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Daily Newsletter, Saturday, 05/14/2005

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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

Bonds Up, Stocks Down, Traders Confused

WE 05-13

 

WE 05-06

 

WE 04-29

 

DOW

10140.12

-205.28

10345.40

+152.89

10192.50

+  34.80

NASDAQ

1976.80

+    9.45

1967.35

+  45.70

1921.65

-  10.54

S&P 100

550.16

-    8.04

558.20

+    5.46

552.74

+    1.34

S&P 500

1154.05

-  17.30

1171.35

+  14.50

1156.85

+    4.73

W5000

11360.37

-178.28

11538.65

+175.13

11363.50

+  26.22

SOX

408.23

+  11.41

396.82

+  11.17

385.65

-    3.70

RUT

582.02

-  14.50

596.52

+  17.14

579.38

-  10.15

TRAN

3402.20

-131.46

3533.66

+107.22

3426.44

-  13.61

VXO

16.37

 

14.05

 

15.18

 

VXN

18.49

 

17.58

 

18.54

 

Bonds Up, Stocks Down, Traders Confused

That has been the story of the week with bonds soaring and pushing yields on the ten-year note to 4.11% intraday and a new three-month low. The Dow retreated from resistance at 10400 last Tuesday and quickly fell back to the bottom of its recent range at just under 10100. Oil slid to a three month low and the dollar rose to a six month high. Triple digit days are becoming the norm as volatility makes a comeback. It was a heck of a week.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


On the economic side Consumer Sentiment fell again to 85.3 from the prior reading at 87.7. Consensus estimates were for a slight rise to 88.0. This marks the fifth consecutive monthly decline since the 97.1 high in December. May's reading was the lowest since March-2003. A weak labor market, rising interest rates and high-energy prices continue to weigh on the consumer. New jobless claims have risen for three consecutive weeks and are nearing 350,000 once again. The recent drop in equities has also soured the mood among those with retirement accounts. The drop in oil prices should provide some relief at the pump but it may only be brief. Have you ever noticed that gas prices never return to their prior levels after a prolonged spike? Once consumers become used to paying more the retailers take advantage of it.

Business Inventories advanced at the slowest pace in three months with a gain of only +0.4%. This was below the consensus for a gain of +0.6%. The inventory to sales ratio slipped back to 1.31 and only one tick above the cycle low at 1.30. A low inventory to sales ratio means sellers are not confident enough in the trend to stock a backlog of products. They are carrying only the minimum necessary for short-term needs. This is good for companies like FedEx and UPS since it generates a constant flow of small shipments. In theory a demand spike could cause an order spike and manufacturers would have to race to catch up. Unfortunately we have not seen any demand spikes in quite a while and that is why inventories have been allowed to drop.


Dell announced earnings on Thursday night and almost single handedly supported the Nasdaq and kept it in positive territory. Dell rose +2.73 on their earnings to $39.22. Dell had been fighting resistance at $37 and it could have been a monster short squeeze for those thinking they would post marginal results. Regardless of the reason the +2.73 jump provided a sizeable boost to the Nasdaq. Since they only reported inline and guided inline I fail to see what prompted the rush into the stock. Dell had a good quarter because HPQ, GTW, SUNW and LXK are floundering not because Dell is so outstanding. I know that is heresy among Dell fans but you have to agree the competition Dell faces is weak at best.

Also providing tech support was earnings from Nvidia and another +2.50 jump above recent resistance. NVDA posted earnings of +36 cents compared to estimates of only 29 cents. Morgan Stanley was quick to issue a note to investors saying Nvidia was undervalued and had little downside risk. The NVDA and Dell earnings gave chip buyers some encouragement and the SOX finally broke back over the 400 level with a close at 408.

Positive tech earnings did little to erase the Wal-Mart warning earlier in the week. The Retail Sales report on Thursday had a headline gain of +1.4% and significantly over the +0.4% in the prior month. This was heralded as the end to the soft patch in consumer sales. However, there were two factors not mentioned. The prior month had been abnormally low as a result of seasonal adjustments. It appears that skewed the numbers and it was corrected in April. Secondly, much of the gains in retail sales was due to rising gas prices. Sales at gas stations rose +1.9%, motor vehicle and parts dealers +2.5% and clothing rose +2.8%. This was the official government numbers. However when Wal-Mart missed estimates and warned that Q2 earnings would probably miss as well that is the real proof. Wal-Mart accounts for roughly 10% of the U.S. retail sales and caters to 150 million shoppers. If Wal-Mart says consumer buying is slowing I am going to believe them rather than the "adjusted" government numbers. The Wal-Mart warning helped convince investors that the soft patch was not over and equities weakened as a result.

