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Daily Newsletter, Monday, 07/03/2006

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Table of Contents

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

Market Wrap

New Concerns or the Right Time for Profit Taking?

As July 4th fireworks exploded across the U.S. Tuesday night, North Korea test-fired at least six missiles early on their Wednesday morning. A seventh was fired this morning. Those missiles included a long-range Taepodong-2 missile.

All missiles fell harmlessly into the Sea of Japan, with the U.S. claiming that the Taepodong-2 missile failed. Some expect further tests in the next days. The U.S. government termed the tests a provocation, Tokyo cautioned that the U.N. could impose economic sanctions on North Korea and the U.N. Security Council set an emergency meeting. NATO warned that the tests could threaten the region's and even the globe's stability. Russia noted its deep concern.

Many blamed the firing of the missiles for a pullback in equity indices across the globe, but it may have been time for some profit-taking, too. Others blamed this morning's release of the ADP index on payrolls for weakness in U.S. equities, with that index a possible harbinger of a strong jobs number on Friday. That group also assigned some of the blame to the later release of May's stronger-than-expected factory orders. However, futures were already lower by the time that ADP number was released and equities had headed lower before the factory orders, too, since that occurred after the cash open. Futures had displayed a tendency to dip on any bad news. The geopolitical and inflation concerns certainly weighed on markets, with crude rising to a new high of $75.40 and closing at $75.19, but investors were also ready to pull back and determine where support would hold.

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Despite several reports that disappointed Monday--an ISM index, a report on construction spending and a Wal-Mart Stores (WMT) forecast--indices had rallied on the light-volume, holiday-shortened session. In this climate in which each report is scrutinized for its dovish or hawkish connotations, some traders on Monday may have speculated that the headline ISM number would allow the FOMC to take a less aggressive stance on raising interest rates. Bond traders might not have been convinced, however. Bonds dropped and yields bounced. Although Monday's bounce remained tepid, yields were already building on Monday's gain before equities opened this morning. Since there was no Wrap on Monday, I also wanted to note that a 2.3 percent gain in Alcoa (AA) also helped the Dow on Monday, with a J.P. Morgan analyst speculating that the company might be a takeover target.

This has been the first Wrap to report on Monday's ISM, so a paragraph on that number seems appropriate. The Institute for Supply Management's June index fell to 53.8, below the prior 54.4 and much lower than the predicted 54.4-55.0. The number remained above the boom-or-bust 50 benchmark. The prices-paid component dropped less than forecast, however. In addition, the Commerce Department reported that May's spending on construction projects fell 0.4 percent, its biggest drop in almost two years. Economists had predicted that construction spending would rise by 0.2 percent.

If Monday's economic reports had encouraged equity traders to ignore what they saw going on with bonds, today's wouldn't allow that dovish outlook to continue any longer. Bonds and equities dropped while bond yields climbed. It's time to see how much damage, if any, was done on equity indices, starting with the SPX.

Annotated Daily Chart of the SPX:

Since last Wednesday afternoon, the SPX had bounced from each approach to the five-minute 100/130-ema's, with those averages serving as good bullish/bearish benchmarks for short-term traders in the last ten days or so. They may no longer be such good benchmarks, however, as the day's actions zig-zagged prices across them. On that five-minute chart, the SPX may be forming a H&S with the shoulder level represented by those averages. Such zig-zagging across support and resistance is sometimes indicative of chop that will narrow into a smaller range, but that potential regular H&S on the five-minute chart argues otherwise.

Note that fulfilling a regular H&S on the five-minute chart is completely in keeping with that potential inverse one on the daily chart. Chop is expected when a right shoulder is formed, and dropping down to the daily 200-sma and perhaps a little below, fulfilling a target for a regular H&S on the five-minute chart, is in keeping with the formation of the daily chart's right shoulder.

