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Daily Newsletter, Thursday, 07/06/2006

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Table of Contents

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

Market Wrap

Smokers Unite

Well at least buy the smokes anyway, or the company that makes them. Thanks to Altria (MO 77.76 4.43), which was up 6% today, the DOW outperformed the market to the upside today. The Florida Supreme Court threw out a $145B punitive damage award against cigarette makers and decertified the case as a class action lawsuit. This made it a very significant victory for the tobacco industry. For some reason this all sounds vaguely familiar with past tobacco cases. While the DOW was not alone in the green column today it didn't have a lot of company up at the top. With the DOW up 73 points we should have seen SPX up about 7 but instead it was up only 3 points. The COMP was marginally in the green, almost 2 points but the NDX was in the red.

The internals supported the green indices but even they say the day was a little better than a mixed bag. Welcome to a summer time market that is lethargic (relatively low volume today) and somewhat confused. It can't seem to make up its mind whether or not it wants to scale the wall (called 50-dma's) or sit down and have a beer. Neither the bears nor the bulls seem particularly interested in taking a stand at the moment. Ah, summer time trading at its best.

Looking at this morning's economic reports, we see a continuation of signals that the economy is slowing down a little. But the market didn't really pay attention to any of this morning's reports, except Altria and the law suit that was ruled in its favor. The unemployment data showed initial claims dropped slightly by 2K to 313K which was slightly lower than expectations for 315K. The previous week's number was revised higher by 6K to 315K (have they ever revised it lower?). The 4-week average of initial claims rose 2,500 to 308,500. Continuing claims were up 52K to 2.46M which is the highest level since mid-March. The 4-week average rose 11,250 to 2.43M.

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The ISM Services (nonmanufacturing) number fell to 57.0% from 60.1% in May, making it the slowest pace since January. It was lower than most economists had been expecting, which was a slight drop to 59.6% and is concerning because the January number followed a slow Q4. New orders fell to 56.6% from 59.6%. The employment index fell to 52.0% from 58.0%. The price index slipped to 73.9% from 77.5% in the previous month. These numbers will help the Fed feel a little better about inflation fears but the stock market shouldn't like the slowing in growth. This is the tough spot for the market--do we like slowing growth because of the reduced inflation fears which gets the Fed to think about pausing, or do we not like slowing growth because of what it will do to company earnings.

There was some good news out of the housing sector and the economists were quick to point out how the real estate market is stabilizing. That sounds like wishful thinking based on one month's data. I thought economists were supposed to report facts and not hopeful thinking. Silly me. The pending home sales index rose 1.3% in May which is the first increase since January. The index is down 10.1% in the past year. But David Lereah, chief economist for National Association of Realtors, said, "The slight change in pending home sales indicates the market is beginning to level out. This is consistent with our forecast, which is showing a soft landing for the housing sector." I hope for a lot of peoples' sakes, including the broader economy, that he's correct. My feeling is that he's off the mark by a wide margin.

The only other major economic report was the crude inventories data which shows crude supplies fell 2.4M barrels last week. The price of oil dipped early today but then climbed back up to near yesterday's closing price--down a dime at $75.15. New highs in oil are being met with negative divergences and this suggests we could see a pullback soon. The good news for motorists is that gasoline supplies jumped unexpectedly higher by 700K barrels to 213.1M total. The price of wholesale gasoline has been hitting all-time highs (high of 2.297 and then closing at 2.276 yesterday) so we could use some relief. Gasoline prices closed at 2.251 today so not a whole lot of relief there. The daily chart for gasoline (August contract) looks like it's ready for a pullback so we'll have to see what happens.

Other than that it was a quiet summer day and other than an early pop in the morning, most of which was given back by the end of the day except for the DOW, there was little excitement today. Let's see what the charts are telling us.

