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Daily Newsletter, Saturday, 09/24/2005

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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

All About Rita

If you wanted stock news on Friday you were out of luck. Hurricane Rita dominated all the airtime on any channel you cared to watch including CNBC. All eyes were on the storm track and the category rating as it approached the Gulf oil patch spared by Katrina and 25% of U.S. refining capacity located in Texas. The markets tried to rally when Rita was downgraded but could not hold the gains.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

There were no material economic reports on Friday with Monthly Mass Layoffs the only blip of data. Announced layoffs fell slightly from 1249 in July to 1142 in August. The total number of workers impacted also dropped from 131,326 to 127,466. This was a non-starter as a market mover and just another report to ignore in favor of Rita news. The economic calendar for next week is also sparse until Thursday so hurricane news will continue to dominate the airwaves early in the week.

The television views of countless miles of stranded cars on Texas freeways and fuel trucks making their way from car to car were repeated over and over. After seeing the Katrina devastation for the last three weeks Texas residents were taking the evacuation order seriously. Unfortunately there was not enough gasoline on hand for two million people to drive out of harms way. Their plight, with dozens of out of gas cars clustered around out of gas stations is only a glimpse of what could happen to the rest of the U.S. next week.

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As I write this on Friday night 23% of U.S. refining capacity, 19 refineries capable of processing more than five million bbls of oil per day, were shutdown ahead of Rita's arrival. Rather than suffer potentially costly repairs by having a running refinery knocked out by the hurricane they elected to execute a controlled shutdown and prevent useless damage. Unfortunately for consumers that means from 7-10 days of lost refining production in a market still seeing shortages from the refineries shutdown by Katrina. 5% of U.S. capacity is still offline from Katrina bringing the total refining capacity shut in to 28%. Nearly 1/3 of our ability to produce gasoline, diesel, jet fuel and heating oil is idle. Reporters and armchair analysts were predicting nationwide shortages of gasoline for the coming weeks with estimates of $4 gasoline or higher in some areas.

Not only are the refineries closed but 99.1% of all Gulf oil production has been shut in with 78% of gas production shut. After seeing the impact to oil prices and supplies from Katrina analysts were constantly predicting the potential outcome from the second hurricane. The production from the Gulf amounts to 29% of all U.S. production and it is offline for the second week in a month. The Louisiana Offshore Oil Port where super tankers offload imported oil has been closed since Wednesday and that represents another shortfall of millions of bbls while closed. Refineries still operating in Louisiana were running short of oil to refine after the LOOP was closed. The Colonial Pipeline, which sends refined products to the north and east from the Gulf area was operating at significantly reduced capacity due to the shortage of products to fill the line. The TEPPCO and Dixie pipelines are closed and the Explorer is running on a contingency plan as supplies are available. Petrochemical plants in the area have been shutdown and that means natural gas liquids used in production have nowhere to go. This forces a shutdown of those pipelines, which in turn shuts down upstream natural gas production facilities once storage capacity is reached. If you can't push it down the pipeline you have to stop producing it. The Chevron, Dow, DuPont, Equistar and Total plants all shut down on Wednesday. This effectively backs up production upstream for at least a week.

When Rita turned slightly east and away from a direct hit on the Houston refining complex oil prices fell and the markets rallied. While this is good for the refineries it was bad for the Gulf rigs. Katrina hit about 50% of Gulf rigs/platforms with its attack on the eastern portion of the field. The turn north by Rita put is on a dead center track to plow right through the other 50% that were spared from Katrina. According to one research firm approximately 60 rigs are directly in the current path of Rita. Using the same percentages for damage as we saw from Katrina they estimate up to 20 rigs could be severely to moderately damaged requiring months to recover. Apache has estimated it will take up to a year before Katrina damage to Gulf rigs and platforms is repaired. Rigs belonging to DO (7 rigs), THE (13), RDC (7) and PDE (6) have the greatest Rita exposure. There are 534 production platforms in Rita's direct path. Companies with the most platforms at risk include APA (23), BP (40), CVX (23), DVN (36), EP (27), FST (37), KMG (13), NFX (38), SKE (16), SGY (15), THX (16). These platforms are manned by just over 3,000 workers who have to be shuttled back out once the storm passes. Overall there are more than 1,200 rigs/platforms in Rita's general path. Because Rita is several hundred miles wide it still had the capability to shut down and damage those eastern platforms just now recovering from the Katrina blast. The double whammy actually had the impact of lowering oil prices due to the refinery closures. Oil is expected to backup in the pipeline once production is restarted with refining capacity the real bottleneck. Thus the potential for higher gasoline prices despite a temporary abundance of oil.