Other than the couple of tech earnings mentioned above there was little news to move the market. Commodity stocks continued to lead the drop with steel, copper and gold moving to new lows. Since bull markets are said to have copper roofs a strong failure in copper could be a sign the economic expansion is slowing. Since copper is a component in almost every electronic product made today a sudden rise in inventory levels and signs of shrinking demand speaks volumes about economic health. I have heard there is 150 pounds of copper in every new home. We have seen copper rise to near $1.50 in late February and hold there for three months with no credible attempt to move higher. The drop to $1.38 on Friday was a three-month low.

Gold fell to close just over $420 and well off its $439 highs just three weeks ago. This is also a three-month low. Oil broke under $48 intraday and came within 25 cents of its 200-day average at 47.50. $46-47 should be very strong support and further declines would be surprising.

The drops in commodities can be attributed in part to the rising dollar. The dollar began spiking on Tuesday and accelerated to a new six month high. A stronger dollar means it takes fewer dollars to buy the same amount of a commodity. A barrel of oil or ounce of gold has not changed in value only the currency used to buy it. The dollar has risen +6% since the April lows and it clearly diverges from the price of commodities, which are trading at new lows for the same period.

Dollar Index Chart - 120 min


Crude Oil Chart - Daily


The real question is why is this market scenario changing? I believe it is still related to those hedge fund rumors that won't go away. The selling this week was clearly program related and volume was heavy only while the programs were active. There were numerous attempts to buy the dip and each ended in disaster. The rumors continue to fly as to who is in trouble and what trades need to be unwound. Bonds have been bought heavily with the yields on the ten-year dropping to a three-month low at 4.12%. Somebody is either covering some massive shorts or rotating out of corporate paper into something safer prompted by multiple debt downgrades over the last two weeks. Since we don't know what trades these funds are trying to unwind we have to watch the market for clues to the extent of the damage. Previously strong stocks and most importantly those with huge long-term gains have been sold off in volume as each sell program appears. Most analysts feel this is a desperate attempt to raise cash to support other positions or withdrawals. Several hedge fund managers were interviewed on Friday and all believe there is some truth to the rumors and are seeing abnormal activity behind the scenes. Goldman Sachs is rumored to be in trouble with huge trading losses and very high derivative risk. GS has fallen sharply the last two days from $104 to $97.

On Friday the selling was especially strong once the S&P failed at 1165. A strong sell program hit and triggered sell stops as prices cascaded down. Just before 3:PM the S&P hit 1146, Dow 10075 and Nasdaq 1975. Shorts were piling on and market sentiment was very negative. Suddenly at 3:04 Carl Icahn announced he was taking large positions in several high profile stocks. With everybody short from Thursday's failure at resistance and highly profitable the sudden emergence of Icahn's announcement with only an hour left in the week produced a knee jerk short covering rebound. The stocks he mentioned were Dow component HPQ, RAD, SEBL, LTS, IMCL and TELK. There was no substance to the move only reaction. Traders trying to decide if they wanted to hold short over the weekend suddenly had their decision made for them. It was just enough news to shock the market back into reality. Like a groggy fighter stumbling to the corner just after the bell the market was losing its grip and suffering from an increasing dizzy spell. When the manager sees his fighter is one punch away from a knockout in the next round he stuffs some smelling salts under his nose to clear his head and bring him back to life. The Icahn news was smelling salts for the market. Unfortunately if the fighter was already being pummeled into dizziness the odds of a further decline are good despite the brief return to consciousness. This is the same with the market. The Icahn bounce stalled at 10150 only 20 min after it began and the Dow weakened into the close. To put it simply the Icahn bounce was nothing but eye candy to frustrated investors and should have no impact on Monday's market.

If you are following my recommendations you should have been short since 10350 on Monday. The drop to 10075 on Friday was a complete retracement of all the gains made in May. We fell back to just above the April lows and are in danger of moving lower. The NYSE advancing volume over the last two days has been horrible. Thursday it was 4:1 declining over advancing and 3:1 on Friday. There is no buying interest on the NYSE because that is where most cyclical and commodity stocks trade. If the dollar continues to rise you can expect those stocks to continue down. Initial support is 10K followed by 9800 and my eventual target.

The Nasdaq was the reverse of the NYSE with advancing volume nearly 3:1 over declining on Friday, nearly even on Thursday and 2:1 on Thursday. For some reason there is a stealth rally underway on techs even as we head into historically the weakest period of the year for tech stocks. Chip stocks bounced off 390 after the Cisco earnings and hit 400 before Dell. I believe shorts loaded up again at 400 thinking Dell would disappoint. While I thought Dell's report was average for them there were enough traders short that a monster short squeeze developed. The chip stocks reacted as well and shorts were squeezed to nearly 412 before the spike cooled. I believe there is no substance to this bounce. It looks to me like two back to back short squeezes on the SOX and that supported the Nasdaq. The Nasdaq still has resistance at the 200-day average at 1995 and horizontal resistance at 2000-2010. Any further gains will be hard to achieve and with earnings over there are no catalysts in sight. Current support at 1965 is rising. While the Dow is suggesting a further breakdown the Nasdaq is giving bullish signals. This divergence could further hamper any additional Nasdaq gains but a sudden change of fortune for the Dow could accelerate them.

