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Daily Newsletter, Monday, 10/23/2006

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Table of Contents

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

Market Wrap

Another Wave of Bullish Insurgence!

Stocks continued their torrid climb Monday, where a brief spat of selling at the open was quickly reversed.

Shares of Wal-Mart (NYSE:WMT) $51.28 +3.86% closed at a 20-month high on heavy volume of 53 million shares after the world's largest retailer and Dow component's CFO Tom Schoewe said the company was looking to "significantly lower" the company's year-over-year global growth rate of capital expenditures to a range of 2% to 4% in fiscal 2008 from the current year's range of 15% to 20%.

Investors and industry analysts applauded the move, which is aimed at improving both returns on invested capital and cash flows.

On a conference call with reporters, Mr. Schoewe said the decision to lower capital expenditures on new stores being built was in part due to higher land and construction costs.

"If there's a significant deceleration in land costs and construction costs, we would be in a position to reaccelerate new-store growth," added Schoewe.

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Wal-Mart said that roughly 600 new stores would be built under the revised plan, with half in the United States. Most of the new stores will be 196,000 square-foot super centers.

Wal-Mart's gains helped boost the S&P Retail Index (RLX.X) 500.47 +.72% back towards its recent all-time high close of 501.91.

Also adding to today's upbeat tone among the Dow blue chips was General Motors (NYSE:GM) $35.19 +5.54% and 3M (NYSE:MMM) $80.09 +2.06%.

Shares of Caterpillar (NYSE:CAT) $60.42 +2.40% edged higher after Friday's negative reaction to earnings.

Meanwhile, the AMEX Disk Drive Index (DDX.X) 150.62 -0.62% closed below its 21-day SMA (155.11), 200-day SMA (153.33) and 50-day SMA (151) with component SanDisk (NASDAQ:SNDK) $47.45 -3.45% unable to find a bid after Friday's -20% decline.

Today's percentage loser among the Dow components had shares of American Express (NYSE:AXP) $56.65 -2.39% trading off their recent all-time highs of $58.43. The financial services conglomerate reported Q3 net income of $967 million, or $0.79 per share, which topped Wall Street's expectations of $0.76 per share.

Closing U.S. Market Watch - 10/23/06

While the major indexes pressed either all-time highs, or new 52-week highs, energy prices were under pressure again today.

After Friday's expiration for the November Crude Oil futures contract (cl06x), December Crude Oil futures (cl06z) settled down $0.52, or -0.88% at $58.81 in its first day of front-month trading as traders remained skeptical that OPEC will be able to successfully implement a decision to cut production in an effort to support prices.

S&P 500 "overbought" ... QUANTIFIABLY speaking

If you're thinking the major indexes are starting to look a little overbought (some have thought so since mid-September) then I'm going to begin siding with those of you that feel this way!

Just as the S&P 500 Bullish % (BPSPX) from Dorsey/Wright & Associates alerted you and I to a "bull confirmed" status on September 13, we should now observe this institutionally followed indicator of market internals, while VERY STRONG, recently achieved the 70% level, where other internal indicators, like my proprietary NYSE and NASDAQ NH/NL ratios reach some very bullish, yet very overbought readings (see above internals).

I want to quickly review Dorsey/Wright's S&P 500 Bullish % with you.

Dorsey/Wright's S&P 500 Bullish % (BPSPX) - 10/23/06 Close

StockCharts.com users will follow the $BPSPX chart, but the main point I want to alert traders and investors to is the STRENGTH, but the overbought levels and greater bullish RISK we're at now.

Tom Dorsey like to use American Football as an analogy, and it is a fitting analogy in my opinion. Think of a football field where 30% and 70% are the actual goal lines.

On September 13, when the BPSPX signaled "bull confirmed" this MARKET was signaling that bulls took possession of the football. At 70%, the bulls have scored a touchdown. While bulls still have the ball, at some point, they will kick the ball back to the bears, and we should see some type of weakness, or supply come back to this market.

The term "overbought" has been used for weeks now, but QUANTIFIABLY speaking, the S&P 500 Bullish % (BPSPX) tells us that 70.77% (roughly 354 of the 500 stocks comprising the S&P 500 Index) now show a "buy signal" associated with their point and figure chart.

Just as I've done over the years, and then my 09/18/06 Market Wrap, let's take a look at the S&P 500 Index ($SPX) 1,377.02 +0.61% point and figure chart. Remember, X is demand, O is supply. Currently we would need to see a 3-box reversal for any sign of MEANINGFUL weakness.

