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Daily Newsletter, Monday, 11/20/2006

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Table of Contents

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

Market Wrap

M&A Activity a Horn of Plenty

In what tends to be a quiet, yet bullish week of trade, the major indices digested last week's option expiration gains with fractional gains and losses scattered across the board.

Advancing issues were evenly matched against decliners at both the NYSE and NASDAQ.

Merger and acquisition news grabbed the bulk of today's headlines,

Today's blockbuster M&A deal had shares of Phelps Dodge (NYSE:PD) $120.47 +26.78% surging more than $25/share after the copper producer said its chief rival, Freeport McMoRan (NYSE:FCX) $55.63 -3.08%, made a $25.9 billion cash-and-stock offer for the company. If consummated, the partnership would create North America's largest copper producer, while the combination would create the world's No. 2 global producer of the shiny metal, second only to Chilean state copper giant Codelco.

Freeport's move was a "jaw dropper" and a big bet that a strong global economy will be an underpinning force for copper demand.

Addition M&A news had the real-estate arm of private-equity firm Blackstone Group offering $20 billion to acquire Equity Office Properties Trust (NYSE:EOP) $48.14 +7.64%, the U.S.'s largest office-building owner and manager, in what could be the largest real-estate deal ever. Excluding the assumption of debt, the deal would be the third-highest leveraged buyout on record, if it goes through, behind the $25.1 billion paid for RJR Nabisco in 1988 and the recent $21.2 billion deal to take HCA Inc. private.

While the Phelps/Freeport and Blackstone/Equity Office mergers were the "deals of the day," there were other deals that had stocks on the move.

On Friday, shares of United States Steel (NYSE:X) $72.75 +3.08% had jumped notably from Thursday's close of $64.57 on speculation the company might be in play as an acquisition target. However, it was Oregon Steel Mills' (NYSE:OS) $63.77 +8.15% investors that broke out in gleeful tears today after Russia's biggest steel maker, Evraz Group SA asked for OS's hand in marriage. The "wedding ring" was valued at $2.3 billion, and would be paid for in cash!

Brokers were strong with Charles Schwab (NYSE:SCHW) $18.94 +2.04% gaining after Bank of America (NYSE:BAC) $54.90 +0.09% said it was willing to pay $3.3 billion for the private-banking arms of Schwab. The deal would reportedly vault Bank of America into the top tier of private banks serving the ultra rich and modestly add to the bank's EPS by 2008.

But not every bride can be "bought" on a first proposal, and sometimes the size of the ring, or the offer, is not big enough.

The London Stock Exchange said "No!" again after the NASDAQ Stock Market (NASDAQ:NDAQ) $37.70 +3.08% made a $5.1 billion offer for the bourse. NASDAQ's move comes after it said it has increased its stake to 25%. The LSE said the offer is still undervalued.

While the LSE confesses it sees positive synergies in a long-term marriage with the NASDAQ, or list of other suitors, the LSE appears willing to stay single awhile a longer.

The Nasdaq's Chief Executive Robert Greifeld told analysts that "This is a long game that we're playing, and I'm optimistic we'll engage with the London Stock Exchange board in a relatively short period of time."

U.S. Market Watch - 11/20/06 Close

Amongst all the wedding invitations being sent out, there were also some earnings reports being released as earnings season winds down into the Thanksgiving holiday.

Building products retailer Lowes (NYSE:LOW) $30.58 +0.32% gained 10-cents by their close after a choppy intra-day trade. The stock fell to $30.00 in early action, to then trade as high as $31.07 after the company said net income rose 11% to $716 million, or $0.46/share, as tight expense controls helped overcome a weakening sales environment. Lowes' executives said sales rose 5.75% year-over-year from $10.6 billion to $11.21, but same-store-sales, or sales in stores open at least one year, a key measure of benchmarking performance, fell 4%. A cloudy outlook had the company expecting a 4% decline in sales from last year's $10.8 billion, which implies sales of $10.37 billion. Analysts were expecting revenues of $10.8 billion in the company's fourth quarter.

The National Association of Realtors confirmed some of Lowes' third-quarter same-store-sales trends when the Association said that sales of existing homes fell in 38 states during the third quarter. Sales retreated to a seasonally adjusted annual rate of 6.27 million units nationwide, down by 12.7% from the same period a year ago. Regional data had Nevada, Arizona, Florida and California leading the sales declines.

Home prices also dropped. The NAR survey showed that the midpoint price for an existing home sold during the summer dipped 1.2% year over year to $224,900.

