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Daily Newsletter, Saturday, 04/02/2005

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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

April Fools

WE 04-01

WE 03-24

WE 03-18

DOW

10404.30

- 38.57

10442.90

-186.80

10629.70

-144.69

NASDAQ

1984.81

- 6.25

1991.06

- 16.73

2007.79

- 33.81

S&P 100

557.49

- 0.22

557.71

- 10.23

567.94

- 5.61

S&P 500

1172.92

+ 1.50

1171.42

- 18.23

1189.65

- 10.43

W5000

11568.73

+ 7.05

11561.70

-168.08

11729.70

- 91.78

SOX

411.22

- 4.66

415.88

+ 1.75

414.13

- 13.75

RUT

611.55

- 3.71

615.26

- 7.31

622.57

- 4.27

TRAN

3686.61

- 58.06

3744.67

- 5.91

3750.58

- 81.51

VXO

14.09

13.42

13.14

VXN

17.61

17.15

17.88

The Dow's rebound from 10400 on Wednesday turned out to be a cruel April Fools joke on the bulls. Friday's economic news showed a growing worry about the economy and funds immediately stripped away the end of quarter window dressing they had applied only two days prior. Oil soared to new highs and equities closed at their lows. It was not a pretty picture.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday morning started off bad economically but great for the bulls with the Jobs report showing a gain of only +110,000 jobs compared to the +255,000 expected. This was the lowest gain since July-2004. Even worse the gains for February were revised down to +243K from +262K and January was revised down to +124K from +132K. With the lower than expected numbers from March this multi-month revision brought the monthly average for the first quarter down to only +159,000. The economy must produce an average of +150,000 jobs per month just to breakeven with the number of new workers moving into the workplace. The +159,000 average barely covered that new worker inflow and suggests the economy is much weaker than previously expected. The weaker than expected jobs numbers were far below what anyone expected and sent shockwaves through the bond markets.

The decline in hiring appears to be pressured by rising interest rates and higher commodity and energy prices. Companies faced with rising costs on almost every front have to find ways to chip away at those costs. They can't control interest rates, energy or prices for raw materials but they can control employment costs by cutting back on hiring. The drop in jobs growth suggests wages will also be pressured at a time when energy prices are taking a bigger bite out of consumer budgets. In theory this pressure on the consumer should slow the rate of inflation due to lack of fuel in the form of excess cash to feed it.

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The markets celebrated the drop in jobs as evidence the economy was still weak and confirmation the Fed could pause its measured pace of rate hikes. The Dow spiked to 10568 on the news despite a sharp jump in oil prices. The spike was short lived as the ISM announcement reversed the jobs reaction. The ISM fell to 55.2 from 55.3 but more importantly extended its period of monthly declines to 14 months. The cycle high was 63.6 in January-2004 and it has been trending down ever since. Friday's 55.2 headline number was the lowest level since September-2003 at 53.7. The +10 point spike into January-2004 has nearly been erased and we are closing in on the critical advance/decline level at 50. Any number over 50 indicates economic expansion and any number under 50 indicates economic decline. Friday's 55.2 is barely above stagnation and the continuation of the 14 month decline indicates the economy is not well. The equity markets focused on the sharp jump in the prices paid index to 73.0 from 65.5 as evidence of a rapid buildup in inflationary pressures. This number was cussed and discussed in nearly every sound bite the rest of the day. What most failed to point out was the drop to 65.5 in February was a 16-month low. The prices paid component has been steadily dropping since August-2004 when it printed 81.5. Yes, it jumped +8 points in a month but we have to keep that in perspective.

Bonds soared on the jobs numbers with the yield on the ten-year falling to below 4.4% but they were immediately sold off again on the ISM news with ten-year yields spiking to 4.54%. The rise in oil prices intraday and further analysis of the economic reports brought the bond buyers back to the market as equities reversed their opening spike and yields fell back to 4.45% at the close. It was a very rocky session for bond traders and equity traders alike.

Chart of Ten-year Yield - 3-min

The ISM Services number was released accidentally by Business Wire instead of the ISM Manufacturing number at 10:00. Because the news was out the government went ahead and made it official and that supplied even more volatility to the mix. The ISM Services came in at 63.1 compared to the consensus at 60 and the prior month at 59.8. This was an offset to the negative impact of the ISM Manufacturing but the damage was already done. If anything it mitigated the losses for the day but the trend was already in place.

Also spoiling the sentiment was a new release of the Consumer Sentiment showing a drop to 92.6 from 92.9. The drop was not material but it was just one more down trending indicator since its high of 97.1 in December. Rising gasoline prices remain the biggest depressant on sentiment but the slowing jobs picture is sure to depress sentiment even further as the month progresses. Economic news appears to be accelerating to the downside but there is still the occasional bright spot.