RigLogix.com Rig Map with Hurricane Tracking

The potential for refinery outages in Texas is less due to the wind and more due to lack of electricity. As we have seen in Louisiana the delays in getting some refineries back online was due to a lack of electric power. The electric grid is notoriously prone to damage and outages. So while refinery damage may be minimal on the current storm track it does not mean they will all start coming back online on Sunday.

One product in short supply continues to be natural gas and every outage knocks critical winter reserves to new lows. Gas continues to hover in the $13 range but estimates are for serious shortages ahead with prices quoted as much as $20 before year-end. This is a major factor for the U.S. consumer. Utility bill estimates for this winter were raised again with heating bills expected to rise +47% in the Midwest, +55% in the North East, +60% in the West and +80% in the South East. Add in $3+ gasoline and consumers are really under attack. ARG released a survey on Friday showing that consumer spending has fallen -16% since Labor Day and that is the biggest drop in 26 years.

One commentator suggested real GDP for Q3 could drop as low as +1% given the double disasters. Actually triple disasters since Ophelia caused another billion in damage on the East coast. The Houston area, home to more than five million, is expected to lose a week of normal productivity/consumption even if Rita damage is minimal. Katrina losses are expected to remove months of productivity and the re-flooding this weekend by Rita will delay the recovery even further.

The impact to the energy community is so strong that the Nymex has taken the unprecedented step of announcing special session for trading energy futures that opens at 10:AM on Sunday morning. TV commentators are making a big deal out of Rita missing Houston but they neglect to mention that the Beaumont/Port Arthur area, currently the bulls eye is also known as Petroleumville USA because of the concentration of oil/gas facilities. Nearly two billion bbls of refining capacity calls that area home.

When Rita was downgraded from a category 5 to a 4 on Thursday oil prices fell through the floor as though it had turned into just another rainstorm. On Friday it was downgraded to ONLY a category 3 and prices again collapsed with a -2.31 drop to close just above $64. A Cat-3 storm is still a dangerous storm with 125-135 mph sustained winds and as slow as it is moving there is a lot of time over the target. As of late Friday night there were signs of strengthening just before going ashore. With the potential for substantial damage I believe the sell off in oil was overdone. If you remember the Friday before Katrina oil prices fell substantially to close near the low for the week. Once the storm passed prices rocketed again once the damage reports began to accumulate. I have a hard time believing we will not see a bounce on Monday if the situation repeats. $63.50 has been strong support for over a month and until that support breaks we are still in an uptrend. Oil stocks have not yet given up their gains from Katrina and that makes me more cautious this time around.

Crude Oil Chart - Daily
 

December Natural Gas Futures Chart - Daily

Unleaded Gasoline Futures Chart - Daily

I believe the Rita evacuation will cause yet another blip in the Q3 earnings cycle and cause a further reduction in earnings. We have seen a steady parade of earnings warnings that included the hurricane excuse and I believe that parade will intensify as the quarter comes to a close. Alcoa (AA) gave us another high profile warning on Friday saying it was forced to close plants in Louisiana and Texas due to the storms. They also said metal prices had been lower and expenses higher, primarily in energy and raw materials. They should benefit from the rebuilding effort once it begins and were it not for the potential for continued high energy prices I might be tempted to buy its two-year low at $24 it hit on the warning. It might be a good play for those who like watching grass grow but I believe it is dead money for the foreseeable future.

Oracle announced earnings Thursday night and was dropped for a -8% loss on Friday due to weak guidance. A casual observer might wonder if the sudden acquisition binge was a result of a slowing business model. Oracle acquired PeopleSoft and is now working on Seibel Systems as it rolls up all the other competitors in its sector. Seems if you can't grow you buy everyone who can. This camouflages your inability to grow and provides an excuse for earnings weakness as you digest the acquisitions. Many companies have prospered using this strategy. Oracles database license growth was only +2% year over year compared to +19% growth in the same period in 2004.

