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Daily Newsletter, Sunday, 02/27/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Tech Divergence Easing\?

WE 02-25 WE 02-18 WE 02-11
DOW 10841.60 56.38 10785.2 -10.79 10796.0 79.88
Nasdaq 2065.40 6.78 2058.62 -18.04 2076.66 -10.00
S&P-100 578.57 3.15 575.42 -1.76 577.18 2.09
S&P-500 1211.37 9.78 1201.59 -3.71 1205.30 2.27
W5000 11934.05 92.34 11841.7 -33.77 11875.5 9.57
SOX 443.70 15.97 427.73 -7.79 435.52 17.36
RUT 637.53 7.40 630.13 -4.63 634.76 -2.68
TRAN 3715.17 95.20 3619.97 6.94 3613.03 16.22
VXO 11.49 11.18 11.43
VXN 17.34 17.87 17.19

Tech Divergence Easing?

In a miraculous recovery from Tuesday's drop the Dow managed to rebound to a new closing high for 2005. The Nasdaq remains the anchor for the rebounding markets with a gain to 2065 but much less exciting than the Dow and S&P rebound. It may not be dragging much longer after rebounding +40 points from the Wednesday low. This attracted some buyers and triggered some buy programs as it moved slowly higher. Is the tech divergence about over? Will it succeed in overcoming the very strong resistance at 2100? Next week may hold the answer for tech traders.

Dow Chart - Daily


 

Nasdaq Chart - Daily


 

Friday started out well with an upward revision to the Q4-GDP to +3.8% growth from its originally reported +3.1%. This may be old data but the upward revision back to near the 4% range relieved a lot of concern about the economy. When the initial +3.1% number was announced it was a shock to many given the Fed's insistence that the economy was improving. Friday's revision was driven by a sharp jump in exports as well as business investment. Consumer spending was revised downward but was not a material factor. The initially reported -3.9% decline in exports was revised to a +2.4% gain which caused the sharp jump in the headline number. Business investment was also revised higher from +14.9% to +18%. These revisions suggest that the economy is indeed gaining strength despite the series of inconclusive reports we see each week.

Existing Home Sales dropped only slightly for January to an annualized rate of 6.8 million units from 6.81 million in December. However, the inventory of homes for sale continues to shrink. In November there were 4.4 months of supply on the market but that has fallen to a record low of only 3.7 months at the end of January and we are heading into the buying season. The talk about a housing bubble continues but demand continues to increase. According to the Brookings Institute and a survey they did last year the demand for housing in the U.S. will require 60 million new homes to be built before 2030. That will require nearly 2.5 million homes to be built each year and this is above the current pace of 2.16 million as reported in the January New Home Sales numbers last week. The drop to the record low of only 3.7 months of supply sent homebuilder stocks soaring once again. RYL gained +2.55, PHM +5.17, TOL +2.39 on top of an already strong week, BZH +5.78 and NVR +5.45. With inventory and demand numbers this strong and builders trading in the 8-12 PE range there appears to be plenty of room to grow.

Like builders the oil sector exploded higher once again after Prudential upgraded Exxon saying it could have another +15% upside despite its recent breakout to new highs. All the major oil indexes also moved to new highs on the upgrade and oil prices continue to hold just under the $52 level. We have not seen a pullback from last week's expiration induced spike and we are seeing a continued pickup in demand despite normal trends for softening in March. Cold weather is depleting heating oil supplies and refineries are hesitant to produce more this late in the cycle. Refiners are also seeing new highs with Valero tacking on +4 after Carl Icahn said he was investing $1 billion in the oil sector and Kerr Mcgee in particular. With billionaires willing to invest billions at these levels it suggests there is plenty of upside still available. Boone Pickens restated his $60 before $40 claim and the smile on his face at $52 is widening. I am joining Pickens on the prediction platform with a $100 before 2010 prediction. That should send gas to about $5 a gallon. Have you ordered your hybrid vehicle yet? I am going to an Oil Crisis seminar n Denver on Monday. It should be interesting to see if their views differ from mine.