Construction Spending slowed again in February with only a +0.4% gain compared to consensus estimates of +0.8% and the +0.6% rise in January. Private construction rose only +0.1% and suggests there is rising concern about economic conditions ahead. Also, rising interest rates should slow construction as the cost of projects rises. Slowing construction rates would also pressure jobs and the downward spiral would continue.

Crude Oil Chart - Daily

The most dramatic economic news for Friday was the jump in oil prices to $57.70 and a new all time high close at $57.20. This two-day jump in oil from the Wednesday low at $52.40 was an impressive +$5 gain. Unleaded gasoline rose to a new all time high at $1.73. I have to admit I was a bit surprised with the jump in oil prices as we moved out of the quarter. I spent most of the day trying to reconcile why oil prices were spiking ahead of the Q2 demand slump when inventories are rising. There was some news about a refinery outage in Venezuela but nothing that should have impacted prices this drastically. I expected a bounce into the end of the quarter as funds tried to appear smart by putting extra cash in energy stocks as the quarter closed. However, I expected a drop in oil once the quarter was over as those with strong oil profits exited ahead of any Q2 demand drop. Next week should be interesting and another pullback would confirm that theory BUT further rises would confirm an even more radical problem.

Further price gains ahead of the Q2 demand slump would confirm that we are farther along in the peak oil scenario than anyone expected and that production from OPEC has NOT been able to keep up with demand. It could prove that OPEC is behind the curve and unable to ramp up production despite their numerous sound bites to the contrary. I still believe that OPEC wants to talk up production potential to keep a lid on any new non-OPEC exploration until it is too late. Once demand does exceed production and oil spikes over $100 a bbl they will be in the drivers seat and can command any price they desire. Any rush to explore/produce then would take 4-6 years to get to market and OPEC will be rolling in cash for that period. A word to the wise, don't believe anything OPEC says and concentrate on actual prices as the real indication of demand and production. Despite the rampant speculation in the market the refiners buy millions of barrels of oil each day and they would not be paying these prices if there was a growing surplus of oil in the system. Oil is a pure supply/demand commodity and with billions of dollars in oil bought daily ANY real surplus would rapidly decrease prices.

I was hoping to see oil return to the 100-day average in Q2 but Friday's spike has put some serious doubt in my expectations. I believe there are quite a few people who also expected the Q2 drop and some may have seen the base built at $54 last week and entered prematurely thinking we were not going lower. Everyone is afraid of missing that rocket ride higher once the demand dip passes and that makes for some nervous buyers. If we are going to see the anticipated decline in prices it should begin next week. I am going to maintain my 100-day average target for at lease another week but I have to admit I am getting nervous as well. If oil continues higher from here it will produce a huge sucking sound as money comes out of the broader market. Q1 is over and fund managers are free to react to any situation and you can bet they want to be on that oil train when it leaves and the broader market will suffer not only from higher oil prices but from negative cash flow into energy equities. The key will be the inventory numbers on Wednesday and another build in inventory levels could weaken the resolve of those willing to buy the top. Goldman Sachs may have negated the fear of a Q2 drop with their $105 price target on oil earlier in the week. Ironically Abby Joseph Cohen, Chief Portfolio Strategist at Goldman, said in late January that over the next 12 months Goldman was expecting oil to average $40 a bbl and this could continue into 2006. She also said they were using $28 a bbl in their pricing model for energy stocks. You think maybe the right hand does not know what the left hand is doing? Maybe somebody at Goldman just finished reading my Oil Crisis report.

One of the biggest drags on the Dow on Friday was AIG with a loss of -4.45. This alone produced nearly a -40 point drop in the Dow. The death sentence card was reinserted in the deck by Spitzer and investors ran for the exits. Spitzer had previously said he would not consider putting the company out of business if the past management left. New allegations suggested that documents have been destroyed and there is growing a pattern of deceit and evidence destruction that restarted the death sentence debate. I had considered buying the dip at $55 thinking the worst was over but the conditions have changed and we could see much lower numbers ahead.

