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Daily Newsletter, Saturday, 07/30/2005

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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

Oil Creeps Higher, Stocks Wilt

Oil Creeps Higher, Stocks Wilt

Oil prices have almost completely recovered from their July swoon and broke the $61 level once again on Friday. Stocks, tired from a breakout to new highs took the day off for a well-deserved rest. The major indexes gave the appearance of a rally but closed flat for the week. The earnings parade is drawing to a close and the high volume on Wed/Thr faded as traders eager for a weekend break closed their books early.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


The economic news on Friday was good across the board and there was plenty of it. The headline news item was Q2 GDP at +3.4%. This was slightly below the consensus of +3.5 and below the +3.8% level for Q1 but still well within a satisfactory range. A drop in inventory investment by -$6.4 billion was responsible for the slower growth. Consumer spending rose +3.3% and business cap-ex spending rose by +9%. The bad news was a jump in inflation with the personal consumption expenditures (PCE) up +3.3%, one point higher than Q1. The core PCE was up only +1.8% and rising at a slightly slower rate than in Q1. Higher energy prices were the main reason for the jump in the PCE. The Fed watches the PCE closely for signs of inflation and this release suggests there will be a continued series of rate hikes into 2006. Greenspan's testimony last week also confirmed this assumption. There is no end in sight for hikes at this time although a Fed rate of 4.50% is now the target number by analysts.


The Employment Cost Index showed employer costs rose +0.7% in Q2, which is no surprise to any employer. Health care costs continue to rise and the higher cost of employee expenses is being passed on to employees in the form of lower wages. Wage growth over the last couple years has been exceptionally weak and that is helping to keep a lid on inflationary pressures. Benefit costs rose +0.8% in Q2 but to a level that is +5.1% over Q2-2004. A +5% gain in only one year is very strong. This will continue to pressure jobs as employers try to contain costs. Employees can expect to work more and get paid less as the ranks are continually pared to the minimum number of employees possible to get the job done.

Consumer Sentiment showed no decline in the final numbers for July as the closing update showed the same 96.5% as the initial reading. The softening of gasoline prices over the summer vacation period acted to ease sticker shock with each fill-up. The expectations component rose slightly as consumers looked ahead to fall.

The NY-NAPM rose to 339.6 ending two months of decline. The July reading almost erased those two declines and came close to the 341.2 high set in April. July's number was the second higher reading for 2005. Business conditions in New York appeared to have weathered the spring soft spot and a rebound is underway. However the outlook component fell to neutral meaning there is little visibility for future conditions.

The July Chicago PMI surged to 63.5 from its 53.6 reading in June and well over consensus estimates of only 55. This reading erased the prior two months of declines and returned it to near its cycle highs. A +10 point jump in this is indicator is very strong. Internal components surged with New Orders jumping from 56.5 to 69.6, Order Backlogs from 45.3 from 56.1 and production from 57.8 to 70.5. The jump in orders and order backlogs suggests an acceleration in business conditions that should carry over into future months. Again, the spring soft patch across the country appears to have passed.

This flurry of strong economic news produced a mixed open on Friday with the good news mixing with some weak earnings and guidance. The early morning spike eroded into a session of profit taking as the day progressed. Given the week behind us that profit taking was completely justified. The weekend headlines will carry only good news with the Dow up +4.1% for the month making it the best showing since December 2004. When you reflect on how range bound the Dow has been for most of the month you realize the majority of the gains came in only two days starting on July 7th followed by a huge gap open on the 14th. Those three days accounted for nearly +450 points of Dow gains leaving the rest of the month as a range bound consolidation period. The constant bumping against the top of the range finally managed to produce a break over 10700 on end of month buying and that prompted at least a few bulls to throw in the towel. The Dow declined -64 points on Friday to close at 10643.

