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Daily Newsletter, Tuesday, 08/15/2006

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Table of Contents

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

Market Wrap

Market Wrap

Benign inflation readings at the wholesale level for July ignited a very broad rally today, while Treasuries also found a strong bid not only in stocks, but Treasuries as well, and the recent pattern of strength fading towards the close was nonexistent.

The Labor Department said producer prices edged up a modest 0.1% in July, while the core rate, which excludes the volatile food and energy components fell 0.3% and gave market participants renewed optimism that the Federal Reserve's measured pace of hiking rates was indeed managing inflationary pressures.

The market also found some solace on the inflation front after the New York Federal Reserve said its manufacturing index came in at 10.3 vs. economists' forecast of 14.0.

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While the New York figures certainly depict some continued cooling at that regions manufacturing level, many saw the data as being one reason the Fed may well take no action at its late September meeting.

In last night's wrap I discussed some August "Max Pain Theory" levels. For the S&P Depository Receipts (SPY) $128.63 1.19%, it ripped away from its $127 Max Pain level where August PUTS were atop today's list of most active option, and PAIN delivered to a bear (holder of the put), but PLEASURE (seller/NAKED put trader).

S&P Depository Receipts Option Chain - Most Actives

A lower move in a volatility measure like the VIX.X is sometimes assumed to be created buy CALL option buyers only. Not true! The SPY August $127 Puts (SPY-TW) were #2 most active and we can see that DownTicks (sell induced trade) greatly outnumbered UpTicks (buy induced trade).

Closing U.S. Market Watch - 08/15/06 Close

There was a lot of "green on the screen" today and only the RXH.X finished in the red.

Home builders as depicted by the DJUSHB recouped all of yesterday's losses, and then some. At 01:00 PM EDT the National Association of Home Builders' (NAHB) said their index for U.S. sales of new, single-family homes fell in August to 32, its lowest point since February 1991 when the economy was in recession.

Still, longer-dated Treasury maturities like the 10-year yield ($TNX.X) and 30-year year YIELD ($TYX.X) created some needed optimism for the group that mortgage rates may stabilize at some historically attractive levels.

Economic Calendar -

"Orange" and "red" folders are usually deemed important than yellow, but these days, when Fed activity is being closely monitored, just about every economic report from around the globe can find some type of analysis.

The "TIC Report" had the Treasury revealing net foreign buys of U.S. securities rose to $75.1 billion in June, which was slightly above the 12-month average, but well above the consensus estimate of $62.9 billion.

The Treasury Department said net foreign purchases of U.S. Treasury notes and bonds more than tripled in June to $27 billion!

Testing 1 ...

I now want to pick up where I left off in last night's wrap with the QQQQ.

Oh, there were some buyers on the break above $37.25, and I have to deem tonight's close as BULLISH, where any type of pullback near $36.33 (IF the QQQQ were to pull back there) would get gobbled up, especially by bears that now find themselves with a paw in the proverbial "honey jar."

What I want to show (with volume turned on) is the same chart of the QQQQ we looked at last night, where a "test for strength" from the QQQQ was to get a close ABOVE $37.25. Sellers (not just bears/shorts, but long liquidators too) had been able to overcome buyers for weeks now.

I'm "turning on" my QCharts' WEEKLY Pivot Levels too, so you and I can get a feel for how INSTITUTIONAL computers have handled things.

NASDAQ-100 Trust (QQQQ) - 5-minute interval chart

There were a couple of technicals in play yesterday that suggested to me that traders should be "bearish" the QQQQ at $37.25, and by yesterday's close, that sure looked to be the case.

Even this morning, on the gap higher open, you can see that sellers were still hanging around the $37.25 level.

Yep ... "OK, inflation data is friendly, but what about the SLOWING economic data out of New York?"

Boom! There's our answer.