Also note that while it's important to watch these formations, it's equally as important these days to discount any eventual target predicted by such a formation. They're just not reliable any longer, their predictability distorted by the fact that these are such well-known formations and can be used now to trap bulls or bears by those with the deep pockets to do so. I do still find it helpful, however, to notice when a right shoulder is extending too far to the side without confirming, as that's often a fairly good predictor that the formation will not be confirmed. That hasn't happened yet.

The Dow also forms a potential inverse H&S, not so long after confirming a regular one and dropping. It did not quite meet its downside target on that one, at least so far, illustrating my point about not counting on targets being hit. Now it's back above the neckline of that formation confirmed in early June.

AAnnotated Daily Chart of the Dow:

Leading into today's action, the Dow had shown the same bullish/bearish benchmark pattern with respect to its five-minute 100/130-ema's as had the SPX. Today, the Dow also chopped through those averages, also perhaps forming a H&S with the shoulder level at those averages. It's just chop now, spoiling the benchmark status of those averages.br>
AAnnotated Daily Chart of the Nasdaq:

The three-minute versions of the 100/130-ema's had looked like a better short-term bullish/bearish benchmark for the Nasdaq than did their five-minute counterparts, but today it was the five-minute versions that rolled the Nasdaq's afternoon bounce down again. Those averages were at 2159 and 2159.67 at the close. br>
Techs were hurt by several developments. Marvell Technology (MRVL) received a letter of informal inquiry from the SEC. A grand jury also subpoenaed documents related to its stock option grant practices. The SOX component closed lower by 7.87 percent today, but did close off its low. Chip giant and SOX component Intel also weighed on the index, dropping after UBS cut its EPS estimate for the stock. INTC closed lower by 3.15 percent. UBS also cut Advanced Micro Device's (AMD) price target from its previous $33 to $29. AMD closed lower by 2.84 percent.

The SOX's weekly chart shows some troubling tendencies, but the important weekly 200-sma has held up as support so far. It looks likely to be retested soon, however.

AAnnotated Daily of the SOX:

On all the charts displayed so far, I see prices tentatively perched above support, with equity traders being jittery and liable to send indices one way or another. An index poised just below a new breakout status is the TRAN, however.

AAnnotated Weekly Chart of the TRAN:

Although today's reports were of the type often ignored, they weren't ignored today. Some, however, were postponed. At 7:00 on Wednesday's, the Mortgage Bankers Association usually releases its weekly mortgage application volume survey for the previous week, but that information was not available this morning. The release was perhaps postponed a day due to yesterday's holiday. Investors focused on inflation concerns proposed by the two other releases. The first was the ADP index. br>
Macroeconomic Advisers uses anonymous payroll data to calculate the ADP index. June's index showed an increase of about 368,000 private-sector nonfarm payrolls. That figure may worry some looking forward to Friday's jobs figures, although Jim Brown pointed out some wide variations in predictions about Friday's number in last weekend's Wrap. The ADP and Labor Department figures don't always exactly coincide, although both surveys are conducted the same week and use similar techniques and the ADP supposedly has a strong correlation with the other number. Macroeconomic Advisers surveys more businesses than does the Labor Department, but its intention is to mirror the government's survey.

After the cash markets opened, the Commerce Department released May's factory orders. Economists had predicted a 0.1 percent rise in those orders, but they surprised by rising 0.7 percent instead. Core capital goods rose 0.5 percent, and ex-trans orders climbed 1.2 percent. Factory inventories were flat but shipments of core capital goods fell 0.3 percent while remaining 7.6 percent higher than the year-ago level. The shipment numbers is sometimes used as a proxy for GDP capital expenditures, my forex news source notes.

Non-durable orders increased by 1.6 percent, with that component prompting that surprise number. Durable goods had been expected to drop 0.3 percent, but they dropped only 0.2 percent. Delving deeper into the durables category showed that orders for primary metals rose 4.6 percent; construction materials, 1.2 percent; and new machinery, 2.5 percent. IT orders dropped 3 percent, however, with orders for PCs and related electronics dropping 2.5 percent, and that outcome might also have hurt the beleaguered techs today.

