MARKET COMMENTARY (1/27/08)

In my post yesterday, I described that I was looking for a breakout or breakdown in the financials and it appears that it may be coming today. During after-hours, the banks spiked +7-10% higher on news that the "bad bank" plan could be introduced as soon as next week. It's a necessary evil, it seems. I mean, who else is going to buy this worthless crap?

The level of ridiculousness would depend on how the Gov't plans on pricing these bad assets. I'm actually curious if they'll create some new type of fancy accounting. Seriously, not even a homeless man would take these toxic assets, so we've come to the point where the Gov't is the only entity that is willing and able to buy the worst assets in the entire world on behalf of taxpayers . No one else can buy up enough shit to make a difference. Also, why do they still call them "assets"? If these "assets" brought down the financial world, then they are liabilities, regardless of what any accounting textbook says.

The big difference here is that the Treasury was buying preferred stock, conveniently deviating from the TARP's original plan. The Gov't will now be buying common stock. Taxpayers, keep in mind that this presents an even greater amount of risk to you, but who will keep the Gov't accountable? The fact that the Gov't will be buying up common stock in banks will send bank shares much higher. Expect significant short covering in the morning.

This plan obviously overshadows the FOMC meeting later today. No one seems to care too much because there's nothing really the Fed is expected to do. Are they going to drop rates to 0% or -0.25%? No. Are they going to raise it? They wouldn't dare + that's absurd and the market will frown upon it. Therefore, I expect no action. Besides, there mf-ers are too busy trying to resuscitate the economy with these creative programs, paid for by your kind donations to the Treasury.

Today's day was a perfect set up for the upside move, but I didn't have the guts to go long. It's fine, like I give a damn what you think. In fact, I've been in 100% cash overnight for almost 3 days, which is a very long time for me. Unless you're long, having an ample cash reserve gives you the opportunity to personally take advantage of the additional misuse of taxpayer's funds. The market completed a 5-day ascending triangle, which will break to the upside (as of 1:09AM EST). The financials should be your focus for today, so keep an eye on BAC, C, JPM, WFC, GS, MS, etc.

I have a feeling that the financials will spike higher on consecutive or near-consecutive multiple days, in a very short time. I talked about the flag formation in my post yesterday and it looks like today will present the upside breakout. The after-hours action (as of 8:00PM EST) dictated that most financials will open slightly above their respective flags' only resistance area. A long spike at the close will also create a 'Cradle' pattern, one of the highest reliable and profitable candle combo patterns during a downtrend. They are one of the most dramatic displays of immediate changes in sentiment. This only matters if the banks CLOSE UP and above their flags' resistance.
Did you hear what I said? There needs to be a strong close. This means that if a "WTF" pattern popped it's head up at 3:55PM and crashed the market, then this negates everything. For the open, I'd prob add an initial starter position in the banks, then either 1) add on sustained momentum, or if the gap suddenly fills, 2) add on a breakout of the gap's opening price. Both are determined in the first 15-30 mins of trading. Trade accordingly.

One more detail: Don't forget that the House will vote on the $816 billion stimulus bill TODAY. There's never been a time where I've seen the words "billion" and "trillion" appear so freakin' much. Congress throws these words around as if it's chump change. Am I right? You hear "billions" more than "millions" as if spending the latter went completely out of style.

Cramer is starting to use technicals. God help us.

Examples of anticipated immediate financial breakouts:

Warning: Extremely offensive.



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YESTERDAY'S ACTION (1/26)

It's snowing here in MD!

I saw this article on iTulip about how wholesale liquidators, the companies that sell goods for companies that are going bankrupt, are themselves going bankrupt. In addition, just sampling losses in tech jobs, the trend seems pretty clear to me. The bad news keeps pouring in, yet the market holds. Odd, no?

Also, the updated chart on yesterday's Existing Home Sales data:

Yesterday, we formed a doji, or for some technicians, a small shooting star. Clearly, we are flagging on lower volume. This is 'healthy', but is usually signals a continuation in the prevailing trend. I will not put overnight money to work until we clear this 800-855 level on the SPX, otherwise, you're bound to see more faking. This consolidation area is purely a daytrader's haven, so if you're swinging, it's good to wait for a breakout or breakdown.


