Option Investor

Daily Newsletter, Monday, 01/14/2008

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Table of Contents

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

Market Wrap

Big Blue Get Things Green

Upbeat guidance from Dow Industrials heavyweight International Business Machines (NYSE:IBM) $102.93 +5.38% helped give stocks a much needed lift to start the week, but action in IBM suggests my call for a "modest recession" in 2008 is well underway.

The Dow Industrials (INDU) 12,778.15 +1.36% regained the bulk of Friday's losses after its most-heavily weight price component IBM warned that preliminary Q4 earnings from continuing operations looked to be $2.80/share, which would be up from the $2.26/share reported in the same quarter last year. Big blue said revenues look to be up 10% vs. the year-ago quarter to $28.9 billion, driven by growth in Asia and Europe.

Intl. Business Machines (IBM) - $2 and $1 Box

Having given two (2) consecutive sell signals at $102 and another at $99, today's trade at $102 in IBM does have its bearish vertical count column (Os from $110 to $98) giving us an early observation that market participants my see some longer-term downside risk to $82.

IBM's Bar Chart - Daily Intervals

Last week's email folder had many subscribers asking about "anchor points" for developing channels and the above point and figure chart might just have traders and investors seeing some distribution LOWER in IBM from the recent highs of $121.46 to a low of $99.27 on 11/09/07, then being followed by a relief rally up to $112.19 on 12/26/07 before the most recent distribution back lower.

I've utilized the Andrews Pitchfork (Modified Schiff) tool to now begin developing bearish channel.

It is notable that IBM would have seemed to have MARKET PARTICIPANTS almost "knowing" last week's lows of $97.04 would be found as the stock reversed course from what is only now seen as a 61.8% ($112.38) retracement of the recent range.


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As earnings season kicks off and companies report, or update their visibility on earnings, stocks like IBM become very important.

It's not only what they companies, but it is the MARKET'S reaction to the news that will grab our attention in the weeks and months ahead.

While stocks may sometimes NEVER achieve their bullish, or bearish vertical counts, sometimes they do. Sometimes they'll even EXCEED them.

Still, with some "good news" from IBM, its worth dragging down a retracement to $82.00 on the stock, just to see if market participants think the stock has that type of downside.

Intl. Business Machines (IBM) - Daily Intervals

I can't cover the 30 Dow Industrial components in an evening's market wrap, but that doesn't mean traders and investors can't utilize the techniques I've taught you over the years.

Suffice it to say a break to new lows on IBM would be viewed as BEARISH in my (Jeff Bailey) opinion.

I can almost envision some further gains in IBM up to its 200-day SMA ($108.29) and the upper-end of the Andrews Pitchfork. An aggressive BEAR could short such a trade with a tight stop above $113.92. A more conservative bear could wait for the test of $108.29, then SELL/PUT WEAKNESS back below $106.38.

For many fundamentalists, it certainly "doesn't make sense" that IBM is trading down at these levels with some "upbeat guidance."

With that in mind, it really "won't make sense" if the stock takes out the recent lows.

Bottom line ... when things "don't make sense," that's when we as traders and investors become alert to some type of change taking place.

Here is a sign of "change" for the Dow Diamonds (DIA) $127.51 +1.04% that I would want us to be alert to.

Dow Diamonds (DIA) - Daily Intervals

I would argue that there may not be any "one" particular stock in the very broad Russell 2000 Index ($RUT.X) that could have as much price impact on that index as IBM can have on the Dow Industrials (INDU) 12,778.15 +1.36%, or the Dow Diamonds (DIA) $127.51 +1.04%.

Early last week I was BULLISH the DIA, looking for an "oversold bounce" to $131.50.

But "something changed" and the DIA has started to spend too much time below an Andrews Pitchfork (modified schiff) channel.

In Thursday afternoon's Market Monitor at OptionInvestor.com I alerted traders that the DIA was testing its 11/27/07 trade of $129.00 and was "prairie dog'n." That is, the DIA was sticking its head above that important 11/27/07 intra-day observation (see my 12/03/07 Market Wrap).

As you can see, the DIA "didn't like what it saw" at the $129.00 level, let alone its 11/27/07 close of $129.32 and suggests a change may be taking place.

Dow Diamonds (DIA) - Daily Intervals

I've confessed before that I do not portend to know anything about "wave counts," but I do know how to look at a point and figure chart and identify relative highs and lows, and make adjustments when I observe a change taking place.

If I were to take an Andrews Pitchfork (modified schiff) from the anchor points now shown, a BEARISH, or downward channel becomes present.

As we near this month's (January) option expiration, I also show the major open interest (OI) levels for the DIA's calls and puts.

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Another Dow component that has gotten headlines in recent months had shares of Citigroup (NYSE:C) $29.06 +1.75% bouncing from yet another 52-week low found last week.

