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Daily Newsletter, Wednesday, 12/06/2006

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Table of Contents

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

Market Wrap

Another New Record

It's not difficult these days to find an index that's making another new high or new recent high. Despite an early negative tenor in the markets, the SPX hit another new six-year high by early afternoon, a six-year high that wasn't to hold.

The SOX offered confirmation of short-term bullishness from another sector. The early negative bias had finished off the head and right shoulders of a head-and-shoulders formation on the SOX's intraday chart. However, while the Iraq Study Group was presenting its report, the SOX gradually crept up to and then beyond the right shoulder level, invalidating that formation.

Breadth indicators weren't offering much confirmation of the bounce off the early lows, however. During that bounce, advancers and decliners proved equally matched on both the NYSE and the Nasdaq. Eventually, that lack of confirmation from breadth indicators was to prove prophetic as indices began falling back off their highs, accompanied by breadth indicators that turned slightly more negative.

Introduction

Some credit should perhaps be given to the homebuilders for reversing that early negative tenor in the markets. With the Mortgage Bankers Association reporting that mortgage application volume had jumped significantly in the week ending December 1, the DJUSHB, the Dow Jones U.S. Home Construction Index, jumped, too. That index had recently climbed above its 200-sma and 200-ema's and had gained significantly after breaching that resistance. With worries voiced this last week that the weakness in the housing sector might spill over into other sectors of the economy, the rebound may have significantly impacted investor sentiment, at least for a few hours. With an intraday high of 766.82, the DJUSHB approaches resistance in the 780-810 zone, and it will also need a weekly close above 745-747 to confirm its breakout. Some homebuilders' stocks left a big gap to perhaps be tested or else consolidated through a sideways movement.

What do other charts show?

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Charts

The SPX's chart shows a small-bodied candle that formed at resistance.

Annotated Daily Chart of the SPX:

The SPX's two days of consolidation have flattened intraday indicators, so that they provide no sense of where the SPX might be headed next.

The small-bodied candle that formed at resistance could be part of the SPX's typical pattern lately, which would suggest that further consolidation in the form of a sideways to sideways-up pattern would continue for another day or two at least. That fits with the idea that markets might chop around ahead of Friday's jobs numbers, too. However, due to the RSI pattern and the continued SPX struggle for more than a month with the midline of that channel, I'm more wary on behalf of the bulls than I had been. My advice must remain the same, though, to keep ratcheting those stops higher with each movement higher of the indices.

The RSI suggests that bears need to have their heads up now, watching for anything that confirms a change in the bullish trend. No confirmation has yet occurred.

The Dow, too, has trouble with a rising trendline, but in the Dow's case, that trendline is the former supporting trendline.

Annotated Daily Chart of the Dow:

The Dow flirts with bearish RSI/price divergence, but such divergences provide only a warning and not a confirmation of bearishness. The Dow's goodbye-kiss, a test of its former supporting trendline, did not result in the expected goodbye which should have come in the form of a sharp drop away from that trendline. Prices have managed to climb the underside of that trendline. It's possible that instead of falling away, the Dow will form another rising channel, this one with a more sedately inclining angle so that the gains are more sustainable. I'm also watching for the possibility that its recent pattern of gains could be breaking up and that the Dow will consolidate sideways for a while.

None of these possibilities--a steep decline after the kiss goodbye, a sideways consolidation or even the formation of a new but less steeply rising channel--are proven or even yet strongly predicted by what's happening on the charts. Some minor differences have arisen in the way indices are handling their previous tests of bottom-of-the-channel support. The Dow's break through that support is one of those differences. Indices may be beginning a pattern of disorganization.

The Nasdaq's chart also shows some minor differences of concern to bulls. The Nasdaq can't seem to pull away from the support of its rising channel, at least not yet.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's intraday charts provide a little more information than do the SPX's or Dow's. The Nasdaq appears to have relatively strong Keltner support near 2440-2441, but it's been testing that support and then bouncing away from it into a series of lower highs. The formation is beginning to look suspiciously like a bearish right triangle, so a prolonged breakdown through that 2440-2441 zone would seem to suggest that the short-term bearishness is being confirmed. In bullish climates, however, such breakdowns sometimes result in a morphing of the formation into a bull flag. If that's happening, support could be found at 2427-2430, at least as of the early part of the day.

