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Daily Newsletter, Wednesday, 01/11/2006

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Table of Contents

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

Market Wrap

Storms Hit Again, Sweep Bears out to Sea

Katrina and Rita swirled to life again today. DuPont warned in part due to the effects of the two storms. Oil explorer giant BP alerted investors that the fourth-quarter's production had taken a greater hit than had the third, due to the storms' impact.

Those warnings were joined by one from Compuware Corp. (CPWR). Gusts buffeted the indices early in the day, but in the end, switched and blew the bears out to sea. Most sectors turned in positive performances. This occurred despite the lackluster advance/decline line performance, with the line's low level mimicking a low barometer reading of the type that signals that something ominous might be building far out at sea.

For now, only blue skies are visible. Over the last week, indices have climbed into one round-number resistance level after another, and today was the Wilshire 5000's turn.

Annotated Daily Chart of the Wilshire 5000:

The SPX also approached its own benchmark round-number level today, but couldn't quite press through that 1300 level. The futures contract did, however, near the close. The SPX's failure to push through 1300 might be offering another low barometer reading.

Despite those low barometer readings markets keep signaling in one form or another, this market remains one in which bulls have nothing more to do than to keep raising their stops. New entries sometimes prove more difficult to justify. New SPX bullish entries can be considered on tests of the 10-sma, but not if the SPX or other indices plunge. Any SPX plunge and close back below the 10-sma, especially if it should occur over the next couple of days, makes that breakout visible on the chart below look suspiciously like a trap for bulls.

Annotated Weekly Chart of the SPX:

If blue skies were the prediction today, it was Boeing (BA) that was winging through those blue skies. A top performer on the Dow, BA won a contract today from India for 68 planes. BA ended 2005 with a record number of sales, with some questioning when the manufacturer's sales might slow after such a record. Not yet, apparently.

Annotated Daily Chart of the Dow:

Some technical analysis techniques suggest next resistance on the Dow at 11,080-11,136, levels it's possible to reach over the next couple of days. This is based in part on the sometimes-seen tendency for consolidation to occur about halfway through a move and the FIB retracement levels projected from that consolidation. November and December's range-bound behavior could have been that type of consolidation. Longs should be raising stops, advice offered unnecessarily lately as the Dow climbs, but that doesn't mean that it's bad advice.

Bulls looking for new entries could watch for retests of and bounces from the 10-sma, although they should not consider an entry there if the Dow falls precipitously. A decline to 10,726-10,728 might be in store if a fall is precipitous. If entering long on a bounce from the 10-sma, guard profits carefully, as it will be the quality of the bounce that predicts whether the Dow will charge up toward a possible 11,300 Fib target. There are those low barometer readings to keep in mind.

Techs led the advance today, and Nasdaq bulls should follow that sound account-management advice, too, by continually cinching up stops.

Annotated Daily Chart of the Nasdaq:

The SOX certainly wasn't buffeted by those early ill winds from warning companies. Despite the presence of at least three gaps in the SOX's climb, typically a warning that the rally is exhausting itself, the SOX managed a more-than-two-point gap higher this morning, and it closed higher by 1.64 percent.

Annotated Daily Chart of the SOX:

Although of course not a component of the SOX, yesterday's report from Apple (AAPL) buoyed techs, and SOX component Broadcom (BRCM) received an upgrade, as did HPQ. Prudential upgraded HPQ to an overweight rating. Komag (KOMG), a manufacturer of thin-film disks, raised its outlook for revenue for the fourth quarter, and it leaped higher at the open, breaking above its August high. KOMG hasn't been hurt at all by a J.P. Morgan downgrade in December, climbing straight off the December low reached a few days later. Its climb is beginning to look a little overdone to the upside, however, and volume/price patterns today suggested that there could have been some selling into KOMG's rise, but there's not enough evidence to suggest a short play.

Although the SOX led indices higher today, other typical momentum plays didn't work as well if betting to the upside. Fast runners YHOO, GOOG and CME showed various possible signs of flagging strength: a gap lower, a doji, a failure to push above a recent high. If there's a storm somewhere out at sea, it may pass far away from shore, and these fast runners may run higher again, but their failure to participate as fully as some other stocks did prove intriguing.

