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Daily Newsletter, Wednesday, 07/16/2008

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Table of Contents

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

Market Wrap

Market Reel

The markets had a really nice day by the close. The S&P 500 closed up over 30 points, the Dow Jones Industrials closed up 276 points and the Nasdaq 100 closed up 45 points. But at the open the markets dropped while it had to disseminate the economic reports from 8:30 am. The June CPI rose by a larger than expected amount. The report pointed to high energy and food prices causing the report to spur a 1.1% month-over-month jump in CPI, which was higher than the expected increase of 0.7%. Core CPI rose 0.3%, topping the expected rise of 0.2%. Total CPI is up 5.0% year-over-year, which the media pointed was the largest increase since 1991. The futures initial reaction was negative but eventually found some stability pre-market. The FOMC Minutes were released at 2:00 PM and showed that some Fed officials favored a rate rise very soon, fearing an "upward drift in long-run inflation expectations." Rates were left unchanged at the last Fed meeting, although there was a dissention that called for a rate increase.

But the Futures were pointed upward prior to all of the above data because Well Fargo (WFC) reported better than expected earnings and raised its dividend. Wells Fargo reported second quarter earnings of $0.53 per share which were $0.03 higher than Wall Street's expectation. In addition, WFC raised its dividend by 10%, indicating it is in a solid financial position despite the current environment. The early commentary was pointing to the logic that a company in todays regulatory arena wouldnt increase dividends if it knew it would have to lower them soon to free up cash. WFC advanced over 30% today while the financial sector increased as a whole over 12% on positive earnings news from Schwab (SCH), Northern Trust (NTRS) and Marshell & Ilsley (MI). Looking at the Select Sector Financial Spiders (XLF), both the RSI and Stochastics have re emerged from oversold territory (see chart below) on a daily basis. The XLF needs to break above the late June consolidation high at $20.63 to confirm the financial sectors bounce up.

After dropping more than $6 per barrel Crude oil dropped another $4 again today. Todays low of $132.1 exceeded Crudes 50 day Simple Moving Average (SMA) and Exponential Moving Average (EMA) but closed above both at $134.60 a barrel. Crude hasnt actually come down far enough from its momentous run to touch the 50 day EMA or SMA since it broke below them in January 2008. A break below doesnt mean that the run in oil is over. The markets seemed to find relief in the decline in crudes price over the past two days. The S&P and Dow have to fight extra hard to move up when there is such a massive energy sector allocation in the respective indices. Financials obviously attracted capital as did consumer discretionary stocks and transportation related stocks. For instance, Ford (F) and General Motors (GM) both advanced strongly, as measured by percentages, on oils decline. Airlines surged 18% on oils decline.

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Market Internals

The New York stock exchanges advance decline ratio was 3:1 today with 2429 advancing issues versus 808 decliners. New 52 week highs, however, were out shadowed by new 52 week lows, with 13 New Highs and 201 New Lows. A simple explanation is that the markets actually declined in the first half hour of todays session. Todays volume was 2,229 million shares versus the 50 day moving average of 1,597 million. The only negative is that todays volume was less than yesterdays 2,335 million shares. The ARMs index or $TRIN closed at 0.80 indicating that there was more volume from advancing shares than declining shares.

The Nasdaqs internals were accumulative as well in that the advance decline ratio was also greater than 3:1 with 2262 advancing issues and 700 declining issues. There were 32 new highs and 216 new lows today. Similar to the NYSE overall volume declined from yesterday. There were 2,450 million shares traded today versus the 50 day moving average 2,141 million shares traded today.

The S&P 500 (SPX)

As mentioned earlier the SPX bounced up today from hitting a two year low yesterday. The decline yesterday to 1200 put the SPX just below the 127.2% Fibonacci level of 1207 we looked at last week. I have drawn a new range from the May high to yesterdays low to determine the price that the SPX may bounce to before finding resistance. There is price resistance at 1277 from the late June volatility highs. The first line of resistance is at 1257 from the 23.60% level and then 1292 from the 38.2% Fibonacci retracement level. There is also price resistance at 1292 from the failed bounce attempt on July 2nd. A move to 1292 will most likely be met with a lot of resistance because there are two resistance levels right there as well as the 1,300 strikes open interest resistance. But the SPX needs to break above 1250 where there the peak open interest (65,340 contracts) exists at that strike price. The peak open interest on the puts is at the 1200 strike price with 98,233 contracts. The minor support exists at 1225 with 47,020 options open.