I am still focusing on the financials, because they are forming very clear flags and pennants on lower and lower volume. What you want to see is a breakout of breakdown on much greater volume that usually exceeds the past 2-3 days' volume levels. They will make really great swing trades when, like I said, the time is right.

Finally, countries in a recession, or pretty damn close to one:

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TODAY'S ACTION

Looks like the financials led the market. Down. As much as traders want to be all gung-ho long and everything, it's important to keep an eye on the weakest sector. Take a look at C, JPM, WFC, BAC, and many smaller names. They all broke their uptrends. C, especially, formed a breakaway gap down on large volume. These types of gaps make it extremely difficult for a stock to recover in the short and intermediate-term.


So, what's been doing fairly well long-term? The utilities, because they haven't been going anywhere. Other sectors such as the materials, industrials, consumer disc. & staples, among others, are threatening to break down. Yesterday, I mentioned that the market cannot rally without the financials. This remains true. The overall health of the market depends on this sector. In addition, we started making more new lows than highs. The $NYHL and $NAHL are negative once again.


As for index breakdowns, the DJIA is leading the decline, followed by the SPY, R2K, and the COMP. The important matter is how the market is churning at the 50-day MA. This has been going on for over a month now without much progress at this key intermediate support level. Usually, you want to see the market use the 50-day MA as a "springboard" to propel itself higher. It is presently not the case.

We still have one major support level at 855 to clear before we start a multi-day decline. The focus continues to be on the financials, especially C (and JPM on the 15th). The trend is intact until it isn't. The financials have broken their trend and it appears that the market will follow for now.

SPX Initial Support: 860
Resistance: 20-day @ 892
Resistance: 30-day @ 885
Resistance: 50-day @ 882

Also, take a look at the VIX. It broke out via breakaway gap up:

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LOOK OUT! High-Reliability Reversal Signals

Some stocks have seen some amazing gains in the past two days, just look at Morgan Stanley (MS), up over 130%, and you’ll see what I mean. These returns are no joke, but when is it time to consider selling or at least scaling out of a long position especially during power spikes?

Below are four of the most highly-reliable reversal signals that every long should watch out for:

For now, ignore the red candles and focus only on the white and black candles that form the left sides of each drawing.

You may have noticed that a lot of “spikers” have gone up too far too fast. These are the stocks that become perfect short candidates for a 1-3 day hold. You may have noticed some of the patterns (above) before, but I’ll give you some examples and what to look out for.

Evening Stars are one of the most reliable reversal patterns available. The failure rate is extremely low and I can’t remember the last time I had a major problem with them. What’s happening is that as each day passes during the rally, the open-close range gets smaller meaning that the buying is starting to slow down. The “cross”, called the doji, at the top signals that the rally has entirely stalled and there is some confusing among both bulls and bears as to which direction the stock should go. This doji day is critical because what happens the next day will most likely continue in the direction of the winner.

Because the rally stalled, it means that the bears have taken some control away from the bulls and there is a very high chance that the stock could drop the very next day. If that does occur, that’s called the evening star and that consists of a long white candle, the doji in the middle, and a down day. Just because a stock dropped to confirm this pattern does not mean that it’s too late to short. Most of the times, this is only the beginning.

Here are some examples of stocks that “may” become evening stars imminently:

Are there pattern failures? Absolutely! That’s why strict risk management and controls must be in place to handle these types of failures. Take a look at Citigroup (C). Notice how it formed a second doji. Shorts would have lost over 18%. This is why I like to wait for confirmation in a signal to go forward before “assuming” that the pattern will go the way I want it to go.

Shooting Stars are one of my favorite patterns. They remind me of a comet (or shooting star) falling down to Earth and that’s exactly how the Japanese rice futures traders named this pattern. It’s an ominous sign that a stock (or rice) will drop very, very soon.
The failure rate is extremely low, but is higher than an Evening Star pattern. What goes on during a shooting star day is that a stock gaps up, moves higher throughout the day, but for some reason is unable to hold its intra-day highs, and falls back near
its close. From the open to its high, the shooting star is formed when at least 2/3^rd’s of the day’s gains are gone. Take a look at Fifth Third Bancorp (FITB) and you can see the shooting star clearly.

