My Stock Winners

In the sessions surrounding the 2006 Memorial Day holiday, the Fourth of July holiday, and Thanksgiving, the Dow Jones suffered triple-digit losses. In addition to the general malaise that could strike trading, the SPX is struggling with a series of “speed bumps”. Despite a few attempts to break out, the broad-market index has yet to close above 1,527.46, its all-time closing high achieved on March 24, 2000. Above this bump is the 1,553.11 level - marking the index’s all-time intraday high.

Added to this thick soup of resistance is a heavy accumulation of calls at the 1,540 and 1,560 strikes. In the June series alone, there are nearly 266,000 open calls perched overhead between these two strikes. These bullish bets could act as a troublesome roadblock during the near term.

Shifting gears slightly to the S&P 100 Index (OEX), we find another annoying “speed bump” at the 700 level. This psychologically significant round-number level has succeeded in rejecting the index since May 18.

Meanwhile, put open interest is swelling on the SPX. During the past week, the number of put contracts on the SPX increased by 593,000 contracts, more than doubling the number of new call positions added during the same time period. While institutional traders may not expect a correction, it could just be a case of institutional investors chasing the rally, but chasing with caution. In other words, index puts are accumulated as institutions accumulate stocks. Since institutions/hedge funds are the only players in the market, as they get overly invested, as is evident by rise in index put accumulation, the market has tendency to run out of gas. However, the index puts suggest any corrections will be short lived and shallow in nature.

This building put open interest is also very interesting in that it confirms what I’ve been saying for months in this column about the tendency for portfolio mangers to accumulate index puts as the CBOE Volatility Index (VIX) declines to levels that are attractive for picking up portfolio insurance. As trading opens again following the Memorial Day holiday, the VIX is hovering close to the 12 zone, which has held as support on a number of occasions since mid-March. We are now faced with the potential for the a VIX bounce to 14-15 from this support level.

Another point worth noting is that bonds are currently trading at the top of their range and a move back into the range would imply weakness for stocks.

Despite being a short week, it will not be without potential fundamental catalysts that could work to temporarily de-rail the current uptrend. Thursday kicks things off with the revised first-quarter Gross Domestic Product (GDP), which is widely expected to be lower from its initial reading. Then Friday floods the Street with the May nonfarm payroll figures, the May Institute of Supply Management report, and the Core PCE Inflation report. Any weaker-than-expected reports could act as the spark that lights selling fire that could consume the Street.

However, as I stated last week, I’d fully expect such a pullback to generate more than enough bearish sentiment to set the stage for a major push by the S&P to all-time highs and beyond, as the major drivers for the bull market skepticism, and put buying, and short selling in the face of strong price action, reasonable valuation, and massive liquidity - remain firmly in place. I’d therefore advise all but the shortest-term traders to forget about trying to position for the pullback.

We picked Amazon (AMZN) for a Downside Trade (Short position)
TRADE QUALITY: 90%, which is rated Excellent
TARGET 1 Price: 61.38 Profit: 11.8% , for a typical pullback.
Cover Limit/Trailing Cover Limit: 71.22 Loss: 2.3%
Profit/Loss Ratio: 5.1 : 1 - Excellent

TARGET 1 POTENTIAL Excellent, there are 0 support areas on the way to Target 1.
Stocks may quickly fall to Targets when there are not many support areas blocking the way.

TARGET 2 Price: 58.13 Profit: 16.5% , Profit/Loss Ratio: 7.2 : 1 - Excellent for an extreme pullback.

BREAKDOWN WATCH for possible breakdown below 67.72, no support in area just below.
Type: Continuation breakdown from single support.
Target: 61.67, 11.4% Cover: 71.22, Loss: 2.3%, Profit/Loss ratio: 5 : 1 - Excellent

SUPPORT BELOW -11.8% at 61.38 (we expect AMZN to reach these level in 3 months)
-35.5% at 44.89 ± 0.9, type single, strength 2
-39.6% at 42.03 ± 0.84, type triple, strength 9
-43.9% at 39.06 ± 0.78, type triple+, strength 10
-46.5% at 37.26 ± 0.75, type triple, strength 9

Bubbles in markets are, as the name implies, unsustainable. They are manifested by inflated prices that go up and up to achieve unthinkable levels for awhile. But inevitably, the bubble pops, with the unfailing result that prices soon thereafter drop back to earth. Thus, like their soap-bubble counterpart bubbles in the market clearly lack something even more fundamentally important- they lack reality.

