Option Investor

Daily Newsletter, Monday, 06/23/2008

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Table of Contents

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

Market Wrap

Energy Shares Jump After Jeddah Meeting

U.S. stocks traded mixed-to-lower on Monday, mirroring their overseas counterparts, with energy shares clearly benefiting from this weekend's news out of Saudi Arabia and Nigeria.

While both the NYSE and NASDAQ's 5-day NH/NL ratio's suggest some "stability" trying to form, their 10-day NH/NL ratio's continue to fall to respective cycle lows of 23.1% and 21.5% and would make it difficult to assess any sign of more aggressive buying of strength (new highs) and weakness (new lows).

The Oil Service Holdrs (OIH) $224.21 4.82%, CBOE Oil Index (OIX.X) 963.03 3.09% and AMEX Natural Gas Index (XNG.X) 761.11 4.01% found buyers after this weekend's meeting of oil producing and consuming nations in the Saudi city of Jeddah.

Saudi Arabia said it would add an addition 200,000 barrels per day of production in July to the 300,000 barrel per day production increase it first announced in May, raising the kingdom's total daily output to 9.7 million barrels per day.

While Saudi Arabia's modest increase in production was seen as an attempt to appease the United States and other consuming nations that argue oil production has not kept up with increasing demand, especially from China, India and the Middle East, Saudi Arabia and other OPEC countries maintained their stance that there is no shortage of oil and instead blamed financial speculation and the falling U.S. dollar for higher oil prices.

Helping bolster today's gains in the energy complex was concerns about Nigerian production as terrorist attacks on several of the nations production facilities, combined with reports of a strike against Chevron (NYSE:CVX) $99.06 2.52% had Nymex Crude Oil futures (cl08q) settling higher by $1.38, or 1.02% at $1.38.

Industry analysts say a Nigerian-worker strike against Chevron is likely to lead to 350,000 barrels-per-day of shut in production.

Continued tensions between Israel and Tehran also kept traders uneasy in regards to supply concerns after the European Union states agreed to impose new sanctions on Iran, including an asset freeze on its biggest bank, over its refusal to meet demands to curb its nuclear program.

Oil futures at the Nymex did finish off their best levels of the session ($138.14) after a panel of energy experts said oil prices could fall to half their current levels if Congress puts strict limits on financial investment in energy commodity futures, saying a drop in price of retail gasoline, currently over $4 on average in the U.S., would drop proportionately.

Nymex August Unleaded (rb08q) responded with a 1.89-cent gain, up 0.55% to settle at $3.4656.

August Nat. Gas futures (ng08q) jumped $0.209, or 1.59% to settle at $13.322 as traders braced for a heat wave in the lower-half of the U.S.

August Heating Oil futures (ho08q) settled up $0.0239, or 0.63% at 3.8266.

Late this afternoon the U.S. Energy Department said that it was looking to use $3 million in appropriated funds to purchase heating oil for the Northeast Home Heating Oil Reserve. The DOE said offers are due no later than July 1, and the fuel oil is expected to be delivered during the week of July 7.

In 2007, a 35,000-barrel sale was conducted to raise money to award new long-term storage contracts to fill the reserve to its authorized capacity of 2 million barrels of home heating oil.

Major Global Markets, Currencies, Oil and Gold - Mon-Mon Closes

Asian markets were lower on Monday with Japan's Nikke-225 ($NIKK) sliding 84 points, or -0.61% despite weakness in the yen, which can have their manufactured products or services. Financials and real estate developers paced declines early, but a late spat of buying had the Nikke-225 finishing nearly 200-points off its intra-day low of 13,668.

The yen was weaker against the dollar with the Yen CurrencyShares (FXY) sliding 0.55% to 92.53.

In Hong Kong, the Hang Seng ($HSI) finished fractionally lower as gains in energy shares helped offset weakness non-ferrous metals. Aluminum Corp. China (NYSE:ACH) $31.04 -2.54% closed at its lowest level in over a year after it warned that its first-half net profit would slide by at least 50%.

Mainland China's Shanghai Stock Exchange ($SSEC) continued lower and has now given up nearly all of its gains from 2007, falling 2.52% to 2,760 on Monday as investors remained hesitant that reforms announced late last week may have been too late in coming to bolster a turnaround anytime soon.