S&P 500 Index - 10-point box

One of the powerful traits of point and figure charts is the methodology for a greater focus on supply/demand (O/X) than on time. I've said before, and I'll say it again. Bull and bear moves can last MUCH LONGER than we might imagine when the move takes hold.

As the bullish % nears SIMILAR LEVELS OF RISK found in January, traders and investors should be prepared, or have plans in place for at least a 3-box reversal (see pinkish box). That 3-box reversal from 1,290 this past January (1= First chart entry the month of January) would have represented a 2.3% decline.

From the 1,370 level, a 3-box reversal, would "only" bring the SPX back down to 1,340, or a 2.19% decline.

I should note that on the above chart from Dorsey/Wright.com, the "top" and "bot" labels are the 10-week trading bands. They can continue to move higher, just as a bollinger band, or keltner band will do as PRICE rises, but here too, we get the observation that things may be a little extended to the upside.

RISK to a simple pullback is 3-boxes. RISK to a "sell signal" is all the way back down to 1,220 at this point.

Now let's take a look at the S&P Depository Receipts (AMEX:SPY) $137.47 +0.46% with an updated WEEKLY (blue) pivot retracement.

In the OptionInvestor.com Market Monitor, I have profiled the November $136 Put (SFB-WF) on two different occasions. One on 10/11/06 when the SPY was trading $135.08, and ANOTHER put at 10/17/06.

S&P Depository Receipts (SPY) - 10/23/06 Daily Intervals

As bullish as I've been in the Market Monitor and Market Wraps since early September upon my return from vacation, I must confess that I thought we would have seen some type of pullback in recent weeks.

Yes, we took some profits on bullish positions WAY TOO SOON, just in time on other, and some, well, there were no profits at all as the MARKET just didn't agree with my bullish analysis on that particular stock. A rising tide tends to lift a lot of boats, but not ALL boats.

But that hasn't kept me on the sidelines either!

One additional "reason" for bullish caution at tonight's close is that the SPY, which mirrors the SPX, is getting very, very close to my bullish resistance. The "dashed red" upward trend is also a bullish resistance trend that has been mentioned in prior weeks, where we can perhaps see just how strong, and perhaps "bull confirming" strength has been in regards to that trend.

Today's continued strength in the SPY above its MONTHLY R2 (resistance 2) had me RAISING the bearish target from my previously profiled target of $132.50 to $135.30. (MONTHLY Pivot Retracement is PINK)

That would be a level where I think other BEARS for the SPY are also going to be looking for some cover near-term, should a decline be found. It is a level where bulls may also be looking for entries.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
CMG None

New Long Plays

Chipotle Mex.Grill - CMG - close: 56.40 chg: +1.44 stop: 53.74

Company Description:
Chipotle Mexican Grill offers a focused menu of burritos, tacos, burrito bols (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. Through our vision of Food with Integrity, Chipotle is seeking better food not only from a variety of fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for the animals, the land, and the farmers who produce the food. Chipotle opened its first restaurant in 1993 and operates more than 530 restaurants today. (source: company press release or website)

Why We Like It:
The early October breakout higher in CMG was not just a breakout on its daily and weekly charts but also a bullish buy signal on its Point & Figure chart. CMG's strength pushed the stock through P&F chart resistance and the buy signal now points to a $74 target. We believe the bounce on Monday (and Friday) now looks like a new entry point to go long the stock. CMG has spent about two weeks digesting the earlier October surge and retested broken resistance as new support. We're suggesting positions now with CMG above the $56.00 level. Our short-term target is the $59.90-60.00 range. More aggressive traders may want to aim higher but we plan to exit ahead of the October 31st earnings report. We're placing the stop just under Friday's low.

Picked on October 23 at $56.40
Change since picked: + 0.00
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 900 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

BJ Services - BJS - close: 30.14 change: +0.29 stop: 28.99

It was a relatively volatile day for BJS. The stock managed to tag both sides of its trading range with a dip to $29.37 and a spike to $30.54 before finally settling with a 0.9% gain. The relative strength was probably due to a positive earnings report from Halliburton (HAL), another oil services stock. Our weekend updated suggested that readers consider an entry point on a dip near $29.50 or on a rise past $30.55. Today's move satisfied the first entry point suggestion. Our target is the $33.50-34.00 range. Be advised that the $32.00 level and the 50-dma (near $32) might offer some overhead resistance. We do not want to hold over the October 31st earnings report.

