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Daily Newsletter, Saturday, 08/20/2005

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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

Expiration Whimper

August options expired with only a whimper on Friday as the markets erased an early morning gain when oil worries returned. It was a very low volume day with advancers and decliners evenly matched. Rather than a defining market event it was simply a late summer Friday with few traders around for the closing bell. From the market action I doubt few even returned from lunch.

Dow Chart - Daily

Nasdaq Chart - 30 min

SPX Chart - Weekly

There was only a couple economic reports and nothing material for traders to worry about. Internet Sales rose to $21.5 billion in Q2 from $19.8 billion in the same quarter in 2004. Yawn. The ECRI Weekly Leading Index came in unchanged from last week at 135.6. Snoring now, Zzzzzzz. With no economic reports traders were left to focus on stock news and news from around the world.

The morning news was dominated by the surge in oil prices due to multiple events. The state oil company in Ecuador, Petroecuador, ceased production of oil after protestors took control of some installations in a long running dispute with the government. Ecuador's state run oil company exports 210,000 bbls per day but that is less than half the total exports from that company. The majority of Ecuadorian oil is exported to America. The protestors are demanding foreign oil companies operating in the region provide financing for infrastructure and more jobs for local workers. Protestors blocked roads and sabotaged equipment in the invaded oil camps. Petroecuador declared force majeure on its oil exports invoking a clause in their export contracts allowing them to stop exports due to events out of their control. Other independent oil companies in the area including Encana, Occidental and Petrobras also restricted output from locations affected by protestors.

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Ecuador was not the only problem area for oil. Shell has 14,000 bbls per day of lost production in Nigeria as political unrest returned to local communities. Nigeria has been a trouble spot for months despite efforts to resolve the problems. Also on Friday three Katyusha rockets were fired at U.S. warships in a Jordanian port and an Israeli port. One Jordanian soldier was killed. Two rockets were fired in the Jordanian port of Aqaba.

Venezuela also reported a refinery fire on Thursday that knocked out a significant portion of its 440,000 bbl a day production. The refinery is only producing 150,000 bbls as of Friday and it could be sometime before full production is restored.

Also impacting the price of oil was a weather warning that the coming winter could be colder than normal based on changing weather cycles. Over the last 30 years any storm season that had more than 18 tropical storms was followed by a drop of -3 to -5 degrees in the average temperature in the North East. For this season we have already seen nine storms with predictions of up to 20 more, 9-11 of which could be hurricanes. The weather patterns that produce these storms are the same weather patterns that produce cold North Eastern winters. It is a factor of water temperatures and currents that upsets the normal pattern.
December heating oil spiked back to $1.93 and there were reports of retail prices surging over $2.55 a gallon. That is coincidentally the same price as the national average for unleaded gas.

September Light Sweet Crude Chart - Daily

All of these problems sent crude oil sharply higher to close at $65.30 and a gain of +2.08 for the day. Oil had fallen from its high just over $67 last Friday to a overnight low of $62.25 on Thursday. The +3 bounce revitalized energy stocks and brought them back from the brink of disaster. Traders had been taking profits by the truckload over the last week ahead of the expiration on the September crude contract. Hedge funds with monster positions were dumping oil after hitting the record $67 level last week. We expected a monster move this week with expiration ahead. Of the last 12 monthly expirations there were $5-$7 moves in crude the week before expiration. 10 were up, 2 were down. Given the end of the peak driving season only two weeks away it appears hedge funds decided the run was over and bailed out. While the end of summer will slow demand for gasoline it will increase demand on heating oil, diesel and jet fuel.

With jet fuel in short supply you can bet the majority of airlines are hoping for a Northwest Airlines strike for more reasons than normal. Northwest could strike as early as midnight on Friday. Los Angeles International came very close to running out of jet fuel earlier this week. The problem is serious enough that many airlines are already cutting back on flights to save on expenses. Northwest announced a -17% drop in flights just last week in news unrelated to their impending strike. Northwest has seen a +$500 million increase in fuel costs so far in 2005. Air traffic in July reached four-year post 9/11 highs despite the increase in fuel costs. That traffic would have increased again this fall as business travelers returned from their holiday schedules. This would put additional strain on refiners and make any disruptions in global oil supply even more critical. The fourth quarter is typically the highest oil demand for the year and there is very little cushion in global supply. The EIA said just last week that there was only 200,000 bbls of excess global capacity of light crude. Since global conditions have not changed it is obvious the sell off this week was simply cyclical profit taking.

