Lots of ups and downs have accompanied market days this week, but when the market action ended today, many major indices had cycled around again to levels only minimally above where they ended last week. The NYSE closed above its February closing high, but even that index closed only 51.19 points above last Thursday's close.
All this cycling around has accomplished little except depositing the indices about back where they started the ride a week ago, with all the centrifugal forces slinging a few bulls and bears off the ride as it whirled just a little too fast at times. The action appears to be all about positioning the markets ahead of tomorrow's economic numbers and GE's pre-market earnings report.
As traders woke to news of explosions in Iraq, one in the cafeteria at the Iraqi parliament building and another that collapsed a bridge in Baghdad, some must have worried that any economic explosion here could sling a few more riders off that Ferris wheel. Some early reports rumbled through the equity markets, sinking U.S. equity futures and the footings beneath the wheel. Rising initial claims and import prices contributed to the shaky ground. So did a caution from Wal-Mart's (WMT) CFO that the company would find the efforts to meet first quarter EPS targets of $0.68-0.71 challenging.
Some soothing to the riders might have been offered from the European Central Bank and initial U.S. same-store sales figures. Yesterday's release of the FOMC minutes again heightened fears that the economy will soften further at the same time that the FOMC is forced to hike interest rates. The ECB at least felt able to keep interest rates steady at the conclusion of its meeting today, and initial same-store sales figures from companies like Costco (COST) reassured some market watchers. Thomson Financial reported that 77 percent of retailers beat expectations, according to an early morning Marketwatch.com article.
COST reported a gain of six percent in March same-store sales, with expectations having been for a rise of 4.7 percent. American Eagle also trumped expectations, as did Target, J.C. Penney, Nordstrom, Limited Brands and a number of other retailers. Even WMT beat same-store expectations for March sales, although the company's predictions for April same-store sales were far from cheering. It was those April predictions that led to the company's caution about the quarter's earnings. Some notice should be paid to company's warning about the impact of the early arrival of Easter this year. That early arrival makes comparisons with last April difficult, but may have been at least partly responsible for the better-than-expected March same-store sales in clothing-related retailers.
The soothing effect didn't last long. In the after-decision press conference, ECB President Trichet confirmed that the ECB might need to raise rates again, perhaps as early as the June meeting. Equity traders for a time discounted strong March same-store sales, focusing instead on the predicted weaker April figures, especially with higher costs hitting the consumer in the wallet. Climbing crude futures and the weaker dollar exacerbated that concern. Markets dropped and the RLX, the retail index, dropped from its early morning height at the top of the wheel.
Then the Ferris wheel cycled up again, pushing indices up into the close. As the charts show, however, this might have been more of the cycling up into resistance before the decline into support. The RLX's close above resistance that has held since late February argues against that conclusion, but even the RLX couldn't maintain its intraday push above its 30-sma.
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All of last week's annotations disappeared from my charts this week, but that's sometimes a good thing. As early as the middle of March, I warned that the triangles seen then could morph into other formations such as wedges or rising channels, and my charts had been crisscrossed with all sorts of trendlines. Prices have been indeed been morphing from one formation into another, and those missing annotations and trendlines allowed for a fresh look at the newest versions.
Annotated Daily Chart of the SPX:
As long as these formations last, look for resistance at the top trendline and support at the bottom, but there may be a reason to hesitate to act on that possibility this time. Prices are moving into the last third of this wedge, a point at which they often break out one direction or the other. Be careful of assumptions if trendlines are approached tomorrow.
Be aware of a second possibility, too. Supposed bearish rising wedges sometimes broaden into a regular old rising price channel. If one's outlook is excessively bearish, it's easy to forget that potential, but I'm not going to forget it and don't advise that you do so, either. Although price patterns appear a bit more organized now than they have at any time since late February, we've seen many examples of price patterns that simply morph into another.
The Dow's chart clearly shows that the supposed "bearish" rising wedge is only one interpretation of potential price action.
Annotated Daily Chart of the Dow:
This chart demonstrates the danger to would-be bulls who buy an upside breakout tomorrow, if one should occur. Be aware of that waiting rising-price-channel resistance on the Dow as well as on other indices.
