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Daily Newsletter, Monday, 07/16/2007

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Table of Contents

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

Market Wrap

Ba..ZOOOM!

There's an old saying that "a picture is worth a thousand words." For those that have heard those words, then last Monday's Market Wrap and this Monday's updated point and figure chart of the very narrow Dow Industrials (INDU) 13,950.98 +0.31% recaps much of that wrap.

The recent pattern of "Bam, bam, ugh..." just went "Ba.. Zoom!" as buyers aggressively bought last Tuesday's pullback.

With a nice little short-squeeze having taken hold on the break higher at 13,700, buyers (especially shorts below 13,700) should have support rising from 13,250 to 13,500.

Dow Diamonds (DIA) - Daily Intervals

I should note that on Thursday and Friday, I suggested OptionInvestor.com Market Monitor traders leg out of their bullish Dow Diamond Aug $135 Calls at DIA respective benchmarks of DIA $137.61 and $139.23 as the DIA $139.46 +0.39% neared my $140.00 target.

Recent action strongly suggests that institutional computers are exhausted of supply at MONTHLY R1 ($136.56) and I'd have to think (based on observation), that they will be set for further buying on any re-test of that level.

While some long liquidation (selling long) took place on the powerful move up as bulls took profits, the rapid move through July's MONTHLY pivot retracement levels, and perhaps today's low at MONTHLY R2, suggests this market (INDU/DIA/DJX and YM futures) is overly short.


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Right? If YOU were making a market in the DIA, or CBOT's mini Dow $5 September futures (ym07u), where 1-point/contract is worth $5, and your inventory was exhausted, what would you have done?

Lighten up your offer/ask, and assess risk to MONTHLY R2. If you're going to stay in business and generate a commission, you might have to SHORT to the market as BUYERS scramble to buy.

Now you want to BUY on weakness and get SQUARED up!

Yes! Even those still short from the 6/11/07 doji close.

U.S. Market Watch - 7/16/07 Close

Having traded as high as 13,989 intra-day, only the very narrow Dow Industrials (INDU) managed to close at an all-time high on positive breadth of 18:12.

Boeing (NYSE:BA) $102.07 +0.18% gets the trade at $102 (see Monday's Market Wrap), while Johnson & Johnson (NYSE:JNJ) $63.80 +0.58% inches its way higher.

Alcoa (NYSE:AA) $46.77 -1.22% traded as high as $48.77, but takes a breather having surged from the $42.00 level on Thursday.

United Technologies (NYSE:UTX) $76.67 +2.22%, which is the 6th-highest-priced Dow component, put in a strong showing today, as did 22nd-weighted Verizon (NYSE:VZ) $42.76 +2.39% on rumor that Vodafone (NYSE:VOD) $33.15 -1.10% may be set to buy the telecom service provider. A rumor that Vodafone denied.

McDonalds (NYSE:MCD) $52.10 +0.36% edged higher after the fast-food giant said same store sales rose 8.4% in June and 7.4% in the second-quarter. However, the company warned that it expects to post its first quarterly loss in more than 50 years in the recently completed second-quarter when it takes a -$1.31/share charge for the sale of some Latin American operations. Excluding the one-time charge, McDonald's said it would likely exceed Wall Street forecasts and earn $0.71/share from continuing operations. Consensus is for $0.68/share.

Ahead of key earnings for financials this week and mixed retail sales trends, 11th-weighted American Express (NYSE:AXP) $61.88 -1.51% was a percentage loser among the Dow 30 components.

The largest U.S. banks are facing a tough operating environment, but their second-quarter results are likely to be decent as they benefit from their diverse business mixes. Still, investors will be scrutinizing the results to detect any fallout from the meltdown in the subprime mortgage market.

I've made a few notes regarding the "delay" of a few bond offerings, especially in the corporate high yield segments in the OptionInvestor.com Market Monitor the past couple of weeks. The bond market dwarfs the equity markets and is difficult to track closely. But the general impression is that there are still some liquidity issues, or lack of buyer interest for "junk bonds."