That presents a conundrum for traders to use Greenspan's term. Half the market appears headed for the cellar and half trying to move higher. If we look to the other indexes for help the Russell 2000 would be the first stop. Small caps don't normally do well in the summer and the RUT has failed at 600 resistance twice in the last month. The drop on Friday to 580 was a retest of the April 18th low but there was a lower low at 570 on April-29th. You could make a case for an inverted head and shoulders but given the lack of excitement Friday at -5 and the positive SOX/COMPX suggests that 580 support could fail.

Russell 2000 Chart - 60 min


SOX Chart - Daily


The SPX fell to 1146 intraday and briefly lost its grip on the 1150 level. It did lose the support of the 200-day average at 1158 and Friday was the first close below that average since April-28th. There is some short-term uptrend support at 1150 that adds to the congestion in the 1140-1150 range. The S&P does not look as negative as the Dow or RUT but far weaker than the Nasdaq. If I had to call a direction on the S&P I would say the charts favor a bounce somewhere in that 1140-1150 range. To have staying power it would have to move over 1175 and hold it and I don't see that happening. A break under 1140 is lights out for the bulls.

A bullish event that went unnoticed was cash inflows into funds of $4.4B for the week. This is a huge jump in cash flow compared to the last six weeks. Even more unusual was that the vast majority ($3.5B) actually went into U.S. funds not overseas funds as we have seen for months. Trimtabs said on Friday that only +$8 billion has flowed into U.S. equity funds year to date compared to +$75B at this time in 2004. Meanwhile $29B has gone into overseas funds compared to $33B in 2004. According to TrimTabs investors are avoiding equities in general and favoring real estate, gold and energy funds. Corporate buybacks at $90B are twice last year's levels. Earnings growth has been better than estimates for nine consecutive quarters. Tech earnings for Q1 came in at +18% and much better than expected. The only thing missing is incoming cash flow into the market. Last weeks +$3.5B was nearly half the total inflows for the entire year. It is entirely possible that sentiment is changing and the slight uptick in techs is the leading edge of that move.

There are several things that trouble me with that concept. Summer is typically not kind to techs or small caps and both would be needed to create a real rally. Nothing says they can't rally into summer but it is not the sentiment we have seen to date. Add in the hedge fund problems as a wild card to really confuse the picture. Maybe one more fund induced drop will be the catalyst for a bottom. If we can finally get a washout in the Dow from fund selling it could create the capitulation event we need to end the last two months of losses. Regardless of the immediate market direction the odds of a range bound market over the summer months remain strong. What we don't yet know is what that range will be. For next week I have moved closer to neutral on market direction. I believe any S&P dip to 1140-1150 will be bought and the Dow will find some buyers around 10000. The wild card is still the hedge funds. Maybe Friday's sharp sell off was the closing blast BUT again maybe not. Huge intertwined positions don't get unwound over a couple days. The sharks smell blood and nobody wants to be holding the bag when the final reveal appears. Bids in quantity have dried up and we are only seeing token offers. There is fear in the market that another Long Term Capital type blowup could appear any day and that is not something that will disappear overnight. It could take time for the rumors to subside and buyers feel comfortable getting back into the market. Remember the lack of conviction I have been discussing over the last several weeks. It is still there as is the question "Why buy?"

If the economy really is improving then the Fed is far from done. If it is not improving and the Fed continues to hike then a recession is imminent. Earnings guidance has been less than exciting and earnings for Q1 are basically over. Market rallies at the end of a hike cycle typically start one hike before the end of the cycle. Based on current expectations that would be around October and coincidentally the month where normal end of year rallies begin. Factor in the head start gene and that suggests a late summer rebound from the early birds trying to beat the rush. It also suggests that the smart money is going to wait out the Q2 earnings to be sure of guidance before moving back into equities. If you are not confused now you are doing better than me. I would key on S&P 1140 for guidance. A break below 1140 signals a new leg down. Until then we are likely to be range bound between 1150-1180 as the summer doldrums begin to grind up those traders trying to pick a direction. According to Ameritrade the doldrums have already started. Trading volume at Ameritrade dropped -30% in April prompting an earnings warning from them on Friday. The CEO said retail investors were waiting for economic conditions to improve before investing. Average daily trades fell from 200,000 to 140,000 and summer is not even here yet. I remain neutral on next week and suggest you key on 1140 for a trading bounce or a new short opportunity if it fails. Cash is always a position. Definitely enter passively and take profits quickly.
 

 
 




New Plays

New Option Plays

New Option Plays
Call Options Plays
Put Options Plays
None MTG
  PCP

New Calls

None today.
 

