Option Investor

Daily Newsletter, Wednesday, 12/26/2007

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Table of Contents

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

Market Wrap

Anticipating Santa

Stocks continued their recent rally, which began in earnest Thursday, as traders and investors across the globe await a visit from Santa.

Unconfirmed reports from the far northeastern reaches of Russia in Provideniya, Russia had Yupik children finding mittens and parkas under this year's tree.

Global Equity Benchmarks, Currencies, Oil and Gold -

Santa's visit has been most eagerly anticipated in Shanghia, London and among the small caps of the Russell 2000 (RUT.X) 794.39 +1.11% since last Monday's close.

If anything, the strong gains among the weaker small caps suggest short-covering into the holiday trade.

The NASDAQ-100 (NDX.X) 2,128.62 +0.79% "Claused" its way back to its pre-FOMC close of 12/10/07.

Heavyweight Apple Computer (NASDAQ:AAPL) $198.80 +2.52% gained $4.89 to close at another all-time high. The stock opened at $195.03 to start the session, but accelerated above $196.00 on rumor that a small hedge fund based in the mountains just north of Whoville was covering its short position.

Hey! Even the Grinch realized that Christmas was more than just gifts and presents. After he returned all the presents and trimmings back to Whoville, the Whos warmly welcomed him back.

U.S. Market Watch -

In a half-day session, buyers prevailed from the opening bell.

In Monday's market wrap I noted how "oversold" many of the internal indicators were. At today's close, many of these measures are right back at levels found on 12/10/07 and after this strong 3-day rebound, I've been suggesting that bulls lock in some gains where they have them.

Having turned bullish on Tuesday of last week in the OptionInvestor.com market monitor for the QQQQ just below the $50.00 level, these gains should be protected.

I (Jeff Bailey) was not "certain" that Oracle (NASDAQ:ORCL) $22.76 +0.22% and Research in Motion (NASDAQ:RIMM) $117.98 -0.54% would experience such bullish responses to last week's earnings, but thought index traders should stick with the strongest.

That bet only pays off when gains are locked in and realized.

NYSE and NASDAQ Comp. Internals - 10/29/07 - 12/24/07

As mentioned earlier, market internals at both the big board and NASDAQ are much improved.

For a second-straight session, advancers easily outnumbered decliners by nearly 3:1 at the NYSE, while NASDAQ reported a narrower 4:3 margin.

One "reason" I suggest bulls lock in some gains from this tremendous bounce is that the NYSE 5-day advance/decline ratio (column M) is right back at ratios found on 12/3 and 12/10.

When I look at today's NYSE new highs of 100, that's not as bullish as I would think a BULL wants to see compared to Friday's 100 new highs.

Point here would be that we're probably seeing the SAME 1, 2 and 3-lettered names making the new high list, but not really seeing others join in despite today's +0.87% price gain for the NYSE Composite ($NYA.X) 9,873.48.

Something I would continue to monitor.

However, you can begin to see how "oversold" the NYSE 5-day A/D ration was on Monday (12/17/07) at 29%, and what type of rebound we've seen in this internal measure.

Charted on a point and figure scale of 2%, it would take a 5-day A/D ratio measure of 54% to see a 3-box reversal lower (60% on chart - 6% = 54%), and it would take a still higher measure of 65% to see a "buy signal" (above the inflection high from 12/3/07). It would currently take a 28% measure to generate another "sell signal", where 38% would be just below the 12/17/07 inflection low of 29% (charted to 30% on a 2% box chart).

Here, we could assess NYSE A/D 5-day ratio as a BULL RISKING a 61% measure down to 54% near-term (3-box reversal) and then further to 28%. At what seemed to be an important 62% on 12/3/07 and 61% on 12/10/07, then bulls should be disciplined here.

The NASDAQ a little stronger near-term. This isn't overly surprising considering the longer-term. Again, I continue to monitor should we see a "shift" as was witnessed earlier this year with the Russell 2000 ($RUT.X).

At today's close, we see the NASDAQ A/D 5-day ratio (column T) reaching 60%, and that's enough to generate a "buy signal" above the 12/10/07 inflection high of 56%. Not unlike the NYSE's a/d ratio, it would take a 3-box reversal lower measure of 54% to signal some weakness near-term, and a decline to 30% to generate a "sell signal," which would be below its 12/17/07 inflection low of 32%.