Annotated Daily Chart of the Nasdaq:
The SOX is still doing its thrashing-around thing, so I'm not going to show its chart. It is notable, however, that since late February, that thrashing is less volatile rather than more so, as seen in some other indices. The SOX appears to be settling into a narrowing triangle, but whether that formation means anything more than any of the dozens of others that have been forming on the SOX's daily chart over the last few months, I can't say. As both Keene and I have been suggesting for months, if you're a directional trader who buys options, look elsewhere for a place to spend your money until the SOX more clearly determines next direction. This action has been wonderful for those trading credit spreads, if any traders had enough nerve to try SOX plays when its chart was so hard to interpret, but it's been deadly for others. As earnings reports begin coming in next week, the SOX may show us something about next direction.
This afternoon's earnings report by chip-equipment maker Lam Research Corp. (LAM) may even prod the SOX a bit, although that's not clear at the moment. LAM is not a component of the SOX, of course, but there could be some spillover into SOX stocks if LAM's beating of expectations is considered a sign of chip strength, too, from further down in the food chain. LAM was rising in after-hours trading, but competitors such as KLAC declined, so some market watchers may assume that LAM's results were due to taking market share away from competitors rather than a sign of broad strength in the sector. I hadn't seen enough information to determine that as this report was prepared shortly after the market close.
Other often market-leading indices, the Dow Jones Transportation Index and the Russell 2000, have patterns that echo those seen on the other indices.
Annotated Daily Chart of the TRAN:
Even the broad NYSE, reaching above the February closing highs today, did so within the confines of its own rising wedge.
Annotated Daily Chart of the NYSE:
I can't show all the charts I'd like to show, but it's important to note in the chart section that, after gapping higher after last Friday's rate-hike scare, ten-year yields continue to consolidate just below their 200-sma. A small triangle appears to be forming just below that presumed resistance. Clearly, bond traders, at least, have not discounted the chance that the FOMC might be forced to hike rates again. They're in a wait-and-see mode, too, just as equity traders are.
First-time claims for unemployment insurance rose to a two-month high this week, rising 19,000 to 342,000. The rise was much higher than anticipated, but it's uncertain how the seasonal adjustments might have impacted those figures. The four-week average also climbed, rising to its highest level in three weeks. The Labor Department cautioned that their seasonal adjustments might not have adequately compensated for the timing of spring breaks, accounting for some recent volatility in the numbers.
Continuing claims rose 38,000 to 2.527 million, but the four-week average of continuing claims dropped, still influenced by recent declining weeks. The insured unemployment rate stayed steady at 1.9 percent, while the jobless rate dropped back to 4.4 percent. The insured unemployment rate measures those people still eligible for benefits, with those benefits typically ending after 26 weeks of unemployment. The figures still suggest that despite a low unemployment rate, those who lose their jobs encounter difficulty finding a new one.
In another pre-market release, the Labor Department also noted that in March, the price of imported goods rose 1.7 percent, driven higher by increasing energy costs. Imported petroleum costs rose 9 percent. Excluding petroleum products, the rise in imported goods was 0.3 percent, but even excluding fuels, non-fuel industrial materials prices increased 0.8 percent.
For the last 12 months, import prices have climbed 2.8 percent, much higher than 1 percent gain that had been reported for the previous 12 months in February. Given that this release is one watched by the FOMC and a 2.8 percent increase is far above the Fed's comfort zone, this was not good news.
Export prices rose 0.7 percent, showing the impact of a weaker dollar against other currencies. Excluding the leading agricultural products, export prices rose 0.6 percent.
The relationship of the dollar, commodities, other currencies, bonds and equities is a complex one, but some with stronger economic backgrounds than mine worry that the falling dollar could increase inflation. It costs more to import those goods we want. Our multinational firms benefit because they can compete better in other countries, an effect we may be able to measure in GE's earnings report tomorrow, but this other effect is worrisome.
The report on natural gas inventories was next on the agenda. Supplies jumped 23 billion cubic feet. The climb was only slightly higher than the expected build in supplies. Commentators also noted continuing cold weather in some parts of the country as one reason that natural gas did not sell off after the report. One commentator noted a changing in seasonal patterns that might be more permanent and create less volatile pricing patterns that depended so heavily on weather conditions. The increasing use of natural gas to produce electricity had resulted in some withdrawals from inventories last summer, this commentator noted on CNBC, and so the typical seasonal effects that would formerly have pointed to more weakness going into the summer might be muted.