New Puts

MGIC Invest. - MTG - close: 58.91 change: -1.39 stop: 61.11

Company Description:
MGIC ( http://www.mgic.com ), the principal subsidiary of MGIC Investment Corporation, is the nation's leading provider of private mortgage insurance coverage with $172.1 billion primary insurance inforce covering 1.37 million mortgages as of March 31, 2005. MGIC serves 5,000 lenders with locations across the country and in Puerto Rico, helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality. (source: company press release)

Why We Like It:
We like MTG as a bearish candidate because the stock just produced a failed rally near the top of its descending channel. Plus, the technical picture on the IUX insurance index has taken a recent turn for the worse. Now that the sector is turning lower in conjunction with the DJIA and the S&P 500 investors can feel more comfortable betting that MTG will continue lower as well. Shares of MTG were already in a bearish trend with the stock producing a series of lower highs over the last few months. MTG just spent about two weeks trying to breakout over the $61 level but failed. Now MTG's technical oscillators are turning lower and its MACD is nearing a new sell signal. Friday's decline looks like a bearish entry point. We are targeting a move into the $55.00-54.0 range.

Suggested Options:
We are suggesting the June puts.

BUY PUT JUN 60.00 MTG-RL OI=2438 current ask $2.60
BUY PUT JUN 55.00 MTG-RK OI= 640 current ask $0.70

Picked on May 15 at $ 58.91
Change since picked: - 0.00
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 742 thousand

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Precision Castparts - PCP - cls: 73.25 chg: -1.73 stop: 75.05

Company Description:
Precision Castparts Corp. is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power generation, automotive, and general industrial and other markets. PCC is the market leader in manufacturing large, complex structural investment castings, airfoil castings, and forged components used in jet aircraft engines and industrial gas turbines. (source: company press release)

Why We Like It:
At first glance PCP may not seem like a bearish candidate when you consider its strong long-term up trend. Yet it's that very trend that is in jeopardy. Shares peaked under $80.00 back in early March and have been slowly drifting lower ever since. PCP now has three lower highs and its technical picture is deteriorating. Friday's high-volume decline brought PCP toward technical support at its 100-dma (at 72.80). We see additional support near the $72.00 level and this is confirmed on the Point & Figure chart. Chart readers will also note that if PCP trades under the $72.00 level it will reverse its P&F chart into a new sell signal. We suspect that if the DJIA and the S&P 500 index continue sliding lower that PCP will break its up trend. Our strategy will be to use a trigger under support to catch the breakdown. We'll use an entry point at $71.95 to open the play. Our target will be the $67.50-66.00 range, just above the 200-dma's.

Suggested Options:
We are suggesting the June puts.

BUY PUT JUN 75.00 PCP-RO OI= 66 current ask $3.50
BUY PUT JUN 70.00 PCP-RN OI= 81 current ask $1.10
BUY PUT JUN 65.00 PCP-RM OI=162 current ask $0.50

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 492 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 73.78 change: -0.26 stop: 72.95

Friday turned out to be a very mixed session with technology stocks bucking the generally weak trend in the market. Shares of AVB pull back toward the simple 10-dma as we cautioned readers earlier in the week. We're not suggesting new bullish positions and more conservative traders may want to exit for a gain early. We're keeping the play open with an eye on our target in the $75.00-76.00 range.

Suggested Options:
We're not suggesting new positions at this time.

Picked on April 24 at $ 70.05
Change since picked: + 3.73
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand

---

Caterpillar - CAT - close: 89.00 chg: +0.12 stop: 89.00

We're not willing to call it quits just yet in CAT and since the play is unopened there's nothing at risk. We initially added the play a few days ago with a trigger above resistance at its 50 and 100-dma's in hopes of catching a bullish breakout from the inverse head-and-shoulders pattern. In the original play description we stated that it's imperative to keep an eye on the Dow Industrials, which would likely lead CAT higher or lower as the DJIA fought with resistance near 10,400. Right now it looks like the bears are winning that fight in the DJIA. We're encouraged to see there was no follow through on Thursday's decline in shares of CAT. Yet we're wary that the current technicals will continue to sour. We're going to leave the CAT as a bullish candidate for now with our trigger to buy calls unchanged at $92.35. If we're triggered our target will be the $99.25-100.00 range.

Suggested Options:
We're not suggesting new positions at this time.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

---

Hovnanian - HOV - close: 51.90 chg: -0.30 stop: 49.99

Heads up! Traders need to be very careful. The housing sector continues to show weakness and the declines in the DJIA and S&P 500 on Friday are not very inspiring. We seriously considered closing HOV as a bullish candidate but the stock remains above round-number, psychological support at the $50.00 level. Plus the P&F chart remains bullish with the triple-top breakout buy signal. The bad news is that the technical picture is deteriorating. We are not suggesting new bullish positions and more conservative players may want to exit now to avoid further losses.

Suggested Options:
We're not suggesting new positions at this time.

