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Daily Newsletter, Monday, 07/09/2007

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Table of Contents

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

Market Wrap

Boeing, JNJ and Alcoa Grab Headlines

The major US indexes posted fractional gains to start the week, and while the very broad NYSE Composite ($NYA.X) 10,099.60 0.24% closed at an all-time high, with the very broad NASDAQ Composite ($COMPX) 2,670.02 0.13% and its narrower large cap issues in the NASDAQ-100 Index (NDX.X) 1,989.20 0.04% set achieved new multi-year highs, it was Dow components Boeing (NYSE:BA) $99.90 1.03%, Johnson & Johnson (NYSE:JNJ) $62.72 0.04% and Alcoa (NYSE:AA) $42.36 1.68% atop today's equity story list.

Stocks got off to a mixed start when August Crude Oil futures (cl07q) jumped to a 10-month high, trading as high as $73.00 before their floor session. Early gains were fueled largely by geopolitical news, with Iraq's Foreign Minister Hoshyar Zebari saying Turkey had massed 140,000 soldiers on its border with Iraq.

Dow Jones reported Turkish military officials saying they had no comment to remarks made by Zebari, and it was unclear where Mr. Zebari got his figures.

Zebari said "Turkey is building up forces on the border. There are 140,000 soldiers fully armed on the border. We are against any military interference or violation of Iraqi sovereignty."

Zebari noted that "The Iraqi government is trying to diffuse the situation," (Turkish action against the rebel Kurdistan Workers' Party in norther Iraq), but added that "The perfect solution is the withdrawal of the Turkish forces from the borders."

Exacerbating oil's early session rise was news out of Nigeria that two Royal Dutch Shell (NYSE:RDS.A) $85.34 0.18% workers had been taken hostage on Sunday.

As the session wore on, August Crude Oil futures (cl07q) eased and finished down $0.62, or -0.85% at $72.19. It was the first decline in the August contract after seven (7) consecutive sessions of gains.

U.S. Market Watch - 07/09/07 Close

Two, OK three Dow stocks are worthy of mentioning today.

With the Dow Industrials (INDU) and its "tracker" the Dow Diamonds (AMEX:DIA) $136.48 0.25% pressing their June 1st all-time highs and short interest having built to a whopping 22.3 million shares as of June 15 (from 17.8 million on May 15) this market looks prime for a short squeeze.

Let's take a quick look at the DIA, with volume turned on, as the DIA presses key levels of technical resistance.

In today's Market Monitor at OptionInvestor.com, I labeled this chart as this week's "Pivot Trader's Chart of the Week." At tonight's close, I'd probably have to label it as "This Week's Key Major Index Chart of the Week."

While just 30 stocks, the Dow Industrials is probably the most-quoted index of all major equity indexes around the world, and its gyrations can have great impact on market psychology.

Dow Diamonds (AMEX:DIA) - Daily Intervals

I say two (2) levels of key technical resistance have been challenged in today's trade. One (1) is the June 1 "doji" close of $136.61, and the other (2) is the institutionally traded MONTHLY R1 ($136.56).

What strikes me as this being a VERY key level of resistance is the above chart, which I captured early this afternoon at around 02:35 PM EDT.

While I'm not a big focuser on the MACD oscillator, I get very BULLISH when it has approached zero (O), kicks higher, with MACD (blue) moving above its Signal (red). Its an oscillator of momentum (Moving Average Convergence/Divergence). However, in just the last 100-minutes of trade (DIA closes at 04:15 PM EDT), I would note that both MACD and its Signal are once again FLAT, but just below zero (O) at respective -0.167 and -0.206 measures.

With the DIA we can also "turn on the volume." Bears have been voicing the "light volume rally" in recent sessions. Yes, volume is light, prices are rising. Lack of buyers, or lack of sellers? That's the 14,000, or $140 question, which I think will resolve to the UPSIDE.

Now let's move on to our two, maybe three "key stocks."

Boeing (BA) - $1 and $2 Box Scale

Let's start with Boeing (NYSE:BA) $99.90 1.03% as it is the 2nd-most heavily weighted stock behind International Business Machines (NYSE:IBM) $108.97 -0.05% in the price-weighted Dow Industrials (INDU)/DIA $99.90 1.03%, and after being the lone Dow component to give a reversing lower double bottom sell signal at $95.00, and a trade at $94.00, a "shake out" pattern has developed as the stock has whipped back higher.