In addition to those factors impacting the energy complex, the International Energy Agency, the IEA, also noted that global oil output has declined by 265,000 barrels a day. OPEC cuts and production outages contributed to that decline. Global demand was also revised down, to 85.8 million barrels a day for 2007.
In company-related news, Nestle SA announced that it would buy Gerber Products Co. from parent company Novartis SA. Nestle will pay $5.5 billion. Nestle's recent acquisitions have focused on health and nutrition-related companies, and the Gerber acquisition will make it the biggest participant in the global baby food market.
Also making news was a report that Ralph Whitworth, a reputed activist shareholder, has acquired a $500 million position in Sprint Nextel (S).
Tomorrow's Economic and Earnings Releases
One of the most important economic releases of the week occurs tomorrow morning at 8:30. That's the March Producer Price Index, an important inflation gauge for the Fed. Expectations are for a rise of 0.8 percent after the previous month's 1.3 percent gain. I don't need to tell you that market participants don't want to see a rise that's too much higher than that, not when this week's minutes provided evidence that the FOMC is worried about inflation.
A number of other releases will fill in the rest of the morning. At the same 8:30 time slot, February's International Trade figure will be released, with economists anticipating a deficit of $60.0 billion, higher than last month's $59.1 billion deficit. April's Consumer Sentiment will be released at 10:00, with that expected to be 88.5, about flat with the previous month's 88.4. A too-strong dip in consumer sentiment would also be negative for equities.
The first quarter's Manufacturers Survey also arrives at 10:00, followed by the ECRI Weekly Leading Index at 10:30. Bankruptcy Filings for the fourth quarter of 2006 will be released sometime during the day.
What about Tomorrow?
This Ferris wheel of action this week has been about keeping equities in position ahead of tomorrow's economic report and next week's option expiration. Equity bulls haven't been able to completely ignore distasteful information such as yesterday's FOMC minutes, but neither have equity bears been able to keep that Ferris wheel from cycling prices higher again.
Last Thursday, I pointed out that the upside breakouts seen on some intraday Keltner charts were far from convincing. Some indices did inch higher early in the week, but on intraday Keltner charts, the firming resistance that I'd pointed out on Thursday continued to be evident, and indices eventually fell to strongest intraday support, promptly bouncing from that support. As is predictable, many ended the day today, ahead of tomorrow's economic release, at or near resistance.
Annotated 15-Minute Chart of the SPX:
Remember that these Keltner lines move with price action. Over the last several weeks, I sometimes watch price action hit exact channel lines on Friday morning, but those channel lines have moved in the direction of price action and are at slightly different levels than depicted in the Thursday Wraps.
Note the way that the prices have been bouncing from the thin red line on 15-minute closes? This is the 9-ema on the 15-minute chart. Subscribers can add that to their charts to note whether the SPX continues to find support at that -ema, meaning the short-term trend is intact, or whether the SPX falls beneath that average and then begins to find resistance there, meaning that the short-term trend has ended.
Annotated 15-Minute Chart of the Dow:
The RUT's breakout was the strongest of all, leading the way for other indices. As can readily be seen on its intraday chart, however, RUT breakdowns or breakouts occur with more regularity and less trust-worthiness than on other charts. More than some other indices, the momentum-driven RUT sometimes overruns boundaries. Watch the 15-minute closes with respect to the thin red line, the 9-ema to determine whether that upside target has any chance of being achieved.
Annotated 15-Minute Chart of the RUT:
Here's the deal. Indices ended at resistance on both intraday and daily charts. The Ferris wheels have carried the indices slightly higher than they were a week ago, when I last wrote this column, but only with a lot of whirling around within those rising wedge formations on the daily charts. While I'm worried enough about an upside explosion that I spent every dip this week getting out of some of my bear call spreads for April, I honestly just can't see this week's whirling around as a sign of great strength. Not yet.
If you've been reading this column since late February, you know that I began warning shortly after February 27 that I had seen signs of institutional buying, and then I saw it again when the indices retested and in some cases hit new lows. As indices climbed, I said that we could expect some disorganization, and I said it before we saw one formation morph into another. I said not to lean too heavily on the belief that indices were going to crater just then. I warned that spread traders needed to be as careful about upside moves as they did about downside ones, because expanding volatility could see their upside positions threatened, too.
