Option Investor

Daily Newsletter, Monday, 04/30/2007

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Table of Contents

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

Market Wrap

Run on Mouthwash Due to Bull's Bad Breadth?

The major indexes finished the month of April on a sour note with decliners outnumbering advancers by a hefty 3:1 margin at the big board, while NASDAQ breadth wasn't much better with just over 2 decliners for every advancing issue with four or five letters in its stock symbol.

Despite Friday's new 52-week and multi-year high, the very broad NASDAQ Composite's (COMPX) 103-point, or +4.2% rise in April, today's 101 new lows are the most since March 14, when the NASDAQ recorded 27 highs and 182 new lows.

The also-very broad NYSE Composite ($NYA.X), which rose 366 points, or +3.95% in April, and recently set an all-time high last Wednesday (4/25/07) with NH/NL breadth of 400:17, finished down for a third-straight session. The last time the NYSE Composite had a 3-day losing streak was from March 1 to March 5 when the broad list of 1, 2 and 3-lettered stock symbols closed at 8,837.97, its lowest close of 2007.

The also-broad small caps, depicted by the Russell 2000 (RUT.X), which last traded an all-time high on Thursday on NH/NL breadth 100:26 (4/25/07 NH/NL breadth was stronger at 128:16) finished the month of April with a 14-point, or 1.7% gain. NH/NL breadth today was almost flat with new highs edging out new lows by a very narrow 64:61 ratio, but this also-broad list of stocks finds its 5-day NH/NL ratio reversing lower at 73.4% (76.00% was the reversal point). Of the major indexes followed in my U.S. Market Watch (see below), only the RUT.X 814.57 closes below its rising 21-day SMA (819.32).

The benchmark S&P 500 Index (SPX.X) finished up 61.5 points, or +4.3% in April. With the SPX's 5-day NH/NL ratio having recently measured 99.6% on Thursday with daily NH/NL measure of 81:0, today's 37:2 closing measure not overly concerning to bulls, but suggests profit taking at a minimum.

The narrower S&P 100 Index (OEX.X) finished up 30.8 points, or +4.7% in April, while the also-narrow NASDAQ-100 Index (NDX.X) gained 95.39 points, or +5.4%, while its tracker QQQQ jumped $2.43, or +5.6%.

The very narrow Dow Industrials (INDU) surged an eye-popping 708 points, or 5.7%!

Consumer products giant Procter & Gamble (NYSE:PG) $64.40 +2.25%, which makes Scope mouthwash, was Monday's percentage gainer among the Dow 30 components, while the price-weighted index's most heavily weighted stock, International Business Machines (NYSE:IBM) $102.21 +1.02% closed at a new 52-week high.

NYSE, NASDAQ Comp, SPX and RUT NH/NL Measures

I was going to "lead" tonight's Market Wrap with some NH/NL observations when I reviewed some of the major market NH/NL indications at Friday's close, and a post from Jane Fox in today's OptionInvestor.com Market Monitor regarding a Dow Jones MarketWatch piece "Technical evidence emerges that rally getting old" has me even further-alert to some recent measures.

I've always kept a watchful eye on the very broad NYSE Composite and NASDAQ Composite NH/NL daily readings, then created my own 5-day and 10-day NH/NL average ratios. These data are equivalent to what I feel are great measures of BULLISH leadership, or conversely, BEARISH leadership.

Now, there are some observations outside the NH/NL data that will catch a trader and investor's attention of late, but I want to simply note that we want to keep a close eye on things when we consider an observation from Michael Burke and John Gray, and their mentioning of "a high number of buying climaxes" last week.

Burke? Mike Burke? Where have I heard that name? "I know that name," I thought to myself.

Yes! Only tonight is my memory jogged. That's the very Mike Burke mentioned in Tom Dorsey's book Point and Figure Charting. A supply/demand chartist to be certain!