If the Nasdaq bounces early tomorrow instead, watch for a lower high or a higher high, with the latter undoing the possibility of that being a bearish right triangle. If the Nasdaq does break down through the first support zone, watch that 2427-2430 area for possible bounce potential.

The SOX's morning run-up had taken it up to and slightly beyond Tuesday's high, but then the SOX rolled over from that level, forming a potential double-top formation on the intraday chart.

Annotated Daily Chart of the SOX:

A sustained move through 482.50 would confirm the double-top formation on the SOX, but remember that the formation has not been confirmed yet. If the SOX should drop, look for potential support at the 30-sma. Bull want to see that moving average hold, but there's such a river of support coursing below the SOX's current position that it's going to take either a prolonged period of chopping around or a strong whoosh lower to break through that support.

Short-term Keltner evidence suggested that the SOX could test 485 again, but didn't promise such a test or suggest what would happen after such a test, if it should occur.

Intraday Keltner evidence also suggested that the RUT could be pressured lower, perhaps toward 794 or even 792, but didn't suggest what would happen after such a test. So far, that support has held, but the RUT's intraday pattern also begins to look a little like a bearish right triangle.

Annotated Daily Chart of the RUT:

The RUT's chart pattern puzzles me. If the slant of the line along which the RUT consolidates is correct, then the RUT struggles to break above it, but hasn't yet given up the test, either. Watch the RSI for confirmation of either an upside breakout or a downside breakdown.

Today's Developments

After several weeks of declining mortgage application volume, the Mortgage Bankers Association reported that the week ending December 1 produced an 8.1 percent week-over-week seasonally adjusted increase in volume. If not seasonally adjusted, the volume increased 52 percent. Contrary to recent patterns, it was higher year over year, too, by 1.9 percent.

Other components were markedly higher, too, with the refinance component up 13.7 percent; the conventional, 8.6 percent; and the government, 2.5 percent. Four-week moving averages climbed. Refinance activity increased as a percentage of total applications.

All this occurred as the average contract interest rate for 30-year fixed-rate mortgages dropped below six percent again, to 5.98 percent, down from the previous week's 6.13 percent. The rate for a one-year ARM also fell, dropping to its lowest rate since March.

That was good news for the housing market, but whether it was a one-week blip or not remains to be seen, and that depends to a great degree on what happens with interest rates. Friday's view of the labor market will tell the Federal Open Market Committee (FOMC) something about how tight the labor market might be, therefore giving FOMC members information about how labor market costs might impact inflation in the future. This morning provided a forecast of Friday's number in the form of the ADP index of private-sector jobs. The ADP announced a gain of 158,000 private sector jobs in November. When the estimated 15,000 government jobs are added in, that brings November's jobs gain to 173,000, far above the expected 110,000.

In last weekend's Wrap, Jim Brown noted that if Friday's number shows a significant climb in employment, fear-of-the-Fed in the form of another rate hike could reassert itself. The ADP number may have been at least partially responsible for the early negative tenor, then, as it resurrected those fears.

Although the ADP index is constructed to forecast the Labor Department figures, supposedly using the same methodology and conducting surveys over the same time period, the ADP number missed spectacularly in June and, on a less colossal scale, in October. Both times, the ADP estimate was higher than the Labor Department's report. Perhaps some market participants remembered those misses and discounted the specter of a higher-than-expected jobs number on Friday.

According to a Marketwatch.com report, the jobless rate is expected to rise from its current 4.4 percent to 4.5 percent, and wage inflation is forecast to ease from its current 0.4 percent to 0.3 percent. Since the markets are watching these figures to ascertain the effect that the labor market might have on inflation, an easing in wage inflation would be good news to the markets. Market watchers wouldn't want to see a sharp rise in the jobless rate, however, as that would suggest an economy cooling more than is optimum, but a modest rise would be in keeping with that wanted easing of inflation pressure.

