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Daily Newsletter, Saturday, 07/02/2005

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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

A Revolting Development for Buyers

A Revolting Development for Buyers

Bulls closed the week with a bad taste in their mouth after starting out the week with a very nice bounce. It brings to mind the phrase from the old 1950s "Life of Riley" TV show. What a revolting development this has turned out to be. So much promise of a Q2 earnings bounce and so little follow through. While the bulls were hoping for a rebound to take us back to the mid-May highs that hope was dashed when that rebound failed at 10400 and what we got was a retest of the May lows instead. This left little to cheer about into the long holiday weekend.

Dow Chart - Weekly


Nasdaq Chart - Weekly


SPX Chart - Weekly


The economic news for the week was not bad with the FOMC doing exactly as expected and various reports showing a pause in the economic decline. The lead report for Friday was the ISM and we dodged a serious bullet with a slight rise to 53.8 from 51.4. There was a lot of hand wringing over the possibility the ISM would come in under 50 for the first time in 25 months. The slight gain over May's 51.4 level should have taken us out of range for next month as well. The ISM showed strong gains in the New Orders, Production and Employment components. New orders rose sharply to 57.2 for a gain of more than +5 points.

The rise in the ISM surprised almost everyone and gave credence to the idea that the spring soft patch is over. Prices paid fell -7.5 points to 50.5 and the lowest level since Feb-2002. This suggests that inflation is as the Fed claims, remaining well contained. The impact of high energy prices was negligible. Inventories failed to build once again and continued to show a continuation of the three-month decline. Moving into the summer months this is still not alarming as anticipation of slower sales prompts caution in inventory levels. As the summer progresses we would hope to see those inventories begin to climb for the fall selling season. This was a strong report but the markets failed to celebrate.


Also surprising traders was a jump in Consumer Sentiment from 94.8 to 96.0 in the face of record high gasoline/diesel prices. Like the Consumer Confidence the Sentiment survey found consumers surprisingly optimistic after five months of worry. Sentiment dipped from 97.1 to 86.9 from December to May and the June reading showed a significant reversal. Expectations rose to 85.0 from 75.3 and present conditions jumped to 113.2 from 104.9. Considering the high prices of gasoline it was an amazing change. Part of the gain was attributed to the rebound of the Nasdaq to test five-month highs at 2100. Consumers love tech stocks and it clearly shows.

On the downside Construction Spending fell -0.9% compared to estimates for a gain of +0.5%. This was the third consecutive monthly decline. The main problem was the -1.7% drop in residential construction for the month. The constant talk of a housing bubble appears to be taking a toll on the sector making some builders more cautious. There was also a downward revision to February, March and April.

There was an announcement on Friday that the long awaited Chinese Yuan loosening could come within the next two months. The Treasury Dept comments put the tariff legislation on hold and were seen as credible. The Treasury Dept made the comments in an effort to quiet the current unrest that was seen to be increasing tensions between China and the U.S. at a time when discussions were occurring at the highest levels.

China was also in the news again in reference to the Unocal bid. The House voted on Thursday to reject the acquisition attempt on national security concerns. The vote was strongly in favor of the measure 333 to 92 and it was added as an amendment to a current spending bill. The measure would prevent the administration from spending any money to approve the purchase. The committee, which would consider the purchase for approval is the Committee on Foreign Investment in the U.S. (CFIUS). The committee makes recommendations to the president on foreign investment (acquisitions) after reviewing national security concerns. Of over 1500 reviews since the committee was formed only one was denied by the President. This was in 1989 against a Chinese acquisition and was largely symbolic in protest for the massacre in Tiananmen Square. Unocal shareholders are set to vote on the Chevron acquisition on August 10th. The board of Unocal has recommended approval but that was prior to the CNOOC bid. Chevron received approval for the acquisition from the SEC on Thursday and this was the last approval necessary to complete the deal. While Chevron has yet to sweeten its offer it is very possible they will wait until the last minute in order to avoid a bidding war with CNOOC. There are also rumors another bidder may enter the fray given the very low price in the neighborhood of $11 pre bbl of proven reserves. Exxon Mobil could pay cash for UCL and CNOOC both and have plenty of pocket change left over.