The Russell 2000 also contributed to that low barometer reading that troubles some. Usually a leader, the RUT could not effectively build on this week's gains.

Annotated Weekly Chart of the Russell 2000:

The TRAN dropped today, with this typical market leader also offering its own version of a low barometer reading. After hitting its upside target, it's languished over the last couple of weeks. The drawback has not been deep enough to predict a plummet in this index or in others, but it should be watched.

Annotated Weekly Chart of the TRAN:

The day proved light on economic releases. The Mortgage Bankers Association released mortgage applications, showing those rising for the first time in five weeks. Countrywide Financial Corp. (CFC) announced that December mortgage funding rose 17 percent from the year-ago level, with the fourth quarter's loans up 40 percent from year-ago level. CFC and other major lenders headed higher.

Home Depot (HD), which had been sinking along with the DJUSHB, has been propelled higher this week by a positively viewed attempt to diversify its business away from the retail sector. Its addition to the Fresh Money Focus List and Bank of America's 30-Stock Model helped propel it further, and peer Lowe's (LOW) tagged along, too. Volume patterns on HD also suggest that there's some selling into the rally this week, but that overhead supply could be exhausted and HD could climb further, if so.

IIn other developments, Moody's downgraded Ford's credit ratings again, listing its outlook as "negative." The rating firm is said to be considering an upgrade of BBY's credit ratings. S&P revised its credit watch to GDT as "developing." While not good news, the news wasn't particularly surprising, and F gained 1.82 percent.

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With few economic releases, attention could focus on individual stock news and the crude inventories numbers. DuPont (DD) cited interruptions of production in Brazil, the Netherlands and the U.S. when it lowered its earnings estimate for the fourth quarter, specifically noting the impact of hurricanes Katrina and Rita. Some speculated that the fact that these were one-time events might limit the damage to DD. However, it closed lower by 3.31 percent. Sales of its crop protection chemical, performance coatings proved below expectations and its surfaces businesses did not perform as well as expected. The company trimmed its former $0.20-0.25 a share estimate to $0.10.

Compuware Corp. (CPWR) announced plans for major changes in the fourth quarter, after stating that third-quarter business did not meet expectations. Analysts had expected $0.11 a share for the third quarter, but CPWR now guides analysts to expect earnings of $0.09 a share. This software company said that demand had not been as strong as expected. CPWR dropped 13.06 percent. Interestingly, Mercury Interactive (MERQ), another software company, but this one based in Yehud, Israel, revised lower its estimate for revenue growth for the full year.

Genentech (DNA) met expectations on revenue and earnings, but Merrill Lynch downgraded the company based on lower-than-expected sales of Avastin. The company's stock dropped 4.41 percent.

Warning season has begun in Europe, too, with Europe's markets also reaching multi-year highs almost daily. This morning, PSA Peugeot Citroen offered its third warning since October, this time citing a greater-than-expected demand decline in Europe. German retailer Metro also warned, saying that 2005's earnings will be significantly below the year-ago level.

Crude inventories brought a stronger-than-anticipated drop in crude inventories, but stronger-than-expected builds in gasoline and distillate inventories. Analysts expected crude inventories to drop 555,000 barrels, but it instead dropped 2.9 million barrels according to the Department of Energy. Gasoline rose 4.52 million barrels, far more than the anticipated 1.73 million barrel climb, and distillates increased by 4.86 million barrels, also far more than its expected 2.13 million barrel increase. Despite the bigger-than-anticipated drop in crude inventories, those inventories remain above the upper end of the average range accumulated this time of year. The higher-than-expected builds in gasoline and distillates bring them into the upper end of the average range and the middle, respectively.

Crude prices had been dropping since Tuesday morning, dropping first to close a gap and then chopping sideways down most of Tuesday. The reaction to the crude inventories number dropped the CL contract through a rising trendline that had been building all of January, but then that contract bounced from the daily 10-sma. Currently, the contract for February delivery is up $0.15, to $64.09.

CNBC attributed the bounce to worries over the Iran situation. The OIX, Oil Index, and OSX, Oil Service Sector Index bounced at the inventories release. With big-caps such as BP, COP, and XOM comprising the OIX, a bounce in those sector indices served to help support the others.

