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Daily Newsletter, Thursday, 03/08/2007

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Table of Contents

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

Market Wrap

Scaling Mount Everest, but Is the Summit Attainable?

Over the last three years, the globe's bourses have performed like mountain climbers scaling Everest, the linked climbers moving higher. Last week, reports from the summit mentioned that one of the climbers tumbled, taking the others down, too. Since then, the world's bourses have attempted to regain sure footing, but they're all shaky and it's far from certain that they'll take the oxygen-thin summit.

Introduction

U.S. futures climbed last night, pulled higher by the climbing overseas bourses. The Nikkei scaled 17,000 again, its highest level this week. The Shanghai Composite also reached a new high for the week.

Some evidence existed that U.S. indices were regaining their footing. Although the first slate of today's U.S. same-store sales figures, released in the pre-dawn period this morning, featured mixed results, U.S. futures did not stumble until Wal-Mart (WMT) disappointed. Even that stumble proved minor.

European bourses were also scaling new heights for the week. The Bank of England left interest rates at the current 5.25 percent, the expected outcome. Economists widely anticipate that England's central bank will raise rates at least one more time. The bank has signaled its intention to move quickly to stem inflation, but no rate hike was put in place at this meeting. Inflation measures had dipped in January, allowing the bank some time to reassess. Although inflation measures showed that January dip, however, the level is still above the central bank's target 2 percent.

The European Central Bank raised rates, with the decision unanimous. Some worried aloud that the ECB's action would eventually be repeated in England and perhaps even in the U.S., with the world's central bankers keeping a close watch on inflation pressures. In fact, the slight stumble in U.S. futures, although attributed by mainstream media to the WMT same-store sales disappointment, also occurred near the time of the ECB's announcement. The slight pre-market stumble may have been due to escalating rate-hike worries as much as to WMT's disappointment.

By the time the U.S. cash open approached, tidbits from the ECB's President Trichet's question-and-answer session were hitting the wires, with quotes such as the notation that he "didn't say rates were at a peak." Rates were termed both "accommodative" and "moderate." President Trichet also warned that the ECB would be watching wage developments with care, with both his prepared introductory comments and his answers during the Q&A session deemed somewhat hawkish.

While what happens in Europe and England doesn't directly impact the decisions of our central bankers, a rate-hike environment also doesn't soothe market watchers worried about increased tightening here. However, futures held near their overnight highs, demonstrating the conditions for the climbers had improved despite pre-market reports that began to append the word "cautiously" to their description of the optimistic tenor.

Both the optimism and the caution would be shown. Markets would climb strongly, but that recent take-some-off-in-the-afternoon pattern would reassert itself, a sign of the caution. Few feel comfortable holding overnight, and indices were well off their day's highs by the close.

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Charts

Last week, I noted the potential for several indices to test 200-ema's if they broke key support levels. The Nasdaq and Russell 2000 followed through as expected when key support was broken, both bouncing precisely from their 200-ema's. However, neither the SPX nor the Dow dipped that far even though key support appeared to have been broken.

Annotated Daily Chart of the SPX:

Today the SPX tested the 10-sma and the 38.2 percent retracement of the decline off the February high, with that Fibonacci level near 1407.12 and with the SPX reaching an intraday high of 1407.93. The SPX fell back from that level, suggesting that the convergence of important moving averages and Fibonacci levels, such as the 10-sma and 38.2 percent level today, might have some importance in determining support and resistance.

The long upper shadow in the SPX's daily candle does not inspire confidence in the rally, but the pullback was not so extreme as to produce a bearish candle. It may be indicative only of hesitation ahead of tomorrow's important Non-Farm Payrolls Report or a need to further consolidate gains, but so far, the upswing has a bit of a choppy look, also failing to inspire confidence.

Last week, I noted that as early as Tuesday's decline, some signs of institutional buying had surfaced. I pointed out those signs last week, and also noted that such signs shouldn't be taken as proof that indices wouldn't decline further or that the longer-term move was still up. I don't see this yet as a proven V-bottom recovery. I am reserving judgment until I see the indices either roll back down and retest recent lows or scale Everest and climb past their breakdown levels from last week and keep climbing toward new summits.