On Friday there was another shot heard around the world but only if you were listening carefully. Chinese President Hu Jintao met with Russian President Vladimir Putin to discuss issues related to joint space exploration, energy, metallurgy and joint military operations. Together they signed a joint declaration critical of U.S. policy. Excerpts from press releases: "Russia and China with one voice declare the inadmissibility of efforts at monopolising world affairs, the dividing of states into the leaders and the led, the imposition from outside of models of social development and the application of double standards." Also "by such cooperation with China, Russia hopes to form an axis of cooperation" (As opposed to an axis of evil? Interesting choice of words) "between Moscow, Beijing and the Central Asian country of Uzbekistan, aimed at more effectively resisting 'destabilizing external influence' -- meaning the growing influence of the West." If you remember last week I described large purchases by China of military equipment from Russia including various weapons, warships and submarines. This is a meeting that will likely not be reported in the mainstream press but clearly a relationship is being built that could be very well be preparations by Russia and China for the future oil wars. Remember, the U.S. consumes 25% of global production and will therefore be the country most hurt by the lack of adequate supply. It appears the other kids on the global block are planning their strategy for handling the bully when he goes into withdrawal panic after missing his injection of the black crack.

August Crude Oil Chart - 60 min


December Crude Chart - Weekly


Oil prices fell this week to $56 and just above the 100-day average and promptly rebounded +2.25 on Friday to close at $58.75. I suspect the drop was related more to end of quarter profit taking than worries about supply and demand. Now that we are in a new quarter the buyers appeared at the open and never slowed despite the early holiday close. The gains were sector wide with oil gaining +4%, gasoline +5.2%, heating oil +4.6% and natural gas +2.7%. I suggested again on Tuesday to buy the dip and again that was the right move. Boone Pickens has been on TV almost daily with his $3 gasoline prediction and he has been putting his own money to work as well. His hedge fund, BP Capital, has an amazing record. An investor putting $1 million into his commodity fund at inception in 1999 would have earned more than $28 million to date. An investor putting $1 million into his equity fund at inception in 2001 would have seen his money grow to $3.7 million. Pickens sees no relief for oil prices in the future. He said on Thursday that current global production is in the 84-85 mbpd range with about 500K of excess production going into inventory reserves around the world. When demand accelerates in Q3 he expects those reserves to evaporate quickly. As demand grows in Q4 to 86-87 mbpd there will be insufficient production to meet that demand. He expects this to produce a feeding frenzy in the markets as a bidding war breaks out for available supplies. The world will consume more than 30 billion barrels of oil in 2005 and that is far more than has been discovered in any year since 1970. Even if the Saudi claims of 250 billion bbls of reserves were true they can only produce about 11 mbpd or 4 billion bbls per year. Any investor with any common sense can do the simple math and see the future. That future contains a brick wall according to Pickens where demand exceeds supply and that wall could come as soon as Q4 of this year. Continue to buy oil companies on dips and you will not regret it.

GM came back from the dead in June and blew away the competition with its employee-pricing program. GM sales surged +41% in June, the largest monthly jump since Sept 1986, compared to a slump of -3.2% at Ford. Buyers deserted the other makers in favor of the lower prices at GM. Only Toyota showed a decent gain at +10%. The Cadillac division of GM saw sales surge +54% and trucks sales soared +68%. This was the largest sales jump for trucks in the companies history. Ironically GM only gained +.65 cents with the news coming after most traders had already left for the weekend. The Postal Service announced on Friday that it was buying $60.5 million in postal vehicles from Daimler Chrysler.

After the bell on Friday Oracle said that despite the recent rise in the dollar it was affirming guidance for Q2. IBM announced that Microsoft would be paying them $850 million to settle some antitrust claims. Looks like IBM will make their numbers for Q3. Also, the FDA issued its strongest warning on some Guidant products. A malfunction in some defibrillators recalled last month could cause injury or death. 20,000 of the devices are being urgently recalled. Another recall of a much easier nature came from Cold Stone Creamery, which is recalling its products containing cake batter after people in four states became ill after eating it. When given the choice to have my ice cream or defibrillator recalled I think we all know it would be an easy choice. They will only get my ice cream when they pry my cold dead fingers off the cone. Of course after a defib failure that may be exactly what would I would get, cold and dead.

The various indexes eked out a minor gain on Friday thanks to a late day buy program and some short covering at 3:30. Unfortunately it cam too late to help the indexes recover from a nasty first half of 2005. The Dow lost -4.7%, Nasdaq -5.4% and the S&P -1.7%. The Dow closed the week at 10300 and clinging to that level as a support lifeline. This level has been penetrated twice over the last week and each time buyers bought the dip with less than convincing volume. Bulls had hoped the mid week rebound to just over 10400 would hold and be a stepping-stone to a retest of the June highs but it did not happen. The end of week decline to retest the June lows suggests the future may not be bright. A break of 10250 could easily see a retest of the April lows in the near term and a retest of 9800 by September. Investors had hoped 2005 would not be a repeat of the 2004 summer from hell but it is shaping up as another range bound summer with a negative bias.

