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Daily Newsletter, Thursday, 05/24/2007

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Table of Contents

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

Market Wrap

Was It China, Germany, Greenspan, or Just Time?

Global bourses turned down last night, and ours followed suit today.

Losses in China and other Asian bourses were attributed to Greenspan's comments about the unsustainability of China's stock market gains. Germany's DAX turned lower after the important Ifo business confidence number disappointed. Currency concerns have been in the forefront this week with the visit from China's officials.

Introduction

Were those the causes for today's weakness? Were today's economic releases? Probably not. While they may have served as catalysts, it was definitely time for a pullback. Even the most committed bull could appreciate the need to pullback and retest support.

Equities were hastily dumped when it was apparent that the test was underway. The day turned into one of those when prices and indicators couldn't rise far enough to give new bearish entries for short-term bears or profit-saving exits for wrong-side bulls before the next rollover. Was any technical damage done?

Charts

Annotated Daily Chart of the SPX:

The SPX barely managed a close at the trendline that's been in place this month, but it did manage that close. Notice that on 5/10, the SPX behaved similarly, cascading right down to that trendline before it rose right back through the small red channel. So was technical damage done? Not really. Not yet.

According to the corrective fan principle, the rally off last summer's low is finished. Kaput. Tell that to those bulls who have been exulting with their earnings as the green trendline break in February was followed by this surge higher. Tell that to bear call credit spreaders who have been scrambling to protect positions gone wrong. However, the green trendline's resistance is holding, and that should serve as a bit of a warning.

We discover a mixture of evidence on this chart, and I've heard a mixture of wildly differing opinions. I even heard the dreaded "it's different this time" this morning on CNBC.

Annotated Daily Chart of the Dow:

The Dow barreled lower so quickly that it overran its 10-sma a bit, but not seriously. A quick trip down to the 30-sma can't be ruled out, however. It's needed, although bulls would rather it didn't occur too quickly. Actually, a deeper pullback than that is probably needed, perhaps as deep as somewhere in the 12,780-12,876 range, but I don't know if that will be allowed to happen.

Annotated Daily Chart of the Nasdaq:


Annotated Daily Chart of the SOX:


Annotated Daily Chart of the RUT:


Annotated Daily Chart of the TRAN:


Today's Developments

The day's economy-related releases began with the weekly initial claims number. First-time claims rose 15,000 to 311,000. The Labor Department figures show this to have been the first increase in six weeks.

The four-week moving average is always a better indicator than this sometimes volatile number, and that average is still being influenced by the recent downturns. It's down 3,500 to 302,750. The average figures as the lowest amount in more than a year.

Continuing claims rose 58,000, but the four-week average fell 14,750. The insured unemployment rate stayed steady. Some market pundits express concern because job figures indicate that wage pressures may remain strong--perhaps ultimately contributing to inflation--while other economic indicators have softened.

Once again, this Thursday featured another of the week's most important economic releases, April's Durable Goods, also released before the cash market open. This Department of Commerce release gives the FOMC some insight into the GDP. It's important. Durable goods were expected to moderate to a 0.7-0.9 percent gain, down sharply from the prior 4.3 percent.

Durable goods moderated more than expected, to 0.6 percent, but March's number was revised higher to 5 percent, a six-month high, taking away the sting of that greater-than-expected moderation. That's especially true because of the volatile nature of the headline number and its dependence on large aircraft orders. This time, civilian aircraft orders dropped 10.7 percent, for example. If the airline component were excluded from the number, durable goods orders would have climbed 1.5 percent. Businesses added 1.2 percent to their March 4.4-percent gains in orders for core capital equipment goods.

The homebuilding sector had produced bad news earlier in the day, so April's New Home Sales, the next release of the day, garnered much attention. Homebuilder Toll Brothers (TOL) had announced that it wouldn't be updating its outlook for its full-year EPS. TOL didn't show much reaction until the release of New Home Sales.

At 10:00, April's New Home Sales surprised to the upside. Industry experts had predicted a seasonally adjusted 850,000-860,000 yearly sales rate, with the prior number at 858,000. Instead, new sales soared to a seasonally adjusted annual rate of 981,000. One source pegged this as the largest gain in fourteen years. The month's figures produced a 16.2-percent rise, the first seen in four months. The number of months' supply also decreased markedly, to 6.5 months' inventory from the previous 8.5 months' supply.

However, that 16.2-percent rise in April sales was calculated against revised-lower March annualized figures of 844,000, down from the previous 858,000 annualized number. Geographical regions showed marked differences, with sales rising strongest in the South, by 27.8 percent. Sales fell in the Midwest, by 4.0 percent.

As the New Homes Sales was released, equities surged higher. They were soon slapped back, with the decline cascading lower. The headlines and bullet points that I found attributed the reaction to the realization that the FOMC wouldn't need to lower interest rates to help the homebuilders.