It would HAVE to be my analysis that the MARKET is more focused on "inflation" and Fed activity, and thinking "the economy will take care of itself, or provide more data in the future, but the move above $37.25 and ability to CLOSE above that level, if not my "old upward trend" would now have the more BULLISH BIAS lifting from $35.56 to $36.32, somewhat "eh.... neutral" at $37.24 (unless your short the QQQQ, then a trader/investor needs to make sure they're not overly short), and a near-term BEAR BIAS would be at the $37.95 level.

I say "bias" based on the levels of fibonacci retracement, NOT the WEEKLY Pivot Levels. For a pivot level trader, WEEKLY Pivot after a trade at a WEEKLY R2 is the more "neutral" to near-term BULL bias level.

Testing ... 1, 2

How about those one, two and three-lettered stock symbols on the NYSE?

NYSE Composite (NYA.X) - Daily Intervals

It never hurts to be consistent. Take the high close to the low close and see what you get.

I get a BULLISH CLOSE (yes, just 3 points). On a "close to close" basis, if SELLERS were stronger than buyers, then the NYA.X should have closed BELOW 8292.78. Right?

Testing 1, 2, 3 ...

How about an intra-day 5-minute interval of the OEX? Same fibonacci retracement we looked at last night. Throw on the 590.20 highest recent close, and QCharts' WEEKLY Pivot Levels.

S&P 100 Index (OEX.X) - 5-minute intervals

Intra-day observations may give traders and investors a better feel of how aggressive buyers and sellers are, and how the MARKET is they're trading is being traded.

The OEX is not an "electronic" index like the NDX/QQQQ, so its opening bar will usually be the prior day's close.

The OEX 5-minute bar actually gapped higher, where e-mini S&P futures (es06u) would be a better indication of today's open, but note how the OEX really seemed to find "caution" among sellers above the 07/28/06 recent relative high close of 590.20, which I made note of last night.

If anything, that's further sign of some "re-think" among bears regarding this morning's economic data.

Yes... the OEX did pull back from the 592 level on the NAHB data, into WEEKLY R1, but remember Mr. Greenspan's remarks several months ago regarding housing prices being on the Fed's watch list of inflationary pressures.

Sometimes... "bad news" is "good news" on the inflation front.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
NoneNone

Editor's note: Tuesday's market rally was fueled by a better than expected PPI report. Investors interpreted the data to mean that the Fed might be done for the year since the Fed's last statement said they were data dependent. The market's internals and the breadth and dept of the rally today suggested this could be a pivotal change in the market's trend. We strongly considered adding new plays to the newsletter tonight but tomorrow's CPI report could undo any gains today if the CPI data is too strong. We're choosing to wait and see if the CPI affirms today's data in the PPI and if stocks see any follow through on today's move. The CPI will be released tomorrow at 8:30 in the morning Eastern time.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

Smith A O Corp. - AOS - close: 41.24 chg: +1.77 stop: 42.26

It looks like the market rally and PPI data produced a short squeeze in AOS. The stock added 4.4% yet volume was significantly below the daily average. We're not suggesting new positions and if the CPI data comes in favorably tomorrow we're expecting to be stopped out at $42.26.

Picked on August 10 at $39.75
Change since picked: + 1.49
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 288 thousand

---

Brookefield Homes- BHS - close: 24.30 chg: +0.90 stop: 24.55

We don't see any changes from our weekend play description for BHS. The homebuilders rallied strongly today in spite of a very negative read on homebuilder confidence. The NAHB announced that its housing index fell to a 15-year low. We're waiting for a breakdown in BHS under $23.00. Our trigger to open positions is at $22.99. If triggered our target is the $20.10-20.00 range. Please note that the latest (July) data puts short interest at 20% of BHS' 26.2 million-share float. That is a high degree of short interest and increases the risk of a short-squeeze!

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 497 thousand

---

Eagle Materials - EXP - close: 35.60 chg: -0.05 stop: 39.26

EXP displayed relative weakness today with a failure to participate in the very widespread market rally on Tuesday. Considering the market's potential bullish breakout we're not suggesting new positions at this time. More conservative traders may want to tighten their stops in case the CPI report comes in better than expected tomorrow.