Some of the component stocks in the XOI and OIX, both sectors related to crude production or services, contributed to the midday bullishness, although not all crude-related stocks rose. In last night's Wrap, Jim Brown addressed the EIA's outlook on crude, including forecasts that Jim apparently considered Pollyanna-ish. Today, Norsky Hydro ASA (NHY) perhaps offered more reason to doubt the EIA's forecast. NHY trimmed its 2010 oil and output target by 6.7 percent, making the point that this was "an industry challenge, not just a Hydro challenge." This fits with the information that Jim Brown has been giving OIN readers for more than a year. NHY's chief executive used words such as "stretching" when describing the efforts the company is making to meet production targets. NHY did go on to point out that beyond 2010, the company believed that its broader portfolio would add to growth.

Two groups reported on crude inventories today, the Energy Department and the American Petroleum Institute. This week, crude futures for January delivery had been consolidating sideways to sideways-down, hit by forecasts of milder weather (and so, lesser demand) for next week.

Today's report was to prove more bullish for crude futures, at least over the short-term and within the recent consolidation zone. Crude futures for January delivery were to close at $63.00 a barrel, up from yesterday's $62.43 close, with both these numbers according to a DTNIQ feed source. Jim discussed some option-related considerations last night that also must be factored into any forecasts for crude prices, of course.

The Energy Department reported a drop in crude inventories of 1.1 million barrels, a drop in distillates of 400,000 barrels, and a drop in gasoline of 1.1 million barrels. The API reported that crude and distillate supplies dropped a much larger 4.1 million barrels and 1.5 million barrels respectively. The API reported that gasoline supplies climbed by 674,000 barrels. The Energy Department and the API seldom agree, but both reported an draw-downs that were unexpected.

Another economic report was issued yesterday, but I don't think it was widely covered until today. As expected after President Bush's April 2005 signing of the Bankruptcy Abuse Prevention and Consumer Protection Act, a new and tougher bankruptcy law, bankruptcies have fallen drastically year over year. For the year ending September 30, they are 38 percent lower than the previous year and are, in fact, at a 10-year low. Some groups believe that bankruptcy rates will rise again to their previous levels, however, with many debtors having rushed to declare bankruptcy just before the new law went into effect in the fall of 2005.

In company-related news, Yahoo (YHOO) announced the departure of its CEO and the head of its media group, among others. Its CFO was promoted. YHOO turned lower, but stayed within a recent consolidation pattern. Other negative news involved Novellus Systems (NVLS), with the company receiving a downgrade, and Novell (NOVL), with that company guiding expectations lower for its full-year 2007 revenue. Both turned lower, with NOVL gapping lower but bouncing strongly off its low of the day. The three companies negatively impacted the Internet, semiconductor equipment and systems software sectors.

In addition, an analyst with Lehman Brothers suggested that investors take profits in Oracle (ORCL) before the company releases earnings on December 18, as he believes that the company's database results could disappoint. ORCl gapped lower at the open, but held tentative support at its 72-ema.

Frontier Airlines (FRNT) announced that instead of breaking even in the third quarter, it now expects a loss of $0.12-0.17 per share. November's load factor, which measures the percentage of a plane that is filled with passengers, also dropped while capacity rose. That news as well as perhaps the rise in crude prices pressured the TRAN, the Dow Jones Transportation Index, turning it lower to retest its 30-sma. Merck (MRK) reaffirmed its fiscal 2007 guidance and earnings-per-share outlook, with those in line with analysts' expectations.

The discussion of the day's events can't be concluded without a mention of the Iraq Study Group's report, "The Way Forward: A New Approach," presented and much discussed today. The group classifies itself as a non-partisan group or as a group of "has-been's," as former Secretary of State Baker humorously characterized them when responding to a relatively young reporter's question about why President Bush should listen to them and not to the people he had on the ground in Iraq. The report's suggestions and conclusions include enlisting the help of other regional powers such as Syria and Iran, initially raising the number of U.S. troops inside Iraq for the purpose embedding more U.S. troops in Iraqi units and supporting those units while avoiding "making open-ended commitments" to retain large numbers of troops inside the country, and to move troops not involved in security efforts out of Iraq by 2008. As one reporter mentioned, the report does not use the word "victory," but former Secretary of State Baker commented that it also did not use other charged words, such as "civil war."

