Option Investor

Daily Newsletter, Monday, 03/26/2007

Printer friendly version

Table of Contents

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

Market Wrap

Weaker, yet stronger-than-expected...

After opening flat, the major indexes darted lower at 10:00 AM EDT on a weaker-than-forecasted February new home sales report, but by 11:00 AM, the major indexes began reversing losses to finish mixed with technology and miners offsetting weakness in homebuilders and transports.

The broader S&P Depository Receipts (AMEX:SPY) $143.20 -0.13% traded as low as $142.09 after the Commerce Department reported that sales of new single-family homes dropped 3.9% in February to a seasonally adjusted annual rate of 848,000 units, the slowest pace in nearly seven years. Consensus among economists was for sales to be at a steadier 990,000 annual rate.

Sales were notably weak in the Northeast and Midwest, to areas that were hit by snowstorms last months. The Commerce Department said sales fell 26.8% in the Northeast and were down 20.0% in the Midwest.

After plunging 25.8% in January, sales rebounded 24.6% in the West. February new home sales were down 7% in the South.

The decline in new home sales followed a sharper 15.8% decline in January, the biggest one-month decline in 13 years.

Meanwhile, the Commerce Department said the number of unsold homes jumped to 546,000 and that it would take 8.1 months to eliminate that backlog of unsold homes at February's sales pace. The 8.1 months supply is the longest period for this measurement in 16 years.

In today's Market Monitor at OptionInvestor.com, I showed the various months CME Housing futures contracts (May'07, Aug'07, Nov'07 and Feb'08). I thing/thought that the Nov'07 contract, which would encompass this spring/summer/fall season, which is also about 8 months of time, looks to be the benchmarking contract that "matches" today's revelation.

On Friday, the CME's Nov'07 housing futures had the Composite (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington DC) closing at contract lows of 212.00.

CME's Nov'07 Housing Futures - Dated Close Benchmarks

Due to limited width the above table is "squished," but a more readable version is displayed in the OptionInvestor.com Market Monitor today.

On 02/08/07 and then on 02/21/07 I benchmarked those dates to the news out of subprime lenders New Century Financial (trading on the "pink sheets"), as well as Novastar Financial (NYSE:NFI) $5.34 -8.08%. On 02/27/07, the S&P 500 (SPX.X) plunged 3.5% to close at 1,399.04.

I think one commentator was speaking tongue-in-cheek today when saying he was "shocked" by today's figures. Shock could really set in should the Nov'07 CME Housing futures Composite break above the 217.80 level and 02/13/07 benchmark.

Certainly some eyebrows are rising with the S&P 500 Index (SPX.X) 1,437.50 +0.09% now up just more than 38 points from its 02/27/07 close.

My eyebrows rose late this afternoon as the SPX/SPY got back in the green.

U.S. Market Watch - 03/26/07 Close

In last Monday's Market Wrap, I spotlighted crude oil, thinking oil traders might start getting bullish.

The U.S. Oil Fund (AMEX:USO) $51.17 +1.18% does depict that scenario playing out to an energy bull's liking. In today's OptionInvestor.com Market Monitor, I suggested that bulls long 1/2 positions, raise their stops to $49.74 to try and protect gains.

Undoubtedly exacerbating the rise in oil prices is heightened tensions between Iran and the West. Today, Iran said that the 15 U.K. naval personnel seized four days ago are well, but added that they could face legal proceedings and that it had no intention of using the naval personnel in any type of prisoner swap deal.

On Sunday, British Prime Minister Tony Blair called the seizure of the 15 sailors and marines "unjustified and wrong," saying that London saw their situation as "very serious."

SS&P Depository Receipts (SPY) - Daily Intervals

Equities have been volatile and some tionInvestor.com subscriber's observations regarding recent option action suggest call sellers were active late last week.

April "Max Pain" theory values have been quite volatile, seemingly changing on a daily basis, which makes some sense to this options trader. April's "Max Pain" theory has risen from $139 to $141 (at tonight's close) and with premiums having been "high" (VIX of 21 "high" relative to 12.5 readings), institutions that tend to be SELLERS of option premiums, may have the CALL side of their selling on the "wrong side" of the trade.

