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Daily Newsletter, Monday, 02/25/2008

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Table of Contents

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

Market Wrap

Blip, Dip, Then Rip As Financials Finish Higher

It is getting tougher and tougher to describe some of the intra-day action and just when it looks like the major averages are going to break lower from a choppy 2-week range and provide an attractive bullish entry point, or cover some short/put positions on a climactic dip, buyers show up in force on news that pending deals may save some mortgage insurers from losing their "AAA" debt ratings.

Negative comments out of Oppenheimer regarding banking giant Citigroup (NYSE:C) $24.74 -1.51% took some wind out of Friday's late-afternoon rally early this morning.

Citigroup's shares darted lower at the open and provided a somber tone as stock futures gave back the bulk of their overnight (Sunday) gains at the cash open after Oppenheimer's Merideth Whitney said further write-downs tied to subprime mortgages, risky corporate debt and consumer loans could have the banker posting another quarterly loss, and possibly forcing the company to sell up to $100 billion in assets.

Citigroup (NYSE:C) - Daily Intervals

Ms. Whitney, who in October correctly predicted that Citigroup would cut its dividend and raise some $30 billion in capital, said the largest U.S. bank might lose $0.28/share, or roughly $1.4 billion in the first quarter. Ms. Whitney's revised estimates are well below Wall Street's current estimate for a profit of $0.62/share.

While somewhat encouraging to bulls that Citigroup isn't trading below its 1/22/08 inflection low, a close much below $24.41 would be viewed as further negative.

Dow Diamonds (DIA) - Daily Intervals

While Citigroup (C) is no longer a heavily weighted PRICE component (#27 of 30) in the Dow, the banking giant's price action tends to carry some weight as it relates to market psychology. As well it should.

The Dow Diamonds (DIA) $125.54 +1.40% posted a strong gain on breadth of 29:1. Late Thursday afternoon, the DIA was trading $121.56 (INDU 12,155) when sellers vanished on news that mortgage insurer Ambak (ABK) $12.41 +15.87% might keep its "AAA" rating.

For several days now, I've been looking for a DIA decline back near the 1/22/08 close on heavy volume approaching 43 million shares, and look for a BULLISH entry on a "sling shot" type of move back above my 19.1% conventional retracement of $120.87.

So far, buyers have been stubborn above the $120.87 level and sellers don't appear to be overly aggressive.

Stocks slid to their morning lows at 10:00 AM EST, but then turned back higher after the National Association of Realtors said January's existing home sales came in slightly above expectations.

The National Association of Realtors said sales of single-family homes and condominiums dropped by 0.4% in January to a seasonally adjusted annual rate of 4.89 million units, which was slightly above economists' forecast of 4.80 million units. Still, January's decline marked the sixth-straight monthly decline for existing home sales. The NAR added that the median price of a home sold in January slid to $201,000, a drop of 4.6% from a year ago. Alarming to some industry watchers was that the inventory of unsold homes jumped to a 10.3 month's supply, meaning that at the current pace of sales, it would take that long to sell the 4.19 million homes on the market.

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January's 10.3 month's supply was up from December's 9.7 months and just below a 20-year high of 10.5 months.

Buyers really stepped in later in the session when rating agency Fitch said was putting the credit ratings of various insurers on watch for further downgrades because of continued weakness in the U.S. mortgage markets. Fitch said MGIC Investments (MTG) $15.98 +7.97%, Radian Group (NYSE:RDN) $8.06 +5.63% and PMI Group (NYSE:PMI) $7.78 +4.85% were the firms they were monitoring closest.

Ambak (NYSE:ABK) $21.41 +15.87% and MBIA Inc. (NYSE:MBI) $14.58 +19.70% surged when their names were not on Fitch's list.

Moments after Fitch's comments, rating agency Standard & Poors took MBIA's "AAA" rating off its credit watch. While some industry watchers say ratings are subject to change any given day, it has been thought that ABK and MBI were likely candidates for downgrades.

Having held two (2) of the MBI April $7.50 Puts (MBI-QU) since 1/22/08 and 2/12/08 based on the thought that a downgrade on their debt was coming, I thought bears should move to the sidelines today.

There is potential for some powerful short covering in MBI should the stock break much above $16.20.