The markets rebounded off their Tuesday lows with the help of continued market inflows. I suspect the mutual funds did their best to paint the tape as we head into month end in an effort to attract more money. TrimTabs reported again today that $2.2B flowed into funds for the week ended on Thursday. That brings the totals for the year to inflows of +$2.8 billion into international funds and outflows of -$6 billion from domestic funds. That gap is closing on the domestic side after three weeks of positive flows but we are nearly two months into 2005 and still negative for the year. Piper Jaffray reported on Friday that 85% of the inflows for the year were into international funds with the last four weeks the strongest inflows since March 1994. In 2004 TrimTabs reported a total of $16 billion flowed into international funds and $35 billion into domestic funds. Given these numbers it should come as no surprise that the majority of market gains over the last three days has come on the backs of dozens of buy programs. Funds are pouring what money they have into the market as we approach the month end in an effort to attract more contributions. Money flows follow performance and so far they have been successful in pushing the Dow and S&P to new closing highs for the year just in time for the weekend/month end newspapers to make the proclamation. To say mutual funds were fishing for cash would be an understatement. If they paint the picture correctly the money will flow and it appears they produced a Rembrandt this week.

XLE Chart - Daily


 

CRB Index Chart - Weekly


 

Oil is not the only commodity on fire and the CRB commodity index rose to close over 300 on Friday and a 24-year high. This is a +7% gain from the early month lows and a strong breakout of its four-month congestion range. Commodities soared from the 2003 low of 228 to 285 in early 2004. They languished at those high levels for all of 2004 as they consolidated the gains with a solid top at 290 in Q4. The talk about China slowing its growth rate kept them in check but recent reports suggest not only that China has not slowed but other countries are picking up speed as well. Commodities are normally late cycle bloomers and this also suggests the U.S. economy may be gaining strength. Commodities are purely demand driven and breakout to a new 24 year high suggests demand is very strong.

The markets rebounded out of Tuesday's drop with the indexes posting their best three-day performance since November. Leading the charge was the Dow where those commodity stocks like DD and AA led the charge along with XOM, now the largest company in the world by market cap. CAT, BA and UTX played strong supporting roles. The Dow closed at a new high for 2005 as well as the S&P. Unfortunately the Nasdaq at 2064 remains the weakest link and is still well below its 2005 highs at 2191. The big techs, MSFT, CSCO, DELL and Internets EBAY, GOOG, YHOO and AMZN remain very soft and in some cases at critical support.

SOX Chart - 60 min


 

SOX Chart - Weekly


 

The Nasdaq did manage to post three days of gains but it was almost entirely on the back of the SOX. The SOX rebounded off its 420 lows on Wednesday and rallied back to 443 and critical resistance in just three days. This was a very strong performance and sets up a retest of very strong resistance at 450. A break over 450 would produce some strong short covering and could give the Nasdaq new life. With Intel the only big tech showing a pulse and facing its mid-quarter update on March 10th it is questionable how much farther it and the SOX will run. The SOX also came to a dead stop right at the 200-week average, which has been solid resistance all year. I believe the trading bounce the Nasdaq is currently seeing was propped up entirely by the move in the chips. If fund managers were going to paint the tape with a small amount of cash the chips would be the way to do it. Most have relatively small market caps compared to the giants of the Nasdaq like CSCO, MSFT, EBAY, GOOG, etc. Throwing $2B cash at those giants would hardly generate a bounce. Using the same cash spread around the chip sector could generate a sizable move with less risk given the broker upgrades over the last two weeks. I may be imagining things but I suspect this scenario may be closer to the truth than we think. They are hoping that by using their small amount of cash and some chip stocks for month end kindling they can attract some additional contributions leading to a bigger fire under a Nasdaq.