NYSE and NASDAQ NH/NL Measures - 10/29/07 to 12/24/07

Not only have we observed some a/d ratio's reverse up from "oversold" levels, but both the shorter-term 5-day NH/NL ratios at the NYSE and NASDAQ have also reversed up at today's close.

On 12/20/07, the NYSE's 5-day NH/NL ratio (column AE) fell to 10.3% (as close as 10.3% is to 10.00%, it isn't 10.00%, so we chart to 12%). See how close this ratio was to its 11/21/07 inflection low measure of 7.1%? For this shorter-term ratio to generate a "buy signal," we would need to see a ratio of 52% (above the 12/11/07 inflection high). To see a "sell signal," we would now need to observe a 5-day NH/NL ratio of 10.00%, which would be just under the recent 12/20/07 inflection low. Even though this shorter-term ratio has reversed back up, I keep its color "red" as it hasn't shown the bullish MOMENTUM to quite get it above its more intermediate-term 10-day NH/NL ratio (column AF) of 22.0%, which is still edging lower at 22.0%.

Here's a chart of the NYSE NH/NL ratio, where it helps the trader and investor better understand the quantitative data from the table.

Note where the NYSE Daily Ratio (column AD) is at (45.5%). If we are to see the NYSE 5-day NH/NL ratio get a "buy signal" at 52%, what does the daily ratio have to do at a MINIMUM?

NYSE NH/NL Ratio Chart - 2% box scale

The above NYSE NH/NL ratio chart looks quite similar to the NASDAQ's NH/NL ratio chart, and I would have to analyze this important internal indicator of bullish leadership and bearish leadership depicting an "oversold bounce," at this point.

To become more than that, I would need to observe a 5-day NH/NL ratio at 52%.

One "message" I feel that BOTH the NYSE and NASDAQ Comp. internals suggest is that the RECENT LOWS are now VERY IMPORTANT levels of support.

Here's a quick look at the NASDAQ Composite's NH/NL ratio chart.

NASDAQ Comp. NH/NL Ratio Chart - 2% box

One reason I felt QQQQ bulls should look to take some profits today is from the above chart.

Again, we've seen a VERY BULLISH 5% bounce since Wednesday and with the NASDAQ's daily NH/NL ratio (see NH/NL column AH) now at 47.6%, a large part of an "oversold" bounce may have been largely had.

With some profits booked, I think bulls would look for another bull entry on a pullback, near QQQQ $51.00, and look for the Santa Claus rally (last 5days of year and first 2 in January).

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

I usually do NOT put great weight into market action into a holiday as the bulk of market participants are NOT around to trade, or cast their votes.

However, this is a GREAT time to try and get a "read" on next year as the Santa Claus Rally, or LACK of gains can be telling for INVESTORS as the New Year is just around the corner.

With the QQQQ up an impressive 21.68% over the last 52-weeks, I would have to say, based on observation, that it has been a FAVORITE among bulls.

Last year, the QQQQ closed at $42.93 with 5 days left in the year (2006) and finished the 2nd session in January at $44.06, perhaps hinting of a bullish year.

The S&P 500 (SPX.X), and index I and many consider to be a very good representation of the U.S. stock market closed at 1,418.30 with 5 days left in the year (2006) and finished the 2nd session of January at 1,418.34, perhaps hinting of a very modest year of gains.

I hope everyone as a Merry Christmas and Happy Holiday! I will not be writing a market wrap next Monday, but hope to see all of you on January 7th!

