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Daily Newsletter, Saturday, 05/21/2005

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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

Big Week, What's Next\?

Big Week, What's Next?

FRIDAY'S TRADING ACTIVITY  
The market had its biggest gain in months last week, with the
bellwether S&P 500 (SPX) up 3.1% (35 points) and the narrower blue chip Dow 30 (INDU) gaining 3.3% (332 points) for the week. This was the biggest point gain since November. Both indices were down slightly on Friday after equaling, or slightly exceeding Thursday's peak. 

The Nasdaq Composite Index (COMP) however saw its sixth up day in a row, gaining 3.8 points to 2,046.4. COMP was up 70 points on th week (+3.5%), its biggest point gain since last August.

Decliners led advancers by an 18-to-15 margin on the NYSE with COMP having 15 stocks down to every 14 up. NYSE volume was a moderate 1.28 billion shares on Friday; 1.52 billion shares changed hands on Nasdaq.

You couldn't point to any single earth-shaking news on the week. [There was some Merger activity as a focus on Friday.] Crude oil continued its slide below 50 bucks, with the nearby and the new front month JULY crude futures closing at 48.65 (June futures went off the board at 47.25). 


There was some ok inflation news (core inflation rate). The market shrugged off cautionary words from Fed Chairman Greenspan about unhealthy debt levels all around (including mortgage lending) and a decline in Leading Economic Indicators, which is now of four months duration. Greenspan also noted in another speech that oil inventories are building as expected for this time of year.

With earnings reporting season behind us, the bulls kind of woke up, realizing that earnings were good pretty much, an outlook for an upward revision in overall economic growth with GDP being reported in the coming week. 

Well, inflation could tack up a bit and the Fed will keep raising rates some, but then again they may pause, what with oil prices coming back down... and the dollar rose to a 7-month high (to $1.256) against the Euro and to a 5-week peak against the Yen (to 108.1) ... not a bad overall picture. 

So, some buried cash got put to work. After all, what else are you going to do with cash? Bond yields aren't great (4% on the 10-year), real estate is viewed by many as being over-inflated and under the matress is not doing much for you! 

Of course the bears are suspicious, as always. Volume levels werent all that great (I'll more to say about one key volume measure); if the Fed DOESN'T have to raise rates more than they've done already and oil prices are starting to drop back, doesn't that point to a SLOWING economy?!

CHEAP STOCKS ... TIME TO BUY OR MERGE
America West Airlines Inc (AWA) announced late-Thursday that they had agreed to merge with bankrupt U.S. Airways (UAIRQ). The 
The new airline will operate under the US Airways name but will be run by the America West CEO.

Investors led by Ripplewood Holdings agreed to buy Maytag Corp. (MYG) for $14 a share, plus assumed debt, making a cost to them of a little over two billion. MYG rallied 26% on Friday.

Occidental Petroleum Corp. (OXY) announced that it would buy an interest in oil and gas production from Exxon Mobil Corp. (XOM) in West Texas for $972 million. Oxy Pete expects their acquisition, as well another potential deal in the works, to raise OXY proven reserves by at least 130 million barrels of oil and to add 26,000 barrels of oil equivalent per day for its 2005 rate. The deal is expected to immediately boost earnings. The stock was off 8 cents on day, as its been falling of late along with oil stocks in general after a multimonth rally. 

EARNINGS NEWS 
The market was not devoid of earnings news. 
Gap (GPX) reported a fiscal Q1 profit that was a penny ahead of Street lowered expectations. Total sales fell 1.1% to $3.63 billion as sales at all three of the company's retail concepts fell. The stock lost 1.3%. 

Sharper Image (SHRP), said it was hit by "sluggish" consumer spending in Q1 and reported both a drop in sales and a loss on its profits. The company also warned that Q2 results, as well as for the year, would be well under current expectations. The stock dropped 10%. 

Did I mention concerns about a slowing economy?

THE CHART LINE UP  
Leading this rebound are some of the key tech stocks and sectors. Leading tech has been the semiconductors sector, which of course have been under the gun until last month. The Philly Semiconductor Index (SOX) bears watching after making a double bottom low. When it's rally falters, it's likely that the Nasdaq advance will also.