For next week the Dow is faced with having to fight the 10850 resistance once again. This has been strong resistance since late December and it is not going down without a fight. We now have nearly a +235 point Dow gain over the last three days and if the tape-painting scenario is correct those funds may be running out of cash. Pushing it higher on Monday will do them no good. They had to produce the gains before the weekend newspapers to attract the cash. This could have left them winded after the sprint into Friday's close and breaking that 10850 resistance without a pause could be a challenge. The S&P is also going to be fighting that 1215-1217 resistance that has always held before.

We are facing some major economic reports next week with the PMI, NAPM and Personal Income on Monday, ISM on Tuesday and several employment reports culminating with the non-farm payrolls on Friday. These reports could confirm the Fed's economic viewpoint or turn into a wall of worry the bulls will have to scale. Either way I have a hard time seeing the Dow and S&P breakout without some more excitement from the Nasdaq. So far our trading bounce from 2023 is looking good but I continue to believe that 2100 is going to be a major hurdle. If we do move higher next week I would look to take profits on the bounce at 2080 and target 2090 for another trading short. If the Dow and S&P do make a break higher and the Nasdaq breaks 2010 I would switch to aggressively long because I think that breakout would drag a lot of cash back into the game. Until that happens we continue to trade the range using the Nasdaq as the weakest link.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
ARLPNone
FDG 
IR 
KLAC 
PCAR 

New Calls

Alliance Resource - ARLP - cls: 75.01 chg: +2.51 stop: 69.99

Company Description:
Alliance Resource Partners is the nation's only publicly traded master limited partnership involved in the production and marketing of coal. Alliance Resource Partners currently operates mining complexes in Illinois, Indiana, Kentucky and Maryland. (source: company website)

Why We Like It:
After three days of positive market gains the coal sector finally decided to join the rally. Most of the coal producers have already been winning plays for investors in 2004 and now they're breaking out to new all-time highs (look at ARLP, FDG and TXI). We like how ARLP has just broken out from a 2 1/2 month consolidation while maintaining its long-term up trend. The bounce from its rising trendline of support (near the 50-dma) and the move over resistance at $75.00 and its new MACD buy signal all sound like a recipe for success. If you look at ARLP's P&F chart you'll see a fresh triple-top breakout buy signal with an $86 price target. We want to go long/buy calls at current levels with a short-term target of $80 and a secondary target of $85.

Suggested Options:
We are going to suggest the April and June calls.

BUY CALL APR 70 AFV-DN OI= 3 current ask $6.50
BUY CALL APR 75 AFV-DO OI= 3 current ask $2.95

BUY CALL JUN 70 AFV-FN OI=112 current ask $8.00
BUY CALL JUN 75 AFV-FO OI=160 current ask $4.90
BUY CALL JUN 80 AFV-FP OI= 14 current ask $2.50


 

Picked on February 27 at $ 75.01
Change since picked: + 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 95 thousand

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Fording Candn Coal - FDG - cls: 90.43 chg: +3.13 stop: 84.99

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust. Through investments in metallurgical coal and industrial minerals mining and processing operations, the Trust makes quarterly cash distributions to unitholders. The Trust, through its wholly-owned subsidiary, Fording Inc., holds a 60% interest in the Elk Valley Coal Partnership and is the world's largest producer of the industrial mineral wollastonite. Elk Valley Coal Partnership, comprised of Canada's senior metallurgical coal mining properties, is the world's second largest exporter of metallurgical coal, currently supplying approximately 25 million tonnes of high-quality coal products annually to the international steel industry. (source: company website)

Why We Like It:
FDG is another stock in the coal sector that is breaking out to new highs after a month of consolidation. Like its peers shares of FDG have a strong up trend. Friday's breakout over resistance in the $88-90 region was fueled by volume almost twice the average suggesting more strength ahead. The P&F chart has a buy signal pointing to a $103 target. We're willing to go long at current levels but if FDG pulls back look for a bounce in the $87-88 range. Our target is the $96-98 region.