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays

New Long Plays

Fiserv - FISV - close: 55.71 change: +0.66 stop: 53.99

Company Description:
Fiserv, Inc., a Fortune 500 company, provides information management systems and services to the financial and insurance industries. Leading services include transaction processing, outsourcing, business process outsourcing (BPO), software and systems solutions. The company serves more than 18,000 clients worldwide and is the leading provider of core processing solutions for U.S. banks, credit unions and thrifts. (source: company press release or website)

Why We Like It:
I hesitate to add a new play to the newsletter this week. Volume is going to be very light all week long and our bias isn't very bullish for January at this time. However, we can't deny that FISV is on the verge of a significant bullish breakout. The stock has been consolidating under resistance near $56.00 for about three months now. If shares can breakout it could be a quick rally toward resistance near $60.00. We're suggesting a trigger to buy the stock at $56.11. If triggered our short-term target is the $59.75-60.00 range. FYI: If FISV can trade over $56 it would produce a new triple-top breakout buy signal on the P&F chart.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 1.5 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks

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Long Play Updates

Advent Software - ADVS - close: 55.61 change: +1.06 stop: 49.99

ADVS has continued to rally following last Friday's bullish breakout. The stock hit an intraday high of $56.57 before paring its gains. Our target is the $57.50 level. More aggressive traders may want to aim for the $60 region. The late day bounce from the $55 region is a good sign. More conservative traders will want to use a tighter stop loss.

Picked on December 21 at $53.83 *gap open entry
Change since picked: + 1.78
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 245 thousand


Ingles Markets - IMKTA - close: 26.63 chg: +0.36 stop: 23.95

IMKTA continues to rally following the recent breakout from its bearish channel. Shares are nearing potential resistance at its 100-dma. Should the stock see any profit taking it should find support near $25.00. We're suggesting long positions now although more conservative traders could wait for a dip back toward $25.00. Our target is the $27.75-28.00 range. More aggressive traders could aim higher. FYI: Normally we do not play stocks with an average daily volume of less than 250,000 shares so we're tempted to label this play as aggressive.

Picked on December 23 at $25.66
Change since picked: + 0.97
Earnings Date 12/03/07 (confirmed)
Average Daily Volume: 81 thousand


Coca-Cola - KO - close: 63.01 change: -0.20 stop: 61.75 *new*

We are urging caution on KO. The upward momentum in this Dow-component is faltering. Given the stock's lackluster performance this week we would hesitate to open new positions. Please note we're adjusting our stop loss to $61.75. More conservative traders may want to up their stop loss to breakeven (61.95). Our target is the $66.00-67.00 range. The bullish P&F chart suggests a $69 target.

Picked on November 15 at $61.95
Change since picked: + 1.06
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 8.3 million


Sonoco Products - SON - cls: 33.44 chg: -0.20 stop: 31.75

SON has spent the last couple of sessions digesting its recent gains. Traders bought the dip near $33 this morning and the intraday bounce looks like a new bullish entry point to buy the stock. There is potential resistance at the exponential 200-dma near $34.50 and then again near $35.00. We're setting our first target at $34.85-35.00. Our second, more aggressive target is the 200-dma (currently near $36.75).

Picked on December 20 at $33.36
Change since picked: + 0.08
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume: 587 thousand


XTO Energy - XTO - close: 52.74 chg: -0.67 stop: 51.79

We are a little surprised that XTO didn't show more strength today following a sharp rise in crude oil prices. Instead XTO actually produced a bearish engulfing candlestick (reversal) pattern. The intraday high was $53.95. We have been suggesting that readers wait for a breakout over $54.00. Our suggested entry point for bullish positions is at $54.15. If XTO can breakout over $54.00 it would produce a new buy signal on the Point & Figure chart. Speaking of the P&F chart XTO has a habit of producing a sell signal and then reversing higher. The P&F chart currently sports a sell signal and it looks poised to reverse higher again. If triggered our target is the $59.00-60.00 range.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/23/08 (unconfirmed)
Average Daily Volume: 4.1 million

Short Play Updates

Bob Evans Farms - BOBE - cls: 27.13 chg: -0.10 stop: 30.11

Unfortunately, we don't see a lot of changes from our weekend comments on BOBE. The stock is still trying to produce an oversold bounce and it looks like the bounce is already beginning to fade a bit. We're aiming for the $25.25-25.00 zone. FYI: The most recent data puts short interest at 11.6% of the 32.74 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze.

Picked on December 16 at $29.01
Change since picked: - 1.88
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 467 thousand


Granite Constr. - GVA - close: 37.55 change: -0.83 stop: 40.26*new*

We remain bearish on GVA. The stock's attempt at an oversold bounce seems to be failing near $38.35. We are adjusting our stop loss to $40.26. Broken support near $40.00 should be another level of resistance. Our target is the $34-33 range near its lows for the year. FYI: The most recent date puts short interest at 7.8% of the 34.4 million-share float.