The daily SPX chart above shows that the RSI and Stochastics have both re emerged out of oversold territory. The SPXs close of 1245.34 is just above the 8 day exponential moving average (EMA) of 1244.75. The 21 day EMA (green line) is at 1277 which is coincidentally at the same level as the next price resistance I covered a little earlier. When there are multiple arguments for resistance or support at the same price levels that verifies that the support or resistance is more established than when there is only one sample. Multiple samples at the same level mean that multiple technical methodologies are being represented. And that translates to more people agreeing on a particular price.

The Nasdaq 100 (NDX)

The NDX bounced up over 45 points today after testing the gap up low from March 21st or 1760. There is still a gap that needs to be filled at 1752. The NDX could continue to bounce higher to the 89 day SMA (grey line) at 1894. But before that MA is tested the NDX needs to break above 1871 1875. The support is at 1752 from the March gap. The 50 day SMA (blue) tried to cross above the 200 day SMA (red) in late June but could hold above while the NDX was trending down. With the 50 day MA less than the 200 day SMA the index is on a confirmed downtrend. However, that signal could be quickly changed if the price moved high enough to cause the 50 day MA to cross above the 200 day SMA.

The daily NDX chart above shows that the NDX crossed and closed above the 8 day EMA (magenta line) today. In addition, the 8 day EMA curled up from the bounce. The 21 day EMA (green line) is at 1862 and stands in the way of the NDXs ability to breakout to begin a new uptrend. Also required for a new short term uptrend is the 8 day EMA crossing the 21 day EMA. The short term EMAs provide trade entries and short term support and resistance levels to trade into. The 50 and 200 day moving averages mainly provide support and resistance to change the overall portfolios bias. For instance, with the price below the 50 and 200 day SMAs in addition to the 50 day SMA trading below the 200 day SMA the tendency is to only trade short positions by selling at resistance levels. I prefer to go long biased when the contrarian indicators confirm the bottom and not rely on short term technical analysis to pick a bottom. That doesnt mean it isnt ok to buy at oversold levels for a trade. Most money is made in the middle of the trend and lost trying to find the beginning of it.

The NDX open interest for August shows that there is peak open interest at the 1800 put strike and therefore support there. Conversely, there is resistance at 2025 from peak open interest (3940) in the calls. Another level of interest is 1850 on the calls with 2446 contracts open.

There is a lot of news coming out tomorrow which should provide for a volatile day. Good news from IBM could be offset by negative news from Microsoft. I am not making predictions on who will surprise positively or negatively. Other market moving stocks reporting tomorrow include Google after the close, Coca-Cola before the open, and JP Morgan in the morning, and a slew of bank stocks too long to list. However, I am particularly interested in what Capital One has to report since they are supposed to make money from the consumers willingness to pay interest on purchases made with their cards. United Technologies, a Dow component, is also reporting tomorrow morning. It looks like five of the thirty industrial stocks are reporting at some point tomorrow. I will be covering the EPS Volatility trade in the Option Writer tomorrow using GOOG. I prefer to sell the premium just prior to the close of option trading (15 to 30 minutes prior to 4:00 PM EST). I will insert the concept in tomorrows edition of Market Wrap so it is timelier.

Tomorrow is a slow day for economic reports as compared to today. I write that because a lot of the economic data was directly from Ben Bernankes mouth as he was testifying before the Senate today. His comments basically discounted the FOMC report released at 2:00 PM this afternoon. Housing is still very much a major concern for our and Europes economies. Why mention Europe? Because if their economy and housing market is suffering, then they arent going to want to buy houses here. They might buy businesses or invest in other vehicles that they actually have control over. The initial claims will give a clue to whether the increase in willing employed citizens from last week was just a seasonal fluke or the beginning of a trend in employment. More employed means higher wage inflationary pressures. That translates into the Fed raising the rates. It was interesting hearing one Senator question why the Fed practiced Liaise Faire (hands off) economics when it came to enacting new banking and lending practices while controlling rates and money policy with Keynesian (meddling hands on) techniques. Some of the comments from the Senate were outright accusatory and defamatory. If I had an opinion that mattered I would say rightly so. But my beliefs arent as important as the facts. We have a weak economy. How do we make money from the Fed if we think that the rates will move up before the election? If you trade currency or Fed Funds futures you can go long the dollar or short the Fed Funds futures. The rate increase/decrease argument can go either way and may have to be a surprise to make a difference. This concept is very similar to the capitulation topic. When will the capitulation occur when everyone is looking for it to occur? No one wants to be the sucker that marks the bottom. Of you are a contrarian like me, you have a friend that always buys the top and sells the bottom. When that person is talking about waiting for the capitulation it will only come after they sell. For instance, the shake out last week that placed two of my contrarian signals at a POSITVE bias. The VIX was the only indicator that hadnt confirmed the long bias. Yesterday the VIX spiked and then contracted into the close therefore confirming a short term capitulation had occurred. We will all have to see if the indicators confirm a shift in the bias. Good trading!
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
AIRM None
PACR  
UYG  

Play Editor's Note: The market rally today is great but remember we're only expecting a short-term bounce. It could last several days so don't be fooled. The overall trend in the market is still down. When we think the bounce is beginning to fail we'll start looking for shorts again.