Another drag on the Dow was Wal-Mart, which, finally broke support at $50 and lost -1.12 for the day. This is directly related to higher gas prices and strong pressure on blue-collar workers. This is where higher gas prices produce the largest impact and that impact is felt by the 100-million Wal-Mart shoppers. The WMT decline was hastened by a warning from Best Buy. BBY said earnings would fall to between 27-32 cents for Q1 and analysts were expecting 38 cents. This is not a good sign and another evidence of consumers under pressure with sales of big-ticket items slowing. BBY also said they were phasing out the mail in rebate program because of too many customer complaints. Hoorah! I hate that triple pricing plan where the company bets you will not go to the effort to fill out the form and mail it back. Sometimes the store and the manufacturer both offer rebates, which produces lower headline prices but double the paperwork and hassle. I would say literally 50% of the rebates I have taken the trouble to mail in were declined for one reason or another. Other customers have seen the same results and the Ohio Attorney General sued BBY over failed rebate complaints. BBY fell -3.41 on the news. BBY is also losing market share to its competitors but not the one you would expect. 20% of its volume comes from music sales and that sector is being revolutionized by the Ipod. They are also losing share to WMT and TGT as those low priced music discounters chip away at BBY's core market. The problems with WMT/BBY are not the only problems. The weakness in retailers in general is showing the real impact of high gasoline prices and I do not expect that sector to recover any time soon.

Despite recent warnings, earning estimates for the S&P continue to rise with estimates for Q1 rising to +10.6% growth from last months +9.9% estimate. This should be examined in context. Energy stocks make up 8.5% of the S&P and their earnings growth for Q1 is now estimated at +39% for the quarter. Materials stocks are estimated to produce +50% growth. It does not take a rocket scientist to realize that without those strong gains in energy and materials that the broader S&P is lagging substantially. Without those sectors inflating the overall estimates it could be as little as +5% growth and far from the bullish overall estimates.

It would probably be no shock to readers that Taser was in the news again. This time they warned that Q1 earnings would miss estimates due to negative publicity about their products. The warning caused a break in long-term support at $12 and a drop to $10.42. Now that this support level has broken the move back to the low single digits seems guaranteed. One analyst reporting on the company suggested the market cap for Taser should be more in the $100 million range at two times sales, especially with those sales falling drastically. Currently Taser has a market cap just under $700 million. The bloom is definitely off the rose and this could be an ugly summer for Taser. Over 100 deaths are now blamed on being stunned with a Taser product.

The bears are literally salivating over the economic news this week. They feel we are setting up for the perfect storm in equities and one that will not be easily overcome. They see slowing jobs growth, rising inflation, rising interest rates, rising oil prices, manufacturing sector slowing and earnings growth slowing. The tax benefits that provided an economic boost over the last two years have passed and their impact is fading. I have to admit it is a pretty compelling argument. Economics around the globe are also showing growing pockets of trouble. Japan's Takan report announced Friday, similar to our ISM, came in at 14 compared to estimates of 22, with unemployment up, consumption down, exports weak, production weak, auto sales weak and falling for the 11th time in 14 months, surging commodity prices and falling demand. Sound like any other economy you know?

Faced with all the factors above the Dow traded in a 187-point range on Friday and closed at its lows for the year and only a fraction away from a -100 point loss. Only the bell saved it from closing under critical 10400 support and the outlook for next week is not good. The 200-day average remains at 10378 but it is not typically a strong support level for the Dow. The next material support point is well below at 10000. This is not the position we want to be in as we head into April. However, April is normally kind to the Dow with an average of a +1.9% gain since 1950. It is the best month of the year for the Dow because of its component mix of big-caps. It tends to draw investor money as some of the "sell in May and go away" crowd looks for a dividend haven to park cash while waiting for October. With big caps under pressure I would be really surprised if this April repeated that performance. It would have to rebound to 10701 on April 29th to equal that statistic.

The bright spot in the indexes is actually the Nasdaq. The tech index closed just below 1985 on Friday and well off its highs but it has ceased being the anchor for the markets. The Nasdaq is still holding above the uptrend support from March 2003 at roughly 1975 and it is putting up a valiant fight to cling to the critical 200-day average at 1992. It has traded at or across that average intraday for ten straight days and making a very strong goal line stand. Once that stand breaks along with the 1975 uptrend support the target is 1900 or lower.

SOX Chart - Daily

Russell 2000 Chart - Daily

Russell 2000 Chart - Weekly

Helping the Nasdaq is the SOX, which is still stubbornly holding above support at 410. The much stronger uptrend support is still below at 400 so this index is proving to be a pillar of strength in supporting the Nasdaq. However, just as 410 has proven to be interim support the 420 level has proven to be very strong resistance. This battle is likely to continue to play out as we move into the earnings season. Diehard tech buyers feel chips are the leaders of any tech drop or gain and at 400-410 this is support that is attracting bargain hunters. Should 400 fail it could begin a sequence of index failures that eventually drags down the entire market.

The Russell 2000 has fallen back to test support at 605 and each touch over the past three months has found buyers. The Russell is not typically a picture of strength heading into the summer months as the lower liquidity prompts cautious holders to move to the sidelines over the summer doldrums. The Russell high for the first three quarters of 2004 was 606, which it touched three times in the first week of April before plunging to 530 in early May. The Russell could turn into the canary in the coal mine and a break of support at 605 would be a warning that even the bravest bulls have left the building.

