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Daily Newsletter, Wednesday, 06/25/2008

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Table of Contents

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

Market Wrap

On the Inside

Do you know what Murphys Law is? Basically it is expecting one thing and getting the opposite. Last week I noted that it seemed as though the market always declines on the days I write the Market Wrap. Its a good thing I didnt trade that coincidence because the while the S&P 500, Russell 2000 and NASDAQ all moved up decent the Dow Jones Industrials barely scraped out 5 points. It was a busy news day so I will get right to the content of what I think made the markets move up today and what we might see tomorrow.

The internal review of the New York Stock Exchange begins with todays volume (1698 million) advancing above the 50 day average volume (1598 million shares). The increase in the volume over yesterday and above the 50 day average along with the increase in the NYSE (Symbol: $NYA) marks today as an accumulation day. Advancing Issues (2199) outpaced the Declining Issues (977) at a 2:1 ratio. The $TRIN or Arms Index at 0.99 was non-indicative of any direction. As for the NASDAQ internals, the Composite advanced 32.98 or 1.39% while my preferred NASDAQ Index, the NASDAQ 100 (NDX) moved up 30.12 or 1.58%. Strangely, there werent that many more Advancing Issues (1851) than Declining Issues (1051). The ratio isnt even 2:1. As for the Volume readings today posted 2133 million shares on the Composite which is barely above the 50 day moving average at 2078 million. Todays volume came in less than yesterdays and right in line with the average. Therefore it isnt enough to classify today as an accumulation day.

Market Movers

The 5 minute chart of the S&P Futures

The quick recap of today is that the market (S&P 500) started up and remained up until the last hour. The ES gapped up 4 points and ran to a peak of 1337.75 or up 22 at 3:00 PM and then proceeded to give most of the gains back by the close. If you hadnt heard the Federal Reserve met yesterday and today to discuss the current and future outlook of the Economy. As you probably know the Fed is concerned with inflation and has very little arsenal to curb the current causes. Those causes are namely energy and food related. The announcement had little downside affect and actually helped spur the advancement to the highs. This amount of volatility is normal on Fed days.

The Fed said overall economic activity continues to expand, partially due to "firming" in household spending. However, the Fed noted that labor markets have softened and financial markets remain under stress. The Fed expects economic growth will face the burdens of tight credit conditions, housing contraction and the rise in energy prices.


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The statement says that uncertainty over the inflation outlook remains high, although it expects inflation to "moderate later this year and next year." The FOMC feels that downside economic risks have somewhat diminished, while inflation risks have increased.

The Fed is likely to keep rates steady for quite a while, as economic growth will remain moderate at best for at least a few more meetings. Credit market conditions are also likely to remain fragile. These factors will inhibit any rate hikes. Addressing any increase in inflation will not come immediately, particularly as the Fed expects inflation to moderate next year.

Dallas Fed President Fisher was the only dissenting vote and preferring a rate increase of 25 basis points. Fisher dissented against previous rate cuts, citing inflation concerns. The Fed believes that they will eventually need to raise the Fed Funds rate from 2% in order to reduce the upside risks of inflation. Their conundrum comes from a tough jobs market and remaining risks in the financial sectors. The difficult part is that rates need to increase to help the fledgling dollar which would also help with the costs of commodities.

Other notable news came from Boeing (Symbol: BA) being added to the Conviction Sell list at Goldman Sachs. The sell rating is being attributed to a weakening economy and record fuel prices. BA closed down 5.39 or 7.21% at $69.64.

Other notable news is out on MasterCard (Symbol: MA) citing that they will be paying American Express (AXP) $1.8 billion after settling an antitrust suit claiming that MA had illegally blocked AXP from the U.S. bank-issued card business. MasterCard announced it has reached an agreement to settle its outstanding litigation with AXP. The form of the agreement calls for 12 quarterly payments by MA, beginning in the third quarter of 2008, of $150 million, contingent upon the performance of AXP's U.S. Global Network Services business. On a tax-affected net present value basis, the settlement payments are estimated to be, in the aggregate, approximately $1 billion. MA will take a charge for the settlement in the current quarter. The maximum nominal amount of the settlement is $1.8 billion. The stock closed up $7.72 at $289.79.

Monsanto (Symbol: MON) reported its earning pre open with Reports of 3rd Quarter earnings of $1.45 per share, $0.11 better than the First Call consensus of $1.34. The revenues rose 26.2% year/year to $3.59 billion versus the $3.71 billion consensus. MON raised its guidance for FY08 and estimates EPS of $3.40 vs. $3.39 consensus; which is up from $3.15-3.25. Monsanto now expects that its free cash flow for fiscal year 2008 will be $550 million. The co expects net cash provided by operating activities to be in the range of $2.6 billion. MON closed down $3.50 at $131.52 after hitting an intra day low of $126.31. The interesting thing about the dip today is that the stock opened at $131.75 or about the close. The stock also went down on volume three times the average and touched the 50 day exponential and simple moving averages. Obviously the upside momentum is faltering in the agricultural space. If the agricultural and energy stocks begin to turn over what sectors will benefit from the rotation?