CNBC reported today that sources it deemed reliable will have the banking giant set to announce further writedowns that could be as high as $24 billion. There was also speculation later in the day that the company will reduce its dividend.

Citigroup (C) - Weekly Intervals

The news flows out of Citigroup (C) have been "negative" for months, and so far, the stock's price hasn't disappointed bears.

Since breaking to an initial 52-week low below the $45.00 level, C's losses accelerated.

With rumor and speculation of more bad news coming, a WEEKLY CLOSE above $32.33 would be shocking. Perhaps suggesting a "change" has taken place.

Several weeks ago an analyst thought the time to try nipping away at C from the bullish side was to wait for the company to cut their dividend.

Citigroup (C) reports earnings/losses tomorrow morning before the opening bell. Consensus is for a loss of $1.00/share on revenues of $10.64 billion.

Plenty of time to get bullish C, but would suggest that BEARS have locked in some type of gain at this point.

Closing U.S. Market Watch - 01/14/2008

Gold and silver as depicted by the StreetTracks Gold (GLD) $89.55 +1.09% and iShares Silver Trust (SLV) $162.80 +1.26% continued their surge to record levels with the U.S. Dollar Index (DXY) exhibiting weakness.

StreetTracks Gold (GLD) - Daily Intervals

In Thursday evening's Market Monitor at OptionInvestor.com, I scrambled to try and warn potential "gold shorts" what they needed to see as another "top" was about to be found.

The "break" back below mid-point of an Andrews Pitchfork (modified schiff) wasn't found, but with overhead supply nonexistent, new highs are!

Further near-term gain looks to be $92.50, and with the FOMC meeting and decision on rates slated for release on January 31st, gold is probably the toughest and most dangerous short on the list.

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
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New Long Plays

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New Short Plays

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Play Updates

Updates On Latest Picks

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Long Play Updates

Aon Corp. - AOC - cls: 44.98 change: -0.19 stop: 43.95

AOC's lack of a bounce today, especially with the DJIA up 171 points, is not a healthy sign. Fortunately, we're still on the sidelines. Aggressive traders might be tempted to buy today's intraday rebound but we're waiting for a breakout over resistance at $46.00. We're suggesting a trigger to buy the stock at $46.15, which is above technical resistance at its 10-dma and 100-dma near $46.00. If triggered our target is the $49.75-50.00 range.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume: 2.1 million


Blackstone - BX - close: 20.39 chg: +0.33 stop: 18.45

It is encouraging to see BX bounce from the $20.00 level. The stock found round-number, psychological support right where it was supposed to. More aggressive traders may want to use a stop under last week's low. This is an aggressive, higher-risk play. Look for a bounce if you're in the market for a new entry point. Our target is the $24.00-25.00 range. We do not want to hold over the February earnings report.

Picked on January 11 at $20.61
Change since picked: - 0.22
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 2.7 million


Fresh Del Monte - FDP - cls: 33.63 change: +0.35 stop: 31.75

FDP managed a 1% bounce today. Shares struggled with prior resistance at the $34.00 level. In the news FDP announced that its CFO, a veteran of 32 years at FDP, would retire soon. The stock did not see a reaction on the news. Our target is the $37.90-38.00 range.

Picked on January 09 at $32.82
Change since picked: + 0.81
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume: 779 thousand


Gilead Sciences - GILD - cls: 48.16 chg: -0.52 stop: 45.45

GILD stumbled out of the gate this morning but traders bought the dip near its rising 10-dma. The afternoon bounce back above the $48.00 mark looks like a new bullish entry point. More conservative traders may want to wait and see how the market reacts to DNA's earnings report tomorrow morning. DNA reported tonight and DNA's stock was all over the place. Our GILD target is the $53.00-55.00 range. We would be tempted to aim higher but we do not want to hold over the end of January earnings report. FYI: I will admit that GILD is facing resistance at the top of its long-term channel (see chart) but a breakout there could really see a strong follow through.

Picked on January 09 at $48.50
Change since picked: - 0.34
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 6.6 million


Parexel Intl. - PRXL - cls: 53.00 chg: -0.87 stop: 47.90

PRXL is finally starting to see some profit taking. We have been expecting a correction lower. We have adjusting our suggested entry point to buy the stock to the $50.25-49.50 zone. Our target is the $54.00-55.00 range. FYI: We don't have a lot of time. PRXL is due to report earnings on January 23rd and we do not want to hold over the report.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/23/08 (confirmed)
Average Daily Volume: 202 thousand


Steel Dynamics - STLD - cls: 55.69 chg: +2.50 stop: 49.99

Positive analyst comments about the steel sector helped fuel a rally in the group today. Shares of STLD rose 4.7%. The stock is now facing potential resistance at $56.00 but we're expecting it to continue rallying higher. Our target is the $57.50-60.00 range.