After the close, MBIA (MBI) did say that it was eliminating its quarterly dividend to save the company approximately $174 million in cash. Shares of MBI eased to $14.33 in extended session trade.

Closing U.S. Market Watch -

Both the AMEX Natural Gas Index (XNG.X) 609.65 +3.25% and CRB Index (CRY) 401.26 +0.64% closed at new multi-year highs today.

Oil prices held steady near the $100/barrels mark on reports that OPEC is expected to pump around 250,000 barrels a day less in February versus January as some members start to pull in output ahead of the end of winter in main consuming nations in the northern hemisphere.

Chevron (NYSE:CVX) $87.18 +2.06%, which was added to the Dow Industrials on 2/19/08 (replacing Altria (NYSE:MO)) closed above its 200-day SMA ($87.00) for the first time since falling below on 1/16/08 ($86.42). Exxon/Mobil (NYSE:XOM) $89.13 +2.24% and CVX are now the #2 and #3 weighted components in the Dow Industrials.

International Business Machines (NYSE:IBM) $110.08 +1.85%, the most heavily weighted Dow Component also closed above its 200-day SMA ($109.29)!

IBM - Daily Intervals

It isn't just "energy" that is giving the Dow Industrials a lift, and it may not be just energy stocks that are building gains from the January lows. "Big Blue" has retraced more than 50% of its October highs to January lows and depicts BULLISH leadership among the Dow 30.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

While "Big Blue" gets a technology trader's bullish attention, two of the QQQQ/NDX heavyweights has Apple Computer (NASDAQ:AAPL) $119.74 +0.23% and Google (NASDAQ:GOOG) $486.44 -4.20% still below their 1/23/08 intraday lows of $126.15 and $519 respectively.

The QQQQ may well be the most manageable bull trade and offer very good risk/reward for a small position, where a rather tight stop could be placed just under the $41.63 level.

With IBM (not a QQQQ component, but a bellwether for tech) showing some signs of favor, the QQQQ could launch with bounces that catch some momentum in AAPL and GOOG.

At tonight's close, Dorsey Wright & Associates' NASDAQ-100 Bullish % (BPNDX) is still in "bear confirmed" status at 25.00%, and would need a higher measure reading of 28% to achieve "bull alert" status. A measure of 30% would be needed for "bull confirmed."

If a trader/investor would normally consider $10,000.00 as a "full position" in the QQQQ, then under current conditions, I would think a 1/4 position, or $2,5000 appropriate (2,500 / $43.90 = 57 shares).
 


 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Acuity Brands - AYI - cls: 46.04 chg: -0.44 stop: 44.59

Uh-oh! AYI displayed relative weakness today, which is not a great sign for the up trend. Volume was above average on today's decline, which is another cautionary signal. More conservative traders may want to exit early now or tighten their stop toward this afternoon's low near $44.92. We are not suggesting new bullish positions. Our first target is the $49.50-50.00 zone. The $50 level will probably be round-number resistance compounded by the 200-dma still overhead. We would suggest exiting the majority of your position here. Our second, more aggressive target is the $54.00-55.00 range.

Picked on February 5 at $45.50 *triggered
Change since picked: + 0.54
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume: 857 thousand

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Cypress Semiconductor - CY - close: 22.71 chg: +0.29 stop: 21.75

CY managed a 1.2% bounce but the stock failed to breakout past its short-term trend of lower highs. We remain on the sidelines. We're suggesting a trigger to buy CY at $23.51. The Point & Figure chart is very bullish with a base of support along its rising trendline of support and a $33 upside target. If we are triggered at $23.51 our short-term target is the $27.00-27.50 range near its 200-dma. We'll have to watch out for potential resistance at its descending 50-dma.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 7.5 million

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FMC Corp. - FMC - close: 58.38 chg: +1.93 stop: 53.70

Almost anything related to agriculture and fertilizer was showing a lot of strength today. Shares of FMC posted a 3.4% gain and on above average volume, which is normally a good sign. We have two targets. Our short-term target is the $59.75-60.00 zone. Ours second, longer-term target is the $64.00-65.00 range. The Point & Figure chart is bullish with a triple-top breakout and a $66 target.