The Nasdaq headline will be even more impressive with a +6.3% gain for the month and the best month since December 2003. The Nasdaq road map looks a lot like the Dow with big gains on the same three days but adds another one on the 19th that broke it out of the prior consolidation and into another range. End of month buying pushed the Nasdaq out of that higher range to tag 2200 on Friday and ringing the exit bell. The Nasdaq closed at 2185 for a loss of -12.

The SPX also broke out of its boring upward bias to tag the next level of uptrend resistance at 1245 the same time the Dow and Nasdaq were touching 10700/2200. Amazing how those round numbers coincide. When Friday's smoke cleared the SPX had returned to the 1233 range where it had spent most of the week. While I was beginning to think the breakout had legs I want to see what happens after the month end buying before switching to a bullish bias. The drop to close at 1233 could be just profit taking and next week will be key for eventual market direction.

SPX Chart - 30 min


The SOX failed to move higher for the week but it also failed to give up any ground on Friday. The SOX has clung to 475 like a drowning man to a life raft. The conflicting chip earnings and guidance has come and gone but for eight straight days the SOX has failed to stray far from that 475 level. It still faces very strong resistance at 485-490 and this could be consolidation ahead of a breakout attempt or an indication that traders do not have enough conviction to overcome the summer doldrums ahead.

The Russell is still possessed by a bullish spirit and refuses to roll over. The constant series of new highs was blunted only slightly by a -3 point dip on Friday. The uptrend appears poised to continue with this weeks 685 high only a stepping-stone higher. At least this is what the chart appears to be saying. A contrary viewpoint would be an oversold index due for a rest. The closest support is 675 followed by 667 and 660. The breakout by the Russell is the most bullish confirmation a market could ask for. However, the Russell has help with the transports also confirming.

Russell Chart - Daily


SOX Chart - Weekly


SOX Chart - 60 min


Dow Transports Chart - Weekly


The transports have rallied from a quadruple bottom low at 3400 to just over 3800 for a +9% gain in only a month and in the face of $60 oil. They fell slightly on Friday as oil hit $61 intraday but only slightly. The transport rally has been confirming the move in the broader markets and a breakout over 3800, the prior all time resistance high in 1999, and a break over the current all time high at 3889 set back in March, would be very bullish. This makes the initial resistance at 3800 especially critical to hold for the next week.

With more than 65% of the S&P reported we are seeing Q2 earnings at the high end of estimates, thanks to the outstanding energy profits, and Q3 guidance has improved to inline with estimates at +16% growth. Without the energy stocks the performance and outlook would have been substantially different. Energy earnings have been from outstanding in the +30% to +50% range to over +100% in some cases. This went a long way on improving the S&P earnings and outlook. Energy stocks should continue to rise with oil futures hitting $61 intraday on the current contract and $63 on the December contract. However, oil stocks fell on profit taking as earnings traders took profits and moved on to other trades. Oil demand estimates are beginning to creep upward again and the stage is set for a Q3 rally into the heating oil season. Continue to buy the dip until we see a change in outlook.

December Crude Oil Chart - Daily


In oil news there were three fires at different installations that helped trigger the move higher on production concerns. Unocal posted a +40% jump in earnings and that fueled increased speculation that CNOOC would make another bid to buy the company. A Chinese newspaper claimed CNOOC was preparing to make another bid that could come as early as next week. However, an unnamed CNOOC official said Unocal was no longer a takeover target due to potential U.S. government intervention. Meanwhile the Financial Times reported late Friday that CNOOC was considering a $20 billion "knock-out" bid to be made public just prior to the August 10th Unocal shareholder vote. Chevron is not sitting idly by and said the Unocal earnings made the company even more valuable to Chevron. You think they are saying that just to make CNOOC think they will rebut any higher bid? I would bet on it and the fact remains Chevron NEEDS to acquire Unocal. Chevron recently reported that their proven reserves fell -11% in 2004 as oil becomes harder and more expensive to find. Chevron said financial projections of the merged company were much stronger than originally stated due to positive events at Unocal. Chevron has offered $17B for Unocal and CNOOC bid $18.5B. CNOOC has almost no chance of getting its deal approved by the administration and may want to save face by withdrawing instead of being blocked. Friday the Senate voted to approve the $14.5 billion energy bill which has a provision attached to block the CNOOC/UCL deal pending a four-month review. It was widely expected that CNOOC would not make any further moves until lawmakers recessed for the summer to avoid any further knee jerk reactions by lawmakers prior to the August 10th shareholder vote.

