Despite a very low volume day the markets managed to post some gains but we should not draw too many conclusions from this performance. Oil was extremely volatile with the bottom falling out of natural gas ahead of the January expiration on Wednesday. Economic reports continued to show weaker trends as shoppers stampeded to the malls. It was a typical post holiday trading session as fund managers try to run out the year-end clock with gains still intact.
Dow Chart - Daily
Nasdaq Chart - Daily
The Richmond Fed Survey fell to -6 in December from a +7 in November. This was the lowest reading from the Richmond manufacturing sector since Sept-2003. New orders fell -14 points to -8, shipments lost -10 points to -4 and order backlogs fell to -16 for the 13th consecutive month in negative territory. Raw material costs rose at a +3.44% rate with finished goods prices rising +2.59%. Hiring fell to -5 and the average workweek also turned negative at -8. Using the same components from the Richmond Survey as are used in the national ISM this report is projecting another reading in contraction territory below 50 for the ISM. The Richmond Survey has the tightest correlation to the ISM of the four regional Fed surveys. The rising inventory levels suggest there is weakness in the entire supply chain from raw materials all the way through to retail sales.
The S&P Case/Shiller housing survey released today continued to show weakness with home prices shrinking to a +2.4% year over year increase. The headline survey covers 10 major markets in the US. The 20-city composite index saw home prices shrink to a gain of only +2.9% year over year. This was the slowest rate of increase since the data has been recorded. For the 10-city headline index this was the lowest rate of price appreciation since Feb-1997. This report covered October period and was a significant drop from the +3.7% Y-O-Y gain seen in September. We should be glad to see any gain given the drastic plunge in new home sales. The fact that housing prices are still positive is amazing to me. The worst performing markets were Detroit, Boston, Cleveland, San Diego and San Francisco. The strongest markets wee Seattle and Portland. This report produced nearly the same results as the National Association of Realtors survey which showed a drop in prices last month of -3.5% to $221,000 and the biggest decline on record. Currently there is a 7.4 month supply of homes for sale at the current rate of sales. That is expected to decrease slightly once the spring selling season arrives.
Stock news was minimal with many traders, researchers and analysts still off for the holidays. Telik (TELK) lost -70% of its value when its experimental cancer drug failed to improve survival in patients. More than 32 million shares were traded as the price fell from $16 to $4.75. More than 17 million shares had been sold short ahead of the data and that is 30% of all outstanding shares. That is a monster payday for those TELK bears holding short positions.
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A Finnish security research firm announced that a new security flaw had been found in the new Windows Vista operating system that would allow hackers to take full control of a user's PC. They said the flaw would also affect any PCs running earlier windows versions if they have upgraded to Explorer 7.0. That release has been available as an update on the Microsoft website for several months. Microsoft downplayed the flaw saying Vista was still the most secure software they have ever released.
Amazon said it had its best ever sales in 2006. December 11th was the strongest single sales day ever with more than 4 million orders placed. This was well above the prior record of 3.6 million set on Dec-12th 2005. Their biggest shipping day saw 3.4 million orders shipped. I cannot even comprehend shipping on that scale. Amazon ran an Xbox 360 promotion in December and they sold 1000 Xbox consoles in 29 seconds when the promotion launched. Top items sold this season was the cold fighting Airborne preparation, Apple iPods, Canon Powershot Digital Elph cameras and Garmin GPS systems. They also sold the most expensive digital music player ever at $19,999. DVDs were very strong despite the reported demise of sales due to rental companies like NetFlix, Redbox and others. The leading title sold was Pirates of the Caribbean: Dead Man's Chest. Leading the book sales were titles like "You: On A Diet" by Oprah's favorite doctors Mehmet Oz and Michael Roizen.
Microsoft is reportedly close to putting targeted ads on its Hotmail network based on behavioral targeting. Microsoft has reportedly begun using demographic data provided by Hotmail users to deliver ads when those same users perform searches on any Microsoft site like MSN. Microsoft has been collecting data on its more than 240 million hotmail users for years but is just now starting to use it. This is seen as a positive event for those advertisers tired of bidding on pay per click sites with no material response. By targeting web surfers with a certain profile those same pay per click ads should do much better.
February Crude Chart - Daily
January Natural Gas Chart - Weekly
Oil prices started out the morning higher with a sprint to 63.20 on concerns over continued Nigeria violence and the new sanctions on Iran. The spike was brief and was followed some serious selling on very thin volume. It appeared as though a major sell program was triggered and there was not enough volume to handle it. Volume reached 98,000 contracts compared to daily volume last week of 150,000 to 215,000 contracts. Were it not for the sell program the price would have remained well over $62. There were 35,000 contracts traded during a single 30 min candle when that sell program hit. That was one-third the volume for the entire day in a single event. This compares to a single candle volume back on the 20th of 43,000 contracts but very little movement in price. There was just not enough volume today to support that kind of program.