Hey, those "doubles" are potent. You see what happened after SOX made a double top back in Feb-Mch. 

And, leading the SOX index is Intel Corp (INTC). INTC's chart pattern below suggests that it could get back up the $29 area. While average daily volume has not jumped, On Balance Volume (OBV) has, suggesting that the stock is under some accumulation. 



The bellwether stock in the S&P tends to be one of the 'generals' (NOT General Motors, although its rebounded some also)... General Electric (GE). GE has broken out of a lengthily sideways pattern otherwise known (in technical analysis terms) as a 'rectangle'; this pattern suggest that GE could go to a new high; although the S&P indexes dont look like they would join it there; perhaps the Dow 30 (INDU) would.



The DOW 30 (INDU) Daily chart
The Dow has substantial resistance in the 10,550 to maybe 10,600 area, as it tends to go to these even 100 levels sometimes. The consolidation (bull flag) after the Tues-Wed run up suggests an objective to maybe even 10,700. Stay tuned on that! 10,400 ought to be rock-bottom support, at the prior top and 200-day moving average. A close under 10,400, with no rebound the following day (to back above this key level), would suggest a rally failure. 



Making me cautious on INDU (above chart) is that the 21-day stochastic is just entering its overbought zone. While this indicator has a good record of being associated with tops or bottoms, there is also a tendency for multiple readings at the extremes before the index reverses. 

I'm cautious about taking any NEW Dow Index (DJX) call positions; the "easy" buy was in the 10,100 area. If holding calls from lower levels, exit on a break of 10,400; or, if INDU falters at 10,550; or, reaches the 10,700 area. 

OVERALL INDICATORS S&P market segment
My tendency in assessing the market trend is to run down my 'big 4', so to speak:
1. Pattern
2. Overbought/Oversold
3. Volume trends
4. Sentiment
I remember these by the "POVS" acronym and I look for where they mostly are pointing to a trend stopping/reversal point and where my key Indicators are at extremes.

S&P 500 (SPX) daily chart + key indicators ...
The chart pattern remains bullish. The second phase of the rally off the April low, occurred after completion of a 2/3rds retracement. Further basing or lows made at or above the absolute low warranted the first yellow circle and bullish buy area as it relates to 'Pattern'. This was also at the low end of its downtrend channel. 

It also should be noted that the SPX advance is approaching resistance implied by the prior (early-April) highs and is equal to a 62% Fibonacci retracement; of the March-April, 7-week decline. A bit more of an advance and SPX will have retraced 66%, which pegs key resistance at just under 1200. Only a close above 1200 would suggest to me that the Index could challenge the prior yearly peak. 

SPX is approaching an overbought reading, but it's not in the extreme zone, unlike the situation at the bottom made in the 1140 area, which kicked off this recent strong rally.



I look at the 10-day moving average of NYSE up volume (see chart above) as the key to volume activity on rallies. It should be rising, but this has not been the case lately, as can be seen on the Up Volume (10-day) moving average above. This latest price spurt up has been accompanied by a falling or faltering 10-day Up Volume average; not a good sign for strong continued upside follow through from here. 

The most bearish of my key indicators is the extreme in sentiment hit on Friday as call activity got quite high, relative to puts. You can see in the lowest portion of the chart above, what happened not long after my Call-Put Sentiment indicator hit the lower extreme. It set the stage for the rally to follow as traders got 'too' bearish. However, this indicator is a 'leading' indicator, as reversals might not occur for anywhere from one to a few days (e.g., up to 5) days after such an extreme. 

S&P 100 (OEX) Index 
I won't repeat the bearish warnings to the health of this current advance as relates to the same indicators as above, but only on the pattern. 

The key element to the pattern, besides the 'overbought' implication of the approach of the OEX to my upper trading band, (currently intersecting around 570), is the fact that OEX has rebounded to resistance implied by the prior top at 567; this level, as noted by the red down arrow, also represents a return to the previously broken October-March up trendline. As support levels AND support trendlines, once pierced or 'broken', tend to then 'become' resistance later on, 567-568 is doubly worth watching for signs of a (downside) reversal from this area; or, from the Friday high already reached. Stay tuned on that. 