On a day where stock news was overshadowed by the urge to leave early for the weekend those investors in Whole Foods were rewarded with a weekend treat. WFMI announced earnings that increased +31%, beat the street by +3 cents and raised guidance. This was a pure case of weakened expectations and a high short interest being hit with the glaring light of a contrary reality. WFMI shares jumped +14 to 136.50 as shorts were not just squeezed but battered badly. Analysts had been downgrading WFMI and the stock had been listless in a tight trading range for the last quarter. Investors who kept the faith were well rewarded. After a +14 point jump +10 points over their prior all time high I would think puts would be in order.

With the weekend headlines set to show a bullish July it would appear to retail investors that they are missing the train. They might not be the only ones with commitment issues. There are a group of traders including me that question this non-stop rally ahead of the historical August dip. There is another group holding off on longs in fear of the decade low on the VIX, another historical danger sign. There are other traders, including a large number of institutions, who typically wait for the Sept/Oct dip to enter positions. They are probably watching the new highs with a great deal of worry that they too are missing the train. The bears, fully aware of all those points have been continually shorting each progressive high only to be forced to cover time and time again. One reader email this week questioned the contrary trend and wondered if it could continue. Yes, is the short answer. As long as nearly everybody expects the markets to pause in August there is always the chance we will move higher. The more traders who believe a drop is coming the more traders will be short. With each dip being bought by those thinking the train is leaving the station and buy programs far outnumbering sell programs the shorts will continue to be squeezed. The problem comes when everyone decides we are going higher and the shorts give up the game. Without the shorts to provide the motive power the market sentiment could change. I know it sounds crazy that once everyone turns bullish we could get a market drop but it does happen. It takes both sides to make a market.

The earnings parade is coming to a close but we will continue to get a slowing trickle of earnings headlined by Dell (8/11) and Cisco (8/9). Earnings over the last two weeks has provided lift to the market on the surface. If you look at the market stats header above you may be surprised. Last week the Dow lost -10, SPX -1. The Nasdaq only gained +5, Russell +2 and the broadest index of all the Wilshire 5000 only added +23. BUT the perception by retail traders, the talking heads on TV and the newspaper headlines this weekend will be that the markets are in rally mode. Does the knowledge that the indexes basically finished flat for the week change your perception of the market?

I believe we should continue to be cautious over SPX 1225 until the market provides confirmation in the form of volume and points. Yes, we touched new highs but promptly gave them up along with all the gains for the week. Not much confirmation there. Volume on Friday was the second lowest in the last two weeks. BUT, that was the good news. Weak volume on a down day is a market positive and it was a summer Friday. The damage could have been a lot worse. The internals were also bullish despite the headline numbers on the indexes. The 52-week highs for the last two days have been very strong averaging over 700 per day. This is well over the numbers posted since the July 11th spike at 868. We have seen numbers well under 500 and as low as 217 over the last three weeks. I view this as bullish confirmation of an underlying bid. HOWEVER, it could also have been due to month end buying by institutions and funds.

While I am leaning more bullish as each day passes I am still watching for lightning to strike. Like playing golf on a cloudy day you could be having an awesome round but are constantly watching for signs of lightning to cancel the game. The markets struggled higher during the week with improving internals but we don't know how much of that was artificial due to month end buying. On Monday we begin the back nine, using the golf analogy, and the storm clouds are still gathering on the horizon. Just like a very hot summer day tends to produce monster storms a very hot market next week could do the same. I know the minute I turn completely bullish the market will turn on me in a heartbeat. So I will continue to recommend cautious longs over SPX 1225 and shorts only below that level. The bottom of the Dow range is just under 10600 so a move below that level would be a danger signal. The Nasdaq is much stronger with support at 2165 and 2145 before falling out of its range.