Starting tomorrow, super regional Wells Fargo (NYSE:WFC) $35.45 -0.25% and Wachovia (NYSE:WB) $52.36 -0.53% are slated to report their quarterly earnings.

Dow component JP Morgan (NYSE:JPM) $49.83 -0.43% will report Wednesday and Bank of America Corp. (NYSE:BAC) $49.62 +0.24% will report on Thursday.

Citigroup Inc. (NYSE:C) $52.19 -0.62%, which is the 14th heaviest price-weighted Dow component reports Friday.

Merrill Lynch & Co. (NYSE:MER) $87.39 +0.98% ends a volatile second-quarter earnings season for the big brokerage firms tomorrow amid continuing concerns over subprime mortgages and the credit markets. Merrill bought a big subprime lender in January, but observers say it has been savvy in shedding many of the riskiest loans.

The narrower S&P 100 (OEX.X) 717.01 -0.02% traded relatively unchanged, but the supply/demand relationship looks very similar to that of the Dow 30.

S&P 100 Index (OEX.X)

As you review the VERY NARROW Dow Industrials, and build out to the narrow S&P 100 Index ($OEX) you can see some similarities. Not a coincidence as the Dow 30 are also found in the OEX. The OEX is a MARKET CAP WEIGHTED index though, so it is constructed slightly different. FINANCIALS are the BIGGEST weighted group in the OEX.

With BUYERS (not just bulls, "old bears") seemingly more focused on the narrower indexes, I would think an "S&P" bull finds 695 as a "best buy" on a pullback. As of tonight's close, it would take a trade at 700 in the OEX to see a 3-box reversal back lower.

Let's stick with the "S&P" for a minute, and look at the BROADER S&P 500 ($SPX).

S&P 500 Index ($SPX) - 10-point box

Slightly different supply (O) and demand (X) picture. Are you seeing the VERY SUBTLE differences as we "broaden out" from 30 stocks in the Dow, to 100 in the OEX, to 500 now with the SPX?

I've shown the S&P Depository Receipts (SPY) $154.83 -0.01% bar charts before and noted the WEEKLY 5/11/07 "doji close." I've superimposed the SPX's 5/11/07 close on the point and figure chart above.

VOLATILITY! In 2005, we would count 7 alternating columns of X and O.

In 2006, we would count 8 alternating columns of X and O.

Were just more than half-way through the year of 2007 and I'm already counting 8 alternating columns of X and O.

EXPECT VOLATILITY!

Now I want to build, or continue to follow up on "breadth."

Just looking at INDU, then OEX, then SPX we see SIMILARITY (INDU/OEX) and some very subtle difference (SPX) in the supply/demand charts.

Today, breadth was negative at the NASDAQ and NYSE with decliners outnumbering advancers by a 2:1 margin.

Let's quickly review the NASDAQ Summation Index ($NASI), which simply measures a/d on a continuous basis.

NASDAQ Summation ($NASI) - 20-point box

At last Monday's close, the $NASI from www.stockcharts.com measured -86.70. We have seen a REVERSAL higher to -80 on the chart, so some slight broadening out of advancing issues.

Now keep that in mind.

Let's jump to the big board and the NYSE's summation ratio.

NYSE Summation Index ($NYSI) - 20-point box

Zero (0.00) is what would envision as a "water line." That is, stuff that floats on water, floats above the water line, or zero.

OK?

VERY BROAD, each measuring over 3,000 stocks per exchange, so a continuous process of measuring the advance/decline line of over 6,000 stocks!

Question! What were the MAJOR US Equity % Gainers since last Monday?

Global Equity Benchmarks / Currencies

That's right!

The INDU and the NDX were the notable #1 and #2.

The OEX was #3.

The broader SPX #4.

And the much broad Russell 2000 ($RUT) is actually down 0.56% since last Monday.

Now look at your currencies!

The Dollar Index (DXY) was down 1.06%, as STRENGTH in the euro/$ and the pound/$ as well as strength in the yen against the $, or weakness in the $/yen unfolded.

What companies might tend to BENEFIT from a weak dollar?