While the oil news was the focus of the morning trading the afternoon was spent discussing the Merck Vioxx trial verdict. Merck was found to be liable for the death of a triathlete in Texas and the jury awarded the widow over $229 million. There are between 4000 and 7000 cases pending and the ramifications for Merck are very serious. Merck will have to increase its reserves for these pending cases based on the size of the award. It also faces a surge in new cases based on the loss. Merck will appeal and the award will be cut substantially under Texas law but the stage is set for a disaster. Some reports now claim that over 100,000 people have suffered heart attacks while taking Vioxx. That makes the high estimate of 7000 current cases only the first wave with the potential for tens of thousands more. Evidence presented in the trial showed Merck knew of the dangers early in the cycle and suppressed the news because of the high profitability of the drug. This may be a gotcha where the vast magnitude of the cases will sink the Merck ship. In the 1970s A.H. Robbins began marketing a contraceptive device for women called the Dalkon Shield. A.H. Robbins disregarded cautionary medical advice concerning a flaw in the device and thousands of women suffered serious injuries. Eleven years later AHR filed bankruptcy under the weight of 300,000 injured claimants. A trust was created for the claimants and over $3 billion was paid out in the biggest damage recovery ever. The potential for damages for Merck is well over that level. Few died from the Dalkon Shield and I have seen estimates that more than 20,000 deaths could have been attributed to Vioxx. I seriously doubt that is the case but anyone dying of a heart attack or stroke while taking Vioxx will have their families jumping on the Vioxx train in hopes of recovering some money. Whatever the eventual outcome of the Texas trial the damage to Merck has been done and it can only get worse. MRK stock lost -10% after the verdict was read. Analysts will probably dump on Merck on Monday with gloomy outlooks and prices are likely to continue further down. Merck's 5% dividend has been considered sacred but that is now in danger. Even if it were not it would take a long time at 5% to recover the losses expected in MRK stock over the next five years.

Other than oil and Merck it was a boring summer Friday that wandered aimlessly on very low volume. Barely 3B shares were traded across all markets and volume was evenly split between advancers and decliners. There were no signs of option expiration gyrations as those traders still trying to make a buck marked time until the close. What little gains the Dow had managed to retain by late afternoon were erased with the drop in Merck when the news broke. All the major indexes with the exception of the NYSE Composite closed within a handful of points from the flat line. The NYA was buoyed by gains in the energy stocks. The Dow was showing the most resilience with the Nasdaq on the verge of another support break at 2135, or 1575 on the NDX.

After the close Semi.org released the semiconductor book-to-bill numbers for July. The headline read "Book-to-Bill rises to .93 in July from .90 in June." You know how I hate headline numbers. If you research this further you would find that the June number was revised down to .90 from .93 in this release. For me that makes Friday's .93 headline number a flat report because we used the previously reported .93 number as gospel all month. Using this revision theory semi.org could always report a higher number by revising the prior number down in the boilerplate of the report. Even worse the BTB number rose ONLY because the billing numbers have fallen for five consecutive months and nine of the last ten months. Billings in July fell to $1.097B from $1.152B in June and its spike high of $1.330B back in February. Over the same period bookings have remained relatively flat at $1.0B. To put this into English the BTB was 0.77 in February when billings were $1.3B and bookings were $1.024B. In July the BTB "rose" to .93 with billings dropping to $1.097B and bookings still flat at $1.020B. Orders remained flat but the ratio rose because shipments are dropping so fast. Despite how they want to spin this number the bottom line is clear. The chip business is NOT seeing any rebound and sales are about -33% below their highs in 2004. I am sure numbers will improve somewhat as seasonal orders for holiday products hit the tape but there is definitely no rebound in chips. On the flipside bookings are not declining either. The chip sector is patiently treading water until the next order cycle appears. There are no must have products on the horizon and with energy prices likely to depress corporate profits the next build cycle could be moving farther into the future.