DOW chart, Daily

It's hard to say whether or not the trend line along the highs from January 2004 is having an influence on price. It was exceeded for about a month in April and May but the DOW couldn't get back above it when it bounced in early June. Of course the 50-dma was right there as well and it failed that test. Now the DOW has been hammering on its 50-dma again and looks like it could make it back over. Then the trend line just under 11300 could offer up some resistance. Two equal legs up from the June low is at 11335 so that makes for a good Fib target. On a smaller time frame, the top of a parallel up-channel for price action since the June low will be near that 11335 level late tomorrow/early Monday. If we're seeing some weakness develop there it could be a good place to try shorting the DOW.

SPX chart, Daily

SPX is having a little less luck with its 50-dma at 1274 which is right where it closed today. In addition to that there's the broken uptrend line from March 2003 at the same level. SPX briefly broke above both but is currently struggling at this level. A consolidation here, which stays above 1260, followed by another push higher would create a bullish impulsive move up off the June low. That's what the bulls want to see--a consolidation that lasts perhaps another week and then a rally from there. That leg up to a minor new high would complete the rally leg from the June low and would then be followed by a little deeper retracement but the impulsive move up would say another one will follow and that would mean we can expect a rally into the summer months.

A break below 1260 would be a shot across the bow suggesting the bounce is over. A break below the uptrend line from the June low, currently near 1249, would be the shot that takes out the bulls' rudder. A break below the last pullback low at 1237 would be the shot below the water line and the USS Bullmarket would be in serious trouble. The Elliott Wave (EW) count on the above chart says the next leg down is going to be a doozy. That's why the bulls want a consolidation here followed by another leg up.

SPX chart, Daily, courtesy stockcharts.com

I like this chart from stockcharts.com, which I've been showing on the Futures Monitor for a few days now, because it clearly shows the importance of its 50-dma. If you go back further in time than what's shown in this chart you'll see it has acted as support and resistance and is often overshot before heading back the other way. During the first 4 months of this year you can see how the 50-dma was supportive, as was MACD above the zero line. Now we have price hitting it from below and MACD below zero. This makes me wonder if we'll see the same thing from below as we saw from above. If so, this test of the 50-sma will fail.

Nasdaq chart, Daily

The 50-dma has clearly crossed down below the 200-dma which gives us an intermediate sell signal, one which the fund managers take seriously. The COMP wasn't even able to get up to test its 50-dma so a drop back down from here would be very bearish, especially from an EW perspective. The current EW count on the chart calls for a 3rd wave down from here and that could be a sharp and steep drop. Bulls will want to see the same thing I talked about for the SPX--a consolidation followed by another move higher.

QQQQ chart, Daily

The QQQQ is giving me just enough of a different picture from the COMP to keep me guessing. While the bounce from the June low looks like it will fail, and says we've got a new low coming, the larger EW count tells me we could see a much bigger bounce after that, perhaps back up to $40 area. If the broader market continues to consolidate and then head higher then there will be little doubt in my mind that we'll see a very choppy rally into the summer months. Short term trading this index in that case could be very difficult.

The SOX chart on QCharts hasn't been updating since June 30th so unfortunately I do not have an updated chart for you. However, the only thing I can add is that the decline since about mid-June is showing bullish divergences and while we could see minor new lows it's looking like it could form a bottom soon. I wouldn't want to be short the semis based on its chart. This may be hinting that the rest of the market could do the choppy summer rally rather than a hard decline from here. It'll definitely be worth keeping an eye on this index.

BIX banking index, Daily chart

The banks are not as strong as I'd like to see in order to help the bulls. By not being able to get up and at least tag its 50-dma, the banks look weak here. Stochastics is heading for overbought and a test of the 50-dma, if it gets there, would be a good time to try a short to see what kind of pullback, or worse, we get.

U.S. Home Construction Index chart, DJUSHB, Daily

There's very little question in my mind about this pattern. The bounce, if you could call it that, from the June low is the picture of a bear flag. If it rallied strong out of this it would catch me and a few others on the wrong side of the trade--this is a short waiting to happen.

