Option Investor

Daily Newsletter, Wednesday, 11/12/2008

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Table of Contents

  1. Market Wrap
  2. In Play Updates and Reviews

Market Wrap

NASDAQ Composite Below 1,500 For First Time Since 2003

[Image 1]

Stocks continued their retreat from last week's Market Wrap and buyers showed little interest as another psychological benchmark, as well as a technical benchmark gets tested.

It would have to be a "chart of the week," perhaps my "chart of the month," a "chart of the year" and even a "chart of half decade" as the very broad NASDAQ Composite retraces 80.9% of its September 2002 low close to recent bull run highs.

Buyers put up little defense for the better part of the session with decliners outnumbering advancers notably from the opening tick.

Commodities, stocks, just about everything traded lower. The loan exception was Treasury prices, resulting in lower yield.

The Dow Industrial shed just more than 400-points with breadth negative at 29:1. General Motors (NYSE:GM) $3.08 +5.47% eased off of Tuesday's 52-week low as traders began to contemplate the increasingly likelihood of new Democratic leadership in Washington bailing out the troubled automaker.

Shares of Ford Motor (NYSE:F) $1.84 +2.22% also edged higher.

That's today's "good news" among the price action I saw.

NASDAQ Composite - Monthly Intervals [Image 2]

"NASDAQ 1,500" was a big psychological level of resistance during the Spring of 2003. A level that "would not be broken" to the upside during one of the great bear markets of our time, and after an historic run that for some reason ended in October 2007, the 1,500 level is traded yet again.

A technician could count the levels here and after each CLOSE below a level, the COMPX has NOT been able to close back above a level. That would be 1,816.52 as I see it currently.

Never say "never" and never say "always."

A good test for the 4-lettered faithful has been delivered in tonight's extended session with Intel (NASDAQ:INTC) $13.54 -2.79%, which was still holding its Oct'02 low of $12.95 was halted for trade, then released to trade as low as $12.36 in the extended session after the biggest maker of chips for personal computers warned that Q4 revenue would come in at $9 billion (+/- $300M), which was below the company's October forecast of $10.1 to $10.9 billion.

Adding to an extended session negative tone, Applied Materials (NASDAQ:AMAT) Chief Executive Mike Splinter said, "The last six weeks of turmoil in the financial markets is unprecedented. The weakening global economy will have significant impact" on all of the chip equipment maker's business.

Mr. Splinter's comments came after the world's largest chip equipment maker reported it recently completed Q4 earnings of $231 million, or $0.17/share.

Oil prices continued a torrid decline ahead of tomorrow's EIA inventory report, which was delayed one day due to yesterday's observance of Veteran's Day.

December Crude Oil futures (cl08z) - Daily Intervals [Image 3]

This is the same chart shown in my 10/22/08 Wrap. However, recent action now has the point and figure chart's bearish vertical count falling further to $50.00.

Global Economic Calendar - [Image 4]

Equities here in the U.S. accelerated losses when Treasury Secretary Paulson signaled readiness to enter the second phase of the $700 billion bailout/rescue, but that is unlikely to include the original proposal to buy up troubled assets. The Treasury is looking at ways to encourage private investors to return to the asset-backed securitization market. Barney Frank said some of the rescue package should be used to buy up troubled mortgages.

The White House again dismissed the use of TARP funds to aid the ailing auto sector.

Global Equities, Currencies, Oil, Gold, HUI.X, OIX.X ... [Image 5]

Mainland China's Shanghai Composite ($SSEC), which has been hardest hit year-to-day does show a gain since last Wednesday's close, but this looks like some "short covering" in what looks to be a more relative "oversold" global equity environment. That is, -64.66% YTD looks more "oversold" relative to other major benchmarks.

US Market Watch - 11/12/08 Close [Image 6]

New 52-week lows noted in red. At a MINIMUM, this suggests to me that SHORTS aren't as eager to cover positions, even under today's declines.

S&P 500 Index (SPX.X) - Daily Intervals [Image 7]

The S&P 500 (SPX.X) nears its 10/10/08 low, but if that's broken, then I'd have to assess further downside to the -11.8% retracement (same use of retracement as cl08z). Tough to try and "hang on" to longs here.

In Play Updates and Reviews

Breaking Support

Play Editor's Note: It proved to be an ugly day with a large number of stocks breaking support levels. It doesn't bode well for tomorrow. Keep your eye on the S&P 500 that settled right on support near its October lows. This is either a set up for new bearish plays on a breakdown or new bullish plays on a bounce. At the moment Intel's comments after hours are pushing futures lower so look for a breakdown.