Boeing's (BA) shares traded as high as $101.32 today after Jefferies analyst Howard Rubel said Boeing has "stimulated" the market to replace older planes with the 787 Dreamliner. Boeing has "solid" bookings for 677 orders for 47 carriers, but Mr. Rubel thinks the company could book as many as 1,000 orders by next year.

In my technical opinion, BA had been a "drag" on the INDU/DIA in June, (blue 6 is early June to blue 7 early July) and with the #2-weighted stock in the INDU/DIA showing strength, I think most traders can begin to tie BA $102 as only helping the DIA get above its MONTHLY Pivot.

CONVERSELY, BA not showing strength above $102, ties relatively well with DIA resistance.

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Here we have a HEAVY WEIGHT reestablishing longer-term strength and demand (X) eating up supply (O).

Note: The Bot, Med, Top on the above Point and Figure chart are Dorsey/Wright's 10-week trading bands. These are similar to "bollinger" bands that bar chartists will utilize and they usually move with PRICE. Stocks can EASILY exceed the bot/top areas, but are utilized for helping determine position size and field position for entry/exit.

Now, I didn't see, or have Johnson & Johnson (NYSE:JNJ) $62.72 0.95% as being anywhere close to a "key stock" until today news, and technical review.

But after Caterpillar's (CAT) $79.83 1.29% action from mid-February ($67.62) when it announced a $7.5 billion stock repurchase plan, today's $10 billion share repurchase program gets my attention and is still the 9th-most heavily weighted component in the INDU/DIA.

Johnson & Johnson (JNJ) - $1 box chart

Late last year, JNJ showed a nice gain from July 26 into late October (blue A early October), but year-over-year the stock has done little to help, or hurt the INDU/DIA.

One interesting "tidbit" from JNJ's stock-repurchase program was that the company said it had already completed a $5 billion stock-repurchase program in Q4 2006, and that the new program would utilize a combination of available cash on hand and DEBT!

Debt? That suggests to me that JNJ's board feels the shares are UNDERVALUED if they're willing to utilize DEBT.

The Prime Rate is currently 8.25%, while the Federal Discount Rate is currently 6.25%.

When looking at two (2) of the thirty (30) Dow components, but two of the "Top 10 Weighted," we see some different dynamics.

BA challenges all-time highs and threatens another triple top buy signal, similar to that found in April.

JNJ, which has done "nothing" year-over-year announces a rather hefty $10 billion stock-repurchase program, just above the March, 2006 lows of $60.

If market participants get these two heavyweights going in the same direction (up or down) a big move in the INDU/DIA could be found.

Do you see it? Do you feel it?

"Bam, bam, ugh... bam, bam, ugh!"

Dow Industrials (INDU) - 50-point box

One of the great things I like about Point and Figure charts is the way they measure supply (O) and demand (X) without much respect to TIME like a conventional bar chart does.

See the IMPACT of BA's price from early April (4) to late May, or early June (6) as the stock rocketed higher from $92 to $100 for the INDU?

Meanwhile, JNJ did NOTHING. Again, BA is carries a bigger weighting as #2, but with a $10 billion stock-repurchase program adding on to a recently completed $5 billion stock-repurchase program, I'd think there is still some type of demand coming for JNJ.

And while Alcoa (NYSE:AA) $42.36 1.68% closed at a new 52-week high today, it is "just" the 21st-most heavily weighted of the Dow components.

Still, it may set the important tone as it is the FIRST component to report quarterly earnings.

Shares of the aluminum giant ticked fractionally higher at $42.49 in this evening's extended session after the company said second-quarter profits slipped 4% as outage costs at two smelters weighed on results. Net income came in at $715 million, or $0.81/share on revenue of $8.1 billion. Consensus among analysts was for the company to earn $0.81/share (9 analysts) on revenue of $8.34 billion (5 analysts).

Options Trader's Note: Higher options volatilities/premiums (VIX, VXN, VXO) are making it "tough" on call/put option traders.

For those that have been following my initial bullish Dow Diamonds (DIA) DIA Aug $135 Call (DAW-HE) entry at the offer of $3.30 when the DIA itself was trading $135.62, that option has risen $0.30 to the current bid, even as the DIA itself has risen $0.86 during the same period of time (July 5th).

I've been strongly suggesting that option traders for CALLS keep focusing IN-THE-MONEY, or AT-THE-MONEY as a MINIMUM. Even as volatility stay's relatively high (MONTHLY Pivot 15.87 for VIX), OUT-THE-MONEY calls are doing very little even as price rises!