Next week is devoid of any material economic reports but there is a flood of Fed heads taking to the podium including Greenspan. They are sure to make some comments about the economy, inflation and interest rates that the markets will key on for direction. The most critical report on the light calendar could be the oil inventories on Wednesday. Should inventories build as expected it could break the back of the current oil spike and give us the entry point we are looking for. A break in oil would flush billions of dollars out of oil investments and that money could find a temporary home in equities heading into the April earnings period. However I believe any equity bounce would be short lived and we need to brace ourselves for the next leg down. The technicals are very weak and we are at critical levels. I hate to keep saying the same thing but Dow 10400, S&P 1165, Nasdaq 1975, SOX 410, Russell 605 are all critical support levels and if broken we could see much lower levels on all the indexes before the summer is over. We tend to keep gravitating to these support levels but the bulls cannot muster any support from institutional traders. The bull market is still in energy and commodities and until that market corrects the broader equity market is left to exist on loose change sloshing in retail pockets. The brightest piece of trivia I found on Friday came from TrimTabs when they said -$311 million flowed OUT of energy funds for the week ended on Wednesday. I am grasping to that tidbit in the hopes it is the leading edge of a profit-taking wave that will begin next week. With my luck it will be more of a ripple and one that has already passed. In case I did not make myself clear today I would not be a buyer of equities without a drastic change in sentiment. I would look to short any rebound to 10550-10600, 2015-2020, 1190-1195. Definitely enter passively and exit aggressively.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
OXY IVGN
OIH RTH
WYNN

New Calls

Occidental Petrol. - OXY - cls: 73.64 chg: +2.47 stop: 67.99

Company Description:
Occidental Petroleum Corp. a world leader in oil and natural gas exploration and production and a major North American chemical manufacturer. (source: company website)

Why We Like It:
Last week in the plays section of the OI Daily newsletter we added APC just as the oil-related indices and equities began to rebound from a month-long consolidation. Comments out of Goldman Sachs that crude could hit $100 a barrel in the next few years helped reignite the oil rally and now crude prices closed near all-time highs on Friday. We like OXY for multiple reasons. The daily chart pattern shows a bull-flag pattern and Friday's rally helped push shares up through the top border of the flag, which should herald the next leg higher. Short-term oscillators like the RSI and stochastics are also turning bullish. Meanwhile its MACD indicator is nearing a new buy signal. We are willing to go long at current levels but we plan to exit before the April 26th earnings report. The short time frame might make some traders uncomfortable. If that's you consider passing on to a different play or consider playing options on the OIH oil service holders or options on the IYE ishares. If you prefer readers could wait for a breakout over $74.00 before going long OXY. Or an alternative would be to hope for a dip and then buy a bounce in the $71.00-72.00 range. Our target is the $80.00 region.

Suggested Options:
We are suggesting the May calls even though we plan to exit before the April earnings report.

BUY CALL MAY 70.00 OXY-EN OI=4935 current ask $5.70
BUY CALL MAY 75.00 OXY-EO OI=4211 current ask $2.75
BUY CALL MAY 80.00 OXY-EP OI=1060 current ask $1.15

Picked on April 03 at $ 73.64
Change since picked: + 0.00
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million

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Oil Service Holdrs - OIH - cls: 98.70 chg: +2.55 stop: 92.49

Company Description:
HOLDRS are trust-issued receipts that represent your beneficial ownership of a specified group of stocks. HOLDRS allow you to benefit from the ownership of the stocks in a particular industry, sector or group. (source: HOLDRS.com)

Why We Like It:
We like the OIH holdrs since the same forces pushing up shares of OXY and APC are going to be driving most of the group. We can trade the OIH holders with a lower risk of any one stock crashing due to news or a bad earnings report. Looking at the daily chart of the OIH we see that the month-long consolidation in March bottomed with a bounce from the $90.00 level. Now shares are breaking out from what looks like a bull-flag pattern. The MACD indicator just produced a new buy signal. We are willing to go long at current levels. More conservative traders may want to wait for a breakout over the $100 level. Or an alternative, more aggressive play, would be to look for a dip back toward the $95-96 range and buy a bounce. Our target is the $105 level.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 95.00 OIH-ES OI=1519 current ask $8.30
BUY CALL MAY 100.00 OIH-ET OI=2640 current ask $4.90
BUY CALL MAY 105.00 OIH-EA OI=2127 current ask $2.70

Picked on April 03 at $ 98.70
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million