Storm clouds looming next week include the ISM on Monday, Factory Orders on Tuesday and Nonfarm Payrolls on Friday. The ISM is expected to rise based on the improving regional reports we have seen over the last few weeks. This should be market positive unless it is a blowout over the estimate of 55, which would be Fed negative. The Jobs report is expected to show a gain of +175,000 jobs and a stronger than expected gain there would also be Fed negative. There is a growing whisper suggesting the Fed will remove the measured pace language at the August 9th meeting in preparation for a 50 point move in September. All signs point to an accelerating economy and the Fed will want to be ready to step up its pace of rate hikes. This makes the ISM and Jobs reports this week all the more important. Critical inflection points while the market struggles at its highs only add to the danger of a change in market sentiment. With the current Fed Funds rate at 3.25% it is very tolerable to stocks. Should the Fed escalate the rate hike process we could be over 4% very quickly and numbers over 4% typically begins to pressure stocks. There were several economic analysts interviewed on Friday regarding the GDP and two mentioned the potential for a 5.+ number for Q3. If they are thinking the economy is picking up speed that fast then the Fed is also thinking it and planning ahead to slow it down. This makes these two reports and the Fed meeting only a week away a potential roadblock for the markets. Either report could be that lightning bolt that ends the game. As long as you are expecting the worst it is easy to plan for future. Keep those stops tight, enter passively and exit aggressively if lightning does strike.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None FDX
  GOOG
  NKE

New Calls

None today.
 

New Puts

Fedex Corp - FDX - close: 84.09 chg: -1.43 stop: 86.01

Company Description:
FedEx Corp. provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $29 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 250,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. (source: company press release or website)

Why We Like It:
We are somewhat surprised by the transportation sector's recent strength with crude oil prices gushing back toward their highs. We understand that the strength in transports has been partially fueled by the positive economic news. Yet we notice that FDX continues to under perform the broad market indices and under perform its peers in the Dow Transports. FDX has failed to breakout over its simple 50-dma near the $86.00 level twice in the past couple of weeks and its technical indicators are turning sour again. Meanwhile its P&F chart is bearish with a $71 target. We are going to suggest that readers use a trigger under $83.00 to open the play. Our entry point will be $82.85. It is true that FDX does have some support at the $80.00 level but if the major indices turn lower into their seasonally weak period in August-September, then FDX could easily breakdown under the $80 mark. Our target will be the $76-75 region.

Suggested Options:
We are suggesting the October puts although Septembers would probably work well too.

BUY PUT OCT 85.00 FDX-VQ OI=1621 current ask $3.20
BUY PUT OCT 80.00 FDX-VP OI=2956 current ask $1.30
BUY PUT OCT 75.00 FDX-VO OI= 704 current ask $0.50

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume = 2.0 million

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Google - GOOG - close: 287.76 chg: -5.74 stop: 300.01

Company Description:
Google's innovative search technologies connect millions of people around the world with information every day. Founded in 1998 by Stanford Ph.D. students Larry Page and Sergey Brin, Google today is a top web property in all major global markets. Google's targeted advertising program provides businesses of all sizes with measurable results, while enhancing the overall web experience for users. Google is headquartered in Silicon Valley with offices throughout the Americas, Europe, and Asia. (source: company press release or website)

