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Daily Newsletter, Wednesday, 03/08/2006

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Table of Contents

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

Market Wrap

A Tale of Two Day's Trading in One

Negative influences abounded in the pre-market period today, with bourses tumbling across the globe, OPEC meeting, and Google (GOOG) goofing up again. FOMC members Bernanke and Poole were slated to speak and markets might have felt some hesitation ahead of their speeches, especially in a rising-interest-rate environment. Iran was doing some saber-waving, warning the U.S. to expect "harm and pain" if the UN Security Council takes action against the country, and asserting that it will continue its research no matter what the UNSC says. The U.S.'s ambassador to the IAEA did some saber-waving of his own, saying that Iran's nuclear defiance should result in consequences to the country. North Korea had reportedly fired two missiles near China's border.

Although few were watching, Treasury Secretary John Snow also fired a missile this week. The WASHINGTON POST was watching, however, and an article today discussed the development. In a letter to Congress, Snow announced his intention to begin drawing from the Civil Service Retirement and Disability Fund to avoid reaching the statutory debt national debt limit. The money will be repaid, with interest, once Congress raises the debt limit, Snow asserted. Last month, a decision temporarily stopped investments in the retirement savings plans of government employees. Snow urged members of Congress to raise the limit immediately, saying that the steps taken last month and this week will keep the government from hitting the debt limit until mid-March.

All those influences were to weigh on the markets and send them sharply lower again, but then the bulls started scaling those walls of worry. Most daily candles left a long candle shadow springing up from support. Some say that the move of the ten-year yield back above that of the two-year treasury note's yield helped or prompted the bounce, although the inversion remains among other treasury bonds. Whether that spring higher in the equities will be strong enough to vault the indices over support-turned-resistance remains to be seen.

I'd had a two-day scenario in mind for the indices that included a punch lower today and then a steadying, to be followed by either choppy movement higher or an actual bounce tomorrow toward those support-turned-resistance levels. I'd had trouble reconciling that scenario for tomorrow with a historical selling bias for the day, to be discussed later. The indices confounded my two-day scenario by splitting the morning and afternoon sessions into two day's worth of action, accomplishing this afternoon what I'd anticipated for tomorrow's action, a bounce up to next resistance. That sets up the potential for a rollover tomorrow now that the bounce up to resistance has been accomplished, but let's see what charts show.

Annotated Weekly Chart of the SPX:

The close above the 50- and 30-sma's was not a particularly convincing one. If the SPX pushes higher tomorrow, watch for signs that 1281-1283.50 resistance is holding. A break above that would see next resistance at the 10-sma. If it were not for the persistent bid under the markets, I'd suggest more strongly that bearish entries be sought on any hint of hesitation after a bounce or on any hint of a rollover from the current level, but that bid may persist. Care still needs to be exercised. My strongest guess is for continued chop, perhaps for another day ahead of Friday's economic numbers, between today's resistance and today's support, so if a rollover materializes, protect positions near today's low.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

As mentioned in the introduction, many influences combined to produce the market action today, many of those influences being negative. Early morning commentary focused on the OPEC meeting and Google's (GOOG) goof in accidentally releasing sales guidance. That sales guidance shows 2006 advertising income in line with expectations. Goldman Sachs promptly lowered its price target to $490 from its previous $500, eliciting some ribbing from CNBC commentators about the precision with which GS thought it could project price targets. Other negative influences in early trading included a disappointment from Dynegy (DYN) after the company's loss from continuing operations was wider than expected.

Keene spent some time last night in his Wrap discussing the housing industry, showing charts of the DJUSHB, the Dow Jones Home Construction Index. This morning brought more news relating to the housing industry. The Mortgage Bankers Association released mortgage applications for the week ending March 3. The title of the release again noted that the volume held steady. The component measuring mortgage loan application volume increased 0.7 percent from the previous week on a seasonally adjusted basis, but declined 17.8 percent from the year-ago level on an unadjusted basis. Compared to the previous week, the Purchase Index rose 0.4 percent; the Refinance Index, 2.6 percent; the Conventional Index, 0.3 percent, and the Government Index, 5.7 percent. Four-week moving averages were still moving down, however, by 1.9 percent for the Market Index, 1.6 percent for the Purchase Index and 2.1 percent for the Refinance Index. Interest rates for a 30-year fixed-rate mortgage rose to 6.31 percent and points increased.

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Early in the day, St. Louis Fed President Poole spoke concerning housing. No major slowdown is expected, he said, although he conceded an expectation that average home price increases would slow. Consumer spending is more dependent on income and job growth than on housing increases, he feels. He believes that it's the Fed's intention to keep inflation stable at a low level and real household income will likely rebound after being hit by energy prices last year. Perhaps his reassurances worked or perhaps the embattled DJUSHB was due for an oversold bounce, but it was one of the first indices that attempted to bounce from its low although that first attempt did not hold. FOMC head Bernanke also spoke, but his topic--banking--perhaps did not engage market watchers as much and his speech appeared to have little impact on the markets. He was not slated to talk about interest rates.

