Motors (GM). Citigroup's 1.84 percent drop was to contribute to the weakness in financials. Office Depot (ODP) also collected a downgrade, this one from Goldman Sachs. The firm cited valuation concerns when downgrading ODP to an inline rating from its former outperform one. ODP peer Lowe's (LOW) collected its own downgrade from J.P. Morgan, with that firm citing a slowdown in home sales. ODP dropped 1.90 percent and LOW, 1.23 percent.

Pharmaceuticals and biotechs grabbed the spotlight. Pfizer (PFE), Schering-Plough (SGP) and Merck & Co. (MRK) presented at a Morgan Stanley conference today. All three headed higher in early trading, with PFE closing higher by 3.23 percent; SGP, 0.23 percent; and MRK, 1.16 percent. Biotech Boston Scientific (BSX) gained 3.47 percent after speculation that Guidant's (GDT) board may favor BSX's bid over JNJ's when the board meets next week.

December auto sales were released, with stocks of auto makers displaying some volatility before and after their release. Sales figures were expected to be down and they were. DaimlerChrysler was one of the first to release figures. Its total sales dropped 5 percent, and U.S. sales of Chrysler and Mercedes-Benz vehicles dropped 2 percent in December, with a promotion of free gas not helping sales. Total sales had been expected to drop 5.3 percent. Sales for 2005 rose 5 percent. DCX was to close lower by 0.44 percent.

Ford and General Motors released their results later during the day. Ford's sales dropped 9 percent, with some sources having expected a deeper drop of 10.5 percent, and with U.S. sales of cars falling 5.8 percent and trucks, 10.2 percent. For 2005, Ford's U.S. sales dropped 4.9 percent. Ford's stock closed higher by 2.29 percent.

GM's December U.S. sales dropped 10.3 percent when compared to the year-ago level, with 2005's U.S. sales dropping 4 percent. GM's results were deemed slightly worse than expected, while at least one source deemed DCX's and F's slightly better than expected. GM closed higher by 2.69 percent. All three major U.S. car manufacturers' stocks rose into the sales figures, dropped afterwards and then rose again. F dropped heavily in the last minutes of trading, however.

Tomorrow will include several economic releases, with initial claims at 8:30, December's ISM services at 10:00 and crude inventories at 10:30. Earnings remain light, but attention tomorrow will probably be on the crude inventories and resultant action in crude and on Friday's jobs numbers.

It's as easy to imagine rollovers on all these indices as it is to imagine breakouts, and that's a problem. Many indices attempted breakouts today, with more and less success on various indices. None of the breakouts proved particularly convincing, and playing such breakouts can be an iffy matter over the last year. It's far better to have already been long from those tests of the 50-sma's and 72-ema's and to be making decisions about protecting profits than to be looking for new bullish entries, but do make those decisions about protecting bullish profits.

For guidance, keep a watch on the SPX. If it should break convincingly above today's high, watch for next resistance at about 1284. If long, continue to tighten stops and plan your tactic for dealing with the current retest of December's high and then of the 1284 level, if that should be approached. If planning new bearish trades, make sure that you're seeing a rollover at the resistance levels depicted above, and watch for potential support at the midlines of the regression channels shown above, many of those midlines now roughly congruent with converging 10- and 30-sma's. If prices should plummet through those levels, watch 50-sma's for next support.
 

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

Builders FirstSource - BLDR - close: 21.93 chg: +0.01 stop: 20.25

BLDR tried to rally higher today but its strength failed early in the session near $22.60. The weakness was probably due to the downgrade to LOW from J.P.Morgan. This looks like a short-term top so it may be wise to look for a dip probably in the $21.00-21.50 region. A bounce from there could be used as a new bullish entry point. We do not see any changes from our weekend play description. Our target is the $23.50-24.00 range. We do not want to hold over the earnings report even if we think it will be positive.

Picked on January 03 at $21.75
Change since picked: + 0.18
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 205 thousand

---

Duke Energy - DUK - close: 27.81 change: -0.03 stop: 26.89

DUK came within five cents of our target today. The intraday rebound during Wednesday's session suggest the stock might make a run at the 200-dma near $28 tomorrow. Our target is the $27.95-28.00 range.