So far the SOX has been holding over support at 460 but there is a clearer pattern of lower highs. The lack of any meaningful move off that 460 support level has produced an even more negative pattern on the Nasdaq. We clearly have a downtrend in progress on the Nasdaq and it barely budged off of support at 2135 for the last two days. There is growing weakness in several high profile Nasdaq sectors and the dip buyers have not been able to overcome the increasingly heavy overhead supply.

SSOX Chart - 90 min

SPX Bar Chart - Weekly

Nasdaq Chart - 90 min

The SPX chart has moved into negative territory where 1225 is now resistance instead of support. Twice this week 1225 has been a solid top and even the rebound in the energy sector on Friday failed to break that resistance. For the last six weeks my recommendation has been to be cautiously long over 1225 and short below that level. We are in that lackluster period in the economy and on the calendar where negatives seem to be out weighing the positives and the market is looking increasingly heavy. This is one of the worst periods on the calendar for the bulls with rising volatility and almost daily spikes producing false hope. We have passed the time in August where a rebound from the initial August dip normally occurs and I think bulls should give up on that hope. I continue to think we will see new lows ahead and we are in for a decline into the October period. Even the -7% drop in oil, -10% in some oil stocks, was not enough good news to lift the market out of its doldrums. The monster jump in the Philly Fed Survey from July's 9.6 to 17.5 in August was also not enough to reverse the growing negative sentiment.

Oil prices, actually gasoline prices, are beginning to have a negative drag on the economy. Retailer after retailer has warned over the last two weeks that sales were slowing. This has produced a change in sentiment at exactly the wrong time of the year, the weakest period on the market calendar. I am actually glad to see it happening in hopes that normal market cycles return. I believe that gasoline prices will moderate over the next couple months as demand moves into jet fuel, diesel and heating oil. Those are still critical areas but rising prices there are less a drag on the consumer than gasoline prices. By the end of September the consumer should have digested the gasoline spike and hopefully prices will have subsided to something more manageable. If there are no damaging hurricanes then Q4 oil prices should find an early top and any dip into October will be a buying opportunity for stocks. From my viewpoint we are setting up for a textbook Q4 rally out of a September decline. Because of the remaining bullish undertones I am only looking for a slight decline into the end of Q3. I see Dow support at 10250, Nasdaq 2050, SPX 1185, Russell 625 and 11800 on the Wilshire 5000. Obviously those are just calculated guesses and markets tend to take on a life of their own once sentiment changes. Once they start reacting to bad news each additional news item tends to accelerate the drop. Trends are normally overdone in each direction and there is nothing to make this year any different. The key is our market posture. This week we do not care where the bottom might be only that we are short under SPX 1225. Let the markets tell us when a bottom has been found. Expect short rallies, some likely violent as shorts eventually get caught flat-footed and have to race to cover. Use any abnormal rebounds as new entry points for shorts/puts until the trend changes back to the upside. Continue buying dips in oil and keep your stops tight as we near the end of the driving season. Expect to trade oil positions from now until March instead of just buying and holding for the long term. For investors the next 45 days are a recurring nightmare of false starts. For traders it is a paradise of short-term profits. Just remember to enter passively and exit aggressively and definitely don't get married to your positions.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
KMG None
SIE  

New Calls

Kerr Mcgee - KMG - close: 85.99 chg: +2.74 stop: 81.99

Company Description:
Kerr-McGee is an Oklahoma City-based energy and inorganic chemical company with worldwide operations and assets of more than $15 billion. (source: company press release or website)

Why We Like It:
We're going to take another swing at the oil/energy sector by suggesting KMG as a bullish candidate. On August 8th the stock broke out to new all-time highs but the sell-off Wednesday-Thursday of this past week pulled KMG back toward previous resistance, now support in the $82 region. Friday's surge in oil sparked another rebound. It is true that KMG is giving off mixed technical signals but considering the "news" affecting the oil supply these days (just read this weekend's wrap to hear about S. America and Nigeria) we believe crude might surge to $70 short-term before seeing more profit taking. KMG's P&F chart is bullish and currently points to a $112 target. We're going to suggest bullish positions with KMG above the $84 level and target the $89.50-90.00 range.