New Puts

Invitrogen - IVGN - close: 67.46 chg: -1.56 stop: 70.15

Company Description:
Invitrogen Corporation provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery and commercial bioproduction. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery, including functional genomics, proteomics, bioinformatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen is headquartered in Carlsbad, and conducts business in more than 70 countries around the world. The company globally employs approximately 4,000 scientists and other professionals and had revenues of more than $1 billion in 2004. (source: company press release)

Why We Like It:
IVGN broke down through significant support at its 50-dma and the $70.00 mark on big volume three trading days ago. The decline also broke its seven-month rising channel. IVGN did manage to bounce from the $67 level and its 100-dma but both times the bounce failed under the $70.00 mark, which is normal as broken support tends to become new resistance. We only have about three weeks before IVGN is due to report earnings but we suspect the stock can trade towards price support near $62.50, which is also underpinned by technical support at the 200-dma. If you check the Point & Figure chart you'll see a fresh sell signal with a $60.00 target.

Suggested Options:
We are suggesting the May puts although we will exit before the April earnings report.

BUY PUT MAY 70.00 IUV-QN OI=474 current ask $4.60
BUY PUT MAY 65.00 IUV-QM OI=505 current ask $2.15

Picked on April 03 at $ 67.64
Change since picked: - 0.00
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 848 thousand

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Retail Holdrs - RTH - close: 94.13 chg: -1.66 stop: 96.51

Company Description:
HOLDRS are trust-issued receipts that represent your beneficial ownership of a specified group of stocks. HOLDRS allow you to benefit from the ownership of the stocks in a particular industry, sector or group. (source: HOLDRS.com)

Why We Like It:
The retail sector could be headed for big trouble with rising gas prices taking a bigger chunk out of consumers' wallets. Retail titan Wal-Mart (WMT) is a prime example and the stock is breaking down under significant, round-number, psychological support at the $50.00 level. This has lead the RTH to breakdown under support at the $95.00 level and its simple and exponential 200-dma's. After four months of consolidating sideways we suspect that this breakdown in the RTH will lead to a decline toward our short-term target in the $90 region.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 95.00 RTH-QS OI=6819 current ask $5.30
BUY PUT MAY 90.00 RTH-QR OI= 507 current ask $2.40

Picked on April 03 at $ 94.13
Change since picked: - 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 1.6 million

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Wynn Resorts - WYNN - cls: 66.04 chg: -1.70 stop: 70.05

Company Description:
WYNN is soon to be the new kid on the block once its new resort opens on the strip in Las Vegas, Nevada. The company also owns and operates the Wynn Macau casino in Macau.
(source: company website)

Why We Like It:
High-flying casino stocks are all starting to look like targets for profit taking. Most of the stocks in the group have begun to breakdown after months of gains and WYNN is one of them. Shares recently broke down under the $70.00 level and its 50-dma. Now the stock is breaking down under the 100-dma with big volume on Friday's 2.5 percent decline. We suspect that investors have already priced in the opening of Wynn's new Las Vegas casino, which is expected to open its doors on April 28th. Technically the stock does look vulnerable. Its P&F chart sports a triple-bottom breakdown sell signal with a $55 target. We are targeting a short-term drop toward support a the $60.00 level. Actually we want to exit at $60.50. Keep in mind that we will plan to close the play before WYNN's late April earnings report.

Suggested Options:
We are suggesting the May puts but it's worth noting that the June strikes have more open interest.

BUY PUT MAY 70.00 UWY-QN OI= 477 current ask $6.40
BUY PUT MAY 65.00 UWY-QM OI=1266 current ask $3.80
BUY PUT MAY 60.00 UWY-QL OI= 592 current ask $2.05

Picked on April 03 at $ 66.04
Change since picked: - 0.00
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million


Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petroleum - APC - cls: 78.20 chg: +2.10 stop: 72.45

Another new high in crude oil and a broker starting coverage on APC with a "buy" rating helped push shares of APC up another 2.75 percent on Friday. A reprint of Thursday's original play description follows:

Here we go again. It looks like the consolidation in the oil stocks over the last three to four weeks may be ending. Comments from Goldman Sachs and their forecast for triple-digit oil in the next few years could easily rekindle the fire under oil-related equities. There are plenty of oil stocks that are starting to look tempting for another trading rally but we're going to step carefully and only add one today. We will be looking at the holders, indices and ishares for potential plays this weekend. We like APC because the stock is producing a nice bounce from support near the $72.00 level (see chart). The bounce actually produced a hammer candlestick pattern and at the end of a bearish trend tends to signal a possible bullish reversal and today's gain was the follow through on that pattern. The stock has also broken through its three-week trendline of lower highs. The MACD indicator is suggesting a new buy signal soon and the RSI and stochastics are already turning positive. It is true that the P&F chart is bearish but the stock could trade up to the $81 level before producing a new buy signal. Our target is the $81.50 region - just under the early March resistance at $82.00. We will plan to exit this play before APC's late April earnings report.