Suggested Options:
We suggest the April and June calls.

BUY CALL APR 85 FDG-DQ OI=108 current ask $7.20
BUY CALL APR 90 FDG-DR OI= 28 current ask $3.80
BUY CALL APR 95 FDG-DS OI= 0 current ask $2.15

BUY CALL JUN 90 FDG-FR OI=346 current ask $6.10
BUY CALL JUN 95 FDG-FS OI=140 current ask $3.90


 

Picked on February 27 at $ 90.43
Change since picked: + 0.00
Earnings Date 02/05/05 (confirmed)
Average Daily Volume = 326 thousand

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Ingersoll-Rand - IR - cls: 83.00 chg: +2.00 stop: 78.50

Company Description:
Ingersoll-Rand is a leading innovation and solutions provider for the major global markets of Climate Control, Industrial Solutions, Infrastructure, and Security and Safety. The company's diverse product portfolio encompasses such leading industrial and commercial brands as Schlage locks and security solutions; Thermo King transport temperature control equipment; Hussmann commercial and retail refrigeration equipment; Bobcat compact equipment; Club Car golf cars and utility vehicles; and Ingersoll-Rand industrial and construction equipment. In addition, IR offers products and services under many more premium brands for customers in industrial and commercial markets. (source: company website)

Why We Like It:
Some of the auto parts makers are also in breakout mode and IR is helping lead the way. After more than two weeks of consolidation between $79 and $82 shares of IR have broken out above resistance at its December high to close at new all-time highs. Volume on Friday was above average and its P&F chart points to a $106 target. Short-term technical oscillators are positive and IR looks poised to run higher next week. Our target is the $88-90 range.

Suggested Options:
We are going to suggest the April and June calls.

BUY CALL APR 80 IR-DP OI=1880 current ask $5.00
BUY CALL APR 85 IR-DQ OI= 168 current ask $2.10

BUY CALL JUN 80 IR-FP OI= 871 current ask $6.00
BUY CALL JUN 85 IR-FQ OI= 746 current ask $3.40


 

Picked on February 27 at $ 83.00
Change since picked: + 0.00
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.1 million

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KLA-Tencor - KLAC - close: 50.81 chg: +1.96 stop: 47.75

Company Description:
About KLA-Tencor: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., the company has sales and service offices around the world. (source: company website)

Why We Like It:
The SOX semiconductor index is on the verge of a major breakout over its 200-week moving average. Technically the index has already done so but this moving average has been consistent resistance for months so confirmation of the move would be prudent before considering new bullish plays in the sector. We think it's noteworthy that KLAC is helping lead the charge. The company recently announced a cash dividend (for the first time ever) and doubled its stock buy back program. This has more fundamental players interested in the stock. Technically shares have closed above round-number resistance at the $50.00 level and its short-term technical oscillators are bullish. Plus, the P&F chart has broken through resistance and points to a $61 target. We also note that the daily chart shows an inverse or bullish head-and-shoulders pattern. We want to use a TRIGGER above the $51.00 level, which was resistance several days ago. Our entry point to go long will be $51.11. Our short-term target is the $55.00 level. Keep an eye on the SOX index. You may not want to initiate a play in KLAC if the SOX doesn't confirm the upward trend.

Suggested Options:
We are suggesting the April calls.