Picked on January 09 at $52.85
Change since picked: + 2.84
Earnings Date 01/28/08 (confirmed)
Average Daily Volume: 2.1 million


XTO Energy - XTO - close: 56.73 chg: +1.92 stop: 51.79

XTO rallies again! The stock added 3.5% and hit new all-time highs today. We heard some positive comments on XTO today as a way to play a rise in natural gas. Our target is the $59.00-60.00 range.

Picked on January 03 at $54.15 *triggered
Change since picked: + 2.58
Earnings Date 02/23/08 (unconfirmed)
Average Daily Volume: 4.1 million

Short Play Updates

Avery Dennison - AVY - close: 49.25 change: +0.75 stop: 50.85

AVY spent almost the whole session trading sideways until finally crossing the $49.00 level very late in the day. Look for a new failed rally near $50.00 as a potential entry point for shorts. There could be some support near $46.25 but we're setting our first target for $45.15-45.00. Our second, more aggressive target is the $42.50 mark. Unfortunately, AVY probably won't reach our second target before its end of January earnings report. The P&F chart is bearish with a triple-bottom breakdown sell signal and a $40 target. We're starting with a stop loss at $50.85. More conservative traders may want to consider a tighter stop loss like $50.05. FYI: The most recent short interest was listed at 3.2% of the 97.3 million-share float.

Picked on January 13 at $48.50
Change since picked: + 0.75
Earnings Date 01/29/08 (confirmed)
Average Daily Volume: 1.0 million


Clear Channel Comm. - CCU - cls: 34.69 chg: +0.22 stop: 35.31

We do not see any changes from our weekend comments on CCU so we're reposting them here:

If the market is worried about a recession then sales could be slowing for CCU. The stock has developed a bearish pattern of lower lows and lower highs as investors continue to sell the rally attempts. Lately CCU has found resistance at its 50-dma. We are suggesting shorts here under $35.00. Our short-term target is the $32.15-32.00 range. The November 19, 2007 low was $32.02. The P&F chart is bearish with a $28 target. FYI: The most recent short interest data was 3.2% of the 429 million-share float.

Picked on January 13 at $34.47
Change since picked: + 0.22
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 8.0 million


Corning Inc. - GLW - cls: 23.25 change: +0.66 stop: 23.75

GLW produced a pretty decent bounce with a 2.2% gain. The close over resistance at $23.00 is bullish but the rally stalled under its 50-dma. Volume was light on the rebound, which is not very bullish. Shares of GLW are now testing resistance at the top of its bearish channel (trend of lower highs). We would use a new decline under $23.00 or $22.90 as a entry point for shorts. Our target is the $21.25-21.00 range. We do not want to hold over the late January earnings report. FYI: The P&F chart is bearish with a $15.00 target. There was virtually zero short interest listed for GLW, which reduces the risk of a short squeeze.

Picked on January 04 at $22.91 *triggered/gap down entry
Change since picked: + 0.34
Earnings Date 01/28/08 (confirmed)
Average Daily Volume: 11.7 million


The Hershey Co. - HSY - cls: 37.37 chg: -0.09 stop: 39.25

HSY continues to drift lower. We don't see any changes from our weekend comments. We're going to aim for the $35.15-35.00 range because we don't have much time. HSY is due to report earnings at the end of January. We're suggesting a stop loss at $39.25 but more conservative traders might try to get away with a tighter stop above $38.25. FYI: The latest short interest data was about 3.8% of the 226 million-share float.

Picked on January 13 at $37.46
Change since picked: - 0.09
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume: 1.7 million


Pitney Bowes - PBI - cls: 36.42 chg: +0.48 stop: 38.05

PBI experienced an oversold bounce but it already looks like it is rolling over. A new decline from here or a failed rally under its 10-dma near $37.00 can be used as a new entry point for shorts. Our target is the $32.25-32.00 zone. FYI: The most recent data listed short interest at 2.2% of the 216 million-share float.

Picked on January 13 at $35.94
Change since picked: + 0.48
Earnings Date 02/07/08 (confirmed)
Average Daily Volume: 1.8 million


Zoll Medical - ZOLL - close: 25.37 chg: -0.26 stop: 27.01

ZOLL performed yet another failed rally near short-term resistance at $26.00 and its 10-dma. This looks like another entry point for shorts. We are basically playing ZOLL's sideways channel. We have two targets. Our first target is $24.10. Our second target is $22.25. FYI: The P&F chart is bearish with a $17 target. The most recent short interest is at 8% of the stock's small 20 million-share float. That does raise the risk of a short squeeze, especially if ZOLL trades over $27.00.

Picked on January 03 at $25.86
Change since picked: - 0.54
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 257 thousand

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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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