Why the program was triggered we will never know but the impact remains. Oil closed at just under $61 and right at support on the February contract. Oil companies themselves did not do badly as end of year shoppers appeared to be adding to energy positions. Some strong performers included Sinopec +4.62, PetroChina +2.29, Petrobras +1.14, Conoco +0.64 and Exxon +.64. Considering the -$1.50 plunge in oil pries those gains are even more amazing. Analysts attributed the gains in major oil stocks to end of year window dressing. Natural gas fell even further lowing -8% to $6.09 as weather continued to be unseasonably warm in the Northeast. Evidently investors hoping for a cold snap to boost prices before the January contract expires on Wednesday finally ran out of patience and dumped expiring positions. The drop was expiration related more than a negative view of nat gas for the near future. Enjoy any dips in retail prices while they last because OPEC appears determined to support prices above $60 and that level is sure to rise. We are already seeing notices delivered by OPEC countries to their customers that shipments for February will be cut. The UAE warned customers it would cut exports in February by 3-5%. Even Santa is worried about the price of gas and its inflationary impact on everything we touch and eat.
This was the lightest volume day for the year with volume across all exchanges of only 2.5 billion shares, less than half of a normal day. This trend should continue the rest of this week. Internals were 2:1 in favor of advancers as retail traders went shopping to spend their holiday bonus checks.
The Dow rebounded with a gain of +64 points after closing at the lowest level in a week on Friday. This holiday period is typically bullish and the low volume allowed the major indexes to post a gain without working up a sweat. The Dow closed at 12413 and right at the bottom of what was support in the prior week. This rebound should not be seen as a major recovery or return to its bullish ways but just a low volume holiday shopping session. Funds which did not dress up their portfolios last week could be taking advantage of the final four days of trading to put on those finishing touches. Support on the Dow is now 12350 followed by 12250.
The Nasdaq managed to add +12 points in a rebound off strong support at 2400. Resistance is currently 2415 with the days close at 2414. That suggests tomorrow's traders may have a little more trouble pushing techs higher to even stronger resistance at 2435-2445. The SOX added +4 points to 467 but remains in danger of a continued drop to next support at 445. The Russell added nearly a full percent with a +7 point gain pushing it back to resistance just under 790. It is too soon to tell if this is a turnaround in the small caps or just further window dressing by funds.
The S&P rebounded from support at 1410 to near initial resistance at 1420 with the bigger issues getting the majority of the cash. This was definitely a window dressing effort with the big caps finding favor as safe havens ahead of year-end. The index stopped right at our 1418 long/short trigger level. This time I would only go long over 1418 for a short term trade and look again to short any weakness at or just below 1430. That level is strong resistance and one that is not likely to be broken before year-end.
S&P Chart - Daily
The current bull market is moving into its 46th month and the S&P has gone 516 days as of Dec-31st without a -10% correction. This is the 4th longest bull market since 1900. With economic data weakening we could see a pause in the first quarter as some investors step to the side to see if the next economic event is a rebound or a recession. The bond market seems to be saying it will be a recession. Once out of 2006 and into the 2007 tax year the funds will be free to take profits and restructure ahead of any potential weakness in 2007. Nobody knows for sure what the future will bring but the odds are good there will at least be a pause in the markets while we wait on the economy and the Fed. This possibility marks the first couple weeks in January as volatile ground we must cross. Maintain your bullish stance above S&P 1418 but keep your eye on the road just ahead.
Play Editor's Note: It is the holidays and many of our readers are traveling and spending time with family as they celebrate the season. The research side of our newsletter staff is also traveling and unavailable this evening. Our stock pick updates and new play content will return with the next regularly scheduled newsletter.
New Long Plays
New Short Plays
Long Play Updates
AllState - ALL - close: 65.69 change: +0.32 stop: 63.49
The S&P IUX Insurance index closed in the middle of the green pack today, up +0.6%, and that helped our long play in ALL. There was a minor dip below its 10-dma this morning but then rallied the rest of the day and nearly recovered Friday's decline. It's now above a 62% retracement of the decline from last week's high so fingers crossed the rally will continue. ALL is short term overbought so we could see a pullback but hopefully the 10-dma, now at $65.30, will continue to provide support. We remain bullish on the stock above $65.00 although we could see an intraday move down to its 20-dma at $64.50. While our stop remains at $63.49 (now near the rising 50-dma at $63.45) more aggressive traders may want to exit with a break of the uptrend line from August, currently at $64.30. Daily stochastics is now overbought and there is a bearish divergence on RSI. In the meantime our target is the $69.00-70.00 range.
Picked on December 15 at $65.25
ONEOK Inc. - OKE - close: 43.40 change: +0.28 stop: 42.25
The XNG natural gas index was down -0.36% today, as were several energy sectors. But OKE bucked today's weakness in the energy field with a small rally and continues to show relative strength. By holding above $43 this should turn more bullish over the next several days and by moving higher it should get its 10-dma back above it 20-dma and lend price support. Our stop is currently near the uptrend line from May which is right on top of the 50-dma at $42.14. If you'd like just a little more staying power in this trade you can move your stop down to about $41.99.
