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Daily Newsletter, Wednesday, 02/22/2006

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Table of Contents

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

Market Wrap

Pipeline Worries

Pipeline worries captured attention as the market day dawned. CPI was due at 7:30 EST, and economists worried that inflation pressures might be working their way through the economic pipeline. A hostage-taking incident and previous attacks by militants in Nigeria had forced Shell to stop the flow of about 455,000 barrels a day through their pipelines. In Ecuador, protestors took Sardinas Station, and the country's private OCP pipeline suspended operations, demanding that the government provide security. At least temporarily, the decision stopped the flow of about 130,000 barrels a day.

Although the core CPI increased 0.2 percent, as was expected, the headline number jumped even higher than the anticipated 0.5 percent climb: to a 0.7 percent increase. Energy costs leaped higher by 5 percent, with electricity costs 5.5 percent higher, a record climb. In the last 12 months, the headline number has climbed 4 percent while core CPI increased 2.1 percent.

Commentators couldn't decide how to interpret that data, with some headlines touting the "benign" or "tame" inflation data and others emphasizing "surging" energy costs and inflation "anxiety" and "worries." Despite the opinion by some that FOMC inflation hawks might push for more rate hikes than had been previously hoped and those crude pipeline worries, equities bounced and crude dropped ahead of tomorrow's delayed release of crude inventories numbers.

The strong day sent indices up to test rising wedge or other resistance. For the Wilshire 5000, today's test was a retest of January's record high.

Annotated Weekly Chart of the Wilshire 5000:

The SPX tested the rising trendline resistance on its rising wedge, attempting a breakout. A glance at the weekly chart shows that it didn't quite complete that breakout.

Annotated Weekly Chart of the SPX:

The Dow has been trading in a broadening formation within its own rising wedge. Last week, I mentioned that in a traditional broadening formation, prices would not touch the top trendline of the broadening formation for a third time, but that the Dow seemed to be impelled toward 11,117-11,156. That won't-touch-the-top-again theory didn't appear as if it would hold, and it didn't. I mentioned that as long as the TRAN was strong, the SPX, OEX and Dow were unlikely to dip or dip far. Today, the Dow reached a high of 11,159.18, a few points above the possible target mentioned last week. By the end of the day, however, the Dow had closed back at the broadening formation's resistance.

Annotated Weekly Chart of the Dow:

While other indices were at least piercing resistance lines, even if they couldn't close above them, the Nasdaq bounced up toward the resistance of its triangle formation, but neither pierced it nor close above it.

Annotated Daily Chart of the Nasdaq:

Some credited the SOX's bounce from its 50-sma with the strong day seen on other indices.

Annotated Daily Chart of the SOX:

In addition to bouncing from the 50-sma, some may not have noticed that the SOX also bounced from the former resistance line of an even longer-term rising regression channel, in place since September 2004. The SOX broke out of this channel to the upside in December, and the current choppy zone is forming right on top of that channel. While bears don't want to see the SOX move back inside the channel that's shown on the daily chart just shown, bulls don't want to see the SOX close a week back inside that longer-term rising channel on the weekly chart, with the top of that channel now at about 517.75.

Today, the Mortgage Bankers Association released mortgage applications for the week ending February 17 at 7:00 EST. For the first time in four weeks, mortgage activity increased, with the seasonally adjusted purchase mortgage index rising 4.3 percent from the previous week's number, with that previous number being the lowest seen in more than two years. Rates on 30-year fixed-rate mortgages dipped, averaging 6.22 percent. After that data and ahead of Toll's earnings report tomorrow, the homebuilding group and mortgage-related financial stocks tended to perform well. The DJUSHB, the Dow Jones Home Construction Index, added 3.96 percent today.

Redbook U.S. Chain Store data for the week ending February 18 was also released. That data showed sales flat for the month through that February 18 date. According to one source, Redbook anticipates that sales will rise only 0.2 percent for all of February. Gap, the Limited and several other retailers report tomorrow, and much attention may focus on their sales figures. Ahead of those earnings report, the RLX, the S&P Retail Index, gained 0.48 percent.

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While market participants ignored an annual CPI figure approaching or slightly exceeding the FOMC's preferred level, crude traders also ignored geopolitical developments to some degree. Crude prices dropped. Transports climbed, with the TRAN driving up into and beyond a test of last week's 4446.96 high, propelled higher with the help of the airlines. The TRAN's high was 4456.44, with the close at 4449.17. The XAL, the airline index continued the bounce off the Tuesday morning low, gaining 2.28 percent today.

While the transports climbed, some crude-related stocks and indices such as the OIX fell, capping gains on some indices. XOM dropped in early trading, with OIN's Market Monitor commentator Jeff Bailey noting that XOM is now the S&P 100's number one company in market capitalization.