BP bounced from a gap lower, however, with the company outlining further damage incurred as a result of the hurricanes that hit during the fourth quarter. The company's stock closed lower by 0.41 percent. The company now says it took a production hit of 160,000 barrels a day in the fourth quarter, a stronger hit than the 135,000-barrel-a-day hit taken in the third quarter, and its profit hit will be bigger, too. It's possible that the specter of lower production also put a floor under crude's decline.

JNJ dragged the healthcare sector lower after speculation that the company was attempting another counter-offer to BSX's bid for Guidant. Guidant's board supposedly met this afternoon to consider the two offers, but one source said that the company would not confirm the board meeting. JNJ closed lower by 0.95 percent.

Tomorrow's usual initial claims release might be crowded out of the limelight by November's trade balance, expected to narrow from the prior $68.9 billion deficit. Export and import prices will also be released. Natural gas inventories will be released at 10:30. At 2:00, December's treasury budget will be released. Earnings remain relatively light, but it might be warnings or raised guidance that could play a stronger part than the earnings.

Bulls should devote some time to planning profit-protection measures, and then to enjoying the offshore breezes, their plans safely made. A special warning should be devoted to the end-of-the week trading pattern, as several forces converge. Over the last year or so, the volatility that typically used to be seen on opex week now sometimes occurs the Thursday and Friday of the week before opex. That would be tomorrow and Friday. In addition, this precedes a three-day weekend, so there may be an even bigger push to adjust options positions, with a resultant move in the indices. It's possible that both bulls and bears could face some buffeting over the next few days. Such buffeting has been occurring in the Nikkei lately, with 200-300-point moves becoming more common, going either direction. Some charts compare the Nikkei with the SPX, and the correspondence has been remarkable, although there's not always a correspondence day to day. The Nikkei's action does, however, suggest that our markets might be due some similar buffeting.

Bears willing to stand on the beaches ahead of those hurricane winds have been swept out into the seas. If you're thinking bearish, you might consider waiting until there's a strong downdraft and then a choppy rise that fails.
 

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

Amer. Power Conv. - APCC - close: 23.36 change: +0.07 stop: 21.69

We still don't have anything new to report on for APCC. The stock is struggling to breakout over the 100-dma near $23.55. If APCC doesn't trade over $24 by the end of the week we might exit early. We remain bullish and see no changes from our weekend play description. We are suggesting long positions in the $23.00-24.00 range. Our end of January target is the $26.50-27.00 range. We do not want to hold over the early February earnings report.

Picked on January 08 at $23.57
Change since picked: - 0.21
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 1.5 million

---

ATI Tech. - ATYT - close: 17.63 change: +0.01 stop: 15.99

It was a lackluster session for ATYT on Wednesday. We don't see any changes from our previous updates on the stock. The stock appears to be consolidating sideways. We see no changes from our weekend play description. We want to suggest longs in the $17.00-18.00 range. Our six to eight week target is the $19.90-21.00 range. More conservative traders may want to think about using a tighter stop near $16.50.

Picked on January 08 at $17.71
Change since picked: - 0.08
Earnings Date 03/23/06 (unconfirmed)
Average Daily Volume: thousand

---

Builders FirstSource - BLDR - cls: 23.37 chg: +1.07 stop: 20.89*new*

BLDR almost reached our target this afternoon. The stock spiked higher this morning and after consolidating sideways for most of the session the rally surged again last in the day. Our target is the $23.50-24.00 range. We are raising the stop loss to $20.89. We are not suggesting new positions here.

Picked on January 03 at $21.75
Change since picked: + 1.62
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 205 thousand

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Bluelinx - BXC - close: 12.95 change: +0.48 stop: 11.45 *new*

The technical breakout continues in shares of BXC. The stock added 3.8% on top of yesterday's gains. We don't see any changes from our previous update but we will raise our stop loss to $11.45. Our target will be the $15.00-15.50 range by late February through early March. FYI - the P&F chart points to a $25 target.