Suggested Options:
We are suggesting the October calls although Septembers might work well too.

BUY CALL OCT 80.00 KMG-JP OI=1889 current ask $7.90
BUY CALL OCT 85.00 KMG-JQ OI=1633 current ask $4.50
BUY CALL OCT 90.00 KMG-JR OI=2445 current ask $2.20

Picked on August 21 at $ 85.99
Change since picked: + 0.00
Earnings Date 07/27/05 (confirmed)
Average Daily Volume = 2.4 million

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Sierra Health Svs. - SIE - cls: 69.01 chg: +0.75 stop: 66.95

Company Description:
Sierra Health Services Inc., based in Las Vegas, is a diversified healthcare services company that operates health maintenance organizations, indemnity insurers, preferred provider organizations and multispecialty medical groups. Sierra's subsidiaries serve more than 580,000 people through health benefit plans for employers, government programs and individuals. (source: company press release or website)

Why We Like It:
This must be a sure sign of a market top if we're adding two new bullish plays to the list! However, we like SIE as a bullish candidate. Despite an initial sell-off following its earnings news back in July the stock has bounced back and maintained its bullish trend higher. Now SIE looks poised to breakout over resistance at its 50-dma and the $70.00 level and make a charge toward its July highs. We're suggesting a trigger at $70.11 to open the play. Our target is the $75.00-75.25 range.

Suggested Options:
We are suggesting the September calls (only other ones available are December and March).

BUY CALL SEP 65.00 SIE-IM OI=182 current ask $5.10
BUY CALL SEP 70.00 SIE-IN OI=195 current ask $1.85
BUY CALL SEP 75.00 SIE-IO OI=167 current ask $0.50

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/05 (confirmed)
Average Daily Volume = 426 thousand
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

None

Put Updates

Best Buy Co - BBY - close: 47.65 chg: -1.05 stop: 51.01*new*

It has been a rough weak for retailers with several of them issuing earnings warnings for the third quarter. Some are blaming the rising cost of fuel for impacting their consumers' pocketbooks (i.e. Wal-Mart). Shares of BBY have continued to sink as traders take profits from its impressive May through July rally. Friday's 2.15% decline is encouraging because it's a new relative low and it breaks technical support at the simple 50-dma. We're not suggesting new positions currently but if BBY bounces then traders can watch for a failed rally under $49.00 as a new entry point. Our target is the $45.50-45.00 range. We plan to exit before BBY's September earnings report. We are lowering the stop loss to $51.01.

Suggested Options:
We're not suggesting new plays at the moment but we like the September puts since we plan to exit before the September earnings.

Picked on August 08 at $ 49.31
Change since picked: - 1.66
Earnings Date 09/13/05 (unconfirmed)
Average Daily Volume = 5.0 million

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Building Materials - BMHC - cls: 72.61 chg: +0.52 stop: 75.01

BMHC is another recent high-flyer that has broken its bullish up trend and looks poised for more profit taking. The stock had been following the homebuilders since BMHC is a supplier for the industry. Concerns over rising interest rates and a slow down in the housing market sound like a good excuse for investors to take some money off the table. We like BMHC because shares have broken their trendline of support and technical support at the 50-dma. More recently BMHC has been churning sideways between $68.40 and $74.50. We would only suggest new positions under the $70.00 level but more aggressive traders may want to consider buying puts here with BMHC near resistance. Our target is the simple 100-dma currently at 64.50.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 75.00 BGU-UO OI= 291 current ask $5.50
BUY PUT SEP 70.00 BGU-UN OI= 340 current ask $3.00
BUY PUT SEP 65.00 BGU-UM OI= 348 current ask $1.45

Picked on August 16 at $ 71.33
Change since picked: + 1.28
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 289 thousand

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Carnival Corp - CCL - close: 50.93 chg: +0.00 stop: 52.51

Shares of CCL were a perfect example of the listless trading on Friday. The stock closed unchanged on the session. The eight-week trend for CCL remains bearish and its P&F chart points to a $39 target but short-term CCL is seeing a bounce. Bulls stepped in to buy the dip toward its trendline of support on its weekly chart (see chart below). We are expecting this bounce to fail near the $52.00 level where its 21-dma, 100-dma and exponential 200-dma all converge as overhead resistance. At this time we would not suggest new bearish positions. Let's wait and see if CCL's bounce will continue into next week. Currently our target is the $47.75-47.00 range. Remember, we plan to exit before CCL's mid September earnings report.

