Option Investor

Daily Newsletter, Monday, 09/24/2007

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Table of Contents

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

Market Wrap

Airlines and Housing Offset Tech Gains

After an option expiration week that saw call sellers scrambling to cover positions into Friday's expiration, the major indexes started the week out mixed to lower with airlines and homebuilders offsetting gains in technology.

The AMEX Airlines Index (XAL.X) 43.00 -5.41% was today's sector loser with shares of AMR Corp. (NYSE:AMR) $20.77 -14.38% grounded after the parent of American Airlines warned late Friday that third-quarter revenue per mile flown by American Airlines passengers would rise 4 to 5 percent from a year earlier, which was less than most analysts were expecting.

Jamie Baker, an analyst with JP Morgan, said AMR's comments pointed to slightly lower revenue and higher non-fuel costs than he had expected for the quarter. Mr. Baker questioned the company's claim that bad weather added to summer costs, calling it "a somewhat flimsy excuse."

Other brokers also weighed in with Bear Stearns cutting their Q3 profit forecast for AMR to $0.71/share from $1.00/share. Morgan Stanley had been at the low end of consensus and raised their Q3 EPS estimate to $0.66/share from $0.54/share.

AMR's cautious Q3 outlook further dampened any bullish sentiment in the commercial passenger group with XAL.X heavyweights Skywest (NASDAQ:SKYW) $24.75 -1.55% (9.65% weighting), Frontier Airlines (NASDAQ:FRNT) $6.04 -0.33%, Airtran Holdings (NYSE:AAI) $9.92 -4.24%, UAL Corp. (NASDAQ:UAUA) $43.23 -6.04%, Southwest Airlines (NYSE:LUV) $14.99 -2.28% and Continental Airliners (NYSE:CAL) $30.46 -6.85% (7.89% weighting) trading lower.


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The housing sector remained weak ahead of tomorrow's housing data (see Saturday's Market Wrap). The Dow Jones U.S. Home Construction Index (DJUSHB) 362.75 -5.22% closed at a new multi-year low.

Economic data released today was largely regional.

The Chicago Fed Index was -0.57 in August, down from +0.03 in July. The three-month moving average decreased from -0.11 in July to -0.21 in August, where the negative value suggests that growth in national economic activity was below its historical trend. The Federal Reserve Bank of Chicago notes that a three-month moving average below -0.70 following a period of economic, would begin to suggest that there is an increasing likelihood that a recession has begun.

After tonight's closing bell, shares of home improvement giant Lowes Companies (NYSE:LOW) $30.55 -0.22% fell to $28.70 in electronic trade after the company said its full-year (2008) earnings will come in at the low end, or below its prior guidance of $1.97 to $2.01 a share, because current sales are trending below earlier expectations. Analysts were expecting the company to post a full-year profit of $1.99/share on revenue of $49.58 billion.

U.S. Market Watch - 09/24/07 Close

The NASDAQ-100 Index (NDX.X) 2,057.25 +0.37% does get a close at a new multi-year high, as does its tracker QQQQ $50.59 +0.45%.

NASDAQ-100 heavyweights Apple Computer (NASDAQ:AAPL) $148.28 +2.86% (10.41% weighting), Microsoft (NASDAQ:MSFT) $29.08 +1.50% (5.43% weighting), Qualcomm (NASDAQ:QCOM) $41.64% +1.98% (4.87% weighting) and Google (NASDAQ:GOOG) $568.02 +1.41% (4.66% weighting) traded higher, while 5th-most heavily weighted shares of networking giant Cisco Systems (NASDAQ:CSCO) $31.88 -1.30% (4.00% weighting) finished lower.

Wynn Resorts (NASDAQ:WYNN) $156.01 +8.67% and Garmin Ltd. (NASDAQ:GRMN) $115.03 +5.82% continued their torrid advances to lead a narrow list of NDX/QQQQ gainers (33 up Vs. 67 down), while telecom equipment maker Tellabs (NASDAQ:TLAB) $9.46 -4.05% and aforementioned UAL Corp. (UAUA) $43.24 -6.04% traded lower.