OOn 03/14/07, I had set up a March sell COVERED PUT trade just below the $137 level in the SPY, thinking the higher VIX and "jacked" premiums a good risk/reward trade for selling some premium, with just two (2) days of RISK. We just missed getting filled by about $0.10/contract, and boy has the SPY ramped higher since.

TThat "missed opportunity," but strong move higher in the SPY, has me thinking some institutional traders were also looking to sell premiums.


Get 50% of your trades wrong and still make big profits in the stock market!

We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!

CLICK HERE: http://www.hotstix.com/public/default.asp?aid=10383

There was a notable IX and SPY correlation that took place today. Just when it looked like bulls got their horns trimmed on the new home sales data, the jump in the VIX hit a key institutional level where we'd monitor for put option SELLING/call option BUYING at its MONTHLY Pivot of 14.71 (see above U.S. Market Watch and VIX's intra-day high of 14.70). Then at important near-term VIX support and the institutionally monitored WEEKLY Pivot (13.33), the VIX did move below that level.

Here's an intra-day chart of the S&P Depository Receipts (AMEX:SPY), but instead of the conventional use of fibonacci retracement show above, I'll match it up with the VIX and tie together its MONTHLY Pivot, WEEKLY Pivot action.

I will also revisit the dollar/yen (USD/JPY) cross rate benchmarks, where the dollar has firmed, and shown some gains against the Japanese yen. We should remember that "one reason" the major market indexes around the world fell sharply in late February, was the sudden RISE in the yen against both the U.S. dollar and the euro!

SS&P Depository Receipts (SPY) - 60-minute intervals

A pivot trader looking just at a "longer-term" MONTHLY Pivot etracement should have expected institutional computers to SELL against MONTHLY Pivot ($142.12) after seeing February's action almost test MONTHLY S2, then trade MONTHLY S1 in March. In essence, institutional computers SHOULD have tried to get squared up at $142.12.

Last week's strong move above MONTHLY Pivot $142.12, finds BUYERS today! Even with so much "bad news" (rising oil prices, new home sales). As if computers were bound and determined to buy that level and SELL premiums, if observing the VIX.

I've marked three (3) observations of the USD/JPY, where I'd have to observe that any USD/JPY jitters from equity bulls have eased.

Over the last three trading sessions, the USD/JPY has closed 118.11, 118.11 and today's 118.13, so VERY LITTLE action.

MMarket Volatility Index (VIX) - 60-minute interval

It is one thing to see a broader-market index like the SPY "peg" a PIVOT, but in my opinion, today's "jump" right to a MONTHLY Pivot and reversal in the IX, even as a closely monitored February new home sales comes in much weaker than forecasted, strongly suggests to me that institutional computers, were already set to trade BULLISH. Either that, or the February new home sales data wasn't "weaker than expected."

Major Market Bullish % changes!

At tonight's close, I should also update some changes in StockCharts.com's major market bullish %.

On Thursday of last week, StockCharts.com's narrower S&P 100 Bullish % ($BPOEX) reversed back up to "bull confirmed" status at 70%, and saw a net gain of 2 stocks (or +2%) to reversing higher point and figure buy signals today to 72%.

In this evening's Market Monitor at OptionInvestor.com, I also noted that StockCharts.com's NASDAQ-100 Bullish % ($BPNDX) reversed back up to "bear correction" status at 62%, with a net gain of 2 stocks' (or +2%) point and figure charts showing reversing higher "buy signals."

II ran through some of today's percentage gainers for the NASDAQ-100 (NDX/QQQQ) and saw Lam Research (NASDAQ:LRCX) $48.08 +1.60% giving a reversing higher PnF "buy signal" at $48.00.

MedImmune (NASDAQ:MEDI) $34.61 +1.46% was another NASDAQ-100 component giving a reversing higher PnF buy signal when it traded $35.00.

One "news item" from a fundamental standpoint that may be of interest to computer-related technology stock traders was Microsoft (NASDAQ:MSFT) $28.22 +0.71% announcing today that it has sold 20 million copies of its new Vista operating system for consumers since its January launch, outpacing sales of earlier Windows versions.

Microsoft said it included the sales from Vista copies featured on new personal computers, individual box sales of the programs, upgrades and the coupons distributed by PC manufactures in the fourth quarter that provided free discounted upgrades to Vista customers who purchased machines between Oct'06 and March'07 (remember MSFT "delayed" its Vista launch last year).br>
The company said current trends indicate that more people are buying the higher-end version of Vista than past operating systems, noting that during the same time period, the earlier Windows XP sold about 17 million versions in 2002.