However, as you'll read further on also in 'Strategy', I suggest taking profits on OEX calls, held from the 545-550 area, at 565. For those wishing to stay with calls, I suggest an exit if OEX starts to fall under 563. 



I don't have put recommendations, as the OEX chart pattern itself remains bullish and pattern is the first among 'equals' of the four factors I mention above. But, I do put a lot of stock in an approach back to the trendline noted above at the red down arrow; sometimes calling it the "kiss-of-death" trendline. 

NASDAQ 100 (NDX) Index --
Of the Nasdaq indices, I'll examine the Nasdaq 100 (NDX), where the strongest buying has come in. I will note that the 2090-2100 zone in the Composite (COMP) is where I see strong resistance. 

Resistance in the NDX Index, as suggested by the Nas 100 daily chart below, is around 1545-1550, as suggested by the up trendline drawn through the late-March/early-April tops. 

This trendline, coupled with the rising support trendline below it, gives an initial appearance of a bearish rising wedge pattern. I am cautious about over-staying in NDX calls. In fact, I suggested in my last Index Trader commentary to exit at and above 1500. This represented a 60 point gain from call purchases made in the 1440 area, on the pullback to the 21-day moving average, before NDX took off on one of its sky-shoots. 

Key support looks like 1450-1455 on the chart. As said, I'm cautious about staying in calls but not ready to suggest that its, willy nilly, time to buck this strong up trend by a put play; except, that I would suggest buying NDX puts in the 1550 area, where stop protection was 5-7 points above; e.g., at 1455-1457. At that point I would be looking for a pullback to at least the 1500 area. 



QQQQ The Nasdaq 100 tracking stock
The stock is bullish in its pattern; it cut through its 200-day moving average like a knife through butter. Short-covering had something to do with that, rather than a huge amount of new buying, judging by the lack of a big daily volume surge. However, the OBV (On Balance Volume) indicator is trending up strongly along with prices, which is a confirming bullish indicator. 

The best near-term upside I see for the Q's is to the 38.25-38.50. 36.75 is key support. 



I would rather be long than short of course ... always respect the trend! ... but will also consider shorting the stock at and above 38.00, on up to 38.50 max, with a protective (buy) stop at 38.70. My downside objective at that point would be for a pullback to the aforementioned 36.75 support. Such a trade would then just meet the kind of risk to reward parameters I look for. 

TRADING STRATEGY -- 
There are basically two types of traders: those that chase trends and those that anticipate them. If you had anticipated this recent surge, buying index and bellwether individual equities calls after the completion of a classic 2/3rds retracement of the October to early-March advance, you would be sitting pretty; and, well, if you follow my (Leigh Stevens) Index Trader column on the web site [for last week's, click here] you would have exited S&P 100 (OEX) calls at 565, after purchase in the 550 area, and exited Nasdaq 100 (NDX) calls in the 1495-1500 zone, after purchase around 1438. Now there was a further surge of course in NDX of another 28 points to 1528 at Friday's close. 

I discussed in my Wednesday Trader's Corner, the modified take-ALL-profits at set objectives, to taking profits on half at the objective and setting "trailing" stops or exit points at just above/below relevant trendlines. [for this rant, click here]

On this (trailing stop) basis, the exit points are up to 563 in OEX and 1501 in NDX. A compromise strategy, but potentially effective; both to protect against a downside reversal (and the opportunity to buy calls on pullbacks, as I favor bullish plays awhile longer) and to protect a portion of the remaining index option profits. 

My stance on trading options, especially of the index variety, when prices EXCEED my objectives and I'm out? Do I remorse about it? I don't much care and I expect to often leave money on the table so to speak. 

What I care about is controlling risk and having a profit expectation that is substantially greater than what I would lose on my initial exiting and protective stop. If we have fewer, but more high-potential, trades, with less losers, those closing year-end account statements will show a healthy increase from year ago equity. That's all I care about. 

Let the other trader-types, you remember, the ones that CHASE trends, fight it out during the period when its obvious to all that the trend is in gear. These are the trend chasers and bless em too, as it takes all kinds of individual participants to make the market what it is! 