Banks traded mostly lower with the S&P Banks Index (BIX.X) 362.12 -1.60% and KBW Bank Index (BKX.X) 106.72 -1.62% stride-for-stride after Merrill Lynch downgraded Well Fargo (NYSE:WFC) $35.96 -0.77% to "neutral" from "buy" and KeyCorp (NYSE:KEY) $32.88 -2.43% and Regions Financial (NYSE:RF) $30.06 -1.47% to "sell" from "neutral," citing their recent stock performance and rising credit losses amid the housing downturn and credit crunch.

Exacerbating the weakness in the financials was a Reuters report that Germany's Deutsche Bank (NYSE:DB) $126.34 -2.27% may have to write-down a $40.96 billion loan portfolio by $2.4 billion. The investment banking giant declined to comment, but the write-down would amount to almost 6% of its total pipeline of leveraged loans promised to clients.

Global Equity Benchmarks and Currencies Table

With many global equity benchmarks showing gains since last Monday's Market Wrap, which encompasses Tuesday's FOMC decision on interest rates, I think traders and investors will now begin to focus on Wednesday's (11:10 AM EDT) commentary out of Europe and the ECB's President Jean-Claude Trichet when he addresses the ABP European Pension Summit, in the Netherlands.

On Saturday, Mr. Trichet will deliver a speech titled "Challenges to the International Monetary System: Rebalancing Currencies, Institutions and Rules" at the Salzburg Seminar, in Austria.

With the euro still showing strength against the US$ and the Japanese yen, it becomes apparent to me (Jeff Bailey) that the ECB may well have to lower rates.

I will note to traders and investors that Great Britain's Pound (GBP), or Great Britain is NOT directly impacted by the ECB (European Central Bank).

Japan's Nikkei-225 ($NIKK) showed what I would consider to be a very anemic "bounce" and with the BOJ hesitant to raise rates from 0.50%, the ECB may well have to follow the Fed's move and begin easing.

Over-the-Counter Bullish % (BPOTC) Reverses Up!

Market participants may have already begun to factor in some ECB rate cuts on the heels of last week's FOMC action as the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright and Associates reverses back up into a column of X and begins to confirm the reversal up in the VERY BROAD NYSE Bullish % (BPNYSE).

OTC Bullish % (BPOTC) - 2% box

At the close of Thursday's trade (09/20/07) the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright & Associates reversed back up into a column of X.

It is thought by market technicians (like myself) that a "healthier" market advance sees broader strength, and that's what I'm seeing as 41.73% of roughly more than 3,000 four and five-lettered stock symbols listed at the NASDAQ now show Point and Figure buy signals associated with their supply (O)/demand (X) charts.

StockCharts.com's NASDAQ Comp. Bullish % ($BPCOMPQ) also reversed back up into a column of X from 34% to 40% and finished at 43.55% as of tonight's close (+0.28% Monday).

NASDAQ Composite ($COMPQ) - 20-point box

The reversal UP in the $BPCOMPQ certainly gives internal "confirmation" to the double top "buy signal" from 09/04/07 at 2,640. I've highlighted in "PINK BOXES" the approximate REVERSAL UP points that would correspond to the $BPCOMPQ.

As of tonight's close (09/24/07) all major market bullish are signaling that DEMAND is back in control of U.S. Equity Markets.

The "last" to reverse up has been the ($BPCOMPQ).

One way I would use the above observation is to now have a more BULLISH bias as internal strength broadens out.

The first sign of MEANINGFUL weakness in the NASDAQ Composite chart above would be a trade at 2,520.

From current levels of trade (2,668), that would equate to a 5.54% decline.

I would NOT condone, nor suggest FULL BULLISH POSITIONS, but look to initiate NEW positions should we see a 2.5% pullback in either the NASDAQ Comp., or other major U.S. Index.