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In Europe, the major bourses posted modest gains.

Energy stocks helped lift London's FTSE-100 ($FTSE) to a 46-point, or 0.83% gain to 5,667. The pound was weaker against the dollar with the British Pound CurrencyShares (FXB) 197.09 -0.58% down just more than one (1) point, but closing well off their intra-day lows of 196.45.

Economic news out of Germany had the German Info Business Climate Index sliding to 101.3, which was weaker than economists' forecast of 102.5.

Still, the DAX managed to eek out a gain of 11 points, or 0.17% to close at 6,589, while France's CAC-40 ($CAC) was relatively unchanged, rising 2 points, or 0.05% to 4,511.

The euro was weak as economists said they thought there was no room for rate hikes with the German Info Business Climate Index falling to its lowest level since Jan'06. The Euro CurrecyShares (FXE) $155.60 -0.63% fell just less than one (1) point, with buyers holding their ground above 155.00.

U.S. Market Watch - 06/23/08 Close

The Financial SPDRs (XLF) $21.48 -3.15% closed at a new multi-year low and were among today's most actively traded ETF's.

Buyers continued their boycott after a Goldman Sachs' strategists admitted it was wrong when they upgraded the U.S. financial and consumer sector seven (7) weeks ago. Moving back to an "underweight" rating, Goldman's David Kostin said, "We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalization and fiscal stimulus." Mr. Kostin added that he thought "our thesis was clearly wrong in hindsight."

Shares of Citigroup (NYSE:C) $18.55 -3.88% remained weak and were today's most actively traded name at the bid board (88.3 million shares) on reports that it is about half-way through cutting 10% of the 65,000 employees in its investment banking unit.

Meanwhile, Bank of America (NYSE:BAC) $25.88 -4.50% fell to another multi-year low.

Merrill Lynch (NYSE:MER) $34.54 -3.92% also closed at a multi-year low after a Banc of America Securities analyst projected a wider loss for the securities firm.

UAL Corp. (NASDAQ:UAUA) $6.08 -15.08% paced today's weakness in the AMEX Airline Index (XAL.X) 16.79 -7.03%. The stock did edge fractionally higher to $6.17 in this evening's extended session after the nation's second-largest carrier by traffic confirmed plans to lay off 950, or 17% of its 5,600 pilots.

Earlier this month, United said it would cut its 460-aircraft mainline fleet by another 70 jetliners by the end of the year as it deals with surging fuel prices.

Economic data released today was regional with the Chicago Fed's National Activity Index improving to a still contracting -0.96 reading in May compared with a -1.23 reading in April. All four (4) of the broad categories of data: production and income; employment, unemployment, and hours worked; personal consumption and housing; and sales, orders and inventories all had negative contributions to May's reading.

Merger and acquisition news had shares of Allied Waste (NYSE:AW) $13.29 -1.99% falling $0.27 per share after the company confirmed it has agreed to be acquired by Republic Services (NYSE:RSG) $30.98 -0.67% in an all-stock deal valued at $6.07 billion, or $14.04/share based on Republic's Friday closing stock price of $31.19.

On June 14, both companies said they were in merger talks with the deal then valuing Allied at about $15.23 per share, or $6.59 billion.

Additional M&A news has two of America's oldest agricultural companies looking to sweeten their agribusiness synergies in a deal valued at $4.4 billion.

Bunge Limited (NYSE:BG) $110.86 -9.26% said it was buying Corn Products Intl. (NYSE:CPO) $50.53 17.78% for roughly $42.90 a share. The deal calls for the exchange of one share of Corn Products for $56 in Bunge stock.

Industry watchers say the deal is a sign that surging global demand for food is driving big agriculture to look for increased economies of scale and that record grain prices will give Bunge, a dominant playing in South America, a stronger position in North America as it supplies some of the largest U.S. food and beverage companies such as Coca-Cola (NYSE:KO) $53.26 -0.74% and Kellogg (NYSE: K) $50.85 -0.29%.

By revenue, Bunge (BG) is the number three (3) player in global agribusiness. Cargill and Archer Daniels Midland (NYSE:ADM) $33.50 2.54%

Tonight I'm going to have us look at the major U.S. equity indices starting with the narrowest (30 stocks) Dow Industrials ($INDU), then the narrower NASDAQ-100 ($NDX), S&P 100 Index ($OEX), then broader S&P 500 Index ($SPX).