There is one very strange thing about bubbles. Even though prices are out-of-line with value based on any prudent historical measure, people don’t react as one would logically think, Instead of recognizing a bubble for what it is, people instead tend to rationalize why prices are so high. They try to explain to themselves why prices are supposedly reasonable.
This attempt to rationalize what is illogical and abnormal is a unique characteristic of bubbles. But it is not too difficult to see why this thinking happens.

When you are living in a bubble, it is very hard to accept the fact that you are indeed in the middle of a bubble. The reason for this inability to perceive foolhardy thinking is that most everyone acts as if there were no bubble. Everybody is saying, doing and thinking the same thing. This mutual & identical action reinforces one’s view to mistakenly believe that what they are thinking is correct & normal instead of what it really is, namely, the illogical & abnormal pervasive thinking that is found in a bubble.

We heard it all before-the reasons-new economy; advance in technology, increased technology, increasing production, inflation is under control. –In Short, its different this time, but in reality its never different. —
Only when the bubble pops does the bubble become obvious.

AMZN is overvalued by any normal fundamental analysis.

You want to compare AMZN to EBAY and YHOO.

Why don’t you compare the Balance Sheets and Earning Stmts of both of them to AMZN’s and you will see they are much stronger. You will discover that they have more cash, less liabilities, and much greater stockholders’ equity. They are also much more profitable and have much higher Free Cash Flow.

AMZN has $1.2 bn in long-term debt and $3.3 TTL Liab, ($1.4bn in Cash and Invtms),

EBAY has no Long-Term Debt with $2.7 bn TTL Liab, ($3.3 bn in Cash and ST Invstms

YHOO’s LT Debt is around $700ml with TTL Liab of $2.5bn (they have $2.4 bn in cash and invstms)

You will find that all of their financial ratios are also better. You emphasis on free cash flow is not that meaningful.

AMZN Music Download Business will Fail and it will effect the bottom line. The cost of the rights to the music are enormous. You can already download all of the same music files from foreign distributors like www.mp3sugar.com for less than half of what iTunes or mp3.com or even AMZN will be able to offer.

AMZN will just be one in several hundred retail sources for downloads now, one in a thousand by the years end.

The unrestricted format is an attempt to undo the Amazon Unbox blunder that has plagued them and caused disgruntled e-patrons to find alternative download formats.

The Television Cable Service providers will be the next to have their hand in the music download sector. They have far more reach than anyone when it comes to marketing, and they also have far greater technology. Watch as they dominate NFLX,BBI and even TIVO in the coming years. AMZN is not a player in this and never will be.

No institutions are buying at this price.
Friday volume was only 9.9 million shares compare to average volume of over 13 million shares. It’s been trading over 20-40 million shares a day since the big pop up from 62 range and this is huge drop in volume from that point under 10 million shs. Everyone knows it’s overpriced and went down when other tech companies went higher Friday. It will be below 60 soon because when it falls, it will fall like hot knife through butter.

On May 12, 2006, the euro’s rally from the November 2005 lows exceeded the 61.8% retracement resistance of the decline from the highs of December 2004 (Fig. 3a, point 1). This indicated that the euro’s uptrend had resumed, which is consistent with the completion of the falling wedge formation that was shown in Fig. 2. Now, let’s look more closely at the rally from the November lows at 1.1661 to the May highs at 1.3003. So far, the euro has held above the 38.2% support level at 1.2500 with next support at 1.2330, the 50% retracement level. The daily chart does show a flag formation, lines a and b.The completion of this formation would indicate that the Euro’s uptrend had resumed.