Bearish Engulfing patterns are just as reliable as shooting stars, but not much so than Evening Stars. Still, they show serious warning to traders that sentiment has almost entirely changed from yesterday. What happens here is that the first day opens and closes well over it’s open but on the next day, the stock gaps up and drops like a rock throughout the day and the open-close range penetrates so deep that it completely “engulfs” the previous day. This action basically cancels out yesterday entirely and shows that something happened that made investors/traders to dump the stock right after they bought it. Take a look at Massey Energy (MEE) and Yingli Green Energy Holding (YGE) below:

Another favorite of mine are bearish gap ups, or formally known as Bearish Belt Holds. These are stops that gapped up considerably but sold off throughout the day, closing well below its open. The gap is usually not filled on the same day. This pattern represents the ultimate change in extreme sentiment because investors/traders were so excited, they continued to buy after-hours and pre-market the next day that the stock gapped up significantly. However, they all just dumped it. Why? Who cares! Just know that you probably shouldn’t own a stock that just sold off from the start. Here are a few examples. In the case of National City (NCC), look how sometimes it may take two bearish gap ups to complete the pattern.

I want to remind you again that there are pattern failures and nothing is a guarantee. Just look at Sallie Mae (SLM). Shorts would have lost 35% in a single day! Practice strict risk management and make sure you cut losses QUICKLY if this does occur.


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NASTY WALL STREET SHENANIGANS!

(courtesy of Shane B., emphasis mine)

Bank of America Said to Cut Off Merrill Before Deal (Update2)
2008-09-18 20:21:39.300 GMT

By Bradley Keoun and David Mildenberg
  Sept. 18 (Bloomberg) -- Merrill Lynch & Co. Chief Executive
Officer John Thain told employees that Bank of America Corp.
``cut our trading lines'' in the days before it bought the firm,
signaling a loss of confidence in the brokerage's ability to pay.
  Thain made the comments while explaining his decision to
sell Merrill, according to five employees who attended the event
at the company's New York headquarters. The Sept. 15 remarks were
rebroadcast on an internal system to all 60,000 employees.
  ``Before the trade was done Bank of America cut our trading
lines,'' Thain said at the meeting, according to the people, who
declined to be named because they weren't authorized to discuss
the internal meeting. ``We did get them to put it back.''
  The disclosure shows how close at least one of Merrill's
trading partners was to reducing its credit after a 36 percent
decline in the firm's stock price last week. The shares tumbled
on speculation Merrill might be the next securities firm to
collapse following Lehman Brothers Holdings Inc., which filed for
bankruptcy protection on Sept. 15 after investors and trading
partners lost confidence in the New York-based company.
  Since the Bank of America agreement was announced on Sept.
14, Merrill has gained 29 percent in New York trading. The
second-biggest U.S. securities firm by market value rose $2.70,
or 14 percent, to $22.06 in composite trading today as of 4:14
p.m.
  Merrill spokeswoman Jessica Oppenheim declined to elaborate
on the Bank of America moves or say whether other firms had
pulled back their trading lines. Scott Silvestri, a spokesman for
Charlotte, North Carolina-based Bank of America, declined to
comment, citing a policy of not discussing client matters.

Trading Lines

  Trading lines include credit or liquidity sources that
securities firms use to facilitate transactions or to meet cash
needs.
  Merrill began its talks with Bank of America on Sept. 13,
even as the bank was considering a bid for Lehman, and struck a
deal by nightfall the next day.
  Since then, Merrill's stock was one of only two gainers --
the other is Jefferies Group Inc. -- in the 10-company Amex
Securities Broker-Dealer Index. Morgan Stanley, the third-biggest
firm, is down 39 percent this week, while No. 1 Goldman Sachs
Group Inc. has tumbled 30 percent.

*T
For Related News:
More stories on Merrill Lynch: MER US  CN BN 
Top financial news: FTOP 
*T

WEEKLY TECHNICAL COMMENTARY - Sept 15th-19th

THIS WEEK’S ISSUE:

• In Play: Lehman Brothers (LEH)
• In Play: Bank of America & Merrill Lynch
• In Play: American International Group (AIG), Washington Mutual (WM), UBS AG (UBS)
• Market Commentary: DJIA, S&P 500, NASDAQ, CBOE VIX
• 5 NYSE & 5 NASDAQ Stocks Making 52-Week Highs
• This Week’s Watch: Economic Reports & Notable Earnings Releases

U.S. FUTURES (as of 5:30AM EST): DJIA -312, NASDAQ -48.25, S&P 500 -41.90

IN PLAY: Lehman Brothers (LEH)

What a sad, sad story. There are numerous questions that shareholders, employees, and others are asking right now. All I have to say is that IT WAS COMING. That’s it. There’s no excuse for shareholders. Why do people think that the worst of the crisis is over? It’s not! Things like this get worse before they get better, and we have a lot more troubled firms to deal with in the future (For example: AIG and WM, to name a few). Unfortunately, the Treasury/Fed lending well has dried up, so don’t expect the same $30 billion in Fed-backed loans to save other firms. And that’s exactly what happened tonight.