After the bell on Friday Microsoft announced a joint press conference on Monday with PALM and Verizon. They will announce a new Windows based version of the Treo smart phone to compete with the RIMM Blackberry. RIMM fell nearly -$2 after the announcement. Palm shed its software division in order to open the way for just such a solution that would enable them to better to compete with Microsoft as a partner.

The deteriorating storm gave the markets a slight boost but not before the Dow tested support at 10350. The bounce was lackluster and resistance at 10450 held for a loss for the week of -222. If we don't see major damage from Rita we could see another rebound attempt but I believe it is simply another opportunity to get short. Dow 10500 should provide a hurdle that will be difficult to scale. Likewise 10350 should continue to provide support for all but a concentrated selling effort. I am still holding to my 10250 target for next week.

The Nasdaq escaped with only a -43 point drop for the week and a nice bounce off the 100-day average at 2108 and support at 2100. Support at 2120 turned into resistance just before the close. The Nasdaq still has risk to 2050 before September is out.

The wild card here is the SPX given the support of the oil stocks. If there is enough damage to produce an oil rebound off $64 then the oil stocks should hold up the S&P to some extent. We saw the SPX rebound from a sharp dip to 1205 as dip buyers jumped in on falling oil on Thursday. That bounce continued on Friday as oil continued its drop. Unfortunately a -$4 drop in oil was only able to produce a +10 point bounce in the SPX. Oil stocks were producing the drag as oil prices fell. The combination of an expired Rita and a potential oil stock bounce could retest SPX 1225 again but I believe it is simply another opportunity to get short for the final bout of month end volatility. The SPX has risk to 1190 before the month is out. Remember, the wild card is oil and hurricane damage. Trying to predict any movement in this market is hypothetical at best but I am sticking with the normal historical trend for the monthly lows to occur in the last week of September.

If you remember last Friday's rally to SPX 1237 I told you that I thought it was all related to the S&P reweighting and suggested you short any weakness on Monday morning. If you took my advice you were rewarded with a -30 point drop. Don't believe what you hear on stock TV or it will be costly to your financial health. With bulls praising the rally all day on the 16th many investors likely bought the top. If you followed my advice you sold it.

The economic calendar will start to heat up as we move into month end with Durable Goods and Kansas City Fed Survey on Wednesday followed by GDP on Thursday. Friday has Personal Income, NAPM-NY, Consumer Sentiment and Chicago PMI. That will close out the month and sets up Construction Spending and ISM on Monday. This ISM is going to be critical although it is still a little early to see the complete impact of Katrina. However, we have seen significant drops in the regional reports and we could easily see the national ISM fall below 50 from last months 53.6. A move below 50 could be the straw that breaks the markets back. The following Friday has the Jobs Report for September and the consensus is for a loss of -120,000 jobs but I believe that is conservative. Obviously this is a one time Katrina related event and will be discounted to some extent by the market but I suspect there will be some higher volatility than normal associated with the announcement. Earnings warnings will likely increase and higher gasoline prices from Rita's impact will be detrimental to consumer spending as the quarter closes. Remember also that we still have a little more than a month in prime hurricane season and while tropical depression Philippe is not expected to head for the Gulf there is likely to be another storm forming right behind it. I wrote this commentary on Friday night so by Sunday many events will have changed significantly after the storm passed but my outlook will still be the same. As always, remember to enter passively and exit aggressively and definitely don't get married to your positions or your bias.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
APOL None
BRCM  
CAH  

New Calls

Apollo Group - APOL - close: 66.09 chg: +0.69 stop: 64.65

Company Description:
Apollo Group, Inc. has been providing higher education programs to working adults for over 25 years. Apollo Group, Inc., operates through its subsidiaries: The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Western International University, Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 90 campuses and 150 learning centers in 39 states, Puerto Rico, Calgary, and Vancouver. (source: company press release or website)

Why We Like It:
We are actually bearish on shares of APOL but the stock is very short-term oversold and due for a bounce. The company issued an earnings warning on September 19th that sparked s very sharp, high volume sell-off. The selling pressure has stalled as APOL tries to find support near the $65.00 level. This is purely a speculative play. Given the odds that the market might produce a hurricane relief rally on Monday we think APOL might join in and push higher. We expect to be in and out in less than two weeks and probably a lot quicker. We will not hold over the October 4th earnings report. We'll use a stop loss under Friday's low. Our target is the $69.00-70.00 range.

