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Daily Newsletter, Saturday, 11/18/2006

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Table of Contents

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

Market Wrap

A Quiet Start to the Weekend

With the exception of the excitement surrounding the Nymex IPO's debut, Friday proved to be a quiet day on the markets. Contrarians might have found the VIX's dip to 10.05 and the VXO's (old VIX) dip to 9.74 somewhat alarming, but it's easy to discount their behaviors during option expiration week. The only other excitement occurred in the few minutes following the 8:30 am release of October's Housing Starts and Building Permits. Few other developments interrupted a boring day.

Breadth measurements proved lackluster, and volume was lower than on other recent days. Indices chopped around, with the closing levels mixed. The SPX inched higher again. The Dow, of course, hit another new record closing high, but the Nasdaq, Russell 2000, TRAN, and SOX all moved lower.

Introduction

Early this week, the FOMC minutes focused traders' attention on the Fed's continued worry about inflation. This had been a long-term worry for market watchers afraid of continued rate hikes. While so many considered that worry of primary importance, this morning's October Housing Starts refocused attention on another worry: that of a harder landing than had been anticipated.

Futures had already weakened before the Commerce Department released the housing starts figure. Crude-related stocks had been hit over the previous days as crude had dropped ahead of the expiration of the front-month contract. Some long the crude futures may also have been frightened by the temporary excitement Tuesday when Cambridge Energy Research Associates' much-hyped report stated that the peak oil theory was a myth. The world isn't running out of oil, CERA's report claimed. Jim Brown, still on vacation this week, sent the following link for those who would like to read a rebuttal of CERA's conclusions:
http://www.theoildrum.com/story/2006/11/15/83857/186

Whatever the reason for crude's decline, the stocks related to crude failed to lend their support to the SPX early Friday morning. In addition to crude's drop, Exxon Mobil (XOM) had been downgraded Friday morning, and that company's stock is the most heavily weighted of the SPX. Although XOM was to scramble back into positive territory by the close, the stock gapped lower at the open and moved down to a daily low of $71.76 before making that scramble back into positive territory, helping to carry the SPX into positive territory, too.

The zooming of interest rates on Thursday may have hurt the Russell 2000, with those small-cap companies more interest-rate sensitive than large-caps. Interest rates dropped again Friday, but momentum traders likely refocused their action on the Nymex IPO rather the often momentum-driven small caps.

It's easy to search for a reason and say this one or that one explains what happened, but perhaps no reason was needed. As early as Wednesday, charts had cautioned that it was time for another of the sideways-to-sideways-up corrections that have been a part of the SPX's and Dow's run-up-then-go-sideways patterns for months.

Charts

Annotated Daily Chart of the SPX:

Reaching round-number resistance at 1400 was reason enough for the SPX to consolidate a few days, continuing its recent pattern. It forms that consolidation along the midline of this rising channel, too, another technical point at which consolidation sometimes occurs. Option-expiration antics also supplied another reason for the stall, as such a stall often occurs beginning on opex Thursday.

So far, the SPX continues its recent pattern as it has climbed through its rising price channel. Nothing long-term bearish can yet be found on the charts. Some might point to the possible warning offered by potential bearish price/RSI divergence. RSI attempted a breakout above the trendline it broke through in early November, however. Unlike on some other indices, RSI with this setting often stays high for a long while on the SPX, so we can't read too much into its current "overbought" status. The possibility remains for RSI to climb with price and undo that potential bearish divergence, too.

The SPX does begin to look overdue for another test of its 10-sma. I wouldn't be surprised to see that test occur next week, although, as of Friday's close, intraday Keltner charts suggested it could zigzag its way higher into a retest of Thursday's high.

While the SPX rose along the midline of its channel, the Dow hadn't quite reached the midline of its hand-drawn rising channel.

Annotated Daily Chart of the Dow:

The midline of that channel is a best-fit one, so might not be exact. By Monday, the midline of this rising channel will be located at about 12,387-12,398, depending on how the line is drawn. With the exception of the relationship of prices to the midline of the chart, the SPX's and Dow's chart show many similarities. There's potential bearish price/RSI divergence that can be erased by a continued rise in the RSI level. That's suggested as a possibility since RSI is breaking through its rising trendline again.

So far, however, prices act just as they've been acting for several months. I would expect a more sideways direction or an actual downturn toward the 10-sma if that channel's midline resistance is approached, however.