Suggested Options:
We are suggesting the May calls even though we plan to exit near the end of April to avoid earnings.

BUY CALL MAY 75.00 APC-EO OI=4666 current ask $5.70
BUY CALL MAY 80.00 APC-EP OI=3914 current ask $3.00

Picked on March 31 at $ 76.10
Change since picked: + 2.10
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 2.3 million

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PalmOne - PLMO - close: 25.14 chg: -0.24 stop: 23.25

Over the last few days we have grown somewhat concerned that PLMO's bullish breakout would fail but so far the stock is holding above the $24.00-24.50 level. Plus, we see that bulls are defending the stock at the rising, simple 10-dma. More aggressive traders may want to use this pullback as a new bullish entry point. The P&F chart remains bullish with a $35.00 target. However, we suggest caution. With the broader market looking weak and a lack of follow through on the recent bounce we would hesitate to open new bullish plays. Wait for a move back over the $26.00 mark before considering new longs.

Suggested Options:
We are not suggesting new plays at this time. Look for a move back over $26.

Picked on March 23 at $ 25.71
Change since picked: - 0.57
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million

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Red Robin Burger - RRGB - cls: 49.57 chg: -1.34 stop: 47.85*new*

The first thing you'll probably notice is that using the RRGB symbol to find news or charts doesn't work any more. Following the news out on Thursday about the NASDAQ notice of potential delisting for RRGB's delay on its 10-K filing the exchange changed the stock symbol to RRGBE. Investors responded negatively and the down market didn't help but RRGB(E) bounced from the $49.00 level intraday. The uptrend is still intact but we're going to turn conservative and adjust our stop loss higher. Our new stop will be $47.85 since the $48.00 level should act as support. Readers can choose to buy a bounce from the $49.00 level but we'd probably suggesting waiting for RRGBE to trade back above $50.00 or even $50.50 before going long. Plus, we would hesitate to go long if the major averages continue to sink.

Suggested Options:
We are suggesting the June options because they have the most open interest.

BUY CALL JUN 45.00 QZR-FI OI= 49 current ask $8.40
BUY CALL JUN 50.00 QZR-FJ OI= 67 current ask $4.10

Picked on March 10 at $ 48.00
Change since picked: + 1.57
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

Put Updates

Allergan - AGN - close: 69.47 chg: -0.00 stop: 72.51

Positive comments in a Barron's article about anti-aging stocks helped push Botox-producer AGN to an early high on Friday. Fortunately for the bears the rally quickly failed at its 10-dma and the stock closed unchanged. Shares remain within a couple of points of our $67.50 target. This is a tough spot to consider new bearish positions unless you believe AGN has farther to fall. The P&F chart does point to a $61 target. We are planning to exit at $67.50.

Suggested options:
We are not suggesting new positions with AGN this close to our target.

Picked on March 13 at $ 73.09
Change since picked: - 3.62
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand

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Beazer Homes - BZH - close: 50.39 chg: +0.53 stop: 53.01*new*

Hmmm... the DJUSHB home construction index was one of the best performing sectors on Friday. Yet the rally in the homebuilders still failed at its 40 and 50-dma's, which should be new overhead resistance. BZH also enjoyed an early morning rally and this lent some strength to its short-term oversold technical oscillators. We are cautious. The stock is somewhat oversold but BZH should have resistance at its own 50-dma near $52.85. We're going to lower our stop loss to $53.01 to reduce our risk. At this point in the game we're really not suggesting new bearish positions even though the P&F chart's sell signal points to a $39 target. Aggressive traders who believe BZH could trade to $45.00 might want to consider new put positions when the stock trades under $49.00 and/or its 100-dma.

Suggested options:
We are not suggesting new positions in BZH at this time.

Picked on March 17 at $ 51.43
Change since picked: - 1.04
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

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Google Inc - GOOG - close: 180.04 chg: -0.47 stop: 185.01

News that GOOG plans to increase the storage of its free gmail accounts from 1 gigabyte to 2 gigabytes did nothing for the stock price. Yet neither did news accounts that GOOG's plans for spending were going to rapidly rise as it plans to confront growing competition from MSFT and YHOO. Of course the higher capex comment was old news from Thursday. We also noticed that the INX Internet index was stronger on Friday morning but the index produced a failed rally at tough resistance with its simple 200-dma, exponential 200-dma and the 50-dma all converging near the 187 level. We would expect the INX to trend lower next week and that would be a positive for our GOOG put play. Remember that we're not suggesting new bearish positions in GOOG until shares trade back under the $177 mark. Our target remains the $165.00 region but we may adjust it considering our time frame. We plan to exit before GOOG's late April earnings report. The challenge is that the earnings date has not yet been confirmed. Currently GOOG is expected to report Q1 earnings on April 21st.