Intel, a component of many indices, also capped gains. ThinkEquity downgraded Intel (INTC) to a sell rating and cut the company's price target to $16 from its previous target of $26. INTC closed lower by $0.47, but bounced $0.07 in after-hours trading. Sprint Nextel (S) and Dell (DELL) also headed lower during early trading, with S investors reacting negatively the company's earnings miss and Dell investors cautious after the company delayed its planned April analyst meeting until September. S closed lower by $1.13, but DELL had dropped only $0.06 by the day's end, climbing well off its $29.37 low of the day. In addition, in news related to RIMM, today a federal judge denied the government's request for a separate hearing that would explore how an injunction against Blackberry service would impact the government. RIMM closed lower by 1.01 points and was last down another nickel in after-hours trading.

In other news, Federal Reserve Vice Chairman Roger Ferguson tendered his resignation, effective April 28, with reports further indicating that he will not attend the March FOMC meeting. Some speculate that he may be considering another position, perhaps at a university.

Tomorrow's economic releases include initial claims at 8:30, January's Help-Wanted Index at 10:30 and natural gas inventories at 10:30. Crude inventories will be released tomorrow, too, delayed a day because of Monday's holiday. Earnings reports include those from BEA Systems (BEAS); retailers Gap Inc. (GPS), Kohl's (KSS), Limited Brands (LTD) and Nordstrom (JWN); some construction industry names such as Hanson (HAN) and Lafarge (LR); homebuilder Toll Brothers (TOL) and a smattering of companies from other groups.

Some who have been reading my Wednesday Wraps have probably tagged my continued insistence that indices were in choppy formations might have felt frustrated by that insistence. Some may have tagged those statement indecision or a waffling, but they were always clear statements, derived from long study of charts, that nothing on the charts yet indicated future direction and that care was needed when entering positions. I've advocated smaller positions than normal during this choppy period for those who felt they had to trade, and a glance at the charts in this Wrap shows that the behavior has been choppy and has not yet proven future direction.

I continue to advocate smaller positions than normal until markets prove themselves. They need a breakout, either direction. There will be a breakout at some point, and your job as traders is to preserve a trading account so that you can benefit when it occurs. I've long been suggesting that the SOX was showing behavior typical of a topping-out process, and it did eventually break down out of its rising regression channel, but it still maintains the support above a former and longer-term rising regression channel.

We will soon, perhaps as soon as this week, get a SOX retest of the bottom of the just-broken-through rising regression channel, to see if it now holds as resistance. Perhaps today's climb up to the 30-sma was enough of a retest, but I'm not convinced that's true. I think there are likely to be further tests of resistance on the SOX before SOX bulls give up, if they're going to do so. The 50-sma's support held in late 2005 and it has so far held this week, and so there's as yet no strong reason for them to give up.

In addition, the TRAN still tests the upper resistance of that long-term envelope resistance on its weekly chart. Last week, for the first time in the almost nine years of data that QCharts carries, the TRAN closed a week just above the envelope that's been topping rallies since mid-1997. Today, the TRAN continued its climb, and it's going to be more difficult for any to ignore the bullishness of a second week's close above that envelope, if that should happen. A steep fall after tomorrow's inventories or due to some as yet unknown geopolitical development this week, and a close back inside that envelope, however, will question last week's minimal breakout. That envelope is currently at about 4393.50. Pronounced bearish price/MACD divergence continues on that weekly TRAN chart.

So far, indices refuse to fall far. The SPX, OEX and Dow are not going to fall too far as long as the TRAN shows such strength, but that doesn't mean that the picture is clear as yet. Perhaps by next week, we'll have more answers.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
HPQ None

New Long Plays

Hewlett Packard - HPQ - cls: 32.94 chg: +0.43 stop: 31.75

Company Description:
HP is a technology solutions provider to consumers, businesses and institutions globally. The company's offerings span IT infrastructure, global services, business and home computing, and imaging and printing. For the four fiscal quarters ended Jan. 31, 2006, HP revenue totaled $87.9 billion. (source: company press release or website)

Why We Like It:
HPQ has been very strong with a steady, long-term up trend from its lows in 2005. While we would prefer to buy a dip toward the simple 50-dma we are not sure that HPQ is going to provide one any time soon. The $32.00-32.50 levels were resistance during the previous four weeks and now the stock is bouncing from that zone, which should be expected since broken resistance tends to become new support. Thus we see today's bounce as our entry point to go long this momentum stock. We're going to set our stop loss at $31.75 and target a rally into the $35.00-35.50 range. More aggressive traders may want to use a wider stop loss.

Picked on February 22 at $32.94
Change since picked: + 0.00
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 13.5 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Amer.Phys.Cap. - ACAP - close: 48.79 change: -0.07 stop: 46.75

We are still in a wait-and-see mode with ACAP. Our plan is to catch a breakout over the $50.00 level. We're suggesting a trigger at $50.61 to go long. If triggered we'll target a rally into the $54.85-55.00 range.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/16/06 (unconfirmed)
Average Daily Volume: 53 thousand

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Claires Store - CLE - close: 32.15 change: +0.47 stop: 29.99

CLE was out performing many of its peers in the retail sector today with a 1.48% gain. We were expecting a dip but shares are showing relative strength. Our target is the $33.90-34.00 range. The P&F chart points to a $42 target.