Why We Like It:
Only brave souls need apply. GOOG's rally from $175 to $300 was spectacular and the stock managed to keep climbing as investors got excited about GOOG's Q2 earnings. Now that the earnings news is out we suspect it's time for some profit taking. Granted GOOG has already fallen from $318 to $287 but the decline has produced a new Point & Figure chart sell signal. Currently the DJIA and NASDAQ are looking vulnerable under resistance and they look overbought from their early July gains. Now that the momentum in the broader market has stalled, earnings season is essentially over and we are approaching a seasonally weak period in the markets between August and September (let's not forget to mention record high oil prices) we believe that stocks are poised to consolidate lower. That could prove to be big numbers if GOOG follows through on its P&F sell signal. Granted last time GOOG produced a P&F sell signal there wasn't much follow through and bears got stung pretty bad. That's why we label this as a very aggressive, high-risk play. Currently GOOG has broken down under technical support at its 21-dma and price support in the $288-290 region. However, there is still potential support near its 50-dma (286.00) so we are suggesting a trigger to buy puts at $284.50. Our target will be the $255.00-250.00 range, just above its rising 100-dma. We will use a wide stop at $300.01 since GOOG is so volatile.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 290.00 GGD-UR OI=5989 current ask $12.90
BUY PUT SEP 280.00 GGD-UP OI=5703 current ask $ 8.00
BUY PUT SEP 270.00 GOU-UN OI=6808 current ask $ 4.60
BUY PUT SEP 260.00 GOU-UL OI=5950 current ask $ 3.20

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 13.6 million

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Nike Inc - NKE - close: 83.80 chg: -0.70 stop: 85.51

Company Description:
NIKE, Inc. based in Beaverton, Oregon is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Wholly owned Nike subsidiaries include Converse Inc., which designs, markets and distributes athletic footwear, apparel and accessories; Bauer NIKE Hockey Inc., a leading designer and distributor of hockey equipment; Cole Haan, which designs, markets, and distributes fine dress and casual shoes and accessories; Hurley International LLC, which designs, markets and distributes action sports and youth lifestyle footwear, apparel and accessories and Exeter Brands Group LLC, which designs and markets athletic footwear and apparel for the value retail channel. (source: company press release or website)

Why We Like It:
The summer rally in NKE stalled back in June and now its daily and weekly technical indicators have all begun to deteriorate. The recent weakness pushed NKE under round-number support at the $85.00 level and technical support at its 50-dma and 200-dma. This also produced a new triple-bottom breakdown sell signal on its P&F chart that now points to a $79 target although we suspect this target will grow (lower). We are going to suggest a trigger to buy puts at $83.39. This is under the recent low and under its simple 100-dma. More conservative traders may want to wait for a decline under its exponential 200-dma. The biggest challenge for the bears is probably going to be the $80.00 level, which should act like round-number support.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 85.00 NKE-UQ OI=600 current ask $3.10
BUY PUT SEP 80.00 NKE-UP OI=518 current ask $1.15

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/26/05 (unconfirmed)
Average Daily Volume = 1.5 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Las Vegas Sands - LVS - close: 40.22 chg: +0.62 stop: 38.25*new*

The good news here is that LVS' rebound continued despite the market's weakness on Friday. Furthermore LVS has managed to breakout (again) over the $40.00 mark and its 100-dma and exponential 200-dma. Unfortunately, we are running out of time. We plan to exit on Tuesday afternoon at the close to avoid LVS' earnings report on Wednesday. We are not suggesting new positions. We are raising the stop loss to $38.25.

Suggested Options:
Time has almost run out. We are not suggesting new positions.

Picked on July 21 at $ 40.31
Change since picked: - 0.09
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 934 thousand

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Pediatrix Med Group - PDX - cls: 78.42 chg: -0.16 stop: 76.10*new*

PDX continues to creep higher and the stock is near our $79.50-80.00 target range. Unfortunately, we are running out of time with this play too. Our plan is to exit near the closing bell on Tuesday to avoid PDX's earnings report on Wednesday. More conservative traders may want to exit now. We are not suggesting new positions. We are raising the stop loss to $76.10 or breakeven.

Suggested Options:
We only have a couple of days left in this play. We are not suggesting new positions.