Picked on October 19 at $30.55
Change since picked: - 0.41
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 5.5 million

---

D.R.Horton - DHI - close: 23.02 change: -0.21 stop: 22.99

This is a pivotal test for DHI. The stock actually broke down under support at the $23.00 level on an intraday basis. The bounce back this afternoon was pretty anemic. If DHI doesn't rebound from this level tomorrow we'll probably drop it as a bullish candidate. So far we're still just spectators waiting for a breakout over resistance near $25.50. We're suggesting a trigger to go long at $25.51.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/14/06 (confirmed)
Average Daily Volume: 4.1 million

---

Denbury Resources - DNR - cls: 29.01 chg: +0.09 stop: 27.99

DNR managed to stall the downward momentum from Friday. Shares bounced twice near $28.60. Whether or not it is a new short-term bottom remains to be seen. We were expecting a dip closer to the $28.00 region. We would suggest waiting for a move over $29.21 or $30.00 before considering new bullish positions. Our target is the $33.00-34.00 range. We do not want to hold over the early November earnings report.

Picked on October 16 at $30.26
Change since picked: - 1.25
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume: 826 thousand

---

Kinetic Concepts - KCI - cls: 34.62 chg: +0.99 stop: 32.65 *new*

KCI shot higher this morning and the stock managed to tick over round-number resistance at the $35.00 level intraday. The relative strength in KCI today (+2.9%) is encouraging but we're not suggesting new positions. More conservative traders may want to lock in a gain right now since we're running out of time. KCI is due to report earnings on Friday, October 27th. We're planning to exit on Thursday afternoon at the closing bell to avoid the earnings announcement. Our target is the $36.00-37.00 range. We're concerned the 100-dma near $36 might be overhead resistance. Please note that we're adjusting the stop loss to $32.65.

Picked on October 08 at $33.35
Change since picked: + 1.27
Earnings Date 10/27/06 (confirmed)
Average Daily Volume: 1.4 million

---

PDL BioPharma - PDLI - close: 20.53 chg: -0.13 stop: 19.94

Any attempt at a breakout higher in PDLI seems to be suffering from a lack of upward movement in the BTK biotech index. The BTK has been consolidating sideways for the last three days and the BTK failed to participate in the market rally today. We remain optimistic in PDLI for now but any significant pull back in the biotech sector would definitely hamper this play. We have less than two full weeks before we plan to exit to avoid holding over PDLI's earnings report. Our target is the $22.25-22.50 range.

Picked on October 05 at $20.11
Change since picked: + 0.42
Earnings Date 11/02/06 (confirmed)
Average Daily Volume: 1.3 million

---

W&T Offshore - WTI - close: 32.12 chg: -0.20 stop: 30.21

Energy stocks were generally weak thanks to another decline in crude oil. This left shares of WTI drifting flat to down on Monday. We're not suggesting new positions at this time although a bounce from the rising 10-dma might be used as a new entry point. More conservative traders may want to exit near $33.00. Our target is the $34.00-35.00 range.

Picked on October 13 at $30.21
Change since picked: + 1.91
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume: 534 thousand

---

Zale Corp. - ZLC - close: 28.07 chg: +0.24 stop: 27.49

Our new play in ZLC is now open. Traders once again bought the dip near the bottom of ZLC's bullish, rising channel. The initial rally this morning pushed ZLC to an intraday high of $28.32 and our suggested entry point was $28.26. Now that the play is open our target is the $29.90-30.00 range. Please note that ZLC's failure to hold its intraday gains is a concern and right now today's session looks like a mini-failed rally at its 10-dma. The lack of volume on today's rebound is another reason we're feeling cautious here. We would still consider bullish positions with ZLC above $28.00 but we'd prefer to see a new relative high over $28.32 before starting new plays. We do expect some resistance at $29.00 so be prepared for a pull back. FYI: The Point and Figure chart for ZLC forecasts a $37 target.

Picked on October 23 at $28.26
Change since picked: - 0.19
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume: 376 thousand
 

Short Play Updates

None
 

Closed Long Plays

Olympic Steel - ZEUS - close: 25.96 change: -0.44 stop: 25.95

We have been stopped out of ZEUS at $25.95. Friday's sell-off carried over into Monday and the stock traded under short-term support at the $26.00 level. The intraday low was $25.88.

Picked on October 15 at $27.34
Change since picked: - 1.38
Earnings Date 11/01/06 (confirmed)
Average Daily Volume: 205 thousand
 

Closed Short Plays

None
 

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

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