In the "What about Tomorrow?" section, I'll discuss levels to watch to determine short-term targets, but keep the moving averages and Fib convergences mentioned above in mind.

Those Fib levels and moving averages do not converge as clearly for the Dow.

Annotated Daily Chart of the Dow:

A test of the 30-sma might be the most important test to watch, if it occurs, because the SPX bounced from the 30-sma for so many months, but I'm not certain yet that the SPX will reach that high. I'm not the only person to gaze at that chart and see how many times the SPX bounced from that average and to remember that prior support can often be new resistance. If I were long, I'd be tempted to bail ahead of a test of that moving average and would wait to see how the test transpired. Others may be thinking the same thing.

I'll show levels to watch for tomorrow in the "What about Tomorrow?" section.

The Nasdaq's 30- and 50-sma's now converge with its former rising channel support, so a test of those averages would constitute a retest of the Nasdaq's breakdown level.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily candle was indicative of indecision, with the Nasdaq's climb looking agonizingly difficult. This does not yet appear to have the makings of a V-bottom rise, at least as viewed on a daily chart, so I would remain protective of any bullish profits from the bounce off the 200-sma.

Levels to watch for tomorrow will be shown at the end of the Wrap.

I hesitated to include the SOX's chart, although I typically do include it, because the SOX's chart remains as messed up as it's been for months. After the close today, National Semiconductor (NSM) reported. Blaming soft demand, the company reported profit 45 percent lower than year-ago levels. The company missed expectations for sales, but at least one article mentioned that demand appears to be stabilizing. The CEO said that during the latter part of the quarter, bookings improved. As this report was prepared, the stock had moved higher in after-hours trading.

Annotated Daily Chart of the SOX:

I will not be showing levels to watch for tomorrow for the SOX, as I will for some of the other indices. I would not advise any trades on this index until its pattern is clarified. Someone, somewhere is having a lot of fun laughing at us technical analysts busily constructing our trendlines and patterns on this index, while it morphs from one pattern to another. I don't intend to put any credence into any pattern until the SOX demonstrates more clarity. I will, however, watch the SOX's direction intraday to see whether the SOX's move is supporting or working against the Nasdaq's movement that day.

I'll also be watching the Russell 2000's action intraday, as the RUT also often serves as a leading index. Today's candle is one that's often followed by further consolidation or a pullback, so I'll be watching for that possibility tomorrow.

Annotated Daily Chart of the RUT:

I'll also be watching the TRAN, as it sometimes provides leading guidance for the SPX, OEX and Dow.

Annotated Daily Chart of the TRAN:

Although it's difficult to ascertain on this chart because the candles are scrunched together, symmetry with a potential top-of-the-shoulder formation for the left shoulder suggests that the TRAN could consolidate another day or two before next direction--either a rounding over toward the neckline or a rise that violates the potential head-and-shoulder formation.

Some intraday charts suggest consolidation as a possibility, too, and I'll show those in the "What about Tomorrow?" section at the end of the Wrap.

Today's Developments

Few economic releases were published today. U.S. traders operated without the benefit of many reports from the base camp. Retail sales figures released before the market and during the day were supposed to assume exaggerated importance, at least according to pre-market media reports. That didn't turn out to be true.

Their effect on the markets probably should have been negative, except that some, such as Target (TGT) predicted stronger same-store sales next month. As the cash open neared this morning, Thompson Financial reported that more than twice as many retailers were missing expectations than beating them. Those beating expectations tended to be high-end retailers. Some big-name retailers such as Wal-Mart (WMT), Costco Wholesale Corp. (COST), Pier 1 (PIR) and Limited Brands, Inc. (LTD) disappointed, but representatives of the retail industry pointed out the impact of the cold weather on sales of spring clothing items.

The figures on consumer savings that Keene Little pointed out last night in his Wrap may be impacting sales, however, with consumers perhaps becoming more hesitant about spending and more prone to save. Some market pundits also point to higher gasoline prices and increasing difficulties in paying mortgages as perhaps being as important as those weather patterns.