Oil chart, August contract, Daily

After a very choppy pullback since its April high, and barely touching its uptrend line from December, oil has shot out of the gates and looks like it's got its sights set on a new high. A pullback is in order, maybe to retest its 50-dma but this chart tells me we should see new all-time highs in oil before the summer is out.

Oil Index chart, Daily

What's good for oil is very good for oil stocks. While oil has not yet made new highs above its April high, the oil stocks did make new highs. Like oil, this index looks ready for a pullback but the pattern would look best with just a sideways/down consolidation and then another leg higher. After that new high I'd want to be taking profits and stand aside since it could be the peak in oil and oil stocks. At the very least we'll be due a much larger pullback correction. But for now, if you're long oil stocks, stay there for a little while longer.

Transportation Index chart, TRAN, Daily

After that 3-wave decline from its May high (which is a correction to the impulsive rally it's been in) it was either going to lead to a much larger sideways move through the summer or head to new highs. By the looks of it it's going to head for new highs. But that new high might be just a test of its broken uptrend line, currently near 5050. With oscillators in overbought, that could be a good test that's worth a short play.

U.S. Dollar chart, Daily

The US dollar is just another example of why you always want to play a retest of a broken trend line. If the play fails (such as a continuation of the rally back above the trend line in this case) then you'll know the market has other plans. But most of the time these retests make very nice trade entries, as a short at the trend line near $87 on June 23rd would have been. The dollar got a bounce today and closed at its 50-dma at $85.46. I'm expecting the dollar to drop down to new lows and I'm anxious to see if the $83 area provides support.

Gold chart, August contract, Daily

After bouncing off its 200-ema gold has had a nice bounce. There's an internal Fib projection, based on an a-b-c wave count to the upside that matches the 50-dma at 640. Therefore that's where it could be worthwhile trading gold to the short side, or taking some profits if you're trading gold to the long side. If we get only a choppy sideways/down kind of pullback then I would expect another leg up and that would be bullish for the longer term pattern. But there's still a chance we could get another leg down in gold and that's why I'd want to take some money off the table if you're long gold (and trading it versus holding it for longer term).

Results of today's economic reports and tomorrow's reports include the following:

Tomorrow's reports include the important nonfarm payrolls number. This, along with the hourly earnings report, will be used by the Fed as part of their "forward looking" data analysis to help them determine what they will do next. My feeling is they will continue to raise rates until it's obvious they've gone too far and they'll turn right around and start dropping rates. We might not have a "pause" in between. So depending on the market thinks the Fed will react to the numbers will determine the knee jerk reaction in the morning.

While today was overall bullish, except for some techs, it wasn't a day for the bulls to write home about. Volume was on the low side and up volume and advancing issues were only marginally ahead of down volume and declining issues. New 52-week highs weren't that much ahead of new lows. But at least the internals were supportive of the positive market today. The big negative in my mind was the fact that the DOW was so much further ahead than the others. This always looks like a defensive move, especially with much of the tech sector in the red.

Speaking of sectors, the leaders on the green board were gold and silver, healthcare (I guess the win by the tobacco companies will mean more smokers which will mean more diseases which will mean more money for the HMOs), drugs (same reason as above), networkers, disk drives and biotechs. QCharts is having some difficulties with some of my sector indexes such as XAU, UTY, SOX and OSX but checking them at other sources shows the OSX was one of the leaders to the downside today. Other leading the red team were the Trannies and utilities.

We've had no significant changes in the SPX weekly charts from last week and therefore there's nothing new to add as far as which scenario could be playing out here. Until SPX drops below 1237 I can't call the more immediately bearish case as the best one. If price consolidates in the 1260-1280 area and then heads higher then there's a good chance we could see the summer rally unfold, which is the intermediate bullish scenario. We would probably see a lot of chop and a slow grind north but at least the bulls wouldn't have to worry about getting out of their positions, yet.