Telecommunications (TTH)
Bullish
Trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Pessimism dominates the sentiment backdrop of the telecommunications sector despite its impressive technical uptrend. In fact, Wall Street continues to wager against the group. Of the 161 analysts ratings on the components of the Telecommunications HOLDRS Trust (TTH ?40.47), less than 29% come in at a “buy,” while a robust 11% rate them a “sell.” This bearish configuration leaves ample room for potential upgrades across the sector. What’s more, the number of the exchange-traded fund’s (ETF) shares sold short jumped sharply in April, pushing its short-interest ratio even higher to more than 10 days to cover. This growing short interest underscores the pessimism that continues to surround the sector.

Outlook: Technically speaking, the ETF has overtaken psychological chart resistance at the 40 mark and hit a new annual high late last week. What’s more, the trust remains in a long-term uptrend, rising along the support of its ascending 10-week and 20-week moving averages. As pessimism toward telecommunications stocks unwinds, it should add more buying pressure, keeping the group aloft.

Sector
Utilities (UTH)
Bullish
Trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Skepticism is extremely heavy in the sentiment backdrop of the utilities sector as well. Wall Street has placed some heavy bets against the group as less than 27% of the 183 analyst ranking on the components of the utilities sector come in at a “buy.” Any upgrades from this dour group could help to add more lift to this sector. Despite the fact that the number of Utilities HOLDRS Trust (UTH ?151.80) shares sold short dropped by 12% in April, the ETF still has a hefty short-interest ratio, pointing to high levels of pessimism among short sellers.

Outlook: The shares of UTH have moved sideways recently, consolidating into support at their rising 20-day moving average and hurdling through the 150 level. In addition, an unwinding of the existing pessimism toward the sector should help to fuel further gains in the sector.

Sector
Airlines (XAL)
Bearish
Trading above its…
20-day Moving Average: YES
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Optimism permeates the sentiment backdrop of the airline sector despite its weak technical performance. Wall Street is enamored of the group, as roughly 52.5% of the analysts ratings on the components of the sector come in at “buy.” Any downgrades from this optimistic pack could fuel additional losses in this group. Options players have yet to levy heavy bearish bets against the group, as the composite Schaeffer’s put/call open interest ratio sits lower than roughly 70% of the readings taken during the past year. This complacency against the sector’s weak technical backdrop has bearish implications from a contrarian perspective.

Outlook: The AMEX Airlines Index (XAL ?51.26) remains in a steep intermediate-term downtrend beneath its 10-week and 20-week moving averages, which have acted as paired resistance since February. In addition, the XAL’s 50-day moving average is also approaching the shares and could add another layer of resistance, keeping the group moving lower during the near term. A rejection at either these trendlines could result in further downside as the remaining optimism unravels in the form of increased selling pressure.

Most investors by nature will “go long” when they buy stocks. Few investors naturally will short stocks (or bet on their decline) because they really don’t know what to look for. Some investors see the shorting process as somewhat counter-intuitive to the traditional investing process since many stocks do appreciate over time. That said, there is a lot of money to be made by shorting, and in this article, we’ll give you a list of signs that show when a stock might be ripe for a fall.

Technical Trends
Look at a chart of the stock you are thinking about shorting. What is the general trend? Is the stock under accumulation or distribution?

It is not uncommon to see a stock that has been in a downtrend continue to trade in that same pattern for an extended period of time. Many traders will use various technical indicators to confirm the move lower, but drawing a simple trendline may be all that is needed to give a trader a better idea of where their investment is headed.

As you can see from the chart below, the declining trend will make it difficult for an investor to gain on a move higher because the position will need to fight against the major underlying trend, which in this case is downward

Insider Selling
There are plenty of reasons why an insider might sell his or her stock. This may include buying a home, or simply a desire to book some profits. However, if a number of insiders are selling the stock in large quantities, it may be a wise move to view this as a harbinger of things to come. Keep in mind that execs have extraordinary insight into their companies. Use this information to your advantage and time your short sales accordingly.

Amazon’s insiders sold over 1 millions of shares in just the past few months.

Fundamentals Deteriorating
You don’t need to find a company that is on the verge of bankruptcy to successfully short its stock. On the contrary, you need to see only a mild deterioration in a company’s overall fundamentals for big holders of the stock, such as mutual funds, to get fed up and dump the shares.