BUY CALL APR 47.50 KCQ-DT OI=243 current ask $4.70
BUY CALL APR 50.00 KCQ-DJ OI=487 current ask $3.10
BUY CALL APR 55.00 KCQ-DK OI=250 current ask $1.00


 

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/20/05 (confirmed)
Average Daily Volume = 5.1 million

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PACCAR - PCAR - close: 75.00 chg: +1.69 stop: 71.99

Company Description:
PACCAR is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy-duty trucks under the Kenworth, Peterbilt, DAF and Foden nameplates. It also provides financial services and distributes truck parts related to its principal business. In addition, the Bellevue, Washington-based company manufactures industrial winches under the Braden, Gearmatic and Carco nameplates. (source: company website)

Why We Like It:
Shares of PCAR are on the verge of a bullish breakout above resistance at the $75.00 level. This truckmaker recently reported earnings and the results came in above estimates on both the profits and the revenues. Technically we like how PCAR is poised to breakout from a two-month consolidation between $68 and $75. You'll notice on the chart that PCAR recently produced a higher high and Friday's rally pushed the stock above technical resistance at its 50-dma and 100-dma. The P&F chart has already produced a new buy signal with an $86 target. We want to use a TRIGGER over round-number resistance at $75.00 and target a run toward the $80-81 range. Our entry point to buy calls will be $75.25.

Suggested Options:
We are going to suggest the May calls although the April strikes should work well too.

BUY CALL MAY 70 PAQ-EN OI=2291 current ask $6.80
BUY CALL MAY 75 PAQ-EO OI=1773 current ask $3.50
BUY CALL MAY 80 PAQ-EP OI=5568 current ask $1.50


 

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.0 million

New Puts

None Today


Play Updates

In Play Updates and Reviews

Call Updates

Hartford Financial - HIG - cls: 72.90 chg: +1.71 stop: 69.95

The rebound in the markets has helped lift the IUX insurance index to its third gain in a row. The IUX is bouncing from a test of its 40-dma after several days of profit taking. The technical picture is improving for the sector index with both the RSI and stochastics turning upward. Meanwhile HIG is out performing its peers in the insurance group and the broader indices. The stock held above round-number support at the $70.00 level this past week so when the market began to bounce traders bought the dip. This above average volume on the rally and the move over the $72 level makes this look like a bullish entry point in HIG. Our target remains the $78-80 range.

Suggested Options:
We are suggesting the March and April calls. While Aprils don't have a lot of open interest yet the March strikes only have three weeks left so be careful.

BUY CALL MAR 70 HIG-CN OI=1865 current ask $3.40
BUY CALL MAR 75 HIG-CO OI=1474 current ask $0.45

BUY CALL APR 70 HIG-DN OI= 36 current ask $4.10
BUY CALL APR 75 HIG-DO OI= 2 current ask $1.10


 

Picked on February 06 at $ 71.17
Change since picked: + 1.73
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million

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Loews Corp - LTR - close: 72.24 chg: +0.29 stop: 69.95

The widely diversified LTR is benefiting from a bounce in both the insurance sector and the tobacco sector. Investors appear to have bought the dip toward the $71 region and the current bounce looks like a new bullish entry point. Short-term technical oscillators like the RSI and stochastics have turned positive again and we would consider new positions here. Our target remains the $80 region but if you're buying the dip then we might consider exiting anywhere in the $76-78 range.

Suggested options:
We are suggesting the April and June calls.

BUY CALL APR 70 LTR-DN OI= 18 current ask $3.70
BUY CALL APR 75 LTR-DO OI= 18 current ask $0.95

BUY CALL JUN 70 LTR-FN OI= 75 current ask $4.90
BUY CALL JUN 75 LTR-FO OI=517 current ask $2.10


 

Picked on February 15 at $ 74.15
Change since picked: - 1.91
Earnings Date 02/10/05 (confirmed)
Average Daily Volume = 452 thousand

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Nova Chemicals - NCX - close: 50.05 chg: +1.00 stop: 45.95*new*

So far so good. We started NCX with a trigger to go long at $48.01 to catch a breakout over resistance. NCX hit our entry point on February 22nd and shares have been trading higher ever since. More importantly for the bulls the stock has been steadily climbing on above average volume. Friday's breakout over what would normally be considered round-number, psychological resistance at the $50.00 mark is another victory. The move has produced a quadruple top breakout buy signal on its Point & Figure chart that now points to a $63 target. Our target is currently the $52.50-54.00 range. If NCX does pull back we would use a dip as a new entry point, especially now that the $48.00 level, as broken resistance, should become new support. We are raising our stop loss to $45.95.

