Option Investor

Daily Newsletter, Monday, 06/05/2006

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Table of Contents

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

Market Wrap

Ouija board spells U N C E R T A I N T Y

Just when market participants thought the ouija board had decoded a pausing Fed after Friday's "inflation friendly" nonfarm payroll figures, hawkish comments regarding inflation from Fed Chairman Bernanke once spelled UNCERTAINTY that the Fed wouldn't continue its stance of measured rate hikes.

July Fed Fund futures (ff06n) ticked 94.89 early in today's session, predicting a less-than 50% chance of a 25-basis point hike at the June meeting, but by the close settled at 94.82 an 72% probability that the Federal Open Market Committee will raise a quarter-point later this month to 5.25%.

Sabre-rattling comments by Ayatollah Ali Khamenei, Iran's Supreme Leader had equities stumbling out of the gate, with July Crude Oil futures (cl06n) jumping as high as $73.40 intra-day. The Ayatollah threatened that Iran might disrupt crude supplies to the West should the country be invaded over its nuclear program.

Despite the Ayatollah's threats, July Crude settled up 27 cents, or +0.37% at $72.60.

Middle East uncertainty did find what I would consider to be defensive buying in Treasuries, with the benchmark 10-year Yield once again undercutting the 5.00% level in early morning trade.

Market internals had been confirming some of the recent week's price action. New high/new low (NH/NL) indications are vastly improved from the 05/22/06 Market Wrap, but NASDAQ's 5-day NH/NL ratio softening up again at the mid-point of 50% suggests some short-term lack of bullish leadership.

U.S. Market Watch - 06/05/06 Close

A snapshot of today's PRICE action would depict a "slow bleed" lower for equities, where a notable break to the downside was found after Fed Chairman Bernanke said current core inflation measures were at the "upper end" of his and many Fed officials comfort zone.

While equities accelerated losses to the downside, sharp reversals were found in the Dollar Index (dx00y) with the dollar reversing losses, while sellers stepped in on Treasuries, with the benchmark 10-year YIELD ($TNX.X) finishing up 3.2 basis point to 5.026%. The StreetTracks Gold Trust (GLD) $62.29 -0.33% also reversed course on Dr. Bernanke's focus toward inflation.

The dollar's fluctuation continues to create a great deal of uncertainty among broader equity traders, as well as gold itself.


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I've been trading some gold equities long and short in the OptionInvenstor.com Market Monitor (BGO, NEM, GG), and boy have they been VOLATILE. I think traders will agree that a softer/weaker dollar trade tends to depict market psychology of a "Fed pause," and easing thoughts towards inflation. But as the Dollar Index (dx00y) challenges recent lows of 83.75, market participant certainly show jitters that a major breakdown in the greenback could open the floodgate for broader selling in equities.

August Gold futures (gc06q) currently trade down $7.90 at $640.80 after kissing the $650.00 mark prior to Monday's open outcry settlement at 01:30 PM EDT.

S&P 500 Index (SPX.X) - Daily Intervals

I touched briefly on the NASDAQ NH/NL ratio readings earlier tonight. While I don't post the SPX (500 stocks) NH/NL readings in my Market Internals, I do keep track of them in order to gather an observation of bullish/bearish leadership in this widely followed index.

The above chart of the SPX is updated from my last Market Wrap on 05/22/06 and our last visit. The SPX had just undercut the 1,254.78 level that day and traded its recent relative low on 05/24/06. Of the 500 stocks in the S&P 500, 3 had been able to achieve a new 52-week high, while 19 had traded a new 52-week low, with a DAILY NH/NL ratio of 13.64%.

Tonight's final tally would show 6 stocks achieved a new 52-week high, while 14 stocks a new 52-week low with a DAILY ratio of 30.00%. These comparison readings should have a bear looking to lock in some type of gain if they hadn't under more "oversold" NH/NL readings.

I've updated recent "Max Pain" Theory tabulations. The rather notable decline for August (from 1,300 in 5/24/06 Market Wrap) strongly suggests a flat to lower trade being expected during the summer months.

I want to quickly tie some of the overseas markets into the dollar's weakness. "Developing markets" as well as major foreign market's like Japan's have exhibited notable weakness in recent weeks.

Japan's Nikkei-225 ($NIKK) - 50-point box scale

The above chart of the Nikkei-225 is one worth being alert to near-term. If you think the Dow Industrials ($INDU) have had a tough time recently, the Nikkei as well as other Asian Pacific markets have been under some heavy selling pressure.

The Dow Industrials ($INDU) exhibits a similar supply/demand pattern as found in the Nikkei, where further weakness in the Nikkei-225 could have bearish implications.

Dow Industrials ($INDU) - 50-point box scale

Inflation fears, or dollar fears aren't just a "U.S. concern." One could argue that much of the weakness found in U.S. equity markets started overseas.

As the Dow Industrials were breaking to multi-year highs in May (red 5), the Nikkei-225 ($NIKK) was triggering a triple-bottom sell signal at 16,750.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

None today.