For the WEAKEST and also broad Russell 2000 Index ($RUT.X), I would now have to initiate a STOP LOSS should the RUT.X trade 824. If FULL POSITION SHORT, look to REDUCE short exposure to 50% on a decline to 784.

For iShare Russell 2000 (IWM) $80.39 -0.70%, this would be equivalent to a STOP at $82.40, and REDUCE short exposure to 50% on a decline to $78.40.

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays

New Long Plays

Zoltek - ZOLT - cls: 43.06 change: +2.00 stop: 39.95

Company Description:
Zoltek Companies, Inc. is an applied technology and advanced materials company with principal executive offices in St. Louis, Missouri. The Company is a leader in the commercialization of carbon fibers through its development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products. (source: company press release or website)

Why We Like It:
ZOLT's bullish trend of higher lows is starting to turned into what looks like a bullish breakout. The stock just cleared technical resistance at its 50-dma. We're suggesting bullish positions now in the $42-44 area. More conservative traders might want to wait for a rally past $44.00 since that might be short-term overhead resistance. Our target is the $$49.00-50.00 range. The P&F chart is bullish with a $51 target.

Picked on September 24 at $43.06
Change since picked: + 0.00
Earnings Date 12/23/07 (unconfirmed)
Average Daily Volume: 804 thousand

New Short Plays

Media General - MEG - cls: 26.83 change: -0.47 stop: 28.55

Company Description:
Media General is a multimedia company operating leading newspapers, television stations and online enterprises primarily in the Southeastern United States. (source: company press release or website)

Why We Like It:
MEG is in a very distinct long-term downtrend with a very clear pattern of lower highs and failed rallies. This trend has been pushing MEG towards support near $26.60, where buyers have been defending MEG for over a month. Should the stock breakdown we want to capture the sell-off. We're suggesting a trigger to short MEG at $26.45. If triggered our target is the $22.50-22.00 range. The Point & Figure chart is very bearish with a $10 target. We do not want to hold over the mid October earnings report. Due to the stock's trend the bears have been piling on top of this stock. Short interest is pretty high at more than 17% of the stock's 20.8 million share float. The combination of high short interest and a small float is a dangerous combination and raises the risk of a short squeeze. A stop loss will not always save us. More conservative traders may want to pass on this play.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/07 (confirmed)
Average Daily Volume: 390 thousand

Play Updates

Updates On Latest Picks

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Long Play Updates

Boyd Gaming - BYD - cls: 43.57 chg: -0.17 stop: 40.90

BYD experienced some profit taking midday but traders bought the dip near its 50-dma and the stock looks poised to challenge the $44 level again tomorrow. Our target is the $44.90-46.00 range.

Picked on September 04 at $41.55
Change since picked: + 2.02
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 1.0 million


Coach Inc. - COH - cls: 47.67 change: -0.61 stop: 45.75

Target (TGT) reduced its September sales out look and that undermined the entire retail sector. Shares of COH posted its third loss in a row and dipped toward what should be support near its 10, 100 and 200-dma. A bounce from here could be used as a new bullish entry point. Our target is the $51.85-52.00 range. More aggressive traders could aim for the April highs near $54.00. The P&F chart points to a $63 target. We do not want to hold over the late October earnings report.

Picked on September 19 at $48.70 *gap higher
Change since picked: - 1.03
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume: 5.0 million


Cisco Systems - CSCO - cls: 31.88 change: -0.42 stop: 30.90

There is no change from our weekend comments on CSCO. We're waiting for a breakout to a new relative high. We want to capture that breakout and we're suggesting a trigger to buy the stock at $32.65. If triggered our target is the $34.75-35.00 range.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume: 56 million


Global Ind. - GLBL - cls: 25.22 chg: -0.34 stop: 23.99 *new*

Oil and oil services stocks all suffered some profit taking today. We are somewhat concerned about the extended rally in crude oil. The commodity is due for a correction, which should weigh on the sector. While the intraday bounce in GLBL today looks like a new entry point we're going to inch up our stop loss to $23.99. Our target is the $28.00-29.00 range.