Keep in mind, however, that the surprising jump in factory orders is now compared to a revised-lower April number, with April's number revised to a 2.0 percent drop, down from the previous 1.8 percent. Treasuries didn't give much credence to the comparison to a revised-lower April number, however. They reacted to the strength shown in May's number and the hawkishness of that number, by dropping further, sending yields higher.

Another release, Redbook Research's indicator of national retail sales, did not quite meet expectations, however. Those sales rose 1.8 percent in June, inching below the expected 1.9 percent increase. The International Council of Shopping Centers chain sales index for the week to July 1 fell 0.7 percent below the previous week's numbers. Many retailers also released same-store sales. Although WMT forecasts disappointed on Monday, Walgreen's (WAG) reported same-store sales that gained 9 percent for the month, with pharmacy same-store sales gaining 11.6 percent and total sales gaining 14.2 percent. Wendy's (WEN) beat expectations for same-store sales, one source reported, but also announced that the company's Q2 profit would decline below that seen a year-ago.

Tomorrow's economic releases include initial claims at 8:30, June's ISM Services number at 10:00 and crude and natural gas inventories at 10:30, with the crude inventories pushed back to tomorrow due to the holiday this week. With crude costs hitting a new all-time high and the TRAN approaching an all-time high, a battle has been engaged. For a long time, however, the TRAN has seemingly reacted more to economic prospects than to crude costs.

Economists expect 59.00 for ISM Services, down from the previous 60.1, but they didn't get Monday's number right, and they might not have this one right, either. Tomorrow will be mostly about positioning ahead of Friday's jobs numbers, and avoiding any paintballs thrown by companies warning ahead of the upcoming earnings season.

Logic, typical "positioning" behavior before an important economic number and chart characteristics all suggest the possibility of continued chop into Friday and maybe even extending into next week. Will that chop be of the type encountered by ocean-going vessels sailing into a storm or of kayakers paddling around in a calm inland lake?

This week's pattern so far has vividly illustrated the hyperactive way the markets react to any hint of increasing inflation or any calming of inflation worries, sailing here and there, depending on the data. Charts suggest that consolidation is due. Typically by tomorrow, a day ahead of an important number, that consolidation would narrow prices into a formation such as a triangle, ready to be broken Friday morning, but neither Monday nor today demonstrated any tendency yet to narrow the wide swings. Therefore, although I'd usually be warning that tomorrow could be an untradable, narrow range day, I'm concerned that instead it may be a much touchier but still untradable day. The narrowing-range type of day gains slightly in probability, but it feels risky to even grant it a slight edge over the wilder swinging type of chop.

I'm concluding with a last chart that demonstrates some of my observations for the benefit of short-term traders. I don't think that markets have yet decided on an intermediate direction, not until they chop their way out of the recent consolidation zones.

AAnnotated 15-Minute Keltner Chart of the SPX:

RSI on this chart measures 49.12, a middle-of-the-road levels that tells nothing about direction. This chart suggests that without a big shove one direction or the other, the SPX could indeed spend tomorrow morning, at least, rattling back and forth between the gold line and the upper purple one, perhaps beginning to hammer out one of the infamous and deadly dull triangles that often are built ahead of and just after important economic news is announced. So, this chart, at least supports the idea that the usual narrowing could be seen, even if Wednesday's example shows how easily this market can blow prices right out of a channel. br>
If there is a narrowing, watch for a break to judge short-term direction, but keep stops tight because this market is jittery. Watch bond yields for the best indicator, with equities reacting negatively to anything that bond traders perceive as hawkish and suggesting higher yields to come. Don't ignore the TRAN, either. The TRAN is one of those indices that can lead the markets. With a daily ATR a whopping 88.04 points currently, the TRAN would have to stretch beyond that ATR by only a little over four points to achieve a new intraday high beyond the 5013.67 one achieved in May. It's also close enough that it could be sent lower now and be considered a failed double-top test. The daily RSI has an ominous potential H&S. Watch it tomorrow, particularly after the crude inventories are released.