The Nasdaq rebounded to 2075 from Monday's dip to 2040 but it could not hold the gains. After two days of trying it finally succumbed to profit taking and retreated to rest on the 2055 level that was support back in early June. The Nasdaq was barely able to rebound +50% of the late June drop and then could not hold it. A break of the 2050 level runs into several averages clustered around 2025 and major support at 2000.

The same story was true of the S&P with a retracement on Friday to the 1195 support that has held since June-1st. That support level was only pierced once during the last month on an intraday basis and was stopped at the 100-day average at 1187. The support levels below 1190 are varied and numerous with 1160-1165 the crisis level likely to be strongly defended. This was the spring highs in 2004 and the lows from Nov-2004 to late March-2005. A summer break of that level could pause at 1140 but targets 1100.

The Russell recovered from its rebalancing dip to 626 and returned almost all the way to its recent 645 resistance highs. Friday's close at 642 came on a late day spurt of buying as laggard funds continue to square positions. The 647 level is a 50% projection level dating back to the Jan-2003 lows. I would continue to expect an upward bias to the Russell for another week as the rebalance activity tapers off and end of quarter fund flows provide lift.

Russell 2000 Chart - Weekly


Volume was very low on Friday despite it being the first day of the quarter. The Nasdaq posted only 1.2B shares in a lackluster day. Traders hit the exits early for the holiday weekend and even rumors of an impending July-4th attack by Al-Qaeda were ignored. At least they did not cause any material drop but there was still the lack of a meaningful bid. Next week should be interesting as we close in on the Q2 earnings reporting period. We only have about 45 early reporters due to announce during the week with the pace growing to about 200 for the following week. The first week of the quarter normally has a bullish bias, which corresponds to money flows from retirement accounts. As such it could provide an opportunity for hedge funds to reestablish some short positions going into the late summer period while using the incoming volume as cover. The early week economic reports are minimal with Factory Orders on Tuesday and ISM Services on Wednesday. The big hurdle is the Nonfarm Payrolls on Friday and one more clue as to the stability of the recovery.

Now that we are into the July period I would be even more cautious about any long positions. The expected rebound from last week fizzled like a 4th of July dud and failed to achieve any real height. That should give traders some additional concern about the health of the market. I did not expect any material declines for about two more weeks but the weakness we saw as the quarter closed has cause a little more caution to creep into my outlook. This is definitely a week to enter passively and be ready to exit aggressively if conditions change.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
FO None
NBL  
SUN  

New Calls

Fortune Brands - FO - close: 90.51 chg: +1.71 stop: 86.95

Company Description:
Fortune Brands, Inc. is a USD7 billion leading consumer brands company. Its operating companies have premier brands and leading market positions in home and hardware products, spirits and wine, golf equipment and office products. Home and hardware brands include Moen faucets, Aristokraft, Schrock, Diamond and Omega cabinets, Therma-Tru door systems, Master Lock padlocks and Waterloo tool storage sold by units of Fortune Brands Home & Hardware, Inc. Major spirits and wine brands sold by units of Jim Beam Brands Worldwide, Inc. include Jim Beam and Knob Creek bourbons, DeKuyper cordials, Starbucks(TM) Coffee Liqueur, The Dalmore single malt Scotch, Vox vodka and Geyser Peak and Wild Horse wines. Acushnet Company's golf brands include Titleist, Cobra and FootJoy. Office brands include Swingline, Wilson Jones, Kensington and Day-Timer sold by units of ACCO World Corporation. (source: company press release or website)

Why We Like It:
We had our eye on FO as a possible bullish candidate a few weeks ago when it was consolidating between $85 and $88. Then it gapped higher and sort of got away from us. Now the recent action over the past two weeks has filled the gap and produced another rebound with shares looking poised to hit new highs soon. The MACD indicator is nearing a new buy signal soon and its shorter-term oscillators are also bullish. The Point & Figure chart shows a triple-top breakout buy signal pointing to a $110 target. We think bulls can use the push back above the $90.00 level on Friday as a new entry point. Our target will be the $95-96 range but whether FO gets to our target or not we're closing the play before its late July earnings report. More aggressive players might aim for the $98-100 region.