Lehman filed for Chapter 11 bankruptcy. This is the largest bankruptcy filing in history ($613 billion in debt) The bankruptcy will not include broker-dealer operations and the Neuberger Berman unit, and other units. Lehman was founded in 1850 by the Lehman brothers, Henry, Mayer, and Emanuel, first as a cotton-trading operation in Alabama, moving its way up to provide a wide range of financial services. LEH has a rich history of mergers and acquisitions including with American Express, Abraham & Co. Trading, Kuhn, Loeb & Co., and Shearson, finally becoming independent in 1993 under CEO Harvey Golub.

They survived every major financial crisis, including the Great Depression, until now. CEO Richard Fuld took over since Mr. Golub.

I just have to say that this was Fuld’s fault. John Gapper said it best: “Fuld never changed, not really. He was still the same dark, obstinate Lehman loyalist that he had always been - a man who never wanted his firm to be sold. And, in the end, Mr Fuld's pride and obstinacy stood in the way of Lehman's desperate efforts in the past half year to right itself...He had devoted so much of his life and his personality into moulding the bank he could not accept its decline. If he had sold out earlier, Lehman might have survived but he was too proud. It was hubris, followed by nemesis.

Hubris (American Heritage) – Overbearing pride or presumption; arrogance, excessive pride. I would specifically add, “inability to admit fault”, “general widespread dishonesty”, and “misleading the public on TV”, among anything else you as the reader wants to add. And don’t even tell me that a CEO doesn’t have any knowledge of what’s going on. The next CEO that says that (i.e. Alan Schwartz – Bear Sterns) will have a tough time covering his assets in the future.

Remember when Fuld commissioned former CFO Erin Callan to act as head cheerleader for LEH earlier this year? At the same time, LEH executives condemned short seller David Einhorn (of Greenlight Capital) for shorting Lehman and calling his accusations false. In my experience, high-profile short sellers have sufficient evidence to back up their position and I consider short sellers, as a whole, to be the best analysts in the world because they’re not biased to the long side nor do they have any interest in any firm (not being employees of a publicly traded company). They are the masters of finding deception, mistakes and irregularities. At this point, any executive of any financial firm that comes out on TV saying anything should be hear with skepticism and any short sellers that come out should be hear with an open mind. Shorts were right this entire year, and financial executives have lost every time. Notice the trend?

Here’s a timeline of Lehman’s history since the start of the credit crisis 13 months ago (Courtesy of CNBC):