FYI: the suggested calls have already increased significantly so conservative traders may want to consider some profit taking.

Suggested Options:
We're going to suggest the March and June calls. Our favorites would be the June strikes.

BUY CALL MAR 45 NCX-CI OI=454 current ask $5.50
BUY CALL MAR 50 NCX-CJ OI=369 current ask $1.40

BUY CALL JUN 45 NCX-FI OI=192 current ask $6.65
BUY CALL JUN 50 NCX-FJ OI=288 current ask $3.30


 

Picked on February 22 at $ 48.01
Change since picked: + 2.04
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 383 thousand

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Spectrasite Inc - SSI - close: 62.52 chg: +1.45 stop: 58.00

The two-week countdown clock is about to begin. We want to be out of SSI before the company reports earnings on March 14th. Fortunately, the stock is currently bouncing from a test of support near the $60.00 level. This looks like a bullish entry point and our target remains in the $66-67 region.

Suggested options:
We are suggesting the March calls since we plan to exit before March 14th.

BUY CALL MAR 60 SSI-CL OI= 79 current ask $3.30
BUY CALL MAR 65 SSI-CM OI= 40 current ask $0.85


 

Picked on February 16 at $ 61.80
Change since picked: + 0.72
Earnings Date 03/14/05 (confirmed)
Average Daily Volume = 391 thousand

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Texas Industries - TXI - cls: 68.00 chg: +3.76 stop: 62.95*new*

Finally! TXI, after weeks of consolidating under resistance near $65.00, is finally breaking out to new highs. Furthermore the stock did so on huge volume about three times the average and that suggests much more upside ahead. Aggressive traders may want to see just how far TXI will run. We're going to abide by our target and plan to exit in the $69.00-70.00 range, which could be on Monday. It's up to you whether to exit with us or let TXI keep going now that it's finally breaking out. We are going to raise our stop loss to $62.95.

Suggested Options:
This close to our target of $69-70 we are not suggesting new bullish positions. However, considering the breakout readers may want to consider a pull back toward $66 as a new bullish entry point.


 

Picked on January 09 at $ 60.18
Change since picked: + 7.82
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 238 thousand

Put Updates

Apollo Group - APOL - close: 75.00 chg: -0.22 stop: 78.25*new*

It's been a tough week to play puts or bearish strategies with the Dow Industrials up 240 some points from its low last week. However, APOL has under performed the market, which is what we would want to see in a put candidate. Our target remains the $72-70 region and we are going to lower our stop loss to $78.25 since the $78 level should be new resistance for the stock. Readers looking for new positions can watch for a failed rally near the $77 area although we would hesitate to open new bearish plays if the market continues to climb.

Suggested Options:
We like the March, April and May puts although the Mays aren't listed below. March strikes only have about three weeks left.

BUY PUT MAR 80 OAQ-OP OI= 338 current ask $5.60
BUY PUT MAR 75 OAQ-OO OI=5774 current ask $2.30
BUY PUT MAR 70 OAQ-ON OI=4483 current ask $0.80

BUY PUT APR 75 OAQ-PO OI= 56 current ask $3.70
BUY PUT APR 70 OAQ-PN OI= 130 current ask $1.85


 

Picked on January 23 at $ 77.61
Change since picked: - 2.61
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million

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Bear Stearns - BSC - close: 98.61 chg: +1.96 stop: 102.51

Uh-oh! The XBD index and BSC were doing well as bearish candidates given that both were not participating in the market rally on Wednesday and Thursday. That changed with the XBD added 1.88 percent and shares of BSC climbed 2.02 percent during Friday's session. Were the bears just giving up? Or is this just an oversold bounce? Currently the three-month trend for BSC is still a bearish one but we could easily see BSC bounce a bit more before continuing lower. Actually if you look at the daily chart it's possible that BSC is now in a descending channel and shares just bounced from the bottom of that channel. If this is true then readers probably don't want to be initiating new bearish plays at this time. Stand back and wait to see where BSC rolls over. Will it be round-number resistance at the $100 mark or will shares trade toward the top of the channel in the $102 region before fading. We're still bearish on the stock but we're expecting the next couple of days to be positive. Plan your attack accordingly.

