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Daily Newsletter, Monday, 07/21/2008

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Table of Contents

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

Market Wrap

Market Wrap

If the rest of the week is like today I would like to just wrap it up and go on vacation. That basically means that it was overall a boring and uneventful day when looking at the broader markets. But there were many pockets of action throughout the day that we will go through in a little bit. I intend on covering the market internals first.

The S&P 500 declined for the second day in a row. However, it fell only 0.66 points today. The NYSE composite advanced 48 points today. There were 12 new 52 week highs and 49 new lows. Internally it was a decent day for the bulls with a 2 to 1 advance/decline ratio (2043 Advanced versus 1155 Declined). The $TRIN (ARMs Index) spiked to close at 1.59. In addition the $TRIN usually spikes on big down days. As mentioned earlier the NYSE was up with positive advance/decline. Closes above 1.5 on the TRIN normally signals a short term long trade on the broad market index. A better signal is at ratios greater than 2.0. If you trade anything other than futures the $TRIN trade becomes a fade the close trade that is betting on a gap up. Volume, 1,514 million shares, was far below the average of 1,624 million.

On the Nasdaq Composite the volume today was lower at 1,823 million versus the average of 2,100 million shares. It closed down 3.25 with 1626 advancing issues versus 1262 declining issues. There were 30 new highs and 55 new lows. The $TRINQ closed at 1.21.

Before the Closing Bell

Bank of America (BAC) gapped nearly three points higher at 30.31 and closed up $0.31 at $28.56 after reporting a 43% year-over-year drop in second quarter earnings per share to $0.72, which was higher than Wall Street's forecast of $0.53 per share. BAC's CEO said that management plans to recommend that the board leave its quarterly dividend at $0.64 per share. The dividend had been a major source of concern for investors until the CEO made a statement after the close on 7/15 regarding that the company would maintain its dividend. The stock closed that day at $18.52 or $10.04 lower. BAC has jumped 53% in four days.

Yahoo! posted some interesting news today about how activist investor Carl Icahn and the company reached an agreement regarding his appointment to the board as well as two additional members from Icahns short list of board seat candidates. YHOO dropped $1.13 to $21.67 one day before their earnings are released.

In the gaming sector, my favorite if anyone cares, Wynn Resorts gapped higher and ran to an intraday high of $96.59 before contracting a bit to $93.43. Last week WYNN announced it would be buying back stock and said today that the company would be hiring new employees. Prior to the buy back announcement WYNN was trading at $75.61. 20 points in a week is huge. WYNN reports earnings on July 24th.

Merck and Schering-Plough were under pressure today when the postponed their earnings release to this evening after the bell. The companies continued to decline after discussing a new study regarding the cholesterol drug Vytorin. The study didnt meet the goals set forth and also found a potential cancer risk in certain Vytorin patients.

Other than energy Biotech has been one of the few sectors that have actually outperformed this year. Genentech (DNA) received a bid for $43.7 billion or $89 per share in cash from Roche. The bid was for the remaining 44% that Roche didnt already own. DNA is trading higher at $93.88 on the belief that Roche will have to raise its bid. I am not sure how that would work if Roche controls the majority of the voting shares. Citing an article by Dana Cimilluca of the WSJ The process of buying out minority shareholders when you already own a majority stake in a company (sometimes referred to as a squeeze out) is a delicate one. Any hint that the controlling shareholder got a sweetheart deal is sure to result in a flurry of shareholder lawsuits. Another burden would-be acquirers like Roche face is the inevitable perception by some that its position as an insider at the target company gives it an unfair advantage in the negotiations.

That is why negotiations between Roche, the Swiss pharmaceutical giant, and Genentech will be handled by a panel of the biotechnology companys three independent directors. (It has a total of seven, three appointed by Roche.)

It looks like a potential arbitrage trade in which the premium of $4.88 on the stock may be over inflated. If you thought that there werent going to be any more offers higher than the 8.8% premium you could sell the August 90 calls for $4.70 or the 95 August calls for $1.45. The deal, if ever done, could take a while to complete. So selling the August calls could be very risky, especially if there is counter offer from DNA. If however, you were anticipating a counter offer or higher bid from another suitor, you could control 100 shares of stock for the next 60 days for $14.80 per contract on the September 80 strike or $1,480. At the $89 purchase price the position would lose $5.80 per share if the deal goes through at that the current offer or lose $1.75 per share if the stock stayed at the same price for 60 days (unlikely).