I tell you this not to say I was right, but rather to put my following remarks into some context. Strangely enough, with the NYSE besting its February close today, I'm seeing slightly more bearishness show up on the charts. It seems antithetical when indices have climbed so laboriously off those spring lows, but it's found in the shape of the rise, in the way markets just give way sometimes, in all the effort exerted just to whirl markets around that Ferris wheel.
So, I'm not convinced that markets will break much higher tomorrow. Don't get me wrong: I wouldn't be at all surprised if they didn't attempt breakouts above the tops of those rising wedges. In fact, with many daily candles being bullish engulfing candles, or nearly bullish engulfing candles, a rise tomorrow wouldn't be at all unexpected. Those short-term intraday charts show you the levels to watch for resistance if there are attempted breakouts tomorrow morning, but I would keep my stops tight and make sure I protected any bullish profits if there are upside breakouts.
That's because I wouldn't be at all surprised to see some selling hit, either, and we've had some instances the last months when selling swamped the markets. That Ferris wheel could slam to the ground, its underpinnings gone.
I'm not ignoring the upside potential. Believe me, I wouldn't have been spending those nickels and dimes for each contract to buy back those spreads if I were ignoring it. I'd just be planning on letting all the options expire worthless, thinking the positions were safe and I could keep all the credit I'd collected from the sold calls that make up part of those spreads. My daily Keltner charts show me that it would be easy to see the SPX reach toward 1468; the Dow, 12789; and the Nasdaq, 2516. That's the reason I closed out those bear calls spreads when given the opportunity to do so and keep most of my April profits.
I'm just less certain that these upside Keltner targets remain viable ones, and the weekly Keltner charts tell me that I'm right to be cautious since many indices test weekly resistance. I've been cautious in my conclusions since late February. I've expected some lack of clarity, some disorganization, and I've seen it. I honestly don't know what to expect next, and I shouldn't pretend to do so ahead of the PPI.
Watch the resistance just overhead if you're already in bullish positions. Keep stops appropriate to your risk level, whatever you're trading. If you're the kind of trader who bets that resistance will hold, watch those 9-ema's on the 15-minute charts for some guidance. Continued bounces on 15-minute closes means that the short-term uptrend remains intact.
New Long Plays
Basic Energy - BAS - cls: 25.39 chg: +1.12 stop: 23.19
Why We Like It:
Picked on April 12 at $25.39
Cabot Oil - COG - close: 35.95 change: +0.53 stop: 33.45
Why We Like It:
Picked on April xx at $xx.xx <-- see TRIGGER
New Short Plays
Long Play Updates
Apria Healthcare - AHG - cls: 33.66 chg: +0.09 stop: 31.45*new*
Volume is fading as AHG nears resistance in the $33.75-34.00 range. We would suggest waiting for a breakout or looking for another dip near $33.00 as a new entry point. More conservative traders may want to tighten their stops toward $32.00 or higher. We are adjusting our stop to $31.45, keeping it just under the rising 50-dma. Our target is the $35.75-36.00 range. We do not want to hold over the May 1st earnings report.
Picked on March 27 at $32.37
Arrow Elctr. - ARW - cls: 41.00 chg: +0.45 stop: 37.74
Semiconductor stocks bounced sharply from their intraday lows. One of ARW's divisions deals in semiconductor related products so the stock got a boost. Traders bought the dip in ARW near the $40 level and shares closed at new multi-year highs. Our target is the $43.75-45.00 range. We don't have much time and plan to exit ahead of the April 24th earnings report. FYI: More aggressive traders may want to use a wider stop loss under the 50-dma.
Picked on April 09 at $40.15
Brookfield Asset Mgmt - BAM - cls: 55.58 chg: +0.35 stop: 52.35
The move in BAM today looks like a minor bullish engulfing candlestick pattern, which should be positive for the stock. Another positive was the announcement after the closing bell of another stock buy back program. BAM announced it had received approval to buy back up to 10% (33 million shares) of the company's outstanding float on the open market over the next twelve months. That doesn't mean they will buy back that much stock, just that then can. During their current stock buy back program the company only purchased 291,600 shares of stock. We remain bullish on BAM. Our target is the $58.75-59.00 range. We do not want to hold over the early May earnings.
