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Daily Newsletter, Saturday, 10/01/2005

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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

Market Wrap


New Plays

New Option Plays

Call Options Plays
Put Options Plays
BPT None
BSC  

New Calls

BP Prudhoe Bay - BPT - close: 79.12 chg: +0.14 stop: 73.99

Company Description:
BP is a royalty trust paying dividends (currently about 7%) on production of oil from the northern slope of Alaska (Prudhoe Bay). (source: company press release or website)

Why We Like It:
This is one of the few stocks we'd consider owning. The future (high) price of oil and BPT's high dividend yield make it an attractive investment. We also think it looks alluring as a bullish candidate for calls. The stock has been consolidating sideways between $70 and $80 for the last three months and just now looks poised to breakout through resistance at $80.00. We're going to suggest a trigger to buy calls at $80.11. Our December 15th target will be the $89.50-90.00 range. After we confirm that BPT has broken out we'll adjust our stop loss higher.

Suggested Options:
November calls are available but we are suggesting the December strikes.

BUY CALL DEC 75.00 BPT-LO OI=323 current ask $6.40
BUY CALL DEC 80.00 BPT-LP OI=383 current ask $3.30
BUY CALL DEC 85.00 BPT-LQ OI=264 current ask $1.95
*the $85 strike is the highest one available as of today

Picked on October xx at $ xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 175 thousand

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Bear Stearns - BSC - close: 109.75 chg: +0.90 stop: 102.49

Company Description:
Founded in 1923, Bear, Stearns & Co. Inc. is a leading investment banking and securities trading and brokerage firm, and the major subsidiary of The Bear Stearns Companies Inc. With approximately $52.1 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales and trading, securities research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers financing, securities lending, clearing and technology solutions to hedge funds, broker-dealers and investment advisors. Headquartered in New York City, the company has approximately 11,500 employees worldwide. (source: company press release or website)

Why We Like It:
This is both a momentum play and a technical play. The XBD broker-dealer index shows the sector charging to new all-time highs. Leading the way are stocks like LEH and BSC. BSC blew past earnings estimates a couple of weeks ago by reporting 30-cents above estimates. Recently the stock has broken through resistance at the $107.50 region and is currently testing what looks like the neckline to a big reverse (bullish) head-and-shoulders pattern. Helping fuel interest in the stock are growing rumors that BSC is a takeover candidate. We suggest the following two entry points. Readers can choose to buy calls on another new high over $110.20. Or readers can look for a pull back toward the $107.50 region, which should now act as support. Our ten-week target is going to be the $119.50-120.00 range. FYI: we are using a wide stop loss because we still have to weather October's volatility, which usually produces a strong market dip before an end of month rally.

Suggested Options:
We are suggesting the January calls since there are no December strikes yet available. Short-term players may want to buy the November strikes.

BUY CALL JAN 105.00 BSC-AA OI=1819 current ask $8.60
BUY CALL JAN 110.00 BSC-AB OI=5231 current ask $5.20
BUY CALL JAN 115.00 BSC-AC OI=2926 current ask $3.20
BUY CALL JAN 120.00 BSC-AD OI=2122 current ask $1.75

Picked on October 02 at $109.75
Change since picked: + 0.00
Earnings Date 09/15/05 (confirmed)
Average Daily Volume = 1.2 million
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apache - APA - close: 75.22 change: -1.44 stop: 72.49

Energy stocks were the laggard on Friday as investors did some profit taking before the end of the third quarter. The OIX oil index lost 1.4% and the OSX oil services index lost 1.5%. Shares of APA fell 1.87% and the decline has given a bearish tilt to some of its short-term technical oscillators. In spite of Friday's decline we remain bullish. APA produces both crude oil and natural gas. Plus, the company does not have a lot of exposure to the Gulf of Mexico. Natural gas supplies are already running tight and Wall Street is worried about a shortage, which is why natural gas prices have risen so sharply. If we experience a cold winter some are predicting natural gas contracts to rise toward $20/bcf. As of Friday natural gas hit a record high above $15/bcf. We would watch APA for a bounce from potential support at $74.00 or the $73.50 levels. A rebound there could be used as a new bullish entry point. However, keep in mind that we do not want to hold over APA's earnings report due out in late October. Our target is the $79-80 range. FYI: the Point & Figure chart points to a $101 target.