Ding Ding Ding

And the flat day turned ugly after hours. The futures closed virtually flat on the day and are now down $12.50 in globex trading. I am not surprised to see a pull back from the sudden move from last Tuesdays lows. Apple (AAPL) reported earnings after the close today and beat the EPS estimates by $0.11. The company reported earnings of $1.19 per share. Revenues rose 38% year over year to $7.46 billion versus the $7.27 billion consensus estimate.

Texas Instruments (TXN) missed EPS estimate by $0.02. TXN issued downside guidance for the third quarter and sees EPS of $0.41 0.47 versus the $0.51 consensus. TXN said demand slowed unexpectedly in June primarily because distributors reduced inventory levels and did not replenish them late in the quarter.

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Other misses included American Express (AXP) and Sandisk (SNDK). SNDK missed by $0.23 per share. SNDKs estimate was for a gain of $0.10 and they lost $0.13 per share. SNDK is delaying the next phase of production until next April. SNDK said Our Q2 sales were well below our expectations due to the rapid deterioration in consumer confidence which impacted our sales in U.S. retail and to handset OEMs. Product gross margin was negatively impacted by the lower sales volume and a substantial inventory write-down.

AXP Reported 2nd quarter (Jun) earnings of $0.56 per share or $0.27 worse than the First Call consensus estimate of $0.83. The revenues rose 7.9% year/year to $7.48 billion versus the $7.6 billion consensus. The second quarter results included a $600 million ($374 million after-tax) addition to U.S. lending credit reserves that reflects a deterioration of credit indicators beyond our prior expectation. In addition, a $136 mln ($85 mln after-tax) charge to the fair market value of the AXPs retained interest in securitized Card member loans. AXP is basically outlining their current exposure to the credit crunch. A good spread idea is long Visa (V) or MasterCard (MA) and short AXP. However, it might be too late to get the most bang out of that idea.

As noted this is not the complete list of companies scheduled to report earnings tomorrow. There were about 180+ companies on the list. So I look the discretion to only post the more widely followed stocks. Sorry if your favorite stock isnt on the list.

Some of the big names that can move the markets are Yahoo! (YHOO), United Parcel (UPS), Chicago Mercantile (CME), Caterpillar (CAT) and DuPont (DD). Royal Caribbean should give some insight into the travel/leisure industry. There are a few semiconductor companies reporting tomorrow including Manhattan Associates (MANH), Linear Technology (LLTC). E*Trade Financial and OptionsXpress report from the discount side of the brokerage business while Raymond James Financial reports earnings from the traditional side of the brokerage industry. Some major banks including Fifth Third, SunTrust, Washington Mutual and Wachovia could throw in some added volatility for tomorrows trading. There are some big name drillers and oil service providers reporting their earnings tomorrow. Some of those include Baker Hughes, Halliburton, BJ Services, XTO Energy, Inc. and Nabors Industries. So the summarize, tomorrow should be another tug of war day with multiple major industries reporting earnings.

There arent any major economic reports due out tomorrow. The next report is the Crude Inventories on Wednesday morning followed by the Feds Beige Book. As for today the only report was the Leading Indicators that reported that 8 of the 10 economic sectors in positive territory. The report is a collection of previously announced economic indicators, including jobless claims, money supply, average workweek, building permits and stock prices. The results of the June leading indicators show that it fell 0.1%, which was in-line with expectations.

The Indices Recap

The S&P 500 has bounced up about 60 points from the low it established last Tuesday. As the daily chart of the SPX shows, the Bollinger bands squeezing together. The lower bands are now increasing upward and therefore reducing the room the SPXs range according to the standard deviation of the 21 day Exponential Moving Average (EMA). The 8 day EMA (magenta line) is also curling up toward the flattening 21 day EMA. The SPX still hasnt closed above the 21 day EMA (1272). But the SPX has remained above the 8 day EMA (1252) for the last three days. The RSI is at 57.40 and still below overbought. However, slow Stochastics is overbought at 94.01.