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

Picked on August 10 at $ 51.79
Change since picked: - 0.46
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume = 2.5 million

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Federated Dept. Stores - FD - cls: 72.35 chg: -1.85 stop: 75.75

Most of you already know that retailers have not been the strongest bunch this past week. Multiple retailers have issued cautious statements about their third quarter and the group looks set to slide from their late summer highs. FD has not yet issued any bearish guidance yet but the stock's upward momentum has clearly evaporated and shares look poised to turn south. There is a new short-term trend of lower highs. Daily oscillators are bearish and its weekly MACD has produced a new sell signal. A move under $72 for FD should reverse its P&F chart into a new sell signal. It doesn't help the bulls that S&P plans to downgrade FD's credit rating after the company completes its acquisition of MAY. Our suggested entry point to buy puts is at $71.99. If we are triggered our target is the $67-65 range but we do admit that FD is likely to bounce at least once from the $70 level, which is bolstered by the 100-dma. More patient traders may want to consider waiting for that bounce to fail first and then open positions.

Suggested Options:
We are going to suggest the September puts for now but the November puts would also work well.

BUY PUT SEP 75.00 FD-UO OI= 826 current ask $3.70
BUY PUT SEP 70.00 FD-UN OI=1691 current ask $1.25

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/10/05 (confirmed)
Average Daily Volume = 2.2 million

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Fedex Corp - FDX - close: 84.77 chg: +0.08 stop: 86.01

We patiently remain on the sidelines with FDX. The overall six-month trend is a bearish one and rising crude oil and fuel prices have to be hurting the stock despite the health economy both here and in China. The daily chart's MACD has been issuing a sell signal for the past few days and its P&F chart is bearish and points to a $71 target. However, we want to see confirmation that FDX's next leg is indeed down and that's why we're suggesting a trigger to buy puts at $82.99. If triggered we do expect an initial bounce at the $80 mark but our target is the $76-75 range.

Technical traders take note! The trading in FDX has narrowed significantly and shares have been stuck in a trading range between $83 and $86 for the past four weeks. Volatility has evaporated. FDX might be a good candidate for an $85.00 straddle play (buy a call and a put at the same strike). The September $85 call is trading at $1.65 and the September $85 put is trading at $1.80. Such a strategy means you're betting that FDX will move far enough to cover the cost of buying both options and still produce a profit for you. October would work too but the cost is higher. Another alternative might be buying an October $80 put for about $1.00 and an October $90 call for about $1.00. We definitely expect a breakout in FDX (up or down) sooner rather than later. If we were using either of these strategies we would definitely hold over earnings, which can create the sort of volatility we need to make it profitable.

With regards to our current directional play. We do not plan on holding over FDX's late September earnings report so traders should keep that in mind.

Suggested Options:
If triggered in FDX we are suggesting the October puts.

BUY PUT OCT 85.00 FDX-VQ OI=2223 current ask $2.75
BUY PUT OCT 80.00 FDX-VP OI=3328 current ask $1.00

Picked on August 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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F5 Networks - FFIV - close: 37.84 chg: +0.05 stop: 40.01

The oversold bounce in shares of FFIV appears to have stalled a bit. There hasn't been much movement over the last couple of sessions. At this point FFIV's trend is still bearish. The P&F chart points to a $20.00 target. However, short-term the stock is stuck in the middle between overhead resistance at $40.00 and round-number support near our target at $35.00. We are not suggesting new plays as the latest candlestick on the weekly chart looks like a "hammer" pattern and could be signaling a bullish reversal. We are adjusting our target from $35.00-34.00 to $35.35-35.00. More conservative traders may want to think about taking some profits on any decline under $36.00.