How about the BIG companies that EXPORT products/services to countries that have a STRONGER currency against the dollar?

Now build out a bit and look at the US equity benchmarks against other FOREIGN equity benchmarks.

I wouldn't just "key" on the dollar, thinking "weak dollar BULLISH INDU/NDX/OEX/SPX," but as time progresses, and I compare US equity benchmarks, perhaps consider that "small companies" may not BENEFIT AS MUCH near-term with a WEAK dollar as larger companies, then add the observation that OVERSEAS markets haven't faired nearly as well as the BIG Cap indexes here in the U.S., I do get a feeling that the NARROW buying we're seeing, may well be part of the WEAK DOLLAR story.

In last Monday's wrap I mentioned that the narrow NASDAQ-100 Bullish % (BPNDX) from Dorsey/Wright had reversed up to "bear correction" status. On Thursday, this narrow bullish % did achieve "bull confirmed" status with a 76% measure (76 of the 100 point and figure charts) now have a point and figure "buy signal" associated with the chart.

On Friday, 3 additional stocks saw reversing higher point and figure buy signals (XMSR, PAYX and AMZN) unfold.

Today's action saw no net change, so still "bull confirmed" at 79% bullish.

Another observation that buyers are focused in the NARROW BIG cap names.
 

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: 31.02 chg: -0.38 stop: 28.99

AHG slipped back toward short-term technical support at its 10-dma and 100-dma. If the markets continue lower then AHG will likely fall toward the $30.00 level. More conservative traders may be tempted to raise their stop loss toward $30.00. 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.

Picked on July 08 at $31.12
Change since picked: - 0.10
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 700 thousand

---

China Netcom - CN - cls: 55.08 change: -1.03 stop: 53.89

The Chinese Shanghai index was down 2.3% on Monday and that weighed on shares of CN, which lost 1.8%. We would expect another dip toward support near $54.00. Wait for signs of a bounce before considering new bullish positions. Our first target is the $59.75-60.00 range. Our second target is the $62.00-62.50 zone. The Point & Figure chart is very bullish with a $ 73 target.

Picked on July 12 at $56.12
Change since picked: - 1.04
Earnings Date 08/20/07 (unconfirmed)
Average Daily Volume: 103 thousand

---

Columbia Sportswear - COLM - cls: 68.79 chg: -0.88 stop: 66.99

COLM has produced yet another failed rally under the $70.00 level. Odds are good the stock will see another dip toward technical support at its 50-dma near $67.50. We're not suggesting new positions at this time. 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: + 0.25
Earnings Date 07/26/07 (confirmed)
Average Daily Volume: 219 thousand

---

GulfMark - GMRK - cls: 54.85 change: -2.19 stop: 52.45

Ouch! GMRK just lost 3.8% and erased most of our potential gains. Oil and energy stocks in general were weak today even though crude oil futures remain near relative highs. We would wait and watch for a bounce in GMRK near the 10-dma or the $54.00 level before considering new positions. Our target is the $59.50-60.00 range. We don't want to hold over the late July earnings report.

Picked on July 09 at $54.55
Change since picked: + 0.30
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 284 thousand

---

Intl. Flavors - IFF - cls: 53.22 change: -0.71 stop: 51.45

Today's pull back in IFF toward $53.00 actually looks like a new entry point to go long the stock. However, we'd feel more comfortable waiting for signs of a bounce before jumping in. Our target is the $57.50-60.00 range. The P&F chart is bullish with an $83 target.

Picked on July 12 at $53.89
Change since picked: - 0.67
Earnings Date 08/07/07 (confirmed)
Average Daily Volume: 534 thousand

---

FreightCar America - RAIL - cls: 53.42 chg: +0.69 stop: 49.95

The railroad sector was the market's best performing group today. The Dow Jones railroad index rose 1.19% and broke through round-number resistance at the 500 level. Shares of RAIL continued to rally with a 1.3% gain. We don't see any changes from our weekend comments but more patient traders may want to wait for a dip back toward the $52.50-52.00 range, which should be support. Our target is the $57.00-58.00 range. More aggressive traders may wan to aim closer to $60.00. This is somewhat aggressive because we don't have a lot of time. We plan to exit ahead of the July 26th earnings report.

