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Daily Newsletter, Monday, 10/30/2006

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Table of Contents

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

Market Wrap

Technology and Small Caps Rally as Energy Prices Plunge

The major averages finished mixed to higher, but plunging energy prices had technology and small caps notably higher by the close with advancing issues outnumbering decliners by a slim margin at both the big board and NASDAQ.

As has been the pattern in recent weeks, a dip at the open to start the week found support from buyers, while fears of building inventories among refined products had heating oil and unleaded gasoline futures pulling crude oil lower.

December Crude Oil (cl06z) settled down $2.39, or -3.93% at $58.36, while December Heating Oil (ho06z) was torched for a 4.52% decline, settling down $0.0785 at $1.66. December Unleaded futures (hu06z) settled at a new contract low, falling just more than 9 cents, or -6.17% to $1.4619.

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The Dow Industrials (INDU) 12,086.50 -0.03% finished well off its session lows of 12,050 where gains in International Business Machines (NYSE:IBM) $91.50 +0.81% and Boeing (NYSE:BA) $80.22 +0.60% helped offset weakness in Wal-Mart (NYSE:WMT) $49.53 -2.36% and Verizon (NYSE:VZ) $37.65 -3.06%.

Shares of the world's largest retailer Wal-Mart (WMT) traded weak after the company said October same store sales rose a modest 0.5%. Results showed the company's recent strategy to boost sales by catering to more upscale shoppers, paring its inventory and remodeling its stores, was not gaining as much traction as had been planned.

Verizon's (VZ) shares fell as low as $37.07 after the telecom services giant reported quarterly net income of $1.92 billion, or $0.66 per share, which included a $0.02/share charge in pension and merger costs. Revenues jumped 26% year-over-year to $23.25 billion. The company said its Verizon Wireless business added 1.9 million net customers, bringing total subscribership to 56.7 million. However, the company said it added just 448,000 net high-speed Internet connections, which include digital subscriber lines (DSL) and the more advanced fiber-optic lines, known as FiOS. The numbers for those higher margin services were lower than some analysts forecast for net additions of approximately 500,000.

Closing U.S. Market Watch - 10/30/06

Adding to some of this morning's mixed-to-lower trade for the major indices was a 0.2% increase in September's month-over-month core Personal Consumption Expenditures (PCE) price index (excludes food and energy), which is a key measure the FOMC policymakers keep close tabs on, but cooler heads prevailed when that volatile month-to-month measure of inflation was viewed in the context of a 0.3% decline in the all-encompassing PCE price index. Economists were expecting the core rate to rise 0.2%.

Personal spending rose just 0.1% and was slightly below economists' forecast for a 0.2% increase.

December Gold futures (gc06z) settled up $6.40, or +1.06% after jumping to $613.20 intra-day.

Treasury yields were little moved during today's session with the benchmark 10-year yield ($TNX.X) finishing unchanged.

Traders and investors were not inundated with merger/acquisition news, but shares of NASDAQ-100 component American Power Conversion (NASDAQ:APCC) $30.02 +26.34% surged and were today's most actively traded after the company said it would agree to be acquired for about $6.1 billion in cash by French electric-equipment maker Schneider Electric. The offer values APCC's shares at $31.00.

American Power Conversion's competitors include ABB (NYSE:ABB) $14.97 -0.26%, Emerson Electric (NYSE:EMR) $84.22 +0.07%, General Electric (NYSE:GE) $35.20 -0.02%, Hitachi (NYSE:HIT) $59.00 +0.13% and SL Industries (AMEX:SLI) $18.89 +1.50%.

NYSE Composite ($NYA) - 20-point box chart

Over the past week, the very broad NYSE Composite ($NYA.X) is up a fractional 0.34%, with near-term supply (O) outstripping demand (X). Bullish leadership as measured by new highs versus new lows (see table at top) remains very bullish, but resting from some very strong, yet overbought readings last week when on Thursday, 390 NYSE-listed stocks traded a new 52-week high versus just 8 components having traded a new 52-week low.

The first sign that SUPPLY (O) would be outstripping demand (X) on a more meaningful basis would currently come with a trade at 8,600.

NASDAQ Composite ($COMPQ) - 10-point box chart

On Thursday of last week, the also very broad NASDAQ Composite traded and closed at a 52-week/multi-year high of 2,379.29 as four and five-lettered stock symbols continue to show demand (X) outstripping supply (O). In mid-September as all of the point and figure bullish % indicators began signaling buyers were gaining control over sellers, this very broad market has given four additional buy signals. The first sign that supply (O) would be outstripping demand (X) would be a trade at 2,320.

Russell 2000 Index ($RUT) - 5-point box

Continued weakness in the energy complex has really brought buyers into the small caps in recent weeks as bulls and short-covering bears drive prices higher. While it would currently take a trade at 785 to have the $RUT making a meaningful-looking new all-time high, the $RUT is up 21.25% over the past 52-weeks, easily outperforming its next closest rival and the NYSE Composite's 18.95% 52-week advance.

The first sign of any near-term weakness for the $RUT would be a 3-box reversal to 760. It would currently take a trade at 710 to have this market giving a "sell signal" (column of O below a prior column of O).

For the broad S&P 500 Index ($SPX) and the conventional 10-point point and figure chart shown in last Monday's Market Wrap, we did see further demand (X) build to 1,380.