-Aug. 22, 2007: Announces plans to shutter its subprime mortgage business, eliminating 1,200 jobs.
- Sept. 20: Chief Financial Officer Chris O'Meara steps down to head global risk management division. Erin Callan, head of the investment banking practice for hedge funds, succeeds him.
-Dec. 13: Reports fiscal fourth-quarter profit of $870 million and full-year earnings of $4.2 billion.
-Jan. 17, 2008: Lehman says it will stop originating mortgages through wholesale channels amid continued weakness in the housing and real estate markets.
-March 16: The federal government and JPMorgan Chase & Co. bail out Bear Stearns Cos. Analysts question whether other investment banks might also collapse.
-March 17: Reports suggest Southeast Asian bank DBS Group Holdings Ltd. instructed its traders to cease working with Lehman, though those instructions were later rescinded.
-March 18: Announces it earned $489 million during its fiscal first quarter.
-April 1: Raises $4 billion in capital.
-April 15: Speaking at the investment bank's annual shareholder meeting, Chairman and Chief Executive Richard Fuld tells investors that the worst of the credit crisis is behind Wall Street, but that the environment "will remain challenging.
-May 16: Announces it is cutting 1,400 jobs, or about 5 percent of its work force.
-June 9: Estimates it lost about $3 billion for the second quarter and that it is raising $6 billion in fresh capital.
-June 12: Removes Callan as CFO and Joseph Gregory as chief operating officer. Herbert McDade replaces Gregory, while Ian Lowitt replaces Callan.
-Aug. 29: The New York Times reports Lehman is preparing to cut 1,500 jobs.
-Sept. 2: Reports indicate state-owned Korea Development Bank was considering buying a 25 percent stake in Lehman.
-Sept. 8-9: Shares of Lehman plunge 52 percent amid worries the investment bank was struggling to find new investors and raise capital. Reports say the talks with KDB have ended.
-Sept. 10: Lehman says it lost $3.9 billion during its fiscal third quarter and plans a number of moves to shore up its balance sheet. The announcement, coming a day after Lehman shares lost 45 percent, is an attempt to assuage market worries. Fuld says the firm will consider all "strategic alternatives."
-Sept. 11: Lehman shares skid another 42 percent as investors reject the plan, forcing Lehman executives to scour Wall Street for a financial lifeline.
-Sept. 12: Late Friday night Wall Street executives and top U.S. financial officials convene at the New York Fed to discuss how resolve Lehman's situation before it shakes investor confidence in the U.S. banking system.
-Sept. 13: The group reconvenes at the New York Fed as foreign finance ministers urge a solution before Asian markets open.

Lehman up to this point holds approximately $60 billion worth of toxic real estate-related holdings, unable to get them off its books or find a hero to save the firm. There were many indications of warning like most impending disasters. The failure of getting support from Asian firms/banks, such as the Korea Development Bank, and the withdraw of interest from several other firms suggested that Lehman’s books were kept in private to hide the true nature of the beast, especially if Bank of America and Barclays pulled out along with other major Wall Street firms. The continued decline in LEH’s share price also suggested that something else was going on behind the scenes at LEH, all the while trying to sooth investors from their worries. The market is never wrong.

This is mostly unfortunate for Lehman employees who own approximated 25% of the firm. They were guided by a wolf in sheep’s clothing and unfortunately, nothing can be done with restricted shares. This is the same story happening over again. Any bank employees thinking about purchasing more shares in their own company, at the company’s request, should learn a lesson from this trend.

I believe it was the right decision to let LEH fail. I also praised the Federal Reserve and the Treasury for keeping to their word by not providing capital to the firm or any other firm in the future. So far this entire year, the Treasury and the Fed have done certain things that were contradictory to their statements, but now they have stood firm. This is a lesson of hubris, the pride and the greed that, once hedonistically savored, will be difficult to get out of. Other firms make note: there is no Fed/Treasury-backed bailout for you.

What about the shares for this morning? Expect what you think would happen to a publicly-traded company that just filing for bankruptcy. Shares will get cratered more so than FNM and FRE, obviously. The stock will get delisted very soon and I wouldn’t be surprised if shares get halted today. Longs beware!

There’s more news on Lehman, but I think that by now you’re reading the headlines yourself.

IN PLAY: Bank of America (BAC) & Merrill Lynch (MER)

By now, you’ve heard that Bank of America (BAC) has agreed to buy Merrill Lynch (MER) for approximately $50 billion (or $29 per share). If you haven’t noticed, MER shares are trading at $17.05, and the offer price is at a 71% premium. The deal includes $4 billion in MER common stock as well as $6 billion in options, convertible shares, and restricted shares. Many people say that it’s a crazy price and it’s too expensive while analysts say that the fair value is $40 per share. It doesn’t matter what people think, the market will make that decision for you.

The sale includes MER’s stake in Blackrock, which has $1.4 trillion in assets under management (AUM). BAC current has $589 billion in AUM. Together with the Countrywide acquisition, I believe that Bank of America will be the next super financial conglomerate after Citigroup. You’ll notice another trend where broker dealers are failing and commercial banks are not. This is due to the fact that banks such as BAC have the cushion of billions in customer deposits to fall on. No major commercial bank has failed thus far. So, for future reference, keep an eye on the broker dealers without commercial major commercial operations. This deal has been approved by both boards but is subject to approval by regulators (not hard given that the Fed had a hand in this) and a vote by shareholders of BAC and MER.

My real opinion? This is a mistake. Why buy MER for $29, when the firm could have been gotten cheaper? Answer: The Fed is trying to prevent another Lehman. It’s all about liquidity and confidence – the two most important words in this market.