Picked on July 15 at $52.73
Change since picked: + 0.69
Earnings Date 07/26/07 (confirmed)
Average Daily Volume: 381 thousand

---

Bankrate - RATE - cls: 50.80 chg: -1.16 stop: 48.99

RATE turned in a bearish session. Shares hit $53.14 and reversed course in a bearish failed-rally pattern. Financials were weak today as investors worried (again) over subprime fears. Broken resistance near $50.00 should be support. Watch for a bounce near $50.00 as a potential entry point. We have a little less than three weeks before RATE reports earnings. Our short-term target is the $54.90-55.00 range. More aggressive traders may want to aim higher.

Picked on July 15 at $51.96
Change since picked: - 1.16
Earnings Date 08/02/07 (confirmed)
Average Daily Volume: 331 thousand

---

Royal Gold - RGLD - cls: 26.41 change: -0.20 stop: 23.99

We don't see any changes from our previous comments on RGLD. The stock traded sideways on Monday and remains above what should be short-term support at $26.00 and its 50-dma near $26.13. We're not suggesting new positions at the moment but keep an eye open for a bounce near the rising 10-dma. 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: + 0.66
Earnings Date 08/16/07 (unconfirmed)
Average Daily Volume: 462 thousand

---

Systemax Inc. - SYX - cls: 21.06 change: -0.43 stop: 19.99

More nimble traders may want to try and buy a bounce from current levels. We are now suggesting that readers wait for a new move over $22.00 before initiating positions. Our first target is the $24.90-25.00 range. Beware potential resistance at the $24.00 level. We do have an aggressive (wide) stop loss and more conservative traders may want to tighten their stops. We can't find any future earnings reporting date for SYX but the company has a history of reporting in August.

Picked on July 12 at $22.01
Change since picked: - 0.95
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume: 479 thousand

---

Verasun Energy - VSE - cls: 14.25 chg: -0.79 stop: 13.95

Ouch! VSE lost another 5.2% and on strong volume. There doesn't appear to be any new reason for the weakness other than a follow through from last Thursday's bearish reversal. Today's breakdown under $15.00 could be the "abandon ship" siren. We're going to stick it out since VSE should have additional support near $14.00 but we're not suggesting new positions at this time.

Picked on June 29 at $14.21
Change since picked: + 0.04
Earnings Date 08/07/07 (unconfirmed)
Average Daily Volume: 878 thousand
 

Short Play Updates

Empresa Natl. Elec. - EOC - cls: 46.05 chg: +0.10 stop: 50.05

EOC is still trying to produce an oversold bounce but isn't having much success. Watch for a failed rally in the $47.00-47.50 zone as a new entry point for shorts. Readers may want to consider tightening their stops. The $45.00 level and the rising 100-dma could be support. Our target is the $43.00-42.50 range. We do not want to hold over the late July earnings report.

Picked on July 08 at $47.50
Change since picked: - 1.45
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 141 thousand

---

Energy Sector SPDR - XLE - cls: 73.00 chg: -0.95 stop: 75.01

We do not see any changes from our weekend comments on the XLE. At this time we don't really expect oil and energy stocks to see any significant correction until early August. However, we're ready if it appears early. All bets are off if a hurricane shows up and heads toward the Gulf of Mexico. Right now we're suggesting a trigger to short the XLE at $69.75. We honestly don't expect to be triggered until early August so we'll make adjustments to our entry point and stop loss as necessary.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 19.1 million
 

Closed Long Plays

Noble Energy - NBL - cls: 64.11 chg: -1.38 stop: 63.90

Oil and energy stocks were some of the market's worst performers today. The OIX oil index lost 1.6%. Shares of NBL under performed with a 2.1% decline. Unfortunately, the intraday low was $63.85, which was enough to hit our stop loss at $63.90.

Picked on July 13 at $66.01
Change since picked: - 1.90
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume: 1.2 million
 

Closed Short Plays

None
 

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

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