Suggested Options:
Wait and watch to see where BSC rolls over. Once that occurs we'd look to the April puts.


 

Picked on February 20 at $ 97.84
Change since picked: + 0.77
Earnings Date 03/22/05 (unconfirmed)
Average Daily Volume = 934 thousand

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Career Education - CECO - close: 35.05 chg: +0.32 stop: 37.51

CECO has joined APOL in its lack of participation during the market's current bounce. Granted CECO has bounced some from its February 22nd low but the rebound has been a meager one and volume has been mild suggesting a lack of conviction from any buyers. Besides it's not uncommon to see a stock pull back to retest a broken level of support or resistance. Technically CECO still looks bearish with the breakdown from three months of consolidation and its very bearish triangle breakdown pattern on its P&F chart. Our target remains the $30.00 region and traders can watch for a failed rally anywhere under 36.50 as a new bearish entry point.

Suggested Options:
We like the March or April puts.

BUY PUT MAR 40 CUY-OH OI=2342 current ask $5.20
BUY PUT MAR 35 CUY-OG OI=3487 current ask $1.40
BUY PUT MAR 30 CUY-OF OI=1807 current ask $0.25

BUY PUT APR 40 CUY-PH OI= 3162 current ask $5.80
BUY PUT APR 35 CUY-PG OI=11013 current ask $2.55
BUY PUT APR 30 CUY-PF OI= 5885 current ask $0.95


 

Picked on February 22 at $ 34.90
Change since picked: + 0.15
Earnings Date 02/15/05 (confirmed)
Average Daily Volume = 2.1 million

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Research In Motion - RIMM - cls: 65.35 chg: -4.13 stop: 70.51*new*

Wow! What a week for RIMM. We started the play a few days ago with a TRIGGER to buy puts on a breakdown below the $70.00 level, its rising trendline of support, and its 200-dma. We were triggered at our entry point of $69.75 on February 23rd. Fueling RIMM's weakness were rumors that the company was going to see new competition from Microsoft (MSFT). This helped lead RIMM to dip under the $66.00 level on Thursday but at least one broker tried to defend the stock and RIMM bounced back toward the $70 level on Thursday afternoon. Then on Friday BSC lowered it valuation levels for RIMM. The firm also issued concerns over potential competition despite RIMM's leading position in the industry. Shares fell almost six percent on very strong volume. The stock is nearing the January low and our initial target in the $64.00 region. This is a tough spot. Do you exit now with a quick profit to avoid a potential bounce from the $64 level? Or do you hold on and look for the breakdown and a possible drop toward the $60 area? We are going to opt for the quick exit. The options we suggested for RIMM have already risen significantly. The March 75s have run from $5.80 to $10.30. The March 70s from $3.00 to $6.30 and the March 65s from $1.30 to $3.40. We're not suggesting that anyone actually got in at these levels and made these sort of returns but it indicates just how fast the puts have risen and if you're sitting on a hefty gain you may want to strongly consider taking some profits here. We are going to adjust our exit point from $64.00 to a range of $64.50-64.00. If RIMM trades anywhere inside this region we'll exit and close the play. We are going to lower our stop loss to $70.51.

Suggested Options:
We are going to suggest the March puts. RIMM is due to report earnings in late March and we do not want to hold over the event.