Suggested Options:
This should be a quick play so we're suggesting the October calls.

BUY CALL OCT 65.00 OAQ-JM OI=259 current ask $2.65

Picked on September 25 at $ 66.09
Change since picked: + 0.00
Earnings Date 10/04/05 (confirmed)
Average Daily Volume = 1.8 million

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Broadcom - BRCM - close: 45.05 chg: +0.84 stop: 42.85

Company Description:
Broadcom Corporation is a global leader in wired and wireless broadband communications semiconductors. Our products enable the convergence of high-speed data, high definition video, voice and audio at home, in the office and on the go. Broadcom provides manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices with the industry's broadest portfolio of state-of-the-art system-on-a-chip and software solutions. These solutions support our core mission: Connecting everything. Broadcom is one of the world's largest fabless semiconductor companies, with annual revenue of more than $2 billion. The company is headquartered in Irvine, Calif., with offices and research facilities in North America, Asia and Europe. (source: company press release or website)

Why We Like It:
BRCM has turned into a momentum play. The stock is ignoring weakness in the NASDAQ and the SOX semiconductor index. Instead shares just keep climbing with rising support near its 40 and 50-dma's (see chart and trendline). Bulls were quick to buy the dip on Thursday at its simple 50-dma and the follow through bounce on Friday suggests this is a new bullish entry point. It is true that our bias is somewhat bearish for the markets over the next couple of weeks but early next week could be bullish as investors heave a sigh of relief that hurricane Rita wasn't worse (besides BRCM has pretty much ignored the markets anyway). We'll put a stop loss at Thursday's low and target a move into the $49.00-50.00 range. We will not hold over the late October earnings report. FYI: if you check the weekly chart you will see that BRCM does have resistance at the $47 level. That is the next hurdle.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 40.00 RCQ-KH OI=10317 current ask $6.20
BUY CALL NOV 42.50 RCQ-KS OI= 6655 current ask $4.30
BUY CALL NOV 45.00 RCQ-KI OI= 8126 current ask $2.70
BUY CALL NOV 47.50 RCQ-KR OI= 2169 current ask $1.60

Picked on September 25 at $ 45.05
Change since picked: + 0.00
Earnings Date 10/21/05 (unconfirmed)
Average Daily Volume = 7.0 million

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Cardinal Health - CAH - close: 61.95 chg: +0.63 stop: 59.85

Company Description:
Headquartered in Dublin, Ohio, Cardinal Health, Inc. is a $75 billion, global company serving the health-care industry with a broad portfolio of products and services. It manufactures and distributes pharmaceuticals and medical supplies, offers a range of clinical services and develops automation products that improve the management and delivery of supplies and medication for hospitals, physician offices and pharmacies. Through this diverse offering, Cardinal Health delivers integrated health-care solutions that help customers reduce their costs, improve efficiency and deliver better care to patients. Ranked No. 16 on the Fortune 500, Cardinal Health employs more than 55,000 people on six continents. (source: company press release or website)

Why We Like It:
CAH is another relative strength play. Shares broke through significant resistance in the $60-61 range a couple of weeks ago, which also coincided with resistance on its P&F chart. Volume was pretty heavy on the rally. We see the recent pull back toward broken resistance (now new support) as an entry point for bullish positions. The P&F chart points to a $78 target. We're going to target a move into the $66.00-67.00 range. We will not hold over the early November earnings report.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 60.00 CAH-KL OI= 249 current ask $3.50
BUY CALL NOV 65.00 CAH-KM OI=1059 current ask $1.05

Picked on September 25 at $ 61.95
Change since picked: + 0.00
Earnings Date 11/04/05 (unconfirmed)
Average Daily Volume = 2.0 million
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apache - APA - close: 73.86 change: -1.88 stop: 72.49