Picked on February 19 at $56.17 *triggered/gap open
Change since picked: + 2.21
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume: 718 thousand

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Forest Labs - FRX - close: 41.73 change: +0.65 stop: 39.65

Bullish reversal alert! Shares of FRX were actually downgraded by Goldman Sachs this morning but the news seems to have backfired. The GS analyst cut FRX to a "sell" and a $43 price target. Shares of FRX dipped to support near $40.00 and quickly vaulted back. The move today is a big bullish engulfing candlestick pattern and a breakout over its 200-dma. Aggressive traders may want to consider long positions now. We are sticking with our plan and waiting for a breakout over resistance near $42.00. We're suggesting a trigger at $42.15. If triggered at $42.15 our target is the $47.50-50.00 range. We do expect resistance at $45.00. This is not going to be a quick trade but a more intermediate, multi-week trade. We will try and limit our risk with a stop loss at $39.65. However, we always consider trading anything biotech related as higher-risk. One never knows when a headline will come out about some FDA decision, or important clinical trial that could send the stock gapping one direction or the other.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 3.0 million

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General Moly - GMO - close: 11.73 change: +0.08 stop: 9.49

Is it time for some profit taking in GMO? The stock rallied to $11.98 and then began to fade into the afternoon. Shares are short-term overbought following the four-day rally. If you're looking for a new entry point wait for a bounce near $11.00 or the 50-dma near $10.50. More conservative traders might want to do a little profit taking here and jump back in on a dip near 11.00-10.50. We have two targets. Our first target is the $12.40-12.50 zone near its December highs. Our second, more aggressive target is the $13.90-14.00 range. We are starting with an aggressive (wide) stop. FYI: GMO has relatively high short interest at 7.7% of the 33.7 million-share float, which is about 7 days worth of short interest.

Picked on February 20 at $10.55 *triggered
Change since picked: + 1.18
Earnings Date 03/31/08 (unconfirmed)
Average Daily Volume: 665 thousand

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Time Warner - TWX - close: 16.57 chg: +0.08 stop 15.45

TWX turned in a decent day. The stock under performed the broader market but the action was bullish. We would use today's bullish engulfing candlestick pattern (albeit a small one) as a new entry point to buy the stock. Our target is the $17.90-18.00 range. We're using a stop loss at $15.45. More conservative traders may want to place their stop closer to $16.00.

Picked on February 17 at $16.70
Change since picked: + 0.13
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume: 24.5 million
 

Short Play Updates

Brunswick - BC - close: 16.89 chg: +0.40 stop: 18.31

Market strength helped BC bounce back toward resistance near $17.00 and its 50-dma. Look for a failed rally here as a new entry point for shorts. More conservative traders might want to think about inching their stops down a little. Our target is the $15.05-14.55 zone near its January lows. The P&F chart is bearish with an $8.00 target. FYI: We are at risk for a short squeeze. The most recent data puts short interest at 11.2% of the 87.8 million-share float. That is about 7 days worth of short interest. The stock has already slipped a lot from last week's high, which is why we have a relatively wide (aggressive) stop loss.

Picked on February 19 at $16.75 *triggered
Change since picked: + 0.14
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 1.8 million

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Cintas Corp. - CTAS - close: 30.03 chg: +0.23 stop: 31.15

CTAS is also bouncing thanks to a positive market environment the last two days. Today's close over its 1-dma and the $30.00 mark is technically bullish. More conservative traders might want to consider a tighter stop in the $29.75-29.85 zone. We are leaving our stop loss at $31.15. Look for a failed rally near $31 as a potential entry point. Our short-term target is the $27.00-26.00 range. The P&F chart is bearish with a $24 target. FYI: The most recent data puts short interest at 1.7% of the 131 million-share float. That is a short ratio of 1.5 (about 1.5 days worth of average volume to cover).

Picked on February 15 at $29.75 *triggered
Change since picked: + 0.28
Earnings Date 03/20/08 (unconfirmed)
Average Daily Volume: 1.5 million

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Dean Foods - DF - close: 23.66 chg: -0.77 stop: 25.05

Once again we are surprised by the action in DF. Shares were poised to rally and we were at risk for a short squeeze. Instead the stock reversed course this morning and sank to new multi-year lows. DF posted a 3.1% loss by day's end. This looks like another potential entry point for shorts. Our target is the $20.25-20.00 range. FYI: The move under $24.00 has produced a new quadruple bottom breakdown sell signal. The P&F chart target is $18.00. Our biggest risk is a short squeeze. The most recent data puts short interest at 7.7% of the 127 million-share float or about 9 days worth of short interest, which is significant.