I don't buy the belief that it was this single number, this one release this morning, was solely responsible for the sell off that occurred. If you've been watching the markets tick by tick this week, you know that attempts to move equities higher have been routinely pushed back. We have a series of upper shadows on daily candles all this week as prices tried to pierce resistance and selling hit. The distribution was there. The imbalance of supply and demand was there.

Also, ten-year yields have been moving up all week, and today's move finally pushed yields up to test the year's high, although they could not manage a new closing high. Although that retest of the year's high in 10-year yields did occur after the 10:00 data release, giving some credence to that argument that it was fear of higher rates that sent equities lower, the move in yields was more of the same of what we've seen all week. This week, yields continued rising after their breakout above the 200-sma and -ema's last week.

All in all, however, today's data combined to show that the FOMC may not need to cut interest rates in order to salvage the homebuilding industry and the economy may be strengthening enough that the FOMC will need to continue watching for inflationary pressures. Whether or not that combination precipitated today's decline or was just the reason given today, the interpretation certainly did nothing to ameliorate concerns once the decline had begun.

Natural gas inventories were released at 10:30. Those showed a build of 104 Bcf.

The day produced its share of gloomy developments in the company-specific reports. TOL wasn't the only company with a comment that troubled market watchers. Network Appliance (NTAP) warned that it would miss forecasts for the first quarter. Synopsis (SNPS) was downgraded. CA Inc. (CA), an IT company, warned.

In other company-related news, Dell (DELL) has decided to sell personal computers at Wal-Mart beginning June 10. DELL selected two of its desktop computers for its first step away from its direct-selling model.

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Another reason being bandied about for today's decline concerned the upcoming long weekend. Supposedly no one wanted to be long ahead of the Memorial Day long weekend. Just yesterday, I heard guest commentators on CNBC opining that no one wanted to be short ahead of the long weekend and another likely explosion of M&A activity early next week. A human tendency exists to look for an explanation, but many charts have been showing in many ways that it was just time. Long past time.

Tomorrow's Economic and Earnings Releases

Tomorrow, April's Existing Home Sales will follow up on today's New Home Sales. Industry experts predict 6.13-6.2 million sales, slightly higher than the prior 6.12 million. Few companies report earnings tomorrow.

What about Tomorrow?

First, a mea culpa. I was surprised last Friday by the strength of the markets. As I had noted in this section last week, short-term intraday charts were set up to indicate a potential bounce Friday morning, but longer-term charts were showing that some weakness was perhaps creeping in. Based on that evidence and the SPX's established pattern, my expectation for Friday had been another consolidation day or perhaps a pullback, but in either case to be started off by a gain in earliest trading.

That early gain occurred, but I never expected the gain that was produced. By Friday morning, soaring futures already indicated a problem with that Thursday evening thesis. Fortunately, I warned bears again last Thursday night that there were as yet no clear signs favoring their side. Fortunately, also, due to what happened today, many of us writers, myself included, have been warning bulls to keep their stops at account-appropriate levels. The drops, when they occur, have been sudden and harsh.

This has been one of those times when technical analysis has been less useful than at others. Momentum has been so strong that it's overridden all those technical setups. Part of being an adept trader and keeping some funds in the trading account includes recognizing those times when signals just aren't working right. Today was one of those days when the momentum was to the downside, but it's one of the few.

Now, I'm going to tell you something that you don't want to hear. The day after such a strong move can be difficult to trade. There's that old maxim about large-range days often being followed by small-range days, and those small-range days can be difficult to trade. I remember well my forex-trading days, when the choppy moves that occurred after a strong move would often eat away at the gains I'd made catching the big move. Markets can sometimes chop one direction and stop out the bulls, then chop the other and stop out the bears. Furthermore, the strong move tends to scramble indicators, so they're of less usefulness than usual.

Let's address what happened today. The day felt bearish. I scalped a little 10-contract OEX put play, entering just after the 10:00 data, with my broker's statement saying that I entered at 702.06, near the OEX's 702.65 high. I stayed in 10 minutes, made a few bucks, and jumped out to await the results of the bounce I felt sure was about to occur. I was going to await the next signal after the expected next bounce to reenter. It never came. The declines would arrive so quickly that RSI never had time to rise into the zone I was watching, and I sat watching a decline in which I had wanted to participate but couldn't. It was worse for bulls trapped in plays and unable to get out, and the bulls who were desperate to get out fueled the decline.

So, the day felt decidedly bearish, but the charts should be showing you that nothing happened that hasn't happened at other times recently, such as on May 10. There's danger in assuming that markets are going to continue to crater just because they did today, and, as a credit spread trader who was feeling pretty happy on May 10 about the positions of her May credit spreads and ended up last Friday not feeling quite so happy, I can tell you, it (the rally) don't gotta be over yet just because one day felt so bearish.