For those "new" to point and figure charts, all we're doing here is observing, monitoring the laws of supply (O) and demand (X) on a continual (not daily) basis, just as Charles Dow did as he hand charted his vast holdings of various securities.

Dow Industrials ($INDU) - 50-point box chart

On Wednesday, 06/18/08 the Dow Industrials ($INDU) and its tracker the Dow Diamonds (DIA) $118.33 0.07% on the day closed below a level (INDU= 12,075 : DIA= $120.75) that I thought would hold buyers.

Since generating a reversing lower double bottom "sell signal" at 12,750 on May 9th, the Dow Industrials ($INDU) has generated five (5) additional sell signals (12,700; 12,400; 12,300; 12,150 and 12,050) and it would currently take a reversing higher trade at 12,350 to get this widely quoted index back on a "buy signal."

While the INDU's bearish vertical count to 11,750 may be a bearish trader's near-term target, I'd have to view 11,750 as somewhat tentative support.

Near-term resistance is back at 12,100 and more formidable resistance just below 12,350.

At tonight's close, Dorsey/Wright and Associates' Dow Industrials Bullish % (BPDJIA) remains in "bull correction" status at 33.33% for a seventh-straight session. That is, of the 30 Dow components, ten (10) of the components still show a PnF "buy signal" still intact on their charts, while twenty (20) show a PnF "sell signal" intact. Current measures are still at a trough low having reached a more "overbought" 70% no May 7th and 8th.

StockCharts.com's Dow Industrial Bullish % symbol is $BPINDU, which is also at 33.33%.

Dow Components (Sorted by Price) -

Unlike the other major indices covered, the INDU/DIA is a PRICE weighted index. There's been little for bulls to write home about the last three (3) weeks.

To the right of each company's name, I quickly looked at the 30 components and marked those in green "BS" as charts that still had a "buy signal" intact, and in red "SS" as those with a "sell signal" intact.

NASDAQ-100 Index ($NDX) - 20-point box

The higher beta names that comprise the narrow NASDAQ-100 Index ($NDX) have started to exhibit some technical weakness after giving a reversing lower PnF "sell signal" at 1,960 on June 9th. This is a progression in my opinion that suggests bulls are stepping up their profit taking from this spring's lows.

Having reached 60% bullish on May 19th, Dorsey/Wright and Associates' NASDAQ-100 Bullish % (BPNDX) has fallen further to 43% bullish and remain in "bull correction status.

StockCharts.com's NASDAQ-100 Bullish % is ($BPNDX).

Near-term support would be viewed just above 1,900, with 1,900 as more intermediate-term support, while 1,860 and the current bullish support trend (blue ) would be deemed longer-term support.

Near-term resistance is just below 2,000, while resistance looks formidable below 2,060.

I would be assessing downside to 1,860 as the other major market indices have failed to hold their bullish support trends.

S&P 100 Index ($OEX) - 5-point box

One of the more bearish observations I could have made late last week was the OEX closing below the 610 level on Wednesday, where there was some heavy put open interest at that level. Thursday's close, if not Friday's close below the 610 put open interest would have to be viewed as a signal from option traders, and especially institutional PUT SELLERS that they were not overly interested in taking possession of many OEX components that make up this market-cap weighted index.

While there was no change in Dorsey/Wright's S&P 100 Bullish % (BPOEX) today, this market remains in "bear confirmed" status at 35% (from 05/22/08) having reached an 60% high on 05/16/08.

StockChart.com's S&P 100 Bullish % is ($BPOEX).

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

In May, when I changed my economic call from "modest recession in 2008" to "modest economic growth for 2008" I was really looking for the SPX to find much firmer support on a pullback test of 1,350.

At tonight's close, the SPX's bar chart may be at a very critical level of support, but only if I were to "drag lower" my 0% retracement from the 01/23/08 low I have been using, to the 03/17/08 "Bear Stearns Failure" low.

S&P 500 Index ($SPX.X) - Daily Intervals

The only "support," or "explanation" I can find for the SPX.X to hold near 1,318 would be a 19.1% conventional retracement from the 10/11/08 all-time high and the eventual "Bear Stearns Failure" low from 03/17/08.