Picked on February 20 at $23.95 *triggered
Change since picked: - 0.29
Earnings Date 02/13/08 (confirmed)
Average Daily Volume: 1.6 million

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PACCAR - PCAR - close: 45.11 change: +1.61 stop: 44.05

We are still sitting on the sidelines with PCAR. The stock continues to bounce and could soon be challenging its short-term trend of lower highs. It has a while to go yet before it challenges the longer-term trend of lower highs. We're waiting for a breakdown under support near $42.00. We are suggesting a trigger to short PCAR at $41.95. If triggered our target is the $38.30-38.00 zone. The Point & Figure chart is bearish with a $26 target but it does show support near $38.00. FYI: On the daily chart the intraday low for January 23rd looks like $41.58 but that appears to be a bad tick. On the chart the 200-week moving average is nearing $38.20.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 3.5 million

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Starbucks - SBUX - close: 18.50 chg: +0.25 stop: 18.76

SBUX is trying to rebound but shares still look mired in a very entrenched bearish trend. Aggressive traders might want to consider shorts on a failed rally in the $18.85-19.00 zone. We are waiting for a new relative low. We're suggesting readers short SBUX with a trigger to open positions at $17.49. If triggered our target is the $15.05-15.00 zone. More aggressive traders could aim lower since the P&F chart already points to a $3.00 target. FYI: The most recent data puts short interest at 3.4% of the 703 million-share float, which is about 2 days worth of short interest.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume: 16.5 million

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SanDisk - SNDK - close: 26.31 change: +0.66 stop: 26.15

SNDK spiked higher this morning but the rally stalled as investors paused to digest the company's comments from its analyst day today. A move over $28.00 might signal an end to this bearish trend (or at least a decent bottom) and we could be tempted to review the stock as a bullish candidate. However, until then the trend is very bearish. We are waiting for a new relative low. We are suggesting that readers short SNDK under $24.00 with a trigger at $23.99. The January 23rd low was $24.29. If we are triggered at $23.99 our target is the $20.15-20.00 zone. The $20.00 level has been significant support in the past.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 8.9 million

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United Parcel Ser. - UPS - cls: 72.48 chg: +0.59 stop: 74.05

UPS is actually displaying a lot of conflicting signals in its technical picture. There is a mix of bullish and bearish signals as the stock consolidates under resistance. If the market breaks out higher we would expect UPS to follow - whether it makes sense or not. We are not suggesting new bearish positions at this time. Our target is the $66.00-65.00 zone.

Picked on February 10 at $70.58
Change since picked: + 1.90
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 5.4 million

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Xerox Corp. - XRX - cls: 15.04 chg: +0.17 stop: 15.66 *new*

XRX continues to oscillate sideways inside a bearish trend of lower highs and lower lows. Another failed rally under its 50-dma ($15.20) could be used as another entry point for shorts. Our short-term target is the $13.55 mark. XRX's Point & Figure chart is bearish with a $10.50 target. The most recent data listed short interest at just 0.6% of the float. FYI: XRX is due to present at the Goldman Sachs conference on Thursday.

Picked on February 07 at $14.95 *triggered
Change since picked: + 0.09
Earnings Date 01/24/08 (confirmed)
Average Daily Volume: 5.9 million
 

Closed Long Plays

None
 

Closed Short Plays

Terra Nitrogen - TNH - cls: 139.72 chg: +11.89 stop: 135.05

Shares of TNH hit our stop loss at $135.05. After the first hour of trading shares of TNH suddenly exploded higher and broke through multiple levels of short-term resistance. The entire agriculture-fertilizer sector was on fire today. TNH had been under performing its peers the last few weeks but now it looks like it's playing catch up. It has been our plan to short TNH toward rising support at its 200-dma and then go long. Given today's move readers will want to strongly consider buying the stock above the $140.00 to $142.00 levels and aim for the $160-165 zone. We are going to wait and see what happens tomorrow. If TNH dips and starts to bounce tomorrow we will consider adding it as a new bullish candidate!

Picked on February 07 at $129.40 *stopped out 135.05
Change since picked: +10.32
Earnings Date 02/070/08 (confirmed)
Average Daily Volume = 455 thousand
 

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

DISCLAIMER

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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