Interviewed as he was headed into the OPEC meeting, the minister from Kuwait said that he expected crude prices to dip below $60.00 in the second quarter, a prediction that was to come true sooner than he might have expected. He qualified that statement, however, by noting that although demand typically drops in the second quarter, India and China had skewed the usual patterns, and it was now more difficult to predict demand and plan production needs. He expects demand to increase this year, but said that non-OPEC members can keep up with the increased demand.

Crude traded lower in the pre-market period, a forecast of its trading pattern for the day, when it was to reach a low of $59.25 before bouncing strongly from and closing at $60.02. OPEC was to issue the hoped-for decision not to cut production, citing geopolitical uncertainties as one reason to maintain production at current levels.

Exxon Mobil's (XOM) chairman and Chief Executive Rex Tillerson weighed in today on the issue of energy independence. He claims that the government is misleading the public when it talks of becoming energy-independent. That's not possible, he claims, using his time in the spotlight to urge for more development of domestic resources. He said the government is withholding those resources--in the Rocky Mountains, the eastern Gulf of Mexico, offshore California and the Arctic National Wildlife Refuge--from the people. [Note: This is a reporting of developments today, and not an endorsement of these ideas.] Tillerson believes energy prices will settle lower, an outlook to be disputed by an analyst speaking today, with his comments noted later in the Wrap.

Most market watchers surveyed believed that crude inventories would rise and gasoline and distillate inventories would fall. According to one forex news source, estimates were for a rise of 1.6 million barrels in crude inventories and declines of 250,000-600,000 in gasoline inventories and 1.6 million barrels on distillates.

Crude inventories numbers surprised when they were released at 10:30 EST. Crude inventories soared 6.8 million barrels for the week, leading the Energy Department to note that the inventories levels are at their highest since May 1999. Gasoline and distillate inventories fell more than expected, however, by 1.1 million barrels and 2.7 million barrels, respectively. Those surprises were moderate when compared to the upside surprise in crude inventories, and the focus remained on the build in crude stocks.

"Cloudy" was what an analyst with Societe Generale was to term that unexpected build in crude inventories when he spoke on CNBC immediately after the release. He noted the changeability of these figures based on constant updates from refineries on what units were being shut down or brought on line again. He commented that the crude story is not over, that the story might not develop until the second half of the year, but that he expected crude to average in the mid-$60's for the year.

Cloudy numbers or not, crude prices dove, as already noted. Other commodity prices saw sharp declines, too.

Not to be ignored today was the NYSE's debut as a publicly traded company under the ticker symbol NYX. Early in the day, some had speculated that the powers-that-be might prop up markets on the day of such an important IPO. The IPO did perform well, opening at $67.00 and closing at $80.31, and perhaps its strong performance also contributed to enthusiasm that led to an afternoon bounce, but I suspect that oversold conditions had more to do with that.

After-hours development include a jump in Biogen Idec, Inc.'s (BIIB) value when it opened for trading after the FDA approved the return of its MS drug Tysabri. As this report went to press, TiVo (TIVO) had also just reported and was rising in after-hours trading after it had narrowed its fourth-quarter loss from the year-ago level.

Tomorrow's economic reports include initial claims and January's Trade Balance at 8:30, and then the natural gas inventories at 10:30. Reporting companies will include ARO, BBI, CTIC, CLE, ISIS, and RMX. A number of those are retailers, and many other retailers, not included in the list, are reporting, too.

An interesting article on seasonal stock patterns was printed in the February 2006 issue of STOCKS & COMMODITIES. That article's author, Robert Steelman, noted that the ninth calendar day of each month tended to have a sell bias. Jim Brown has been noting some seasonal trading patterns with regard to March, too.

As mentioned earlier, I was having trouble fitting that seasonal pattern for tomorrow into what I thought still needed to happen: a bounce back to retest broken support. Since that bounce occurred this afternoon instead, it provides leeway for the seasonal pattern to assert itself and for markets to turn down tomorrow. It provides leeway, but not proof.

My best-guess scenario is for perhaps another day of trading in the ranges established over the last couple of days of trading. The fact that defensive-type stocks appeared to lead the recovery reinforces the idea that resistance might hold. However, my expectation that the recent ranges may hold for another day means that if there are downturns tomorrow, profits need to be protected near the bottoms of those ranges.

I'm always aware of that underlying bid in the markets, however. It's been there since March, 2003, and despite the fact that the TRAN and the SOX show classic topping-out behaviors and that both saw steep declines this week, neither has seen irreparable damage done to their charts. Don't hold onto a losing bearish position if markets appear to roll over and then shoot higher.
 