As of Friday's close, intraday Keltner charts suggested that, without another real push, the Dow's current rise might be about tapped out. Consider the possibility that the drop toward the 10-sma could occur at any time and plan your approach if that should happen.

The Nasdaq may have already begun a drop toward its 10-sma.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's 10-sma still rises sharply toward the midline of the Nasdaq's price channel. If the Nasdaq does drop toward that average or move sideways until the midline and 10-sma support catch up, expect a bounce attempt from that potential support. If you're thinking about a new long entry in a Nasdaq stock or the QQQQ's when that support is hit, be aware that a bottom-of-the-channel test may be overdue, and it's possible that a bounce attempt from the 10-sma or midline might fail. Before you enter any new long trade at midline or 10-sma support, plan how you'll react if the Nasdaq rolls lower again. Will your stop be a broad one, below the channel's bottom or a tighter one that gets you out ahead of that test? You have time to plan the play.

As has been true for some time, the SOX's chart proves a little more difficult to interpret.

Annotated Daily Chart of the SOX:

Although the SOX's slide along that trendline is dropping prices, the SOX is still producing daily closes above the trendline, and so could legitimately be considered as consolidating along it. However, the SOX's RSI doesn't tend to trend at its current level, as does the RSI of some of the other indices. Its current level signals some concern for bulls. I've been noting for many weeks that something was wrong with the SOX's bearish picture after it had broken down from its price channel, and now it's possible that there's some concern about the bullish picture, too, now that the SOX has broken back above its 200-sma. So far, though, the SOX performs mostly in accordance with what bulls would want to see.

The intraday chart showed the possibility that the SOX is forming a bearish right triangle with the support at about 479.25. The SOX needs to produce a higher intraday high and break to the upside again to violate that pattern. Otherwise, the SOX may be vulnerable to a drop to 478.60-480.68 or possibly even the 200-sma. Neither of those events would be particularly bearish if all that's accomplished is a retest of the 200-sma, but if in a SOX-related play, evaluate your willingness to weather such a test, if one should occur.

Like the SOX, the RUT's RSI doesn't tend to trend at its current level, making the RUT vulnerable to a downturn, too.

Annotated Daily Chart of the RUT:

Unlike the SOX, however, the RUT's intraday pattern looks more like a bull flag, with the RUT just attempting an upside breakout above the descending trendline of that flag as of Friday's close. Bulls need to see a high higher than Thursday's to confirm that bull-flag breakout, however, especially since the flag was somewhat wide in comparison to the RUT's movements as it rose last week. That indicates more volatility while the flag formed than is optimum. If RSI turns lower, bulls would like to see the RUT consolidate in a mostly sideways movement rather than drop quickly with the RSI.

In the RUT's case, the (black) 30-sma looks like stronger support than the 10-sma. It's possible that the RUT might need to test that 30-sma if a rollover begins.

The TRAN, too, may be due for a pullback, but a pullback within a formation that is, for now, potentially long-term bullish while intermediate-term bearish.

Annotated Daily Chart of the TRAN:

When viewed on a one-year chart, the TRAN's formation looks a bit like a potential inverse head-and-shoulders, but these formations are no longer reliable, particularly when they form as a continuation pattern and not as a bottoming formation. However, in the climate since the spring of 2003, many of these have confirmed to the upside and have been followed by a strong rally. Even if that's what is eventually in store for the TRAN, that formation still lacks a real right shoulder, and so could conceivably drop back for a one- to two-month period to complete the right shoulder. Although the TRAN played catch-up this week, its performance remains relatively weaker than that of other indices. Unless it really "is different this time," that urges some caution on the part of Dow and other bulls, too.

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Today's Developments

Some market pundits blamed October's Housing Starts for the early weakness in the markets. New housing starts fell 14.6 percent to 1.49 million units, and the volume of building permits, a measure of future activity, dropped 6.3 percent to 1.54 million units. The Commerce Department termed that the largest decline in permits in seven years, although another source claimed that it was the largest decline in nine years.

Forecasters had predicted that housing starts would drop by 4.5 percent to 1.68 million units and that permits would see only a modest decline, to 1.63 million. Some revisions were made to September's data, with housing starts revised lower and building permits revised higher. Still, September's numbers had provided a an upside surprise and some dismissed October's drop because it had been in comparison to such a strong number.

Although the FOMC minutes had reassured markets that the FOMC had not yet seen any spillover into the economy from the decline in the housing sector, that decline had dragged the growth 1.1 percent lower than it otherwise would have been in the third quarter. Now some fear that the impact could be worse this quarter. Supposedly, that thought weakened futures early this morning and predicted the early morning decline in the cash markets.

