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Daily Newsletter, Monday, 03/05/2007

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Table of Contents

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

Market Wrap

"Yen in Doubt," Get Out!

The major U.S. indexes continued their retreat from recent highs as the "yen carry trade" continued to unravel with the Japanese yen showing strength against the dollar and the euro.

Decliners easily outpaced advancing issues at both major exchanges, and since last Monday's Market Wrap, internal measures have turned negative.

The NYSE Summation Index ($NYSI) from StockCharts.com, which measures the relationship between advancers/decliners at the NYSE has given a "sell signal" on its 20-point box which I've been following and updating in recent wrap. Tonight's closing measure is +596.13, thus a "sell signal" below it late January's +580 relative low reading.

More importantly, Dorsey/Wright and Assoc. NYSE Bullish % (BPNYSE) also reversed lower on 03/01/07, suggesting a more DEFENSIVE posture. I will tie in this major market bullish % when we review a bar chart of the NYSE Composite ($NYA.X) 8,837.97 -1.33% later.

StockCharts.com's NYSE Bullish % ($BPNYA) has also reversed back lower, falling 3.45% today (net loss of roughly 104 stocks to reversing lower point and figure sell signals) to 64.42%.

Please note! It takes a VERY MEANINGFUL amount of buying, or selling (as is the current case) to move such a BROAD MEASURE of internal strength and weakness.

Leadership as depicted by the NH/NL ratios has been bearish, with NASDAQ's 5-day NH/NL ratio now deemed near-term "oversold" below 30%.

In Tuesday's Market Wrap I noted that StockCharts.com's NASDAQ Composite Bullish % ($BPCOMPQ) had achieved "bull confirmed" status to 62.00%. Recent action, including today's, now has this very broad measure of internal strength/weakness REVERSING BACK LOWER to "bull correction" status at 54.50%, or 56.00% on its chart.

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The NASDAQ Summation Index ($NASI), which measures advancing/declining issues reversed back lower last week from +260. Tonight's closing measure is +6.88, but has not yet given a "sell signal" below its late-January relative low measure of
-80.00.

On Tuesday of last week, global equity markets fell sharply, with China's equity markets notably weak as investors contemplated the negative impact that a stronger yen against both the U.S. dollar and euro may have on global trade.

In essence, investors of equities may "fear" that too much strength in the yen vs. the dollar and euro could lead to economic weakness in Asian markets, or economies, should accelerated weakness in the dollar and euro have consumers in both of those countries buying fewer Asian manufactured goods.

But tonight's trade in the dollar/yen portion of the "carry trade" may signal some near-term stability for the major indexes as the cross-rate dollar/yen did achieve its point and figure bearish vertical count of 115.30.

Below is a real-time screen capture of the USD/JPY (dollar/yen), where it appears we're seeing a bounce from an intra-session low of 115.23.

Forex Global Currencies - 03/05/07 06:43 PM EST

The above screen capture was taken this evening as I began writing this evening's wrap. Last Tuesday's sharp declines in Asian markets did show some strong correlation to a strong move in Japan's yen.

US Dollar/Yen Cross Rates - 03/02/07

The above point and figure chart is from our good friends at Dorsey/Wright & Associates. Action in Treasuries and gold in recent sessions have suggested that there are some currency concerns.

While any security, or commodity can always exceed a bullish or bearish vertical count (sometimes never meet), if one portion of the "yen carry trade" were to find some stability, the dollar/yen cross rate chart would be a place to begin monitoring things.

Dorsey's chart above (red Os to 116.6355) would have been to Friday's close. I've added my own "blue Os" (O = Supply) down to 115.4764).

Point and figure chartists will note that on 02/27/07 (Tuesday of last week), the very bearish "bearish catapult" pattern was found. Coincidence with last Tuesday's sharp declines? I doubt it!

I don't think any of us need to be "experts" in currencies, but I want traders and investors to have an idea of how the sharp movements have perhaps roiled the equity markets.

If it is true that yen STRENGTH has come with EQUITY WEAKNESS, then perhaps, in the future, the OPPOSITE would be true. I would also want traders and investors to comprehend the STRENGTH in TREASURIES of late as a DEFENSIVE signal from the MARKETS.

All eyes will be focused on Japan's Nikkei-225 ($NIKK) tonight, which would be a first test for any signs of equity market stability.