That's the warning. Here's my impression. My impression is that it's time for markets to retrace more deeply than they have today, but that may not be accomplished tomorrow. Tomorrow could be a choppy day as the mighty bulls and the newcomer bears fight it out. I don't know which group is going to win this tussle tomorrow or whether there will be a clear winner.

Let's look at short-term charts.

Annotated 15-Minute Chart of the SPX:

Remember that Keltner lines are dynamic. They move. They will move tomorrow and this chart shows only the earliest setup.

That gathering resistance looks fairly strong to me. Unless the SPX powers up and surges right through it, it looks as if that resistance should hold. (Think of children playing that childhood game where all link arms and one child on the other team runs at them. Only the strongest and fastest runners could burst through that line of children with linked arms.)

If markets crater first thing tomorrow morning, watch for potential support at that 1494 zone, if it's touched, as well as higher, at the presumed round-number 1500 support. If markets attempt a rise first thing, as some charts do suggest might happen, watch instead for a potential rollover from that zone pointed out above unless the SPX just surges higher. If the SPX does roll down from that resistance, what happens next is up for grabs at this point. Watch your favorite sentiment and breadth indicators for some clues.

Annotated 15-Minute Chart of the Nasdaq:


Annotated 15-Minute Chart of the RUT:

I won't have another opportunity, so I want to remember all who have died defending our country. To those remembering them and to all subscribers, when tomorrow's trading shuts down, turn off your computers and take some time away from charts and trading. Spend time with your families. See you back next week.
 

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

Arch Coal - ACI - close: 40.56 change: +0.10 stop: 37.95 *new*

ACI displayed some relative strength and managed to hold support at the $40.00 level. While we are encouraged by the positive close we are not suggesting new positions. Please note that we're adjusting the stop loss to $37.95. More conservative traders may want to do some profit taking right here. Our target is the $42.50-45.00 range.

Picked on May 09 at $38.44
Change since picked: + 2.12
Earnings Date 07/23/07 (unconfirmed)
Average Daily Volume: 3.6 million

---

Business Objects - BOBJ - cls: 39.29 chg: -0.83 stop: 38.75

Tech stocks were a major drag on the market today. The GSO software index fell 2.49%. Shares of BOBJ followed with a 2% decline. The stock has fallen toward support near $39.00. Normally we'd look for a bounce here as a potential entry point. Unfortunately, we're not very optimistic. The recent move looks like a bearish failed rally and a double-top pattern compared to the December 2006 peak. Readers may want to exit early or tighten their stops even closer to the $39.00 level.

Picked on May 21 at $40.15
Change since picked: - 0.86
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

British Amer. Tob. - BTI - cls: 65.85 chg: +0.55 stop: 62.85

BTI displayed relative strength with a 0.8% gain and another new high. The stock might be getting a boost since tobacco stocks are normally seen as "safe haven" plays when the market or the economy turns south. 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
Change since picked: + 1.80
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume: 105 thousand

---

Anheuser Busch - BUD - cls: 51.28 chg: -0.07 stop: 48.95

Traders bought the dip in BUD near $51.00 twice today. Given the market weakness we would still expect a dip toward what should be support near $50.50. Investors should note that it could take several weeks before shares hit our target in the $53.85-54.00 range.

Picked on May 06 at $50.50
Change since picked: + 0.78
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 3.1 million

---

Columbia Sportswear - COLM - cls: 66.55 chg: -0.48 stop: 63.39

COLM is holding up relatively well with a minor decline on Thursday. A bounce near $66.00 or the $65.00 levels could be used as a new entry point. However, given the market's new bearish tone, traders may want to avoid new bullish positions. Our target is the $69.85-70.00 range. More aggressive traders may want to aim higher given the trend.

Picked on May 21 at $66.25
Change since picked: + 0.30
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 235 thousand

---

ENSCO - ESV - close: 58.04 change: -1.90 stop: 55.85

Oil stocks suffered a one-two punch today. The market was weak and crude oil fell 2.3%. ESV endured a triple-whammy with additional bad news from the analyst community. One analyst firm downgraded multiple oil service stocks and ESV was one of them. Shares fell 3.1%. We are not suggesting new positions and traders may want to exit early or raise their stop toward breakeven. Our target is the $61.50-62.00 range.

Picked on April 29 at $56.84
Change since picked: + 1.20
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 2.9 million

---

Gerdau Ameristeel - GNA - cls: 15.29 chg: -0.53 stop: 14.49

After hitting new highs this week GNA finally hit some profit taking. The stock lost 3.3% during today's market sell-off. The next level of support is the rising 10-dma near round-number support at the $15.00 mark. More conservative traders may want to tighten their stops toward $14.75 or toward $15.00. We're leaving ours at $14.49 for now. This remains an aggressive, speculative play. Our target is the $17.50-18.00 range. The P&F chart points to a $29 target.