When I mention the "classic" strategy above of buying certain retracement levels, it's an old trading principle, going back over a hundred years to Charles Dow and his Wall Street Journal editorials, to buy (or short) the one-half (50%) retracements that go opposite or against the MAJOR (or intermediate) trend; or, if this retracement percentage is exceeded, exit quickly and wait to see if the market retraces 62-66% of the last big move. 2/3rds retracements were also favored by Dow and some other famous trader types; e.g., WD Gann. Again, exit if the market goes much beyond the 2/3rds mark; it may have the "ultimate" retracement of 100%, back to prior major low or high! 

You would think that the recent lows in the major indexes, being so exactly at or close to the 2/3rds retracements, might have attracted a LOT of buying. No, only some; mostly professional. Many, if not most, tend to wait and see and buy or sell the re-newed trend; i.e., 'momentum' traders. However, options, those fascinating trading instruments, favor almost the same strategy as the Warren Buffets of the world: buy em when nobody else wants em. Fascinating. 

Unlike buying and shorting stocks and futures, we got premium expansion to contend with. Faster than a speeding bullet is the way index options premiums get inflated when the market breaks out. I learned the hard way when I went from trading S&P index futures to trading S&P index options and couldn't understand how I didn't make any or much money by buying puts or calls very close to when the indexes had technical breakouts. Well, that's another story. 

Good Trading Success! 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
AIG None
CECO
UTX

New Calls

Amer. Intl Group - AIG - close: 53.76 chg: +0.76 stop: 52.49

Company Description:
American International Group, Inc. (AIG) is the world's leading international insurance and financial services organization, with operations in more than 130 countries and jurisdictions. AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and AIG American General is a top-ranked life insurer. AIG's global businesses also include retirement services, financial services and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making. AIG's growing global consumer finance business is led in the United States by American General Finance. AIG also has one of the largest U.S. retirement services businesses through AIG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate. (source: company press release)

Why We Like It:
This is a little speculative but we suspect that the worse may be behind it for AIG. It is true that NY Attorney General Elliot Spitzer is still investigating the company, as is the FBI. Plus a grand jury is also considering criminal indictments for some of AIG's top employees. Yet the stock's decline from $75 to $50 appears to have stalled. Actually AIG appears to be building a base between the $50 and $55 levels. If AIG can breakout over the $55.00 mark (which would also include its simple 50-dma) then the stock's P&F chart should reverse into a new buy signal. We are going to suggest that traders use a trigger at $55.05 to open the play. If triggered we'll target a move into the $59-60 range. 

Suggested Options:
We are going to suggest the August calls.

BUY CALL AUG 50.00 AIG-HJ OI=11154 current ask $5.70
BUY CALL AUG 55.00 AIG-HK OI=52905 current ask $2.55
BUY CALL AUG 60.00 AIG-HL OI=30501 current ask $0.80

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million 

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Career Education - CECO - close: 34.70 chg: +1.25 stop: 32.45

Company Description:
Career Education Corporation (www.careered.com) is one of the largest providers of private, for-profit postsecondary education and has a presence in both on-campus and online education. CEC's Colleges, Schools and Universities Group operates over 80 campuses in the U.S., Canada, France, the United Kingdom and the United Arab Emirates and offers doctoral degree, master's degree, bachelor's degree, associate degree and diploma programs in the career-oriented disciplines of business studies, visual communication and design technologies, health education, information technology, and culinary arts. The Online Education Group operates American InterContinental University Online and Colorado Technical University Online and offers a variety of degrees in information technology, business, visual communication and education. CEC's total student population on April 30, 2005 was approximately 96,700 students. (source: company press release)

Why We Like It:
It looks like investors are doing some bargain shopping. CECO, like AIG, is seeing its share of lawsuits, investigations and shareholder unrest. Yet despite all the negative publicity CECO appears to be turning around. The big bearish reversal candlestick in early May was bought and now the stock is breaking out past its 50-dma and on Friday past its 200-dma. CECO's P&F chart, while bearish, is also showing signs of a bullish reversal. There is risk that more bad news could service or that CECO will not be able to trade past its 100-dma, but now that the major averages are new bullish trends we think this might be one stock that could out perform the broad market. We're suggesting that traders use a trigger at $35.05 to open the play. Our initial target will be the $38.50-39.50 range. More aggressive traders may want to consider buying a dip toward $33.50 if one appears. 