New Short Plays

Autodesk - ADSK - close: 35.13 change: -1.40 stop: 36.65

Company Description:
Autodesk, Inc. is a Fortune 1000 company, wholly focused on ensuring that great ideas are turned into reality. With seven million users, Autodesk is the world's leading software and services company for the manufacturing, infrastructure, building, media and entertainment and wireless data services fields. Autodesk's solutions help customers create, manage and share their data and digital assets more effectively. As a result, customers turn ideas into competitive advantage, become more productive, streamline project efficiency and maximize profits. (source: company press release or website)

Why We Like It:
Software stocks have been showing a lot of weakness for weeks. The GSO software sector's attempt at an oversold bounce has failed and today's 1.3% decline in the GSO pushed it to a new one-year low. The sector weakness has helped pull ADSK back down toward support at the $35.00 level. Given the stock's trend of lower highs we suspect that ADSK will also break down to new one-year lows. We are going to suggest a trigger at $34.89 in an attempt to catch a breakdown below support. If triggered we are going to suggest a target in the $32.60-32.50 range and a second target in the 30.75-30.50 range. The P&F chart currently points to a $26.00 target.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 3.2 million


Fording Coal - FDG - close: 34.08 change: -1.40 stop: 36.01

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust. Through investments in metallurgical coal and industrial minerals mining and processing operations, the Trust makes quarterly cash distributions to unitholders. The Trust, through its wholly owned subsidiaries, holds a 60% interest in the Elk Valley Coal Partnership and is a leading producer of the industrial mineral wollastonite. Elk Valley Coal, comprised of Canada's senior metallurgical coal mining properties, is the world's second largest exporter of metallurgical coal, supplying high-quality coal products to the international steel industry. (source: company press release or website)

Why We Like It:
Our bullish play on coal-producer ACI is reversing on us so we're going to hedge our bets and suggest a short on coal-producer FDG. Technically FDG has just produced a failed rally under resistance at $36.00, its 50-dma and the top of its descending bearish channel. If you really want to get technical the drop today also looks like a breakdown from a bear-wedge pattern. Volume on today's decline came in above average. The Point & Figure chart is bearish and points to a $28 target. We are suggesting shorts with FDG under $35.00. We are going to suggest two targets. Consider selling half or more of your position in the $31.85-31.75 range, since FDG has support near $31.75. Then sell the remainder of your position in the $30.25-30.00 range.

Picked on June 05 at $34.08
Change since picked: + 0.00
Earnings Date 07/22/06 (unconfirmed)
Average Daily Volume: 1.0 million


Blue Nile - NILE - close: 29.72 chg: -1.20 stop: 32.01

Company Description:
Founded in 1999, Blue Nile is the leading online retailer of diamonds and fine jewelry. It has built a well respected brand by providing consumers with a better way to buy diamonds and fine jewelry. Blue Nile has established some of the highest quality standards in the industry and provides consumers with in-depth educational materials and unique online tools that place consumers in control of the jewelry shopping process. The Blue Nile web site showcases thousands of independently certified diamonds and styles of fine jewelry. (source: company press release or website)

Why We Like It:
NILE is a high-risk, aggressive short play. The latest data puts short interest at 30% of its 15 million-share float and that creates an opportunity for a big short squeeze. Fortunately for the bears NILE has been and continues to look weak. In the last several weeks NILE has broken down under multiple levels of support and produced a few failed rallies. More recently the stock has been consolidating sideways between $29.50 and $32.00. Now it looks like NILE is poised to breakdown under support in the $29.50-29.20 range. The P&F chart is already bearish and points to a $15.00 target. We are going to suggest a trigger to short NILE at $29.45. More conservative traders may want to avoid this play altogether or wait for a move under $29.20 or $29.00 before initiating positions. Our target is the $25.50-25.00 range.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 212 thousand

Play Updates

In Play Updates and Reviews

Long Play Updates

Arch Coal - ACI - close: 47.00 change: -2.63 stop: 44.95*new*

Uh-oh! This could be bad news. ACI has been struggling to breakout over the $50.00 level for the last couple of days. Shares produced another failed rally at $50.00 this morning before closing with a 5.2% loss. Odds look good that ACI will retreat to its 50-dma (near 45.44) or the $45.00 level. Considering today's bearish reversal traders may just want to exit early right now to protect their capital. We are raising our stop loss to $44.95.

Picked on May 28 at $47.50
Change since picked: - 0.20
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume: 3.9 million


Anadarko Petrol. - APC - close: 49.09 chg: -1.34 stop: 47.95

Crude oil traded higher today on rising concerns about Iran and its threat to play their "oil card". Yet this strength in crude did nothing to stop the bloodshed in the oil sector. Oil stocks were some of the hardest hit during today's market sell-off. Shares of APC traded higher this morning only to reverse course and close with a bearish engulfing candlestick pattern. Today's bearish reversal looks pretty negative and if you opened positions this morning we'd consider exiting early just to protect your capital.