What will most likely happen is that BAC will gap down lower and MER will form a breakaway gap near $29. That’s how these things work. MER shorts, be aware that it’s unlikely that MER shares will ever touch $17 again unless BAC somehow backs out of the deal or shareholders don’t approve (which is highly unlikely given that the Fed has forced the deal to happen, according to numerous sources). The Fed always seems to make things happen.

IN PLAY: American International Group (AIG), Washington Mutual (WM) & UBS AG (UBS)

Another troubled financial firm is American International Group (AIG). AIG’s market cap is $32.64 billion and they just announced a plan to raise $40-$50 billion in liquidity! What does that tell you? They’re in some serious liquidity trouble. The firm is currently in talks with the Fed (for short-term financing), Warren Buffett, the NY Insurance Department, and private equity firms. AIG is also looking to avoid an imminent downgrade from the major ratings agencies. Whatever they’re talking about better be quick. Did you know that AIG was founded in China 89 years ago? Me neither.

Washington Mutual (WM) is another struggling firm that is highly likely to be taken over. There were reports that JP Morgan (JPM) was in talks with WM, but the reports were false. WM also announced that they were “well-capitalized” but why have shares fallen 30% last week and over 90% so far in the past 12 months not trading a $2.73? The market is never wrong. Both Fitch and Moody’s downgraded WM’s debt rating on Thursday. In addition, WM got the courage to replace the CEO recently so they’re on the right track. But how long do they have to survive? Loan loss provisions are now estimated at $4.5 billion for Q3 and they are scheduled to report earnings on October 22.

UBS AG (UBS) announced over the weekend that they’re taking an additional $5 billion in write-downs. This is in addition to the $42 billion they wrote down since the credit crisis started. This leaves the same question: How long do they have to survive?

There seems to be a lot of press on the major firms. But what about the smaller, regional banks? So far, there are 313 lenders and banks that have failed (to my knowledge). More to come!

MARKET COMMENTARY -- INDU 11,421.99, COMP 2,261.27, SPX 1,251.70, VIX 25.66

I don’t know what to say honestly; except that this is the most manipulated market I have ever traded in since I started six years ago. It’s unbelievable. My currently policy as of last Friday is to cut all positions by half and go into cash. It’s the safest action and there’s nothing wrong with holding cash and waiting for the right opportunity. It’s a blessing that I don’t hold LEH, MER, BAC, AIG, WM, UBS (or all the firms mentioned above) for one simple reason: no one knows what will happen on the weekends. Since there is a lot of activity on the weekends, I refuse to take the risk and any prudent trader would do the same. I advise all traders to take defensive measures and act conservatively in anticipation of additional market-moving news this week, and of course prepare for anything that may occur on the September 20-21 weekend. By now, you’ll have noticed the weekend trend.

The DJIA and S&P 500 are forming similar patterns, but decided to post both to note a difference. The DJIA has yet to test the July low where as the S&P 500 has tested closet to the low. Notice the massive increase in volume that was not present in the past three weeks (refer to my last three newsletters, available for download (PDF) for free on http://www.weeklyta.blogspot.com). The negative that I see is the consolidation may be wide-ranged flag patterns that may signal a continuation to the down side. If you checked the futures, the market will gap down and the indices will test the July low. Whatever happens today, will determine whether we start a new primary leg down or if we hold the lows and trade in a neutral range.

As for the NASDAQ, the index has already tested its low successful for now. The only negative is that the volume is again declining on the most recently up days. On a major reversal day, I need to see huge volume, preceding the volume level of previous days in order for me to confirm buying conviction, otherwise, the September low will not hold. Given the futures action this morning, it looks like the NASDAQ will once again test the low.

I profiled the VIX today because the sentiment indicator could not be more effective on days like today. I expect a bearish gap up close to the 30 level and a fade throughout the day. This is an indicator that measures fear, and what better day to watch it than today?

5 NYSE STOCKS HITTING 52-WEEK HIGHS

Alpharma Inc. (ALO)

• Drug manufacturer for humans and animals.
• King Pharmaceuticals (KG) started a $1.6 billion tender offer on September 11 for $37 per share. This is up from KG’s $1.4 billion offer in August.
• ALO condemns the hostile takeover attempt and took on a shareholder rights plan which should make it more difficult for KG.
• Jefferies & Co. downgraded ALO from “Buy” to “Hold” on September 12.