Picked on July 11 at $ 76.10
Change since picked: + 2.32
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 158 thousand
 

Put Updates

AutoZone - AZO - close: 97.44 chg: -1.94 stop: 100.01

Good news! Resistance at the $100 level held and AZO has produced a failed rally that plays along with what looks like a big double-top pattern. We see this as another bearish entry point to buy puts. The market is nearing what is traditionally a seasonal weak period in the August-September time frame. Seasonal trends combined with the market's currently short-term overbought status certainly plays into the bears' hands. We do see potential support near $95.00 but we're going to adjust our target from the 50-dma (now at 93.75) to $93.00-92.50.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 100.00 AZO-UT OI= 633 current ask $4.50
BUY PUT SEP 95.00 AZO-US OI= 553 current ask $2.20
BUY PUT SEP 90.00 AZO-UR OI=2350 current ask $0.95

Picked on July 25 at $ 98.13
Change since picked: - 0.69
Earnings Date 09/20/05 (unconfirmed)
Average Daily Volume = 748 thousand

---

Fannie Mae - FNM - close: 55.86 chg: -1.44 stop: 59.01*new*

And the race is on! FNM appears to have begun its next leg lower. The breakdown last week under the $57.50 level was followed up with an oversold bounce that quickly failed. Friday's decline of 2.5 percent pushed the stock under technical support at its 100-dma. Volume has been above average on the last two days of declines. This looks like another bearish entry point to buy puts. We are targeting the $51.50-50.00 range. We are lowering the stop loss to $59.01. More conservative traders may want to use $58.51.

Suggested Options:
The only options available appear to be January leaps. We're suggesting the January 06's.

BUY PUT JAN06 60.00 WFN-ML OI=12410 current ask $5.70
BUY PUT JAN06 55.00 WFN-MK OI=19958 current ask $3.10
BUY PUT JAN05 50.00 WFN-MJ OI=31766 current ask $1.65

Picked on July 27 at $ 56.49
Change since picked: - 0.63
Earnings Date 00/00/05 (unconfirmed)
Average Daily Volume = 3.3 million

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Infosys Tech. - INFY - cls: 71.18 chg: -0.75 stop: 74.05*new*

We remain bearish on INFY but the stock has certainly struggled with any downward momentum. Overall the scenario does tend to weigh more towards the bears. INFY recently failed at resistance in the $79 region (under round-number resistance at $80.00) and broke down after producing what looks like a double-top pattern. The catalyst for the breakdown was INFY's earnings report. Investors have grown more concerned over the company's ability to keep profit margins from sliding. The move has produced a sell signal on its P&F chart that points to a $59 target. Furthermore the NASDAQ looks very overbought and way over due for some profit taking. The fact that the NASDAQ is right under resistance at the 2200 level is another factor. Yet despite it all we suspect that INFY's lack of downward momentum may be due to strength in the Indian stock market. The main index has been up five days in a row and hitting new all-time highs each day. The Indian markets are also due for some profit taking and it may be soon. This past Friday saw the BSE Sensex Index struggle with the 7700 level all day long before turning lower Friday afternoon. At this time we would not suggest new bearish positions until INFY traded back under the 70.00 mark. We are lowering the stop loss to $74.05, just above technical resistance at the bottom of its recent gap down.

Suggested Options:
We are not suggesting new plays at this time but if an opportunity presents itself we like the September puts.