New Long Plays

Air Methods - AIRM - close: 27.52 change: +0.80 stop: 25.99

Company Description:
Air Methods Corporation is a leader in emergency air medical transportation and medical services. The Hospital Based Services Division is the largest provider of air medical transport services for hospitals. (source: company press release or website)

Why We Like It:
If the market might see a multi-day bounce then AIRM might be able to rally from its current, short-term consolidation pattern. The stock broke higher a few days ago and has been digesting those gains. We are suggesting bullish positions now. More conservative traders will want to seriously consider waiting for a move over $28.00 first. We're listing two targets. Our first target is $29.95 since the $30.00 level might be round-number resistance. Our second target is the $32.00 level, which is under potential technical resistance at the 50-dma. We do not want to hold over the early August earnings report. FYI: AIRM has a high amount of short interest, almost 20% of the float according to the latest data. This raises the risk of another short squeeze.

Picked on July 16 at $27.52
Change since picked: + 0.00
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 276 thousand

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Pacer Intl. - PACR - close: 22.71 change: +1.15 stop: 20.95

Company Description:
Pacer International, a leading asset-light North American third-party logistics and freight transportation provider, through its intermodal and logistics operating segments, offers a broad array of services to facilitate the movement of freight from origin to destination. (source: company press release or website)

Why We Like It:
A lot of the transport-related stocks are rising thanks to the pull back in oil. We want to point out that PACR has been out performing the group for months. The rising cost of oil has not stopped the stock from climbing higher this year. This stock tends to stair step higher and it looks like it's about to step up again. We're suggesting bullish positions now or anywhere in the $23.50-22.00 zone. Our target is the $25.85 mark. We do not want to hold over the early August earnings report. FYI: PACR also has a high amount of short interest around 19% of the float. A breakout to a new high could spark a short squeeze.

Picked on July 16 at $22.71
Change since picked: + 0.00
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 531 thousand

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Ultra Financials - UYG - close: 17.30 change: +2.55 stop: 15.99

Company Description:
The Ultra Financials ProShares (UYG) is an exchange traded fund (ETF) that moves twice the performance of the Dow Jones U.S. Financials index.

Why We Like It:
We're going to take a deep breath, hold our nose, and jump into the deep end of the pool. The financials made an impressive move higher today. A lot of banks and financial stocks produced very defined bullish reversal patterns. This UYG, which moves twice the performance of the Dow Jones Financial index, has produced a three-day bullish reversal candlestick pattern. We hate the idea of buying it after a 17% gain but this could very easily get away from us. The real key to this market's bounce is whether or not the financials see any follow through on today's gains. This is a very aggressive play because the bearish trend in financials is still unbroken. The volume in the last two days has been unbelievable. Today's volume was more than 104 million shares versus the average of just 28 million. The big volume is another clue that this might be a bottom. We're going to suggest a stop loss at $15.99. Our target is the $22.50 mark.

Picked on July 16 at $17.30
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 28 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Broadcom - BRCM - close: 29.74 change: +0.80 stop: 27.49

BRCM produced a nice rise today but it didn't breakout over resistance at $30.00 yet. We're suggesting readers buy BRCM at $30.05. If triggered our short-term target is $34.75. This is going to be a short-term trade since BRCM is due to report earnings on July 22nd after the closing bell. We do not want to hold over the announcement so that gives us five trading days to be triggered and see the stock rally. The P&F chart is negative but a move over $30.00 would reverse that into a new triple-top breakout buy signal.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/22/08 (confirmed)
Average Daily Volume: 13.8 million

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FLIR Sys. - FLIR - close: 42.45 change: +0.50 stop: 40.85 *new*

We are a little disappointed in FLIR today. The market has a big bounce and FLIR under performs. The trend is still bullish and generally speaking FLIR is doing a lot better than the market. Volume was very low today. We're not suggesting new positions at this time. Please note that we're raising our stop loss to $40.85. Our target is the $44.95 mark. The P&F chart points to a $73 target. We do not want to hold over the July 24th earnings report.