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

Bright Horizons - BFAM - cls: 38.35 chg: +0.12 stop: 37.45

If you're feeling optimistic then the good news with BFAM is that shares failed to experience any real follow through lower after Friday's sell-off. Traders appeared to buy the dip but volume was below average. It would have been nice to see BFAM dip to $37.70 or $37.50 to fill the gap from last Thursday. If that occurred we would have had a bit more confidence buying today's bounce. We hesitate to suggest new positions with our target at the $39.85-40.00 range.

Picked on March 21 at $38.62 *gap higher*
Change since picked: - 0.27
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume: 185 thousand


Bristow Group - BRS - close: 36.96 chg: -0.16 stop: 34.99

BRS struggled to post any gains even though crude oil and the oil services index both closed higher. We're not suggesting new positions at current levels. If you're looking for a new entry point then watch for a dip near $36.50 maybe $36.00. More conservative traders may want to use a tighter stop near $35.30. Our target is the February highs in the $38.40-38.50 range. FYI: The P&F chart is bullish and points to a $47 target.

Picked on March 11 at $35.88
Change since picked: + 1.08
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand


Countrywide Fincl. - CFC - cls: 36.24 chg: -0.59 stop: 33.95

What happened to the bounce in CFC? It was bombarded with a triple-punch of bad news. First and foremost was the worse than expected new home sales that sparked the market sell-off. Second, were negative comments from Goldman Sachs, who reiterated their "sell" rating on the stock. Third was news that Morgan Stanley (MS) had decided against keeping the $2.5 billion in loans they received from New Century as compensation for a $2.5 billion line of credit. MS announced it was planning to sell the mortgage loans at auction. This prompted a new round of bankruptcy fears for New Century and that pessimism weighed on the mortgage lenders. Overall the afternoon bounce in CFC looks like a new entry point to us but readers may want to see a new rally past $36.85 before initiating positions. More conservative traders may want to use a tighter stop loss. We're listing a conservative target in the $39.85-40.00 range. More aggressive traders may want to aim higher. FYI: We do not want to hold over the late April earnings report.

Picked on March 25 at $36.83
Change since picked: - 0.59
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 9.5 million


Canadan Nat.Res. - CNQ - cls: 54.36 chg: +0.56 stop: 48.95

Rising tensions with Iran over the 15 British soldiers it has hostage pushed crude oil prices higher on Monday. This lifted the energy stocks and CNQ rose over 1% to breakout above the $54.00 level. Our target is the $58.00-60.00 range. The rally past $53.00 has produced a brand new Point & Figure chart buy signal with a $62 target. We do expect some resistance near $56.00-56.50.

Picked on March 21 at $53.05
Change since picked: + 1.31
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million


eBay Inc. - EBAY - close: 33.22 chg: +1.39 stop: 29.85

Goldman Sachs raised their earnings estimates on EBAY and reiterated their "buy" rating and $40 price target. This positive press helped fuel a 4.3% rally in EBAY and a new four-week high. More conservative traders may want to tighten their stops. We're not suggesting new positions at this time. We have two targets. Our first, more conservative target, will be the $33.85-34.00 range, since EBAY has resistance near the $34.00 level. Our second, more aggressive target, will be the $37.00-38.00 zone. FYI: We do not want to hold over the late April earnings.

Picked on March 05 at $30.49
Change since picked: + 2.73
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million


EMC Corp. - EMC - cls: 13.66 chg: -0.04 stop: 12.74

Some of the hardware stocks were posting gains with the GHA hardware index rising 0.8%. EMC under performed its peers and closed down 0.29% after producing another failed rally at the $13.90 level this morning. The morning bounce near $13.50 looked like a new entry point but if the major averages are weak again tomorrow don't be surprised to see EMC dip toward $13.25. More conservative traders may want to adjust their stop toward $13.00. Our target is the $14.50-15.00 range. FYI: The P&F chart is still bearish from the February-March sell-off.