For those trading PUTS, just the opposite is true. With overhead supply VASTLY limited (major indexes pressing all-time/multi-year highs), speculation on a DECLINE (buyer of a put options) is seeing FASTER erosion for IN/AT-THE-MONEY, so traders might as well go OUT-THE-MONEY, look for a PRICE DECLINE, and further INCREASE in volatility/premium. This way you're at least RISKING LESS capital, and if a decline does come, volatility/premium should RISE.

Speaking of Weightings!

I was somewhat "shocked" last week to learn how much the NASDAQ-100 Index (NDX) and its tracker the QQQQ have changed.

You might be too, as Microsoft (MSFT) $29.87 -0.33% is no longer the BIGGEST weighting. In fact, it has/had slipped to #2 in, with Apple Computer (AAPL) $130.33 -1.48% #1 with a staggering 9.21% weighting as of July 3rd!

Here's a Microsoft Excel spreadsheet screen capture I made on 07/04/07, where the "Top 10" components (per NASDAQ) comprise roughly 41% of the NDX/QQQQ weighting!

NASDAQ-100 Weightings - As of 07/03/07

It has been awhile since I even LOOKED at the WEIGHTINGS for the NDX/QQQQ as I had still been sorting them by my QCharts' "Market Cap" tabulations. However, NASDAQ did make some changes.

Suffice it to say I was surprised to see AAPL and QCOM as the #1 and #3 weighted components.

Of the 100 stocks that comprise the NASDAQ-100, it is notable that roughly 66% of its price action comes from just the top 1/3 weighted stocks!

Again ... Roughly one-third (1/3) of the NARROW NASDAQ-100 components account for roughly two-thirds (2/3) of its weighting.

As the VERY BROAD NASDAQ-Composite (COMX) 2,670.02 0.13% trades a multi-year high for a 4th-straight session, market participants are OBVIOUSLY focusing on LARGE CAP names.

Here, take a look at the NASDAQ Summation Index ($NASI), which measures more than 3,000 stock's daily advance/decline over time!

NASDAQ Comp. Summation Index ($NASI) - 20-point Box

"Bad breadth" is what this would be called for the VERY BROAD NASDAQ Composite (COMPX) 2,670.02 0.13.

What can, or SHOULD be worrisome to a "contrarian" that is, or continues to short the NARROWER NDX/QQQQ is that PRICE is moving against them. Heck, EVEN the VERY BROAD NASDAQ Composite price action is moving against a bear.

A contrarian often trades what they see as "opposite the MARKET." That can be painful if the MARKET continues doing what its doing.

One MAJOR MARKET bullish % change that should be noted tonight is that after the conclusion of Monday's trade (07/02/07), Dorsey/Wright's NASDAQ-100 Bullish % (BPNDX) did reverse back UP to "bear correction" status at 74% bullish, after falling to a low measure of 67% (68% on a 2-box chart).

At tonight's close, this narrow, but widely followed bullish % is at 75%. A measure of 76% is needed to achieve "bull confirmed" status.

Here too, a sign that market participants are focusing on larger-cap names.

A quick scan would show that it was shares of Infosys Technologies (NASDAQ:INFY) $54.25 3.15% that gave the reversing higher double top buy signal at $54.00.

Dollar steady, Hang Seng Hits New High!

I'm running late on my editor's deadline, but wanted to quickly updated a "no change" in the Dollar Index, but note a new high for the Hang Seng (Stockcharts.com symbol $HSI)

Global Equity Benchmarks / Currencies

Not much to mention here, but the Dollar Index (DXY) is little changed since Monday's Market Wrap.

The HansSeng leads Monday-to-Monday's list of percentage gainers.

One quick tidbit I did mention in today's OptionInvestor.com Market Monitor is some comments out of the Germany's Finance Minister Peer Steinbrueck.

Having seen the euro hit a series of new highs against the yen in recent days, and nearing an all-time high against the dollar, Steinbrueck said "I'm not worried about the strong euro," and added that "I love the strong euro."

We'll see if the MARKETs agree with that.
 

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

Apria Healthcare - AHG - cls: 31.07 chg: -0.05 stop: 28.99

AHG didn't do much on Monday. The stock spent the session inside a 70-cent trading range. Overall we don't see any changes from our weekend comments. We're suggesting positions with AHG above $30.00. You can jump in now or wait for another dip in the $30.00-30.50 zone. Our target is the $33.95-34.00 range. We do not want to hold over the late July earnings report in about three weeks. We're placing our stop loss at $28.99. More conservative traders may want to place theirs closer to $29.50 or even near $30.00.