Picked on July 20 at $ 69.92
Change since picked: + 1.26
Earnings Date 07/12/05 (confirmed)
Average Daily Volume = 922 thousand

---

Lehman Brothers - LEH - cls: 105.13 chg: -1.79 stop: 108.01

After a week we are right back where we started but this time we're probably in better shape. The major indices are starting to show some weakness under resistance. The bulk of earnings season has passed so there could be a drought of good news to keep the markets higher. Looking at the XBD broker-dealer index we see the sector has broken down under its simple 10-dma, which has been technical support for the past couple of months. The XBD is also showing a MACD sell signal. LEH is also showing a recently minted MACD sell signal. This remains a very speculative, high-risk play but Friday's decline is certainly a positive development. Our plan is to buy the August $100 puts and gamble that LEH will trade near the $100 level before the August $100 puts expire. These are currently trading near $0.35 a contract. If we're right then these options could see some serious appreciation. If we're wrong it will be a complete loss. We are willing to buy puts at current levels but more conservative traders who choose to speculate here might want to wait for a drop under $105.00 first.

Suggested Options:
We are speculating with the August $100 puts.

BUY PUT AUG 100.00 LES-TT OI=3081 current ask $0.35

Picked on July 21 at $105.13
Change since picked: + 0.00
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 2.7 million

---

3M Co. - MMM - close: 75.00 change: +0.30 stop: 76.77*new*

Hmm.. Friday's strength in MMM comes as a surprise. The DJIA lost 0.6% and we would have expected MMM to follow suit. Instead shares unexpected gapped higher and managed to maintain most of its gains for the session. We remain bearish but traders may want to wait for another decline under $74.40 before initiating positions. We are lowering our stop loss to $76.77 just over the July 15th high. Our target is the $70-68 range compared to the P&F chart, which points to a $63 target.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 75.00 MMM-UO OI=870 current ask $1.95
BUY PUT SEP 70.00 MMM-UN OI=554 current ask $0.45

Picked on July 19 at $ 74.29
Change since picked: + 0.71
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

---

Panera Bread - PNRA - close: 58.25 chg: -0.05 stop: 60.01

PNRA is a new bearish candidate from the Thursday night newsletter. We see no changes from our previous update so we're reprinting below. Our trigger to buy puts is $57.49. The play description begins here:

Wednesday PNRA pre-announced its revenues for the second quarter and told Wall Street they expected earnings in the 32-33 cent range. Analysts were already looking for 33 cents a share so investors naturally sold the stock on this news. PNRA broke down under support near $60.00 and technical support at its 100-dma (where PNRA had bounced twice in April and May). We honestly expected an oversold bounce back toward the $60 level today but that failed to materialize. The lack of participation in today's market rally could spell bad news for bulls. Now that PNRA has let the earnings cat out of the bag the technical breakdown looks like a new entry point to buy puts. We are going to suggest buying puts with a trigger at $57.49. Our target will be the $52.50-51.00 range or the simple 200-dma (currently near $51.00), whichever PNRA hits first. Traders with more patience might continue to wait for a bounce back toward the $60.00 level and use a failed rally there as a new entry point. We are still going to exit this play ahead of its August 9th earnings report but more aggressive traders may want to consider holding over the report since PNRA has already pre-released some of its numbers. The odds of a surprise are a lot smaller now.

Suggested Options:
This is a very short-term play so we're only suggesting the August puts.

BUY PUT AUG 60 UPA-TL OI=1774 current ask $2.90
BUY PUT AUG 55 UPA-TK OI=3220 current ask $0.90

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/09/05 (confirmed)
Average Daily Volume = 601 thousand
 

Dropped Calls

None
 

Dropped Puts

Best Buy Co - BBY - close: 76.60 chg: -1.87 stop: 76.61

We are choosing to exit this play early and unopened. It's true that the recent failed rally under the $80.00 level looks like a tempting bearish reversal but the upcoming 3-for-2 stock split will change the amount of momentum (both up and down) in this stock. We're going to take a step back and re-evaluate BBY late next week.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 3.3 million
 


Trader's Corner

Curbing the Markets

On July 1, the NYSE made a little-heeded announcement. As it does each quarter, the exchange updated the levels at which restrictions would be imposed on trading the SPX component stocks. For the rest of the current quarter ending September 30, CNBC would have to pull out its "Curbs In" banner if the Dow Jones Industrials were to move more than 200 points away from the previous day's close. That banner has been absent so long that new traders might never have seen it.