Suggested Options:
We are suggesting the July calls. 

BUY CALL 30.00 CUY-GF OI= 694 current ask $6.00
BUY CALL 35.00 CUY-GG OI=2131 current ask $2.75
BUY CALL 40.00 CUY-GH OI=2149 current ask $0.95

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million 

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United Technologies - UTX - cls: 105.15 chg: +0.15 stop: 102.45

Company Description:
United Technologies Corp., based in Hartford, Connecticut, is a diversified company that provides a broad range of high technology products and support services to the building systems and aerospace industries. (source: company press release)

Why We Like It:
Dow-component UTX recently broke out over round-number resistance at the $105.00 level and is now poised to breakout over the top of its five-month trading range. This diversified industrial stock has been churning sideways for months but the recent market strength is helping pave the way for UTX to hit new highs. The P&F chart looks poised to produce a new triple-top breakout buy signal. We are going to suggest that traders use a trigger at $106.25 to open the play. Our eight-week target is the $114.00-115.00 range. More aggressive traders might want to consider bullish positions now given the intraday bounce off the $104 level on Friday. UTX is due to split 2-for-1 on June 13th. 

Suggested Options:
We are suggesting the August calls. Junes are available.

BUY CALL AUG 100.00 UTX-HT OI=2048 current ask $7.80
BUY CALL AUG 105.00 UTX-HA OI=4218 current ask $4.50
BUY CALL AUG 110.00 UTX-HB OI=1386 current ask $2.05

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Amerada Hess - AHC - close: 90.06 chg: -1.25 stop: 86.25

Energy stocks experienced some profit taking on Friday after most equities in the group turned in a three or four day bounce this past week. At the moment AHC is offering technical traders a mixed picture. The Point & Figure chart is showing sell signal. Meanwhile its daily candlestick chart is displaying a bounce from the bottom of its ten-week descending channel. AHC is also bouncing from its 200-dma's. Yet the bounce has been somewhat volatile as traders witness crude oil prices slowly breakdown under technical support at its own 200-dma. Technical traders using the daily chart might consider bullish positions but watch for a possible dip back toward the $88 level near its 200-dma before it continues higher. We are not suggesting new bullish plays at this time. The major market indices are short-term overbought and due for a dip and that could lead AHC lower to retest the lower boundary of its channel. 

Suggested Options:
We are not suggesting new plays at this time.

Picked on May 17 at $ 89.41
Change since picked: + 0.65
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 1.6 million 

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Caterpillar - CAT - close: 93.63 chg: +0.13 stop: 89.00

So far so good. CAT turned in a strong week following the DJIA index higher. CAT managed to breakout above its six-week trend of lower highs, technical resistance at its 50 and 100-dma's, and the neckline of its inverse/bullish head-and-shoulders pattern. We remain bullish on the stock but expect a probably dip back toward the $92.00 level (maybe 91.50) before CAT continues higher. Readers can watch for the dip and use a bounce as a new bullish entry point. Our target is the $99.25-100.00 range. The P&F chart's bullish signal points to a $109 target.

Suggested Options:
We are suggesting the June calls although August strikes would also work well.

BUY CALL JUN 90.00 CAT-FR OI=3397 current ask $4.90
BUY CALL JUN 95.00 CAT-FS OI=3179 current ask $1.75
BUY CALL JUN100.00 CAT-FT OI=1349 current ask $0.40

Picked on May 18 at $ 92.35
Change since picked: + 1.28
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million 

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Federated Dept Stores - FD - cls: 68.86 chg: -0.08 stop: 64.45 

Retail stocks turned in a pretty strong week fed by a broad market rally and several strong earnings reports in the sector. Shares of FD broke out over resistance at the $65.00 level to hit new all-time highs. Volume has been relatively strong in FD's breakout suggesting more gains ahead. A downgrade for a handful of apparel retailers hit the sector on Friday morning but shares of FD rebounded to close nearly unchanged. This display of relative strength bodes well for next week, especially since the major averages look tired and due for a dip. We are not suggesting new bullish positions because FD is nearing our target in the $69.95-70.00 range. More conservative traders may want to consider an earlier exit in the 69.50-70.00 range. 