Like the SPX, the Dow dropped back inside its nested Keltner channels today, and lines are aligning on either side in a fairly symmetrical array. The Dow's differs a little from the SPX's, however. Support may look firmer near 11116-11130 than the SPX's support. The SPX has firmer nearby resistance, too, up to about 11161, but if it can get past that on 15-minute closes (and the level will change during the trading day), then resistance above that is actually weaker than on the SPX.

The Nasdaq ended the day right on crucial Keltner support. That support looks firm, but if negative futures action gaps the Nasdaq below about 2150 on the first 15-minute close tomorrow morning and if today's low doesn't hold, then the Nasdaq may be quickly vulnerable to 2125 or so.
 

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

Asta Funding - ASFI - close: 36.35 change: -1.47 stop: 34.95

ASFI has taken a turn for the worse. Shares have closed back under their 50-dma and are resting near short-term technical support at the 10-dma. We are not suggesting new positions at this time. More conservative traders may want to put their stop near $36.00. We suspect that if the market continues lower that ASFI will dip toward potential support near $35.00 and its 100-dma.

Picked on June 23 at $36.01
Change since picked: + 0.34
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 165 thousand

---

A.S.V.Inc. - ASVI - close: 22.63 change: -0.77 stop: 20.85

ASVI almost hit our target on Monday. Shares traded to $23.42 near Monday's closing bell. Unfortunately, the stock experienced some heavy profit taking today with a 3.29% loss. There was a bounce from $22 and its 10 and 50-dma(s). We are not suggesting new plays at this time. Our target is the $23.50-24.00 range.

Picked on June 18 at $21.20
Change since picked: + 1.43
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand

---

Celgene Corp. - CELG - close: 47.21 chg: -0.25 stop: 43.99

Positive analyst comments and a new, higher price target on Monday was not enough to inspire more buying. Shares of CELG have spent the last two sessions consolidating sideways. At the moment we would not be surprised by a dip toward the 10-dma or the $45.00 region. Wait for a bounce before considering new bullish positions. The $50.00 level is probably the next level of resistance but we're going to aim for the $52.40-52.60 region. Readers should expect some give-and-take around the $50 mark. We're setting our initial stop loss at $43.99 but more conservative traders can probably get away with 44.49, which is under last Wednesday's low. The Point & Figure chart shows a triple-top breakout buy signal with a $57 target. We do not want to hold over the late July earnings report.

Picked on June 29 at $47.24
Change since picked: - 0.03
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 3.9 million

---

Energy Transfer - ETP - close: 44.72 chg: -0.25 stop: 42.95

Crude oil traded to a new high above $75 a barrel on rising tensions with Iran and the missile tests from N. Korea. Yet the energy stocks failed to make much headway on the commodity's rise. We remain somewhat cautious here with ETP as the technical indicators are flat to bearish. Our target is the $47.50-48.00 range. Please note that we do not have a confirmed earnings date yet for ETP and they might announce as early as July 10th. We do not want to hold over the report.

Picked on June 18 at $44.25
Change since picked: + 0.47
Earnings Date 07/10/06 (unconfirmed)
Average Daily Volume: 149 thousand

---

Kenexa - KNXA - close: 32.21 change: -1.00 stop: 29.85

KNXA experienced another big gain on Monday's shortened trading session. Unfortunately, the stock gave a lot of it back with today's 3% decline. Watch for a dip to the 50-dma (near 31.42) or the 10-dma (near 30.50) as another bullish entry point to go long. Our short-term target is the $34.90-35.00 range. FYI: The P&F chart is still bearish and points to a $23 target.

Picked on July 02 at $31.85
Change since picked: + 0.36
Earnings Date 08/07/06 (unconfirmed)
Average Daily Volume: 178 thousand

---

Lam Research - LRCX - close: 46.02 chg: -1.24 stop: 44.95*new*

A downgrade for Intel (INTC) this morning did not help the semiconductor sector. Shares of LRCX also experienced new selling pressure this morning and closed with a 2.6% loss. This does not bode well and more conservative types might want to prepare an early exit. We're raising our stop loss to $44.95. We're not suggesting new plays at this time.