Japan's Nikkei-225 ($NIKK) - 50-point box

Tuesday's trade for the Nikkei-225 is underway. At the time of this writing (08:55 PM EST), the $NIKK is up 127-points, or +0.77% at 16,770. So far, tonight's low has been 16,649, so we would not be able to currently chart another "O" to 16,500. While Tuesday's trade is not complete, the current session high of 16,770 does have me envisioning "X" with a "?" to 16,750 and suggesting some sign of stability in Japan's equity markets.

Other markets that will open up later this evening are Hong Kong's Hang Seng. Their StockCharts.com symbols is $HSI.

Here at Home in the Good'ol USA

My QCharts' data has had some problems due to last week's surge in volume that created some problems with various computer-related trading at both the NYSE and NASDAQ.

I've tried to correct some of the "more important" 5-dayNet% changes to reflect changes since last Monday's Market Wrap.

US Market Watch - 03/05/07 Close

As you can see, there is very LITTLE of anything except the price of Treasuries, which move inverse of their Yield that has shown a gain since last Monday.

Even as Treasury Yields as depcited by the 5-year ($FVX.X), 10-year ($TNX.X) and 30-year ($TYX.X) have fallen, the higher dividend paying Utilities HOLDRs (AMEX:UTH) $132.25 -1.04% and their 5.26% decline in 5-days should suggest that market participants have taken a DEFENSIVE stance, even for a group that tends to hold up better-than-most as a "defensive" sector.

Today's big losers continued to have the "subprime" area under pressure. Shares of New Century Financial (NEW) $4.56 -68.87%, the third largest US subprime lender plunged further as the company scrambled to avoid a bankruptcy filing following the disclosure of a criminal investigation into its practices.

European-based HSBC Holdings (NYSE:HBC) $85.91 -0.41% reported record earnings, but said it would take at least two years to fix its portfolio of bad home loans in the U.S.

Homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 640.47 -4.02% were atop today's list of sector losers as investors continue assess tightening of lending standards.

NYSE Bullish % Reverses Lower!

One of the major market bullish % that I feel if imperative to cover this evening is the NYSE Bullish % (BPNYA) from Dorsey/Wright & Associates.

One June 30, 2006 this very broad measure of supply (O) and demand (X) reversed up at 50% bullish, signaling demand was starting to outstrip supply, and that an offensive posture was taking hold.

On Thursday, March 01, 2007 it reversed lower and while still "bull confirmed", bullish investors should not be more than 50% long in their equity accounts.

NYSE Bullish % (BPNYSE) - 2% box chart

The above chart of the NYSE Bullish % (BPNYSE) was screen captured earlier this evening. I'm just now getting today's closing reading where Monday's action saw this indicator fall an additional 3.62% to 63.24% bullish, so we would chart more "O"s down to 64.00 and stop.

Now let's quickly take a look at the NYSE Composite ($NYA.X) and make the tie between the mid-June low from the bullish % and the recent late-February high.

NYSE Composite ($NYA.X) - Daily Intervals

For several week's we've been "dragging up" our 0% retracement from the summer lows, and now we have many of the major market indexes like the NYSE Composite ($NYA.X) falling back below a 19.1% retracement.

A "normal correction" by fibonacci retracement standards would be to see 38.2% of the advance be retraced.

S&P Depository Receipts (SPY) - Daily Intervals

The broad S&P 500 Bullish ($BPSPX) from StockCharts.com and Dorsey/Wrights S&P 500 Bullish % (BPSPX) has also reversed lower.

With the SPY I had been "dragging up" its 0%. At last Tuesday's close, I showed an SPY option chain and option montage that strongly suggested we might see a trade at $137.00 on, or before March's expiration. Further observations since then suggest a March low at/near the $134.00 level.

I was very busy in Tuesday's Market Monitor. While I did not have a PROFILED SPY long trade open, I did suggest that those long above $142.00 sell covered calls as VIX.X.

In the above chart of the SPY, I've shown a PROFILED SPY put trade we made early Tuesday morning. I thought traders should take some money off the table later that day, but hold onto a portion of that trade, but have LOWERED the stop to $4.00 in the option to try and protect a gain from $2.60 option entry.
 