Picked on June 04 at $50.43
Change since picked: - 1.34
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 4.7 million


Archstone - ASN - close: 49.77 chg: +0.03 stop: 47.35

Warning! Failed rally alert. REITs and related stocks were one of the few pockets of strength today but the rally in ASN failed at the $51.00 level. Shares reversed course and closed back under resistance at the $50.00 level. We were triggered at $50.21 so the play is open for us but we are not suggesting new plays at this time. ASN looks poised to consolidate back toward the $48.00 level.

Picked on June 05 at $50.21
Change since picked: - 0.44
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 989 thousand


Brookfield Asset Mgt - BAM - cls: 41.72 chg: -1.51 stop: 40.83

This doesn't look good. BAM has reversed course with a 3.49% decline on Monday. More conservative traders may want to exit immediately to preserve any kind of gain. Odds look good that we'll be stopped out tomorrow at $40.83.

Picked on May 25 at $40.83
Change since picked: + 0.89
Earnings Date 04/28/06 (confirmed)
Average Daily Volume: 473 thousand


Drew Industry - DW - close: 30.66 chg: -1.39 stop: 30.19

DW has produced a bearish reversal with Friday's failed rally and today's 4.3% decline. The stock was hit pretty hard even though volume came in below average. The selling stalled right at the 200-dma so there is a chance for a bounce tomorrow but more conservative traders may just want to exit now to minimize any losses.

Picked on May 25 at $31.62
Change since picked: - 0.96
Earnings Date 05/01/06 (confirmed)
Average Daily Volume: 137 thousand


Ensco Intl. - ESV - close: 49.60 chg: -2.11 stop: 47.35

Oil stocks were hit hard by relatively strong selling pressure. A lot of stocks in the sector produced bearish engulfing candlestick patterns and ESV is one of them. We are not suggesting new positions and if you did open longs on the early morning strength you may want to exit early to minimize any losses.

Picked on June 04 at $51.71
Change since picked: - 2.11
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 2.8 million


ImClone Sys. - IMCL - close: 40.06 chg: -0.11 stop: 39.40

Biotech stocks, which had seen some decent gains over the last couple of weeks gave a lot back today. The BTK index had produced a failed rally at its 50 and 200-dma's on Friday and the index confirmed that reversal with a 3.5% decline today. IMCL actually out performed its peers with a 0.27% decline as it clings to the $40.00 level. We are not suggesting new plays and more conservative traders may want to exit early to preserve their capital.

Picked on June 01 at $40.55
Change since picked: - 0.49
Earnings Date 07/16/06 (unconfirmed)
Average Daily Volume: 1.6 million


Murphy Oil - MUR - close: 52.53 chg: -2.05 stop: 49.99

MUR has erased all of our potential gains in one session. The stock has produced a failed rally near $55.00 and a bearish engulfing candlestick pattern with shares closing near their lows for the session. MUR looks pretty bearish right here and we expect a dip toward $51.00 and its 200-dma. More conservative traders may want to protect their capital and exit early right now. You can always re-enter later. We're not suggesting new plays.

Picked on May 31 at $52.55
Change since picked: - 0.02
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 1.3 million


Potlatch - PCH - close: 38.51 chg: -0.88 stop: 36.99

PCH spiked to $40.18 and then promptly reversed course. The close under $39.00 and its 50-dma is bearish and we expect a dip toward $38.00-37.50. We are not suggesting new positions at this time. If you opened positions this morning you may want to exit early right here.

Picked on June 04 at $39.39
Change since picked: - 0.88
Earnings Date 07/17/06 (unconfirmed)
Average Daily Volume: 362 thousand


RPC Inc. - RES - close: 24.79 change: -0.25 stop: 22.45

RES out performed most of its peers by limiting its losses to just one percent on Monday. The results still look bearish and we'd expect a dip toward $24.00. Watch for a bounce from $24.00 as a potential entry point.

Picked on June 04 at $25.04
Change since picked: - 0.25
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 618 thousand

Short Play Updates

K-Swiss - KSWS - close: 26.45 chg: -0.59 stop: 27.25 *new*

KSWS continues to consolidate lower in a narrow channel. We are lowering our stop loss to $27.25. Our target is the $26.00 mark. We see no other changes from our previous updates.

Picked on May 12 at $27.45
Change since picked: - 1.00
Earnings Date 04/27/06 (confirmed)
Average Daily Volume: 300 thousand


Starbucks - SBUX - close: 35.38 chg: -0.61 stop: 36.65

Our bearish play in SBUX is still alive. The stock lost 1.69% and closed back under its 100-dma. Traders can use today's loss as a new entry point to short the stock. More conservative traders may want to use a tighter stop loss or wait for a move under $35.00 as an entry point to short SBUX. Our target is the $33.15 mark.

Picked on May 23 at $35.59
Change since picked: - 0.21
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 5.7 million

Closed Long Plays

Amer. Std. Co. - ASD - close: 40.86 change: -1.49 stop: 41.49

We have been growing worried over ASD's performance lately and today's market-wide sell-off was the last straw. The stock caved in under support near $41.50 and its simple and exponential 200-dma's. We have been stopped out at $41.49. This actually looks like a bearish entry point to short the stock.

Picked on May 28 at $43.30
Change since picked: - 2.44
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 1.3 million

Closed Short Plays


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


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