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Daily Newsletter, Saturday, 06/11/2005

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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

Good News Priced In?

The markets dipped on Friday after a week of positive news and high profile events. The Greenspan speeches calmly erased the eighth inning comments from Fisher and the Intel update was seen as less than exciting. Positive guidance from a handful of chip stocks failed to prevent the SOX from selling off once again. In short it appears the good news was already priced in given the May rally and Greenspan provided the final blow. However, the resilient bulls refused to accept defeat and that is the real news this weekend. 

Dow Chart - Daily

Nasdaq chart - Daily

On Thursday Intel raised its earnings guidance to the high end of its prior range citing the strong demand for notebooks using its Centrino chips. Unfortunately that news was already known and the upgraded guidance was already expected. Intel had rallied for four weeks straight and topped just under $28 on June 3rd as investors hoped for some blowout news. The lukewarm report failed to impress and Intel fell nearly -$1 intraday on Friday and broke support at $27 only to return there at the close. Other chip stocks giving positive guidance this week included TSM, LSI, TXN and NSM. Despite this positive guidance the SOX found itself well off its multi month highs at 440 and threatening to break support at 427. 

SOX Chart

Helping create this chip swoon was news out of Merrill that they were still recommending an underweight in tech stocks. They claim the current valuations were swelled by hopeful buyers but they are not supported by fundamentals. Merrill feels the negative economic momentum may slow tech spending at a time when the stronger dollar is already hurting tech profits. Tech mutual funds have seen outflows for nearly all of 2005 with only a handful of weeks seeing marginal inflows. This continued caution on techs after a lukewarm update from Intel prompted some weak profit taking from the May rally. 

Greenspan erased the optimism created by Fisher that the Fed was nearly done raising rates. Greenspan calmly repeated the measured pace language and reiterated the "data dependent" clause that could change the Fed posture. He made his comments so slowly and cautiously that there was not big reaction by the markets but the result was the same. The Fed funds futures are now back to pricing in three more rate hikes at the next three meetings, June, August and September. The November and December meetings are questionable but the futures are suggesting at least one of them will contain another hike. This reversal of fortunes for traders from expecting only one more hike last week to the current possibility of four substantially depressed sentiment despite the lack of reaction by the markets. 

The sentiment on Friday was a feeling that the Q2 rally was behind us and there was nothing left to produce excitement heading into the summer. Q2 guidance has been more positive than normal but not exciting. The lurking economic weakness has created concern among traders and most are patiently waiting the next round of economic reports for confirmation of direction. We have three weeks until the next ISM and four weeks until the next Jobs report. This waiting game will be punctuated with many reports of lesser importance but the ISM and Jobs are the reports that will govern our fate heading into Q2 earnings. Not all of Greenspan's comments were negative. He said the economy was on "reasonably firm footing" and inflation remained contained. He also said there was no national housing bubble although there might be some froth in several local markets. This was good news for the housing stocks and relieved some pressure produced by the bubble talk over the last year. 

December Oil Futures Chart

Oil prices have been very volatile with daily news providing no trend. OPEC meets on the 15th in Vienna and they are expected to vote for a production increase. Unfortunately it should not create any new production but only validate the current over quota production by several countries. Saudi is rumored to be producing slightly over 9.5 mbpd and this is right near their maximum sustained output. The IEA said on Friday that demand shrank in China by -2.8% in April but the demand in the U.S. surged to fill the gap. The first tropical storm of the season is heading for Mississippi and several oil companies have begun evacuation of their rigs in the gulf. As a medium strength storm it is not as dangerous as a hurricane but still has the capability to disrupt production for several days and cause damage from high waves. Anyone watching the Oil Storm movie on Fox last week should have second thoughts about any storm heading for that region of the gulf. Nearly two million bbls per day flow through Port Fourchon, Louisiana just offshore from New Orleans and a serious storm in that region could cause real economic problems. That movie echoed nearly all the scenarios I laid out in my Oil Crisis report last December. 