The merits of the study's suggestions will be much debated in the coming weeks, but the purpose of this mention of that report is not to debate those suggestions or engage in a political discussion. Rather, it's to recognize that the outcome of those debates will have implications for the economy and for particular sectors of the economy. Ahead of December's FOMC meeting, another source of uncertainty, this may add to a jittery mood in the markets.

Tomorrow's Economic and Earnings Releases

Thursday's economic releases begin with November's Monster Employment Index at 6:00, followed by the weekly Jobless Claims at 8:30. Information about the labor market won't be ended there, however, because Job Openings Labor Turn for October will be released at 10:00. I'm actually not familiar with this last report and it's not listed in my sources of economic releases, but Jim had it on his calendar, and his is usually more complete than mine.

The last two releases are the weekly Natural Gas Inventories at 10:30 and October's Consumer Credit, at 3:00.

Of course, many traders will be looking forward to Friday's November Employment Report rather than focusing on Thursday's economic releases.

Reporting companies include CMOS, FLE, IDT, JJZ, and NSM.

What about Tomorrow?

Last Wednesday, my prognosis of choppy trading behavior for Thursday, with prices mostly within Wednesday's range was exactly right . . . for the morning. Then buy programs sent indices higher again, although not much higher. Many indices produced doji or similar candles indicative of consolidation or uncertainty, so although I was wrong about the range, the tenor of the day was still in keeping with that expected consolidation or choppy behavior.

That's what we're getting again: choppy intraday behavior that produces candles indicative of consolidation or uncertainty. After months of typing that the SPX or some other index was just repeating its usual pattern as it climbed within its rising channel, I have to say now that most indices are repeating their usual pattern, but with a few minor stumbles. Those stumbles--the Dow's breakdown through its channel's support, the SPX's more-than-month-long struggle each time it tests midline resistance, the Nasdaq's heaviness, if that's the right word, that hampers it from climbing strongly off bottom support of its rising channel--bother me. They are not yet, however, strong evidence of a downturn in the making, although they certainly are making me pay attention to that possibility.

Actually, I think the strongest suggested possibility as of this moment is a period of disorganization that could chop both bulls and bears out of their positions.

Some time ago, I suggested that when prices next dropped to the bottom of the upward rising channels in which most indices were moving, that traders be careful about buying that dip, that they do so with smaller positions or more careful placement of their stops. I've been advising for a while that long-term bulls had nothing more to do than to ratchet up their stops, but now I'm not advising: I'm warning. I continue to warn bears, however, as there are heads-up signs to pay attention, but absolutely no confirmation yet that indices won't just take off to the upside again.

Tomorrow is more difficult than usual to predict, although I always seem to write during one of those sideways-to-sideways-up consolidation patterns. If such patterns are to play out as they have in the past, we should be due for another day or two at least of such consolidation. Such a period would also be true to form in front of important economic releases such as Friday's.

However, I'm not so certain that the consolidation will hold. Those scrambled intraday patterns on the SPX and Dow's intraday Keltner charts are of the type that can continue for a day, but then eventually see a strong breakout one direction or the other. Indices are near recent highs and so vulnerable ahead of Friday's numbers, and we've definitely seen some who want to take profits in the markets these days. If I'm seeing those signs, though, so are bears out there, bears who have been taught through the long months since July that they better step right back out of positions and quickly if they're not going to be skinned. For newbies: when bears step out of positions, they're forced to buy to cover, sending prices higher. In addition, tomorrow is the dreaded Thursday before opex week, a day when wild market action can occur.

Be ready for anything. I think it may be a case of who blinks first tomorrow or whether anyone blinks at all.
 