Picked on September 06 at $24.65
Change since picked: + 0.57
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume: 2.5 million


Gamestop - GME - close: 56.17 chg: +0.89 stop: 49.95

Another day, another gain for GME. The stock's momentum produced another 1.6% gain. The HALO3 hype comes to a head tonight at midnight and tomorrow. We'd like to see one last pop tomorrow as Microsoft expects to sell about $200 million worth of Xbox 360s and HALO3 games in the next 24 hours. GME should definitely benefit from the game launch. Readers should be warned that GME's stock could see a "sell the news" reaction so be ready to exit. The intraday high today was $56.83. Our target is the $57.00-60.00 range.

Picked on September 17 at $52.10
Change since picked: + 4.07
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume: 2.4 million


Liberty Global - LBTYA - cls: 42.20 change: -0.13 stop: 39.99

LBTYA bounced around its $42-43 trading range. We remain bullish on the stock although readers could look for a dip near $41.50 as an alternative entry point (or a rise over $43.00). Our short-term target is the $44.85-45.00 range. More aggressive traders may want to aim higher.

Picked on September 23 at $42.33
Change since picked: - 0.13
Earnings Date 08/08/07 (unconfirmed)
Average Daily Volume: 2.0 million


NET Services - NETC - cls: 15.33 change: +0.14 stop: 13.90

NETC gapped open higher this morning. Shares opened at $15.60 and hit $15.70 before pulling back. We couldn't find anything specific to account for the early morning strength. Our suggested trigger to open positions was at $15.60 so the play is now open. A rebound tomorrow could be used as a new entry point. Our target is the $17.75-18.00 range. The P&F chart is bullish with a $21 target. FYI: We can't find a third quarter earnings date yet but the company has a history of reporting in late October or early November. We don't want to hold over the earnings report.

Picked on September 24 at $15.60
Change since picked: - 0.27
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 610 thousand


Westwood One - WON - cls: 2.98 chg: +0.23 stop: 2.24

Hmm... we are encouraged by WON's relative strength today. The stock rose another 8.3% and did so on big volume. Unfortunately, we were expecting a dip after Friday's big gain so we listed an entry zone in the $2.60-2.50 region. The $3.00 level looks like short-term support so wait for a pull back before entering new positions. We'll stick with our $2.60-2.50 entry zone for now. If triggered we're going to target a rebound into the $3.25-3.50 range.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume: 1.5 million


Wyndham Worldwide - WYN - cls: 31.32 change: -0.78 stop: 29.90

WYN is still struggling. The stock produced another failed rally under its 50-dma. Shares are headed toward what should be short-term support in the $31.00-30.50 zone. We're not suggesting new bullish positions at this time but we will be watching for a rebound in the $31.00-30.50 region. Our target is the $33.90-35.70 range. FYI: The P&F chart is still bearish from the summer sell-off.

Picked on September 19 at $32.15
Change since picked: - 0.83
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume: 1.5 million

Short Play Updates

Commscope - CTV - cls: 51.87 change: -0.75 stop: 56.21

CTV lost 1.4% and broke down under short-term support at the $52.00 level. Today's decline has produced a new triple-bottom breakdown sell signal on the P&F chart with a $45 target. We were suggesting a trigger to short CTV At $51.75 so the play is now open. Our target is the $47.00-45.00 range but we'll be watching for potential support at the rising 200-dma.

Picked on September 24 at $51.75
Change since picked: + 0.12
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 1.2 million


Varian Medical - VAR - cls: 38.87 chg: -0.41 stop: 40.21

Today's decline in VAR would appear to confirm Friday's bearish engulfing candlestick pattern. We don't see any changes from our weekend comments. We're suggesting shorts at current levels. Our target is the $35.50-35.00 range. The P&F chart is bearish and points to a $31 target. We do not want to hold over the late October earnings report.

Picked on September 23 at $39.28
Change since picked: - 0.41
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume: 997 thousand

Closed Long Plays


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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