So the bulls want to see the consolidation we've been in for the past week continue for another week or so. That would suggest we've got higher to go but it probably won't be a very smooth ride. On the other hand if SPX drops below 1260 it would be a heads up for something more potentially bearish. But it takes a break of the uptrend line from the June low, currently near 1249, to say the bounce from that June low could be over. And then a break below 1237 would be confirmation that we've probably got some very bearish things about to happen to the market. In either case I'm hoping by this time next week that we'll know which weekly chart that I posted at the end of last Thursday's report is playing out. Patience is required as we wait for price to tell us. In the meantime if you're day trading, trade quickly and take profits early since we're in a period of no follow through and quick reversals. Good luck and I'll be back next Thursday. I'll also be updating during the day on the Futures Monitor.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
AEOS None
USAK  

New Long Plays

Amer.Eagle Outfitters - AEOS - cls: 34.77 chg: +1.00 stop: 32.99

Company Description:
American Eagle Outfitters is a leading retailer that designs, markets and sells its own brand of laidback, current clothing targeting 15 to 25 year-olds, providing high-quality merchandise at affordable prices. AE's original collection includes standards like jeans and graphic Ts as well as essentials like accessories, outerwear, footwear, basics and swimwear. American Eagle Outfitters currently operates 808 stores in 50 states, the District of Columbia and Puerto Rico, and 71 AE stores in Canada. (source: company press release or website)

Why We Like It:
AEOS is a relative strength play. The stock is trading near new all-time highs. Today's gain was fueled by better than expected June same-store sales numbers, which came in at +11%. The stock is really out performing its peers. The RLX retail index looks vulnerable to more selling, thanks in part to new weakness in Wal-Mart (WMT). We are going to suggest longs in AEOS with the stock above $34.00. More conservative traders might want to use a trigger over $35.00 since that level could be seen as psychological resistance. Our target is the $38.25-38.50 range. The P&F chart is more optimistic with a $63.00 target. We do not want to hold over the August earnings report. PLEASE note that we would NOT suggest opening new bullish positions if the market does not respond positively to the jobs report due out Friday morning!

Picked on July 06 at $34.77
Change since picked: + 0.00
Earnings Date 08/15/06 (unconfirmed)
Average Daily Volume: 2.2 million

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USA Truck - USAK - close: 19.35 chg: +0.63 stop: 18.99

Company Description:
USA Truck is a medium haul, dry van truckload carrier transporting general commodities throughout the continental United States and into and out of portions of Canada. We transport general commodities into Mexico by allowing through-trailer service on our trailers through our facility in the gateway city of Laredo, Texas. We also provide third-party logistics and freight brokerage services for a diverse customer base. (source: company press release or website)

Why We Like It:
It has been a pretty dismal 2006 for USAK so far. Yet it looks like the stock may have put in a significant bottom over the last six weeks. Short-term technicals have improved and the stock is flirting with a breakout over its 50-dma and resistance at the $20.00 level. If USAK can trade over $20.00 it would produce a new Point & Figure chart buy signal. If the market responds well to the jobs report out tomorrow then USAK might have enough gas to breakout. We're going to suggest a trigger to go long at $20.05. If triggered then our target will be the $22.00-22.50 range. We do not want to hold over the late July earnings report.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume: 140 thousand
 

New Short Plays

None
 


Play Updates

In Play Updates and Reviews

Long Play Updates

Asta Funding - ASFI - close: 36.23 change: -0.11 stop: 34.95

We don't see any changes from yesterday's update. ASFI still looks weak and shares dipped to the $36.00 level late Thursday afternoon. Tomorrow's jobs report will probably determine direction. 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: + 0.22
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 165 thousand

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A.S.V.Inc. - ASVI - close: 22.78 change: +0.15 stop: 21.20*new*

ASVI spent Thursday churning sideways as traders wait for tomorrow's jobs report. Please note that we're adjusting the stop loss to $21.20. More conservative traders may want to put their stop under $22.00. 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: + 1.58
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand

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Celgene Corp. - CELG - close: 47.30 chg: +0.09 stop: 43.99

CELG is yet another stock that traded sideways on Thursday as investors wait for the jobs report tomorrow. A move over $48.00 could be used as a new entry point or a bounce from the simple 10-dma (46.50). 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: + 0.06
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 3.9 million

---

Energy Transfer - ETP - close: 44.99 chg: +0.27 stop: 43.25*new*

We do not see any changes from yesterday's update but we are going to raise our stop loss to 43.25, which is still under the simple 50-dma (43.35). 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: + 0.74
Earnings Date 07/10/06 (unconfirmed)
Average Daily Volume: 149 thousand

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Kenexa - KNXA - close: 32.00 change: -0.21 stop: 29.85

KNXA dipped toward its 50-dma and managed a minor bounce but essentially the stock traded sideways. The jobs report tomorrow will probably determine direction. More conservative traders might want to raise their stop toward today's low. 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: + 0.15
Earnings Date 08/07/06 (unconfirmed)
Average Daily Volume: 178 thousand

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Lam Research - LRCX - close: 45.60 chg: -0.42 stop: 44.95

Semiconductor stocks are still sinking. This does not bode well and more conservative types might want to prepare an early exit. We're not suggesting new plays at this time.

Picked on June 30 at $47.25
Change since picked: - 1.65
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 3.1 million

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Norfolk Southern - NSC - close: 52.26 chg: -1.47 stop: 49.35

We cannot find any news to explain it but all of the railroad stocks were hit with significant profit taking today. NSX lost 2.7% and closed under its 50 and 100-dma. A bounce back over the $52.50 or $52.75 levels could be used as a new entry point to go long. 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: - 0.31
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 2.2 million

---

Starbucks - SBUX - close: 37.88 chg: +0.32 stop: 34.98

Watch out! Tomorrow could be rough for SBUX. After the closing bell the company reported June same-store sales figures. SBUX was forecasting a gain between + 3%-7%, while Wall Street was looking for a gain between +6% and +8%. The company reported +6% and the stock sold off after hours (trading around $36.55). That's bad news because the $37.00 level should be acting as support. Of course market reaction to the jobs report tomorrow morning could help alleviate or exacerbate the reaction. We're not suggesting new plays at this time and more conservative traders may want to adjust their stops toward $36.00.

Picked on June 29 at $37.05
Change since picked: + 0.83
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million

---

Verizon Comm. - VZ - close: 33.02 change: +0.13 stop: 32.45

Something is not right with VZ. All of the data sources we checked show VZ closing at $33.02 up 13.5 cents. Yet if you look at the historical prices for VZ the stock closed at $33.29 yesterday. That should be a loss of 27 cents. Looking at the intraday chart we see a dip to and bounce from the $32.50 region. Normally we'd suggest longs on the bounce but we're not going to suggest any new plays here. Our target is the $34.75-35.00 range.

Picked on June 18 at $32.54
Change since picked: + 0.48
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 9.8 million

---

Zoltek - ZOLT - close: 29.28 change: -0.54 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: 16.01 chg: +0.10 stop: 16.26*new*

There is no change from our previous updates on JNPR. The stock has been trading sideways the last few days and the market's reaction to the jobs report tomorrow could set a new direction for JNPR. We are going to lower our stop loss to $16.26. More aggressive traders may want to leave their stop north of the 50-dma (16.58). 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: + 0.12
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 13.8 million

---

Medtronic - MDT - close: 47.43 change: +0.38 stop: 48.75

There are no surprises here. We've been warning that MDT was ready to bounce for days. More conservative traders might want to do some profit taking. 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: - 2.06
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

NitroMed - NTMD - close: 4.68 change: +0.02 stop: 5.07

NTMD is yet another stock that traded sideways ahead of tomorrow's jobs report. We're not suggesting new plays at this time. Our target is the $4.10-4.00 range.

Picked on June 18 at $ 5.07
Change since picked: - 0.39
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

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