Annotated chart:

Picked on January 10 at $12.47
Change since picked: + 0.48
Earnings Date 03/09/06 (unconfirmed)
Average Daily Volume: 142 thousand

---

Evergreen Solar - ESLR - close: 12.25 change: +0.00 stop: 10.99

Lack of profit taking after yesterday's big gain could be interpreted as bullish news. Traders were there to buy the early dip back to the $12.00 level although there wasn't enough momentum to push ESLR over the $12.50 level today. We see no changes from our play description from last night. We would suggest long positions in the $11.50-12.50 range but would prefer to initiate bullish positions on a pull back into the $11.50-12.00 region. More conservative traders may want to put their stop closer to $11.50. Since we only have until early February we're going to target a rally into the $13.90-14.00 range.

Picked on January 10 at $12.25
Change since picked: + 0.00
Earnings Date 02/03/06 (unconfirmed)
Average Daily Volume: 2.4 million

---

LifeCell Corp. - LIFC - close: 20.29 change: +0.24 stop: 19.24

Officially the play is now open but we would be careful here. LIFC spiked higher intraday and hit $20.86 before pulling back. That was enough to breakout over resistance at the 100-dma and hit our trigger to go long at $20.65. The failure to hold its gains makes us skeptical. We would wait for a new move over $20.75 or $20.86 before initiating new long positions. Our target is the $24.00-25.00 range but we don't want to hold over the January earnings report and that doesn't give us a lot of time.

Picked on January 11 at $20.65
Change since picked: - 0.36
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 598 thousand

---

Nexen Inc. - NXY - close: 52.00 change: +0.80 stop: 47.95

We did not have to wait very long before NXY hit our trigger to open the play. Shares continued to rally on Wednesday and hit an intraday high of $52.67. Our trigger to go long the stock was at $52.11, above resistance at the $52.00 level. Volume on today's gain was pretty strong. The P&F chart shows a new triple-top breakout buy signal with a $63 target. Our target is the $57.50-58.00 range by mid February.

Picked on January 11 at $52.11
Change since picked: - 0.11
Earnings Date 02/17/06 (unconfirmed)
Average Daily Volume: 424 thousand

---

VCA Antech - WOOF - close: 29.30 chg: -0.25 stop: 27.45

WOOF is seeing some profit taking. Conservative traders may want to give some serious thought to just exiting right here. Our target is the $29.90-30.00 range. We are not suggesting new positions.

Picked on November 09 at $26.74
Change since picked: + 2.53
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

GMX Resources - GMXR - close: 34.98 chg: -0.23 stop: 37.11 *new*

GMXR continues to be very volatile. The stock dipped to $33.20 near its rising 40-dma before rebounding back toward the $35 level. The candlestick created today looks like a "hammer" pattern and could be a one-day bullish reversal signal. Therefore we are not suggesting new positions. In an effort to reduce our risk we're going to lower our stop loss to $37.11, still above its simple 10-dma, which has been resistance for the past couple of weeks. Our recently adjusted target is the $31.50-31.00 range, near its 50-dma. We do not want to hold over the late January earnings report.

Picked on January 01 at $36.00
Change since picked: - 1.02
Earnings Date 01/29/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Landstar System - LSTR - close: 41.52 change: -0.29 stop: 42.01

We remain on the sidelines. Our trigger to short the stock is at $39.95. If triggered we'll target a decline into the $36.50-36.00 zone above its simple 200-dma.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 406 thousand

---

MedImmune - MEDI - close: 34.86 change: +0.02 stop: 35.41

We don't see any changes from our weekend play description. Our trigger to short the stock is at $33.45. If triggered we'll target a decline into the $30.50-30.00 range above its 200-dma. We do not want to hold over the early February earnings report.

Picked on January 0x at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 2.1 million

---

Mercury Computer - MRCY - close: 19.51 change: -0.23 stop: 20.51

There is not much change in MRCY. The stock is still consolidating sideways. A new relative low under $19.25 could be used as a new entry point for shorts. We are going to target a drop into the $17.70-17.50 range by its January earnings report. We do not want to hold over the report.

Picked on January 05 at $19.34
Change since picked: + 0.17
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 296 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Waters Corp. - WAT - close: 39.15 chg: +0.19 stop: 39.01

There are no surprises here. WAT did continue to climb higher on Wednesday. The stock broke out over the $39.00 level and then promptly flattened out. We have been stopped out at $39.01.

Picked on December 18 at $38.60
Change since picked: + 0.55
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 901 thousand
 

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

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