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

Picked on August 03 at $ 38.76
Change since picked: - 0.92
Earnings Date 07/20/05 (confirmed)
Average Daily Volume = 1.4 million

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Google - GOOG - close: 280.00 chg: +0.01 stop: 293.01*new*

Wow! Friday's session is arguably one of the least volatile days that shares of GOOG have ever seen. For the second half of the day GOOG traded in a tight 65-cent range. With the closing price right at $280.00 this smacks of August options expiration. We remain bearish on the stock but would expect a bounce back toward $284-285 to fill the gap down from Thursday before GOOG continues lower. It would make a nice failed rally under the simple 10-dma, which traders could use as a new bearish entry point. The biggest risk here for bears is an announcement that the S&P 500 is adding GOOG to the index. Having just past its one-year anniversary as a publicly traded company on August 19th the announcement could come at anytime. Meanwhile market pundits also suggest that GOOG could and will be added to the NASDAQ-100 index but that probably won't occur until the NDX rebalancing in December. This remains a very aggressive, high-risk play that should only be played with risk capital. Our target is the 100-dma now at $260. We're going to adjust the target to $262-260 for now but keep in mind this will be a moving target. We are going to try and lower our risk a bit by adjusting the stop loss to $293.01, which is above the simple 50-dma.

Suggested Options:
We are suggesting the September options.

BUY PUT SEP 290.00 GGD-UR OI= 5527 current ask $14.20
BUY PUT SEP 280.00 GGD-UP OI= 8047 current ask $ 7.90
BUY PUT SEP 270.00 GOU-UN OI=15270 current ask $ 3.90

Picked on August 11 at $284.50
Change since picked: - 4.50
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 13.6 million

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Ingersoll Rand - IR - close: 79.06 chg: +0.64 stop: 80.61

IR is a new bearish candidate from the Thursday night newsletter. We see no changes from our strategy so we're reprinting the initial play description:

It looks like the six-week bounce in shares of IR have finally run out of steam. Short-term oscillators like the RSI and stochastics are bearish plus the MACD has produced a new sell signal from overbought levels. We also see similar bearish hooks in the weekly oscillators. However, while the technical picture may have turned bearish we want to see a little more confirmation. That's why we're suggesting a trigger at $77.49, under its simple 200-dma. Our short-term target will be the $72.60-72.40 range but we do expect a bounce at the $75 mark. Please note that IR is due to split 2-for-1 on September 2nd. We do not want to hold over the split. Lately stocks have not seen much post-split depression. That only gives us about two weeks for IR to open and move toward our target.

Suggested Options:
We are suggesting the September puts since we do not plan on holding over the early September stock split.

BUY PUT SEP 80.00 IR-UP OI=685 current ask $2.90
BUY PUT SEP 75.00 IR-UO OI=593 current ask $0.75

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.1 million

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KOS Pharma - KOSP - close: 69.52 chg: +0.02 stop: 72.51

KOSP appears to have produced a short-term top with sort of a double-top pattern with the peak in July and then August. The stock has broken its multi-month trendline of support and now shares are poised to breakdown under technical support at its 50-dma. We want to see confirmation that the trend has indeed changed and that's why we're suggesting a trigger to buy puts at $68.25. This would be a new relative low and a decline under $69.00 should produce a new sell signal on KOSP's Point & Figure chart. If we are triggered we're targeting a decline into the $62.00-60.00 range, just above the 100-dma. Keep an eye on the BTK biotech index. A breakdown under the 600 mark for the BTK would be good news for the bears.

Suggested Options:
We are suggesting the September puts although Novembers are also available.

BUY PUT SEP 70.00 KQW-UN OI=461 current ask $3.10
BUY PUT SEP 65.00 KQW-UM OI=454 current ask $1.25

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/04/05 (confirmed)
Average Daily Volume = 642 thousand

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3M Co. - MMM - close: 72.07 change: +0.15 stop: 74.46*new*

Dow-component MMM produced a bit of an oversold bounce on Friday but the rally quickly failed. We see no changes in our strategy and continue to target the $70.00-68.00 range. However, at this point in the game we are not suggesting new plays. More conservative traders may want to consider exiting early in the $71.25-71.00 range (near its 200-week moving average) as MMM has managed to bounce there about three times in the last week. We are lowering our stop loss to $74.46 near its 50-dma.