Overvalue
Amazon is currently trading at a PE ratio of 120, forward earning of around 60 makes it a clear short sell candidate.

Sluggishness in the semiconductor and Internet sectors, however, forced the Nasdaq Composite (COMP – 2,558.4) into a bit of underperformance; the tech-rich index edged 0.1% lower for the week. And the Russell 2000 Index (RUT – 823.66) of small-cap issues gave back 0.7% last week.

A relative-strength picture of the RUT versus the SPX is frankly not pretty. The market’s rally from its March bottom has been large-cap dominated. In fact, over the past couple of weeks, there have been definitive swings to negative breadth among the small caps, despite a relatively strong market. The blue-chip ride, on the other hand, has been much smoother. On a more positive note, this small-cap under performance has been incorporated into the “wall of worry,” as “weak breadth” is often cited by the bears as a reason to be cautious.

Part of the RUT’s recent struggle, as I pointed out last week, has been the heavy wall of overhead calls in the April and May series. I feel these out-of-the-money positions have capped rallies, but so far the June series is looking like a clearer path. How the June open-interest configuration develops over the course of the next week or so will be key to the small-caps’ short-term development, in my opinion.

As for the broader market, I told readers on Friday that my song remains largely the same. I’m still confident in some major upside from this point, at least over the intermediate term. Momentum remains solid, but we’ve seen muted fanfare despite positive earnings surprises, new record highs, buyback announcements, merger deals, and economic data that have been stronger than expected.

Skepticism (or, at the very least, a lack of enthusiasm) is still at a slow boil, as suggested by the latest from the world of the CBOE Market Volatility Index (VIX). The “fear barometer” continues to hang around the 13 level, several steps away from single-digit territory and more than 30% above the index’s mid-February low. I continue to be amazed (and encouraged) that the VIX is refusing to pull back amid our uptrending market.

The VIX’s inertia is a plus for the bulls for two major reasons. First, those who use the VIX to time the market won’t come out of the woodwork as sellers, because there hasn’t been a decline to warrant any selling action. Secondly, index put buyers are less apt to scoop up “cheap” portfolio insurance, which acts to cap the market as those selling the puts hedge via selling short futures. This routine will often cap market rallies as the VIX drifts to low relative levels. Note though that the VIX closed at 12.76 on Friday and is approaching the 12.50 level that has capped market rallies in recent weeks.

An article in this past week’s Wall Street Journal attempted to reason why the VIX is staying so stubbornly high. The speculative crowd may be to blame, the article reasoned, noting that “traders buying the November 18 [VIX] calls expect the VIX to rise by the fall … the traders sold put options on the VIX to effectively lower the cost of buying the calls…”

This is consistent with the mentality I perceive of those trading options on stocks and equity indices – they either sell covered calls or buy married puts. In other words, they purchase crash protection while limiting their upside. When it comes to options on volatility, however, the trend has been to buy VIX calls and sell VIX puts - with the same theme of limited upside potential for the market (since VIX put sellers are not expecting a huge decline in the VIX) and the urgent need for crash protection (which would cause a sharp spike in volatility, thus the potential for huge profits on VIX calls). I view the action on VIX options as a confirmation of the huge caution among stock investors amid the market’s rally. Such positioning continues to suggest that any pullbacks that might occur should be relatively muted, as those playing this market are hedged for a steep pullback and thus are less likely to panic sell.

On the equity-options front, while we are nowhere near the euphoric stage, which to me would be a sign to look toward the exits, we are seeing a bit more bullish positioning. Data from the ISEE reveal that those buying calls to open have begun to notably outweigh those buying puts. The trend is definitely moving toward the call direction, as evidenced by the data below and may be a precursor to some short-term market weakness:

With all of these factors in mind, this week could be a critical one for the SPX. At 1,522.75, it is five points away from its all-time closing high of 1,527.46, hit on March 24, 2000. This psychologically significant threshold could present a minor “speed bump” for the broader-market index, at least over the very short term. Structural support and a lack of euphoria should allow the index to muscle through this threshold soon, but it may face a bit of a road block in the very short term. This week, we have a number of earnings reports to keep market-watchers busy, particularly out of the retail sector. Durable goods orders for April will be revealed on Thursday, and we’ll get another look into the housing market Thursday as well, with the release of new-home sales.