Picked on May 06 at $ 54.26
Change since picked: - 2.36
Earnings Date 03/02/05 (confirmed)
Average Daily Volume = 1.2 million

---

Invitrogen - IVGN - close: 76.86 change: -0.26 stop: 71.49

IVGN has continued to show relative strength over the last few weeks and is trading near one-year highs. We remain bullish with IVGN above resistance at the $75.00 level but we hesitate to suggest new bullish positions given the weakness in the broader market. The BTK biotech index has been bullish the past couple of weeks as investors typically buy the group ahead of the ASCO conference that begins this weekend. The question now is whether or not the sector (and IVGN) will see any sell-the-news type of reaction next week. Technical indicators for IVGN do look a little overbought so traders looking for a new entry point might do well to sit and wait for a dip back to $75.00 although we'd look for signs of a bounce first before committing any capital. The P&F chart remains bullish with an ascending triple-top breakout buy signal and an $85 target. Our target is the $80.00 area. This past week IVGN also announced it would present at the Banc of America conference on May 17th.

Suggested Options:
We are suggesting the June calls although Mays and August strikes have more open interest.

BUY CALL JUN 70.00 IUV-FN OI=164 current ask $7.90
BUY CALL JUN 75.00 IUV-FO OI=562 current ask $3.90
BUY CALL JUN 80.00 IUV-FP OI=284 current ask $1.40

Picked on May 03 at $ 75.51
Change since picked: + 1.35
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand

---

Eli Lilly - LLY - close: 58.76 change: -0.43 stop: 57.49

The DRG drug index has been cycling higher for the last few months and has reached a new turning point. The group has been consolidating lower the last several days and is due for a bounce or the beginning of the next leg higher. There is also the possibility that the DRG drug index could slip lower and retest the bottom of its wider, rising channel. If this occurs we'd expect LLY to pace the decline and break support near the $58.00 level. The catalyst we need to beware is investor reaction to the ASCO conference that began this weekend. The biotech stocks will probably have the biggest reaction but the drug sector will react as well. Since the DRG has already been consolidating the last several days we're not so concerned for a sell-the-news move but it could still occur. Considering these influences in addition to a market that looks vulnerable to more selling we are not suggesting new bullish positions. Instead we will reiterate our previous suggestion to wait for a new move over the $60.00 mark before committing any capital. FYI: P&F chart watchers will note the quadruple-top breakout buy signal and LLY's $79 price target.

Suggested Options:
We're not suggesting new positions at this time.

Picked on May 04 at $ 60.15
Change since picked: - 1.39
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million

---

Reynolds American - RAI - cls: 78.45 chg: -0.55 stop: 77.95

It looks like shares of RAI were not done consolidating when we added the stock to the play list in early May. Fortunately, we decided to use a trigger above short-term resistance near the $81.25 level. Thus we remain on the sidelines waiting for RAI to trade at our entry point of $81.31. We are a little surprised that RAI and the tobacco sector has not done better the last couple of sessions. Recent news revealed that a Minnesota judge has dismissed the "lights" cigarette case against RAI. Yet shares of RAI are slowly drifting back toward the bottom of its six-week trading range near the exponential 200-dma and the $77.00 region. RAI is currently in danger of reversing its recent P&F buy signal. We will stand by our trigger to go long for now but if RAI breaks down under the $76.50 mark then more aggressive traders may actually want to consider bearish positions.

Suggested Options:
We're not suggesting new positions at this time.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

---

Research In Motion - RIMM - cls: 70.58 chg: +1.53 stop: 66.85

Whoa! We warned readers that RIMM tends to be volatile and that's one of the reasons why we labeled this play high-risk. RIMM is proving that our caution is warranted. The stock gapped down this morning and dipped toward the $67.00 level after a research firm downgraded shares to a "sell". Yet the bullishness in the NASDAQ and the entire group of technology-related sector indices helped inspire a rebound in RIMM pushing the stock back above round-number resistance at the $70.00 mark. This looks like a new bullish entry point but traders should think twice about initiating new bullish plays with the NASDAQ right under resistance at the 2000 level. We would suggest waiting for the NASDAQ to breakout first. Our target for RIMM remains the $76-77 range.

Suggested Options:
Only aggressive traders should consider this high-risk play. We like the June strikes for RIMM.

Picked on May 10 at $ 70.51
Change since picked: + 0.07
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 1.7 million
 

Put Updates

Fording Cndn Coal - FDG - close: 79.35 chg: -4.55 stop: 86.51*new*

FDG is a new bearish candidate we added to the play list on Thursday night following its technical breakdown. A reprint of the original play description follows but readers need to decide if they want to wait for an oversold bounce before considering new positions or whether or not they want to chase it. Friday's decline and massive volume (about 6x the average volume) sent option values soaring. The June 85s rose more than 50 percent and the June 75s have doubled from Thursday's prices. We are lowering the stop loss to $86.51. Our target remains in the $76-75 range. Here's a reprint of Thursday's play:

We have had our eyes on FDG for a while now but never added it to the play list due to its pattern. The stock has been consolidating in a neutral pattern of lower highs and higher lows for several weeks. Normally we would look for the prevailing pattern (which was up) to overcome but this time FDG is breaking down. The stock broke out from its neutral wedge and declined below technical support at its 100-dma on volume more than double the average. FDG's P&F chart also shows a sell signal that currently points to a $74 target. We are suggesting bearish positions at current levels with a target in the $76-75 range. This would put FDG near its simple and exponential 200-dma's. Readers can choose to buy puts at current levels or look for a possible bounce back toward the $85-86 levels and use a failed rally there as a bearish entry point.