The MarketWatch article went on to describe what Mr. Burke and fellow analyst John Gray were monitoring last week.

"Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are sign of distribution and indicate that stocks are moving from strong hands to weak ones."


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While Burke and Gray mentioned that "buying climaxes readings over 100 are somewhat worrisome, and the current level at twice that is a further sign of topping action. We usually see at least 200 buying climaxes before the market makes a top, although very often there are 500 or 600. The current readings are a cause for increased nervousness."

Mr. Burke and Mr. Gray noted that last week, according to their calculations, there were 206 buying climaxes.

The MarketWatch article went on to note that Burke and Gray are not "perma bears" simply looking for evidence to justify their pre-determined caution. Their model portfolio of U.S. equity funds, for example, was 80% invested this past week.

As soon as Jane Fox alerted us to that article, I thought about this weekend's Trader's Corner article.

I also thought about last week's CBOE Market Volatility Index (VIX.X) action, where the rise was somewhat "counter" to the S&P 500 Index (SPX.X) 9.7-point, or +0.65% rise.

I didn't have time to check more than 6,000 stocks (NYSE and NASDAQ Composite combined), or 2,000 stocks from the Russell 2000, or 500 stocks of the S&P 500, let alone 100 stocks of the S&P 100, or NASDAQ-100, but running through the Dow 30 was easy enough.

Of the Dow 30, I could only come up with two (2) stocks that would have fit Burke/Gray's "buying climax" price action description.

What does a potential "buying climax" look like? I've heard the term so many times, but what does it look like?

One was AT&T (NYSE:T) $38.72 +0.20%.

AT&T (NYSE:T) - Daily Interval Chart

I placed a BLUE horizontal line at a Friday (4/20/07) close of $39.87, then marked a NH of $40.14 from Monday of last week PINK DASHED, where last Friday's (4/27/07) would have T closing at a week's low (solid red), after a recent 52-week high.

Coca Cola (NYSE:KO) $52.19 +0.13% was the other Dow component that would have fit the Burke/Gray "buying climax" depiction, but KO traded another new high again today.

Anyway, I wanted to see what a "buying climax" might look like in at least one of the 206 stocks that Burke/Gray mentioned.

AT&T (T) doesn't carry all that much weight by itself in the price-weighted Dow Industrials (INDU), as it is the 21st largest-weighted stock.

However, AT&T (T) is a "big gun" in the S&P 100 (OEX.X) as it ranks #5 in this market cap-weighted index!

Verizon (NYSE:VZ) $38.18 +0.76% is #21, but birds of a feather can flock together. Verizon carries the 24th-largest market capitalization in the S&P 100 (OEX.X).

Today, Verizon (VZ) reported quarterly earnings of $0.56 per share before special items (non-GAAP), which was above consensus of $0.53. The company said quarterly revenues came in at $22.6 billion, which was ahead of consensus estimates for $22.49 billion.

Verizon (VZ) currently needs to trade above $38.95, found on 10/30/06 for a new 52-week high.

Closing U.S. Market Watch - 4/30/07 Close

Only the Dow Industrials (INDU) and S&P 100 Index (OEX.X) managed to trade new 52-week highs today, but after doing so, start the week out on a negative note.

With Burke/Gray outlining a "buying climax" and using AT&T (T) as an example of what they may be talking about, or following over time, I'll make note of the S&P 500 new high and new low measures, as a broader S&P indication of bullish/bearish leadership.

Suffice it to say the leadership has been BULLISH. To think otherwise, a new low measure below 12, or 3/14/07 is a good benchmark.

I want to also make a quick note that today was expiration for the May Unleaded (NYMEX:rb07k) contract. In the above U.S. Market Watch, you can see the bullish impact that refinery outages have had compared to the now front-month June Unleaded (NYMEX:rb07m) contract, which settled down fractionally at $2.2594.