========= Undervalued Stock #1 ==========

——— Chesapeake Energy Corp. (NYSE: CHK) ———

Insider Name: Aubrey K. McClendon
Insider Position: Chairman & CEO
Insider Action: 100,000 shrs on 5/10/2007
Insider Total Holding: 27,420,798 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 10.2 (Industry Average 18.4)
P/S Ratio = 2.31 (Industry Average 6.27)
P/B Ratio = 1.76 (Industry Average 3.02)
P/CF Ratio = 5.2 (Industry Average 10.3)

Industry: Independent Oil & Gas

——————————————————-
Other Merits…

Dividend Yield = 0.70%
Exceeded or Met Analysts’ Estimates for Past 5 Quarters

——— Chesapeake Energy Corp. (NYSE: CHK) ———

The weekly chart above, Fig. 2, shows the entire rally from the euro’s late 2000 lows at .8245 up through the latter part of July 2006. I have outlined the euro’s first three major corrections; the first labeled b-c, retraced 38.2%, the second (d-e) retraced 50%, and the third (f-g) resulted in a 61.8% correction. This illustrates the Fibonacci symmetry that is often seen in a major rally or decline. The major Fibonacci support levels of the rally from .8245 to 1.3687 were calculated as follows: 23.6%-1.2402, 38.2%-1.1608, 50%-1.0966, and 61.8%-1.032. The euro, after attempting to rally from the daily 50% support level (Fig. 1), again turned lower, breaking back below the daily 50% support (1.2716) at point 2, and then the 61.8% (1.2486) support level. You will note on the weekly chart above (Fig. 2) that the major 23.6% support at 1.2402 was also broken. The euro did attempt another rally in the middle of 2005, but then turned lower late in the year declining to a low of 1.1661 and holding just above the weekly 38.2% support level at 1.1608 (point 3). The euro formed a classical falling wedge formation in 2005, lines B and C, which was resolved on January 7, 2006 at point 4. This indicated that the euro would move higher in 2006, which we will see when we look at the rebound in terms of Fibonacci ratios.

========= Undervalued Candidate #1 ==========

———– Parker-Hannifin Corp (NYSE: PH) ———–

Insider 1 Name: Donald E. Washkewicz
Insider 1 Position: Chairman
Insider 1 Action: 3,400 shrs on 4/27/2007
Insider 1 Total Holding: 141,724 shrs

Insider 2 Name: Linda S. Harty
Insider 2 Position: Director
Insider 2 Action: 5,000 shrs on 4/25/2007
Insider 2 Total Holding: 5,000 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 13.5 (Industry Average 18.0)
P/S Ratio = 1.00 (Industry Average 1.12)
P/B Ratio = 2.31 (Industry Average 2.56)
P/CF Ratio = 9.60 (Industry Average 13.60)

Industry: Industrial Equipment & Components

——————————————————-
Other Merits…

Dividend Yield = 1.20%
Exceeded Analysts’ Estimates for Past 5 Quarters
Analyst Expectations On Rising Trend

———– Parker-Hannifin Corp (NYSE: PH) ———–

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Pessimism dominates the sentiment backdrop of the telecommunications sector despite its impressive technical uptrend. In fact, Wall Street has turned its back on the components of this sector. Of the 160 analysts ratings on the components of the Telecommunications HOLDRS Trust (TTH ?39.40), less than 29 percent come in at a “buy,” while an impressive 11 percent rate them a “sell.” This bearish configuration leaves ample room for potential upgrades. What’s more, the number of the exchange-traded fund’s (ETF’s) shares sold short jumped sharply in April, pushing its short-interest ratio even higher. This growing short interest underscores the pessimism that continues to surround the sector.

Outlook: Technically speaking, the ETF is currently resting on support at the 39 level as it consolidates its recent gains, moving into support at its ascending 20-day moving average. The trust remains in a long-term uptrend, rising along the support of its ascending 10-week and 20-week moving averages. As pessimism toward telecommunications stocks unwinds, it should add more buying pressure, keeping the group aloft.