Picked on June 30 at $47.25
Change since picked: - 1.23
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 3.1 million

---

Norfolk Southern - NSC - close: 53.73 chg: -0.02 stop: 49.35

NSC weathered the market weakness pretty well. Traders bought the dip this morning near its 50 and 100-dma and shares closed with a very minor loss. We remain bullish. Our target is the $57.35-57.50 range. We do not want to hold over the July earnings report.

Picked on June 29 at $52.57
Change since picked: + 1.16
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 2.2 million

---

Starbucks - SBUX - close: 37.56 chg: -0.46 stop: 34.98

We remain bullish on SBUX with the stock above $37.00 but we're not suggesting new plays. Looking at the intraday charts it looks like the stock could see more consolidating tomorrow. Traders can try and buy a bounce near $37 and/or the rising 10-dma if they're feeling nimble. Our target is the $39.95-40.00 range.

Picked on June 29 at $37.05
Change since picked: + 0.51
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million

---

Verizon Comm. - VZ - close: 33.29 change: -0.26 stop: 32.45*new*

After the initial drop on the market weakness this morning VZ traded sideways in a narrow channel. We're not suggesting new long positions at this time. Please note that we are raising our stop loss to $32.45. Our target is the $34.75-35.00 range.

Picked on June 18 at $32.54
Change since picked: + 0.75
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 9.8 million

---

Zoltek - ZOLT - close: 29.89 change: +1.27 stop: 27.49

There is no change from our new play description from this weekend. We remain on the sidelines. Our trigger to go long ZOLT is at $30.81. More conservative traders may want to wait for a move over $31.00 before initiating positions. Our target will be the $34.75-35.00 range.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 810 thousand
 

Short Play Updates

Juniper Networks - JNPR - cls: 15.91 chg: -0.27 stop: 16.71

Daily and weekly technicals, at least most of them, continue to look bearish. We're suggesting that readers wait for a decline under $15.75 (or even $15.50) before considering new shorts. Our target is unchanged in the $14.10-14.00 range. The P&F chart points to an $8.50 target.

Picked on June 19 at $15.89
Change since picked: + 0.02
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 13.8 million

---

Medtronic - MDT - close: 47.05 change: +0.30 stop: 48.75*new*

MDT did hit a new relative low this morning but the bounce back was pretty strong. We're not suggesting new plays at this time. Instead we're lowering our stop loss to $48.75 and more conservative traders might want to adjust their stop toward $48.00 or consider just locking in some profits right here. MDT is oversold and we've been warning readers to expect a bounce for days now. In the news today MDT announced that it had received FDA approval for its InterStim II device for bladder problems. Our target is the $45.50-45.00 range. We do not want to hold over the August earnings report.

Picked on June 21 at $49.49
Change since picked: - 2.44
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

NitroMed - NTMD - close: 4.66 change: -0.08 stop: 5.07 *new*

NTMD has produced another failed rally under $5.00 and its descending 50-dma but we're not suggesting new plays at this time. Readers should note that we are lowering the stop loss to $5.07 (breakeven). Our target is the $4.10-4.00 range.

Picked on June 18 at $ 5.07
Change since picked: - 0.41
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand
 

Closed Long Plays

Adobe Systems - ADBE - close: 29.86 chg: -0.78 stop: 29.69

We have been stopped out of ADBE at $29.69. The stock was very weak this morning as the market dropped after the open. The afternoon bounce in ADBE failed near the $30.00 level and the technical indicators are deteriorating. If ADBE trades under $29.50 or $29.00 traders might want to consider bearish plays.

Picked on June 29 at $30.40
Change since picked: - 0.54
Earnings Date 06/16/06 (confirmed)
Average Daily Volume: 7.1 million
 

Closed Short Plays

None
 

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

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