Suggested Options:
We are suggesting the June puts. The next available would be September strikes. These are the updated prices for Friday's close.

BUY PUT JUN 85.00 FDG-RQ OI= 486 current ask $8.50
BUY PUT JUN 80.00 FDG-RP OI=1297 current ask $5.80
BUY PUT JUN 75.00 FDG-RO OI= 230 current ask $3.20

Picked on May 12 at $ 83.90
Change since picked: - 4.55
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 394 thousand

---

L-3 Comm. - LLL - close: 65.23 chg: -0.64 stop: 69.55

Already breaking down, shares of LLL lost close to one percent during Friday's market pull back. The stock did hit the $65 region and tried to bounce twice from the $64.65 level. LLL does look short-term oversold so we would expect a bounce next week unless the major averages continue declining. Readers can look for a bounce back toward the $67.00-67.50 range and then use a failed rally there as a new bearish entry point. Our target remains the $63-62 range.

Suggested Options:
LLL is only a couple of points from our target so we're not suggesting new plays unless the stock produces a bounce. If this occurs we'd use the June or July puts.

Picked on May 10 at $ 68.01
Change since picked: - 2.65
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 855 thousand

---

Marriot - MAR - close: 60.80 chg: -0.52 stop: 64.21

MAR is almost there. The stock lost another 0.8 percent on Friday and hit another new relative low at $60.40. MAR is very close to our target in the $60.00-58.00 range and we're suggesting that readers prepare to exit. Actually, some traders may want to plan an exit anywhere between $60.40 and $60.00 to avoid any potential bounce since the $60 mark could be round-number, psychological support.

Suggested Options:
MAR is very close to our target so we're not suggesting new positions at this time.

Picked on April 28 at $ 63.37
Change since picked: - 2.57
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

Parker Hannifin - PH - close: 57.97 change: -0.41 stop: 62.01

After the early May bearish reversal shares of PH have been consistently weak. Now the stock is hitting new three-week lows while its MACD indicator has produced a new sell signal with Friday's decline. The P&F chart continues to look weak as well with a sell signal pointing to a $44.00 target. We would use the recent weakness as a new bearish entry point but more patient traders can look for a possible bounce back toward the $59 level and then consider new put positions. Our target is the $55-54 range.

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

BUY PUT JUN 60.00 PH-RL OI=302 current ask $3.50
BUY PUT JUN 55.00 PH-RK OI=142 current ask $1.00

Picked on April 28 at $ 59.08
Change since picked: - 1.11
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million
 

Dropped Calls

Chubb Corp - CB - close: 80.45 chg: -1.51 stop: 79.99

It was a weak day all day for the insurance group and the selling appeared to pick up speed into the afternoon. The IUX insurance index pierced support near the 295 level just as shares of CB pierced support near the $80.00 level in the last couple of hours of trading. Our stop loss was at $79.99 closing the play. The MACD indicator has produced a new sell signal but more aggressive players might want to watch for a bounce back above the $82.50 level as a potential bullish entry point. The $85.00 level has been set as new overhead resistance.

Picked on May 01 at $ 81.78
Change since picked: - 1.33
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 1.2 million

---

Coventry Hlth Care - CVH - close: 64.21 chg: -2.51 stop: 66.99

It could be game over for the CVH bulls. After two weeks of trying to breakout over the $70.00 level the stock finally faltered and broke down below its multi-month trendline of support and technical support at its 50-dma on Thursday. Friday's high-volume decline merely confirmed the breakdown. Our plan was to go long/buy calls at our trigger of $70.51. That never occurred and we're closing the play unopened. Nimble traders may actually want to consider bearish positions with a target in the $57.50-60.00 range. The $60 could be round-number support but we see the exponential 200-dma near 57.50 and the simple 200-dma just north of $55. The P&F chart has reversed from a buy signal into a sell signal pointing to $57.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 973 thousand
 

Dropped Puts

Lehman Brothers - LEH - close: 87.55 chg: -0.30 stop: 92.80

Target achieved. Smith Barney issued a note on the broker-dealer sector and trimmed its earnings estimates for some big name brokers. The Smith Barney analyst is concerned about revenue weakness in the second quarter for the group. This news sent shares of LEH declining sharply at the open and the stock traded to $85.92, which is inside our target of $86-85. After a quick bounce shares of LEH faded toward the $86 level again before yet another late day bounce. Volume has been very heavy during the declines over the last few days. We're closing the play but readers may want to keep an eye on LEH. It wouldn't surprise us to see another bounce toward the $90.00 level, which might roll over again and offer another short-term bearish entry point.