BUY PUT MAR 75 RUP-OO OI=8370 current ask $10.30 -5.80
BUY PUT MAR 70 RUP-ON OI=9003 current ask $6.30 -3.00
BUY PUT MAR 65 RUP-OM OI=9981 current ask $3.40 -1.30

|
 

Picked on February 23 at $ 69.75
Change since picked: - 4.40
Earnings Date 03/22/05 (unconfirmed)
Average Daily Volume = 7.9 million

Dropped Put

Penn Natl Gaming - PENN - cls: 60.24 chg: -1.68 stop: 63.01

Experienced traders know that they're not supposed to let their emotions get in the way yet it's still frustrating when we see these intraday spikes hit our stops. PENN climbed above the simple 50-dma and support/resistance at the $63.00 mark on Friday just before a sudden slide lower on massive volume. Evidently there was a gaming decision in Maryland that is being interpreted as negative for PENN. It is worth nothing that the selling paused long enough for PENN to bounce back above the $60 level so it's anyone's guess which direction the stock will move next week. We are stopped out at $63.01.


 

Picked on February 22 at $ 59.77
Change since picked: + 0.47
Earnings Date 02/03/05 (confirmed)
Average Daily Volume = 593 thousand


Trader's Corner

Waiting for the Retest

You waited and watched through much of 2004. A neutral triangle had been forming on Phelps Dodge's (PD) weekly chart over a six-month period from February until August. By early August it was narrowing to its apex, and you expected a break. Because the triangle had formed at the top of a rise, you expected the break to be to the upside, too, but you didn't act ahead of the signal. You waited patiently for that break, knowing how dangerous it would have been to anticipate the signal.

Annotated Weekly Chart of Phelps Dodge:


 

Unfortunately, your daughter didn't exercise the same patience. She tried out her new gymnastics feat on your lawn instead of waiting for her time on the forgiving gymnastics floor during class. She tore her ACL. A surgery later, when you could finally return to your trading screen, you realized PD had broken out of the formation. It broke to the upside as you had expected. You had lost your opportunity to enter the play.

Or had you? You could have waited for the rest of the broken resistance to see if it held as support.

Annotated Daily Chart of Phelps Dodge:


 

After breaking through a trendline or formation, prices often move briskly in the direction of the breakout, consolidate and then head back for a retest. Thomas A. Meyers advises in THE TECHNICAL ANALYSIS COURSE that pullbacks to broken trendlines offer great new entries for bullish or bearish plays. Meyers calls these "pullbacks." Pring of TECHNICAL ANALYSIS EXPLAINED fame calls such moves "throwbacks." Whatever they're called, conservative traders often wait for such pullbacks or throwbacks before considering an entry.

They're not always offered, of course.

Annotated Daily Chart of the OEX:


 

Look for retests on intraday as well as daily charts, and for retests after breaking below support as well as above resistance.

Annotated 30-Minute Chart of ELY:


 

Those who enter at the first breakout often have to suffer through a retest, while those who wait for the retest don't share that suffering. Stops can be tight, too. Perhaps more importantly, those who wait for the retest can watch the shape of the move to retest the breakout level. That's important. Traders want to see a corrective-type move back to retest, with a tight-ranged zig-zagging back to the broken support or resistance. While a small violation of the former resistance or support might be acceptable, those waiting for a new entry on a retest don't want to see the kind of action depicted in the following chart.

Annotated Sixty-Minute Chart of VZ:


 

That immediate expansion of volatility offered a warning. So does a sideways break out of a formation or below or above a trendline.

Annotated Thirty-Minute Chart of the SPX:


 

In addition, Thomas Myers warns that upside breaks on low volume or downside breaks on high volume remain suspect.

Despite the warnings and the risk that a move will run away without ever retesting a breakout point, waiting for retests offers benefits to conservatives traders. It offers benefits to aggressive ones, too, if they happen to have children prone to injuries or even bosses who suppose that they ought to occasionally attend meetings or otherwise occupy themselves away from the trading screen. Don't assume that the move has happened without you if you miss that first breakout or breakdown.

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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