Picked on July 08 at $31.12
Change since picked: - 0.05
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 700 thousand

---

Columbia Sportswear - COLM - cls: 69.33 chg: -0.35 stop: 65.95

COLM under performed the market on Monday. Shares slipped 0.5% and the stock continues to struggle with resistance near $70.00. Readers can choose to buy another dip near $68.00 or wait for a new relative high over $70.06 as their entry point. Our target is the $73.50-75.00 range. The P&F chart is very bullish with an $89 target.

Picked on June 17 at $68.54
Change since picked: + 0.79
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 219 thousand

---

GulfMark - GMRK - cls: 55.39 change: +1.34 stop: 49.99

Our new play on GMRK is now open. Shares gapped open higher at $54.25 and soared to an intraday high of $55.93 before paring their gains. Volume was above average on the bullish breakout from the two-month trading range. This is also a new all-time high for GMRK. Oil stocks were strong today in spite of a dip in crude oil prices. Fueling the move was news that COP announced a very large stock buy back program. Meanwhile for GMRK, the company announced plans to move its listing to the NYSE. The company expects to be trading on the NYSE around July 20th under the new symbol "GLF". Our target is the $59.00-60.00 range. We do not want to hold over the late July earnings report.

Picked on July 09 at $54.55
Change since picked: + 0.84
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 284 thousand

---

Royal Gold - RGLD - cls: 25.82 change: +0.07 stop: 23.99

We were disappointed in RGLD's performance today. As a sector gold stocks continued to climb on Monday. The XAU index rose more than 1% and the GOX index rose 4.5%. Shares of RGLD under performed both indices and produced what looks like possible bearish failed rally pattern under the 50-dma. Odds just jumped that we'll see a better entry point on a pull back toward the $25.00 level. Our target is the $27.90-28.00 range. More aggressive traders may want to aim higher. FYI: The P&F chart is still very bearish.

Picked on July 08 at $25.75
Change since picked: + 0.07
Earnings Date 08/16/07 (unconfirmed)
Average Daily Volume: 462 thousand

---

Verasun Energy - VSE - cls: 15.69 chg: +0.38 stop: 12.89

VSE rose another 2.48% but the stock struggled to build on its early morning gains. Today's move almost looks like a bearish failed rally under technical resistance near $16.00 and its 50-dma. We would expect a dip back toward the $15.20-15.00 zone. More conservative traders may want to tighten their stops toward $14.00 or breakeven. Our target is the $17.75-18.00 range, just under the simple 200-dma. We'll be watching the 50-dma and 100-dma as potential resistance. FYI: Keep an eye on ADM, another ethanol-related stock. Shares of ADM soared today and broke through multiple levels of resistance.

Picked on June 29 at $14.21
Change since picked: + 1.48
Earnings Date 08/07/07 (unconfirmed)
Average Daily Volume: 878 thousand
 

Short Play Updates

Empresa Natl. Elec. - EOC - cls: 47.00 chg: -0.50 stop: 50.05

So far so good. EOC lost another 1%. We don't see any changes from our weekend comments. If the stock does see a bounce we'd watch for the $48.00 level or the 10-dma near $48.50 to act as overhead resistance. We're suggesting shorts with a target in the $43.00-42.50 range. We do see potential support at the rising 100-dma around $45.00 so don't be surprised by a bounce. We do not want to hold over the late July earnings report.

Picked on July 08 at $47.50
Change since picked: - 0.50
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 141 thousand

---

Staples Inc. - SPLS - cls: 24.60 chg: -0.15 stop: 25.15

Monday's trading in SPLS looks bearish. The stock produced yet another failed rally under its sliding 50-dma. Normally we'd suggest new shorts right here but given the bullish tone in the market's major averages we are cautious about new shorts at this time. More conservative traders may want to tighten their stops toward $25.00. We're not suggesting new positions at this time. Our target is the $22.00 mark.

Picked on May 27 at $24.40
Change since picked: + 0.20
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume: 7.0 million
 

Closed Long Plays

None
 

Closed Short Plays

Broadcom - BRCM - cls: 31.26 change: +0.63 stop: 31.05

BRCM hit our stop loss at $31.05 today. Another strong day for semiconductor stocks helped fuel a 2% rebound in BRCM. We've been warning readers for the past couple of sessions that the bounce looked dangerous and a potential trap. BRCM has now rallied back toward the top of its previous trading range (30.00-31.50).

Picked on June 25 at $29.75
Change since picked: + 1.51
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume: 11.1 million
 

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

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