Suggested Options:
We are suggesting the August calls. September strikes are available and have more open interest.

BUY CALL AUG 85.00 FO-HQ OI= 0 current ask $6.60
BUY CALL AUG 90.00 FO-HR OI=10 current ask $2.85
BUY CALL AUG 95.00 FO-HS OI=28 current ask $0.85

Picked on July 03 at $ 90.51
Change since picked: + 0.00
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume = 648 thousand

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Noble Energy - NBL - close: 77.62 chg: +1.97 stop: 73.99

Company Description:
Noble Energy is one of the nation's leading independent energy companies and operates throughout major basins in the United States including the Gulf of Mexico, as well as the recently added Patina Oil & Gas properties located primarily in Colorado's Wattenberg Field, the Mid-continent region of western Oklahoma and the Texas Panhandle, and the San Juan Basin in New Mexico. In addition, Noble Energy operates internationally in Argentina, China, Ecuador, Equatorial Guinea, the Mediterranean Sea and the North Sea. Noble Energy markets natural gas and crude oil through its subsidiary, Noble Energy Marketing, Inc. (source: company press release or website)

Why We Like It:
A bounce in crude oil on Friday helped light a fire under the oil stocks again and many look poised for another leg up after two or three weeks of consolidating their May gains. NBL happens to be one such stock and shares added 2.6 percent on Friday. Technical oscillators are turning bullish again and its P&F chart looks very strong as it points to a $109 target. We are suggesting that readers use a trigger over the $78.00 level to open the play. Our entry point will be 78.15. Our target is the $84-85 region, which coincides with analysts' mean price target on the stock. We do not plan on holding over the early August earnings report.

Suggested Options:
We are suggesting the August calls. At this time we don't see any strikes above $80.00.

BUY CALL AUG 75.00 NBL-HO OI= 468 current ask $4.60
BUY CALL AUG 80.00 NBL-HP OI=1306 current ask $1.95

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 1.0 million

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Sunoco Inc - SUN - close: 117.87 chg: +4.19 stop: 112.45

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, approximately 4,800 retail sites selling gasoline and convenience items, over 4,300 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. Sunoco is a significant manufacturer of petrochemicals with annual sales of approximately five billion pounds, largely chemical intermediates used to make fibers, plastics, film and resins. Utilizing a unique, patented technology, Sunoco also has the capacity to manufacture over 2.5 million tons annually of high-quality metallurgical-grade coke for use in the steel industry. (source: company press release or website)

Why We Like It:
SUN is another oil stock that got a boost from the bounce in August crude on Friday. SUN is an oil refiner who also has almost five thousand retail pumping stations. The rise in oil certainly helps them on both fronts. Friday's gain also pushed the stock price above the top of its two-week trading range at $117.20. SUN's MACD indicator may look overbought but the other technical indicators are turning bullish again. The P&F chart points to a $163 price target. We are going to target a move into the $124.50-125.00 range. The biggest risk here is that oil dips again and SUN doesn't recover before its July 21st earnings report, of which we plan to exit before the company announces.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 115.00 SUN-HC OI=414 current ask $7.10
BUY CALL AUG 120.00 SUN-HD OI=202 current ask $4.50
BUY CALL AUG 125.00 SUN-HE OI=119 current ask $2.60

Picked on July 03 at $117.87
Change since picked: + 0.00
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 1.3 million
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

3 BODY-->

Call Updates

Chubb Corp - CB - close: 85.44 change: -0.17 stop: 82.99 *new*

Insurance stock CB continues to slowly churn sideways within its slow six-week drift higher. For the most part CB continues to look bullish. The challenge is the prolonged loss of momentum, which is throwing off the oscillators. Option players have a right to be concerned because this slow crawl higher will eat up any time premium. Due to CB's lack of upward mobility we are not suggesting new bullish plays at this time. We are also going to raise our stop loss to $82.99, keeping it under the simple 50-dma. The Point & Figure chart is still bullish and points to a $109 target. We are targeting a move into the $89.50-90.00 range but at the current rate of ascension CB will not get there before its July 26th earnings report. We will plan to exit ahead of the report.