Picked on May 20 at $15.23
Change since picked: + 0.06
Earnings Date 07/30/07 (unconfirmed)
Average Daily Volume: 552 thousand

---

Kansas City Southern - KSU - cls: 39.97 chg: -0.79 stop: 37.75

Railroad stocks have been sliding all week. KSU, which had been out performing its peers, finally turned with today's 1.98% decline. The move today looks like a short-term bearish reversal. Watch for broken resistance near $39.50 to act as support. More conservative traders may want to raise their stops. We're not suggesting new positions at this time. Our target is the $43.50-44.00 range. Currently the P&F chart points to a $45 target.

Picked on May 17 at $39.61
Change since picked: + 0.36
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 716 thousand

---

Superior Energy - SPN - cls: 38.52 chg: -1.70 stop: 37.99

Ouch! SPN has now erased almost all of our potential gains. The stock plunged 4.2% on Thursday. SPN wasn't downgraded but one firm cut their rating on five oil service stocks today. A 2.3% drop in crude oil futures didn't help either. A bounce from here could be used as a new entry point but we'd wait for a rise past $39.00 before even considering new positions. 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
Change since picked: + 0.10
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume: 1.5 million
 

Short Play Updates

MarineMax - HZO - cls: 20.22 chg: -0.51 stop: 21.51

The bounce continues to roll over in HZO. Shares are nearing a breakdown under support at the $20.00 level. Aggressive traders may want to short it here. We are suggesting a trigger to short HZO at $19.95, which is under round-number support at $20.00. Our target is the $17.75-17.50 range. It is VERY important that traders realize HZO has a high amount of short interest. The latest data put short interest at $28% of the 16.8 million-share float. That's a lot of short interest and a small float. Unfortunately, that can be a recipe for a big short squeeze and our stops may not help in what your broker will call a "fast market". More conservative traders may want to pass on this one.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 354 thousand

---

U S T Inc. - UST - close: 54.36 chg: -0.60 stop: 56.21

The sell-off in UST continues. The stock lost over 1% and hit a new six-month low on an intraday basis. We don't see any changes from our Wednesday comments, which we are reposting here: The daily chart has produced a bearish double-top pattern with the February and April peaks. Now the recent oversold bounce has stalled with multiple failed rallies under technical resistance at the 200-dma. Volume is creeping higher this week and we expect the next move to be down. We are suggesting shorts right here with a tight stop loss at $56.21. More conservative traders may want to use a trigger under the May low (54.34) before opening positions. A breakdown under $54.00 would produce a new Point & Figure chart sell signal. We have two targets. Our conservative target is $52.60-52.50. Our more aggressive target is the $50.50-50.00 range.

Picked on May 23 at $54.96
Change since picked: - 0.60
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 965 thousand
 

Closed Long Plays

GulfMark - GMRK - cls: 49.97 chg: -1.98 stop: 49.49

We are calling it quits with GMRK. Oil service stocks were weak after one analyst firm downgraded several of them today. GMRK was not downgraded but shares fell 3.8% and on above average volume. The move today broke GMRK's bullish trend and the close under $50.00 is also bearish. We would rather cut our losses and step back to see where oil and the markets go next.

Picked on May 20 at $51.75
Change since picked: - 1.78
Earnings Date 07/30/07 (unconfirmed)
Average Daily Volume: 241 thousand

---

China Life Ins. - LFC - cls: 46.61 chg: -1.62 stop: 47.94

It was a rough day for LFC. The stock gapped open lower at $47.53, bounced back to $48.00 and then turned south again. Shares plunged toward the April and May lows and its rising 100-dma. Sparking the sell-off in LFC and many of the Chinese stocks was news that the Chinese government has asked brokerage firms to warn investors about the risks of trading in the stock market. Sounds like they're trying to get ahead of the bubble bursting. If you haven't heard the Shanghai A-share index is up 55% this year while the Shanghai B-share market, which is open to foreign investors, is up 129% this year (source: CBSMarketwatch). Our stop loss on LFC was $47.94 but due to the gap open lower we would have been taken out at $47.53.

Picked on May 13 at $50.27
Change since picked: - 3.66
Earnings Date 08/25/07 (unconfirmed)
Average Daily Volume: 1.2 thousand

---

McGrath RentCorp - MGRC - cls: 30.11 chg: -0.82 stop: 29.89

We are dropping MGRC as a bullish candidate. It was our plan to capture a breakout over significant resistance near $32.00 but we've been waiting for days and it doesn't look like it's going to occur any time soon. Our suggested trigger to open positions was at $32.35.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/03/07 (confirmed)
Average Daily Volume: 94 thousand
 

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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