In other headlines, Best Buy announced today that it is increasing its dividend 8% to $0.14 per share. Also, Countrywide stockholders approve transaction with Bank of America; merger is expected to close on July 1, 2008.

After the close Oracle (Symbol: ORCL) reported 4th quarter earnings of $0.47 per share, excluding non-recurring items. That is $0.03 better than the First Call consensus of $0.44. Revenues rose 23.8% year/year to $7.28 billion versus the $6.85 billion consensus. "Non-GAAP operating margins were up 200 basis points in FY08 to a record 43.0%. Non-GAAP earnings per share were up 29% for the year and non-GAAP EPS has tripled over the last five years. Oracle has delivered solid results year-after-year." "Oracle's application new software license revenues grew 38% in FY08, while SAP's new software license revenues grew only 13% in their most recent fiscal year. This is the third consecutive year we've taken applications market share from SAP." "Four years ago we publicly announced a five year plan to deliver non-GAAP earnings per share at a compound annual growth rate of 20%. During the past four years we exceeded our plan and delivered a non-GAAP EPS CAGR of over 26%." ORCL is down in after hours trading.

Research in Motion (Symbol: RIMM) 1st Quarter earnings of $0.84 per share were $0.01 worse than the First Call consensus of $0.85. Also revenues rose 19.1% year/year to $2.24 billion versus the $2.27 billion consensus. RIMM issued mixed guidance for the 2nd Quarter with EPS estimates of $0.84-0.89 versus $0.90 consensus and Revenues of $2.55-2.65 billion versus $2.44 billion consensus. RIMM Q1 (May) net Blackberry subscriber additions 2.3 mln vs. guidance of 2.20 mln. The revenue breakdown for the quarter was approximately 82% for devices, 13% for service, 3% for software and 2% for other revenue. "We are pleased to report another record quarter with revenue increasing 107% as the popularity of the BlackBerry platform continued to spread in business, government and consumer segments. Our comprehensive technology and business strategies continue to reap strong results in the market and RIMM is well positioned to build on its momentum throughout the remainder of fiscal 2009... As we prepare this summer to ship our 40 millionth BlackBerry smartphone, we continue to steadily scale our business and partnerships to support the opportunities ahead in this thriving sector." RIMM is down $9.50 in after hours trading at $131.

NYMEX Crude

Crude oil dipped down significantly after the weekly inventory reports surprised the market with an increase of 880,000 barrels versus an expected shortfall of 1.2 million barrels. At one point oil was down over five points and touched the 21 day EMA (green line). I may be wrong, but oil looks like it is running out of gas. Thats funny, right? A break of 131 will put the commodity down to 126 or the 50 day moving average. After that the June low of 121 will come into play. I have my fingers crossed.

The S&P 500

The above chart is the Daily chart of the S&P 500 as shown with various moving averages. I use a combination of simple and exponential moving averages to provide a more diversified perspective of multiple technical views. Some people use the simple moving averages and some use the exponential. If there is support or resistance at roughly the same price then there are that many more traders buying or selling, respectively, at those levels. Yesterday the SPX dropped to a low of 1304 before running up. While the market was actually positive yesterday it failed to close up on the day. Today was similar in that it closed down substantially from its lows. The Slow Stochastic oscillator has re emerged from below 20 as well as crossing above its own 3 bar moving average. This is actually a good long signal. Couple the Stochastic buy signal with the bottoming attempt over the last two days and the rest of the week should provide a nice bounce up to the resistance provided at the downtrend line depicted on the graph. If we had a stellar day tomorrow, that level would be as high as 1360. However, the market needs to clear a path above todays high before it attempts any move that aggressive.

Also re emerging the RSI closed today at 35.31, which is slightly above the oversold level of 30. The Fibonacci level (76.4%) at 1300 was the last level of support or else the market pattern would have continued downward. The sell off isnt over until the market can close above the 21 day moving average (green line). Actually, the decline below the 61.8% Fibonacci level is usually very bearish and may cause a lot of technical damage to the over chart pattern. It will take a remarkable event to help the market make it past the resistance of the downtrend line and the 21 day EMA. As the chart shows the markets price has ridden down the lower Bollinger band while the upper Bollinger band has declined very little.

