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Daily Newsletter, Saturday, 06/18/2005

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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

Primed to Rise

Primed to Rise

Oil fueled overnight market action Friday and set up the action for U.S. markets. Gains in Asian and European commodity-related issues drove those bourses higher. Steel-makers, miners and oil majors saw overnight gains, while equities seemed to ignore the impact of rising crude costs and joined right along. The FTSE 100 hit a new three-year high. Morning online newsletter editions predicted a likely bump higher in U.S. equities, too. Equities were primed to rise.

Still, with crude over $57.00 a barrel as most U.S. investors woke opex Friday morning, some nervously eyed charts of U.S. indices and pondered the estimates for a widening deficit, wondering if an upside pop would hold. After the SPX settlement and the final economic release were out of the way Friday morning, would equities be free to decline?


They weren't going to decline pre-market, no matter what, it seemed. When the current account data at 8:30 EST showed an unexpected widening to $189.4 billion, only the dollar and bonds seemed to react, despite the economic risks from the burgeoning deficit. Equity futures stayed positive, barely moving. Shortly after the open, equities received a further boost from the Michigan sentiment number. A higher than expected June number of 94.8, well above May's 86.9 and the expected 88.8, buoyed equities that were already climbing. Bad news was good, and good news was even better.

Not far into the day, CNBC commentators and print articles began touting the fact that the S&P 500 was positive for the year. Some might have missed a perhaps more important gauge of market strength, the Wilshire 5000's rise to test the year's high and the brief pop above that level. As well, the important DJUSHB, the Dow Jones Home Construction Index, zoomed to a new high above 1000, and the Nasdaq raced up to test the neckline of a well-defined inverse H&S on its daily chart.

Annotated Daily Chart of the Wilshire 5000:


While the Wilshire closed at a new high, that close was less than three points higher than February's closing high, so it's essentially an equal high so far. The Wilshire 5000 still faces resistance from Friday's high up to just above 12,200. While 12,000 has some historical significance as resistance and probable major psychological significance, the upside breakout did not quite happen on this index that is the broadest of all our indices.

The SPX did manage that positive close for the year.

Annotated Daily Chart for the SPX:


The RUT broke above a descending trendline off last year's high, but couldn't quite confirm the breakout by closing above the early March high.

Annotated Daily Chart of the Russell 5000:


The Nasdaq also tested important resistance and could not close above it, although the Nasdaq's formation is potentially bullish.

Annotated Daily Chart of the Nasdaq:


The Dow has already confirmed one version of an inverse H&S on its daily chart, but daily candles have all shown some indecision since breaking over that neckline. It will soon face a neckline for an inverse H&S on the weekly chart, at the lower bold red line.

Annotated Daily Chart of the Dow:


Recent gains have caught some market participants by surprise. Potential new breakouts over important resistance levels loom, but formations such as inverse H&S's can be rejected at the necklines, too. Some speculate that early gains Friday were opex related, a theory that will be tested early next week, after opex settlement is out of the way. Chart formations look easy to read and breakouts or rollovers easy to determined, but now is no time to get married to positions. A breakout may be a fake-out move, destined to be quickly reversed as markets finally pull back to next likely support.

Be ready to jump out if indices reverse course. With indices looking so overbought by many measures, including RSI, buying at these levels looks risky to this writer, but one helpful exercise may be watching the relationship of the indices with respect to tests of the 5- and 60-minute 100/130-ema's. Many fast-moving indices have been bounding off the five-minute versions, and then, if those fail, off the 60-minute versions on deeper pullbacks. The Russell 2000 is one of those indices.

Annotated 60-Minute Chart of the Russell 2000:


Use the action surrounding these averages, combined with the resistance levels identified above, to help guide your decisions. If the Russell 2000 were to open at or below Friday's close, for example, bringing up the possibility of an evening-star formation, watch first to see if it bounces again from the five-minute 100/130-ema's at 643.28 and 642.52, respectively. If not, there's a possibility of a drop down to the 60-minute versions, particularly if the RUT rolls over from retests of the five-minute versions. A decline down to the 60-minute versions would be enough to complete that evening-star formation, although the 60-minute averages should keep rising for a while as the RUT drops. A completion of an evening-star formation coupled with a change in trend, identified by these averages being converted to resistance, might signal that over the short-term at least, it's time to start selling rallies. A bounce over resistance coupled with continued bounces from these averages maintains the buy-the-dips mentality. In any trending market, identify a time frame in which the security being watched is bouncing from the 100/130-ema's and watch for a change in trend.

Charts show many bullish characteristics with some hesitation, while Friday's current account information questions all this bullishness. Looking at the numbers might be helpful. As had been anticipated, the revised deficit widened, but it widened even more than some had expected, to $195.1 billion, a 3.6 percent increase. The deficit now comprises 6.4 percent of the GDP. The component measuring the trade of goods created much of that deficit, with that component's deficit rising to $186.3 billion. The goods and services deficit increased more than it had in the fourth quarter.

Foreign-owned assets increased by $226.1 billion. Unilateral current saw net outflows of $27.1 billion, higher than had been seen in the fourth quarter. Foreign official assets in the U.S. rose $24.7 billion, a number far less than the fourth quarter's $94.5 billion gain. Foreign direct investment in the U.S. and U.S. direct investment abroad both moderated. U.S.-owned assets abroad increased by a more modest $60.7 billion than it had in the previous quarter.

Foreign purchases of U.S. equities moderated to $28.9 billion from the previous quarter's $45.7 billion, and foreign purchases of corporate bonds also moderated to $58.6 billion from the former $69.3 billion. Agency bond purchases fell to only $800 million from the previous $43.2 billion. Net foreign purchases of U.S. Treasuries climbed to $75.5 billion, however.

For those whose eyes are crossing as they sort through the various components, a Wall Street Journal interpretation of the data was that Americans had increased purchases of foreign overseas goods, creating a deficit in goods. In part, higher crude costs led to the higher amounts U.S. consumers spent on foreign goods, but demand appeared to be higher, too. Net outflows for unilateral current transfers also contributed to the deficit, but the WSJ thought income and services surpluses helped offset those deficits.

Another article's writer felt more concerned. That writer summed up the release by noting that the current account deficit continues to rise steadily as a percentage of the GDP. In the fourth quarter the current account made up 6.3 percent of the GDP. A year ago, it was only 5.1 percent. Also just this week, Federal Reserve Governor Donald Kohn said that the current-account deficit contributes to the greater-than-usual risks to the economy.

U.S. Treasury Secretary John Snow put a positive spin on the deficit. He said that it emphasizes the strength of the U.S. economy, showing that it's growing faster than economies in Europe and Japan. The U.S. is importing more goods and paying a higher price, since crude and dollar developments both contributed to those higher prices in the first quarter. Recent data has corroborated Snow's impression that the U.S. economy is growing faster than many others across the globe, as they've shown recent signs of weakening. However, an economy that is growing faster in comparison to weakening economies may not be a stellar endorsement of the U.S. economy. This week, some television guests have again begun to mention the "R" word with regard to the U.S. economy.

Developments in crude prices didn't offer consolation to those worried about the impact of rising crude costs. It did cheer those heavily invested in commodity-related issues, as those issues were seeing gains across the globe Friday. Both the U.S. and U.K. closed down consulates in Lagos, Nigeria, after security threats in that country. Nigeria produces a better grade oil than OPEC would if it geared up to replace any lost supplies from Nigeria. As Jim Brown has been warning for some time and reiterated this week, it's not just a supply problem that's heating up crude costs, but a problem in obtaining the right type of crude. Next week, OPEC ministers are to consult again about a second increase in production, with that consultation to be held if the organization's price index remains above $50 a barrel for seven days, a target already met. However, the ability to produce light sweet crude and the refining capacity to turn that into needed products remains questionable, no matter what reassurances OPEC ministers make. Friday, the OIX, the oil index, rose to an all-time high, closing at an all-time closing high of 504.27, just off the high of the day.

Also impacting the sector was news that Valero Energy raised guidance, resulting in a 4.25 percent gain. While VLO is not an OIX component, UCL is. CNOOC, China's largest offshore oil producer, might make a counteroffer for Unocal (UCL), some speculated, leading to a 3.62 percent pop in UCL.

At times during the day Friday, Nasdaq and S&P behavior and volume patterns appeared bifurcated, with that bifurcation stalling the indices for a while. The differences in behavior were attributed at least in part due to Adobe Systems' (ADBE) issuance of in-line guidance for the third quarter after beating analysts' expectations for the second quarter by a penny. ADBE also revealed that it will face a lawsuit concerning its proposed acquisition of Macromedia (MACR). ADBE closed lower by 3.30 percent as some disappointed investors abandoned the stock.

While ADBE's in-line guidance punished tech stocks, KB Home's (KBH) strong earnings report for the second quarter helped. KBH was to close higher by 6.92 percent, but it wasn't the only homebuilder gaining, although many closed off their highs of the day. Smith Barney upgraded KBH, HOV, PHM and RYL to buy ratings, with some of these also being components of the S&P 500.

The DJUSHB, the Dow Jones Home Construction Index, leaped above 1,000, breaking to a new all-time high. Mid-afternoon, the index slipped, falling quickly below the mid-point of the day's range and raising the possibility of a key reversal day if it actually closed negative, but it recovered to close above that midpoint. The day's candle left a long upper shadow, however, and this index bears watching Monday morning.

Financials gained attention due to Bank of America's $3 billion deal to take a 9 percent stake in China Construction Bank. That deal, reported during the overnight session, will be the largest single foreign investment in China's banking sector. Other company-related news included speculation that General Electric (GE) might announce three vice chairman next week, with further speculation that its current chief executive John Rice and chief executive of transportation David Calhoun would number two of the three. GE rose 1.08 percent. The Wall Street Journal reported the GE news and also speculated that Morgan Stanley (MWD) might be reconsidering its planned spin-off of credit-card operation Discover due to a possible need for a heftier cash infusion than MWD had expected. MWD dropped 1.00 percent, but the XBD, the Securities Broker Dealer Index, did squeak by with a 0.15 percent gain.

Circuit City (CC) also reported Friday, with its loss widening due to rising costs. A portion of those costs proceeded from the need to rebrand 970 InterTan Inc. stores that Circuit City bought last year. InterTan lost a judgment, forcing the stores to stop using the RadioShack name in Canada. The title of one article, "There's Little to Cheer at Circuit City" says it all. Same-store sales for stores open more than a year were flat. Inventory shortfalls of notebook and desktop computers were significant, the chief officer acknowledged, and that officer has requested a shakeup in merchandizing. The RLX did post a 0.51 percent gain, however.

Pre-market upgrades and downgrades included a Wachovia Securities downgrade of Goldman Sachs Group, Inc. (GS) to a market-perform rating. This was due to earnings' volatility since trading comprises too big a proportion of GS's revenue. Goldman Sachs was doing some rating of its own, starting Monster Worldwide, Inc. (MNST) at an outperform rating, mentioning MNST's expected increasing recruitment advertising market share. Bear Stearns downgraded The Cheesecake Factory (CAKE) to a peer-perform rating, speculating that CAKE might see another earnings miss this year. UBS and J.P. Morgan couldn't agree on the prospects for Sanofi-Aventis (SNY) with UBS upgrading the company and J.P. Morgan downgrading it. UBS saw SNY's loss of a case involving one of its patents as creating a buying opportunity. J.P. Morgan didn't see it that way, speculating that sales could be impacted by as much as half by 2009.

Next week's economic releases include Monday's 10:00 release of leading indicators. The word "leading" can be a bit misleading, pun intended, because the conference board compounds this number from prior releases of indicators such as new orders, jobless claims, and money supply. Although markets occasionally react to this number, they also sometimes ignore it. Tuesday's releases include the ICSC-UBS store sales for the previous week, Redbook's measure of sales at chain stores, discounters and department stores and the State Street investor confidence index, with that last release at 10:00. This last number is not a survey, but a direct measurement of how many risky investments professional investors are holding. With the RLX still gaining, but with the daily chart showing small-bodied candles with upper shadows, those figures on retail sales may assume importance.

Other than MBA mortgage figures and crude inventories on Wednesday, with crude inventories certainly closely watched, the next releases don't come until Thursday, with the usual jobless claims release followed at 10:00 am by May's existing home sales and then at 4:30 by the money supply figure for the week of 6/13. With the DJUSHB reaching new record highs but showing signs of some selling Friday afternoon, those home sales figures might be particularly important, too.

The next day, May's durable goods orders will lead the day's releases at 8:30, with May's new home sales following at 10:00. Durable orders, with its importance as a leading indicator of manufacturing activity, should catch market watchers' attention.

A few important earnings reports will begin to appear next week. Homebuilder Lennar (LEN) reports before the open Tuesday, and Bed Bath & Beyond (BBBY) reports Wednesday, giving investors another clue into how the buy-a-home-and-furnish-it sectors are performing. FDX reports Thursday, as do low-cost retailer Family Dollar (FDO) and A.G. Edwards (AGE).

Next week should be an important week, although early Monday action might be somewhat volatile and difficult to fit into a pattern as opex settlement activity proceeds. Remember to watch the Russell 2000 for a potential evening-star formation, and the Wilshire 5000 for a breakout above or rollover below that important resistance. Watch those 100/130-ema's, tinkering with the time interval for your preferred index so you can note a change in trend. Logic says that indices shouldn't be performing as well as they are with the "R" word beginning to be mentioned here and abroad, but don't argue if indices decide otherwise. Keep a close watch on those profits, however.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
CMI None
FDG  

New Calls

Cummins Inc - CMI - close: 74.03 change: +1.64 stop: 70.95

Company Description:
Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in more than 160 countries through its network of 550 Company-owned and independent distributor facilities and more than 5,000 dealer locations. With more than 28,000 employees worldwide, Cummins reported sales of $8.4 billion in 2004. (source: company press release)

Why We Like It:
When CMI reported earnings in April the company bested Wall Street's estimates and raised guidance for 2005. This sent the stock gapping higher but the rally failed at its 200-dma. Since then CMI has put in what appears to be a double-bottom and now after weeks of consolidating under the 200-dma the stock is breaking out. CMI pushed past the $73.00 level and its simple 200-dma on Friday to hit a new 2 1/2 month high. The breakout also pushed CMI through resistance on its Point & Figure chart, which now points to a bullish $95 target. We're suggesting bullish positions following Friday's move. Our initial target is the $77.50-80.00 range. We only have about a month before CMI reports earnings so we're not setting the target too high. We will not hold the play over its earnings report. We'll set the stop loss at $70.95 but more aggressive traders may want to consider setting theirs under tested support at the $70.00 mark.

Suggested Options:
July strikes are available but we'll probably hold the play past July expiration. Thus we're suggesting the next available, which is currently Septembers.

BUY CALL SEP 70.00 CMI-IN OI= 156 current ask $6.80
BUY CALL SEP 75.00 CMI-IO OI=1053 current ask $3.90

Picked on June 19 at $ 74.03
Change since picked: + 0.00
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 970 thousand

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Fording Candn Coal - FDG - cls: 90.30 chg: +2.37 stop: 84.99

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust. Through investments in metallurgical coal and industrial minerals mining and processing operations, the Trust makes quarterly cash distributions to unitholders. The Trust, through its wholly owned subsidiary, Fording Inc., holds a 60% interest in the Elk Valley Coal Partnership and is the world's largest producer of the industrial mineral wollastonite. Elk Valley Coal Partnership, comprised of Canada's senior metallurgical coal mining properties, is the world's second largest exporter of metallurgical coal, and expects to supply approximately 27 million tonnes of high-quality coal products to the international steel industry in 2005. (source: company press release)

Why We Like It:
It's back! We've played FDG before and now the stock is offering bulls another entry point. Oil is not the only energy sector drawing attention. Coal stocks like FDG have turned in some strong returns over the last year or so. We like FDG here given the stock's bullish technical breakout over resistance at its 50-dma, 100-dma and round-number, psychological resistance at the $90.00 mark. Friday's move also pushed FDG through technical resistance at its 3 1/2 month trendline of lower highs. Plus, volume came in well above normal but that could have been due to option expiration Friday. In addition to all of the bullish signals listed above FDG's Point & Figure chart just produced a new buy signal that points to a $106 target. We are willing to suggest bullish positions here. Possible alternative entry points could be a dip back toward the $89-88 region or a new relative high over $91.25. Our short-term target is the $97.00-100.00 range. Our stop loss is a bit wider (aggressive) but once FDG confirms the breakout we'll probably tighten the stop. We do not plan on holding over FDG's July earnings report.

Suggested Options:
July strikes are available but they'll probably expire before the play does. August strikes are available but there is no open interest yet. Therefore we're suggesting the September strikes.

BUY CALL SEP 85.00 FDG-IQ OI= 331 current ask $9.70
BUY CALL SEP 90.00 FDG-IR OI= 464 current ask $7.30
BUY CALL SEP 95.00 FDG-IS OI=1374 current ask $4.50
BUY CALL SEP100.00 FDG-IT OI= 361 current ask $3.10

Picked on June 19 at $ 90.30
Change since picked: + 0.00
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 384 thousand
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

AmerisourceBergen - ABC - close: 68.17 change: +0.15 stop: 63.85

Shares of ABC managed to post their sixth gain in a row. The stock has been strong and with the bullish breakout in the DJIA and S&P on Friday ABC could keep marching higher. The stock is not that far away from our target in the $69.50-70.00 range. Of course it's also worth noting that ABC is due for a dip and with the Dow up seven sessions in a row odds of a market dip next week are pretty strong. We would watch ABC for a pull back toward the $66-67 range and buy a bounce there. Otherwise we would not suggest new bullish positions.

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

Picked on June 13 at $ 65.57
Change since picked: + 2.60
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 1.3 million

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Ashland Inc - ASH - close: 70.02 chg: -0.12 stop: 66.99

ASH is a technical breakout play on a stock with a steady long-term up trend. The company's five business divisions should be doing well given the current economy. The Point & Figure chart shows a triple-top breakout buy signal with an $83.00 target. We are suggesting bullish positions with the stock over resistance at the $70.00 level. If you prefer to buy a dip watch for a possible pull back toward the $69.00 level, which should be short-term support. Our target is the $74.75-75.25 range. We do not plan to hold over ASH's late July earnings report.

Suggested Options:
We are suggesting the July calls but we may end up holding the play past the July expiration so traders may want to consider the October strikes.

BUY CALL JUL 65.00 ASH-GM OI=2975 current ask $5.70
BUY CALL JUL 70.00 ASH-GN OI=3493 current ask $1.95
BUY CALL JUL 75.00 ASH-GO OI=2123 current ask $0.45

Picked on June 16 at $ 70.05
Change since picked: - 0.03
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.1 million

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Chubb Corp - CB - close: 84.80 change: -0.44 stop: 82.49

We are growing a little concerned here with CB. The stock did make a new multi-year high on Friday morning but it was unable to maintain its gains. CB is really struggling to hold on to any breakout over the $85.00 level. Volume on Friday's failed rally was above average, which is bearish. Overall the insurance sector looks bullish but this lack of follow through in CB's breakout makes us cautious. We would only consider bullish option positions with CB trading over $85.00. CB's P&F chart points to a $109.00 target. We're targeting the $89.50-90.00 range. Another stock in the same sector that might be a stronger play is Hartford (HIG). Shares of HIG just broke out to a new multi-year high.

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=1209 current ask $5.50
BUY CALL JUL 85.00 CB-GQ OI=1157 current ask $1.60
BUY CALL JUL 90.00 CB-GR OI= 347 current ask $0.20

Picked on June 10 at $ 85.05
Change since picked: - 0.25
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.2 million

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Rockwell Collins - COL - close: 48.23 chg: -0.23 stop: 44.95

The defense sector continues to be a strong spot in the market with the DFI index trading at all time highs. Thursday's rebound in COL had us a little concerned that the rebound may have started without us but we're not giving up on our buy the dip strategy just yet. Investors have been buying dips in COL near the simple 100-dma. Currently that technical support is near $46.75. We are going to maintain our strategy to buy a dip into the $46.75-46.00 range. If we are triggered we'll re-evaluate our suggested target. Currently the bullish P&F chart points to a $69.50 target. We will not hold over COL's late July earnings report.

Suggested Options:
We are not suggesting options at this time. If COL hits our entry point we'd probably choose the August strikes.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 800 thousand

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Eagle Materials - EXP - close: 95.00 chg: +0.30 stop: 89.49

The homebuilders are breaking out to new highs and the economy is improving and this has shares of construction materials company EXP hitting new highs as well. The stock has been up seven out of the last eight sessions. We're very encouraged by the stock's relative strength but EXP is starting to look a little overbought. Short-term traders may want to seriously consider taking some profits here. Our target is the $97-99 range but we would not suggest new positions unless EXP pulled back toward the $92-93 region.

Suggested Options:
We are not suggesting new positions at this time but if EXP pulls back we like the October strikes.

Picked on June 09 at $ 90.45
Change since picked: + 4.55
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 134 thousand

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Netease.com - NTES - close: 58.04 chg: -0.86 stop: 53.95

Hmm... Chinese Internet stock NTES managed to tag another new relative high on Friday morning before drifting lower. We wonder if bulls suddenly got spooked after IIJI, a Japanese Internet-related stock, lost 33 percent on Friday. We remain positive on the stock but want to remind readers that this is a more aggressive, higher risk momentum play. A pull back toward support near $55.00 or even technical support near the 10-dma in the $56.00 region could be used as a new bullish entry point. Our target is the $62.00-63.00 range. We do not plan to hold over NTES' late July earnings report.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 50.00 NQG-GJ OI=1164 current ask $8.40
BUY CALL JUL 55.00 NQG-GK OI=3310 current ask $4.10
BUY CALL JUL 60.00 NQG-GL OI=2910 current ask $1.60

Picked on June 13 at $ 57.29
Change since picked: + 0.75
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 752 thousand

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Teekay Shipping - TK - close: 44.73 chg: +0.91 stop: 42.45

The surge in crude oil and the oil-related sector indices may finally start rubbing off on the oil tanker stocks like TK. TK has rebounded from Thursday's intraday low and is on the verge of breaking out over resistance. Unfortunately, that resistance has been a tough challenge over the last few weeks. TK needs to push through its simple 200-dma, its simple 100-dma and the $45.00 level. That's why our suggested entry point/trigger is at $45.05. On Wednesday we were close to calling it quits for this play. As of Friday's close and the recent sign of strength we'll give TK a couple of more days to breakout or we'll probably drop it.

Suggested Options:
We are suggesting the October strikes but we do not plan to hold over TK's July earnings report.

BUY CALL OCT 40.00 TK-JH OI=1278 current ask $6.70
BUY CALL OCT 45.00 TK-JI OI=1177 current ask $3.50
BUY CALL OCT-50.00 TK-JJ OI=1155 current ask $0.80

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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United Technologies - UTX - cls: 53.14 chg: +0.61 stop: 51.80 *new*

We were on the verge of giving up on UTX as a bullish candidate but Friday's market rally has renewed our interest for a couple more days. The Dow's breakout over resistance at the 10,600 level is good news and if the Dow continues to climb we expect UTX to pace the move and push through its own resistance in the $54.00 level. However, we are not suggesting new bullish positions at this time. Instead we are raising our stop loss to $51.80 to reduce our risk. Our target remains the $57.00-57.50 range. We do not plan to hold over UTX's July earnings report.

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

Picked on May 23 at $ 53.12
Change since picked: + 0.02
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 4.0 million

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Wellpoint Inc - WLP - close: 69.64 chg: +0.95 stop: 65.90 *new*

Health insurance stocks continue to be market leaders and WLP is trading very close to its all-time highs set earlier this week. We remain bullish and would consider new bullish positions with WLP above the $69.00 level although more conservative traders may want to see a new high over $70.40 before going long any calls. Our target remains the $74.00-75.00 range compared to the P&F chart, which points to an $87 target. We are raising the stop loss to $65.90 since the $66.00 level has held as support for the last four weeks.

Suggested Options:
We are suggesting the July calls. Keep in mind that the play's time horizon may exceed the July expiration depending on WLP's earnings date.

BUY CALL JUL 65.00 WLP-GM OI= 814 current ask $5.40
BUY CALL JUL 70.00 WLP-GN OI=1134 current ask $1.70

Picked on June 05 at $ 68.40
Change since picked: + 1.24
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million
 

Put Updates

Quality Systems - QSII - cls: 48.02 chg: -1.00 stop: 51.51

We have good news to report on for QSII. The stock failed to participate in any sort of market bounce on Friday. Instead the recent drift lower has picked up speed and shares closed near their low for the day. We continue to suggest that readers looking for new bearish positions wait for QSII to trade under $47.75 again but more aggressive players may want to consider put positions here. Our only concern at this point would be the very low volume for Friday's decline suggesting that there isn't much conviction here and only a temporary lack of buyers. Our target remains the $41.00-40.00 range, just above its exponential 200-dma. The P&F chart points to a $39.00 target.

Suggested Options:
We are going to suggest the July puts but keep in mind there is about four weeks to expiration.

BUY PUT JUL 50.00 QCR-SJ OI=203 current ask $4.30
BUY PUT JUL 45.00 QCR-SI OI=102 current ask $1.60

Picked on June 15 at $ 47.75
Change since picked: + 0.27
Earnings Date 06/13/05 (confirmed)
Average Daily Volume = 330 thousand

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Semiconductor Holders - SMH - cls: 34.44 chg: -0.01 stop: 35.05

Tech stocks did not participate in the rally on Friday and the SMH semiconductor holders barely budged. That's good news for any semiconductor bears. Thus far initiating bearish positions near the top of its channel seems like a sound plan but there are risks. If the DJIA and S&P continue to climb they could easily drag the NASDAQ along. If the NASDAQ breaks through the 2100 level then we'd probably expect the SMH to break through resistance in the 35.00-35.50 region at the to of its channel. Therefore, we do not suggest new bearish positions in SMH at this time. We would only consider new put positions if the SMH traded back under the $34.00 level. Our target is the $32.25-31.75 range.

Suggested Options:
We are not suggesting new positions at this time but would choose the August strikes if the SMH declined under the $34 level.

Picked on June 15 at $ 33.95
Change since picked: + 0.49
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 26.3 million
 

Dropped Calls

Amer. Intl Group - AIG - close: 55.55 chg: +0.32 stop: 54.49

We are cutting AIG loose. We expected that if the DJIA could breakout over the 10,600 level that Dow-component AIG could push past the $56.00 level. This was not the case on Friday. We're choosing to close the AIG play early. Some of our readers may want to reconsider and keep their long positions open. AIG's bullish six-week trend is still in play but on the verge of being broken. The current three-week consolidation is narrowing so traders can expect a breakout one way or the other sooner rather than later.

Picked on May 26 at $ 55.05
Change since picked: + 0.50
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million

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Caterpillar - CAT - close: 100.20 chg: +1.89 stop: 95.85

Target achieved. Positive broker comments and news of strong sales for the month of May helped push CAT up another 1.9 percent to breakout over round-number technical resistance at the $100.00 mark. Our target was the $99.00-100.00 range. Volume was above average on the breakout so that's bullish but traders who do not exit should consider tightening their stop losses.

Picked on May 18 at $ 92.35
Change since picked: + 7.85
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

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Occidental Petrol. - OXY - close: 80.13 chg: +1.01 stop: 74.50

Target achieved. Another strong day for crude oil continued to push shares of the oil stocks higher. OXY actually gapped higher to open at $80.30, which is toward the upper end of our $79.75-80.50 target range. We are closing the play per our game plan. The stock is looking a bit overbought and extended here but we'll keep an eye on it for a pull back. A dip toward $76 could be an attractive entry point for a new bullish position.

Picked on June 09 at $ 75.51
Change since picked: + 4.62
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.7 million

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Pulte Homes - PHM - close: 86.00 chg: +3.75 stop: 76.95

Target achieved and surpassed. A strong earnings report from homebuilder KB Homes (KBH), who beat by 28 cents, and a PHM upgrade by Smith Barney put investors in a bullish, homebuilder buying mood today. Shares of PHM gapped higher to open at $86.50 and traded to an intraday high of $87.70 before pulling back. The opening price at $86.50 is above our target range of $84.75-85.00 so we would have immediately been taken out. The volatile surge higher has certainly been good for the calls. Our suggested strikes have risen from +90 percent to +333 percent depending on which strike price. The entire group is very bullish but the homebuilders are also looking extended. We'll watch for another bullish entry point on a pull back.

Picked on June 15 at $ 80.25
Change since picked: + 5.75
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.7 million

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Total S.A. - TOT - close: 119.80 chg: +3.55 stop: 111.95

Target achieved. European markets saw oil stocks surge on Friday and that prompted TOT to gap open when trading began in New York. Shares of TOT opened at $118.32 and climbed through out the session to close at the high of the day of $119.80. This was enough to hit our target range of $119.50-120.00. We're closing the play per our game plan but we'll be sure to keep an eye on the sector for additional bullish candidates.

Picked on June 09 at $114.00
Change since picked: + 5.80
Earnings Date 08/04/05 (unconfirmed)
Average Daily Volume = 857 thousand
 

Dropped Puts

ITT Industries - ITT - close: 97.84 chg: +2.68 stop: 96.01

No surprises here. ITT did exactly what we expected it to. In our previous updates we discussed our concern that if the DJIA managed to breakout over resistance at the 10,600 level we expected ITT to breakout over resistance at the $96.00 level. The stock did exactly that and powered through resistance on big volume. Aggressive traders may actually want to keep an eye on ITT as potential bullish candidate here. We have been stopped out at $96.01.

Picked on June 08 at $ 93.85
Change since picked: + 3.99
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume = 581 thousand
 


Trader's Corner

Dragonflies, Gravestones and Shooting Stars: The Doji as

a Reversal Signal in Candlestick Charting

Colorful names: important candlesticks. Many candlestick reversal signals are built on variations of the doji. The doji, a candlestick introduced in last weekend's article on the basics of candlestick charting, results when a session opens and closes at the same price. The candle possesses no real body, but it may have upper or lower shadows or both. Doji, a word appropriate for single or multiple candles of this type, may comprise part of multiple-candle reversal signals or may serve alone as possible reversal signals.

Annotated 120-Minute Chart of CME:

Some call Steve Nison the father of candlestick charting. When introducing the doji, he explains that the appearance of a doji signals indecision. If a doji appears after a trending move, the trend may be weakening. Not always, however.

While doji sometimes signal reversals, a study of CME's 120-minute chart illustrates a couple of points that Nison makes. Don't assume a reversal will occur after each doji, he counsels. Doji that come in the middle of consolidation zones merely corroborate the indecision that prompted the consolidation pattern to form. Several such doji occurred in the May 23-31 period on CME's 120-minute chart.

A doji's position matters. A doji can be a neutral candlestick when it occurs during consolidation or a potential reversal signal after a trend. Its significance depends on the market action prior to its formation. The size of the preceding candles also matters. A doji that follows a long candle assumes more significance than a doji that follows a small-bodied candle.

Nison also addresses candles that are nearly, but not quite doji. Their bodies are small, but the open and close were not at exactly the same price. Are they ever treated as if they were doji? That depends on the size of nearby candles, too. If the near doji's body appears small in comparison to nearby candles, the near doji can usually be treated as if it were a doji. A spinning top, a small-bodied candle with both upper and lower shadows, sometimes appears at the end of a trend, serving the same function as a doji.

Annotated Daily Chart of LSI:

Even when doji or near doji occur after a trending move, a reversal cannot be assumed. LSI's action produced several doji or near doji as it declined early in August and again in mid-September, and their appearance did not herald a reversal.

Doji need confirmation. Sometimes confirmation comes in the form of a gap in a direction opposite to the prior trend. That sort of gap confirmed the reversal after LSI's doji was printed at the early September swing high. Other times, confirmation comes in a single long candle that reverses the prior direction or in a move that eventually surpasses the open of the tall candle that preceded the doji. The order might be as follows: long white candle, doji and long red candle, or long red candle, doji and long white candle.

Annotated Weekly Chart of the TRAN:

The doji shown on the TRAN's chart was the second of a three-candle reversal signal known as an evening-star pattern. In this pattern, a doji or small-bodied candle follows a long white candle. Ideally, the doji sits above the long white candle. A long red candle is the third of this three-candle formation, with the red candle ideally forming beneath the doji's close. Traders know the comparable bullish reversal signal as a morning-star formation, and it consists of a long red candle followed by a doji or near doji, with the pattern completed by a long white candle that forms above the doji.

Wait for the confirmation. GOOG bears who saw a doji at the top of a climb in May and automatically entered a bearish position had reason to rue that decision when GOOG did not confirm the reversal the next day.

Annotated Daily Chart of GOOG:

Doji come in many variations. Doji can be spinning tops, although not all spinning tops are doji. Some possess small real bodies. Doji also come in long-legged variations. They can be gravestone doji or dragonfly doji or shooting stars. The different names describe the size and position of shadows. Generally, the longer the shadows, the more pronounced the indecision has been.

Annotated Three-Minute Chart of INTC:

Doji names can vary according to where the doji appear. A gravestone doji at the top of an uptrend may be known as a shooting star, for example. Shooting stars can also have small real bodies. A dragonfly doji is a specialized type of hammer or hanging man candle, a candle with a small real body, no or a small upper shadow and a long lower shadow. Hammers and hanging men have the same shape, with the candle named a hammer if it occurs after a downtrend and a hanging man if it occurs at the top of an uptrend.

Don't get hung up on the names. The general idea is that doji or small-bodied candles that occur after a trending move indicate a weakening of that trend. They indicate indecision and can presage a reversal. Since they can also presage consolidation, the trend reversal needs confirmation. The longer the shadows associated with that small-bodied candle or doji, the more indecision that is expressed.

The previous article offered some basics of candlestick charting, and this one offered the basics of doji as reversal signals. Readers who want to know more might check out the books mentioned in the previous article. Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES is an often-quoted favorite and Greg Morris' CANDLESTICK CHARTING EXPLAINED is another possibility.
 

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

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