Picked on December 16 at $38.73
Change since picked: - 1.18
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 1.1 million


IAC Interactive - IACI - cls: 27.56 chg: -0.15 stop: 28.81

The last couple of sessions may have provided another entry point with a failed rally under $28.00. More conservative traders may want to tighten their stops closer to the $28.00 level. Conservative tradres may also want to wait for a breakdown under support near $26 and target the $22.50 zone. We have two targets. Our first target is the $25.50-25.00 range. The H&S pattern, if it follows through, is forecasting a target in the $22 region. Our second, more aggressive target will be the $22.50 level. The P&F chart is still bullish for now but is on the verge of a breakdown. FYI: The latest data puts short interest at about 4% of the 120 million-share float.

Picked on December 11 at $27.60
Change since picked: - 0.04
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume: 2.8 million


Medicis Pharma - MRX - close: 26.38 change: -0.07 stop: 28.05

Shares of MRX have also seen their bounce loose steam. The stock is trading with a consistent pattern of lower highs. A new decline under $26.00 would look like a new entry point. MRX has technical resistance at its 50-dma near $27.00. More conservative traders may want to tighten their stops closer to $27. Our target is the $23.00-22.50 zone. The P&F chart is bearish with a $19 target. FYI: Any time we play a biotech stock we're dealing with a high-risk situation. MRX seems to be more of a drug company but we're still at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other. Furthermore the most recent data puts short interest at more than 23% of MRX's 49.2 million-share float. That is a high-degree of short interest and raises the risk for a short squeeze.

Picked on November 18 at $26.08
Change since picked: + 0.30
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million


Tempur-Pedic Intl. - TPX - cls: 27.97 chg: +0.39 stop: 30.15

The downtrend in TPX is still very much intact but short-term this sideways consolidation is almost starting to look like a potential bottom. A solid close over $28 and its 10-dma could spark some short covering. TPX should find resistance again near $30 and its 200-dma. Wait for a failed rally under $30.00 as a potential entry point for new shorts. TPX has already exceeded our first target in the $27.25-27.00 range. Our second target is the $25.25-25.00 range. FYI: It's important to note that the most recent data puts short interest at almost 19% of the 68-million share float. That is a high degree of short interest and raises the risk of a short squeeze.

Picked on December 12 at $30.67
Change since picked: - 2.70
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 1.9 million

Closed Long Plays

Evergreen Solar - ESLR - cls: 18.84 chg: +2.29 stop: 14.85

Target exceeded. Momentum traders must be in heaven with the big moves some of these solar stocks are making. ESLR rallied from a test of its 10-dma on Monday. The rally continued today with a 13.8% gain on big volume almost three times the norm. Today's move also marks a bullish breakout over significant resistance in the $17.50-18.00 zone and coincidentally a new all-time high for ESLR. Our target was $17.45.

Picked on December 18 at $15.70
Change since picked: + 3.14
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 5.7 million


PC Mall - MALL - close: 10.05 change: -0.42 stop: 9.90

MALL under performed the market this week and shares dipped back under support at the $10.00 level. The intraday low was $9.89, which was just enough to stop us out at $9.90. MALL had already hit our initial target at $12.25. Our second, more aggressive target was the $13.75-14.00 region.

Picked on December 04 at $10.25 *triggered
Change since picked: - 0.20
Earnings Date 02/04/08 (unconfirmed)
Average Daily Volume: 356 thousand

Closed Short Plays

Mack-Cali Realty - CLI - cls: 34.96 chg: -0.44 stop: 34.26

CLI rallied sharply on Monday, December 24th and broke out over resistance at the $34.00 level. The stock hit our stop loss at $34.26 ending the play. We're not fully convinced this is a bottom on CLI and readers may want to keep an eye on it for a reversal back under $34.00. Our target was the $30.25-30.00 range. CLI almost hit our target with the December 18th low at $30.42.

Picked on December 16 at $32.74
Change since picked: + 2.22
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 751 thousand


Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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