A slow down in hurricane Rita on Friday and news that the storm would likely miss the Houston area prompted some more profit taking in crude oil and the oil-related stocks. Shares of APA lost 2.48% and filled the gap from September 19th. This dip is probably another bullish entry point. Oil production, natural gas production and refining is almost completely shut down across the gulf area. This is going to cause additional shortages and prices for crude and natural gas are likely to rebound, especially natural gas, which is one reason why we added APA due to its exposure in the natural gas markets. If you read the market wrap this weekend some are predicting high-teens to almost $20 for natural gas and this will push heating bills higher by +40% to +100% depending on where you live in the country. Here's our plan with APA. We would buy any bounce above $72.00. It is certainly possible that APA will dip toward stronger support at its 50-dma near $70.00. This would stop us out at $72.49 but we would strongly consider jumping back in on a rebound. The best-case scenario is that APA bounces from Friday's close now that it has filled the gap. Our target is the $79.00-80.00 range. We will not hold over APA's late October earnings report.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 70.00 APA-KN OI= 467 current ask $6.50
BUY CALL NOV 75.00 APA-KO OI= 510 current ask $3.70

Picked on September 18 at $ 73.42
Change since picked: + 0.44
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume = 2.6 million

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Cameco Corp - CCJ - close: 52.22 chg: -0.51 stop: 49.49

Shares of CCJ continue to trade in sync with the energy markets. Remember that higher oil makes alternatives like nuclear energy look more attractive. When oil sell-offs it looks like investors use it as an excuse to sell CCJ too. The stock lost another percent on Friday and the recent profit taking is pushing the MACD indicator closer toward a new sell signal. This technical development and what looks like a breakdown of its short-term trendline of support would make us cautious here. CCJ should still have significant support near broken resistance at the $50.00 level. We are still bullish on the stock but would not suggest initiating new positions at this time. Instead we would wait to see a bounce from the $50 level and use that as a new bullish entry point. The P&F chart remains bullish and points to a $78 target. We are targeting a move into the $58-60 range before the company's earl November earnings report. We will not hold over the earnings report.

Suggested Options:
We're not suggesting new positions at this time but if CCJ bounces from the $50 level we like the November calls.

Picked on September 18 at $ 53.30
Change since picked: - 1.08
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 862 thousand

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Altria Group - MO - close: 71.91 change: +0.00 stop: 69.90

This past week has been pretty rough on the DJIA but shares of Dow component MO held in there relatively well. You'll remember that investors are feeling a bit more confident on the cigarette maker now that most of its legal woes appear to be in regression. Yet many investors are merely addicted to the stock's relative strength and its four percent dividend yield. We're going to remain bullish on the stock as long as shares stay above what should be support at the $70.00 level. Readers can choose to buy a bounce from $70 (or the recent lows near 70.85). Or readers can wait for a new move over $73.50-74.00. The P&F chart points to a $111 target but we are targeting a move into the $78-79 range. We will not hold over the October earnings report.

Suggested Options:
Readers can choose from the October, November, December, and January strikes but we like the October and November calls.

BUY CALL OCT 70.00 MO-JN OI=15571 current ask $3.50
BUY CALL OCT 75.00 MO-JO OI=34911 current ask $0.95

Picked on September 18 at $ 73.14
Change since picked: - 1.23
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume = 6.7 million

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Noble Energy - NBL - close: 45.83 chg: -0.68 stop: 43.24

NBL is another oil stock that was hit by profit taking on Friday following a downgrade for hurricane Rita and news that the storm was going to miss Houston. We believe this is temporary weakness and that NBL will rebound. However, shares of NBL may continue to dip and hit the $45.00 or $44.50 region first before rebounding. Therefore we would not suggest new bullish positions until we see the bounce begin. Our target is the $49.00-50.00 range. We will not hold over the early November earnings report.

Suggested Options:
We like the November calls.

BUY CALL NOV 42.50 NBL-KV OI=2051 current ask $4.80*
BUY CALL NOV 45.00 NBL-KI OI=1569 current ask $3.20*
BUY CALL NOV 47.50 NBL-KW OI=1442 current ask $1.60*
*these prices from the CBOE don't look accurate.
Confirm with your broker.