Picked on August 08 at $36.18
Change since picked: - 0.58
Earnings Date 07/24/06 (confirmed)
Average Daily Volume: 1.7 million

---

Juniper Networks - JNPR - cls: 13.49 chg: +1.05 stop: 13.75

Ouch! The market's rally produced a big short-squeeze in shares of JNPR today. The stock added 8.44% and erased most of our unrealized gains. News that JNPR received a delisting letter from the NASDAQ failed to faze investors. We are not suggesting new positions. If the CPI data comes in favorable we expect to be stopped out. The risk here is if JNPR gaps open higher or that JNPR will move past our stop so fast we'll get a bad fill on the exit. Be prepared.

Picked on July 21 at $13.75
Change since picked: - 0.26
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million

---

Lamar Adver. - LAMR - close: 48.91 chg: +0.78 stop: 50.05

LAMR is still rebounding but the results still seem somewhat lackluster. If the CPI report is positive tomorrow we would expect LAMR to rally toward resistance near $50 and its 200-dma. Odds of being stopped out at $50.05 would be pretty high. We're not suggesting new plays at this time.

Picked on August 10 at $47.90
Change since picked: + 1.01
Earnings Date 08/08/06 (confirmed)
Average Daily Volume: 862 thousand

---

Oregon Steel - OS - close: 48.56 chg: +1.56 stop: 50.51

Steel and iron-related stocks produced a relatively strong rebound today. Shares of OS added 3.3% although volume came in below average. We're trying to trade a pull back toward the bottom of its trading range but if the markets rally on a better than expected CPI report tomorrow then OS will likely challenge overhead resistance near our stop loss.

Picked on August 13 at $47.39
Change since picked: + 1.17
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Portfol.Recov.Assoc. - PRAA - cls: 41.86 chg: +1.61 stop: 42.05

We see no changes from our new play description on PRAA. The P&F chart is bearish with a $32 target. We are suggesting a trigger at $39.49 (under Friday's low) to open new short positions. If triggered our target is the $36.00-35.00 range.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (confirmed)
Average Daily Volume: 166 thousand

---

Steel Dynamics - STLD - close: 53.10 chg: +1.60 stop: 55.21

The market rally fueled a +3.1% oversold bounce in shares of STLD. The move took a good chunk of our unrealized gains. We're not suggesting new plays and more conservative traders may want to tighten their stops should the CPI data come in better than expected.

Picked on August 09 at $53.95
Change since picked: - 0.85
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 1.6 million
 

Closed Long Plays

None
 

Closed Short Plays

Dell Inc. - DELL - close: 22.08 chg: +0.84 stop: 22.15

We have been stopped out of DELL at $22.15. DELL was one of the big stories today after the company announced a recall of 4.1 million laptop batteries due to a potential fire hazard. The stock unexpectedly rallied on the bad news. Maybe investors figure it can't get any worse than this. Rival Hewlett-Packard is due to report earnings tomorrow night and DELL will report earnings on Thursday night.

Picked on August 09 at $21.14
Change since picked: + 0.94
Earnings Date 08/17/06 (unconfirmed)
Average Daily Volume: 25.1 million

---

FMC Corp. - FMC - close: 60.35 chg: +0.84 stop: 60.26

We have been stopped out of FMC at $60.26. The market's rally this morning fueled a breakout in FMC over the $60 level and its exponential 200-dma and 21-dma. The move higher today also produced a new MACD buy signal.

Picked on August 08 at $57.20
Change since picked: + 3.15
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume: 298 thousand

---

Meridian Biosci. - VIVO - cls: 22.02 chg: +1.94 stop: 21.21

We have been stopped out at $21.21 today. The stock experienced a big short squeeze right from the opening bell with a gap open higher at $20.49 and a spike past the $21 level. The move today helped produce a new MACD buy signal.

Picked on July 23 at $20.94
Change since picked: + 1.08
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand
 

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

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