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

Amer. Electric - AEP - close: 42.14 change: -0.47 stop: 40.89

Wednesday was a day for profit taking across several sectors of the market. Shares of AEP lost 1.1% and erased most of its recent gains. Fortunately, the stock did bounce from broken resistance and what should be support near the $42 region. Readers can use the pull back as a new entry point while more conservative traders may want to wait for some signs of strength tomorrow before opening new plays. Our short-term target is the $44.90-45.00 range. The P&F chart points to a $50 target. FYI: We do not expect shares of AEP to move very fast so it could take a few weeks to reach our target.

Picked on December 03 at $42.03
Change since picked: + 0.11
Earnings Date 01/30/07 (unconfirmed)
Average Daily Volume: 2.0 million

---

ALON USA Ener. - ALJ - close: 31.21 chg: +0.20 stop: 28.85

ALJ tried to rally again but couldn't make it past resistance at its 100-dma. Yet if you're feeling optimistic then the pattern of higher lows is still bullish. We remain bullish with the stock above $30.00. If ALJ continues to dip then a bounce near $30 can be used as a new entry point. Our target is the $33.50-34.00 range.

Picked on November 21 at $30.15
Change since picked: + 1.06
Earnings Date 11/07/06 (confirmed)
Average Daily Volume: 504 thousand

---

Beazer Homes - BZH - close: 48.19 change: +1.85 stop: 42.99

Today was the annual homebuilders convention in New York. Analysts and industry experts offered a positive outlook that the industry would find a bottom in the first half of 2007. This lifted the homebuilding stocks and the DJUSHB index rose 2.1% while the HGX index rose 1.59%. Shares of BZH managed to out perform most of its peers with a 4% gain on strong volume. The stock is now challenging technical resistance at its 200-dma near $48.70. More conservative traders may want to exit now or near the 200-dma. Our target is the $49.50-50.00 range. FYI: The P&F chart displays an ascending triple-top breakout buy signal with a $58 target.

Picked on December 03 at $45.84
Change since picked: + 2.35
Earnings Date 02/06/07 (unconfirmed)
Average Daily Volume: 1.2 million

---

Chesapeake Energy - CHK - cls: 33.73 chg: -0.03 stop: 31.99

Shares of CHK, like many oil stocks, continued to consolidate on Wednesday. Readers might want to watch for a bounce near its 10-dma (around $33.40) or a dip near $33.00 as a new entry point to go long the stock. Our target is the $38.00-40.00 range.

Picked on November 29 at $33.98
Change since picked: - 0.25
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume: 7.5 million

---

Carrizo Oil & Gas - CRZO - cls: 32.71 chg: -0.41 stop: 29.75

Some afternoon profit taking in CRZO pulled the stock down to a 1.2% decline. We'd look for a dip near the 10-dma (around 32.30) or the $32.00 region as a new bullish entry point. Our target is the $35.50-36.00 range. FYI: The P&F chart's bullish target is $49.

Picked on November 29 at $32.15
Change since picked: + 0.56
Earnings Date 11/09/06 (confirmed)
Average Daily Volume: 345 thousand

---

D.R.Horton - DHI - close: 27.53 change: +0.90 stop: 24.69

DHI is another homebuilder that soared on positive comments about the sector nearing a real bottom. The stock rose 3.3% on strong volume. This is a new five-month high. Broken resistance near $27 should now be short-term support. Our short-term target is the $29.90-30.00 range. The P&F chart points to a $36 target.

Picked on December 03 at $26.59
Change since picked: + 0.94
Earnings Date 01/18/07 (unconfirmed)
Average Daily Volume: 3.7 million

---

Florida East Coast - FLA - close: 61.53 change: -0.61 stop: 58.99

The market suffered some profit taking on Wednesday and FLA was not immune. Shares lost almost 1%. Readers can choose to buy the dip today or wait and see if FLA provides a stronger dip near $60. Our target is the $67.00-70.00 range.

Picked on December 05 at $62.14
Change since picked: - 0.61
Earnings Date 02/01/07 (unconfirmed)
Average Daily Volume: 120 thousand

---

GulfMark - GMRK - close: 38.59 change: +0.39 stop: 36.99

GMRK managed a 1% bounce but failed to make it past yesterday's high or the simple 10-dma, which is bearish in our book. Traders should proceed cautiously. More conservative traders may want to bail out right now to limit any losses. We're not suggesting new positions at this time but another rally past $39.00 would appear to be a new entry point. We're aiming for the $42.50-43.00 range.