BULLISH Play Updates

Anadarko Petroleum - APC - close: 35.16 change: -2.64 stop: 34.75*new*

We warned readers last night to expect a drop toward $36.00-35.50 and APC actually overshot to the downside with an intraday low of $34.87. Shares ended the day down about 7%. While APC is testing support near $35.00 I don't have a lot of confidence that it will hold.

More conservative traders will want to exit early immediately. We're raising the stop loss to $34.75 under today's low. The worst case scenario for us tomorrow would be a gap down at the open. We're not suggesting new positions at this time.

Picked on November 10 at $38.36 *triggered/gap higher entry
Change since picked:     - 3.20   			
Earnings Date          11/03/08 (confirmed)    
Average Daily Volume:      10.7 million     

BEARISH Play Updates

Chipotle Mexican Grill - CMG - close: 42.20 change: -2.48 stop: 47.55*new*

CMG is off to a good start with a 5.5% decline. Remember, we're suggesting readers take most of their position off the table at $40.25 since the $40.00 level looks like it could be big support. The way things are shaping up after hours the market could spike down sharply tomorrow morning and CMG could hit our target early on. We are adjusting our stop loss to $47.55.

We're setting a secondary target because until the trend changes CMG forecasting a much lower price. Our secondary target is $35.50.

Important! Traders should note that CMG has a high amount of short interest. The most recent data listed short interest at almost 35% of the 31.9 million-share float. That is a large amount of short interest and a small float, which is traditionally a recipe for a short squeeze.

Picked on November 11 at $44.68 
Change since picked:     - 2.48   			
Earnings Date          02/12/09 (unconfirmed)    
Average Daily Volume:       752 thousand    

Capital One Financial - COF - close: 30.04 change: -2.01 stop: 33.05

Our new play on COF is now open. The stock dipped to $29.52 before paring its losses. Our plan was to short it at $29.75, which is a new multi-year low and a breakdown under significant support at $30.00.

Granted the stock looks extremely short-term oversold but there is nothing to stop it from growing more oversold. Even news that the government might use some of its TARP money for credit card companies failed to fuel any buying in COF.

We have two targets. Our first target is $25.50 because there is some support near $25.00 back in 2003-2002. Our secondary target is the $22.50 mark. More aggressive traders may want to aim for $20.00.

This is a very volatile stock that can see $10 swings in just a couple of days. Readers should consider this a very high-risk play.


Picked on November 12 at $29.75 *triggered       
Change since picked:     + 0.29   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:      12.8 million 

Plains All American Pipeline - PAA - close: 34.39 chg: -2.77 stop: 40.05

As expected shares of PAA continued to fall. The stock lost 7.4% and closed on its lows for the session. We would not chase the stock here. More conservative traders might want to adjust their stops toward $38.00 or $37.50. We're leaving our stop at $40.05 for now.

Our first target is $31.00. Our secondary target is $27.00. This play may take a few weeks to occur.

Picked on November 11 at $37.16 
Change since picked:     - 2.77   			
Earnings Date          02/12/09 (unconfirmed)    
Average Daily Volume:       647 thousand    


Ameron Intl. Corp. - AMN - close: 41.48 change: -6.31 stop: 44.45

Ouch! AMN delivered a terrible day. The stock gapped down to open at $46.47 and then plunged to a 13.2% loss. We did not see anything specific in the news to account for such a terrible pounding. Shares quickly hit our stop loss at $44.45.

At this point it might pay off to watch AMN for a failed rally near $45.00 and then short it with a target in the $37-35 zone.


Picked on November 09 at $48.17 /stopped out 44.45
Change since picked:     - 6.69   			
Earnings Date          01/26/09 (unconfirmed)    
Average Daily Volume:       176 thousand   

Chesapeake Energy - CHK - close: 20.13 change: -2.23 stop: 21.75

It was another ugly day for CHK. The stock quickly broke short-term support near $22.00 and hit our stop loss at $21.75. CHK eventually ended down 9.9% near round-number support at $20.00. If CHK closes under $20.00 it might be a signal that shares are destined to retest their October lows.


Picked on November 09 at $23.39 /stopped out 21.75
Change since picked:     - 3.26   			
Earnings Date          10/30/08 (confirmed)    
Average Daily Volume:      36.5 million     

Perdigao S.A. - PDA - close: 29.08 change: -2.17 stop: 29.49

PDA suffered some heavy profit taking on Wednesday with a 6.9% drop and a breakdown under support in the $30.00-29.50 zone. Shares hit our stop loss at $29.49 closing the play. PDA has now produced a short-term bearish head-and-shoulders pattern that is forecasting a decline toward the $25.00 level. A failed rally near $30.00 may be a new entry point for bearish positions.


Picked on November 10 at $32.00 *stopped out 29.49   
Change since picked:     - 2.92   			
Earnings Date          10/28/08 (unconfirmed)    
Average Daily Volume:       245 thousand    


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