Picked on June 29 at $41.38
Change since picked: + 1.07
Earnings Date 07/24/08 (confirmed)
Average Daily Volume: 2.2 million

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Garmin - GRMN - close: 46.49 chg: +3.32 stop: 41.49

Some positive analyst comments helped boost GRMN and shares broke through the $45.00 level and its 50-dma. Volume was a little above average, which is bullish. Our target is the $49.50 mark. We do not want to hold over the July 30th earnings report.

Picked on July 08 at $44.10
Change since picked: + 2.39
Earnings Date 07/30/08 (confirmed)
Average Daily Volume: 3.0 million

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Helmerich-Payne - HP - cls: 64.05 chg: -2.00 stop: 62.39

Weakness in crude oil is weighing on the energy sector. Shares of HP lost 3% and closed under its 50-dma. We are suggesting that more conservative traders use today's move as a signal to exit. We would wait for a new rally over $65.00 before considering new bullish positions. We have two targets. Our first target is $69.90. Our second target is $74.00. We do not want to hold over the late July earnings report.

Picked on July 10 at $66.40
Change since picked: - 2.35
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 1.6 million

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Masimo Corp. - MASI - close: 36.10 chg: +1.18 stop: 34.45

MASI delivered a nice bounce (+3.1%) but pared its gains. We're bullish with the stock above $35.00 but the intraday pull back this afternoon leaves us feeling cautious. MASI might dip to $35.00 again. More conservative traders may want to tighten their stops. The P&F chart is positive with a $56 target. Our target is the $39.95 mark. More aggressive traders could aim for the highs near $42.00 but we do not want to hold over the late July earnings report.

Picked on July 09 at $35.65 *triggered
Change since picked: + 0.45
Earnings Date 07/28/08 (unconfirmed)
Average Daily Volume: 461 thousand

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Terra Inds. - TRA - close: 46.44 chg: -1.25 stop: 44.45

A lot of the commodity-related stocks did not perform very well. Everyone's attention was on tech and financials. Shares of TRA dipped to $45.00 and bounced. We warned readers to expect this pullback. More conservative traders may want to raise their stop loss closer to $44.90 (today's low). We have two targets. Our first target is $49.75. Our second target is $54.00. We do not want to hold over the late July earnings report.

Picked on July 08 at $45.44
Change since picked: + 1.00
Earnings Date 07/24/08 (confirmed)
Average Daily Volume: 4.6 million

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Wyeth - WYE - close: 48.29 change: -0.27 stop: 47.19 *new*

WYE had some news today. The U.S. courts approved a settlement deal between WYE and rival Impax Labs over a patent lawsuit. The news didn't do much for the stock price. The technical pattern is decaying and WYE's relative weakness today may be a warning. We are raising the stop loss to $47.19. We're not suggesting new positions at this time. This week WYE may have some news as the company presents at a conference on July 17th. Our target is the $52.50 mark. We do not want to hold over the late July earnings report. FYI: The P&F chart has a $61 target.

Picked on July 08 at $48.31 *triggered
Change since picked: - 0.02
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 8.7 million
 

Short Play Updates

ICICI Bank - IBN - close: 26.51 chg: +2.09 stop: 30.15

The U.S. financial sector rallied sharply today and the foreign bank stocks followed. Shares of IBN surged 8.5% but they remain in their down trend. We're not suggesting new positions at this time. More conservative traders may want to lower their stop. Our target is the $21.50 mark. Our original play description suggested an alternative strategy of buying an out-of-the-money call as a little bit of insurance just in case the financial sector explodes higher on some unexpected news. We had suggested the August $30 call, which was $1.20 as of last Friday night. FYI: It is up to you when you sell the call if IBN rallies. You could sell it when the value covers our loss on the stock or let it run and potentially make a profit if IBN breaks out over $30.00.

Picked on July 13 at $26.61
Change since picked: - 0.10
Earnings Date 07/20/08 (unconfirmed)
Average Daily Volume: 3.6 million

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UBS Ag - UBS - close: 19.83 change: +1.87 stop: 20.75

UBS is another overseas bank that is rising on the rebound in the U.S. financial sector. UBS added 10% and is back to challenging round-number resistance at the $20.00 region. We're not suggesting new shorts at this time. Our original play description suggested that readers might want to buy a little insurance with an out-of-the-money call on UBS. It's not guaranteed to work but if the financial sector unexpectedly rebounds higher it could help protect us from serious losses. We had listed the July $22.50 call or the August $22.50 call with our suggestion to use the August $22.50 call. Our estimated cost was $0.80 ($80 per contract). You may have pay more or less for it depending on when you opened the trade.

Picked on July 13 at $19.49
Change since picked: + 0.34
Earnings Date 08/12/08 (unconfirmed)
Average Daily Volume: 7.3 million
 

Closed Long Plays

None
 

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.

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