The NASDAQ 100 (NDX)

The grey line on the chart above represents the 89 day simple moving average. While the market didnt actually touch it the relatively close proximity of the price to the line followed by a quick bounce provides some confirmation of support. The NDX was up over 40 points at its high today. As mentioned earlier it closed strong up 30 points. Also note that the Slow Stochastic has re emerged above the oversold 20 level and has also closed above the red line. The red line is the 3 bar moving average of the Stochastic and is helpful in providing confirmation. Over the long term, traders are most successful when patiently waiting for a confirmation of a change in direction. Traders lose money when trying to catch the bottom or top. Consistently getting the juicy middle is better that the ego of buying the absolute bottom and riding it up. Most likely the greed and the ego will cause one to hold the position too long and give up some or all of the profits.

The Bollinger band view of the NDX isnt as convincing that the market may have bottomed yesterday. In fact, a break below yesterdays low would put the 1849 gap into play. I am in the camp that believes that all significant gaps are filled, eventually. However, the RSI is convincing that me that some positive divergence is occurring. For instance, the low of the RSI was higher than the low of the RSI in early June. The market is indicating a down open as I write this. But things change fast overnight and overseas. The NDX ran up to the 21 day EMA and found resistance. This is going to be the first heavy level of resistance should the NDX begin to strengthen.

Open Interest

The Yellow highlighted levels indicate the peak levels above and below the current price that should provide resistance and support, respectively. The light blue level is the peak put open interest at the 1950 strike. Interestingly, the high today on the NDX touched the upper resistance level as indicated by the 1950 Call strike. The Calls have 6118 contracts open and 9916 contracts open at the 1950 strike level. Peaks in high put open interest on the option strikes close to the underlying indexs price represent bullish contrarian signals. The puts peak open interest, 7441 open contracts, is about 100 points lower at 1825.

There is support at 1300 as identified by the peak open interest off 91,531 contracts. There is quite a bit of open interest at 1325 but the $SPX closed just below there at 1321.97. There isnt much resistance until 1350 as indicated by the 82,265 call contracts open. However, the peak open interest is all the way at 1400. The Put/Call ratio is at 1.86 which indicates that there are almost 2 puts for every one call. The SPX is normally traded by institutions because of the leverage and size of the contracts. That means that the high call skew associated with retail investors is not a consideration of the Index Put/Call ratio contrarian signals.

The Economy and Earnings Tomorrow

The market will be looking at Lennar (LEN) for clues to how bad the new home market really is. Christopher & Banks (CBK) and Finish Line (FINL) are consumer discretionary stocks and may provide insight into the consumers shopping tendencies. Palm and Micron (MU) may provide decent news of the stealth expansion in technology related sectors.

Existing home sales along with the LEN news should provide additional transparency on one of the many sectors that are giving the economy trouble. Fridays PCE Core Inflation and Income and Spending reports are probably the most market moving news. Good trading.
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
SDD None
SID  
TBSI  

New Long Plays

UltraShort SmallCap - SDD - cls: 71.21 change: -1.54 stop: 68.25

Company Description:
The SDD is the UltraShort SmallCap ProShares exchange traded fund that moves to twice the inverse of the daily performance in the S&P SmallCap 600 index.

Why We Like It:
If small caps go down then the SDD goes up. The SDD broke through resistance in just the last couple of days. Today's dip back to $70 looks like a new entry point to get long this ETF. We're suggesting a stop loss at $68.25. More conservative traders could try a stop closer to $69.50 or $70.00 instead. We have two targets. We would exit most of the position at $74.90. Our secondary, more aggressive target is at $79.50.

Picked on June 25 at $71.21
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 63 thousand

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Companhia Siderurgica Nac. - SID - cls: 43.87 chg: +1.88 stop: 40.99

Company Description:
Companhia Siderurgica Nacional (CSN) is a steel producer in Brazil.

Why We Like It:
SID is still up significantly for the quarter so the stock could see some window dressing in the next three days. Furthermore the simple 100-dma has been support in the past and SID has been bouncing near its 100-dma for the past three sessions. Today's relative strength was fueled by better than normal volume. More aggressive traders may want to buy it here. We think there could be a dip tomorrow so we're suggesting readers buy SID in the $42.75-42.00 zone. Our first target is $45.95. Our secondary target is the $49.50-50.00 zone.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/04/08 (unconfirmed)
Average Daily Volume: 3.3 million

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TBS Intl. - TBSI - close: 38.09 change: +1.59 stop: 34.99

Company Description:
TBS International Limited is an ocean transport and shipping company with liner, parcel, bulk or vessel chartering available.

Why We Like It:
The shipping stocks are starting to bounce again. TBSI has found support at its trendline of higher lows (see chart). We are suggesting bullish positions now. However, if you are the patient type, then consider waiting for a dip back to the $37.00-36.50 region before initiating positions. We have two targets. Our first target is $42.50. Our second target is $44.90.