If home builders might have suffered from the downturn in the housing sector, apartment developers, management firms and owners might be benefiting. Another report indicated that apartment rentals were up by four percent and that vacancy rates were the lowest in five years. A young real estate broker I know owns offices that handle both real-estate sales and apartment rentals. He says that the combination protects him because when house sales decline, apartment rentals tend to increase, and vice versa. It's like balancing a portfolio, and that's what the comparison of housing starts and permits and the rental data seemed to indicate.

The lead-up to the Nymex (NMX) IPO debut on Friday had been intense, with many comparisons to the CME and ICE debuts being mentioned all week. The IPO had been priced at a projected range of $54 to $57, but opened at a startling $120.00. Momentum players pushed it up to $152.00 before it dropped back by mid-afternoon, with the action reportedly catching Nymex Chairman Richard Schaeffer by surprise. It closed at 134.75, having traded 19,561,600 shares, according to one source. At least one analyst was terming the price action "frothy," however, and I imagine more were thinking that it was. CME had soared in the days leading up to Friday's NMX debut and punched to a new intraday high on Friday, but then spent the rest of the day moving sideways, closing modestly lower. ICE behaved similarly, although it closed modestly higher.

Reporting companies Thursday had included Starbucks (SBUX) and Hewlett-Packard (HPQ). Friday morning, traders evinced disappointment with SBUX's report, sending the stock lower in pre-market trading on Friday and closing it lower by $2.01 or 5.10 percent. The report matched forecasts of $0.17 a share excluding a change in the company's future costs of terminating leases, but the company reported its first profit decline in five years. HPQ issued upside guidance, saying that its price cuts had produced stronger demand and that the company had nearly tripled its fourth-quarter profits, but the SEC has now termed its formerly informal investigation as a formal one. In addition, the FCC has asked for information about the pretexting case leading to Patricia Dunn's resignation as chairwoman. HPQ was to close only modestly lower, however, by $0.36 or 0.90 percent.

Chip-manufacturer Marvell Technology Group Ltd. (MRVL) reported Friday morning, although an ongoing effort to restate earnings prevented the issuance of full quarterly results. Although sales beat expectations, they did drop nine percent for the third-quarter. The EPS also appeared to miss expectations by a penny, according to one analyst. A Morgan Keegan analyst cut the stock's rating to a "Market Perform" one. The stock moved lower in pre-market trading and was blamed by some for early Intel weakness since Marvell has a deal to acquire Intel's XScale business. Some analysts believed that business was more dilutive to Marvell than had been anticipated. MRVL closed lower by $0.57 or 2.91 percent, and INTC closed lower by $0.23 or 1.03 percent.

Next Week's Economic and Earnings Releases

Next week's economic calendar will be holiday-shortened one. On Monday, October's Leading Indicators will be released at 10:00, with expectations for a 0.2-0.4 percent rise after the prior 0.1 percent increase. The name proves misleading, however, as most of the information that goes into the computation of this number is already known. It doesn't tend to be a big market mover unless the number differs substantially from the prediction. On Wednesday, November's revised Michigan Sentiment will be released, with the number predicted to remain near the previous 92.3. Other than that, crude inventories on Wednesday and initial claims on Friday are the only releases. My calendar does not specify when natural-gas inventories, normally released on Thursday, will be released, but initial claims are postponed to Friday, and perhaps the natural-gas inventories will be, too.

Monday's reporting companies include CPB, LOW, MDT and JWN. The rest of the week also remains light for reporting companies.

What about Monday?

As I've frequently suggested as indices have climbed for the last months, long-term bulls have nothing to do but to keep ratcheting their stops higher as indices climb. Those in long-term bullish positions might be raising stops just underneath the support of those long-term rising channels seen on so many of the charts. New entries can be sought on pullbacks to the bottom-of-the-channel support, but stops need to be set tightly if such entries are sought. Although I see nothing too bearish on any of these charts, all traders should be aware by now that the rallies are becoming extended. Prices have been rising rather sharply. Even if the rally is going to extend further, the angle at which those channels are rising probably needs to decrease into a more sustainable one. Some day or other, prices are going to break down out of those channels and establish a new pattern.