Picked on April 08 at $54.76
Bristow Group - BRS - close: 37.10 chg: +0.36 stop: 35.45*new*
A strong (3%) rally in crude oil helped lift the oil sector. Shares of BRS responded with a 0.9% gain and a breakout over its 50-dma and the $37.00 level. Shares are nearing resistance at the late March highs around $37.25. We remain bullish on BRS but if you don't want to buy today's rebound then look for a dip in the $36.50-36.75 region. We are adjusting our stop loss to $35.45. More conservative traders may want to put their stop closer to the $36.00 mark. 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
eBay Inc. - EBAY - close: 34.05 chg: +0.44 stop: 32.99 *new*
Once again EBAY looks poised to breakout past significant resistance in the $34.00-34.40 range. We are not suggesting new positions given our time frame. We're suggesting an exit ahead of the April 18th earnings report. We plan to exit at the closing bell on April 18th. More conservative traders should strongly consider exiting early right here. EBAY has already hit our conservative target in the $33.85-34.00 area. Please note that we're raising the stop loss to $32.99.
Picked on March 05 at $30.49
Helmerich Payne - HP - cls: 31.96 chg: +0.66 stop: 30.45*new*
Readers will want to strongly consider an early exit to lock in a profit with HP rising another 2.1% today. The surge in crude oil helped push HP to another new relative high. Our target has been the $32.50 mark but we're adjusting it to $32.35-32.50. Please note that we are raising the stop loss to $30.45, which is about 50 cents under the 10-dma.
Picked on March 19 at $28.77 *gap higher*
James River Coal - JRCC - cls: 8.65 chg: +0.10 stop: 7.89
Our speculative play in JRCC is still alive for now. The stock is trying to bounce. If shares see any future profit taking we would look for some support near $8.25 and the 10-dma (currently near 8.15). Our target is the $9.90-10.00 range. We do not want to hold over the early May earnings report.
Picked on April 08 at $ 8.15
KLA-Tencor - KLAC - cls: 55.67 chg: +0.31 stop: 52.75
Fellow semiconductor stock LRCX received two upgrades today after the company reported earnings and beat the estimates. Unfortunately, the news didn't have a big affect on shares of KLAC, which spent most of the session trading sideways. More conservative traders may want to tighten their stops. Our target is the $59.50-60.00 range. Please note that we do not want to hold over the April earnings report. FYI: The P&F chart is bullish with a $69 target.
Picked on April 04 at $55.15
Titan Intl - TWI - cls: 27.20 chg: +0.33 stop: 25.45
Market strength helped TWI posted a decent bounce on Thursday but shares still look a little short-term overbought. We are not suggesting new positions at current levels. Our target is the $27.90-28.00 range.
Picked on April 04 at $26.25
UNIT Crp. - UNT - cls: 55.26 chg: +1.86 stop: 49.89
All the positive news on oil and the strength in crude helped fuel a 3.4% rally in UNT. The stock broke out to new seven-month highs on strong volume today. Our target is the $58.00-60.00 range. We do not want to hold over the late April earnings report.
Picked on April 08 at $51.95
Short Play Updates
Closed Long Plays
Canadan Nat.Res. - CNQ - cls: 58.79 chg: +2.16 stop: 53.05
Target achieved. A draw down in gasoline inventories and concern over refinery outages helped push crude oil to a 3% gain, which lifted the oil stocks. Shares of CNQ shot higher and broke out past the $58 level with a 3.8% rally. Our target was the $58.00-60.00 range.
Picked on March 21 at $53.05
Closed Short Plays
Hovnanian - HOV - cls: 23.90 chg: +1.05 stop: 26.01
We are suggesting an early exit in HOV. It might just be a one-day fluke but today's session produced a bullish engulfing candlestick pattern and at the bottom of a trend like this these patterns tend to be strong bullish reversal signals. There hasn't been any confirmation of the reversal yet but we're suggesting an early exit anyway because HOV has a high amount of short interest and the stock could easily see a short squeeze. The catalysts behind HOV's rally today was word from rival homebuilder M/I Homes (MHO). MHO reported that new orders rose sharply, better than the last two quarters combined, and that their cancellation rate dropped significantly.
Picked on April 02 at $24.69
Today's Newsletter Notes: Market Wrap by Linda Piazza and all other plays and content by the Option Investor staff.
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