Resistance is at 1277 from the 7/9 high and 1272 from the 21 day EMA. I drew the Fibonacci retracement lines from last weeks low to the May high in order to determine the new range the market is in. Over the last few days the SPX has traded in and around the 23.6% retracement level. 1272 is the coincidence resistance level with the 21 day EMA and the 38.2% retracement level at the same price. Remember, multiple indicators at the same level show multiple traders perspectives of support and resistance. The 50 day EMA is falling quickly and is at 1311. With the 50 (blue) and 200 (red) day SMAs both way above the current price the moving averages the bias is still negative until the SPX can close above the 50 day moving average. However, short term trades can be made from the shorter term 8 and 21 day EMAs. For instance, a long confirmation trade can be taken once the SPX breaks above the 21 day EMA. On the other hand a short term break down could occur as signaled by the SPX breaking and closing below the 8 day EMA. Should that occur, a short position could be taken with a tight stop at a close back above the 8 day EMA, for example.

The Nasdaq 100 (NDX) ran into resistance on Thursday at 1862.99 and simultaneously setting a lower high in the recent series of spikes. The low last week came close to filling in the 1751.99 gap but still came close only hitting a 1761 low. The futures are currently pointing to a lower open which would put the NDX down below 1800. I would like to see a close above the recent high of 1863 for a long or the gap to be filled at 1750 before going long on the NDX. According to the 50 and 200 day SMAs, the bias on the NDX is negative until the 50 day can close above the 200 day SMA. On the positive side there is an upside target that could be achieved from the gap down on 6/26.


According to the Bollinger bands there is a squeeze or contraction in the volatility of the NDX. The low range is at 1775 while the upward expansion level is at 1934. RSI is currently declining after peaking in Thursday around 60, well below the overbought territory. In addition, the slow Stochastic has turned over and re emerged to the downside from overbought territory. It looks like the NDX is leading the SPX right now. The 8 day EMA turned downward with the NDX closing below the moving average for the last two days. With only 8 days to calculate, the 8 day EMA is very reactive to price action. Using it along with the 21 day EMA provides entry points and confirmation levels. For instance, the close below the 8 day EMS after failing to close above the 21 day EMA signals a short term short trade. A close above Thursdays high and the 21 day EMA would signal a long trade with a stop at a close or trade below the 8 day EMA, for instance.

Black Gold

Oil bounced a little today but failed at the 50 day EMA (orange line shown below). The 50 day SMA is at 134 (blue line) and should provide additional resistance. My target is a test of the 89 day SMA (grey line) at 124 per barrel. The advance in oil spurred some buying in the oil related sectors. That made my oil short on DUG decline. But I am fine with that after the run it had and the fact that we sold the $44 calls for August.

Open Interest


The NDX shows peak open interest at the 1800 put strike with 8,811 options open. Resistance is found at 1850 with 5,400 options open but its peak resistance for August is at 2025/2050 with a combined 20,600 options open. Since we dont know if this is just a short call spread we will assume that the 2025 strike is the short option.

The peak open interest on the August Puts is at the 1250 strike price (118,792 option open interest). The SPX closed at exactly 1260 today or 10 points higher than the peak open interest strike price. The next major peak in open interest doesnt come into play until the 1200 put strike. The 1250 strike is also the call peak open interest strike. There are peaks at 1260, 1275 and 1300. Many times when these numbers are close they can be attributed to institutional positions making large market neutral positions like Double Diagonals and Iron Condors and Double Winged Butterflies. The next level is at the 1275 strike with 47,917 option open interest. Good trading to all!
 

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

Air Methods - AIRM - close: 29.89 change: +0.24 stop: 27.52

AIRM rallied to another new four-week high but failed to hold the breakout over $30.00. The trend is bullish but AIRM is potentially short-term overbought and due for a dip. A dip back toward broken resistance around $28.00 should not be unexpected. We do have a secondary, more aggressive target at $32.00. AIRM has already exceeded our target at $29.95.. 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, which would be great for the bulls.