Suggested Options:
We are not suggesting new plays at this time. Traders can prepare to exit. 

Picked on May 17 at $ 66.60
Change since picked: + 2.26
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million 

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Hovnanian - HOV - close: 56.82 chg: -0.27 stop: 52.49 

The housing stocks did pretty well this past week with the DJUSHB sector index breaking out over its nine-week trend of lower highs. Shares of HOV helped lead the way. We're encouraged that the sector held up as well as it did on Friday after Fed chairman Alan Greenspan's comments. Alan said the Federal Reserve does not see a national housing bubble but they do see several smaller, regional bubbles. We expect a market pull back next week as stocks digest their gains. Readers can watch for HOV to pull back toward the $55.00 level and use a dip there as a new bullish entry point. Our short-term target is the $59-60 range compared to the bullish P&F chart's target of $72.

Suggested Options:
We are suggesting the June calls although August strikes would also work well.

BUY CALL JUN 55.00 HOV-FK OI=2106 current ask $3.80
BUY CALL JUN 60.00 HOV-FL OI=1028 current ask $1.30

Picked on May 06 at $ 54.26
Change since picked: + 2.56
Earnings Date 05/31/05 (confirmed)
Average Daily Volume = 1.2 million 

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Eli Lilly - LLY - close: 58.90 change: -1.04 stop: 57.99 

Hmmm... we cannot explain it but LLY took a disappointing tumble on Friday with a 1.7 percent decline. Volume was slightly above average. Most of the move all occurred right at the open and then LLY traded sideways in a narrow range. We've been suggesting that readers wait for LLY to trade over the $60.00 level before considering new bullish positions. Conservative types might wait for a move over $61.00 instead. Those suggestions still apply today but traders should also re-evaluate their stop losses. LLY's relative weakness on Friday could suggest more weakness next week. Some traders might want to exit LLY early if the DRG drug index breaks down under the 330 level. Longer-term we like the April breakout but LLY may need to consolidate more. The P&F chart shows a quadruple top breakout buy signal with a $79 target.

Suggested Options:
We are not suggesting new plays at this time. Watch for a move over $60.00. If LLY does turn higher we like the July calls.

Picked on May 04 at $ 60.15
Change since picked: - 1.25
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million 

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Reynolds American - RAI - cls: 82.67 chg: -0.03 stop: 77.95

RAI, like most of the market, saw its rally stall on Friday. We were triggered in this bullish play a few days ago when RAI broke out above resistance in the $81.00 region and hit ours entry point at $81.31. The move also helped produce a new P&F buy signal that now points to a $90.00 target. Thus far we're encouraged that RAI has been able to maintain its gains with the stock consolidating sideways in a $1.00 range the last 2 1/2 sessions. Yet if the major market indices dip lower next week we'd expect RAI to follow. Readers can watch for a dip back toward the $81.00-81.50 region and use a bounce there as a new bullish entry point. Our target remains the $85-86 range.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 80.00 RAI-FP OI=3740 current ask $3.70
BUY CALL JUN 85.00 RAI-FQ OI= 615 current ask $0.90

Picked on May 16 at $ 81.31
Change since picked: + 1.36
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand 

Put Updates

MGIC Invest. - MTG - close: 60.05 change: +0.22 stop: 61.11

Shares of MTG continue to consolidate sideways right at pivotal overhead resistance near the $60 level. Looking at the daily candlestick chart readers can see that MTG is trading right near the top of its descending channel. Normally this would be a tempting spot to open bearish plays. Our concern is that with the major market averages turning higher MTG might breakout from its own declining channel. We would not suggest new bearish put plays until MTG trades under the $59.00 level again. 

Suggested Options:
We are not suggesting new plays at this time. Watch for a move under $59.00. 