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

Picked on July 19 at $ 74.29
Change since picked: - 2.22
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million

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Simon Prpty Grp - SPG - close: 75.06 chg: -0.18 stop: 77.26

SPG is a new bearish candidate from the Thursday night newsletter. We see no changes from our original play description so we're reposting it here:

REIT stocks have been big winners for the bulls over spring and summer but now it looks like the group is seeing some profit taking. Investor concerns over rising inflation and bond yields is putting pressure on the REIT industry. While SPG still has a strong 3.9% dividend yield rising interest rates make REITs less attractive. Plus, there was a recent article in Barron's suggesting there could be a speculative bubble in the group. We like SPG because the stock has clearly broken its four-month up trend and the oversold bounce from the initial sell-off has already begun to fail. We're suggesting that traders buy puts here with a target at the $70.75-70.00 range near its 100-dma. More conservative traders might want to wait for SPG to decline under the $75.00 level again, which has been acting as minor support for the last couple of sessions.

Suggested Options:
We are suggesting the October puts.

BUY PUT OCT 80.00 SPG-VP OI= 81 current ask $5.00*
BUY PUT OCT 75.00 SPG-VO OI=367 current ask $2.45*
BUY PUT OCT 70.00 SPG-VN OI=707 current ask $0.95*

*We were unable to confirm these prices as the current ask. Double-check with your broker!

Picked on August 18 at $ 75.24
Change since picked: - 0.18
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 946 thousand

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United Parcel Svc - UPS - cls: 71.48 chg: -0.30 stop: 74.21

UPS is another play on the Transportation sector that is bound to be suffering from the sky-high prices in crude oil and thus fuel, both truck and jet. The bounce from July has failed near $74 and after four-weeks of churning between $72 and $74 shares of UPS are finally turning lower. Daily and weekly technical indicators either have or are close to turning bearish. We used a trigger at $71.99 to open the play and our target is the $68-67 range, near the bottom of its wider trading range. We would open new positions at current levels. You'll notice that there has been a big increase in the October 70 puts over the last week.

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

BUY PUT OCT 75.00 UPS-VO OI= 3104 current ask $4.00
BUY PUT OCT 70.00 UPS-VN OI=10101 current ask $1.40

Picked on August 17 at $ 71.99
Change since picked: - 0.51
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 2.6 million

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Wynn Resorts - WYNN - close: 49.35 chg: -1.58 stop: 54.01

Our bearish play on WYNN has now been opened. We noticed a few days ago that WYNN has broken its three-month trendline of support but was still trading above round-number support near the $50.00 level. We suggested that readers use a trigger at $49.95 to open the play to confirm the next leg down. WYNN did just that on Friday with a 3.1% decline on above average volume. Looking more closely at the intraday chart there appeared to be a surge of selling on Friday afternoon, which bodes well for Monday morning. Our target is the $45.25-45.00 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 55.00 UWY-UK OI=1803 current ask $6.10
BUY PUT SEP 50.00 UWY-UJ OI=3105 current ask $2.35
BUY PUT SEP 45.00 UWY-UI OI=3191 current ask $0.55

Picked on August 19 at $ 49.95
Change since picked: - 0.60
Earnings Date 08/01/05 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Calls

Danaher - DHR - close: 54.41 chg: -0.10 stop: 53.99

We've patiently waited for shares of DHR to pull back and test support at its simple 200-dma but we're not seeing any signs of a bounce. Given the short-term outlook on the DJIA and S&P 500 we're choosing to exit DHR early. More aggressive traders may want to consider holding on as DHR still has some support near $54.00 with its simple 50-dma. We'd rather cut our losses here and move on.

Picked on August 03 at $ 56.67
Change since picked: - 2.26
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.5 million
 

Dropped Puts

Eastman Chemical - EMN - close: 50.27 chg: -0.65 stop: 54.01

Target achieved. The Friday bounce in crude oil could have been the extra push EMN need to sink toward the $50.00 level. As a chemical producer rising oil means higher costs for EMN. Shares have sunk toward what we believe could be short-term round-number, psychological support at the $50.00 level. Our target was the $50.50-50.00 range. Readers can watch for a bounce from here and aggressive players might want to open new bearish plays again if the bounce fails under $54 but keep in mind the P&F chart only points to a $49 target.