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

Picked on June 10 at $ 85.05
Change since picked: + 0.39
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 1.2 million

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Rockwell Collins - COL - close: 47.24 chg: -0.44 stop: 46.49

Our strategy with COL has been a simple one. Investors have consistently bought the dips to its rising 100-dma. We waited for COL to pull back to its 100-dma and bought the dip. We did see an immediate rebound but now we're growing a little concerned that the rebound has not seen any follow through. Traders holding positions can double-check their stops to make sure they're comfortable with them. Our stop is relatively tight at $46.49. We would not suggest new bullish positions at this time. Wait for COL to breakout above its short-term trend of lower highs, which would probably be in the $48.25 region.

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

Picked on June 27 at $ 46.75
Change since picked: + 0.49
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 800 thousand

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Cummins Inc - CMI - close: 74.76 change: +0.15 stop: 70.95

We remain bullish on CMI. The stock's breakout past the $72-73 region in addition to its simple 200-dma also coincided with a breakout through resistance on its Point & Figure chart. Speaking of the P&F chart CMI's points to a $101.00 target. Traders looking for a new play might want to consider a bounce from the $74 level but we would confirm market direction in the major indices first (a.k.a. if the DJIA and SPX are sinking, don't open new bullish plays here). We would definitely look for a bounce here first because the technical oscillators are looking a bit tired. Our target is the $77.50-80.00 range. We plan to exit ahead of CMI's July 21st (unconfirmed) earnings report.

Suggested Options:
We would suggest the August calls.

BUY CALL AUG 70.00 CMI-HN OI= 0 current ask $6.30
BUY CALL AUG 75.00 CMI-HO OI=64 current ask $3.00

Picked on June 19 at $ 74.03
Change since picked: + 0.73
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 970 thousand

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Coventry Hlth Care - CVH - cls: 70.60 chg: -0.15 stop: 68.49

The health insurance stocks have been pillars of strength in this market for a while now. We've had our eye on a possible bullish play in CVH for weeks as it consolidates sideways after an impressive October '04 through April '05 run. Currently shares of CVH are testing resistance in the $72.00-72.50 region and we are suggesting that readers use a trigger to catch the next breakout and probably the next leg higher. Our suggested entry point is $72.75. We're targeting a move into the $77.50-80.00 range but we plan to exit ahead of CVH's early August (unconfirmed) earnings report. In the news on Friday CVH reaffirmed its positive Q2 outlook.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 65.00 CVH-HM OI= 91 current ask $6.80
BUY CALL AUG 70.00 CVH-HN OI= 88 current ask $3.20
BUY CALL AUG 75.00 CVH-HO OI=468 current ask $0.95

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/05 (unconfirmed)
Average Daily Volume = 1.0 million

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Fording Candn Coal - FDG - cls: 93.60 chg: +1.40 stop: 88.49

So far so good. Shares of coal producer FDG have broken through several layers of resistance in the past couple of weeks. Traders were there to buy the dip back toward the $90.00 level and its simple 100-dma. We see the bounce as another entry point for bullish plays. Currently the P&F chart points to a $118.00 target. We are targeting a move into the $97.00-100.00 range.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 90.00 FDG-HR OI= 43 current ask $7.65
BUY CALL AUG 95.00 FDG-HS OI=158 current ask $4.40
BUY CALL AUG 100.00 FDG-HT OI=631 current ask $2.10

Picked on June 19 at $ 90.30
Change since picked: + 3.30
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 384 thousand

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Rio Tinto - RTP - close: 122.98 chg: +1.06 stop: 119.99

We remain bullish on RTP. The stock's pull back toward the $122 level can be used as a new bullish entry point. This happens to coincide with technical support (broken resistance) at the 40 and 50-dma's. There is additional support below with the 200-dma near the $120.00 level. Plus, the P&F chart is bullish and points to a $154 target. Our target is the $129.50-130.00 range since the $130 level is the next level of major resistance. We plan to exit ahead of RTP's early August earnings report.

Suggested Options:
We are suggesting the August calls although some traders might want to consider the October strikes.

BUY CALL AUG 120.00 RTP-HD OI= 0 current ask $6.70
BUY CALL AUG 125.00 RTP-HE OI= 8 current ask $3.80
BUY CALL AUG 130.00 RTP-HF OI= 10 current ask $1.95

Picked on June 27 at $123.33
Change since picked: - 0.35
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 160 thousand

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SLM Corp - SLM - close: 50.25 change: -0.55 stop: 48.95