Picked on September 11 at $ 44.90 *post-split price
Change since picked: + 0.93
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 796 thousand
 

Put Updates

Adobe Sys. - ADBE - close: 28.08 chg: +0.20 stop: n/a

ADBE was showing some relative strength on Friday with a minor gain versus a loss for the GSO software index. We suspect that the stock is poised to run higher into the next couple of weeks. This was a strangle play on ADBE's 9/15 earnings report so we're not suggesting new positions. Our initial investment was approximately $1.55 with the October 27.50 call and October 25.00 put. Currently, if ADBE does turn higher, we're planning to exit near $30.00 and its 200-dma.

Suggested Options:
We are not suggesting new positions.

Picked on September 13 at $ 26.82
Change since picked: + 1.26
Earnings Date 09/15/05 (confirmed)
Average Daily Volume = 6.2 million

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Black & Decker - BDK - close: 83.07 chg: +0.13 stop: 85.05

BDK is a technical play based on its trend change from the July peak and its breakdown below multiple levels of support on September 14th. We predicted that the stock would bounce at the $80 level. Now we are watching for a failed rally under the $84 level or at its exponential 200-dma near 83.60. Readers can use a failed rally under $84 as a new entry point. Our target is the $78-77 range but we do not plan on holding over the late October earnings report. Currently the Point & Figure chart points to a $74 target but we see support on the P&F chart near $77.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 85.00 BDK-WQ OI=705 current ask $4.05
BUY PUT NOV 80.00 BDK-WP OI=546 current ask $1.95

Picked on September 14 at $ 83.31
Change since picked: - 0.24
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 636 thousand

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Hovnanian - HOV - close: 51.23 chg: -0.09 stop: 55.01

Homebuilders have been hit pretty hard the last couple of weeks with many of the key players seeing their stocks breakdown under significant levels of support. HOV is one of them and shares are close to our target in the $50.25-50.00 range. The stock looks a bit oversold here so we're not suggesting new plays at this time. More conservative traders may want to exit early on any decline under the $51 level.

Suggested Options:
We are not suggesting new plays.

Picked on September 18 at $ 54.75
Change since picked: - 3.34
Earnings Date 09/07/05 (confirmed)
Average Daily Volume = 1.2 million

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Hershey Co. - HSY - close: 55.50 change: +0.00 stop: 58.01

HSY has produced what is arguably a bearish head-and-shoulders pattern from February 2005 through August 2005. The stock broke the neckline and support near $60.00 and its 200-dma in late August. Then after consolidating sideways under its exponential 200-dma for three weeks the stock continued lower. The $55.00 level is round-number support so we're not surprised to see the decline pause here. As a matter of fact HSY could easily bounce back and retest broken support near 57.50 as new resistance again. A move back toward $57.50 would also test resistance at the top of HSY's narrow descending channel. A failed rally under $57.50 could be used as a new bearish entry point. We're targeting a move into the $54.00-53.50 range because that lines up with the H&S pattern's projected target. We will not hold over the late October earnings report.

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

Picked on September 14 at $ 57.90
Change since picked: - 2.40
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume = 760 thousand

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Itron - ITRI - close: 44.82 change: +0.58 stop: 46.51

ITRI is a new play from the Thursday night newsletter. The stock is a little short-term oversold so if the market bounces on Monday we would expect ITRI to bounce as well. To that end our stop loss might be too tight. We would not rush in to initiate new positions but wait and watch to see where any oversold bounce might roll over. Our original play description is here:

ITRI produced an amazing run higher through most of 2005 but now it seems the stock is finally hitting some profit taking. Shares produced a double-top pattern back in July-August. Then the oversold bounce from the September low failed near resistance under the $52 level. Now the stock is breaking support at the $45.00 mark and its simple 100-dma on volume well above its average. Technicals are bearish and its MACD has produced a new sell signal. The P&F chart is bearish and points to a $38 target. We see today's breakdown as a new bearish entry point to buy puts. Our target is the $40.00 region (40.25-40.00) but more aggressive traders might target the exponential 200-dma near 38.50. A failed rally under $45.00 or even $46 could offer an alternative entry point to buy puts. We will not hold over the early November earnings report.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 45.00 IUP-WI OI=374 current ask $5.50* (last $3.20)
BUY PUT NOV 40.00 IUP-WH OI=225 current ask $4.80* (last $1.30)

*These current "ask" prices from the CBOE do not look accurate. Confirm with your broker.