We are suggesting the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 185.00 GOU-PQ OI= 4451 current ask $8.00
BUY PUT APR 180.00 GOU-PP OI=12407 current ask $4.00
BUY PUT APR 175.00 GOU-PO OI=12128 current ask $1.80

Picked on March 10 at $179.49
Change since picked: + 0.55
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 10.9 million

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Intl Bus. Mach. - IBM - close: 90.44 chg: -0.94 stop 92.15

Dow-component IBM was a factor in the DJIA's decline. The stock lost more than one percent with shares producing a failed rally near the exponential 200-dma under the $92.00 level. This looks like a new bearish entry point but we are still suggesting that readers wait for a drop under the simple 200-dma and the $90.00 mark. Our target, if IBM drops under $90.00, is still the $85.00 level. However, readers should be very careful. We are quickly running out of time. IBM's earnings report is coming up in a couple of weeks. Part of the risk here is that the earnings date is still yet to be confirmed. We will do all we can to make sure we exit before IBM announces.

Suggested Options:
We are going to suggest the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 95.00 IBM-PS OI=24307 current ask $4.70
BUY PUT APR 90.00 IBM-PR OI=33147 current ask $0.80

Picked on March 17 at $ 89.86
Change since picked: + 0.58
Earnings Date 04/14/05 (unconfirmed)
Average Daily Volume = 4.8 million

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MGM Mirage - MGG - close: 70.38 chg: -0.44 stop: 72.51

Thus far we remain on the sidelines. MGG broke down through its bullish trend a few weeks ago but there has not yet been any follow through to the downside. Instead MGG is flirting with support at the $70.00 level and its 100-dma. The P&F chart is bearish and points to a $60.00 target. We are targeting a move to the early December lows and the exponential 200-dma near $62.00-62.50. However, we are using a TRIGGER at $68.75 to open the play. Until MGG trades at or below this mark we'll sit out. Fortunately, if the market continues to decline we would expect MGG to follow.

Suggested Options:
We are suggesting the May puts although the June strikes have much more open interest.

BUY PUT MAY 70.00 MGG-QN OI=652 current ask $3.20
BUY PUT MAY 65.00 MGG-QM OI=153 current ask $1.45

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/01/05 (unconfirmed)
Average Daily Volume = 997 thousand

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Mcgraw Hill Cos - MHP - close: 86.03 chg: -1.22 stop: 88.51*new*

The market sell-off on Friday helped pull MHP to another 1.39 percent decline. The stock is nearing support and our target in the $85.00-84.00 range. Conservative traders may want to choose an early exit in the $85.50-85.25 region as MHP nears its exponential 200-dma. We are not suggesting new bearish positions. We are lowering the stop loss to $88.51.

Suggested Options:
This close to our target we are not suggesting new bearish positions.

Picked on March 15 at $ 88.40
Change since picked: - 2.37
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

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Millipore - MIL - close: 42.84 chg: -0.56 stop: 45.05 *new*

The sell-off continues in shares of MIL. The recent failed rally under $45.00 and its 50-dma has now turned into a new short-term leg down. MIL lost 1.29 percent on Friday to close at a new eight-week low. Technical oscillators have turned negative again and the stock looks ready to test possible support at the $42.00 level soon. Our target remains the $40.00 region. We are lowering our stop loss to $45.05. Don't forget that we plan to exit before the April 21st earnings report.

Suggested Options:
We are suggesting the April puts because we do not plan to hold over the April earnings report.

BUY PUT APR 45.00 MIL-PI OI=338 current ask $2.35
BUY PUT APR 40.00 MIL-PH OI=184 current ask $0.30

Picked on March 16 at $ 43.95
Change since picked: - 1.12
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 358 thousand

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Pacificare Health - PHS - cls: 56.35 chg: -0.57 stop: 60.05*new*

The market weakness on Friday also affected PHS, which lost exactly one percent to breakdown under technical support at its 100-dma. PHS is nearing our target in the $55.00-54.00 region. We are not suggesting new bearish positions at this time. We are lowering the stop loss to $60.05. Readers can prepare to exit.

Suggested Options:
PHS is nearing our target range. We are not suggesting new positions.