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

LM Ericsson - ERICY - close: 34.47 chg: +0.09 stop: 33.93

ERICY is still bouncing from its simple 200-dma. Wait for another move over $35.25 before considering new bullish positions. Our target is the $36.75-37.00 range.

Picked on February 14 at $34.61
Change since picked: - 0.14
Earnings Date 01/31/06 (confirmed)
Average Daily Volume: 2.2 million

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Hewlett Packard - HPQ - cls: 32.68 chg: -0.28 stop: 31.75

We are starting to grow more concerned over the pull back in shares of HPQ. More conservative traders may just want to exit early right here and protect their capital. You can always re-enter again later. If HPQ doesn't trade back over $33.20 soon we'll probably opt to abandon this play and just wait to see if shares bounce from the 50-dma again.

Picked on February 22 at $32.94
Change since picked: - 0.26
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 13.5 million

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IAC/InterActive - IACI - close: 30.09 chg: +0.04 stop: 28.75

Internet stocks were mostly lower today thanks in part to weakness in GOOG. Shares of IACI are hanging in there but given the market environment we hesitate to open new bullish positions.

Picked on March 03 at $30.31
Change since picked: - 0.22
Earnings Date 02/08/06 (confirmed)
Average Daily Volume: 2.1 million

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Microchip - MCHP - close: 35.48 chg: -0.30 stop: 34.99

MCHP broke down under its 50-dma on an intraday basis but the rebound in the SOX this afternoon helped fuel a bounce in shares of MCHP as well. Today's session saw MCHP also test round-number support at the $35.00 level. One might be inclined to believe that today's session looks like a short-term bullish reversal in the SOX (and MCHP) but that might just be wishful thinking. More conservative traders should still be considering an early exit to protect their capital. We are not suggesting new bullish positions at this time.

Picked on March 02 at $36.52
Change since picked: - 1.05
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume: 1.6 million

---

Network Appl. - NTAP - close: 33.49 chg: +0.18 stop: 31.90

Networking stocks managed to bounce back into the green late this afternoon and shares of NTAP followed suit. We are not suggesting new bullish positions at this time.

Picked on February 27 at $33.50
Change since picked: - 0.19
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 4.5 million

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SCS Transportation - SCST - cls: 27.75 chg: -0.01 stop: 25.99

We don't see any change from our previous updates on SCST. Our target is the $29.90-30.00 range. SCST's P&F chart points to a $36.50 target.

Picked on March 01 at $27.55
Change since picked: + 0.20
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume: 139 thousand

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Synopsys - SNPS - close: 22.00 change: -0.03 stop: 21.58

Traders bought the dip near SNPS' simple 50-dma this morning. The move might be considered a new bullish entry point but there wasn't much follow through to the upside. We would not suggest new bullish positions at this time.

Picked on March 02 at $22.49
Change since picked: - 0.46
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 1.4 million

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Unisys - UIS - close: 6.66 change: -0.06 stop: 6.58

UIS is slipping toward minor support at the $6.60 level. We are not suggesting new bullish positions.

Picked on February 16 at $ 6.81
Change since picked: - 0.15
Earnings Date 01/26/06 (confirmed)
Average Daily Volume: 2.1 million

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UST Inc. - UST - close: 41.26 change: +0.36 stop: 39.95

UST continues to show relative strength posting its sixth gain in a row. Our target has been the 200-dma but we've been using a target in the $41.75-42.00 range. Currently the 200-dma is at $41.78. We need to adjust our target (exit) range to $41.65-42.00. We are not suggesting new bullish positions.

Picked on March 05 at $40.55
Change since picked: + 0.71
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume: 1.5 million
 

Short Play Updates

Hilton Hotels - HLT - close: 23.65 chg: -0.04 stop: 24.27

We do not see any changes from our previous updates on HLT. We are not suggesting new bearish positions at this time. We're aiming for a decline into the $22.25-22.00 range.

Picked on March 02 at $23.98
Change since picked: - 0.41
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume: 2.9 million

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Hovnanian - HOV - close: 42.51 change: -0.70 stop: 48.01

The homebuilders declined again today although many stocks in the sector are starting to produce oversold bounces. We would not be surprised to see HOV produce a bounce soon. Be ready for one. A failed rally near $45.00 might be used as a new bearish entry point. Our target is the $40.50-40.00 range.

Picked on March 05 at $44.85
Change since picked: - 2.34
Earnings Date 03/01/06 (confirmed)
Average Daily Volume: 972 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Bed Bath & Beyond - BBBY - cls: 36.51 chg: +0.34 stop: 37.01

BBBY has broken out above its simple 50-dma. We're choosing to drop the stock as a bearish candidate. Our plan suggested shorting the stock at $34.80 but we were never triggered.

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
 

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

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