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The FTC approved the merger of Chevron and Unocal and with no time to spare. There was also news this week that China National Offshore Oil Corp, CNOOC, was rumored to be planning a higher bid for Unocal. Part of the future global oil problem is the demand for oil by China. They are aggressively pursuing nearly every major oil reserve across the globe with the intention of locking up production for decades to come. They are trying to work out a deal on Canadian oil sands production as well as several South American fields. CNOOC is government owned and as such has no limit on how much it can pay to capture future production. Given the shrinking global reserves the future goes to whoever is aggressive enough to secure those reserves before the global crisis begins. The U.S. is currently the largest consumer of oil in the world at 22mbpd but China is expected to move into first place by 2025. They are estimated to see demand rise by +8% this year to 7mbpd. Since it is widely known that there is only about 1-mbpd of additional production available China is going to have to act aggressively to acquire the additional 15-mbpd it will need by 2025. Somebody is going to end up short and odds are good it will not be without a fight. China is well behind the energy curve and consumes only 1.7bbls per person per year compared to 25 in the U.S. and 7 in Mexico. Just bringing them up to the level of Mexico would increase their demand to 30% of global production. Given their huge population and rapid growth rate it is incumbent on China to lockup production and reserves far in advance of that need. The problem for us is that every non-OPEC reserve they acquire removes that reserve from the U.S. shopping cart. It does not take a rocket scientist to understand that as available reserves shrink and demand continues to grow prices will rise substantially. China is the biggest problem the U.S. faces with regards to future oil imports and I would be very surprised if we were not shooting at each other within ten years. The oil wars are coming. It is only a matter of time. On a side note China is about done with the first phase of its strategic petroleum reserve. They are building storage for 102 mb and the first phase, 33 mb, will be ready for oil in August. Any guess as to the price of oil when they start trying to fill it? That just happens to be the same time the U.S. is planning on the next round of additions to its 700mb SPR.

JP Morgan said on Friday that the oil sector was ripe for further merger activity given the large amount of cash held by the majors. Takeover targets they listed include SRE, FTO, SUN, TLM, D, AYE and HOC. Energy stocks have surged over the last week on comments that increased profits have pushed valuations even lower and produced even better opportunities. Many stocks have broken out to new highs again and dividends are rising. 

GM exploded higher on Friday after the UAW agreed to negotiate on health care costs. GM claims that $1500 of the price of each car is directly related to health care costs. Last week the GM CEO said he was hopeful an agreement could be reached without having to resort to drastic measures. Those measures could have included a bankruptcy to break the union contracts. Apparently the union was listening and decided to give a little ground on this single point rather than face potentially harsher concessions later. GM soared to more than $35 and a three-month high on the news. Kirk Kerkorian should be happy with his profit on the 18 million GM shares tendered at $31. 

The lack of material market gains over the last two weeks was not due to a lack of bullish sentiment. The Investors Intelligence survey of newsletter writers showed 60.9% of writers were bullish and only 20.9% were bearish. As a contrary indicator this is very bearish to have so many writers in bullish mode. The VXN confirmed this with a drop to a new all time low under 15 several times over the last two weeks. The VXO, old VIX, dipped under 11 twice over the last two weeks and also multi year lows. This excessive bullishness heading into the summer months is contrary to long-term historical trends. However, six of the last seven summers have seen buying in tech stocks, also contrary to long-term trends. This bullishness has also pushed the broader indexes, SPX, Wilshire and NYSE Composite to highs very near to their multiyear highs. Now the question for analysts is will it last? Fund inflows over the last two weeks have been the strongest since February. This is also contrary to normal cycles. 

The Dollar rallied to a nine month high against the Euro on Friday and was partially responsible for the drop in some commodity prices. The yield on the ten-year note rose back over the 4% level with the outlook for rate hikes much more likely. With the Euro breaking down it is being seen as a weaker place to park money for the coming years. Italy wants to return to the Lira and the unification of Europe appears far less certain. This has pushed the Euro lower against other currencies as funds are shifted to other countries. When the dollar was falling on our rising deficit and weak economy there was flight from the dollar to the perceived strength in a united Euro. With rates rising and the Greenspan comments about the soft patch being temporary the dollar has found renewed buyers. 

Russell-2000 Chart - Daily

The Russell rebalancing is upon us and the next two weeks could be rocky for the Russell. Each June the Russell Investment Group revalues the top 3000 U.S. stocks and adjusts the composition of the Russell indexes. The 1000 largest stocks in the Russell-3000 become the Russell-1000 and the 2000 remaining stocks become the Russell-2000. This year 160 stocks are expected to be removed from the Russell-2000 and replaced by others as of close of trading on June-24th. The initial announcement of the stocks being added/deleted was done after the close on Friday. This creates downward pressure on the Russell-2000 for the next two weeks as funds sell to beat the June-24th rush. Since buying in the new stocks does not impact the index until after June-24th their individual gains are not available to offset the index losses. There is also the problem of shifting. As stocks in the Russell-2000 increase in market value they can move up into the Russell-1000 and knock stocks out of the 1000 and back into the 2000. This shifting causes significant churning and that churning does impact the indexes in advance of the June-24th effective date. The Russell Group estimates that more than $2 trillion dollars are indexed to the Russell indexes. There are nearly 3,000 U.S. funds indexed to the Russell and numerous global funds. The Russell method of index structure is different from the S&P. It is based strictly on market cap with very few exclusions for things like shares owned by insiders and share values under $1. All stocks are included unlike the S&P method. Few investors realize that nearly 100 major companies are NOT represented in the S&P-500 because inclusion is done in secret vote by S&P administrators. Companies not in the S&P include GOOG, JNPR, CDWC, AMZN, AMTD, DHI, TOL, DO, DISH, IACI, XMSR, PIXR, WFMI and WYNN to name just a few. In 2004 the Russell-2000 lost -20 points in the week that followed the rebalance announcement. This was right in the middle of a strong +60 point bounce from mid May to July 1st. Beginning on July 1st the reconstituted index plunged from 591 to a low of 515 on August 13th as the summer doldrums appeared. 

Press release from Russell on the rebalancing: http://www.russell.com/US/Indexes/US/Reconstitution/PR_Recon061005.asp

Additions: http://www.russell.com/us/indexes/us/Reconstitution/recon_additions.asp

Deletions: http://www.russell.com/us/indexes/us/Reconstitution/recon_deletions.asp


The Dow hit its highs for the week on Tuesday at 10577 and trended lower the rest of the week. Support at 10435 held and we ended the week just slightly above we started. The Dow would have been much lower on Friday were it not for the +2.75 bounce by GM. Without that bounce the Dow would have been about -25 points lower. After three weeks of trading in a very narrow range I expected the combination of Greenspan and Intel to provide a direction. Unfortunately that did not occur and we are left wondering what catalyst will appear to give us that direction. 

The Nasdaq leadership has weakened and the Nasdaq closed very near to the bottom of its range for the last two weeks at 2060. The Nasdaq appears to be setting up for some profit taking but traders keep appearing right at that 2060 support. The Nasdaq rallied from 1889 on April 29th to 2097 on June 2nd for a +11% move. That rally has yet to see any material profit taking despite the minor post Intel loss. As long as the SOX holds support at 430 tech traders should remain comfortable in their long positions. 

I said on Tuesday that I would attempt to pick a direction today but it is proving very difficult given the numerous conflicting indications. The Wilshire 5000 continues to hold near its highs and showed very little selling. As the broadest market indicator it is not showing any weakness and is very close to breaking out over its 11900 resistance. When coupled with the NYSE composite ($NYA.x) which is also holding very near its highs it appears the broader indexes are suggesting further buying ahead. 

The complicating factor is the gain in techs and the lack of profit taking. While it should be a danger signal it could also be an indication that we are consolidating in place rather than a typical drop/rebound cycle. This suggests the lack of a negative catalyst could see us creep even higher over the next couple weeks as we wait for the June ISM and Jobs. 

If I had to pick a direction this weekend I would say the markets have an upward bias. This is contrary to personal bias but when in doubt don't fight the tape. The market can remain "wrong" longer than you can remain liquid. The indicators that would change my bias back to bearish would be a Dow drop under 10400 and an SPX break under 1190. Over those levels any pullback would be simple profit taking. The Wilshire has support at 11800 and again at 11700. As long as it stays over 11700 any drop in the thinner indexes, Dow and SPX, should remain under control. Last week my plan was to remain short under 1205 and that worked well with a couple nice drops from that level. I still see 1205 as decent resistance and the top of our recent range. That gives us a tradable range from 1190-1205 and one I would continue trading until it failed. While logically I am disposed to the downside the Wilshire is suggesting the breakout could be to the upside. Knowing the ranges allows us to trade either direction with equal ease. 

Wilshire-5000 Chart - Daily

Last year the June highs proved to be the highs for the next three months with a strong dip into August. I am not suggesting that will happen again but we have yet to see a summer swoon and we almost always get one. August, September and October are known for producing yearly lows and I see no reason for that to change this year. Greenspan almost guaranteed three more rate hikes. The ISM is only a point above recession levels and the Jobs report could be setting up for a real shocker on July 8th. If those problems do get worse then we would likely see a serious pullback. Conversely if the ISM and Jobs strengthen and prove Greenspan's claims that the spring soft patch was only temporary then the lows may be behind us. The market exists to confound the most analysts as possible at any given time and the current market message is definitely mixed. That leaves us with only technical trades ahead for June. Trade the 1190-1205 range and watch for a breakout over 1205 or a breakdown under 1190 for the next directional move. As always cash is a position and traders should not get married to their positions. 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

Editor's note:

We are choosing not to publish any new plays this weekend. The sideways churn over the last couple of weeks has made picking a direction a lot more challenging. In spite of the slow down in the market's momentum the intermediate trend does appear to be up. Our playlist reflects this bias with an overweight toward bullish candidates yet we hesitate to add more bullish plays should the markets reverse course on us. As always the next trading session could bring changes to the play list and our market outlook so check back on Monday. 


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - close: 55.09 chg: -0.46 stop: 53.95 *new*

The lack of follow through on Thursday's bounce from AIG's rising trend line of support is discouraging. The lack of direction in the DJIA doesn't help matters either. AIG's MACD indicator is showing a serious lack of momentum and looks ready to produce a new sell signal but this conflicts with AIG's bullish P&F chart, which currently points to a $69 target. We're going to play the trend, which remains bullish for now but we're going to turn cautious and try and protect ourselves by raising the stop loss to $53.95. Traders looking for new bullish positions can do so carefully. We really wouldn't suggest new bullish plays at this time but readers could watch for a bounce from the $54.50-54.75 region or wait for a push past the $56 mark before initiating new plays. 

Suggested options:
We're not suggesting new bullish plays at this time.

Picked on May 26 at $ 55.05
Change since picked: + 0.04
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million 

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Caterpillar - CAT - close: 97.02 chg: -0.43 stop: 92.49 

CAT has produced a very strong week after raising its cash dividend and announcing a 2-for-1 stock split for July. We remain bullish but the stock is nearing our target in the $99.25-100.00 range. This close to our target we would not suggest new bullish positions. More conservative traders may want to exit now. If the Dow does show any weakness we would watch for CAT to find support in the $94.75-95.00 region. 

Suggested options:
We're not suggesting new bullish plays at this time.

Picked on May 18 at $ 92.35
Change since picked: + 4.67
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million 

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Chubb Corp - CB - close: 85.61 change: +0.64 stop: 82.49

CB is a new bullish play we added to the newsletter on Thursday night. The stock hit our entry point (trigger) to go long/buy calls on Friday at $85.05. A reprint of Thursday's play description follows:

Insurance stocks have been a pocket of strength in the markets lately and CB has not been left behind. The stock has been consolidating its late April breakout over the last five weeks and now looks poised to breakout over resistance at the $85.00 level. The Point & Figure chart shows a bullish catapult breakout pattern that points to a $107 target. We're not that optimistic. Instead we suggest traders use a trigger at $85.05 to catch any breakout over resistance at the $85.00 level. Our short-term target will be the $89.50-90.00 range. We do not plan to hold over the stock's late July earnings report.

Suggested Options:
We are suggesting the July calls but that only gives us about five weeks. More conservative traders may want to consider the October calls.

BUY CALL JUL 80.00 CB-GP OI=1223 current ask $5.90
BUY CALL JUL 85.00 CB-GQ OI=1041 current ask $1.95
BUY CALL JUL 90.00 CB-GR OI= 267 current ask $0.30

Picked on June 10 at $ 85.05 
Change since picked: + 0.56
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.2 million 

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Rockwell Collins - COL - close: 48.25 chg: -0.32 stop: 44.95

We are still on the sidelines and remain untriggered in this play with COL. The stock has been consistently bouncing from its rising simple 100-dma for the last several months. We are suggesting that readers wait for COL to pull back toward the 100-dma again before initiating positions. Now that the 100-dma has climbed to the $46.40 level we're going to adjust our entry point to $46.50-45.75. You, the reader, may want to wait for COL to rebound from this range instead of buying the dip. 

Suggested options:
We're not suggesting new bullish plays 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 = 800 thousand 

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Eagle Materials - EXP - close: 89.80 chg: -0.65 stop: 86.95

EXP is a new bullish candidate we added to the newsletter on Thursday night. We do not see any change after Friday's small decline. A reprint of the Thursday play follows.

A bear could easily argue that EXP is looking a bit overbought and extended here but as a bullish momentum play the stock is showing lots of strength. The company must be doing plenty of business given the current homebuilding boom. We like how EXP broke through resistance near the $87.00 level and then pulled back to retest broken resistance at $87 as new support. The fact that the stock and the options tend to have lower volume than we like makes this a bit more aggressive for us. Traders need to keep that in mind. The P&F chart looks very bullish as it points to a $124.00 price target. We're going to suggest buying calls at current levels and target a move in the stock toward the $97-99 range. 

Suggested Options:
We are suggesting the October calls although July strikes are available. 

BUY CALL OCT 85.00 EXP-JQ OI= 65 current ask $8.60
BUY CALL OCT 90.00 EXP-JR OI=252 current ask $5.50
BUY CALL OCT 95.00 EXP-JS OI= 20 current ask $3.90

Picked on June 09 at $ 90.45
Change since picked: - 0.65
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 134 thousand 

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Occidental Petrol. - OXY - close: 76.01 chg: +0.50 stop: 71.95

OXY is a new bullish candidate we added to the newsletter on Thursday night. We see no change from our previous update. A reprint follows:

We like how the oil sectors have pushed through resistance at the top of their descending channels and the group could be set for another leg higher just as the summer driving season is upon us. With that in mind we are drawn to OXY who is a relative strength leader in the sector. Shares are trading very close to new all-time highs here over resistance at the $75.00 level. Again, bears could argue that OXY looks overbought but given the stock's history and current out performance we're willing to buy the breakout with a stop loss under the recent low. The P&F chart shows a double-top breakout buy signal that points to a $98 target. We would go long here at current levels with a short-term target in the $79.75-80.50 range. Depending on your risk profile traders can watch OXY for a pull back into the $73-74 range as a new entry point or wait for shares to trade back over the $76.00 level before initiating new positions. 

Suggested Options:
We are going to suggest the August calls although July strikes are available.

BUY CALL AUG 70.00 OXY-HN OI=7387 current ask $7.70
BUY CALL AUG 75.00 OXY-HO OI=4962 current ask $4.30
BUY CALL AUG 80.00 OXY-HP OI=6810 current ask $2.00

Picked on June 09 at $ 75.51
Change since picked: + 0.50
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.7 million 

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Teekay Shipping - TK - close: 44.56 chg: +0.07 stop: 42.45

We remain untriggered in this play with TK. The stock has struggled to produce any follow through following its early June breakout. Bulls have been unable to push TK through resistance at its 100-dma near the $45.00 level. If and when TK does breakout over the $45.00 level we'll be ready to catch the next leg higher. Our strategy is to buy calls on TK if the stock trades at $45.05. Our target is the $49.50-50.00 range. 

Suggested Options:
We are going to suggest the July calls although October strikes are available.

BUY CALL JUL 40.00 TK-GH OI=2405 current ask $5.20
BUY CALL JUL 45.00 TK-GI OI=6471 current ask $1.65
BUY CALL JUL 50.00 TK-GJ OI=3558 current ask $0.30

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 681 thousand 

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Total S.A. - TOT - close: 113.69 chg: -0.31 stop: 110.95

TOT is a new bullish candidate we added to the newsletter on Thursday night. We see no change from our previous update. A reprint follows:

If you like the oil sector but you don't feel like chasing a new high in the case of our new OXY play then consider TOT as a potential bullish candidate. Like the oil-related sector indices shares of TOT have broken through resistance at the top of its descending channel. The stock has also broken through technical resistance at its 50-dma and 100-dma. We also like its bullish P&F chart, which currently points to a $139.00 target. We are willing to initiate bullish option positions at current levels but traders have a choice. You could look for a possible dip back toward the $112.00 level and buy a bounce. Or you could wait for TOT to clear what looks like minor resistance in the $114.50 to 115.00 range. Our target is the $119.50-120.00 region.

Suggested Options:
We are suggesting the August calls. 

BUY CALL AUG 110.00 TOT-HB OI=113 current ask $6.40
BUY CALL AUG 115.00 TOT-HC OI=144 current ask $3.10
BUY CALL AUG 120.00 TOT-HD OI=206 current ask $1.35

Picked on June 09 at $114.00
Change since picked: - 0.31
Earnings Date 08/04/05 (unconfirmed)
Average Daily Volume = 857 thousand 

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United Technologies - UTX - cls: 104.93 chg: -1.01 stop: 102.45

UTX experienced some profit taking on Friday with a dip to $103.74. The low was near its simple 40-dma and close to support near the $104 level from mid-May. An intraday chart shows a surge of volume as buyers stepped in to buy the dip on Friday afternoon. We've been discussing a potential dip in UTX for days now and now that it's occurred it's time to see the rebound. Readers may want to initiating new plays at current levels - or - wait for UTX to trade back above the $106 level ($53 post split) just to confirm the bounce. Traders should also keep in mind that UTX is due to split 2-for-1 on Monday. That means your options symbols are going to change as will the number of contracts you own and their value. We'll reclassify support near the $52 level and overhead resistance at $108 will become $54. Our target will change from $114.00-115.00 to $57-57.50.

Suggested options:
We're not listing options to buy at this time as the symbols will change by Monday. We would probably consider the $50.00 or $55.00 strikes.

Picked on May 23 at $106.25
Change since picked: - 1.24
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million 

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Wellpoint Inc - WLP - close: 67.80 chg: -1.25 stop: 64.90

Friday's session was a little disappointing as WLP failed to produce any follow through on Thursday's rally and bounce from support at the $66.00 level. Granted volume was pretty low on Friday's decline but it leaves WLP in a narrow $3 trading range. We would watch for WLP to dip back toward the $66 region again and buy any bounce. Should the market's surprise us with a stronger decline then WLP will probably retest the $65 level as support. Our target is the $74.00-75.00 range.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65.00 WLP-GM OI=543 current ask $4.00
BUY CALL JUL 70.00 WLP-GN OI=628 current ask $1.15

Picked on June 05 at $ 68.40
Change since picked: - 0.60
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million

Put Updates

ITT Industries - ITT - close: 94.45 chg: -0.28 stop: 96.01

Good news. ITT did not produce much of a follow through on Thursday's bullish reversal. Shares remain stuck between $93.00 and $96.00 with the stock overbought and near resistance. If you missed the original play description this bearish play on ITT is a somewhat aggressive short the top of ITT's rising channel. Longer-term ITT has a nice bullish trend but shares look extended and have been struggling with resistance near the top of the channel for the last three to four weeks. We were triggered on a drop to $93.85. We would probably suggest new bearish positions if ITT traded back below the $93.50 level. Our target is the $90.00-87.50 range. 

Suggested options:
Until ITT trades back under $93.50 we would not suggest new positions. If this occurs then we like the July puts.

Picked on June 08 at $ 93.85
Change since picked: + 0.60
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume = 581 thousand 

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MedcoHealth Sol. - MHS - close: 49.75 change: -0.85 stop: 52.21

We have good news to report on for MHS. The stock produced another failed rally near the $51.50-52.00 region and proceeded to drop through the $50.00 level. This looks like a new bearish entry point to buy puts. However, in previous updates we suggested that readers wait for MHS to trade below $49.50 before initiating new positions. We still suggest waiting for the decline below $49.50. More aggressive players might want to consider new positions at current levels. Our target is the $45.50-45.00 region but we are concerned about possible support at the 100-dma currently near $48.00. 

Suggested options:
We are suggesting the July puts.

BUY PUT JUL 55.00 MHS-SK OI= 230 current ask $5.70
BUY PUT JUL 50.00 MHS-SJ OI=3244 current ask $2.10
BUY PUT JUL 45.00 MHS-SI OI=1659 current ask $0.50

Picked on June 01 at $ 49.90
Change since picked: - 0.15
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.0 million 

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Whole Foods - WFMI - close: 113.54 chg: -4.43 stop: 118.51*new*

So far so good. Friday was a good day for WFMI bears as the stock lost 3.75 percent on volume well above the average. The breakdown below its 21-dma and the $115.00 level was sparked by a broker downgrade. UBS reduced their outlook from a "neutral" to the equivalent of a "sell" based on valuation concerns and put their price target at $100. The move has produced a pretty big jump in the July puts that we were suggesting. Now that WFMI is nearing our target in the $111.00-110.00 range we're not willing to suggest new plays. However, readers can watch for a potential bounce-failed rally near $116-117 as new bearish entry point. We are lowering the stop loss to $118.51.

Suggested Options:
We're not suggesting new plays at this time but see the update above for alternative entries. 

Picked on June 08 at $117.40
Change since picked: - 3.86
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 859 thousand

Dropped Calls

Reynolds American - RAI - cls: 84.59 chg: +0.14 stop: 79.99 

Target achieved. Another decent day for some of the tobacco-related stocks and shares of RAI traded into our target range of $85.00-86.00. We are closing the play per our game plan. Readers may want to keep an eye on RAI and some of the other tobacco stocks (like MO and LTR) as potential bullish candidates in the future. 

Picked on May 16 at $ 81.31
Change since picked: + 3.28 
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand 

Dropped Puts

None


Trader's Corner

Basics of Candlestick Charting, Part 1

Candlestick charts need better PR. The patterns have strange, off-putting names. When a candlestick enthusiast mentions a unique three river bottom, three stars in the south or three black crows pattern, non-aficionados must be grimacing as if they'd eaten something sour. Nothing about those names sounds analytical, mathematical or clear cut. This article sets out to erase that bad impression given candlestick charting by those names. 

About the only negative to candlestick charts are those names. A candlestick chart offers all the same information offered by a regular bar chart, plus some. 

Annotated Daily Intel Bar Chart, through 5/31:


Candlestick charts don't require the same close study to determine when closes are higher than opens.

Annotated Daily Intel Candlestick Chart, Through 5/31:


Even if traders learn nothing more about candlesticks than the information included in those annotations, that's enough to make candlesticks worth including on charts. The trader loses nothing from the switchover, and visual clues offer a quicker assessment. No reading glasses are required to study those notches, either. Lots of white candles and few red ones: an uptrend is strong. Lots of red candles and few white ones: a downtrend is strong. A mixture: markets are range-bound or choppy. 

Intel's May rally was a strong one, as evidenced by the lack of a single red candle until May 31. Many candles were tall white candles. Long candles with small or nonexistent candle shadows indicate a large-range day during which either bulls or bears held sway, and INTC bulls were holding sway during much of May. There was no balancing of strength on the days when prices produced those tall white candles.

Other information can be obtained from that chart with almost as much ease. Most traders understand that even in the strongest trend, markets sometimes need a breather. We know the axiom that small-range days tend to follow large-range ones. It shouldn't be surprising that during INTC's May climb, those tall white candles were sometimes followed by small-bodied ones. 

Small-bodied candles indicate that bulls and bears remained evenly matched during a particular session. Neither could sustain prices far from the open. That can be typical of measured accumulation or distribution that often takes place after a strong move, but such days also offer an opportunity for bulls or bears to turn the tables. Times when bulls and bears are more evenly matched can be times of vulnerability to a reversal. Their appearance alerts traders to pay attention, but those candles don't promise a reversal. 

Small-bodied candles with upper or lower shadows or both gain even more significance. When those shadows appear, particularly if they're long shadows, either bulls or bears have temporarily overcome the other side. Those shadows indicate that either bulls or bears or both, in the case of both upper and lower shadows, were able to push prices a certain direction for a period of time, but weren't able to maintain prices where they wanted them. That gives traders important information.

A small-bodied candle occurring at the top of a strong climb or the bottom of a strong decline indicates at least a temporary waning of bullish or bearish strength. If a candle shadow reached above or below such a candle, the potential for a reversal might be stronger. Such small-bodied candles occurred at the bottom of April's swing low, before INTC reversed and climbed.

Annotated Daily Chart of INTC, through April 6:


Those two small-bodied candles indicated the potential for a reversal, potential made even stronger since they were produced at support. All such potential reversals must be confirmed, however. INTC's gap higher on the third day provided that confirmation.

The second of the small-bodied candles at the bottom of INTC's April swing low opened and closed at almost the same level. If the open and close had been the same, the candle would have had no real body. This would have been a doji, a term often mentioned when candlestick charts are discussed. In addition to sometimes serving as a reversal signal, doji (the word used for both a single candle of this type and plural ones) can also serve as resistance or support when another swing high or low tests it. 

A small-bodied candle in the middle of a consolidation zone offers little information: it just corroborates the sense that neither bulls nor bears yet hold primacy. That's what the consolidation was showing anyway. 

Shadows can be important whether or not the candle body is small. Beginning on May 31, INTC continued producing tall candles, but those candles sported tall upper shadows, too. Bulls couldn't maintain the breakouts to new highs. They didn't have enough strength. 

On June 2, prices punched to a new swing high, but then dropped back with a red candle body produced. Those upper candles had been warning of waning bullish strength and the next day saw follow-through. By the end of that week, the weekly candle had produced a near-doji, a small-bodied candle with both upper and lower shadows. Since then, INTC has been consolidating, with Friday's candle a red one turning down, falling from top to bottom of the consolidation pattern. The weekly candle was a red one, with this week's candle and the previous two looking a bit like a three-candle patterns known as an evening-star pattern. That pattern and others will be discussed in future articles. What's important for this article on the basics is that as early as a week ago, the candlesticks warned that INTC needed to consolidate or pull back.

These basics of candlestick charting provide enough information to gain a quick impression from candlestick charts, but these charts offer more information. The next article on candlestick charting will discuss some specialized single and multiple candlestick formations. Those who don't want to wait might try a book on candlestick theory, with Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES an often-quoted favorite and Greg Morris' CANDLESTICK CHARTING EXPLAINED another possibility.

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.


Trader's Corner

Basics of Candlestick Charting, Part 1

Candlestick charts need better PR. The patterns have strange, off-putting names. When a candlestick enthusiast mentions a unique three river bottom, three stars in the south or three black crows pattern, non-aficionados must be grimacing as if they'd eaten something sour. Nothing about those names sounds analytical, mathematical or clear cut. This article sets out to erase that bad impression given candlestick charting by those names. 

About the only negative to candlestick charts are those names. A candlestick chart offers all the same information offered by a regular bar chart, plus some. 

Annotated Daily Intel Bar Chart, through 5/31:


Candlestick charts don't require the same close study to determine when closes are higher than opens.

Annotated Daily Intel Candlestick Chart, Through 5/31:


Even if traders learn nothing more about candlesticks than the information included in those annotations, that's enough to make candlesticks worth including on charts. The trader loses nothing from the switchover, and visual clues offer a quicker assessment. No reading glasses are required to study those notches, either. Lots of white candles and few red ones: an uptrend is strong. Lots of red candles and few white ones: a downtrend is strong. A mixture: markets are range-bound or choppy. 

Intel's May rally was a strong one, as evidenced by the lack of a single red candle until May 31. Many candles were tall white candles. Long candles with small or nonexistent candle shadows indicate a large-range day during which either bulls or bears held sway, and INTC bulls were holding sway during much of May. There was no balancing of strength on the days when prices produced those tall white candles.

Other information can be obtained from that chart with almost as much ease. Most traders understand that even in the strongest trend, markets sometimes need a breather. We know the axiom that small-range days tend to follow large-range ones. It shouldn't be surprising that during INTC's May climb, those tall white candles were sometimes followed by small-bodied ones. 

Small-bodied candles indicate that bulls and bears remained evenly matched during a particular session. Neither could sustain prices far from the open. That can be typical of measured accumulation or distribution that often takes place after a strong move, but such days also offer an opportunity for bulls or bears to turn the tables. Times when bulls and bears are more evenly matched can be times of vulnerability to a reversal. Their appearance alerts traders to pay attention, but those candles don't promise a reversal. 

Small-bodied candles with upper or lower shadows or both gain even more significance. When those shadows appear, particularly if they're long shadows, either bulls or bears have temporarily overcome the other side. Those shadows indicate that either bulls or bears or both, in the case of both upper and lower shadows, were able to push prices a certain direction for a period of time, but weren't able to maintain prices where they wanted them. That gives traders important information.

A small-bodied candle occurring at the top of a strong climb or the bottom of a strong decline indicates at least a temporary waning of bullish or bearish strength. If a candle shadow reached above or below such a candle, the potential for a reversal might be stronger. Such small-bodied candles occurred at the bottom of April's swing low, before INTC reversed and climbed.

Annotated Daily Chart of INTC, through April 6:


Those two small-bodied candles indicated the potential for a reversal, potential made even stronger since they were produced at support. All such potential reversals must be confirmed, however. INTC's gap higher on the third day provided that confirmation.

The second of the small-bodied candles at the bottom of INTC's April swing low opened and closed at almost the same level. If the open and close had been the same, the candle would have had no real body. This would have been a doji, a term often mentioned when candlestick charts are discussed. In addition to sometimes serving as a reversal signal, doji (the word used for both a single candle of this type and plural ones) can also serve as resistance or support when another swing high or low tests it. 

A small-bodied candle in the middle of a consolidation zone offers little information: it just corroborates the sense that neither bulls nor bears yet hold primacy. That's what the consolidation was showing anyway. 

Shadows can be important whether or not the candle body is small. Beginning on May 31, INTC continued producing tall candles, but those candles sported tall upper shadows, too. Bulls couldn't maintain the breakouts to new highs. They didn't have enough strength. 

On June 2, prices punched to a new swing high, but then dropped back with a red candle body produced. Those upper candles had been warning of waning bullish strength and the next day saw follow-through. By the end of that week, the weekly candle had produced a near-doji, a small-bodied candle with both upper and lower shadows. Since then, INTC has been consolidating, with Friday's candle a red one turning down, falling from top to bottom of the consolidation pattern. The weekly candle was a red one, with this week's candle and the previous two looking a bit like a three-candle patterns known as an evening-star pattern. That pattern and others will be discussed in future articles. What's important for this article on the basics is that as early as a week ago, the candlesticks warned that INTC needed to consolidate or pull back.

These basics of candlestick charting provide enough information to gain a quick impression from candlestick charts, but these charts offer more information. The next article on candlestick charting will discuss some specialized single and multiple candlestick formations. Those who don't want to wait might try a book on candlestick theory, with Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES an often-quoted favorite and Greg Morris' CANDLESTICK CHARTING EXPLAINED another possibility.

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