Just as May unleaded settled, we witness a decline in June Crude Oil (NYMEX:cl07m), which reversed course from $66.50 to settle down $0.75, or -1.13% at $65.71.

As I type, June Crude (cl07m) is down an additional $0.40 at $65.31.

I maintain a bullish stance on oil as depicted by the U.S. Oil Fund (AMEX:USO) $51.24 -1.14%, but have scaled back to 1/4 bullish position.

While unleaded inventories have seen sharp declines due to refinery outages, oil inventories have steadied due to the lack of refinery draws. My "key level" of resistance for the USO is currently $52.00. Current stop for 1/4 long positions is $48.80.

S&P 100 Index (OEX.X) - Daily Intervals

Since we're alert to some NH/NL observations and a potential "buying climax," or at least know what that might look like, I'm going to place a fibonacci retracement on the S&P 100 Index (OEX.X) from the March 5th relative low close of 630.77, to Friday's 52-week high close of 684.42.

We can perhaps look back at T's chart, then look at the OEX's chart and think, "protect bullish gains!"

I've marked the S&P 100 Bullish % (BPOEX) from Dorsey/Wright and Associates when it reversed back up to "bull confirmed" status on 4/09/07 and signaling this market was seeing demand begin to outstrip supply with 74% (74 of the 100 components) showing point and figure "buy signals" associated with their charts. At tonight's close, this market of 100 stocks is still "bull confirmed," at 85% bullish, with no net change from Friday's close.

I'll be filling in for Jim Brown in tomorrow's Market Wrap and will cover additional indexes, but I really wanted to update some of today's "news" and recent observations regarding new highs, new lows, and the term "buying climax."


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

Bristow Group - BRS - close: 37.60 chg: -0.38 stop: 36.75 *new*

Oil service stocks had a rough day on Monday. Shares of BRS closed down 1% but that's after dipping toward $37.00 and bouncing back. We're not suggesting new positions. More conservative traders will want to consider an early exit now. We are adjusting the stop loss to $36.75. Our target is the $38.40-38.50 range. FYI: The P&F chart is bullish and points to a $47 target. We do not want to hold over the early May earnings report.

Picked on March 11 at $35.88
Change since picked: + 1.72
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand


Dell Inc. - DELL - cls: 25.21 change: -0.02 stop: 24.49

We are urging caution with DELL. The stock displayed some strength this morning but gave it all back. The move today looks like a bearish failed rally pattern. Combine this with the weakness in the NASDAQ and DELL may have a rough time posting any gains this week. Watch for a bounce from the $25.00 level before considering new positions and more conservative traders may want to tighten their stops even further. Our target is the $27.25-27.50 range. We do not want to hold over the late May earnings report.

Picked on April 29 at $25.23
Change since picked: - 0.02
Earnings Date 05/31/07 (confirmed)
Average Daily Volume: 21.9 million


ENSCO - ESV - close: 56.38 change: -0.46 stop: 53.44

ESV is another oil service stock that failed to build on last week's gains. Shares traded just north of $58.00 and then reversed course late this afternoon. We would wait and watch for a bounce near $56 or $55 before considering new long positions. The P&F chart points to a $76 target. We have two targets. Our conservative target is $59.85-60.00. Our aggressive target is the $62.50-65.00 range.

Picked on April 29 at $56.84
Change since picked: - 0.46
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 2.9 million


NVIDIA Corp. - NVDA - cls: 32.89 chg: -0.18 stop: 30.58

We want to reiterate our weekend comments that more conservative traders will want to consider exiting early and locking in a gain right now. Today's trading in NVDA looks like a short-term top and the stock is poised to dip toward $32.00 or its 10-dma near 32.20. We want to exit ahead of the May 10th earnings report. Our target is the $34.50-35.00 range.

