Monday's trade turned out to be rather volatile as traders position themselves into this week's option expiration, where a "doji" (doe-jee) pattern on the S&P 500 Index's ($SPX.X) weekly interval chart just adds to pressure and uncertainty into this month's expiration.
I am not a Japanese Candle Stick analyst, affectionately called "a candle sticker" and do not portend to be one, but one of the first bar chart technicals I learned to be alert to when I first embraced bar chart technical analysis as a tool for trade/investment analysis was the doji. Many Japanese Candle Stick analysts will say the doji is the most important to recognize as it often marks the beginning of a minor or intermediate-term trend reversal.
Dojis (do-jeez) are depicted by a bar/candle where a bar's open and close depict price equilibrium, the doji is sometimes seen as point where we look for a reversal of trend.
Now hold on!
In one of the greatest bull runs seen in years, I count at least three (3) prior doji on the SPX's weekly interval chart, but a rather easy test going forward can be identified.
S&P 500 Index (SPX.X) - Weekly Intervals
There are basically four (4) different types of dojis (common doji, long-legged doji, gravestone doji and dragonfly doji).
I've pointed to three prior dojis (#1, #2, #3) and last week's doji, which based on my LIMITED knowledge of dojis, look to be "common" dojis.
The SPX's price action saw BULLISH resolution continue as long as the 10-week SMA (approximates 50-day SMA) held support at each weekly close (#1 and #2).
Only the most recent doji (#3) proved somewhat meaningful two weeks later (TWO WEEKS LATER) when the SPX fell sharply as the "yen carry trade" seemed to unravel from 02/26/07 to 03/02/07.
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For current SPX.X STRENGTH relative to doji #3, I've noted that the SPX exceeded the #3 doji high by 0.60%.
If I were to ADD a 0.60% gain to last week's SPX high of 1,513.80, I would calculate a price level of 1,523.
BULLISH RISK/REWARD based on the above chart for the SPX could be assessed as RISK to 10-week SMA (1,464) and 1,523, or 40:20.
BEARISH RISK/REARD based on the above chart for the SPX could be assessed as 20:40.
The solid RED line labeled "1,475" is still May's "Max Pain" theory level, which is tabulated in 5-point increments.
"Max Pain" theory is simply the summation of all open interest SPX May expiration calls and puts.
Not unlike the popular game show Deal or No Deal, the "banker" is constantly calculating a midpoint to the briefcases dollar amounts that are still on the board.
Each day, or each week a briefcase is opened. As of tonight's close, I'd still have to say that longer-term, the RISK/REWARD still favors bulls, but the candle stick chart hints at a near-term trend reversal.
S&P 500 Index - 10-point box chart
Not EVERY bull, or bear bought the SPX at 1,420 on March 21. If EVERY market participant (bull, or bear) bought the SPX at 1,420 and stopped their buying at the price level, then we wouldn't have seen PRICE rise to 1,520.
What isn't obvious to some is the following.
Now put yourself in the shoes of a trader/investor that DID buy at that exact price level on March 21, when the SPX's point and figure chart gave the "buy signal."
I'd also ask you to put yourself in the shoes of a bear, or a short that sold 1,420, or even the recent 52-week and multi-year high of 1,470.
Now the "banker" asks.... "deal, or no deal" with his/her offer being 1,503.
As I see things, I certainly DO NOT like new bull positions on a longer-term perspective.
A doji on the weekly interval bar chart, and the SPX.X current point and figure RISK/REWARD of just better than 1:2, at the "top" of its 10-week trading band.
On a short-term perspective, a BULL could assess downside RISK to 1,461, with reward either the "top" of the 10-week trading back of 1,520.
In last week's Market Wrap (Thursday) I showed the SPX.X daily interval bar chart with MONTHLY Pivot Levels, and we still haven't witnessed a trade at its MONTHLY R1 of 1,514.80.
Watch the VIX.X!