Picked on June 25 at $38.09
Change since picked: + 0.00
Earnings Date 04/04/08 (unconfirmed)
Average Daily Volume: 1.0 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Citigroup - C - close: 18.85 change: +0.00 stop: 17.95

C came close to hitting our first target today. The intraday high was $19.74. Unfortunately, you could argue that today's session looks like another failed rally in C's downtrend. The stock hit the 10-dma and reversed. However, if C bounces from here we'd use it as a new entry point for bullish positions. Readers may want to raise their stops toward this week's low (18.25). Our target is the $19.90 with a secondary, more aggressive target at $21.35.

Picked on June 23 at $18.50 *triggered
Change since picked: + 0.35
Earnings Date 07/18/08 (confirmed)
Average Daily Volume: 83 million

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DIAMONDS - DIA - close: 117.91 chg: -0.03 stop: 116.99

The DJIA eked out a bounce following yesterday's rebound but today's session was clouded by the reaction to the Fed decision on interest rates. There is always volatility following the interest rate decision and it is quite common for next 24 hours to be filled with false starts and stops costing traders millions as they try and pick a direction. We are not suggesting new positions at this time. Our target is the $121.50-122.00 zone.

FYI: Investors were not acting positively to most of the earnings announcements out tonight. The after-hours weakness suggests a lower open tomorrow. Of course that could change by tomorrow morning.

Picked on June 24 at $117.75 *triggered
Change since picked: + 0.16
Earnings Date 00/00/00
Average Daily Volume: 13.1 million

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SPDRs - SPY - close: 131.81 chg: +0.62 stop: 129.19

SPY rallied to its 10-dma near $133.40 and failed. The trend is still bearish so we're not suggesting new positions at this time. You could buy another dip or bounce close to the $130 level but we would suggest a much tighter stop loss. Our target is the $134.00-134.50 zone.

FYI: Investors were not acting positively to most of the earnings announcements out tonight. The after-hours weakness suggests a lower open tomorrow. Of course that could change by tomorrow morning.

Picked on June 24 at $130.50 *triggered
Change since picked: + 1.31
Earnings Date 00/00/00
Average Daily Volume: 200 million

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Steel Dynamics - STLD - close: 39.87 change: -0.22 stop: 36.49

Just another wild day in the stock market and STLD failed to make any progress either way. 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: - 0.30
Earnings Date 07/21/08 (confirmed)
Average Daily Volume: 4.6 million
 

Short Play Updates

Allstate - ALL - close: 47.55 change: +0.09 stop: 50.51

We've been expecting an oversold bounce in ALL and we don't think this is it. ALL hit $48.17 before paring its gains. Look for a failed rally near its 10 or 100-dma before considering new shorts. Our target is the $45.25-45.00 zone.

Picked on June 11 at $49.31
Change since picked: - 1.76
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 3.9 million

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Paychex Inc. - PAYX - close: 32.09 change: +0.49 stop: 33.41

We hope that today's early morning rally in PAYX was actually our readers covering to lock in a profit after last night's suggestion. PAYX rose to $32.52 before scaling back. We plan to exit tomorrow afternoon at the closing bell to avoid holding over the earnings announcement. We're adjusting our target to $31.25.

Picked on May 22 at $34.87
Change since picked: - 2.78
Earnings Date 06/26/08 (confirmed)
Average Daily Volume: 2.4 million

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PowerShares QQQ - QQQQ - close: 47.57 change: +0.76 stop: 49.05

The Qs are showing conflicting technical patterns. This ETF on the NDX has produced a bearish head-and-shoulders pattern with a down-sloping neckline over the past several weeks. Yet today's bounce marks what appears to be a three-candle bullish reversal pattern (morning doji star). More conservative traders may want to abandon ship right here or tighten their stops toward the $48.50 zone. We're not suggesting new positions. Our target is $46.10. The $46.00 level and its 100-dma might be support.

FYI: Investors were not acting positively to most of the earnings announcements out tonight. The after-hours weakness suggests a lower open tomorrow. Of course that could change by tomorrow morning.

Picked on June 17 at $48.54
Change since picked: - 0.97
Earnings Date 00/00/00
Average Daily Volume: 133 million
 

Closed Long Plays

BPZ Resources - BZP - close: 24.43 change: -0.34 stop: 24.45

The oil inventory report showed a surprising rise in stock piles and that sent oil lower. The oil stocks followed. BZP plunged to its 50-dma near $23.10 before bouncing back. We were quickly stopped out at $24.45 this morning. BZP had already hit our early target at $27.50 and we were aiming for our more aggressive target near $30. The big rebound actually looks like another potential entry point for bullish positions but we're going to wait.

Picked on June 12 at $25.53 / 1st target hit $27.50
Change since picked: - 1.10
Earnings Date 08/02/08 (unconfirmed)
Average Daily Volume: 883 thousand
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Robert Ogilvie 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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