Picked on April 29 at $ 89.45
Change since picked: - 1.90
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million
 


Trader's Corner

Just for Newbies: What on Earth Are We Talking About? Common Terms Used on the OptionInvestor Site

When I was studying physics in high school, the teacher explained an easy method for determining the direction of the torque. If you curled your fingers in the direction of the rotation, he explained, your extended thumb pointed in the direction of the torque. I got that, no problem, and grasped much more complicated concepts later in college physics, but the next part of my high school teacher's explanation--the easy part, as it turned out--stumped me. He talked about torque being directed "into the board" and "out of the board." What board?

The board was the blackboard, of course, a term he expected us to grasp with no explanation needed. I was trying for a more complicated explanation. Writers on investing websites freely use terms that might seem more complicated than they are to those new to trading. Heres a listing of some common terms used on the OptionInvestor website and a brief explanation of the terms:

BoE: Bank of England.

BoJ: Bank of Japan.

ECB: European Central Bank. This central bank serves functions similar to those of our FOMC (see below), such as setting discount rates. Global market watchers do pay attention to the statements coming out of meetings by the leaders of this central bank and the others listed above. Those statements concern interest rates, risks to the economies of the various regions, and currencies issues, among others. Links to the websites of these central banks can be found below:

http://www.bankofengland.co.uk
http://www.boj.or.jp/en
http://www.ecb.int

Studying press releases by these central banks can give insight into global economic developments.

FIB: Traders use this term as shorthand for Fibonacci numbers. University courses have been devoted to the background and uses of Fibonacci numbers, but the short version is that these are the series of numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 . . . .), with each new number in the series, after the first two, calculated by adding the previous two numbers. This series of numbers has been used to predict everything from the number of rabbits born to a single pair n months after they begin breeding, to the number of petals on a flower. Turns out that flowers have 3, 5, 8, 13, 21, 34, etc. petals. Fascinating, right?

Something else proceeds from a study of the numbers. After the first five numbers of the series, the ratio of one number to the next in the series is 0.618, making each number 61.8 percent of the number that will follow it. This number and proportions of this number (one-half, for example) turn out to have relationships to all kinds of thing, too, including to movements of the stock market. Market watchers find that after a big rally or big decline, prices sometimes reverse and retrace part of the prior movement before resuming the rally or decline. Often those retracements turn out to be based on Fib numbers or the ratios between the numbers. For example, a 61.8 percent retracement is sometimes seen.

Dont worry: you dont have to memorize the numbers. Most charting services have a snap-on Fibonacci bracket with the most commonly watched retracement values already calculated as default values. It's tempting to believe that movements around Fib numbers become self-fulfilling and that's all that's behind the importance of the Fib numbers. Because so many traders watch them, many sell or buy near a Fib number. However, those flower petals and breeding rabbits argue against that conclusion. Something else appears to be at work, although now that the Fib numbers are so widely known, that self-fulfillment factor now must play a part.

EMA: Exponential moving average. You don't need to know how to calculate it to use it. Unlike simple moving averages that give equal weight to all price points in a given period of time, an exponential moving average gives greater weight to the most recent prices. Some technicians prefer to use ema's when studying longer-term moving averages such as a 200-period moving average. Others stick with simple moving averages. Experiment and make your own observations.

FOMC: Federal Open Market Committee. This committee consists of twelve members, with its best-known current member being Board of Governnors Chairman Alan Greenspan. The committee has three duties, with most Americans being most familiar with its duty to set the discount rate, usually reported on news services as "the interest rate," as in "the Fed hiked the interest rate." The FOMC also conducts daily open market operations, useful to watch in gauging whether the FOMC is adding to liquidity on any given day.

The FOMC typically sets those discount rates during two-day meetings eight times a year. For more information about the FOMC, check the site: http://www.federalreserve.gov/FOMC

HOD: High of the day.

H&S: Head-and-shoulders formation. Sometimes traders refer to inverse or reverse H&S's, too. A H&S formation is typically a bearish formation that looks like a head and two shoulders, with an inverse or reverse formation typically a bullish formation that looks like an upside-down head and two shoulders. Each requires confirmation by a thrust through the neckline. Formerly more reliable whether than they appear to be in recent years, confirmation can not be considered guaranteed. More information about this formation and others such as triangles and wedges can be found in technical analysis texts.

LOD: Low of the day.

MAX PAIN: This term becomes important during option expiration week. Max pain describes a settlement number for a stock or index that would cause maximum pain to owners of options, from the most options expiring worthless. Max pain can be determined from studying option chains, observing open interest numbers. Some feel that stocks or indices are often maneuvered to max pain numbers and pinned there, if possible. Some investors plan options plays based around the likely settlement value for a stock or index, while others feel the numbers have little value in predicting settlement values. Make your own observations.