Today's 13.96 close for the CBOE Volatility Index (VIX.X) may also serve as a "heads up" for traders. While we approach this week's May expiration, call sellers and put buyers outnumbered call buyers and put sellers, with VIX.X closing above its MONTHLY Pivot.
Note: The S&P 500 Index (SPX.X) has NOT been able to trade at, or ABOVE its MONTHLY R1.
CBOE Volatility Index (VIX.X) - Daily Intervals
We would expect some "volatility" into an option expiration, but after a doji on the SPX's weekly interval bar chart, the SPX pressed at the high end of its 10-week trading band, today's close for the VIX.X above its MONTHLY Pivot should get some attention.
A reading of 13.96 by itself isn't what a bull notes, it is 13.96 RELATIVE to its MONTHLY Pivot, where the MONTHLY "levels" are derived from APRIL's VIX.X range.
Here we look at the VIX.X and make a DAILY observation RELATIVE to a MONTHLY range.
A BULL does NOT want to see a "repeat" of February 27th tomorrow. If they start to see it, they'll know what to do.
Closing Internals -
If I could paint a picture of the developing internals (new highs and new lows) compared to the broader advance/decline lines, it would be that of a BULLISH army, where the Generals as depicted by the new high/new low ratios have their sabers raised in the air and the word "charge" being issued. However, the "troops" as depicted by the developing advance/decline lines remain rather hesitant, waiting to see how many "Generals" get picked off.
Hmmm! I'm surprised.
As I type, I'm now getting a reading of New Highs and New Lows for the S&P 500, where I'm being told 48 components traded a new 52-week high and 4 traded a new 52-week low.
In today's OptionInvenstor.com Market Monitor, without an intraday observation, I thought BULLS needed to see at least 30 new highs.
Here I can envision 48 Generals with sabers raised in the air saying "charge," while 4 calls of "medic" also being heard.
It wouldn't be a Monday without some merger and acquisition activity being announced, but some "old" merger announcements saw bids sweetened and arbitragers are also left wondering if it's a "Deal or No Deal?"
Late Friday, the Chicago Mercantile Exchange (NYSE:CME) $529.49 -1.26% said it was upping its bid for the Chicago Board of Trade (NYSE:BOT) $199.75 -0.79% by 16% to $187.71/share, or nearly $10 billion. Even though IntercontinentalExchange's (NYSE:ICE) $138.80 -1.24% offer is still higher ($10.5 billion), the CBOT's board recommended that shareholders accept the revised bid from the CME.
All three stocks were somewhat volatile intraday, but reversed gains with major indexes.
Arbitragers interpret the BOT's $199.75 trade suggesting ICE may have to hike its bid, or that there may be another offer coming from a party other than the CME and ICE.
From what I've been able to uncover from those following the situation, market participants on a broader scale want to see the BOT "stay in Chicago" with the CME hooking-up with its cross-town rival, where synergies for cost-cutting potential appear greater based on the two company's proximity.
Should the CME win BOT shareholder approval, some commodity exchange watchers see ICE being an acquisition target of either a New York exchange like the NYSE Euronex (NYSE:NYX) $81.44 -1.85%, or the Deutsche Boerse.
Dow Jones, Co. (NYSE:DJ) $53.77 +1.26% reversed earlier session losses and continues to keep traders on their toes. The stock jumped from the $52.00 to trade as high as $54.70 after News Corps' (NYSE:NWS) $23.53 +0.98% Rupert Murdoch stepped up his campaign to woo the Bancroft family, which is a controlling shareholder of Dow Jones, Co. (DJ). In a letter to the Bancroft family, Mr. Murdoch promised them a board seat on his media conglomerate's board. Since News Corp. offered to buy Dow Jones (DJ) for $60/share, the Bancroft family had reportedly been opposed to the merger.
Today's "mega deal" had the automakers firing on bullish cylinders.