• ALO formed its second continuation gap indicating that the stock is heading higher.

Covidien Ltd. (COV)

• A healthcare company specializing in devices, drugs, imaging, and supplies.
• COV reported positive earnings this entire year and beat estimates in their latest four quarters (Q308 reported: $0.72, estimate: $0.66. Q208 reported: $0.66, estimate: $0.59, Q108 reported $0.59, estimate: $0.57, Q407 reported: $0.63, estimate: $0.60).
• BMO Capital Markets upgraded COV from “Market Perform” to “Outperform” on September 11.
• COV continues its uptrend having broken through $55.50 resistance (prior high). Major moving averages continue to slope upward.

Nicor Inc. (GAS)

• A natural gas distributor that also owns one of the largest cargo carriers in the Caribbean as well as provides service contracting for repairs and maintenance for everything related to natural gas.
• GAS reported positive earnings this entire year and beat estimates in their latest three quarters (Q208 reported: $0.59, estimate: $0.28, Q108 reported: $0.91, estimate: $0.89, Q407 reported: $1.2, estimate: $1.11).
• GAS is outperforming most of its competitors and has remaining resilient ever since the sharp decline in natural gas prices.
• Formed a long-term reverse head-and-shoulder pattern (not shown) which broke out mid-August. Uptrend remains intact and recently broke through $47 resistance (prior high). Major moving averages continue to slope upward.

Ikon Office Solutions Inc (IKN)

• Involved in the copier and printer business, provides professional services such as technical support and strategy assessments and provides lease financing to customers.
• Ricoh announced in August that they will acquire IKN for $1.62 billion or $17.25 per share in cash. Unlike ALO, this deal has been approved by both companies.
• IKN reported positive earnings this entire year and beat estimates for the latest two quarters (Q308 reported: $0.37, estimate: $0.35, Q208 reported $0.24, estimate: $0.23, remained in-line for the past three quarters thereafter)
• Outperforming its two closest competitors, Pitney Bowes Inc. (PBI) and Xerox Corp. (XRX) by a wide margin.
• On the day of the deal announcement, IKN formed its third continuation gap. Currently in consolidation and about to breakout.

Leggett & Platt Inc. (LEG)

• A consumer discretionary company focusing on home furnishings. The entire sector has been performing well along with the consumer staples sector.
• LEG hasn’t performed too well with earnings, coming in-line in Q208 ($0.28) and missing in Q108 (reported: $0.23, estimate: $0.25).
• The August 25 upgrade by Stifel Nicolaus (“Hold” to “Buy”) helped fuel the uptrend from its high-and-tight flag consolidation in August.
• The uptrend remains intact, but I expect a pullback to the mean.

5 NASDAQ STOCKS HITTING 52-WEEK HIGHS

Gibraltar Industries Inc. (ROCK)

· A component of the steel & iron industries. Unlike many if its peers, ROCK has been going up instead of getting crushed. ROCK’s stock performance is the complete inverse of companies such as Rio Tinto (RTP), Arcelor Mittal (MT), POSCO (PKX), and Tenaris (TS).

· On August 8, ROCK reported Q2 earnings of $0.67 per share vs. $0.40 per share a year ago. Analysts were expecting $0.38 per share, crushing estimates. ROCK also surprised in Q1, reporting earnings of $0.27 while estimates were at $0.14 per share, a nearly 100% surprise. Turns out that ROCK made significant improvements in their cost structure. They also raised guidance for the full fiscal 2008 year.

· ROCK was upgraded by Robert W. Baird to “Outperform” and RBC Capital Markets raised their price target to $21 from $15.

· ROCK made two continuation gaps, both from exceptional earnings. The trend is highly likely to continue higher, divergent from the steel & iron sector’s performance.