Picked on November 28 at $38.70
Change since picked: - 0.11
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume: 108 thousand

---

Guitar Center - GTRC - close: 47.35 change: +0.95 stop: 43.99

The rally in GTRC continues. The stock rose 2% today on above average volume. It became apparent why GTRC was moving. The company has been labeled as an attractive leveraged buyout target. Today's rally really confirms the bullish breakout yesterday but patient traders might want to wait for a dip before opening new positions. Please note that the Point & Figure chart displays a potential problem with resistance near $48.00. Our short-term target is the $49.75-50.00 range but more aggressive traders may want to aim higher.

Picked on December 05 at $46.40
Change since picked: + 0.95
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume: 600 thousand

---

Noble Energy - NBL - close: 53.20 change: -0.15 stop: 48.99

The rally in NBL took a break today. Shares traded near $54 before paring their gains. We remain bullish on NBL but the stock might dip back towards $52 or its 10-dma before moving higher. The P&F chart looks very bullish with a $76 target. Our target is the $57.50-60.00 range.

Picked on November 29 at $53.11
Change since picked: + 0.09
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume: 1.3 million

---

ONEOK Inc. - OKE - close: 43.86 change: -0.40 stop: 41.35

OKE also suffered some profit taking after its multi-day run up. We remain bullish but we're not suggesting new positions. Our target is the $45.00-46.00 range.

Picked on November 28 at $42.25
Change since picked: + 1.61
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 547 thousand

---

Rowan Cos. - RDC - close: 35.74 change: +0.24 stop: 34.45

RDC acts like it wants to go higher but we remain on the sidelines. Our plan is to catch a breakout over resistance at its 200-dma and the $37 level. We're suggesting a trigger to go long at $37.05. Our target is the $41.00-42.00 range. More conservative traders may want to exit early near $40.00, which might be round-number resistance.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/30/07 (unconfirmed)
Average Daily Volume: 3.4 million

---

Raytheon - RTN - close: 52.82 change: +0.54 stop: 49.85

RTN displayed relative strength with a 1% gain on strong volume to post a new record high. We don't see any changes from our previous updates. Our target is the $54.50-55.00 range.

Picked on November 29 at $51.05
Change since picked: + 1.77
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

Worthington Ind. - WOR - close: 18.65 chg: -0.31 stop: 17.99*new*

WOR experienced another round of profit taking but this time shares produced an intraday failed rally near $19 and its 200-dma. That should be the bulls on alert! Watch for a bounce near $18.50 or its simple 10-dma as a continuation of the up trend. We're raising our stop loss to $17.99. Our target is the 19.85-20.00 range.

Picked on November 19 at $17.96
Change since picked: + 0.69
Earnings Date 12/19/06 (unconfirmed)
Average Daily Volume: 868 thousand
 

Short Play Updates

Cheesecake Factory - CAKE - cls: 26.75 chg: +0.15 stop: 27.01

There is no change from our previous updates on CAKE. The stock looks poised to move lower. More aggressive traders might want to jump in now with what appears to be a failed rally near $27.00. We are waiting for a breakdown. We're suggesting a trigger to short the stock at $25.65. If triggered at $25.65 our target is the $22.25-22.00 range. We do expect some support near $24.00 but given the bearish technicals on the weekly chart we think any bounce at $24 would be temporary. The P&F chart currently points to a $4.00 target.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/30/06 (confirmed)
Average Daily Volume: 1.3 million

---

Imperial Sugar - IPSU - close: 22.89 change: -0.12 stop: 23.55

IPSU spent most of the session trading sideways. However, late in the day the stock tried to rally and failed at $23.26. We would use this as a new bearish entry point to short the stock. More conservative traders may want to ratchet down their stops toward today's high. Our target is the $20.05-20.00 range.

Picked on December 03 at $22.00
Change since picked: + 0.89
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume: 248 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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