Utilities (UTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as only 27 percent of the 183 analyst ranking on the components of the utilities sector come in at a “buy.” Any upgrades from this dour group could help to add more lift to this sector. Despite the fact that the number of Utilities HOLDRS Trust (UTH ?149.71) shares sold short dropped by 12 percent in April, the ETF still has a hefty short-interest ratio, pointing to high levels of pessimism among short sellers.

Outlook: The shares of UTH have moved sideways recently, consolidating into support at their rising 20-day moving average. A bounce of this short-term trendline should help to boost the equity through the 150 level once again. In addition, an unwinding of the existing pessimism toward the sector should help to fuel further gains in the sector.

Airlines (XAL)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Optimism permeates the sentiment backdrop of the airline sector despite its weak technical performance. Wall Street is enamored of the group, as roughly 52.5 percent of the analysts ratings on the components of the sector come in at “buy.” Any downgrades from this optimistic pack could fuel additional losses in this group. Options players have yet to levy heavy bearish bets against the group as the composite Schaeffer’s put/call open interest ratio sits lower than roughly 60 percent of the readings taken during the past year. This complacency against the sector’s weak technical backdrop has bearish implications from a contrarian perspective.

Outlook: The AMEX Airlines Index (XAL ?50.99) is facing staunch resistance in the form of its descending 20-day moving average. This short-term trendline has ushered the index lower since late January. In addition, the XAL’s 50-day moving average is also descending into the region and could add another layer of resistance, keeping the group moving lower during the near term. A rejection at either of these trendlines could result in further downside as the remaining optimism unravels in the form of increased selling pressure.

Standard and Poor’s rating is at a “Sell” as well….

We all know Amazon (AMZN) reasonably well and have tried its services; it is clearly one of the e-commerce success stories. The recent earnings announcement pushed the stock up to $63. But is this stock worth a $24 bn market cap?

Amazon started by selling books online. Great brand, broad catalogue and efficient business model. But after reaching a very high penetration rate in North America and the Rest of the World it is getting harder and harder to find new ways to maintain the high growth rates expected by the market. Amazon Prime is a very good initiative in order to maintain and even grow its market share; however it comes to a price in terms of reduced profitability. And we are talking about a company whose operating margin in 2007 will be in the mid single digit.

Competitors are catching up. When it first entered the market Amazon was offering products at a huge discount to its competitors. And it became a benchmark. It took them a lot to react, but, in order to survive, they had to cut prices and gain efficiency. The gap between Amazon and all the other players is reducing and the trend cannot be but in one direction.

Given the difficulties in its core business, Amazon diversified over time and became a retailer of a larger range of items. Most of these new revenues come from consumer electronics, audio & video, cell phones, etc which are not exactly the easiest products to deal with (they have low margins and become obsolete very soon).

Working capital is a source of cash for Amazon: it receives the money from the client before it has to pay the suppliers. This is a very good situation while the business is growing at 20% p.a. BUT will become an issue (declining cash flows) in the near future when growth rates will gradually slow down.

The company gradually improved its ROIC from 2001 (-20%) to 2004 (+44%); but the environment worsened in 2005 (ROIC of 35%) and in 2007 (32% in the IQ). Couldn’t this be a sign that the competitive landscape is getting tougher for Amazon?

Think about the different phases in the low cost airlines industry: 1) only traditional airlines and high fares, 2) introduction of a different business model (low cost and low fares), 3) low cost airlines increase market share while traditional airlines are looking for ways to catch up, 4) traditional airlines adopt a segmentation strategy and gain back price sensitive customers. Are we far away from seeing something similar happening to e-commerce?

Now, all these issues could be “business as usual� for a value company. The problem here is that we are talking about a company whose market cap is $24bn and with a consensus GAAP P/E ratio of over 50 for the year 2007.

We do not consider the high multiples at which the company is trading sustainable over the medium- to long-term.