Suggested Options:
We're not suggesting new positions at this time. Look for a bounce from support. If APA does offer another entry point readers can choose from the October or November calls.

Picked on September 18 at $ 73.42
Change since picked: + 1.80
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume = 2.6 million

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Broadcom - BRCM - close: 46.92 chg: +1.16 stop: 43.49*new*

A surprisingly positive earnings report from Micron (MU) helped inspire a strong 1.9% rally in the SOX semiconductor index. This also helped fuel a 2.5% rally in shares of BRCM. Technically shares of BRCM are looking pretty good. Shares just broke out over short-term resistance near the $46 level. Now its short-term technical oscillators are bullish and its MACD indicator is nearing a new buy signal. The Point & Figure chart is bullish and points to an $86 price target. Currently BRCM is testing resistance at the $47 level and looks poised to breakout. BRCM might be able to hit our target in the $49.00-50.00 range before the SOX runs into resistance near the 485 region. We are going to raise the stop loss to $43.49.

Suggested Options:
We are not going to suggest new positions here but if BRCM dips back toward $46.00 readers might want to consider buying some October or November calls. Remember, there are too many unknown variables when dealing with a company's earnings report so we plan to exit ahead of BRCM's late October earnings announcement.

Picked on September 25 at $ 45.05
Change since picked: + 1.87
Earnings Date 10/21/05 (unconfirmed)
Average Daily Volume = 7.0 million

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Cardinal Health - CAH - close: 63.44 chg: +0.28 stop: 59.85

The breakout play on CAH is doing okay. The stock is still struggling a bit with resistance near $63.50 but we do expect shares to push past this level. The breakout on September 15th pushed CAH above significant resistance near $61.00. Shares pulled back to retest this level as new support, which is a common occurrence. Now we're seeing shares begin the next leg higher. The Point & Figure chart supports this with a bullish breakout through resistance as well. Plus, the P&F chart points to a $75 price target (which also happens to be long-term resistance). We are suggesting positions here but if we get the chance a dip back toward $62.00 or $61.50 would also work as a bullish entry point. We will plan to exit ahead of CAH's early November earnings report. Our target is the $66-67 range.

Suggested Options:
We are suggesting the October and November calls.

BUY CALL OCT 60.00 CAH-JL OI=2682 current ask $3.90
BUY CALL OCT 65.00 CAH-JM OI=3928 current ask $0.70

BUY CALL NOV 60.00 CAH-KL OI= 287 current ask $4.50
BUY CALL NOV 65.00 CAH-KM OI=1579 current ask $1.50

Picked on September 25 at $ 61.95
Change since picked: + 1.55
Earnings Date 11/04/05 (unconfirmed)
Average Daily Volume = 2.0 million

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Cameco Corp - CCJ - close: 53.50 chg: -0.28 stop: 49.49

Our bullish play in CCJ is struggling to produce any sort of upward momentum. The stock broke through major resistance at the $50 level at the end of August. There was a quick run to $55 and then CCJ faded lower to retest the $50 level as new support. Since then CCJ has been stuck in a trading range between $50-55. We like how the Point & Figure chart is bullish and points to a $78 target. However at the moment we would probably not suggest new positions. We do believe that CCJ will garner more and more investor attention as an alternative to rising oil costs and thus might make an interesting long-term options play using LEAPs. Readers can choose to buy another bounce from the $50.00 level or a breakout over the $55.50 region. Our target is the $58-60 range.

Suggested Options:
We are not suggesting new bullish positions at the moment. Traders looking for new positions can play the October, November or December calls. Just remember that we plan to exit ahead of CCJ's early November earnings report.