As of tonight's close, Dorsey/Wright & Associates' S&P 500 Bullish % (BPSPX) now shows 73.44%, or 367 of the 500 components, having a point and figure "buy signal" associated with their supply/demand chart. Compared to last Monday's closing measure of 70.77%, this represents an additional net gain of (73.44 - 70.77 = +2.67%) 13 stocks to reversing higher point and figure buy signals.
 

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

In Play Updates and Reviews

Long Play Updates

Chipotle Mex.Grill - CMG - cls: 59.05 chg: +0.63 stop: 56.40

CMG set a new closing three-month high with today's 1% gain thanks to traders buying the dip this morning at $57.30. The stock is nearing our target and more conservative traders may want to exit early. Our target is the $59.90-60.00 range. We're planning to exit tomorrow at the closing bell anyway to avoid holding over the company's earnings report, which is expected after the closing bell on Tuesday. Wall Street is expecting CMG to turn in profits of 27 cents a share.

Picked on October 23 at $56.40
Change since picked: + 2.65
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 900 thousand

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D.R.Horton - DHI - close: 23.57 change: -0.18 stop: 22.99

There is no change from our previous updates on DHI. We're still waiting for a breakout over resistance at $25.50. Our suggested entry point to go long is at $25.51. Unfortunately, we're running low on time as we need to exit ahead of DHI's mid November earnings report. We would consider this an aggressive play even if DHI hits our trigger at $25.51 because our time frame is short and DHI will probably find technical resistance at the 200-dma nearing $27.50. Our target is the $29.00-30.00 range.

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

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Randgold Res. - GOLD - close: 21.93 chg: +0.30 stop: 21.45*new*

Gold stocks were generally higher on Monday thanks to strength in gold futures. The XAU index rose 0.6%. Shares of GOLD added 1.3% but the stock closed off its best levels of the session. The move today actually looks a little bearish with a failed rally under $22.50. More conservative traders may want to exit early right here! We're raising our stop loss to $21.45. We're not suggesting new positions and plan to exit ahead of GOLD's earnings report on Nov. 2nd. (We're exiting on Wednesday at the closing bell).

Picked on October 25 at $22.35
Change since picked: - 0.44
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 369 thousand

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PDL BioPharma - PDLI - close: 20.81 chg: -0.07 stop: 20.39*new*

We only have a couple of more days on our PDLI play. The company is due to report earnings on November 2nd after the market's close. We're planning to exit that day at the closing bell. Due to our time frame we're not suggesting new positions. Please note that we're raising our stop loss to $20.39. Our target is the $22.25-22.50 range.

Picked on October 05 at $20.11
Change since picked: + 0.70
Earnings Date 11/02/06 (confirmed)
Average Daily Volume: 1.3 million

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Simpson Mfg. - SSD - close: 29.00 chg: +0.00 stop: 27.99

There was no change in shares of SSD on Monday and we do not see any changes from our weekend new play description. If SSD can trade over $30.00 it could spark more short covering. We're suggesting a trigger to go long the stock at $30.15. If triggered our target is the $34.00-35.00 range, under the 200-dma. Expect some resistance near $32.50.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/26/06 (confirmed)
Average Daily Volume: 494 thousand

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W&T Offshore - WTI - close: 33.17 chg: +0.37 stop: 31.19

WTI displayed some relative strength on Monday. Most of the oil stocks were down thanks to a decline in crude oil futures. Yet shares of WTI added 1.1%. We're not suggesting new positions at this time. More conservative traders might want to lock in a profit right now with shares up nearly 10%. Our target is the $34.00-35.00 range.

Picked on October 13 at $30.21
Change since picked: + 2.96
Earnings Date 11/09/06 (confirmed)
Average Daily Volume: 534 thousand
 

Short Play Updates

INVACARE - IVC - close: 21.79 change: -0.46 stop: 23.11

Our play in IVC is now open. The stock continued to sell-off and shares lost 2% on strong volume. The big volume is bearish as is the breakdown under support near $22.00. We have been suggesting a trigger to short IVC at $21.94. Now that the play is open our target is the $20.05-20.00 range. More aggressive traders may want to aim lower.

Picked on October 30 at $21.94
Change since picked: - 0.15
Earnings Date 10/26/06 (confirmed)
Average Daily Volume: 209 thousand

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Rambus Inc. - RMBS - close: 16.63 change: +0.24 stop: 17.25

We do not see any change from our weekend new play description on RMBS. The stock managed a bounce on Monday, which was a reaction to strength in the semiconductor sector via an upgrade for KLAC. The overall pattern in RMBS is unchanged. We want to short a breakdown under support at $16.00. We'll suggest a trigger to open positions at $15.90. If triggered our target is the $12.50 level. More aggressive traders may want to aim for the August lows closer to $10.00. Be advised that RMBS is very active in various legal battles over patents and intellectual property and bears (and bulls) are constantly at risk for an unexpected headline sending the stock surging one way or the other. More conservative traders may want to avoid this play.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (confirmed)
Average Daily Volume: 9.7 million

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Texas Instruments - TXN - close: 30.16 change: +0.26 stop: 32.05

Semiconductor stocks rebounded on Monday after KLAC received an analyst upgrade. The SOX added 1.1% and shares of TXN closed with a 0.8% gain. TXN did close off its best levels of the session. We remain bearish and would use a new decline under $29.90 as another entry point to short the stock. Our target is the $27.50 mark. More conservative traders may want to adjust their stops toward the $31 level, which as broken support should act as new resistance.

Picked on October 27 at $29.90
Change since picked: + 0.26
Earnings Date 10/23/06 (confirmed)
Average Daily Volume: 14.8 million
 

Closed Long Plays

None
 

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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