Picked on March 20 at $ 59.04
Change since picked: - 2.69
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

Dropped Calls

None

Dropped Puts

Toll Brothers - TOL - close: 80.24 chg: +1.39 stop: 80.51

We have been expecting TOL to bounce back toward the $80.00 level, which should have acted as overhead resistance. Unfortunately the home construction sector was one of the best performing groups on Friday and TOL showed a little too much strength. The stock hit our stop loss at $80.51 early into Friday's session. We would be especially careful here. TOL appears to have produced a short-term bottom and if TOL breaks out over the $82.00 level it would not surprise us to see another rally attempt toward the $90.00 level.

Picked on March 17 at $ 76.81
Change since picked: + 3.59
Earnings Date 02/23/05 (confirmed)
Average Daily Volume = 2.1 million


Trader's Corner

Trust Yourself and Nobody Else

Long ago, Bob Dylan sang about the need to "trust yourself" and not "be a slave to what somebody else believes." Dylan was singing about love, but that sounds like good advice for traders, too.

One day when my charting service stubbornly refused to provide daily charts, a trader advised me to substitute 720-minute charts for daily charts, noting that the moving averages would be slightly different but still deliver a workable substitute. Voila! I had a chart. From that point on, whenever my charting service balked at providing a daily chart, which it sometimes did, I switched to a 720-minute chart and went on my merry way with barely a hitch. Then, one day a reader inquired why I was substituting a 720-minute chart when each trading day was 390 minutes.

The reader was right, of course. The cash market trading day is 390 minutes. And why was I using a 720-minute chart? Someone I trusted had made the suggestion. I hadn't bothered to calculate the minutes in a trading day or test it for myself. Did it make a difference? Let's look at the charts and see.

Daily SPX Chart as of 3/24

720-minute SPX Chart as of 3/24

390-Minute SPX Chart as of 3/24:

The 390-minute and 720-minute charts prove virtually identical. Turns out that using any number of minutes over 390, the length of the trading day, produces a virtually identical chart. The longer the number of minutes used, the closer the candlesticks and moving averages appear to mimic those found on the daily chart. That proves true even if a period that's above the number of minutes in a five-day trading week (1950 minutes) is used, although logic would have told me that using a 2500-minute chart, for example, would have produced candles mimicking the weekly candles.

2500-Minute SPX Chart as of 3/24:

These examples show that although the trading day measures 390 minutes and logic suggests that a longer-period chart would grab some values from the next trading day, that just doesn't happen, at least on my charting service. Trust yourself. Try it out on your own charting service.

So where did the 720-minute calculation arise? I'm not certain. That doesn't match the hours that futures trade, either, and substitution of a 720-minute all-sessions chart for a daily all-sessions chart on the futures will not produce congruent values or candlestick formations. Because futures trade longer, they require more than 390 minutes and in fact, seem to require more than the number of minutes that futures actually trade to accurately reflect a daily chart.

Although my initial adoption of the 720-minute substitute for a daily chart resulted in an accurate chart, that might not have happened. Logic had suggested otherwise, and logic suggests that traders question everything they're told by experts of all stripes. On the morning of February 11, I benchmarked analyst upgrades to strong buy, buy or overweight, and downgrades to sell or underweight.

I chose February 11 to benchmark upgrades and downgrades because it was a period at which I'd noted some danger signals in the forms of bearish divergences and TRAN action, hinting that markets might be nearing at least intermediate swing highs. I chose a one-month period for the test in order to allow some initial volatility after a downgrade or upgrade to subside and to move out of prime earnings season into a quieter period between earnings seasons.

First takes on the data above include the impressions that as markets were nearing their recent highs, more upgrades than downgrades were occurring; that upgraded stocks were just as likely to decline over that period as downgraded ones; and, conversely, that downgraded stocks were just as likely to gain as upgraded ones. If a trader had bought 100 shares each of those upgraded stocks and shorted 100 shares each of those downgraded ones, that trader would have lost $393.00 as of the March 10 close.

Of course, there's more to the story than that. Some upgraded stocks did swing higher in late February and early March with the broader markets.

Daily Chart of Upgraded Stock CTSH:

So did one of the four downgraded stocks.

Daily Chart of Downgraded Stock WOLF:

A closer examination that sorted gains and losses by analyst firm might have shown one firm more reliable than others. A sort by exchange might have shown differences. A look at the stocks might find that an upgrade by one firm was followed shortly by a downgrade by another or vice versa. Still, even this non-scientific, anecdotal test shows that blind trust in analysts does not always prove profitable. Look at charts. Determine whether volume patterns, particularly on-balance volume (OBV), supports the view of the analyst. Trust yourself more than the analyst.

Question everything, including the time frame someone tells you is most reliable, the nifty new charting tool your charting service has introduced, and analysts' comments. It's your money at stake. In the words of Dylan, "If you want somebody you can trust, trust yourself."

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.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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