Economic data released today had the Conference Board saying its forward looking Index of Leading Economic Indicators rising 0.2% in October. The Conference Board said an increase in real money supply and improved consumer expectations helped offset sharp declines in housing permits and weaker vendor performance. The index stood at 138.3 versus 139.1 in January, its peak so far this year. The index has declined four of the last seven months.

The Conference Board's labor economist, Ken Goldstein, said the October index suggests "the economy is unlikely either to reheat or to get significantly cooler."

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An old trend is like an old friend. Sometimes....

In last Monday's Market Wrap, we looked at a weekly interval chart of the NASDAQ-100 Tracker (NASDAQ:QQQQ) $44.39 +0.20% as it was following the other major indices pattern and getting a new multi-year high.

As such, I turned to my fibonacci technique of "fitting" a 38.2% retracement in order to build some resulting higher levels of resistance, but more importantly, pointed out how the QQQQ had not CLOSED back below a prior level of retracement, when on a Friday (or end of week trade) it had closed above a level of retracement.

Ah, but with a week gone by and the NASDAQ-100 Bullish % ($BPNDX) from StockCharts.com now nearing a strengthening yet longer-term "overbought" 70% at 69% bullish (that's 69 of the 100 components now showing a PnF buy signal intact with its chart) traders and investors can still use the "once above, not below" slogan to test their own convictions, if not that of other market participants.

Now, some traders have been so focused on intra-day chart that they haven't been able to see the forest through the trees. Or is it the trees through the forest?

As the faster moving, or more volatile NASDAQ-100 Bullish % ($BPNDX), or BPNDX from Dorsey/Wright and Associates gets near 70%, I'm always looking for "trouble."

It has been my observation for years now, that the NASDAQ-100 has been "the index" that weakens first, and has a pulling lower effect on the other major indices. It has been my observation that technically, the NASDAQ-100 has been FOLLOWING the other major indices higher..

If I'm looking, or monitoring for "trouble," then this is the index I think we as traders/investors should be keeping up to speed on.

NASDAQ-100 Tracking Stock (QQQQ) - Weekly Intervals

As I review a plethora of charts at week's end, always starting with a point and figure chart, then working with other time intervals with bar charts, I'm a little more focused on an "old trend" in the QQQQ.

OK ... last week, the QQQQ closes above my resulting "bull fit 38.2%" resulting 61.8% retracement of $42.84. Did it close below that level on Friday? The answer is "no."

I could play the same game with the PINK retracement, which would be a "conventional" use of retracement this week too. As long as the QQQQ closes ABOVE $42.66 (the next level below $44.30) then technically, the pattern of strength would hold.

For some perspective, the BRIGHT GREEN horizontal lines simply mark the past three option expirations for September, October and Friday's November expiration.

See my "trend?" I'd deem this a longer-term "bullish resistance" trend. Bullish as it is trending HIGHER.

There is an old saying in the technical world that a broken trend, can become resistance in the future. It is my belief that a LONGER-TERM trend is more powerful, or significant than a shorter-term trend.

When the QQQQ broke above the $40.11 level in mid-September (09/12/06), a new "bull confirmed market" for this market (the NDX/QQQQ) had just been signaled by the $BPNDX. Now Stockchart.com's $BPNDX is nearing 69%.

There is NO sign of internal weakness. Let's make that clear, just as there was no sign of internals weakness in mid-September, or mid-October.

And while we've been seeing short-term "bullish resistance" trends get broken to the upside just about every week, this longer-term UPWARD trend, that was notably broken to the downside in early May (week of 05/08 to 05/12) will get some attention from technicians, and a great number of market participants.

NASDAQ-100 Bullish % ($BPNDX) - 2% box

Yes, I may be "looking for trouble," or monitoring for trouble, but as I felt bulls should be picking up the OFFENSE in mid-September and bears should be playing DEFENSE at that very time, I always grow a little more cautious when a bullish % nears the 70% level. You can probably see that a traders doesn't need to RUN for the exits, but taking some profits from the long side doesn't hurt here.

In late April, just before early May (red 5 is early May) the $BPNDX had fallen to 54%, below February's 56% reading and turned "bear confirmed." Now that the $BPNDX is reaching similar levels of bullishness, but also RISK as found in January (red 1), a trader/investor that incorporates the point and figure bullish % indicators into their investment/trading strategy, should be booking some gains.

On the ACCOUNT MANAGEMENT side of things. GET OFF OF MARGIN at these higher levels of BULLISH RISK. It is tempting to LEVERAGE your account, or utilize MARGIN to keep buying and buying and buying as the account grows. Don't do it here at 69% bullish.
 