Shares of DaimlerChrysler (NYSE:DCX) $84.12 +2.58% jumped as high as $85.16 after the company said it has agreed to sell a majority stake in its Chrysler group to Cerberus Capital Management for $7.4 billion. Cerberus will reportedly invest $5 billion in the new Chrysler's automotive operations, $1.05 billion in Chrysler's financial arm and pay $1.35 billion to DaimlerChrysler. But the German automaker agreed to absorb $1.6 billion in restructuring-related costs and loan the new company $400 million. Depending on whether the loan is repaid, its out-of-pocket costs could ultimately total $650 million.
Shares of General Motors (NYSE:GM) $30.62 +3.93% and Ford Motor (NYSE:F) $8.71 +4.06% traded higher, with some industry analysts saying the new may strengthen both company's position in future labor negotiations with the United Auto Workers (UAW).
UAW President Ron Gettelfinger said Monday that after his pitch to keep Daimler and Chrysler together failed, it became clear that Cerberus was the best option for workers.
"So once that decision's been made, then you've got to deal with the cards that you're dealt," he said Monday afternoon, adding that he did not think the sale would have an impact on upcoming national contract talks.
Additional M&A announcements found shares of Viasys Healthcare (NYSE:VAS) $43.18 +36.86% rocketing higher after the medical device maker said it agreed to be bought by Cardinal Health (NYSE:CAH) $69.19 +0.17% in a deal that values VAS at $1.4 billion, or $42.75/share. The deal, which was approved by both company's boards, is expected to be completed this summer.
Closing U.S. Market Watch -
While the very narrow Dow Industrials (INDU) 13,346.78 +0.15% did see a new all-time high intraday, today's most notable 52-week high may have come from the "junk bond" Pacholder High Yield (NYSE:PHF) $10.20 -0.29%, where this morning's, then this afternoon's trades at $10.40 give some type of indication that a new 52-week high for a closed-end "junk bond" fund provide some type of bullish thought for the small caps.
As stated in prior commentary that I've written over the years, it is painting the small caps as depicted by the Russell 2000 Index (RUT.X) 822.33 -0.86% with a broad brush to say the "small caps are junk-related," but from a debt-perspective, it may be acceptable to think that small cap debt is "riskier" than large-cap debt. Or that the interest rate a smaller company might have to pay to a lender higher than a rate a larger company might also have to pay.
If anything, the resilient strength of "junk bonds" as depicted in the U.S. Market Watch by the PHF suggests balance sheets among the small caps are "healthy." Yes, PHF's fund manager has shown an ability to perform well in his debt selection, and he's very active in his trading, but a security we've been following in the U.S. Market Watch for several years now, where small caps tend to mirror.
Traders and investors may want to keep an eye on some "junk bond" indicators, such as closed-end funds in coming sessions.
I'd suggest just a couple, but KNOW what the junk bond fund YIELDS. Simply take the last 12-months dividends the fund has payed, and divide by the fund's current trade.
PHF has paid a $0.075/month dividend for the last 12 months, so $0.90/year. At today's closing price of $10.20, its SEC yield would be tabulated at 8.82%.
If you and I do see a small cap stock as being "riskier" than a large cap stock, then we might also view a "junk bond" as being MUCH riskier than a 5-year Treasury bond, which currently yields ($FVX.X) 4.605%.
See, I would think a "junk bond" at least twice, if not three-times RISKIER than buying a 5-year Treasury bond, that YIELDS 4.605%. A Treasury bond is backed by the full faith and credit of the U.S. Government. A higher-grade corporate bond, just like a "junk bond" is only backed by a company's full faith and ability to pay its debts.
Why do such RISKY "junk bonds" carry a lower YIELD relative to a safer Treasury bond?
We may find out when tomorrow's core CPI data are released.
According to ForexFactory.com, economists are looking for the core rate of consumer prices (excludes food and energy) to have risen 0.2% after a previous 0.1% month-over-month gain. Meanwhile, the overall CPI is expected to have risen 0.5% after a 0.6% month-over-month gain.
One additional possibility is that while we've seen "large caps" outperform in recent months, it may have come at the undue expense of the small caps.