Picked on December 13 at $26.89
Change since picked: + 0.92
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 3.9 million

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LifeCell Corp. - LIFC - close: 18.95 change: -0.30 stop: 19.24

We do not see any change from our weekend update on LIFC. Our trigger to go long the stock is at $20.65. If triggered we'll target a rally into the $24-25 range. The P&F chart is still bullish with a $29 target. We do not want to hold over the late January earnings report. FYI if LIFC doesn't trade over $19.40 in the next day or two we're dropping it 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: 598 thousand

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Norfolk So. Corp. - NSC - close: 43.55 chg: +0.10 stop: 42.49

We remain on yellow alert here with NSC. Traders should have their stops in place and have an eye on the exit door. We see no change from yesterday's update. We are not suggesting new long positions here. Our 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: - 0.80
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 2.2 million

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Outback Steakhouse - OSI - close: 41.99 chg: +0.21 stop: 40.49

OSI is still struggling to breakout over its 200-dma near $42.00. We see no change from our previous update. More conservative traders may want to wait for a move over the 200-dma before considering new long positions. Our target is the $44.00-44.50 range.

Picked on December 23 at $41.55
Change since picked: + 0.44
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 789 thousand

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VCA Antech - WOOF - close: 28.92 chg: +0.64 stop: 27.45

WOOF is showing some relative strength today. The stock added 2.2% on above average volume. Today's gain puts the stock above its multi-week trading range and at a new all-time high. Its MACD has produced a new buy signal. 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: + 2.18
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

GMX Resources - GMXR - close: 37.88 chg: +0.44 stop: 38.51

Energy stocks continued to rally today and GMXR along with them. The stock rallied twice but failed both times near $38.40. While this is good news for us we remain in danger of being stopped out. Reaction to tomorrow's oil inventory report will probably determine direction. The biggest risk to bears in GMXR is a short squeeze. The latest data put short interest at 12.8% of its 9.95 million shares outstanding. While a failed rally under $38 could be used as a bullish entry point we are not going to suggest new positions here. We are going to keep the play open for now since there is no way to know if Tuesday was a one-day fluke rally in the energy industries. More conservative traders may want to wait for a new decline under $35.00 before initiating positions. Our target will be the $30.50-30.00 range. We do not want to hold over the late January earnings report.

Picked on January 01 at $36.00
Change since picked: + 1.88
Earnings Date 01/29/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Network Appliance - NTAP - cls: 28.06 chg: +0.15 stop: 28.55

Technology stocks were strong today and the NWX networking index added 1.8%. Shares of NTAP under performed its peers with a 0.5% gain and a failed rally near the 50-dma. A drop back under $27.50 might be considered a new bearish entry point but we would be very careful about opening new short positions at this time. Our target is the $25.25-25.00 range since NTAP appears to have long-term support near the $25 region.

Picked on December 28 at $27.70
Change since picked: + 0.36
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume: 4.3 million

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NeuroMetrix - NURO - close: 30.10 chg: +2.10 stop: 31.05

An enthusiastic buy rating from an analyst firm this morning sent shares of NURO soaring higher. The stock gapped open at $29.10 and rallied to $30.65 under its 100-dma. Volume came in well above the average. More conservative traders may want to just exit right here and cut their losses. We're going to hold on to the stock to see if shares fill the gap from this morning. We are not suggesting new positions.

Picked on December 06 at $29.59
Change since picked: + 0.51
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand

---

Somanetics - SMTS - close: 29.93 change: +0.73 stop: 33.05

SMTS almost made it. The low today was $27.58. Our target is $27.50-27.00. More conservative traders may want to exit right here. The oversold bounce may not be over. We are not suggesting new positions at this time.

Picked on December 29 at $32.45
Change since picked: - 2.52
Earnings Date 01/11/06 (unconfirmed)
Average Daily Volume: 158 thousand

---

Waters Corp. - WAT - close: 37.83 chg: -0.27 stop: 39.25

We do not see any change from our previous update on WAT. Our target is the $35.25-35.00 range. WAT's P&F chart points to a $25 target. We do not want to hold over the late January earnings report.

Picked on December 18 at $38.60
Change since picked: - 0.77
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 901 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Starbucks - SBUX - close: 31.67 change: +0.80 stop: 31.01

There is no surprise here. Yesterday we stated that SBUX would likely stop us out today. Volume came in above the average on today's 2.5% gain. We were stopped out at $31.01.

Picked on January 03 at $29.90
Change since picked: + 1.77
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 5.6 million
 

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

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