When I first began showing the major indices with conventional retracement, I wanted to stick with the first set of lows from 01/23/08.

With the SPX below its June MONTHLY S2 of 1,337.42 and still above its April-June QUARTERLY S1 of 1,229.40, the PINK dashed conventional 19.1% is the only technical explanation I can find to support some type of buying.

According to Dorsey/Wright and Associates, their broader S&P 500 Bullish % (BPSPX) remains "bear confirmed" at 36.87%.

StockCharts.com's S&P 500 Bullish % symbol is ($BPSPX).

After the Bell

United Parcel Service (NYSE:UPS) $66.26 -0.16% saw its shares fall to $63.91 late this evening after air/ground shipper cut its Q2 forecast. Blaming an "unprecedented increase" in fuel costs for lower-than-expected U.S. package volume and describing the U.S. economy as "anemic," UPS said it now expects Q2 earnings to be between $0.83 and $0.88 per share, down from the $0.97 to $1.04 a share predicted in April.

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
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New Long Plays

None today.

New Short Plays

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Play Updates

Updates On Latest Picks

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Long Play Updates

BPZ Resources - BZP - close: 26.33 change: +0.80 stop: 24.45

Oil and energy stocks rallied thanks to strength in crude oil futures. BZP bounced from the $25 region. We don't see any changes from our weekend comments, which suggested buying the dip. BZP has already exceeded our first target at $27.50. Our secondary target is the $29.90 mark. The Point & Figure chart is bullish with a $40 target.

Picked on June 12 at $25.53 / 1st target hit $27.50
Change since picked: + 0.80
Earnings Date 08/02/08 (unconfirmed)
Average Daily Volume: 883 thousand


Citigroup - C - close: 18.55 change: -0.75 stop: 17.74

Our new bullish, buy the dip near support play in Citigroup is now open. The stock slipped to $18.44 intraday and closed with a 3.89% loss. Our suggested entry point was to buy the dip in the $18.50-18.00 zone. Citigroup made headlines today after announce layoffs for 10% of its investment banking staff. Now that the play is open our target is the $19.90 with a secondary, more aggressive target at $21.35. More conservative traders may want to wait for signs of a bounce first before initiating long positions.

Picked on June 23 at $18.50 *triggered
Change since picked: + 0.05
Earnings Date 07/18/08 (confirmed)
Average Daily Volume: 83 million


Crown Castle Intl. - CCI - close: 40.75 chg: -0.65 stop: 39.95

CCI continues to see profit taking and dipped to its simple 50-dma today before bouncing. The afternoon bounce was pretty weak today so readers may want to wait for a move back over $41.00 or $41.50 before considering new bullish positions. The bull flag pattern is forecasting a $50 target. Coincidentally the Point & Figure chart is forecasting a $49 target. Our first target is $44.95, since the $45.00 level might be round-number resistance. Our second target is $47.25. We're putting our first stop at $39.95 but more conservative traders may want to consider a tighter stop loss.

Picked on June 18 at $42.02
Change since picked: - 1.27
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 1.5 million


Cognizant Tech. - CTSH - close: 35.12 change: +0.15 stop 33.90

There is no change from our weekend comments on CTSH. The stock, like most of the market, spent Monday churning sideways. We are not suggesting new positions at this time. If you look at the weekly chart and see how CTSH has now produced a failed rally under the trendline of resistance we would seriously consider an early exit right here! If we don't see a bounce soon we're going to be looking for an early exit. Our target is the $38.00 mark. The P&F chart is much more bullish with a $49 target. We do not want to hold over the late July earnings report.

Picked on June 12 at $34.57
Change since picked: + 0.65
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 4.8 million


DIAMONDS - DIA - close: 118.33 chg: +0.09 stop: 116.99

There is no change from our weekend comments on DIA. We are still waiting for a dip. Here is a copy of our comments:

We suspect that the Dow Jones Industrial Average (DJIA) will bounce near its March lows. It will probably be a temporary bear-market rally but we want to try and capture a chunk of any rebound. We're suggesting readers buy the DIA in the $117.75-117.45 zone with a stop loss at $116.99. If triggered our target is the $121.50-122.00 zone.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 13.1 million


SPDRs - SPY - close: 131.45 chg: -0.13 stop: 129.19

There is no change from our weekend comments on SPY. We are still waiting for a dip. Here is a copy of our comments:

This trade in the SPY is the same strategy as the DIA it's just focused on the S&P 500. We're looking for a dip toward the $130 level early this week at which point the S&P should see an oversold bounce. Our suggested entry point is the $130.50-130.00 zone. We'll use a stop loss at $129.19. More conservative traders may want to use a tighter stop closer to $130.00. If triggered our target is the $134.00-134.50 zone.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 200 million


Steel Dynamics - STLD - close: 39.95 change: +1.05 stop: 36.49

Hmm... STLD displayed more relative strength than we expected. Friday's session looked pretty ugly but traders bought the dip at the 10-dma today. Volume was relatively low but then again it is summer and we're in front of a fed meeting. A rally over today's high (40.43) might be a new entry point for bullish positions but consider using a tighter stop loss! Another dip from here and it would look like a very short-term bearish head-and-shoulders pattern with a $36.70 target. Our target is the $44.00-45.00 range. We do not want to hold over the July earnings report. The P&F chart is bullish with a $50 target.

Picked on June 17 at $40.17 *triggered/gap open entry
Change since picked: - 0.22
Earnings Date 07/21/08 (confirmed)
Average Daily Volume: 4.6 million

Short Play Updates

Allstate - ALL - close: 47.56 change: -0.33 stop: 50.51

Insurance stocks continued to fall but ALL fared better than its peers in the IUX insurance index (-2.5%). It's probably time to start looking for an oversold bounce soon. Look for resistance in the $49.50-50.00 zone. Wait for a new failed rally before considering shorts again. Our target is the $45.25-45.00 zone.

Picked on June 11 at $49.31
Change since picked: - 1.75
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 3.9 million


Darden Rest. - DRI - close: 30.65 change: -0.99 stop: 32.65 *new*

Tomorrow is our last day for this play on DRI. The company reports earnings after the closing bell on Tuesday, June 24th. We do not want to hold over the announcement. Our target remains $30.10 but if DRI does not hit our target we will close the play at Tuesday's closing bell. Our new stop loss is $32.65.

Picked on June 13 at $32.50 *triggered
Change since picked: - 1.85
Earnings Date 06/24/08 (confirmed)
Average Daily Volume: 2.0 million


Paychex Inc. - PAYX - close: 32.00 change: -0.39 stop: 33.91

PAYX continues to sink. Readers should consider exiting in the $31.35-31.00 zone. The company is due to report earnings on June 26th. That is this Thursday. With only a few days left we're not suggesting new positions. Our target is the $31.00-30.00 zone. FYI: The most recent data listed short interest at 5% of the 320 million-share float. That's several days worth of short interest.

Picked on May 22 at $34.87
Change since picked: - 2.87
Earnings Date 06/26/08 (confirmed)
Average Daily Volume: 2.4 million


PowerShares QQQ - QQQQ - close: 47.05 change: -0.37 stop: 49.26

The Qs broke down under the exponential 200-dma but failed to break short-term support near $47.00. If there was going to be a short-term bounce this is the place to look for it. We're not suggesting new positions at this time. If the DJIA rebounds from its March lows it could inspire a sharp bounce in the NDX too. Our target is $46.10. The $46.00 level and its 100-dma might be support.

Picked on June 17 at $48.54
Change since picked: - 1.49
Earnings Date 00/00/00
Average Daily Volume: 133 million

Closed Long Plays

Adaptec - ADPT - close: 3.21 change: -0.08 stop: 3.19

Once again the bounce has failed and yet again ADPT is testing short-term support at $3.20. Unfortunately, the intraday low was $3.19. The play has been stopped out.

Picked on May 28 at $ 3.25
Change since picked: - 0.04
Earnings Date 05/08/08 (confirmed)
Average Daily Volume: 559 thousand


SLM Corp. - SLM - close: 22.07 change: -0.77 stop: 21.75

Investors continue to crush the financials. The BKX banking index lost 2.9%, the BIX index lost 3% and the XBD index lost 2.3%. Shares of SLM under performed all of them with a 3.3% decline and that's after it pared its losses. The intraday low was $21.24 where it bounced from the 50-dma. Our stop loss was $21.75.

Picked on June 16 at $24.25 *stopped out 21.75
Change since picked: - 2.18
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume: 9.1 million

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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