With "junk bonds" performing rather well, it may be time for some rotation away from the large cap names, and back into the small caps.
May YrNet% (52-weeks) at tonight's close shows the INDU +17.27%, the OEX +17.09% and the SPX +16.41%. These would be "classified" as large cap indexes. The RUT.X is up 10.76%.
Energy prices were choppy today. One point of note was President Bush directing federal agencies to craft regulation by the end of 2008 to cut gasoline consumption and greenhouse-emissions from automobiles. The President's 2008 timeline was a revision from 2010. President Bush said his plan now seeks to cut U.S. gasoline consumption by 20% over the next 10 years.
June Crude Oil futures (cl07m) settled up $0.09, or +0.14% at $62.46, while the
July contract (cl07n) settled down $0.23, or
I'm noting the U.S. Oil Fund (AMEX:USO) $48.56 -0.02% did find some resistance around the $48.80 level, which was a 1/4 bullish position stopping point of 05/04/07. For me, I'd want to at least see a close above a bullish stopping point to think renewed bullishness from recent lows is taking place.
Unleaded futures found June Unleaded (rb07m) settling down $0.0509, or -2.16% at
$2.3012, while July Unleaded (rb07n) settled down a more modest $0.0209, or
-0.92% at $2.2387.
New Long Plays
New Short Plays
Long Play Updates
Arch Coal - ACI - close: 38.63 change: -0.12 stop: 35.89
ACI displayed some strength this morning. Unfortunately, the rally failed near round-number resistance at $40.00. Trading today actually looks bearish but investors were buying the dip near $38.00. A bounce from here could be used as a new entry point to go long ACI. Overall the coal sector is getting some positive press. We're keeping our stop at $35.89 for now. The P&F chart is already bullish with a $55.00 target. We see some resistance near $40.00 but our target is the $42.50-45.00 range.
Picked on May 09 at $38.44
Aracruz Celulose - ARA - close: 55.74 chg: -0.81 stop: 53.95
We are starting to get motion sickness with the back and forth trading in ARA. Shares have been churning sideways for two weeks. We would now wait for a rise past $57.00 before considering bullish positions. 0. We see what looks like an inverse (or bullish version) head-and-shoulders pattern forming. If so it would project a $68 target. Our target is the $62.00-62.50 range.
Picked on May 06 at $56.29
British Amer. Tob. - BTI - cls: 63.08 chg: -0.17 stop: 61.45
BTI gapped down this morning but managed to recoup most of its losses by the closing bell. Rival tobacco firm, Reynolds American (RAI), out performed BTI with a 3% rally today. Yet we couldn't find any specific news to account for RAI's strength and big volume. BTI still has a bullish trend of higher lows - at least for now. We'd probably wait for a rally past $63.50 or $64.00 before opening new plays on BTI. Our target is the $67.50-70.00 range. BTI doesn't move very fast so this could take several weeks.
Picked on May 07 at $64.05
Anheuser Busch - BUD - cls: 49.95 chg: -0.19 stop: 48.95
We do not see any significant changes from our weekend comments on BUD. Shares continue to trade inside their very wide, bullish channel. There's still a chance that BUD will see a dip toward $49.00. A bounce near the rising 200-dma would definitely be a tempting entry point. The stock remains inside its wide, rising channel. The stock doesn't move very fast so it could take several weeks before shares hit our target in the $53.85-54.00 range.
Picked on May 06 at $50.50
ENSCO - ESV - close: 57.65 change: -0.38 stop: 54.75
Hmm... we remain bullish on oil and oil stocks but the lack of follow through in ESV after Friday's rebound is discouraging. Currently our target is the $61.50-62.50 range. More conservative traders may still want to lock in a gain at $59.85. The Point & Figure chart points to an $82 target.