Therefore we are shorting the stock. If implied volatility goes up from the current levels (30%) it could be possible to sell out of the money put options in an equal or lower proportion. In this way one can benefit from a decline in the stock price (up to the strike price of the option) while limiting the losses in case the stock goes up a little bit more.

Taret Price is $35 by the end of the Summer.

A mixed slate of economic reports and earnings news failed to halt the broad-market rally last week, though stocks did pull back sharply on Thursday. At the close of the week, the Dow Jones Industrial Average (DJIA) finished with a gain of 0.46% while the S&P 500 Index (SPX) edged 0.02% higher. Furthermore, since the start of 2007, the Dow has racked up 6.9% in gains and the SPX has added 6.2%. And yet, pessimism reigns from a sentiment perspective despite this strong rally.

As we head into another options expiration, we have seen a steady rise in put positions on the various broad-market exchange-traded funds (ETF). During the same time frame, call open interest has increased by fewer than 370,000 contracts. As a result, the ETF’s Schaeffer’s put/call open interest ratio (SOIR) has risen to 2.21, its highest level since April option expiration.
Meanwhile, put open interest on the Standard & Poor’s Depositary Receipts remains at robust levels.
This building of put open interest is not only significant because its underscores the continued caution from institutional investors toward the market’s uptrend, as investors remain heavily hedged against a pullback, but also this wealth of put positions has accumulated as we approach expiration this week. In the past, we have seen an upside bias in expiration weeks due to the unwinding of heavy out-of-the-money puts that accelerates during that week. Since January 2006, the SPY finished only five expiration weeks in negative territory, while the average return during the week comes in at a gain of 0.55 percent.

One immediate obstacle that will need to be hurdled on the road to the all-time high I expect in the S&P 500 Index (SPX) this year is round-number resistance at the 1,500 level. The SPX has been dancing around 1,500 for about a week now, which is not surprising since this level had great significance as the SPX traced its major top in the first 9 months of 2000.

Checking in on the latest Commitment of Trader (CoT) report, it appears that large speculators in S&P e-minis haven’t quite finished covering their huge short position that we highlighted a few weeks ago in this space, as the net short position comes off its biggest level in five years and is now at levels consistent with the bottom of 2006 correction. Meanwhile, small traders of SPX futures are maintaining a short position that is hovering near 5-year highs.

This week has a number of key economic reports on tap, which could steal the spotlight. Inflation concerns will take center stage on Tuesday with the release of the Consumer Price Index (CPI). Last Friday saw a tame core Producer Price Index hit the Street, which helped to soothe fears. A benign CPI report could add some lift to the market. Meanwhile, Wednesday sees the release of industrial production and capacity utilization numbers, which will help the Street gauge the health of the economy. After the release of disappointing April retail sales and a larger-than-expected increase in the trade gap, expectations are relatively low on the Street regarding the economy. Any reports than come in better than the consensus estimate could result in a sharp rally in the market. Meanwhile, in the event of more disappointments on the economic front, declines should be modest, as heavy ETF put activity makes investors less apt to panic selling.

Trading Tips – Introduction to Fibonacci – Part 2
In the previous article, I introduced how the Fibonacci ratios of 0.236, 0.382, 0.500, and 0.618 could be used in a strongly rising market to determine good levels of support where new positions could be considered. These are noted in the charts that follow as percent levels: 23.6%, 38.2%, 50%, and 61.8%. In this article, I will continue the discussion of the Euro FX Composite through July 2006 and then look at some examples of how the Fibonacci analysis can be applied to stocks and to intra-day data.

Previously, we looked at the euro from the lows in 2001-2002 up through the correction, which ended in April-May of 2004. The Euro FX, after rallying from the lows at point g, moved sideways for the next five months with support at 1.1944 and resistance at 1.2449. The resistance was overcome on October 15, 2004 (point 1) and the euro quickly surpassed the previous highs, reaching the 1.3687 level on December 30, 2004 (point h) The initial correction from these highs was quite sharp as the 23.6% support level was broken, which was followed four weeks later by the 38.2% support at 1.2930. The euro was finally able to reach the 50% support level on February 2, 2005 (point 2) and then turned higher. At this point it was important to look at the long-term Fibonacci support levels as well…

To be continued..