Those "Curbs In" banners used to be more common near the turn of this newest century, but disappeared as markets settled into long periods of range-bound trading. They're still waiting to protect markets from periods of extreme volatility and are updated at the beginning of each quarter. According to some sources, trading curbs were first codified after the crash of 1987, when some market watchers theorized that program trading had intensified the selling.

In NYSE nomenclature, curbs would actually be called collars. Rules 80A and 80B set forth the rules that pertain to collars and circuit breakers, actual halts in trading. Curbs would be imposed if the Dow were move more than 200 points away from the previous day's closing value, but removed if it traded back within 100 points of that previous day's closing value. They could be re-imposed again if the Dow were to move 200 points away from that previous close again. Although movements of the Dow trigger the collars and circuit breakers, restrictions and halts apply to all S&P 500 component stocks.

For this quarter, trading in the S&P 500 components stocks would actually be halted if the Dow were to fall more than 1050 points from the previous day's close. The exchange calculates this amount by determining 10 percent of the average closing values of the Dow for the month before the beginning of the quarter. Trading would be halted for an hour if the circuit breaker had been imposed before 2:00, but only 30 minutes if it had been imposed at 2:00 or later, but before 2:30. After 2:30, trading would not be halted unless the Dow had fallen more than 2100 points from the previous close by that time. A decline of 2100 points would trigger a Level 2 halt, and perhaps many a heart attack, too, with Level 2 representing 20 percent of the Dow's average closing value for the previous month. Depending on the time of day such a drop occurred, the halt might last as much as two hours. That happens if the Level 2 halt occurs before 1:00. At 1:00 or later, but before 2:00, a one-hour halt occurs. At 2:00 or later, trading would not resume for the rest of the day. Level 3 halts occur, too, on a 30 percent drop below the Dow's average closing price for the prior month. For this quarter, those would happen if the Dow were to drop more than 3150 points from its previous close, shutting down trading for the rest of the day.

Notice that while the exchange imposes trading curbs or collars when the Dow moves either up or down by a certain amount, it halts trading only when the Dow drops by a certain amount. The exchange would not stop trading if the Dow were to gain 3000 points above the previous day's close, not unless the stampeding bulls were to wreck the place, that is. Those curbs or collars would be in place, but the trading not halted. It's also important to remember that these rules don't address the halting of a specific stock due to news or some event requiring that action.

Those Rules 80A and B define the type of trading activity that will be restricted as well as the levels at which those restrictions will apply. Trades initiated because of differences between a basket of stocks and derivatives of those stocks--including cash-settled options, futures or options on futures--would be considered index arbitrage trades and would be restricted if the exchange had imposed collars. The basket of stocks and the derivatives named don't have to be traded at the same time to be included in this definition of index arbitrage trades. Program trades would include this type of strategy or any tactic that would trade a group of 15 or more S&P 500 stocks with a total market value of $1 million or more. Such basket trades don't require the purchase of derivatives to be considered program trades.

So what happens to index arbitrage or program trades after those curbs are imposed? Index arbitrage or program sales of S&P 500 component stocks must be marked "sell plus" after a 200-point drop triggers a collar, and must be marked "buy minus" when a 200-point gain triggers a collar. According to one source, a sell-plus order is one in which the price is equal to the previous transaction price, but more than the most recent different transaction price. Investopedia describes the term more simply, saying that the sell order would be placed at a price above the current market price. A buy-minus order would be one when the price to buy is the same as the previous transaction price, but less than the most recent different transaction price. Also said more simply, the order would include instructions to buy at a lower price than the current market price.

These curbs are meant to slow the plunge or the melt-up, as the case might be. This last month, some SOX or Russell 2000 bears must have wished that such collars and circuit breakers had been in place on those indices. Unfortunately, it just ain't so and those bears will just have to wait for natural market forces to apply some curbs.
 

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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