Monster Worldwide's February Employment Index was the first economic report. It climbed 9 points to a record 177 high in February, the firm announced. Monster breaks the index into various industry and occupational groupings as well as in groupings for each of the nine U.S. Census Bureau regions. The firm reported that nearly all component indices showed a pickup in online job availability. The industries that demonstrated the greatest increases were in the utilities, transportation and warehousing industries. However, manufacturing layoffs and a slumping housing industry hurt several related occupational groups and contributed to a regional slowdown in Arizona and Nevada. Remember that in an environment in which the world's central bankers are watching employment and wage figures to determine if wages are exerting inflation pressures, that's not entirely good news.

Weekly jobless claims came next. First-time claims fell 10,000 to 328,000 last week, beating expectations. The four-week moving average still rises, however, and has now reached its highest level since the fall of 2005.

The last economic release of the day was natural gas inventories. Stocks fell 102 billion cubic feet. That was roughly in line with estimates and was considered bearish for natural gas. Last year at this time, inventories had fallen 85 billion cubic feet and inventories remain above the five-year average.

Company-related news mostly centered on those same-store sales figures during the morning. In addition, retailer Wal-Mart (WMT) announced that it was raising its dividend.

DDuring the afternoon, retailers lost airtime to New Century Financial (NEW). Speculation swirled that the collapse of the sub-prime mortgage industry would force NEW to seek Chapter 11 bankruptcy protection. Late-day news included reports that the company had lost a director and that it was no longer accepting applications for loans.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic reports include one of the most important of the week, the February Non-Farm Payrolls or Employment Report. Wednesday's ADP report hinted that the prior consensus of 100,000 jobs added might be missed, but the ADP has been wrong three times in the last year. Two of those times, it's been spectacularly wrong. The ADP has reformulated the way the survey is conducted, however, including more data, with Keene reporting last night that some market watchers were beginning to put more faith in the ADP report than in the government's official report. That official jobs report will be released at 8:30 tomorrow morning. A big miss in either direction would perhaps be needed for this number to be the determinant of market action tomorrow, however. Watch pre-market action, including bond yields, to determine whether the report is deemed Fed friendly or more hawkish. br>
Other economic releases for tomorrow include January's International Trade at 8:30, January's Wholesale Trade at 10:00 and the ECRI Weekly Leading Index at 10:30.

FFew companies of note report tomorrow. Reporting companies include a number of energy-related companies as well as BIG and BNSY.

What about Tomorrow?

Last week, I pointed out the potential for short-term upside bias. I mentioned that it might not hold beyond the morning, and it didn't even hold that long. Indices slipped down early to test Keltner support levels before attempting a tepid bounce and rolling down again to hit new recent lows. br>
I had also mentioned an intermediate upward bias that was suggested by the signs of institutional buying I had seen as early as Tuesday. That did play out after Friday's decline, but has it now "played out," as in finished?

Some daily charts indicated some hesitancy about moving the indices higher today, leaving upper shadows on the daily candles. That may have been hesitancy ahead of tomorrow's important Non-Farm Payrolls or it may have been just part of a choppy rise into resistance, with the rise to eventually retest the breakdown levels. In normal circumstances, today's candles would suggest further consolidation or a downturn tomorrow, and the TRAN's daily chart suggests consolidation as a strong possibility, but both bulls and bears are jittery and I'm not ruling out any movement for tomorrow without knowing the reaction to the Non-Farm Payrolls tomorrow morning.

I'm not going to leave you stranded, though. I'm going to show charts that might prove helpful. Several 30-minute charts that I'm including below show the indices ending the day mired in a web of support and resistance lines, conditions that sometimes prompt consolidation, at least for a few hours. Here's how it works: unless there's a strong drive one direction or the other to break through that web of lines, it typically takes at least a few hours and sometimes a whole day to bump back and forth against the lines and separate them, softening either the support or the resistance.