We initially added SLM on its bullish technical breakout over round-number resistance at the $50.00 level. The stock had been consolidating under the $49.50-50.00 region for weeks and had broken its trend of lower highs as well. We certainly didn't expect to see SLM struggle this much with the $51-52 region following the breakout but then again the broader market hasn't been very cooperative either. We remain bullish on the stock and would still consider new positions with SLM above the $50.00 mark. However, at this time we would probably watch for a dip to and a bounce from the $50 level before initiating new plays. The P&F chart is bullish and points to an $89 target but we are only targeting a move $54.50-55.00 range. The company just confirmed that it will report earnings on July 21st and we will plan to exit ahead of the report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 45.00 SLM-HI OI=325 current ask $5.80
BUY CALL AUG 50.00 SLM-HJ OI=508 current ask $1.90
BUY CALL AUG 55.00 SLM-HK OI=117 current ask $0.30

Picked on June 20 at $ 50.92
Change since picked: - 0.67
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.8 million

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Molson Coors - TAP - close: 61.59 chg: -0.41 stop: 59.49

So far so good. TAP appears to have built a new bottom or base pattern over the last several weeks and the recent breakout over the $61.00 level looked like a bullish entry point for short-term longs. We suggested that readers buy calls and target a move to the $64.00-65.00 range but to also be aware that the 50-dma would probably act as short-term resistance. Thus far TAP is following the script. The rally stalled at the 50-dma but Friday's pull back or profit taking was pretty mild. Traders bought the dip at the $61.00 level and shares were bouncing higher into the weekend. Readers can choose to go long at current levels of hope for a possible dip back toward the $60.00-60.50 region and buy a bounce from there instead. We plan to exit ahead of TAP's late July earnings report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 60.00 TAP-HL OI= 83 current ask $3.30
BUY CALL AUG 65.00 TAP-HM OI= 66 current ask $0.95

Picked on June 29 at $ 61.38
Change since picked: + 0.21
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume = 909 thousand

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Wellpoint Inc - WLP - close: 69.82 chg: +0.18 stop: 65.90

WLP is another health insurance stock that is trading at or near its all-time high. To be completely honest we've been disappointed with WLP's performance over the last few weeks. The breakout over resistance in the 68.00-68.30 region has been following with a slow, rocky, churning consolidation higher. This has made the technical oscillators useless. The P&F chart, which cuts out a lot of this noise, remains bullish and points to an $87 target. We're going to keep the play active but we do plan on exiting ahead of WLP's late July earnings report. Our target is the $74.00-75.00 range.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 65.00 WLP-HM OI= 13 current ask $6.20
BUY CALL AUG 70.00 WLP-HN OI=508 current ask $2.75
BUY CALL AUG 75.00 WLP-HO OI=428 current ask $0.85

Picked on June 05 at $ 68.40
Change since picked: + 1.42
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million
 

Put Updates

Ambac Fincl. - ABK - close: 70.26 chg: +0.50 stop: 71.51

Hmm... ABK is struggling to let go of support near the $70.00 level. On Thursday the decline looked like a new bearish entry point but we would not open new plays with ABK above the $70 mark. Instead look for a new decline under $69.65. The P&F chart continues to look bearish with a $63 target. Our target is the $64.50-65.00 range but we plan to exit before ABK's late July earnings report.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 75.00 ABK-TO OI=853 current ask $5.30
BUY PUT AUG 70.00 ABK-TN OI=338 current ask $2.15
BUY PUT AUG 65.00 ABK-TM OI=499 current ask $0.75

Picked on June 26 at $ 69.62
Change since picked: + 0.64
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 992 thousand

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ESCO Tech. - ESE - close: 99.60 chg: -1.20 stop: 101.65 *new*

Good news! Our aggressive higher-risk put play in ESE is starting to look better. The stock was unable to breakout over its three-week trend of lower highs. Friday's breakdown under round-number, psychological support/resistance at the $100.00 mark is a good sign. Shares even dipped under the $99 level, which could have been used as a new entry point. We are going to lower our stop loss to $101.65. We continue to suggest that readers look for a decline under $99.00 or $98.00 before opening new put positions. Our target is the $92.00-90.00 range. We plan to exit before ESE's August earnings report.