Picked on August 05 at $ 53.90
Change since picked: - 3.63
Earnings Date 07/28/05 (confirmed)
Average Daily Volume = 872 thousand

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Lehman Brothers - LEH - cls: 105.11 chg: +0.22 stop: 107.01

We are throwing in the towel on LEH. The stock has refused to consolidate lower and now bears are facing another risk. The big brokers like LEH tend to rally into their earnings report and LEH is due to report again in mid September. Nimble traders may actually want to consider bullish positions if LEH can trade above $107.00.

Picked on July 21 at $105.13
Change since picked: - 0.02
Earnings Date 06/14/05 (confirmed)
Average Daily Volume = 2.7 million

---

Neurocrine Bio. - NBIX - cls: 47.11 chg: +0.92 stop: 48.51

NBIX has tried for a week to breakdown through support at the $45.00 level and now at the rising 50-dma. It would seem that the selling pressure has been alleviated and buyers are tempted to move in again. Technicals are mixed but given NBIX's relative strength on Friday we are choosing to exit early! The rising volume on the two-day rebound doesn't give us much confidence as a bear. This is beginning to look like an entry point for bulls with a target near the July highs.

Picked on August 07 at $ 47.30
Change since picked: - 0.19
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 543 thousand
 


Trader's Corner

Technical Analysis of Breadth and Volatility Measures

Some technicians are just flat-out going to disagree with the premise of this article. I'm proposing that technical analysis tools work with breadth and volatility measures.

Note: Charts were chosen with respect to the points being discussed, and do not represent current prices.

Annotated Fifteen Minute Chart of the Wilshire 5000:


Annotated 15-Minute Chart of the VIX:


Just as the Wilshire 5000 had done, the trending-higher VIX was bouncing from a moving average. Coincidence, you say? Let's look at that same chart using another tool of technical analysis, the regression channel.

Annotated 15-Minute Chart of the VIX:


Why does it seem strange or a stretch, as some claim, that regular technical analysis tools might be applied to breadth or volatility measures? The great McMillan of OPTIONS AS A STRATEGIC INVESTMENT fame mentions that volatility measures of individual stocks tend to settle into a trading range. He has no trouble characterizing a volatility measure in terms of a trading range.

Going a little further out onto that limb, let's look at the advdec line using one of my favorite technical analysis tools, nested Keltner channels.

Annotated 15-Minute Chart of the Advdec Line:


On 8/08 and 8/09, indices produced one of each of the moves that the advdec line's Keltner setup suggested as possibilities.

Annotated 15-Minute Chart of the SPX:


Although my study of the advdec line on nested Keltner charts has just begun, the support and resistance levels set out by nested Keltner channels sometimes have eerily correct resonances with movements in the advdec line. While equity prices do not always move in lockstep with the advdec line, this has proven to be a helpful tool in recent weeks. On August 1 and 2, the advdec line was showing Keltner-style bearish divergence, hinting at weakness to come. That weakness showed up on the morning of August 3. After another attempt to rise, in which the SPX retested its recent high, the advdec line fell back and SPX prices began tumbling, too. The correspondence was not exact, but did prove helpful in gauging potential market action.

Annotated 15-Minute Chart of the Advdec Line:


While these charts can provide only anecdotal evidence, my years of watching breadth and volatility indicators using standard tools of technical analysis provides enough evidence to convince me. I see no difficulty in believing that technical analysis tools might provide useful when studying volatility or breadth indicators so long as I believe that market participants might be reacting to levels considered high or low by actions that might change these measurements. In a simple example, if the advdec line were to drop to a level considered extreme, some contrarians might begin nibbling on equities, thereby changing the advdec line and eventually turning it higher again if the buying was strong enough.

Go wild. Snap a Fib bracket on the advdec line or a Donchian channel on the VIX. See if they help you. I bet they will, but just don't tell your technician friends who insist there's no possible correlation between these indicators and standard technical analysis tools.
 

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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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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