Those charts also suggest levels at which the indices are breaking out of consolidation, either to the upside or the downside. The Keltner charts provide potential upside or downside targets if those breakouts or breakdowns should occur.

AAnnotated 30-Minute Chart of the SPX:

The SPX could remain within the blue channel's boundaries on 30-minute closes and still drop lower or climb higher as long as it drags the blue channel down or up with it. Be aware that these lines are dynamic and will shift with price movement, so the levels may be slightly different tomorrow morning and perhaps much different by the afternoon. The pink line corresponds to a 45-ema on the 30-minute chart and the aqua one to a 120-ema. You can watch those even if you don't have Keltner charts. As long as the SPX is mired between the support of one and the resistance of the other tomorrow morning at each 30-minute close, it's still caught in a chop zone as far as I'm concerned.br>
The Dow, Nasdaq and RUT charts are similar.

AAnnotated 30-Minute Chart of the Dow:


Annotated 30-Minute Chart of the Nasdaq:


Annotated 30-Minute Chart of the RUT:

Perhaps as you're looking at these charts, you've noticed potential inverse H&S formations being chopped out since last Tuesday. A pullback to those black lines pointed to by the lower arrows could be part of a right-shoulder formation as long as the support holds on 30-minute closes. Again, I'm not suggesting that you trust any version of any head-and-shoulder formation or that you count on its targets being hit, but I am suggesting that they still give insight as to whether bulls or bears are winning for the moment. Therefore, unless that black-line support is violated on 30-minute closes, a pullback to that line should not necessarily be considered short-term bearish. It could be part of a bullish formation. Points at which such formations are most vulnerable to being violated are as the right shoulder is forming and as the neckline is being tested.br>
As I said earlier, I'm reserving judgment for now as to what will happen over the longer-term. I'll want to see what happens at the retest of the breakdown levels or at the retest of recent lows before I decide. If I were entering new plays right now, I'd be entering them with smaller positions than usual. Even if I were still day trading, and not concentrating on credit spreads, I don't think I'd be entering anything right now, with indices midway between recent breakdown levels and the new recent lows. However, if you've just got to trade, the Keltner charts give you some guidance. Know where your stops will be before you enter, however, and keep inching them up, because nothing, not even my beloved Keltner charts, is foolproof, especially these days.
 

New Plays

Most Recent Plays

NEW PLAYS TABLE-->
New Plays
Long Plays
Short Plays
None None

Play Editor's note: We remain skeptical of the widespread bounce in the U.S. markets and hesitate to jump into a bunch of new bullish positions. The rally in the S&P 500 failed under its 10-dma and 100-dma on Thursday. Both the NASDAQ Composite and the DJIA both remain under their respective 10-dma and 100-dma. We are suggesting that investors wait and see how the market reacts to the jobs report number on Friday morning before creating any new positions.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Boardwalk Pipeline - BWP - cls: 37.15 chg: +0.45 stop: 35.35

Our bullish play in BWP is now open. The stock actually gapped open higher at $36.95 and then spiked to $37.50 before consolidating sideways for the rest of the session. Our suggested entry point to go long the stock was at $37.10. The close over resistance near $37.00 is certainly bullish but we are concerned about the lack of volume behind today's move, which should signal the bulls to be cautious. Our target is the $39.85-40.00 range. Our stop will be $35.35. FYI: Average daily volume is a little low so stay more cautious than normal.

Picked on March 08 at $37.10
Change since picked: + 0.05
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume: 182 thousand

---

eBay Inc. - EBAY - close: 31.02 chg: -0.01 stop: 29.49

EBAY under performed both the broader market and the Internet sector. The stock produced another failed rally near its 50-dma and that suggests the stock might dip back toward support near $30 and its 200-dma. Wait for signs of a bounce in the $30.00-30.50 region before considering new long plays. 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: + 0.53
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million

---

Level 3 Comm. - LVLT - cls: 6.22 chg: -0.00 stop: 6.46

There is no change from our previous comments on LVLT. The stock is still consolidating although it's worth noting that today's action looks a little bearish. 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 or even consider buying a rebound over $6.30 (today's high). 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