Picked on September 22 at $ 44.24
Change since picked: + 0.58
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 435 thousand

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MBIA Inc. - MBI - close: 57.21 chg: +0.94 stop: 58.75*new*

We knew that September would be volatile but shares of MBI are all over the place. Thus far they remain in their descending channel but it makes for exciting times if you're an options trader. Friday's rebound was almost enough and might qualify as an effort to fill the gap down from Wednesday morning. If that is the case then we'd look for MBI to turn lower next week. If not then the stock may yet retest overhead resistance near the 200-dma again. At this time we are not suggesting new positions. Our target is the $54.25 mark. We are lowering the stop loss to $58.75.

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

Picked on September 13 at $ 57.75
Change since picked: - 0.54
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 1.2 million

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WellChoice - WC - close: 70.61 change: +1.07 stop: 71.65

WC produced a very volatile session on Friday. After Thursday's gap down and technical breakdown under support at its 50-dma and the $70.00 mark the future looked bearish. Friday morning saw WC gap down and traded to $67.75 before rebounding sharply. Yet the rally ran out of steam under the $71.50 level, which appears to be just enough to fill the gap down from Thursday. By Friday afternoon the stock was turning lower again. The whole session produced what looks like a potential bullish engulfing candlestick. If so then that is bad news for bears. Yet we're getting conflicting signals with WC turning lower after filling the gap. At this point we'd rather be cautious. The markets might produce a relief rally on Monday if the hurricane Rita damage is less than expected. We are not suggesting new plays at this time. More aggressive traders might want to watch for a new decline under $70 as a new entry point. If you're curious about our original play description we're reprinting it here:

We're adding WC to the play list as a speculative technical play. We can't find the catalyst for today's gap down and big volume but the stock has broken support at the $70.00 mark in addition to support at its simple 50-dma. Technicals are naturally bearish but its Point & Figure chart is still bullish. Meanwhile the HMO.X healthcare index, while still relatively near its highs has produced what looks like a possible double-top pattern with the July and September peaks. We're going to bet that WC consolidates lower and tests the 100-dma near $66.50. If WC does not confirm this breakdown tomorrow we may choose to exit early.

Suggested Options:
We are not suggesting new plays at the moment.

Picked on September 22 at $ 69.54
Change since picked: + 1.07
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume = 248 thousand
 

Dropped Calls

None
 

Dropped Puts

Noble Corp - NE - close: 68.63 change: -1.37 stop: 68.49

NE has been under performing the oil sector the last few days and is the main reason we turned cautious on it mid-week. We suspect that investors are concerned that NE may have too much exposure to hurricane Rita. The breakdown on Friday pushed NE below its trend of higher lows and below technical support at the simple 50-dma. We were stopped out at $68.49. The decline on Friday also reversed NE's P&F chart from a buy signal to a sell signal that now points to a $63 target.

Picked on August 31 at $ 71.30
Change since picked: - 2.67
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume = 1.8 million
 


Trader's Corner

Where's My Stop?

Once when boarding a train from Madrid, Spain, my whole family in tow, I questioned fellow passengers about the stop for Toledo. I didn't see it listed on the route posted overhead, and I was the only one who spoke Spanish. It turned out we had boarded the wrong train. It wasn't going to Toledo at all.

Sometimes traders find themselves in the same spot. They've entered a trade, thinking it's going one direction, only to find out it's headed somewhere else entirely. I was lucky in Spain. We had barely pulled out of the Atocha station before I found out that the train was going the wrong direction. We were able to get off one station away and board the correct train. Traders need to find out quickly when they're going the wrong direction, too, so they can get off the train before it travels too far. Traders need stops.

Setting stops proves relatively easy in a trending market. Trending markets tend to come back to key moving averages or an established trendline, bouncing from them. In a down-trending market, set a stop just above such a key average or a descending trendline.