Picked on November
28 at $42.25
Raytheon - RTN - close: 53.45 change: +0.02 stop: 51.99
RTN battled back and forth at the flat line today. We're watching how price will react if it RTN pulls back to its uptrend line from November which is right on top of its 10-dma, both at $53.15 (little higher on Wednesday). We remain somewhat cautious given the weakness in the major market indices and the overbought oscillators so we are not suggesting new positions. Considering how close Thursday's high ($54.17) came to our target in the $54.50-55.00 range and the steepness of the rally since November, we're raising our stop to protect profits now. The stop is being raised to $51.99 which keeps the stop below the 20-dma at $52.46 and the $52.06 low on 12/11/06.
Picked on November 29 at $51.05
St.Paul Travelers - STA - close: 54.02 change: +0.47 stop: 51.95
STA was relatively stronger than the Insurance index (IUX.X) today thus reversing its relatively weaker performance last Friday. But with the daily oscillators looking to be rolling over, and the bearish divergence at the last high we do not recommend any new plays in this stock. The current stop at $51.95 keeps it below the 20-dma and uptrend line from August, both currently at $52.60. Our target is the $57.50 level. The P&F chart is bullish with a $76 target.
Picked on December 17 at $53.56
Short Play Updates
Cheesecake Factory - CAKE - close: 24.68 chg: -0.19 stop: 27.01
CAKE continues to be pressured lower by its downtrend line from the end of November and its 10-dma, both currently near $25.30 and dropping. This bodes well for our short play and the stop at $27.01 is above the 20-dma at $26.15. If the decline continues for another few days we'll be able to lower our stop to just above the breakdown level of $25.75. Use a bounce to the 10-dma or $25.75 to initiate a new play. 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. FYI: The most recent (November) data puts short interest at 11.8% of CAKE's 73.7 million-share float. That is relatively high short interest and could raise the risk of a short-squeeze if CAKE manages to rally.
Picked on December 18 at $25.65
Colonial Prop. - CLP - close: 46.22 change: +0.36 stop: 48.26
CLP got a bounce today but has not made it back up to its 10-dma yet, currently
at $46.65 and dropping. The bounce closed Friday's gap down at $46.07 which
provided another short entry. The next short entry, if it bounces further on
Wednesday, would be at its 10-dma which has been holding this down since its
Picked on December 17 at $46.71
New Century - NEW - close: 34.32 change: -0.12 stop: 36.55
NEW bounced sharply at today's open and tagged its downtrend line from August and 20-dma, currently at $35.05. It made for another short entry for those who were able to watch it intraday. It was all down hill from there for the rest of the day and the short term pattern looks bearish. Our stop is presently just below the declining 50-dma at $36.65. Aggressive traders can lower their stop to just above the 20-dma and the previous low of $35.54 on 12/1/06 so perhaps $35.70. We remain bearish on NEW and traders can choose a breakdown under $34 or a failed rally under $35.10 as a new entry point. Our target is the $31.00-30.00 range. FYI: The most recent (November) data put short interest at 22% of the company's 50 million-share float. That is a very high degree of short interest and it does raise the risk of a short squeeze if NEW reverses sharply higher.
Picked on December 10 at $34.47
21st Century - TCHC - close: 23.05 change: -0.19 stop: 26.01
Today's price action looks like further consolidation after Friday morning's big spike up. The downtrend line and 10-dma are both near $23.90, and dropping, so watch that level for potential resistance. Volume was very light today which supports the idea that we'll see a continuation of its bounce but it's hard to read volume during a holiday week like this. With the lower holiday volume and high short interest ratio we could see a stronger bounce. Our stop at $25.01 is close to the 20-dma at $25.06, and dropping, so that will hopefully allow this to whip around a bit underneath our stop. Our downside target is the $21.50-20.00 range. The most recent (November) data puts short interest at over 6% of TCHC's 6.4% float. That's a very small float so 6% might be enough short interest to really increase the risk of a short squeeze should TCHC reverse higher.
Picked on December 10 at $24.84
Cognos - COGN - close: 42.09 change: +1.12 stop: 42.31
The short play in this stock has not been triggered yet as we're still waiting for it to drop through its 50-dma and its uptrend line from August, currently at $39.80, to trigger our entry at $39.60. COGN got a nice bounce today so thankfully we're not short yet. Price action on the daily charts looks like it's just consolidating so we like our entry price and will patiently wait for it to get hit. We might raise our trigger price if this pushes a little higher in the coming week. Our downside target price is $35.00 which is just above its 200-dma and at previous price level resistance now potential support.
Picked on December 21 at $40.19 (waiting for trigger at $39.60)
Citrix Sys. - CTXS - close: 26.82 change: -0.17 stop: 51.95
After dropping below support at $27.60, which is a potential H&S neckline for price action since August, we are now hoping to see CTXS head for its H&S price objective of $18 which is the same as the current P&F price objective. Aggressive traders can aim for that target while a short term downside target is a little less aggressive at $24.60 which is based on the 200 weekly average and a gap fill from October 2005 ($24.47 closing price on 10/24/05). An additional entry opportunity can be found if CTXS bounces back up to resistance at $27.60.
Picked on December 22 at $27.45
Closed Long Plays
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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