Questcor Pharmaceuticals Inc. (QCOR)

• This company has only two products, but they command the market for childhood neurological disorders. Although the diseases are rare, QCOR’s products extremely effective are the first in line for treatment.
• QCOR has also been reporting positive earnings for the past six quarters.
• In addition, QCOR has been repurchasing shares all year, with a total of 2.7 million common shares valued at $11.8 million and all of its outstanding A-series preferred shares for $10.3 million. On September 4, QCOR repurchased 1.8 million shares at $5.06 per share from Iverlochy Consultadoria & Servicos L.D.A. They won’t be stopping here though; QCOR has an additional 3.5 million shares able to be repurchased under its program.
• On September 11, Stanford Research and Soleil initiated coverage, both issuing “Buy” ratings.
• As of August, 13.4% of shares (float) were short. I suspect that the number has sharply declined.
• QCOR spiked out of its multi-month consolidation, having broken through numerous support levels, aided by substantial short-covering. I expect a pullback as soon as buying momentum subsides.

Northern Trust Corp. (NTRS)

• This bank is amazing. What’s amazing is that NTRS reported positive earnings every quarter since 2005. That’s every single quarter since the start of the housing and credit meltdown.
• Nonperforming assets as a percentage of total loans are at 0.12%, much lower than many banks that took the hit. This bank is about quality, and if someone really has to buy a bank, then NTRS is it.
• The short interest is only 2.4%, so don’t expect a lot of pressure from shorts (unless they’re crazy). This is the definitely the wrong bank to be shorting.
• NTRS’s uptrend remains intact and doesn’t look it will give up. This whole crisis is NTRS’s big opportunity to take advantage of the failure of dozens of regional banks.

Medicines Co. (MDCO)

• A pharmaceutical company focusing on acute care.
• MDCO beat estimates for every 2008 quarter so far (Q208 reported: $0.8, estimate: $0.07, Q108 reported: $0.09, estimate: $0.05).
• MDCO announced in August that they will acquire Curacyte Discovery GmbH, a German-based critical case medical company.
• Cleviprex, a drug recently approved by the FDA for high blood pressure, is expected to be a $200 million/per year drug.
• MDCO saw a recent spike. The uptrend continues and I expect MDCO to continue to hit new 52-week highs.

Hawaiian Airlines Inc. (HA)

• Despite missing estimates for the past two quarters (Q108 being a loss of $0.42 per share), HA keeps on flying to new highs. This is one of the very, very few airlines that are actually up YTD. It’s actually up approximately 120% so far YTD.
• HA is doing so well because it’s main competitors, Aloha Air and ATA airlines, have both shutdown since the first week of Q2.
• As oil prices subside, I expect HA to perform even better than they did when oil was at $145.
• The uptrend is intact without any major breaks. Both the 50-day and 200-day MA’s continue to slope upward.

THIS WEEK’S WATCH:

• LEH, BAC, MER, AIG, WM, UBS
• U.S. Dollar, Crude Oil, Treasuries
• Economic Reports and Earnings Reports listed below.

Economic Reports: Mon. (Empire Manufacturing – 8:30AM, Industrial Production – 9:15AM), Tues. (CPI – 8:30AM, Net Long-term TIC Flows – 9:00AM, NAHB Housing Market Index – 1:00AM, FOMC Rate Decision – 2:15PM, Weekly Retail Sales – 7:45AM), Wed. (Weekly MBA Mortgage Applications – 7:00AM, Current Account Deficit – 8:30AM, Housing Starts – 8:30AM, EIA Petroleum Report – 10:35AM), Thurs. (Initial Jobless Claims - 8:30AM, Philadelphia Fed – 10:00AM, Leading Indicators – 10:00AM, Money Supply – 4:30PM), Fri. (Watch for Quadruple Witching!)

Noteworthy Expected Earnings: Mon. (KG - D, TITN - B), Tues. (BBY - D, CBRL - D, DRI - A, GS - B, ADBE - D), Wed. (DBRN - A, GIS - B, MS, MLHR - A), Thurs. (CCL - D, CTAS - A, CAG - B, FDX - B, LEH, ORCL - A, PALM - A, PIR - B), Fri. (None Noteworthy)

Key: B – Before Market Open, D – During/Intraday, A- After-hours.

IN AN EFFORT TO KEEP THE WEEKLY TECHNICAL COMMENTARY 10 PAGES OR LESS, OTHER FEATURES HAVE NOT BEEN INCLUDED. FEATURES SUCH AS COMMODITIES, CURRENCIES, TREASURIES, ETFs, INDUSTRY ANALYSIS, AFTER EARNINGS REVIEWS, AND READERS REQUESTS MAY BE FEATURED NEXT WEEK, GIVEN THAT 2+ MORE BANKS DO NOT FAIL OVER THE WEEKEND.