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

BUY PUT AUG 100.00 ESE-TT OI=10 current ask $5.00
BUY PUT AUG 95.00 ESE-TS OI= 0 current ask $3.40

Picked on June 26 at $ 97.80
Change since picked: + 1.80
Earnings Date 08/10/05 (unconfirmed)
Average Daily Volume = 102 thousand

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KLA-Tencor - KLAC - close: 43.60 chg: -0.08 stop: 45.76

KLAC isn't moving very fast but it is moving the right direction. We added KLAC as a put candidate this past week after the stock broke down under support at the $44.00 level and its 200-dma. The stock has continued to sink and now the SOX semiconductor index could help lead KLAC lower now that the SOX has broken down under support at the 420 level. The next obstacle for the bears is KLAC's 50-dma currently at 43.40. We are targeting a decline to the $40.50-40.00 range. The biggest risk we see in this play would be overly positive earnings reports from other semiconductor companies. The biggest one to watch out for is Intel's (INTC) on July 19th. We plan to exit KLAC before its own late July earnings report.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 45.00 KCQ-TI OI=1647 current ask $2.75
BUY PUT AUG 42.50 KCQ-TV OI= 232 current ask $1.50
BUY PUT AUG 40.00 KCQ-TH OI= 390 current ask $0.75

Picked on June 29 at $ 43.88
Change since picked: - 0.28
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume = 5.4 million
 

Dropped Calls

AmerisourceBergen - ABC - close: 69.35 change: +0.20 stop: 65.57

Target achieved. ABC continued to rally on Friday morning and hit an intraday high of $69.74, which is more than enough for our $69.50 target. The stock looks a little short-term overbought and is facing round-number, psychological resistance at the $70.00 mark. Yet more aggressive traders may want to consider letting the stock run as ABC was bouncing higher on Friday afternoon. We are following our game plan and closing the play.

Picked on June 13 at $ 65.57
Change since picked: + 3.78
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.3 million

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Ashland Inc - ASH - close: 60.15 chg: -11.72 stop: 67.95

Do you remember the headline on Wednesday regarding ASH completing the sale of its stake of an oil refinery to Marathon Oil (MRO) for $3.7 billion. The actual transfer of assets for that transaction took place on Friday and the share price of ASH was readjusted for the change. Looking at the daily chart you'll see a gap down and a 16 percent decline. Oddly enough we don't see any huge changes in the stock's calls or put prices. We're going to call this a busted play where we have been stopped out for a loss but you'd better check with your broker on how they're handling this change regarding the option values.

Picked on June 16 at $ 70.05
Change since picked: - 9.90*
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Puts

None
 


Trader's Corner

Candlestick Reversal Signals: Multiple Candlestick Formations

Recent Traders Corner articles on candlestick charting established a common theme: candlestick and candlestick formations possess colorful names. Multiple candlestick reversal formations certainly fit that theme. They feature names such as evening star, rising three methods, and three black crows.

Those names sometimes prevent an intuitive understanding of candlestick formations, but most reversal signals build on basic and easily understood ideas. A doji represents indecision; a harami, a possible slackening of a trend's strength; and an engulfing pattern, a renewal of buying strength after a downtrend or of selling strength after an uptrend. Many multiple-candlestick reversal signals build on those basic ideas. For those who want a review of the previous articles in the series on candlestick formations can find those Traders Corner articles in the June 11, 18, and 25 editions of the weekend OptionInvestor newsletters.

The doji often serves as the second candle in the three-candlestick formations known as evening-star and morning-star formations. Two weekends ago, the article on the doji briefly described these formations. They can sometimes also feature a small-bodied candle as the second candle. (Note: Charts were searched for examples of reversal signals, so will not reflect current values for indices or stocks.)

Annotated Weekly Chart of the TRAN:

The morning-star formation serves as the bullish version of the evening-star formation. In the bullish morning-star version, a doji or small-bodied candle follows a red candle after a downtrend. A long white candle completes the three-candle formation. In the optimum setup, the doji or small-bodied candle will form below the candles that precede and follow it.

Some multiple-candle reversal signals appear to be non-classic variations on the evening or morning-star formations. For example, a tri-star bullish reversal pattern consists of three doji. Two take the place of the long red and white candles, and the middle doji gaps below the first and third. Another difference lies in the candles that precede the tri-star formation. In a long downtrend, the real bodies of the candles will have grown smaller before the tri-star's formation. In a morning-star formation, the preceding action often produces long red candles.

The ladder-bottom formation also resembles a morning-star formation in many respects.

Annotated Daily Chart of LEH:

With the exception of the requirements for the three red candles, this formation could be considered a morning-star formation. Traders could recognize it as a reversal signal even if the ladder bottom name or variation were not known. That's going to be true of many of the multiple-candle reversal signals discussed in this article.

Although a bit of a stretch, the unique three rivers bottom formation might be seen as either a morning-star or harami variation. A small-bodied candle follows a long red candle, with the real body of the second candle forming within the real body of the long red candle. The second candle has a lower shadow stretching down to a new low. The third day's trading produces a white candle, but not a tall white candle as in the typical morning-star formation. The white candle is a small-bodied white candle with a close below that of the second day.