Picked on May 15 at $ 58.91
Change since picked: + 1.14
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 742 thousand 

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Precision Castparts - PCP - cls: 74.65 chg: -0.38 stop: 75.05

We initially added PCP to the play list as a bearish candidate several days ago when the stock look poised to breakdown under major technical support. Since then the major market averages have all broken out to the upside. Normally a bullish market turnaround like this would have us dropping an untriggered bearish play like PCP. However, PCP has not participated very much in the market's rally. Furthermore it is still trading under a two-month trend of lower highs. If the stock does break technical support at its 100-dma it could signal a significant change in direction for PCP. If the stock declines under the $72 level it will produce a new sell signal on its P&F chart. We're going to stand by our strategy to use a trigger at $71.95. Our target will be the 200-dma near $67.50.

Suggested Options:
We are not suggesting new plays at this time. Wait for PCP to breakdown under the $72.00 level.

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 

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Parker Hannifin - PH - close: 60.67 change: +0.29 stop: 62.01

PH appears to be stuck in a trading range between $57 and $62. Nimble traders might want to try and time their entries and exits to take the maximum advantage of this range. However, we suspect that the sideways consolidation may be over soon. If the market continues to rally then PH is likely to breakout over its trendline of resistance (see chart). However, currently the major averages are overbought and due for a pull back. That can set PH up for another decline. We would suggest new short-term bearish positions on another decline below 59.50. More aggressive traders might look for a failed rally under the 50-dma near 61.50 instead. We're going to stick with our $55-54 target for now but some investors might want to consider an early exit near $57.

Suggested Options:
We are not suggesting new plays at this time. Look for a drop below $59.50 first. 

Picked on April 28 at $ 59.08
Change since picked: + 1.59
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million 

Dropped Calls

Invitrogen - IVGN - close: 79.70 change: +0.02 stop: 74.85 

Close enough! As we discussed in Thursday's update we're choosing to exit early in IVGN. The stock continues to trade with a bullish pattern of higher lows and looks poised to climb higher next week. We felt it was more prudent to exit now as IVGN toys with overhead resistance (and our target) at the $80.00 level. IVGN looks a little extended up five weeks in a row and we'll be sure to keep an eye on it for a pull back toward support near $75.00 where it might offer another bullish entry point.

Picked on May 03 at $ 75.51
Change since picked: + 4.19
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand 

Dropped Puts

L-3 Comm. - LLL - close: 69.97 chg: +1.84 stop: 69.55 

We have been very cautious on LLL's rebound the last few days but until Friday the stock had remained under resistance. LLL got a boost on Friday morning after Smith Barney upgraded the stock to a "buy". This sent LLL through resistance in the $69.00-69.50 levels and its simple and exponential 200-dma's. Our stop loss was 69.55, which was triggered early in the day. 

Picked on May 10 at $ 68.01
Change since picked: + 1.96
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 855 thousand 


Trader's Corner

Going Keltnering

My almost four-year-old granddaughter often asks to go "chickening" when she's visiting, her term for collecting eggs from imaginary chickens. Since we live in an urban area, I'm not certain why the idea of searching imaginary chicken nests, the dishwasher cutlery basket in hand to collect the eggs, so captured her attention. However, I am certain why searching nested Keltner channels appeals to me. Tonight we're going to go Keltnering, putting together all the information from previous articles on nested Keltner channels, watching how they help to initiate and exit a specific trade.

That trade will be an OEX bearish day trade that could have been entered and exited Friday, May 13. If you're new to nested Keltner channels, you might review previous Traders Corner articles on nested Keltner channels from Sunday, March 20 and May 1, and Saturday, May 7 before proceeding with this article. 

Pre-market Friday morning, May 13, the daily Keltner chart provided the bearish bias for the day.

Annotated OEX Daily Keltner Chart:

The weakness was corroborated by the numerous Keltner lines converging above Thursday's candle. That thickening of Keltner lines prompted a judgment that Keltner resistance was far stronger than the Keltner support. With that evidence of possible strong resistance, the bias was a bearish one, and any bullish trades would be considered countertrend, and the preferred trades bearish ones.