Picked on February 14 at $32.00
Change since picked: + 0.15
Earnings Date 03/09/06 (unconfirmed)
Average Daily Volume: 697 thousand

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Curtiss Wright - CW - close: 63.26 chg: +1.43 stop: 59.90

A bullish day for the markets helped propel CW to a 2.3% gain. The stock is nearing our target in the $63.95-64.00 range. Prepare to exit.

Picked on February 16 at $ 60.35
Change since picked: + 3.91
Earnings Date 02/09/06 (confirmed)
Average Daily Volume = 76 thousand

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LM Ericsson - ERICY - close: 34.99 chg: +0.36 stop: 33.93

Today's rebound from the $34.50 level looks like a new bullish entry point. Our target is the $36.75-37.00 range.

Picked on February 14 at $34.61
Change since picked: + 0.38
Earnings Date 01/31/06 (confirmed)
Average Daily Volume: 2.2 million

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Foster Wheeler - FWLT - close: 47.75 chg: -1.10 stop: 45.95

We remain on red alert with FWLT. The stock under performed the markets today and today's drop merely confirms yesterday's reversal. We are not suggesting new plays and conservative traders may want to consider exiting early or raising their stops significantly.

Picked on February 17 at $48.65
Change since picked: - 0.90
Earnings Date 03/13/06 (unconfirmed)
Average Daily Volume: 900 thousand

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Novell Inc. - NOVL - close: 9.40 change: +0.19 stop: 8.99

Semiconductor stocks rebounded today after testing support at their rising, simple 50-dma in spite of another downgrade-induced decline for shares of Intel (INTC). NOVL produced a nice bounce from its lows and this looks like a new bullish entry point to go long the stock. Our target is $10.25.

Picked on February 14 at $ 9.30
Change since picked: + 0.10
Earnings Date 03/02/06 (unconfirmed)
Average Daily Volume: 5.6 million

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Unisys - UIS - close: 6.84 change: -0.07 stop: 6.25

UIS is consolidating a bit after challenging resistance at the $7.00 level yesterday. Last night we suggested that readers look for a dip into the $6.70-6.80 region as a new entry point and shares of UIS delivered with a low of 6.72 today. Our short-term target is a move into the $7.40-7.50 range.

Picked on February 16 at $ 6.81
Change since picked: + 0.03
Earnings Date 01/26/06 (confirmed)
Average Daily Volume: 2.1 million
 

Short Play Updates

Bed Bath & Beyond - BBBY - cls: 35.53 chg: +0.03 stop: 37.01

As far as we are concerned today's 3-cent bounce in BBBY is still relative weakness. We want to catch the next leg lower so we're suggesting a trigger to short thes tock at $34.80. If triggered we'll target a decline into the $30.50-30.00 range. More aggressive traders may want to consider new shorts right here under $36.00.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/29/06 (unconfirmed)
Average Daily Volume: 3.5 million

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Hilton Hotels - HLT - close: 24.43 change: +0.22 stop: 25.01

We remain on the sidelines with HLT. The stock dipped toward support near $24.00 and bounced. We suspected that the $24.00 level could be a problem and that's why we put our trigger to short the stock at $23.98. Looking more closely at HLT's chart we see that today's session has produced a bullish engulfing candlestick pattern. That would suggest that shares are prepared to bounce even higher and we may not be triggered any time soon.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume: 2.9 million

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Juniper Networks - JNPR - close: 17.74 chg: +0.29 stop: 19.25

JNPR did produce an oversold bounce today, which isn't really a surprise considering that most of the technology sectors were trading higher. What looks noteworthy on the intraday chart is that JNPR struggled to trade over the $18.00 level and never made it today. Contributing to the stock's relative weakness was one analyst firm's move to lower their price target from $25 to $22. Our target is the $15.25-15.00 range.

Picked on February 19 at $17.97
Change since picked: - 0.23
Earnings Date 01/25/06 (confirmed)
Average Daily Volume: 11.8 million
 

Closed Long Plays

Helen of Troy - HELE - close: 19.68 chg: +0.02 stop: 19.45

HELE was weak early this morning and shares hit our stop loss at $19.45 closing the play.

Picked on January 25 at $19.04
Change since picked: + 0.64
Earnings Date 01/09/06 (confirmed)
Average Daily Volume: 285 thousand
 

Closed Short Plays

Adobe Sys. - ADBE - close: 38.76 change: +0.66 stop: 39.01

We have been stopped out at $39.01. Yesterday's relative strength was a clue that the stock may not see any follow through to the downside. Shares of ADBE continued to out perform the software sector index today and traded above $39.00 on an intraday basis.

Picked on February 19 at $37.80
Change since picked: + 0.96
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume: 6.5 million

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Ebay Inc. - EBAY - close: 41.35 change: +0.55 stop: 42.01

We are throwing in the towel on EBAY. The stock bounced from its simple 200-dma today and looks poised to move higher. There is still resistance at the $42.00 level and then higher at the 50-dma (43.50) but we're going to choose an early exit here and cut our losses.

Picked on February 09 at $39.53
Change since picked: + 1.82
Earnings Date 01/18/06 (confirmed)
Average Daily Volume: 13.9 million
 

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