MOC: Market on Close. This refers to an order to buy or sell at market price as near the market close as possible, with these orders often coming from the big boys and girls of the stock market. We usually get a look at what MOC orders are like about twenty minutes before the close, with exchanges and the SEC setting rules for when those MOC orders have to be entered. NYSE Rule 123C, "Market on The Close Policy And Expiration Procedures" (SIC), states that in order to avoid large imbalances at the close, all MOC orders must be entered by 3:40 p.m. Exceptions exist, of course, such as when a stock is halted for trading and with different procedures employed on expiration days. Once those MOC orders are made known to the specialist and placed, they cannot be revoked until 3:50 unless the order was wrongly entered or because of a regulatory halt.

Rule 123C also relates how MOC buy and sell orders must be treated in relationship to limit orders. You can read the rule for yourself by following this link: http://www.nyse.com/Frameset.html?displayPage=http://rules.nyse.com/NYSE/Help/Map/rules-sys248.html

The Amexs rule 118 governs Nasdaq National Market Securities' MOC orders, saying that imbalances of 25,000 shares or more must be published in a manner specified by the Exchange. As of April, 2004, SEC rules state that "Beginning at 3:50 p.m., Nasdaq shall disseminate by electronic means and Order Imbalance Indicator every 30 seconds until 3:55 and then more frequently afterwards. Information on the Nasdaq's Net Order Imbalance Indicator (NOII) can be found here: https://noii.nasdaqtrader.com/public/

Why do we care about MOC orders? The easiest explanation is that knowing whether buying or selling pressure is highest helps make end-of-day decisions. At least one article recently concluded that MOC imbalances tended to be reversed in after-hours trading and early the next morning, information that has not been corroborated by this author, so it may be that the imbalances should help one make exit decisions only. For example, if a trader were planning on exiting a bearish position by the close and MOC orders showed selling pressure, that trader might decide to wait until as late as possible to sell. If the MOC orders showed buying pressure, that trader might decide to sell as soon as possible.

Subscription services offer MOC order information, but they tend to be expensive. Check with your charting service or online broker as to the best way to view MOC orders.

MOF: Minister of Finance

OPEX: Option expiration. Traders often refer to opex week, or the week of options expiration. As explained on the CBOE site, stock options typically expire the Saturday immediately following the third Friday of the expiration month. This is also the expiration date for the OEX. SPX settles differently, on Friday morning. Holidays result in expirations one day ahead, and, obviously, options stop trading the day before expiration.
Option expiration becomes important because it sometimes results in volatility as options positions are unwound prior to expiration. That volatility used to take place mostly during opex week, but now often happens the Thursday and Friday preceding opex week. The tendency for a while has been for markets to get nailed down from about noon on the Thursday of opex week. Volatility can be exacerbated when a month also sees expiration of other securities, such as futures.

For options traders, opex week and the few days immediately following opex can produce changes in options pricing. Options for the next month can lose value quickly in the Monday and Tuesday following opex week.

To learn more about options expiration, check the Learning Center on the CBOE site at http://www.cboe.com/

P&F: Point and figure charting. This type of charting method employs columns of X's and O's, with the X columns representing uptrends and the O columns representing downtrends. Because of the method employed in their construction, they tend to filter out choppy movements and show the underlying trend because prices have to move a specified reversal distance before a new column is begun. A unique characteristic of these charts is that the movement from one column to the next is dependent only on price action and not on time. To learn more about P&F charting, refer to the P&F bible, POINT & FIGURE CHARTING by Thomas J. Dorsey, or get an overview at this site: http://stockcharts.com/support/pnfCharts.html

SPREAD: Traders referring to "the" spread usually reference the difference between the bid and ask on a stock or option price. If an OEX call option shows a bid price of $1.70 and an ask price of $1.95, the spread is $0.25. Traders referring to "a" spread usually reference a type of combination play in which one call or put option is bought and another sold. These spreads can be used to establish bullish or bearish positions, depending on the combination of options employed. Lawrence G. McMillan in OPTIONS AS A STRATEGIC INVESTMENT tells all you want to know about spreads of either type.

TRIANGLE: When prices coil, they sometimes coil into a triangle or wedge shape. One technical analysis guru distinguishes the two by noting that with a wedge, the converging trendlines both head up or both head down, while with a triangle, the converging trendlines do not both head the same direction. With a triangle, the bottom trendline can be flat and the top descending, or the top can be descending and the bottom ascending, or the top flat and the bottom ascending. In the first case, the triangle is sometimes called a bearish right triangle; in the second, a neutral triangle; and in the third, a bullish right triangle. The names are self explanatory.

WEDGE: See the explanation of "triangle" for the distinguishing characteristics of triangles and wedges. Wedges can also be bullish or bearish. Technicians deem a rising wedge a bearish one, with gains unsupported and the wedge likely to break to the downside. They deem falling wedges bullish, with the wedge likely to break to the upside.

Perhaps you found your personal "board" among this list of frequently used terms, or perhaps it wasn't included. For explanations of words not included, try these sites:
http://www.investorwords.com
http://www.investopedia.com
 

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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