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

Updates On Latest Picks

Long Play Updates

A.G.Edwards - AGE - close: 59.19 change: +0.94 stop: 55.49

Today's session turned out to be another merger Monday and the broker-dealer stocks enjoyed another gain and another new high. AGE is more of an investment-services company but shares rallied anyway with a 1.6% gain and its own new high. The move may have been fueled by the news out on Friday after the bell (dividend and stock buy back program). We remain optimistic but right now we're expecting some short-term resistance at the $60.00 level. After trading near $60 a pull back toward $58 would not be shocking. Our target is the $62.50 level. The P&F chart has a quadruple-top breakout buy signal with a $70 target.

Picked on November 15 at $58.15
Change since picked: + 1.04
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume: 386 thousand

---

ALON USA Ener. - ALJ - close: 29.44 chg: -0.20 stop: 27.75

Crude oil futures continued to edge lower and the oil sectors turned in a mixed performance. However, as we mentioned in the play description, shares of ALJ have been ignoring weakness in oil. The stock continues to consolidate just under resistance at the $30.00 level and we're waiting for a breakout. Our suggested trigger to go long the stock is 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.

PPicked 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: 32.56 change: -0.22 stop: 30.89

CCJ is not off to a stellar start. Friday's session produced a bullish reversal pattern and we wanted to see some follow through today. Shares gapped open higher at the open only to slip back into the red. Our initial reaction would be to exit now to limit any losses. However, looking more closely at the intraday chart we suspect that CCJ may still be poised to rebound. We'll give CCJ one-more day to show some strength or we'll cut it loose. Our short-term target is the $35.00-36.00 range.

Picked on November 19 at $32.78
Change since picked: - 0.22
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 2.5 million

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Celadon Group - CLDN - cls: 20.30 chg: -0.05 stop: 18.49 *new*

Transport stocks were unable to escape the market malaise on Monday. Shares of CLDN closed with a 0.2% loss. However, the session looks more bullish than it might seem given today's intraday bounce from the $20.00 mark. We would use today's session as a new entry point to go long the stock. However, you may want to tighten your stop loss! We're going to adjust our stop loss to $18.49. Our target is the $22.00 level. Plan for some resistance at $21.00 at least on the initial test.

Picked on November 12 at $19.44
Change since picked: + 0.86
Earnings Date 10/19/06 (confirmed)
Average Daily Volume: 305 thousand

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Heinz - HNZ - close: 43.50 change: -0.44 stop: 41.85

Monday marks the third day in a row that HNZ has churned sideways in the $43-44 range. This sideways consolidation is beginning to show up in the technical oscillators and they're beginning to grow more bearish. We have less than two weeks left so we're not suggesting new plays at this time. 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: + 0.30
Earnings Date 11/30/06 (confirmed)
Average Daily Volume: 1.6 million

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Thor Industries. - THO - close: 43.77 change: -0.76 stop: 41.99

Warning! THO's session produced a bearish engulfing candlestick pattern, which is typically seen as a one-day bearish reversal. We didn't see any specific news to account for the weakness and volume came in very low today so it's hard to make too many judgments on today's pattern but readers should turn defensive. More conservative traders may actually want to exit early right here and cut their losses since the major averages also seem tired and due for a pull back. Our target is the $47.85-48.00 level. near the October peak.

Picked on November 15 at $44.25
Change since picked: - 0.48
Earnings Date 11/28/06 (unconfirmed)
Average Daily Volume: 624 thousand

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VeriSign - VRSN - close: 23.10 change: -0.24 stop: 20.99

We don't see any changes from our previous updates on VRSN. Our last few updates have been warning readers to expect some consolidation lower. We'd look for signs of a bounce near the 10-dma around $22.50-22.60 although a bounce from here (near $23) would be encouraging. 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: + 0.59
Earnings Date 10/19/06 (confirmed)
Average Daily Volume: 2.9 million

---

Worthington Ind. - WOR - close: 18.06 chg: +0.10 stop: 17.39

News that Russian steel-maker Evraz was buying Oregon Steel (OS) helped light a fire under the steel stocks today. The sector strength helped account for WOR's gap open higher (18.21) and intraday rally to $18.44. Unfortunately, WOR gave back almost all of its gains. We remain bullish but traders may want to wait for a bounce from here since today's trading might be considered a failed rally. Alternatively look for a dip (and bounce) near its rising 10-dma around $17.75. 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: + 0.10
Earnings Date 12/26/06 (unconfirmed)
Average Daily Volume: 868 thousand
 

Short Play Updates

None
 

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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