Variations of the evening-star formation occur, too. Two crows is one example.

Annotated 60-Minute Chart of TWP:

Other formations build on harami or engulfing candle formations. After a downtrend, the bullish concealing baby swallow formation consists of four candles, all red. The third candle of the formation gaps below the previous two long red, shadowless candles, pierces the body of the second candle and falls back. The last candle of the four engulfs the third candle's small body and upper shadow. Those who don't recognize the concealing baby swallow pattern would still likely recognize the engulfing pattern of the last two candles as a potential reversal signal.

The three outside up formation consists of three candles, and it's built on an engulfing pattern, too.

Annotated Daily Chart of CPST:

This variation provides extra confirmation of the bullishness of the engulfing candle pattern. The three outside down pattern serves as the bearish variation of this engulfing candle pattern. After a climb, a tall candle engulfs a small-bodied candle. The third day produces a red candle that closes lower than the second day's candle. Both variations would be recognized as reversal signals even if the particulars of the variations weren't known.

The bullish three inside up formation consists of a two-candle harami followed by a white candle that closes higher than the second day's close. For those familiar with inside-day patterns, this would be a familiar long signal.

A three inside down formation serves as the bearish variation of this three-candle formation. This harami and confirming third candle occurs at the top of a climb.

Annotated Five-Minute Chart of LF:

This article makes the point that many of the multiple-candle signals prove to be specialized versions or slight variations on already known two- and three-candle formations. These variations illustrate again that it's important not to get hung up on the colorful names attributed to candlestick formations. Understanding the doji, harami and engulfing patterns allow traders to pinpoint most of these other reversal signals, too.

A few patterns cannot be described as variations of doji, harami or engulfing patterns, but instead are distinctive patterns of their own. The bearish advance block pattern comprises one of these, but even this pattern offers bearish hints to those who might not have known the name or recognized the pattern. After an uptrend, trading produces three white candles, each opening within the body of the previous day's candle and each closing higher than the other. Yet each of the three shows progressive signs of weakness. Each day's body might be smaller than the previous day's, for example, and the second and third day might produce long upper shadows.

Traders might also recognize the bearishness of the three black crows and identical three crows reversal signals, too, although neither of them is built on a doji, engulfing candle or harami. Each occurs after an uptrend. The three black crows pattern requires three red candles with each open within the body of the previous red candle and with each close below the previous close. The identical formation requires three red candles. Each candle opens at the close of the prior candle, rather than inside that candle, and then closes lower than the prior candle.

The three white soldiers pattern serves as the bullish version of a three black crows pattern. After a downtrend, trading produces three white candles, the second and third opening within the body of the previous candle and each closing higher than the previous candle.

Some bullish reversal signals prove more difficult to link to any other pattern or recognize intuitively as bullish signals. Examples include the stick sandwich and three stars in the south patterns. Don't worry too much about these patterns, however. A several-hours search of daily and intraday charts turned up only one stick sandwich and no three stars patterns. With the goal of providing as comprehensive a list of multiple-candle reversal signals as possible, their descriptions will be provided, however. In the strictest sense, the stick sandwich formation is built on an engulfing pattern, but nothing about the pattern appears bullish on first glance. After a decline, a long white candle opens within the body of a long red candle but closes above it. Then, the third day opens higher than the second day's open, but then produces a long red candle that closes back near the first day's close. Candlestick enthusiasts reason that the pattern shows that prices might be bottoming, establishing a support level near the close of the first and third candles. It could also be considered a consolidation pattern.

The three stars in the south pattern includes three red candles, each with lower closes than the previous day's candle. On the first day, prices reached to a new low but bounced off that new low. On the second and third days, each day's low is higher than the previous day's low.

Since some of these formations prove relatively rare, charts didn't offer examples of all, and this article would have proven too long for the newsletter if they had. The point wasn't to give an exhaustive illustration of rare candlestick formations with the goal of persuading readers to memorize multiple small variations. The goal was to suggest that, despite the strange names, most of these patterns would be easily recognized by those familiar with the basic doji, harami and engulfing patterns. Those who want more details and would like to memorize each particular of each variation might find information in Steve Nison's JAPANESE CANDLESTICK CHARTING TECHNIQUES, Greg Morris' CANDLESTICK CHARTING EXPLAINED and various online sites.
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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