Picked on April 29 at $56.84
Georgia Gulf - GGC - close: 19.06 chg: +0.33 stop: 17.35
Investors are buying the dip/bounce from Friday in GGC. Shares added 1.7% on above average volume, which is normally a good sign. More conservative traders may want to tighten their stops. Our target is the $19.90-20.00 range.
Picked on May 07 at $17.35
Kansas City Southern - KSU - cls: 39.06 chg: +0.25 stop: 37.75
KSU continues to inch higher. The stock is nearing resistance in the $39.50 zone. We are suggesting that readers wait for a breakout over resistance at $39.50 first. Our suggested entry point to buy the stock is at $39.61. More conservative traders could even wait for a rally past potential round-number resistance at $40.00. If we are triggered at $39.61 then our target is the $43.50-44.00 range. Currently the P&F chart points to a $45 target.
Picked on May xx at $xx.xx <-- see TRIGGER
China Life Ins. - LFC - cls: 50.32 chg: +0.05 stop: 46.74
It was a quiet day for shares of LFC. The stock failed to see any profit taking or any follow through after Friday's rally. We don't see any changes from our weekend comments. The Chinese government has relaxed their requirements about domestic banks investing in overseas equity markets. This should be a bullish under current for LFC. We normally do not like to chase a big move like Friday's rally in LFC. However, this appears to be a unique event and LFC appears to have started a new leg higher. We are suggesting long positions now. It is up to the individual trader if they want to chase it here or wait for a potential dip back into the $49-48.50 zone. We're putting our stop under Thursday's low. Our target is the January 2007 highs in the $57.00-57.50 range. FYI: The P&F chart has produced a new triple-top breakout buy signal. The chart pattern points to a $70 target.
Picked on May 13 at $50.27
McGrath RentCorp - MGRC - cls: 31.13 chg: -0.65 stop: 29.89
There is no change from our previous comments on MGRC. We're still waiting for a bullish breakout over resistance. Our suggested trigger to buy the stock is at $32.35. More conservative traders may want to use a trigger above $32.50. If we are triggered our target is the $35.75-36.00 range. The P&F chart is bullish with a $50 target.
Picked on May xx at $xx.xx <-- see TRIGGER
Superior Energy - SPN - cls: 38.89 chg: +0.47 stop: 35.99
SPN continued to rally on Monday. Shares hit an intraday high of $39.58. The move today actually looks like a bearish failed rally. Watch for a dip back toward the $38.00 zone, which should now be short-term support. Our target is the $42.50 level. The P&F chart is very bullish with a $65 target.
Picked on May 13 at $38.42
Thermo Fisher - TMO - close: 53.38 change: -0.25 stop: 51.75
TMO struggled with any follow through on Friday's rebound. Traders may want to be patient and wait for a dip into the $52.75-52.25 range as a new entry point. We are aiming for the $59.00-60.00 range. The P&F chart points to a $76 target.
Picked on May 13 at $53.63
Short Play Updates
Closed Long Plays
Dell Inc. - DELL - cls: 25.27 change: -0.54 stop: 24.95
We are giving up on DELL. There was no follow through higher after Friday's rebound. Today's under performance in DELL (-2%) is casting a very negative shadow in the technical indicators. We're suggesting an early exit now to avoid or limit any losses.
Picked on April 29 at $25.23
Closed Short Plays
Apt Inv. & Mgmt - AIV - cls: 56.49 chg: +0.60 stop: 56.05
We would have been stopped out of AIV at $56.05. Shares continued to rally following Friday's big rebound. AIV broke out over technical resistance at its 200-dma. The bearish breakdown on Thursday now looks like a bear trap!
Picked on May 10 at $53.99
Sifco Industries - SIF - cls: 18.25 chg: +0.55 stop: 19.01
Our high-risk, speculative short in SIF didn't work out. The stock gapped open higher at $18.75 and rallied to $19.29 before paring its gains. We would have been stopped out at $19.01 this morning. Nimble traders may want to keep an eye on it. A drop back under $17.40 or $17.00 could be another aggressive entry point for shorts.
Picked on May 13 at $17.70
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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