Picked on April 15 at $30.58
Change since picked: + 2.31
Earnings Date 05/10/07 (confirmed)
Average Daily Volume: 11.9 million


Starbucks Corp. - SBUX - cls: 31.02 chg: -0.48 stop: 30.85

It's not looking good for the SBUX bulls. Shares continued to slide and broke down under its 50-dma. The selling (-1.5%) stalled near short-term support at $31.00. More conservative traders may want to exit early right here to cut their losses. If we don't get stopped out soon we plan to exit on Thursday at the closing bell to avoid holding over earnings.

Picked on April 22 at $31.66
Change since picked: - 0.64
Earnings Date 05/03/07 (confirmed)
Average Daily Volume: 10.5 million


World Acceptance Corp. - WRLD - cls: 42.93 chg: -1.65 stop: 40.99

Today's trading in WLRD was bearish. The stock's failed rally turned into a bearish reversal with a bearish engulfing candlestick pattern and a close under the simple 100 and 200-dma. We are not suggesting new positions at this time and more conservative traders may want to raise their stop loss toward $42.00. Our target is the $49.50-50.00 range. The P&F chart points to a $56 target.

Picked on April 29 at $44.58
Change since picked: - 1.65
Earnings Date 04/26/07 (confirmed)
Average Daily Volume: 180 thousand

Short Play Updates

Lan Airlines - LFL - close: 73.15 chg: -0.46 stop: 76.05

There is no change from our weekend comments on LFL. The stock is slowly drifting lower and looks ready to breakdown. We are suggesting a trigger to short LFL at $71.49, which is under the simple 50-dma. More conservative traders may want to wait for a breakdown under $70.00 before considering shorts. If LFL continues to rally and breaks out past significant resistance at the $76.00 level, then nimble traders may want to switch direction. If triggered at $71.49 then we suggest two targets. Our first target is the $66.00-65.00 range (near the rising 100-dma). Our second, more aggressive target, will be the $61.00-60.00 range. FYI: The most recent data puts short interest at 750K shares versus the 19.3 million-share float. LFL has about 63.7 million shares outstanding.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 189 thousand

Closed Long Plays

Archer Daniels Midland - ADM - cls: 38.70 chg: -0.31 stop: 38.55

We have run out of time with ADM. It was our plan to exit today at the close to avoid holding over tomorrow's earnings report. Even though we expect a positive report there are normally too many other variables that make it dangerous to hold a directional position over the earnings announcement. Wall Street expects ADM to report 61 cents a share.

Picked on April 22 at $38.55
Change since picked: + 0.15
Earnings Date 05/01/07 (confirmed)
Average Daily Volume: 8.7 million


Basic Energy - BAS - cls: 25.85 chg: -0.97 stop: 24.45

Abandon ship! We can't find any news to account for today's relative weakness but BAS produced a big bearish reversal with today's bearish engulfing candlestick pattern. The stock failed to rally past $27 and then sank 3.6% back toward the 10-dma. There is still a chance that BAS will bounce from short-term support at the 10-dma but we don't want to risk it. We're suggesting an early exit immediately.

Picked on April 12 at $25.39
Change since picked: + 0.46
Earnings Date 05/09/07 (confirmed)
Average Daily Volume: 160 thousand


Cabot Oil - COG - close: 36.42 change: -0.46 stop: 35.99

We have run out of time with COG as well. It was our plan to exit today at the close to avoid the company's earnings report tonight. COG beat the street's estimates by 5 cents but we're not seeing much after hours activity.

Picked on April 23 at $36.15
Change since picked: + 0.27
Earnings Date 04/30/07 (confirmed)
Average Daily Volume: 1.0 million


James River Coal - JRCC - cls: 9.06 chg: -0.30 stop: 8.95

We have been stopped out of JRCC at $8.95. The stock was consolidating sideways most of the session until finally breaking down this afternoon during the market's sell-off.

Picked on April 08 at $ 8.15
Change since picked: + 0.91
Earnings Date 05/08/07 (confirmed)
Average Daily Volume: 647 thousand

Closed Short Plays


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


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