---

Redwood Tr. - RWT - close: 55.19 chg: +0.43 stop: 52.45

Uh-oh! Bulls need to be careful here. Today's trading in shares of RWT looks like a bearish failed rally pattern. The stock gapped open higher at $55.36 and continued to rise until it hit $56.79 and then the stock quickly gave back most of its gains. The bad news is that our suggested trigger to go long was at $55.25 so the gap open this morning would have opened the play. We are not suggesting new positions unless we see a bounce from the $55.00 (maybe the $54.50) level. More conservative traders, if you opened positions today, you may want to exit early or significantly tighten your stops due to the afternoon bearish reversal. Our target is the $59.00-60.00 range. More conservative traders may want to avoid this play altogether. In addition to being a REIT, RWT also has exposure to the residential loan market, which has been getting killed as investors flee anything related to residential lending thanks to the carnage taking place in the sub-prime areas. Today that group, the sub-prime lenders, witnessed a sharp bounce but it may just be a bounce and nothing more. FYI: The P&F chart remains bearish given the recent sell-off. The most recent (and probably out of date) data put short interest at almost 7% of RWT's 26.4 million-share float.

Picked on March 08 at $55.36 *gap higher*
Change since picked: - 0.17
Earnings Date 02/20/07 (confirmed)
Average Daily Volume: 234 thousand

---

TEPPCO Part. - TPP - close: 42.70 chg: -0.00 stop: 41.95

Today was a non-event for TPP. The stock closed unchanged with shares trading in a 50-cent range. The overall pattern remains bullish but readers can watch for a dip (or a bounce) near $42.50 as a new entry point. Our target is the $44.90-45.00 range.

Picked on March 06 at $42.88
Change since picked: - 0.18
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand
 

Short Play Updates

Agilent Tech. - A - close: 31.74 chg: +0.96 stop: 32.55

Rumors that Agilent might be a takeover target fueled a sharp rally this morning. The stock gapped open higher at $31.00 and challenged overhead resistance near $32.00 and its exponential 200-dma before paring its gains and closing with a 3.1% rise for the session. More conservative traders may want to tighten their stops. We're not suggesting new positions at this time. 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: + 1.02
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume: 2.6 million

---

Avid Tech. - AVID - close: 33.54 chg: +0.29 stop: 34.25

AVID is still trading under resistance near $34.00 but 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: - 1.07
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

---

Consol Energy - CNX - close: 36.24 chg: +0.88 stop: 36.86

Danger! The bounce in CNX is starting to look like a bona fide rally. Volume on today's 2.4% gain was above average. The stock came within four cents of our stop loss at $36.86. More conservative traders may want to abandon the play immediately. We're not willing to quit just yet since the rally struggled with overhead technical resistance at its simple 200-dma. The recent move is starting to look like the right shoulder on a bearish head-and-shoulders pattern. We're not suggesting new short positions at this time.

Picked on March 05 at $33.95
Change since picked: + 2.29
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume: 2.4 million

---

Comptr.Prog.&Sys - CPSI - cls: 28.01 chg: +0.28 stop: 30.05

The market-wide rally continued to fuel the oversold bounce in CPSI. Shares rose 1% but still closed under its simple 10-dma. The afternoon pull back looks like a failed rally at its short-term trendline of resistance. 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: - 1.79
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume: 97 thousand

---

Federated Dept. - FD - close: 44.94 chg: +1.14 stop: 45.05

The rally in FD on Thursday is a bit of a mystery. The company reported same store sales of +1.2%, which were under analysts' estimates for a gain of +2.8%. The company blamed the extreme cold weather for the slow down. There were some reports that today's rally in FD was due to positive analysts comments on the stock but we couldn't find them. At any rate the rally stalled near resistance at the $45.00 level. Nimble traders may want to consider switching sides and going long if FD can breakout over $45.00. We'll certainly drop FD as a bearish candidate if shares close over $45.00. Right now the plan is to short the stock 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 Linda Piazza and all other plays and content by the Option Investor staff.

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