BAC was such a down-trending stock. In late June, it had violated its 30-sma. By early July, it had risen to retest that average, finding resistance again. Then it gapped lower after that failed test, signaling that a bearish entry might be good idea, perhaps offering an entry just above $45.00.

Note: Charts were chosen to illustrate when stops might be taken, and do not represent current values.

Annotated Daily Chart of BAC:

What happened next? September 16, the last day on this chart, was notable for including a re-weighting of the SPX, equity option expiration, and a presidential speech the previous night. That speech had all debating the costs of rebuilding Louisiana and Mississippi, and the effect on taxes and interest rates. BAC's action that Friday might have been a fluke, some might have reasoned, and price was approaching potential resistance at $44.00 by the close. In a recent SFO Magazine article, the great Thomas N. Bulkowski explained his attitude after selling a stock that had violated a trendline, and the opposite might be inferred, too. "Even if I am wrong," about selling the stock after it violates a trendline, he said, "it doesn't matter, because I don't own the stock anymore." Presumably he feels the same about covering a short when a stop has been hit.

As it turned out, September 16 did turn out to be a fluke, and BAC ended the current week at $42.23, but take a lesson from Bulkowski. Adhere to your trading plan, exit when your stop is hit, and don't look back. Certainly don't ignore a stop because you "think" or "hope" prices will turn around again. In BAC's case, the bearish trader would have profited more if that trader had held on, but in other cases, the outcome would not have been so good.

In a trending market, some traders also position stops just below a previous swing high on an up-trending market and just above a previous swing low on a down-trending one. If breakaway gaps--those that occur when price gaps out of a consolidation pattern--exist, stops can be set below an upside gap and above a downside one.

Annotated 240-Minute Chart of TXN:

Markets don't always trend upward or downward, of course. Range-bound markets sometimes offer trades of the "buy low, sell high" variety once a range has been established. Horizontal trendlines can often be drawn, with a favorite oscillator then used to choose entries. Longs can switch to shorts as the top boundary is approached and then switch back to longs as the bottom boundary is approached. Stops could be set an account appropriate level either side of the range.

Annotated Weekly Chart of DD:

Bulkowski offers another bit of advice about setting those stops. Avoid round numbers, he cautions. He would likely also caution against using a number such as $39.75, instead using "oddball" numbers for stops. Oddball numbers might prove less likely to be touched in stop-running moves. Jane Fox of OptionInvestor also sometimes advices that traders use contingent orders, with the order held with the broker until the contingency is met. This avoids giving market makers a view of your stop, avoiding a little stop-running move to pick it off before a reversal again.

Bulkowski's discussion in SFO Magazine offers his experiences trading stocks, but those traders who utilize options have special considerations. An options trader must be right on both direction and timing. A stock or index might creep higher while a call's value inches lower because the creeping stock movement proves too slow. This effect intensifies in the last two weeks of an options cycle before expiration. How does an options trader set appropriate stops if timing must also be considered?

Traders adopt several approaches. When I first began trading, I remember an options trader mentioning that if an option had lost one-third of its value, the play was probably not working as expected. Setting a stop contingent upon either the option's value or the stock's appear equally valid. Some trading platforms even allow for the setting of two conditions in a contingency order, with a one-cancels-other possibility. An OEX put's stop might be conditioned on the OEX staying below a certain number and its option staying above a certain value, for example. If your trading style incorporates decay in an option's value when setting a stop, perhaps search for a trading platform that allows for two conditions when setting stops.

Not all traders base their stops upon the option's decay. Some traders, including the OIN's Jeff Bailey, have at times employed a different strategy. That strategy involves deciding the amount of risk or size of loss a trader is willing to accept on a stock play, then purchasing an option position for that amount. No stop would be set, because no more than the predetermined risk or loss will be incurred.

By this point, it's clear that a trader's style and the condition of the markets must be considered when setting stops. Back in Spain, I acted conservatively, getting off at the first stop encountered after entry, and that's the type of trader I tend to be, too. Perhaps there would have been another train that intersected with ours and gotten us to Toledo faster, but I never worried about that after getting off the wrong train and boarding one that was going to bring us to Toledo. Bulkowski recommends not looking back, either. Set those stops and get off as soon as you find that the train is not going the direction you intended.
 

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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