Picked on March 21 at $13.26
Change since picked: + 0.40
Earnings Date 04/17/07 (unconfirmed)
Average Daily Volume: 29.1 million


Helmerich Payne - HP - cls: 30.84 chg: +0.19 stop: 27.95

Rising crude and a strong gain for energy stocks helped HP post another score in the plus column. The stock is challenging the $31.00 level and continues to look short-term overbought. It could get more overbought if money managers decide to buy more to dress up their portfolios for the end of the quarter. More conservative traders may want to take some money off the table or lower their target into the $31.75-32.00 range. We're keeping our target at $32.50 for now. We are not suggesting new positions at this time.

Picked on March 19 at $28.77 *gap higher*
Change since picked: + 2.07
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 1.4 million


KLA-Tencor - KLAC - cls: 54.39 chg: +0.05 stop: 52.75

We do not see any changes from our weekend comments. If the markets rally and if stocks see any window dressing then KLAC could be an attractive target. The stock is up for the quarter and is nearing significant resistance at the $55.00 level. We're suggesting a trigger to buy the stock on a breakout at $55.15. If triggered our target is the $59.50-60.00 range. Before opening positions consider our time frame. We do not want to hold over the mid-April earnings report. That gives us about three weeks, which may be a little optimistic. FYI: The P&F chart is bullish with a $69 target. Nimble traders may also want to consider an alternative entry on a dip or bounce near $53.00.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/16/07 (unconfirmed)
Average Daily Volume: 4.9 million


Northwest Pipe Co. - NWPX - cls: 38.49 chg: +1.64 stop: 33.99

It looks like news leaked early for NWPX. After the closing bell today the company announced a $12 million order from a construction company hired for the city of Aurora, Colorado. Yet the move in the stock price happened earlier today. Shares of NWPX opened sideways but shortly after 11:00 a.m. the stock vaulted higher to close with a 4.4% gain on strong volume. We're not suggesting new positions at this time. Our target is the $39.85-40.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $53 target.

Picked on March 25 at $36.85
Change since picked: + 1.64
Earnings Date 03/22/07 (confirmed)
Average Daily Volume: 57 thousand


Rentech - RTK - close: 3.23 chg: +0.32 stop: 2.49

We didn't see anything specific to account for the 11% rally in RTK today. It could have been the situation with Iran and the rising cost of crude oil. Whatever the case shares surged higher on strong volume. The stock is now up about 22% from our picked price and we strongly suggest that readers consider taking some profits now and exiting early. As a matter of fact we are adjusting our target from $3.40-3.50 to $3.28-3.30 to account for potential resistance at the November low and the falling 50-dma. More aggressive traders may want to stick with our original target. FYI: Don't forget that RTK is building coal-to-liquid fuel plants and with crude oil rising investors may turn more attention toward alternative energy stocks.

Picked on March 18 at $ 2.64
Change since picked: + 0.59
Earnings Date 05/11/07 (unconfirmed)
Average Daily Volume: 915 thousand


Titanium Metals - TIE -cls: 36.90 chg: +0.35 stop: 34.49

TIE weathered the market weakness this morning relatively well. We see the intraday bounce as a new entry point to buy the stock. In the news today TIE announced plans to begin a new titanium sponge facility. Another headline hit after the closing bell. Valhi Inc. (NYSE:VHI), who is the majority shareholder of TIE, completed a dividend to investors in the form of TIE stock. Post-dividend VHI still held over 51% of TIE's outstanding shares. You can see the details here:
This news had TIE trading lower after hours around $36.50. We would suggest buying another dip in the $36.00-36.50 zone. Actually we'd watch for a dip into the $36.50-35.00 zone as a potential entry point - just wait for signs of a bounce first. Our target is the $39.85-40.00 range. The P&F chart points to a $54 target.

Picked on March 21 at $36.30
Change since picked: + 0.60
Earnings Date 05/15/07 (unconfirmed)
Average Daily Volume: 2.4 million


TEPPCO Part. - TPP - close: 44.00 chg: +0.03 stop: 41.95

Traders bought the dip in TPP near $43.50 and shares almost broke out to a new high this afternoon. The trend remains bullish but if you missed the dip this morning we would not suggest new positions at this time. Our target is the $44.90-45.00 range. The Point & Figure chart is very bullish with a $67 target.

Picked on March 06 at $42.88
Change since picked: + 1.12
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand

Short Play Updates


Closed Long Plays


Closed Short Plays


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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives