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Daily Newsletter, Saturday, 06/25/2005

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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

Buying Opportunity\?

Buying Opportunity?

The investment press spent the last three days whining about the strong market drop and each commentator seized on one of about six different key reasons they felt the market collapsed. None that I saw really saw the big picture. Or maybe they were seeing too much of the big picture and were not focused on the real culprit. Various reasons given included $60 oil, protectionism, weak economics, rising dollar, CNOOC and Unocal, Greenspan comments, etc. Which do you think was the real cause of the drop?

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


The Nasdaq climbed to new five month highs on Thursday at 2106 and just as euphoria was taking hold somebody knocked the ladder over. The plunge was sharp and selling continued steadily into Friday's close. The Dow came within a couple ticks of 10650 again on Wednesday and was doing a very good job of holding over 10600 until the sell programs appeared on Thursday. Did something Greenspan say suddenly cause a million investors to rush to the sidelines? I think not. Was it the China bashing that jumped to the front page when CNOOC made its offer for Unocal? I doubt it. Surely it was the August contract for oil hitting $60 that greased the market skids. Wrong again Kemosabe. (Tonto's name for the Lone Ranger for those of you born after black and white TV went the way of the dinosaurs) If it was $60 oil then why did the markets reach new highs later in the week after that same $60 level was touched on Monday? So many excuses, so little grasp of reality. I will try to touch on them all. 

First the economic picture is slowing as evidenced by several events of the week. The Durable Goods headline number on Friday soared by +5.5% giving the appearance of good news. Under the hood the internal components told a much different picture. The core capital goods, which are comprised of nondefense capital goods excluding aircraft, FELL -2.3% for the month. This is the REAL indicator of production growth not the headline number. New orders for computers and electronics fell -1.2% after dropping -6% in April. A huge increase in orders for Boeing raised the transportation component +21.2% for the month to provide the headline bounce. If anything this should have been somewhat favorable to the markets as it suggests the Fed could quit hiking rates much quicker than we discussed just last week. I do not believe this was a major factor for the market drop. The drop began a day before this number was announced. Did it add to the already negative trend? Probably, but not a major factor. 


On the economic side of the ledger we have to consider the impact of the FedEx warning on Thursday. FDX said that higher fuel costs, slowing shipment rates and aggressive competition had blunted their previously rosy outlook. The stock took nearly a -$10 two day hit and settled at $80 on Friday. The transports took a -150 point hit and closed at two-month lows. The impact of high oil was a factor but the sell off was related more to slowing shipments as a sign the economy was slowing. 

Oil over $60, who would have thought? (grin) The oil bears are busting out all over but bearish on production not on prices. Bad news seems to beget more bad news and the comments I have been posting for a year are slowly gaining more credibility in the mainstream media. Hardly a day goes by now without some story critical of future demand or current production. The August crude contract bumped against $60 multiple times this week with the December contract closing at $61.15. Both contracts posted new closing highs. Boone Pickens face was plastered across all the networks on Friday with predictions of $3 gasoline this year and $100-$120 oil within five years. Nice to have the experts in the field agree with your own predictions. Invested in oil yet?

August Crude Oil Chart - Daily


December Oil Chart - Daily


China's CNOOC bid for Unocal ignited a firestorm of China bashing and calls for the administration to veto the deal on the grounds of national security. Personally I strongly agree. I have mentioned in these pages many times over the last year that I expect the U.S. to be in a shooting war with China over oil within ten years. I strongly suggest we not give them the oil (Unocal) with which to power their war machine as that shooting war gets closer. China just contracted for 40% of the future production of Canada's Northern Lights oil sands. They also just contracted with Venezuela for delivery of oil to China and agreed to invest billions in Venezuela to secure those rights for decades to come. There are only so many sources for oil in the world and China is rapidly trying to acquire as many as possible to guarantee their own future. On Tuesday night I discussed the rapid buildup in their armed forces and some of the details that were specifically dangerous to the U.S. Is anyone else connecting the dots here? 

While on the topic of China and Unocal have you noticed that UCL has not risen much since the CNOOC bid? CNOOC bid $67 per share compared to $60 offered by Chevron. Many think these bids are out of sight and obscene. "Who really wants to buy an oil company at the top of the market" is what many so-called analysts are saying. To put things in perspective the CNOOC bid only equates to $11.50 per barrel of proven Unocal reserves. Do the math Chevron could afford to pay a lot more but they don't need to. The lack of a jump in UCL highlights the very strong possibility that the CNOOC bid will not get through the approval process. It also represents some disappointment that the bid was not as high as expected with some estimates over $70. 

To put this scenario into perspective requires a divergence from just the oil conversation. The committee meeting where Greenspan and Snow were grilled on Thursday outlined several major problems with China. The high profile oil play just pushed everyone over the edge. Various officials have been waging verbal war with China over the valuation of their currency for several years to no avail. The suggested 27% tariff on all China's products would be a massive overkill and could cause serious economic problems both in the U.S and around the world. China's leaders are not stupid and they have a very large weapon at their disposal. They currently hold over $625 billion of U.S. debt with $200 billion in U.S. treasuries. Just a suggestion that they could reevaluate their dollar denominated debt could send strong ripples through our financial markets. While I don't think they would intentionally cost themselves billions by playing that trump card it is entirely possible they could hedge against that event before actually playing the card. 

Since trade wars typically are not won with a single shot there is a very strong possibility that we will see escalation by both sides if it appears the Senate vote in late July will pass. For instance, should the U.S. pass a tariff against China then China would likely return the favor with a tariff against U.S. products. How competitive would Cisco and Dell be against the Chinese cloners with a 27% tariff on our products going into China? China is a huge consumer and they are trying to convert one billion lower class citizens into middle class consumers. I feel the imposition of a tariff against China would be the first blow that would eventually turn into an economic war. Therefore I don't believe the tariff will ever pass. It is not smart to intentionally aggravate the biggest kid on the block and kicking a sleeping bear is always dangerous. It makes no difference that they have a total disregard for copyright laws and copy/steal everything possible. It makes no difference that they intentionally manipulate their currency to provide a competitive advantage. The answer to this problem is continued diplomatic pressure as they mature into the dominant power on the planet. 

The tariff conversation may have had some negative impact to the market but any real economic impact is still to far away to be seen. If there was any impact it was an emotional knee jerk reaction only. So, if the market did not drop on oil, economics or tariffs then what killed it? I personally believe it was time for profit taking and that profit taking was accelerated in a large way by the Russell rebalance. I have speculated for several weeks that the markets were long overdue for a pause. The 10650/2100/1220 resistance was rock solid and June was rapidly expiring. That should not have been the reason for the severity of the drop. If anything we should have seen a continued underlying bid as the end of the quarter and end of half window dressing took us into July. The disappearance of the bid may have been due to oil, economics and tariffs but the selling came directly from the Russell rebalance. 

I expected it to appear sooner and we entered a DJX put play two weeks ago in the Leaps Trader section in anticipation of this drop. I believe the bullish markets kept funds from selling on hopes of capturing that last penny of profit before being forced to swap stocks for the rebalance. With the inchworm moving ever closer to a breakout they were hoping for that last burst of short covering to pad their accounts as resistance broke. What they got instead was a dead stop at resistance with Nasdaq 2100 and S&P 1220 as solid tops. When the breakout over 2100 failed on Thursday morning they pulled the sell trigger and their program trades ruled the rest of the week. Dip buyers were methodically hammered on every bounce and we ended up with the worst drop since April with the Dow losing -2.8% for the week. I believe oil, economics and tariffs may have captured the headlines and removed the bid but the Russell rebalance was the final culprit. 

If I am right we should see a rebound on Monday. Despite a Fed meeting on Tue/Wed we still have the end of quarter window dressing ahead. It is also entirely possible the Fed could blink in their statement given the recent economic weakness and suggest they are nearing an end to the measured pace hikes. This would also stimulate the markets into the Q2 earnings. 

The downside to Q2 earnings is the falling expectations. Current earnings are only expected to show +10% to +12% growth compared to over +20% in Q1. Warnings have been accelerating and next week should be a prime warning week on the Q2 calendar. I expect most of those warnings to be ignored. Granted a high profile tech warning could do serious damage but I think most investors are already factoring in a slow summer. 

While I believe $60 oil was only a minor factor this week I would expect any move over $60 to create substantially more stress. $60 should be a psychological roadblock and a break higher would confirm the bearish production concerns. We are too far away from the fall demand spike to already be over $60. I was not expecting that until August. A breakout now suggests we could see $75 by October. This is a very serious problem for the transportation sector and for many businesses. Higher fuel costs raise the cost of every product that is made with oil or shipped to market. Diesel is very close to an all time high and could break that high next week. Overall distillate demand is up +7% year over year for the four weeks ended June 17th. Gasoline demand is up +2.5% despite the huge rise in prices over 2004 and diesel demand is up +6.9% year over year. Valero, a large U.S refiner said this week that output of diesel nationwide should drop about -3% in 2006 due to much stronger regulations about the sulfur content of diesel. Just what the markets needed to hear. Jet fuel demand is up +31% year over year and up +91% since the same period in 2001. U.S. oil production fell last week to an average of 8.7 mbpd, down -255,000 bbls from the prior week. With gasoline demand expected to increase sharply with the July-4th weekend ahead the inventory levels are expected to drop again. There is nothing positive in the near term outlook that should cause oil prices to fall. This should keep oil prices in the headlines for at least two more weeks and continue to pressure those stocks/sectors that depend on oil. Michael Economides, Professor of Petroleum Engineering at the Univ of Houston said $70 was the next target. He also said, "oil is not going down and that is the end of that story." 

My outlook continues to be for a late summer decline unless we see a strong surge in Q2 earnings that surprises everyone. The May rally gains are at risk and there are plenty of news headlines to provide the pressure as we move into mid July. Personally I see Monday as a short term buying opportunity as laggards continue to buy Russell stocks to complete the rebalance. The actual weightings were not known until the close of business on Friday. The Nasdaq closing numbers are used for the final weighting calculation. This can produce another round of positioning on Monday and that positioning should have an upward bias. (keyword is should) I would look to buy any bounce for a four to five day trade and keep a tight stop. The next series of potholes are the Fed announcement on Wednesday and the ISM on Friday. An ISM headline number under 50 could be the last straw for any bounce. The various jobs numbers are out on July-7th/8th and any weakening could apply more speed to any July decline. The Nasdaq retreated to initial support at 2050 and a good launching point if the decline was only Russell related. The next Dow support is in the 10150-10200 range and that suggests the market could open Monday looking at the Nasdaq for leadership. The SPX could also help with Friday's close on recent support at 1190. 

SOX Chart - Daily


Russell Chart - Daily


If you are looking for something specific to trade I would think about EBAY. Ebay had their 10th annual convention this week and there were numerous positive developments. David Faber on CNBC will have an Ebay special on June-29th similar to the Wal-Mart special they ran almost daily for months. I expect this to provide a positive boost to Ebay stock. The bottom fell out of Ebay this week with nearly a -$4 drop. Most of the drop was in the last two days and was likely Russell related. With large companies going into the Russell-1000 the weightings for all other stocks changed drastically. Internet stocks like Ebay and Yahoo were hit hard. The July $35 call XBA-GG was trading at 95 cents on Friday when I recommended it in the Market Monitor. EBAY closed at $34.31. I believe now that the rebalance is almost over and the CNBC profile event is scheduled for next week it is very possible we could see a significant bounce. If the short time frame scares you there are many other strikes available. 

Until November we want to continue buying oil stocks on any pull back and holding them until year end. Looking at an oil chart it appears more likely there is more upside given the holiday demand ahead. Buying now rather than waiting for any post holiday dip would also be an option. I sure wish I could get the same $11.50 a bbl price CNOOC is offering for Unocal but I don't have that kind of buying power. One analyst speculated that the loser on the Unocal deal could shift their sights to Marathon (MRO) given their diverse operations and market cap. Just a parting thought for those that need a little extra incentive to buy oil at this level. Until Tuesday remember to enter passively and be ready to exit aggressively if conditions change. 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
GS ABK
ESE

New Calls

Goldman Sachs - GS - close: 103.67 chg: +1.65 stop: 101.89

Company Description:
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range of services
worldwide to a substantial and diversified client base that includes
corporations, financial institutions, governments and high net worth
individuals. Founded in 1869, it is one of the oldest and largest
investment banking firms. The firm is headquartered in New York and
maintains offices in London, Frankfurt, Tokyo, Hong Kong and other
major financial centers around the world. (source: company press release)

Why We Like It:
The XBD broker-dealer index is showing incredible amounts of relative strength. The group broke out to a new high on Friday compared to the rest of the market, which was sinking. GS did its part to push the sector index higher with a 1.6 percent gain of its own. Furthermore GS' rally on Friday was fueled by stronger than average volume and pushed it back above technical resistance at its 200-dma. We like to see this kind of strength on a down market day but GS still has resistance near $104.00, which is the top of its weeklong trading range. We're suggesting that readers use a trigger above the June 17th high. Our entry point will be $104.35. GS' P&F chart currently points to a $123 target. We will target a move into the $109.50-110.00 range. We will try and limit our risk with a relatively tight stop under the lower edge of the trading range and its 50-dma. 

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 100.00 GS-HT OI= 787 current ask $5.20
BUY CALL AUG 105.00 GS-HA OI=1601 current ask $2.25
BUY CALL AUG 110.00 GS-HB OI= 392 current ask $0.75

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/16/05 (confirmed)
Average Daily Volume = 4.8 million

New Puts

Ambac Fincl. - ABK - close: 69.62 chg: -0.88 stop: 71.51

Company Description:
Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, is a leading guarantor of municipal and structured finance obligations. (source: company press release)

Why We Like It:
ABK has been languishing for weeks now. The stock was hammered back in April but managed to rebound back toward the bottom of the gap down in the $72-73 range. Yet buyers were unable to push the stock any higher and the stock has been withering under a slow decay of lower highs against support near the $70.00 level. Friday's market sell-off was enough to pull ABK under support. We want to use it as a new bearish entry point with a target in the $65.50-65.00 range. We have just under a month as we do not plan on holding over the July earnings report. 

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 75.00 ABK-TO OI=838 current ask $6.00
BUY PUT AUG 70.00 ABK-TN OI=174 current ask $2.65
BUY PUT AUG 65.00 ABK-TM OI=211 current ask $1.00

Picked on June 26 at $ 69.62
Change since picked: + 0.00
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 992 thousand 

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ESCO Tech. - ESE - close: 97.80 chg: -1.80 stop: 102.51

Company Description:
ESCO, headquartered in St. Louis, is a leading supplier of engineered filtration products to the process, health care and transportation markets worldwide. In addition, the Company markets proprietary, special purpose communications systems and is the industry leader in RF shielding and EMC test products. (source: company press release)

Why We Like It:
ESE is an aggressive bearish candidate. We consider it aggressive because longer-term we're bullish on the stock. Yet over the last month or so the stock appears to have really gotten ahead of itself. The upward momentum staled back in early June after a small double-top near $106. Ever since the stock has been consolidating sideways and the recent market sell-off has sparked some profit taking. We suspect that the profit taking isn't over yet and most of its technical indicators are all pointing lower. We also consider this an aggressive play because we normally don't play stocks with average daily volume under 300,000. This low volume is also seen in its options. We think the breakdown under round-number, psychological support at the $100.00 mark is a bearish entry point. We don't see any support until the $87.50-90.00 region. We're going to suggest buying puts with a $92-90 target range. 

Suggested Options:
We are suggesting the August puts although Septembers are also available. 

BUY PUT AUG 100.00 ESE-TT OI= 0 current ask $6.40

BUY PUT SEP 100.00 ESE-UT OI= 0 current ask $7.30
BUY PUT SEP 95.00 ESE-US OI= 7 current ask $5.50
BUY PUT SEP 90.00 ESE-UR OI= 15 current ask $3.70

Picked on June 26 at $ 97.80
Change since picked: + 0.00
Earnings Date 08/10/05 (unconfirmed)
Average Daily Volume = 102 thousand 


Play Updates

In Play Updates and Reviews

Call Updates

AmerisourceBergen - ABC - close: 67.05 change: +0.10 stop: 63.85

We have to admit that we were surprised by the relative strength in ABC on Friday. The stock held support in the $66.80-67.00 range and actually closed higher on the session. Considering the sell-off in the major indices on Thursday and Friday professional traders have mixed opinions about what happens on Monday. Do we get an oversold bounce or do the markets produce more follow through to the downside. We would continue to watch ABC for a dip toward the $66.00 level and only consider new bullish positions on a significant bounce. More conservative traders may want to exit here to avoid any losses now that the DJIA has broken support at the 10,400 level. Our target is the $69.50-70.00 range. 

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

Picked on June 13 at $ 65.57
Change since picked: + 1.48
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 1.3 million 

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Ashland Inc - ASH - close: 70.45 chg: -0.68 stop: 66.99

ASH has been rather resilient to the market sell-off this past week. The stock remains above round-number, psychological resistance at the $70.00 level and is trading near all-time highs. Readers can use the pull back on Friday toward the $70 level as a new bullish entry point. Or if you think the markets my dip further on Monday then watch ASH for a dip toward the $69.50-69.25 range and use that as an entry point. Keep in mind that we would prefer to see a bounce first before committing any capital if you're using a dip under $70.00. Our target is the $74.75-75.25 range but we do not plan on holding over ASH's 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=2761 current ask $6.00
BUY CALL JUL 70.00 ASH-GN OI=3284 current ask $1.90
BUY CALL JUL 75.00 ASH-GO OI=2056 current ask $0.40

Picked on June 16 at $ 70.05
Change since picked: + 0.40
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.1 million 

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Chubb Corp - CB - close: 84.70 change: +1.05 stop: 82.49

CB displayed some impressive strength on Friday. The stock rebounded from its early low near $83.25 and hit a high of $85.37 before fading lower in the afternoon. We remain bullish on the stock and the bullish bias on the P&F chart has not changed. The P&F chart still points to a $109.00 target. We're still targeting a move into the $89.50-90.00 range. However, readers looking for a new entry point might want to wait a day or two. If the markets continue to decline next week then CB could pull back again and retest its simple 50-dma as technical support near $82.50. Or an alternative entry point would be to consider new longs on a move past Friday's highs near $85.40. We will not hold over CB's 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=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: - 0.35
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.2 million 

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Rockwell Collins - COL - close: 47.28 chg: -0.32 stop: 44.95

Believe it or not we're still not triggered in this play. COL dipped to an intraday low of $46.80, which isn't enough to hit our suggested entry point in the $46.75-46.50 range. However, readers may want to consider new bullish plays here anyway. The decline on Friday was enough for COL to test its 100-dma again and as we expected there were bulls waiting to buy the dip. Our choice now is to either go long here on the late afternoon bounce or considering the weakness in the broader market and the odds of some follow through to the downside next week we can keep our suggested entry point at $46.75. At the moment we're going to leave our suggested entry range unchanged. Readers should remember that if we are triggered we do not plan on hold over COL's July earnings report.

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

BUY CALL AUG 45.00 COL-HI OI= 0 current ask $3.20
BUY CALL AUG 50.00 COL-HJ OI= 58 current ask $0.55

Picked on June 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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Cummins Inc - CMI - close: 72.30 change: -0.68 stop: 70.95

So far there are no surprises here. We've been suggesting that readers watch for a dip toward the $72-71 region and shares of CMI hit a low of $72.06 on Friday. We're not excited about the decline back below its simple 200-dma but the six-week bullish up trend is still intact for now. The P&F chart remains bullish as well and points to a $98 target. Considering the current market environment we would probably wait for CMI to bounce back above the $73.00 level or the 200-dma (73.30) or the $74.00 level before initiating new bullish positions. Which level you choose to consider new positions depends on your risk profile. Our target is the $77.50-80.00 range but we do not plan to hold over CMI's July earnings report.

Suggested Options:
We are not suggesting new option plays at this time. If CMI does rebound we would choose from the September strikes.

Picked on June 19 at $ 74.03
Change since picked: - 1.73
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 970 thousand 

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Fording Candn Coal - FDG - cls: 93.83 chg: +0.00 stop: 87.49 

Investors are focused on oil right now but alternative energy stocks have not been left behind. Coal producer FDG broke through multiple levels of resistance in the last week and the stock did not show any weakness during the market sell-off. Currently the Point & Figure chart points to an $118.00 target. We are targeting a move into the $97-100 range. Readers looking for a new entry point might want to watch for a dip back toward the $92 level. 

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 $11.20
BUY CALL SEP 90.00 FDG-IR OI= 557 current ask $ 7.80
BUY CALL SEP 95.00 FDG-IS OI=2311 current ask $ 5.40
BUY CALL SEP100.00 FDG-IT OI= 409 current ask $ 3.10

Picked on June 19 at $ 90.30
Change since picked: + 3.63
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 384 thousand 

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Netease.com - NTES - close: 58.45 chg: -0.98 stop: 55.95 

After hitting new 18-month highs on Wednesday and Thursday morning shares of NTES have pulled back toward short-term support at the simple 10-dma. Readers may want to consider new bullish positions on a bounce from here as the two-day pull back did not see much volume. Our target remains the $62.00-63.00 range. More conservative traders may want to raise their stop loss toward the $57.00 level. We're leaving our stop at $55.95 for now. Remember, we do not plan on holding over NTES' July earnings report.

Suggested Options:
We hesitate to suggest new call plays with the broader indices sinking but if NTES bounces from here we'd consider the August calls.

Picked on June 13 at $ 57.29
Change since picked: + 1.16
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 752 thousand 

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SLM Corp - SLM - close: 50.88 change: +0.22 stop: 48.95

SLM is showing relative strength with a fresh gain on Friday. Bulls were there to buy the dip at $50.40 on Friday morning. We remain positive on the stock and would consider new positions here. However, if you think the market will continue to decline next week you might want to wait and see if SLM does indeed hit the $50.00 level and use that as a bullish entry point. The P&F chart currently points to an $89 target. We are targeting a move into the $54.50-55.00 range. We do not plan on holding over SLM's July earnings report.

Suggested Options:
We are going to suggest the new August strikes even though they have very little open interest yet. 

BUY CALL AUG 45.00 SLM-HI OI= 50 current ask $6.40
BUY CALL AUG 50.00 SLM-HJ OI=204 current ask $2.30
BUY CALL AUG 55.00 SLM-HK OI=119 current ask $0.40

Picked on June 20 at $ 50.92
Change since picked: - 0.04
Earnings Date 07/14/05 (unconfirmed)
Average Daily Volume = 1.8 million 

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Wellpoint Inc - WLP - close: 68.19 chg: -0.55 stop: 65.90 

As we expected WLP dipped back toward the $68.00 level, which is very short-term support. Overall the health insurance stocks weathered the market sell-off pretty well. Readers can probably use this dip as a new bullish entry point. However, if the market continues to decline you might want to wait and see if WLP dips back toward the $66.00 level or its 50-dma before turning higher again. Currently the P&F chart remains bullish with an $87 target. We do not plan on holding over the July earnings report.

Suggested Options:
July options don't have a lot of time left. We're suggesting the August strikes.

BUY CALL AUG 65.00 WLP-HM OI= 2 current ask $7.30
BUY CALL AUG 70.00 WLP-HN OI=320 current ask $4.80

Picked on June 05 at $ 68.40
Change since picked: - 0.21 
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million 

Put Updates

Quality Systems - QSII - cls: 44.89 chg: -1.08 stop: 48.01 *new*

The market sell-off on Friday helped pull QSII under round-number, psychological support at the $45.00 level. This is good news for shorts and we noticed that volume came in above average. Traders looking for new bearish positions might want to use Friday's drop as a new entry point. We are going to lower our stop loss to $48.01, above the simple 10-dma and the simple 100-dma. Our target is the $41-40 range near the exponential 200-dma.

Suggested Options:
We are going to suggest the July or August puts but keep in mind there is about three weeks to expiration for the Julys. 

BUY PUT JUL 50.00 QCR-SJ OI=217 current ask $5.80
BUY PUT JUL 45.00 QCR-SI OI=169 current ask $2.10

BUY PUT AUG 45.00 QCR-TI OI= 8 current ask $3.80
BUY PUT AUG 40.00 QCR-TH OI= 10 current ask $1.85

Picked on June 15 at $ 47.75
Change since picked: - 2.88
Earnings Date 06/13/05 (confirmed)
Average Daily Volume = 330 thousand 

Dropped Calls

Eagle Materials - EXP - close: 89.57 chg: -1.34 stop: 89.49 

The market sell-off was too much for EXP and the stock broke down under the $90.00 level. We were stopped out at $89.49 late Friday afternoon. Currently the daily technical oscillators look pretty negative but we would keep an eye on EXP for a bounce from the $88-87 range. 

Picked on June 09 at $ 90.45
Change since picked: - 0.88
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 134 thousand 

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Intl Bus. Mach. - IBM - cls: 74.01 chg: -1.40 stop: 74.99

IBM did not respond well to the market sell-off on Thursday-Friday. The stock broke down below the $75.00 level and looks poised to breakdown under its mid-June support at the $74.00 level. We're going to close the play unopened since IBM never traded at or above our entry point at $78.25. 

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/14/05 (unconfirmed)
Average Daily Volume = 7.4 million 

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St Joe Co - JOE - close: 79.30 change: -1.13 stop: 79.45

JOE was unable to escape the profit taking on Friday. The stock lost 1.4 percent on volume well above the average. We've been stopped out at $79.45. The breakdown under the $80.00 level might herald the beginning of a deeper consolidation. We suspect that JOE is still a bullish candidate but we'll watch for a dip toward the $75-76 level first. 

Picked on June 20 at $ 82.56
Change since picked: - 3.26
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 507 thousand

Dropped Puts

None


Trader's Corner

Trader's Corner

Other Candlestick Reversal Signals

Tweezers top, dark clouds and harami join doji as possible reversal signals. Those potential reversal signals number too many to include or illustrate in a single article, but a few important ones might be valuable to note. (Those who haven't read the previous articles on candlestick charting and would like further background can find those articles in the Saturday, June 11 and 18 editions of the OptionInvestor newsletter.)

In one of Nison's books on candlestick charting, this "father of candlestick charting" organizes the discussion by the number of candles needed to create a reversal signal. That organization seems as workable as any. This article will discuss two-candle reversal signals. 

Nison characterizes a tweezers top or bottom as a double-top or -bottom formation, but many people characterize these formations somewhat differently. 

Annotated Daily Chart of PVN:

Another type of two-candle reversal formation is a bearish or bullish-engulfing candle formation. In an engulfing pattern, the second candle envelopes the prior candle. Ideally, the second candle's body envelopes the first candle's shadows as well as the real body. In other words, the second day's open and close envelopes the prior day's entire range. 

Annotated Daily Chart of AAPL:

The larger the engulfing candle with respect to the prior one, the stronger the signal. In this case, a long red candle engulfs a prior white one, producing a bearish engulfing pattern. In the bullish version, a long white candle engulfs a prior red candle after a downtrend. 

However, there's a time when a long white engulfing candle can be a bearish signal and a long red engulfing candle can be a bullish signal. This occurs when trading produces a last engulfing top or last engulfing bottom pattern. The bearish version occurs when a long white candle engulfs a red one after an uptrend, and the bullish version occurs when a long red candle engulfs a white one after a downtrend. Although this signal might appear counterintuitive on first glance, the last engulfing candles indicate a possible exhaustion of buying or selling interest.

Annotated Daily Chart of G:

Not all two-candle reversal formations require a second candle that matches or exceeds the size of the first candle, as happens with the tweezers and engulfing patterns. Neither the dark cloud cover nor piercing pattern, one bearish and one bullish, requires that the second candle be larger than the first, but each requires that the second candle closes deeply into the prior candle.

Annotated Daily Chart of TXN:

In a classic piercing pattern, the second day's candle opens at a new low for the move, but then prices rise, with the candle closing deep inside the red candle that preceded it, ideally more than midway into the real body of the prior red candle. The analogous bearish formation is the dark cloud cover. In this two-candle pattern, prices open at a new high the day after a tall white candle, but then prices fall, with the candle ideally closing more than midway into the real body of the prior white candle. Some might recognize these candle patterns as being akin to key reversal days.

Another two-candle combination that sometimes signal reversals is the harami. Japanese candlestick enthusiasts denote a harami as a two-candle pattern when a small candle of either color forms inside a preceding longer-than usual red or white candle. Such candle pairs should occur after a trending move, but the candles can come in any color combination. For example, a downtrend can end with a long white candle followed by a short red candle nestled within the real body of the prior candle. In classic harami, the second candle is positioned in the middle of the previous long candle, but it can be near the top, in the case of a high-price harami, or near the bottom, in the case of a low-price harami.

Annotated Daily Chart of CRAI:

While any combinations of colors are possible the red/red combination here would be more bearish than others, because the red candles themselves imply bearishness. 

Nison warns that if the second candle of a harami after an uptrend forms near the top of the prior candle, consolidation may be more likely than a reversal. The opposite is true during a downtrend: a second candle forming near the bottom of the real body of the prior candle may be signaling that consolidation is more likely than a reversal.

Anyone familiar with inside-day candles from traditional chart analysis will recognize harami as inside-day formations. They, like any other reversal formation, require confirmation. If prices exceed the harami in an uptrend or move below one in a downtrend, the formation was instead a continuation formation.

This provides a glimpse into the most important of the two-candle candlestick reversal formations, but there are of course nuances that can't be covered in a single article. Next weekend's article will discuss reversal formations that require three or more candles to complete. As always, those who want more details might find information in Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES and Greg Morris' CANDLESTICK CHARTING EXPLAINED is 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.

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