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

eBay Inc. - EBAY - close: 30.35 chg: -0.47 stop: 29.49

Our bullish play in EBAY is now open. The stock dipped into our suggested entry range of $30.50-30.00. Our entry point was at $30.49. We would expect to see a bounce near support around $30.00 and its 200-dma. However, the market's sell-off is pretty nasty and is showing no signs of slowing down yet. We strongly suggest that readers wait for signs of a bounce first before initiating new bullish positions. If the market keeps dropping then EBAY will probably drop right along with it and we'll be stopped out at $29.49. Now that the play is open we have two targets. Our first, more conservative target, will be the $33.85-34.00 range. Our second, more aggressive target, will be the $37.00-38.00 zone.

Picked on March 05 at $30.49
Change since picked: - 0.14
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million

---

Level 3 Comm. - LVLT - cls: 6.09 chg: -0.19 stop: 6.46

We are still in a wait and see mode with LVLT and fortunately, we are comfortably on the sidelines. The stock has continued to pull back along with the broader markets. Today's breakdown under $6.20 and its 50-dma is bearish. Aggressive traders might want to consider buying a bounce near $6.00 but we would definitely use a tight stop loss if you did. At the moment our plan is to buy a breakout over resistance near $6.80. We're suggesting a trigger to buy the stock at $6.81. If triggered our target is the $7.35-7.40 range as LVLT has long-term resistance near $7.40. More aggressive traders may want to aim higher near $8.00. The P&F chart is very bullish with a $12.75 target.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/10/07 (unconfirmed)
Average Daily Volume: 37.8 million
 

Short Play Updates

Agilent Tech. - A - close: 30.69 chg: -0.03 stop: 32.55

Shares of A produced another failed rally under its 200-dma on Monday. This looks like another entry point for short positions. We don't see any changes from our weekend comments. Traders have a choice to either watch for an oversold bounce and failed rally under $32.00 or wait for a new decline under potential support near $30.00. The H&S pattern projects a $26.50 target. We are aiming for the $28.50-27.50 range since A might have additional support near its September 2006 lows around $28.50. The P&F chart points to a $14 target. There doesn't not appear to be any significant amount of short interest in the stock.

Picked on March 04 at $30.72
Change since picked: - 0.03
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume: 2.6 million

---

Avid Tech. - AVID - close: 32.78 chg: -0.17 stop: 34.25

AVID tried to bounce again but the rebound stalled at the $33.50 mark. We're not suggesting new positions at this time. Our target is the $30.50-30.00 range. FYI: Readers should note that the most recent (January) data puts short interest at 12.2% of AVID's 40.9 million-share float, which is relatively high and raises the risk of a short squeeze.

Picked on February 05 at $34.65
Change since picked: - 1.87
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

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Cons Energy - CNX - close: 34.27 chg: -0.71 stop: 36.86

Our new bearish play in CNX is now open. The stock experienced a lot of weakness early this morning. Shares gapped open lower at $34.59 and plunged to $32.62 before bouncing back. Our suggested trigger to short the stock was at $33.95. Fortunately, the rebound struggled and the stock closed down 2%. Now that the play is open our target is the $30.50-30.00 range. Readers have a choice to either look for a failed rally under $35.00 or wait for a new decline under $34.00 and/or its 50-dma before opening new positions.

Picked on March 05 at $33.95
Change since picked: + 0.32
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume: 2.4 million

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Comptr.Prog.&Sys - CPSI - cls: 27.00 chg: -0.49 stop: 30.05

CPSI set a new closing low for the last 18 months and the stock closed near its lows for the session, which is normally bearish for the next trading day. We don't see any changes from our weekend comments. Our target is the $25.50-25.00 range. The P&F chart's bearish target has fallen from $18 to $16. The most recent (January) data puts short interest at 10.3% of the company's 9.3 million-share float. That is a high amount of short interest and with such a small float it really increases the risk of a short squeeze so trade cautiously!

Picked on February 06 at $29.52
Change since picked: - 2.52
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume: 97 thousand

---

Federated Dept. - FD - close: 44.17 chg: -0.08 stop: 45.05

There is no change from our weekend play comments for FD. Volume continues to be very high but the stock isn't going anywhere, which could suggest we're seeing a lot of distribution. We suspect that given this market environment the next move will be down. However, nothing is guaranteed and FD has shown some relative strength the last couple of days by not selling off (much). Aggressive traders may want to consider positions now. We are suggesting a trigger to open plays at $43.43. If triggered our target is the $40.50-40.00 range.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/07 (unconfirmed)
Average Daily Volume: 6.3 million
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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