Those seeking bearish entries could try entries at top-of-the-channel resistance, but, if so, they should be aware of the possibility that they'll be greeted with another sideways movement as the channels or the 10-sma's rise up to meet price and provide support. Another possibility lies in a channel breakdown, a rise to retest the channel's former support in the classic "kiss goodbye" scenario, and then a falling away again. Want-to-be-bears must be cognizant that overbought conditions can be relieved by a prolonged sideways movement rather than a prolonged decline, and they should plan their exits if such should happen.

I'd advise careful consideration of any new entries next week. Volume will be low toward Wednesday and again on Friday, and crazy things happen when volume is low.

Happy Thanksgiving week to all our U.S. readers.
 

New Plays

Most Recent Plays

New Long Plays

ALON USA Ener. - ALJ - close: 29.64 chg: +0.74 stop: 27.75

Company Description:
Alon USA Energy, Inc., headquartered in Dallas, Texas, is an independent refiner and marketer of petroleum products, operating primarily in the Southwestern and Western regions of the United States. (source: company press release or website)

Why We Like It:
We recently closed all of our bullish oil plays due to the weakness in crude oil futures this past week. Yet not all oil stocks are moving lower. Shares of ALJ have ignored weakness in crude oil and continued to consolidate under resistance at $30.00 with a bullish trend of higher lows. Shares look poised to breakout over $30.00, especially have Friday's rally. We're suggesting a trigger to go long the stock at $30.15. If triggered our target is the $33.50-34.00 range. Be aware that the 100-dma near $32 might offer some resistance. FYI: The P&F chart is still bearish after the August-September sell-off.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/07/06 (confirmed)
Average Daily Volume: 504 thousand

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Cameco - CCJ - close: 32.78 change: +1.18 stop: 30.89

Company Description:
Cameco, with its head office in Saskatoon, Saskatchewan, is the world's largest uranium producer. The company's uranium products are used to generate electricity in nuclear energy plants around the world, providing one of the cleanest sources of energy available today. (source: company press release or website)

Why We Like It:
The weekly chart for CCJ shows that the stock has broken its long-term up trend. However, that doesn't mean the stock won't produce some trade-worthy rallies. This is an aggressive play given our entry point. Shares have recently been weak but Friday's session produced a bullish engulfing candlestick pattern. These patterns are typically seen as one-day reversals, especially at the bottom of a move down. We're suggesting longs on the reversal. However, if CCJ doesn't confirm the reversal with a gain in the next day or two we'll quickly abandon the play. We'll start the play with a stop under Friday's low. Our short-term target is the $35.00-36.00 range.

Picked on November 19 at $32.78
Change since picked: + 0.00
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 2.5 million

---

Worthington Ind. - WOR - close: 17.96 chg: +0.26 stop: 17.39

Company Description:
Worthington Industries is a leading diversified metal processing company with annual sales of approximately $3 billion. (source: company press release or website)

Why We Like It:
Several iron and steel-related stocks displayed relative strength on Friday thanks to new rumors and talk of potential M&A activity. We're not saying WOR is a buyout target but strength in the sector certainly doesn't hurt. What we do like about WOR is how shares have begun to bounce back from the bottom of a wide trading range (approximately $16-21). This past week saw WOR breakout over technical resistance at its 50-dma and shares are challenging resistance near $18.00. More conservative traders may want to wait for a rise past $18 or last week's high ($18.17) before initiating positions. Traders should also be aware that the 200-dma near $19.00 might offer some resistance. Our target is the $19.85-20.00 range. FYI: The P&F chart points to a $31 target.

Picked on November 19 at $17.96
Change since picked: + 0.00
Earnings Date 12/26/06 (unconfirmed)
Average Daily Volume: 868 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

A.G.Edwards - AGE - close: 58.25 change: -0.38 stop: 55.49

This past week was a strong one for the broker-dealer-investment stocks. The XBD index broke out to an all-time high and a bullish cup-and-handle pattern. Shares of AGE enjoyed the sector rally and broke out over resistance at $58.00 to hit its own record high. The Friday dip back toward the $58 level, which should offer some support, looks like a new entry point to go long the stock. Our target is the $62.50 level There is a chance that AGE could encounter some round-number resistance at the $60 level. However, the P&F chart has a quadruple-top breakout buy signal with a $70 target. FYI: After the closing bell on Friday AGE announced a 20-cent quarterly cash dividend payable on January 2nd, 2007 to shareholders of record on December 8th. Plus the Board of Directors announced a stock buy back plan of up to 10 million shares next year. AGE currently has 76 million shares outstanding.