The daily chart helped establish a bias, but the 15-minute one proves more useful for entering day or swing trades, setting targets and managing exits. A pre-market study of the 15-minute chart did not suggest an immediate bearish entry at the open.

Annotated 15-minute Keltner Chart:

Friday morning began with a brief dip to Keltner support and then a climb and 15-minute close above the bold red line. That suggested that the OEX would climb to test the converging resistance lines from 554.63-556.06. By noon, it had done so, and it was time to begin looking for another 15-minute close beneath the bold red Keltner line as a signal that the OEX was rolling over from that Keltner resistance. Note that MACD had not yet given a sell signal.

Annotated 15-minute Keltner Chart

At 1:01 EST, a bearish OEX position could have been entered with a May 555 put, with that put at 4.90 bid x 5.30 ask. Half profit might have been taken on a test of the Keltner line just above 551, with stops set to breakeven at that point. But what about the original stop? Depending on a trader's risk parameter, a stop might have been placed just above the previous high of the day or perhaps even wider, just above the aqua mid-channel line. As it turned out, neither was to be tested. 

Annotated 15-minute Keltner Chart:

At 1:57, as the OEX was testing that potential Keltner support, with the OEX at 550.21, the previously purchased May 555 put was valued at 6.50 bid x 7.20 ask. A few minutes later, this writer suggested via the Market Monitor than any who might have entered bearish positions on the rollover might consider taking profits on half their positions and lowering stops to breakeven on the rest, in keeping with the Keltner evidence. But the OEX was to move lower that day.

Annotated 15-minute Chart of the OEX:

At 2:33, as the OEX was heading down toward that lower Keltner line, the purchased May 555 put was valued at 7.90 x 8.40, with the OEX at 548.50. This might have made an appropriate exit point for all but the most aggressive traders, and this was the point at which this writer stopped tracking the May 555 puts, because it was a point at which risks to bearish traders began to rise. This writer again suggested via the Market Monitor, at 2:38, that those traders who had not lightened their positions should do so at that point and should again lower stops.

The OEX did continue lower than 548.50, actually touching the lower Keltner line. In fact, it pierced that line, but then closed the 15-minute period back above that channel line, as most often does happen once it's touched. Keltner channels were devised to identify breakout plays, but breakouts above or below the widest channel line prove relatively rare, and this was a Friday afternoon on a week that had seen big losses. Keltner evidence aside, a short-covering bounce seemed possible as the close approached. 

The OEX was to steady after that touch of the lower Keltner line, and Monday began a strong bounce.

Annotated 15-minute Chart of the OEX:

Keltner evidence worked exactly as it should in this trade. The daily chart set the bias and kept traders from putting faith in the first bounce, instead looking for a rollover. Keltner channel lines allowed for a setting of a first downside target, at which partial profit might be taken and stops set to breakeven, and also allowed for the setting of a final profit. In summation, times and prices of OEX options at each point are as follows:

Enter OEX 555 May put @ 4.90 x 5.30 @ 1:01 with the OEX at 553.13.
Exit half at 6.50 x 7.20 @ 1:57 with the OEX at 550.21. Set rest to breakeven.
All but most aggressive traders, exit rest of position @ 2:33 @ 7.90 x 8.40 with the OEX @ 548.50. 

Trades don't always work this smoothly, of course. One peculiarity of Keltner channels did not prove as problematic on this trade as it sometimes does. Keltner channel lines are based on moving averages. They're dynamic, moving as the OEX does. This makes setting a stop or target somewhat more difficult than it might be with other types of trades. When the trade was first entered, it was based on converging Keltner lines overhead, but a scan of the various charts as the afternoon unfolded shows that those lines moved lower and separated as the afternoon moved on. Targets move, too, so that it's difficult to set one of these trades and walk away for a long period of time, as stops and targets shift.

Although this dynamic quality makes it tricky to pinpoint targets and stops, it's also an advantage, because it allows traders to judge when resistance might be softening or support strengthening. 

My granddaughter says chickening can be tricky, too. Seems that some of those imaginary chickens peck, although they never seem to peck her. Only she has the right touch. Keltners are different. With study and observation, anyone can acquire the right touch and go Keltnering, picking up their own little nest eggs.

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

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