Picked on July 16 at $27.52 /first target exceeded 29.95
Change since picked: + 2.37
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 276 thousand

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Masimo Corp. - MASI - close: 36.17 chg: -0.28 stop: 34.75 *new*

Today's session was not a good sign for the bulls. Initially MASI bounced from its 10-dma again this morning but the stock rolled over around $36.80 and was heading lower into the closing bell. We are raising our stop loss to $34.75. We're not suggesting new positions at this time. MASI announced that it would report earnings on August 4th, after the closing bell. 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 earnings report.

Picked on July 09 at $35.65 *triggered
Change since picked: + 0.52
Earnings Date 08/04/08 (confirmed)
Average Daily Volume: 461 thousand

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Pacer Intl. - PACR - close: 24.37 change: -0.07 stop: 21.45

PACR looked good today. The stock resisted any serious attempts at profit taking and held on to its gains from last week. Shares still look a little overbought so don't be surprised if there is a correction toward $23 again. 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. We could be seeing a shorts squeeze.

Picked on July 16 at $22.71
Change since picked: + 1.66
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 531 thousand

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Sanofi-Aventis - SNY - cls: 35.75 change: -0.35 stop: 34.95

The BTK biotech index was up thanks to the merger/acquisition news regarding DNA but that failed to influence shares of SNY. The stock drifted lower toward its 10-dma. Our strategy remains unchanged. We're suggesting readers buy SNY if it trades at $36.55 or higher, which would be a bullish breakout over its 100-dma. If triggered our target is the $39.50 mark. This is an aggressive target since we plan to exit ahead of the July 31st earnings report (unconfirmed at this time). An alternative entry point that more aggressive traders might want to consider would be a dip near $35.50.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 1.7 million

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Ultra Financials - UYG - close: 20.42 change: +0.02 stop: 17.30

The rally in financials may be running out of steam. Make sure you're happy with your stop loss placement. It could be tested on a pull back. Look for the 10-dma near $18.40 and the $18.00 region to act as short-term support. Readers will want to seriously consider taking some money off the table right here! Don't be surprised if the UYG corrects back to $18.50-18.00. This is a very aggressive play. Our target is the $22.50 mark.

Picked on July 16 at $17.30
Change since picked: + 3.10
Earnings Date 00/00/00
Average Daily Volume: 28 million
 

Short Play Updates

Genoptix - GXDX - close: 28.25 change: +0.19 stop: 30.75

Our time frame for this bearish play on GXDX has just been shortened. The company announced plans to report earnings on July 31st. It's our rule to avoid holding over an earnings report unless we have a really good reason to take that kind of risk. GXDX managed a meager bounce from its 100-dma today. We would still consider new shorts here. Our stop is a little wider than we'd like and this is an aggressive play because GXDX does not have a lot of volume, which makes it more susceptible to volatile movement. We have two targets. Our first target is $25.50. Our second target is $22.75.

Picked on July 20 at $28.06
Change since picked: + 0.19
Earnings Date 07/31/08 (confirmed)
Average Daily Volume: 146 thousand

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Infosys - INFY - close: 37.48 change: -0.94 stop: 40.05

INFY continued to sink following last week's failed rally. The stock lost more than 2% today. We don't see any changes from our weekend comments. Our target is the $35.25-35.00 zone. FYI: The P&F chart is bearish with a $34 target.

Picked on July 20 at $38.42
Change since picked: - 0.94
Earnings Date 07/11/08 (confirmed)
Average Daily Volume: 3.6 million
 

Closed Long Plays

Garmin - GRMN - close: 46.59 chg: +1.55 stop: 43.85

Shares of GRMN rallied sharply midday after Dutch rival TomTom reported better than expected earnings. This lifted hopes that GRMN might do well and the stock ended with a 3.5% gain. Unfortunately, just before the rally shares of GRMN plunged to $43.71 and hit our stop loss at $43.85. We would be tempted to buy this bounce but would not hold over the earnings report on July 30th.

Picked on July 08 at $44.10 /stopped out 43.85
Change since picked: + 2.49
Earnings Date 07/30/08 (confirmed)
Average Daily Volume: 3.0 million
 

Closed Short Plays

None
 

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

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