Picked on November 15 at $58.15
Change since picked: + 0.10
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume: 386 thousand

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Celadon Group - CLDN - close: 20.35 change: -0.07 stop: 17.99

Transport stocks turned in a solid week with the Dow Jones Transportation index bursting through resistance at the 4800 level. Fueling the rally in transports was a significant drop in crude oil futures and some big merger news in the airlines. Shares of CLDN, a trucking company, rose more than 4.5% last week. Friday's session wasn't so hot. The stock hit a new four-week high at $20.80 but gave back all of its gains. This looks like a short-term failed rally and we'd expect a dip back toward $20.00 and maybe the $19.75 region. Look for a bounce anywhere above $19.00 as a new bullish entry point to go long the stock. Our target is the $22.00 level. Plan for some resistance at $21.00 at least on the initial test. Conservative traders might want to consider a tighter stop loss (maybe near $18.50).

Picked on November 12 at $19.44
Change since picked: + 0.91
Earnings Date 10/19/06 (confirmed)
Average Daily Volume: 305 thousand

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Heinz - HNZ - close: 43.94 change: -0.01 stop: 41.85

Traders bought the dip in HNZ on Friday at $43.45. Shares rose about 2.4% last week and look poised to push past resistance the $44.00 level soon. We have less than two weeks left for this play. HNZ is due to report earnings on November 30th and we don't want to hold over the announcement. If you're considering new positions take into account the time frame. Right now we would not consider new plays but a dip or bounce near the $42.50 region might qualify as a new entry point. Our target is the $46.50-47.00 range. FYI: More conservative traders may want to tighten stops toward the $42.50 region. Currently the P&F chart points to a $56 target.

Picked on November 08 at $43.20
Change since picked: + 0.74
Earnings Date 11/30/06 (confirmed)
Average Daily Volume: 1.6 million

---

Thor Industries. - THO - close: 44.53 change: -0.17 stop: 41.99

THO suffered a bout of indecision on Friday. At first the stock dipped to $43.82 only to bounce and hit a new two-week high. Yet the highs didn't hold and shares traded back into the red by the closing bell. The breakout over resistance at $44 last week is bullish and it follows a bullish double-bottom near $42. The daily chart's MACD indicator has also turned positive. We would consider new positions here but it looks like we might get a chance to buy the dip near $44 on Monday. Our target is the $47.85-48.00 level. near the October peak.

Picked on November 15 at $44.25
Change since picked: + 0.28
Earnings Date 11/28/06 (unconfirmed)
Average Daily Volume: 624 thousand

---

VeriSign - VRSN - close: 23.34 change: -0.16 stop: 20.99

The last few days we've been warning readers that VRSN was due for a pull back to consolidate its gains. Shares finally began to pull back on Friday with a minor 16-cent decline. The dip may not be over yet. If you're looking for a new entry point a dip to $23.00 or $22.50 could be used as a new entry point to go long. Our target is the $24.90-25.00 range. FYI: More conservative traders might want to adjust their stop loss closer to the $22 level, which should now act as support (22.00-22.50).

Picked on November 13 at $22.51
Change since picked: + 0.83
Earnings Date 10/19/06 (confirmed)
Average Daily Volume: 2.9 million
 

Short Play Updates

None
 

Closed Long Plays

HARSCO - HSC - close: 80.74 change: -0.39 stop: 79.90

We are suggesting an early exit in HSC. When we first listed this play it was our plan to go long on a breakout over resistance at the $83.00 level. A few days later the bounce from support near $80 and its rising 50-dma and 200-dma looked like an attractive entry point so we adjusted our plan. Unfortunately there has been no follow through higher and HSC has been displaying relative weakness as the major averages hit new relative highs. Our Thursday update said that if we didn't see a bounce on Friday we were going to drop the stock. There is still a chance that HSC will bounce near the $80 level but we don't want to risk it. FYI: The P&F chart for HSC still shows a buy signal and points to a $111 target.

Picked on November 14 at $ 81.30
Change since picked: - 0.56
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 173 thousand
 

Closed Short Plays

Texas Instruments - TXN - cls: 30.04 chg: -0.22 stop: 30.51

We have decided to exit early our short play in TXN. The SOX may have struggled to build on its bullish breakout last week the trend is still positive for the sector. Meanwhile the big oversold bounce in TXN has done a lot to turn the daily and weekly technicals more favorably toward the bulls. We're going to cut our losses here.

Picked on October 27 at $29.90
Change since picked: + 0.14
Earnings Date 10/23/06 (confirmed)
Average Daily Volume: 14.8 million
 

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

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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