Picked on September 18 at $ 53.30
Change since picked: + 0.20
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 862 thousand

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Cigna - CI - close: 117.86 change: +0.42 stop: 111.49

The HMO.X healthcare index did see some profit taking on Thursday but remains near its all-time highs. Helping lead the healthcare sector higher are shares of Cigna (CI). The health insurer has a long-term bullish trend and just broke out of a seven-week trading range. Technical oscillators are bullish and its MACD produced a new buy signal a couple of days ago. Friday's gain represents a new all-time high over the early August peak. We would initiate new positions here but some readers may want to wait and hope for a dip back toward the $116.00-116.50 region, which as broken resistance should now act as support. The $120 level is probably round-number resistance but we expect shares to eventually push through it and hit our target at the $124.00 level. We plan to exit ahead of CI's early November earnings report.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 115.00 CI-KC OI= 113 current ask $6.30
BUY CALL NOV 120.00 CI-KD OI= 203 current ask $3.50
BUY CALL NOV 125.00 CI-KE OI= 148 current ask $1.70

Picked on September 29 at $116.51
Change since picked: + 1.35
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 991 thousand

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Intuitive Surg. - ISRG - close: 73.29 chg: -2.13 stop: 70.99 *new*

Uh-oh! ISRG hit some profit taking on Friday and shares lost 2.8%. Volume was pretty low, which might suggest a lack of conviction. The drop back below resistance at the $75 level is also discouraging. Friday's decline has produced some bearish hooks in the RSI and stochastic oscillators. Currently the MACD and the P&F chart remain bullish. We very rarely do it but we feel the need to adjust our stop loss backwards. ISRG has minor support at $73 and again near $72 but we feel like our stop at $71.99 is just too close and we could get stopped out on an intraday spike lower. We're going to adjust the stop loss to $70.99. More aggressive traders may want to put their stops under the 50-dma (70.85) or the $70.00 level, which should both act as stronger support. More conservative players may not want to move their stop at all. We are not suggesting new plays at this time. We'll wait to see if and where ISRG bounces. Our target is the $79.50-80.00 range.

Suggested Options:
We are not suggesting new plays at this time. Remember that we plan to exit ahead of ISRG's late October earnings report.

Picked on September 28 at $ 75.11
Change since picked: - 1.82
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 962 thousand

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Altria Group - MO - close: 73.71 change: +0.06 stop: 69.90

Our defensive momentum play in MO is still moving higher. The stock did gap down on Friday morning in response to the news out of Canada. On Thursday night we reported that the Canadian Supreme court upheld the right for Canadian provinces to sue tobacco companies for the health care costs of smoking. Yet shares of MO rallied from its lows on Friday and now looks poised to breakout over resistance at the $74.00 level. The question now is whether or not that was real buying on Friday or was it just window dressing for the end of the quarter. MO has certainly been a strong performer over the last quarter so it would do well for funds to dress up their portfolio with this stock trading near all-time highs. Readers can choose to enter new positions on a bounce from the $72.50 region or a breakout over $74.00. Our target is the $78-79 range. Remember, that we plan to exit ahead of MO's mid-October earnings report. FYI: the P&F chart points to an $111 target.

Suggested Options:
Readers can choose to play the October or November calls. Just remember we plan to exit ahead of the October 19th earnings report.

Picked on September 18 at $ 73.14
Change since picked: + 0.57
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume = 6.7 million

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Noble Energy - NBL - close: 46.90 chg: -0.62 stop: 44.49

If you read the market wrap this weekend then you already know that the vast majority of oil and gas production in the Gulf of Mexico is still offline. This is going to keep the cost of energy high and energy companies will reap the benefit. We like the momentum in shares of NBL but we would not suggest new positions right here. Watch for a dip to $46.00 (worse case maybe $45) as the next bullish entry point. Our target remains the $49.00-50.00 range. We plan to exit ahead of NBL's early November earnings report.

Suggested Options:
We're not suggesting new positions right here but if NBL dips then we like the November calls.

BUY CALL NOV 45.00 NBL-KI OI=1687 current ask $3.50
BUY CALL NOV 47.50 NBL-KW OI=1689 current ask $2.00
BUY CALL NOV 50.00 NBL-KJ OI= 48 current ask $1.05

Picked on September 11 at $ 44.90
Change since picked: + 2.00
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 796 thousand

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Total S.A. - TOT - close: 135.82 chg: -1.68 stop: 131.99

TOT was also hit by the end of quarter profit taking in the oil sector. Shares gapped down, then traded to a new all-time high, and then turned lower. We remain bullish on the stock and the oil sector. However, TOT may see more profit taking before it turns higher again. We would wait and watch for a dip to and bounce from the $134.00 level, which is the next level of support for TOT. Worse case the stock may fall all the way to the bottom of its recent trading range near $132.00. Our six-week target is the $144-145 range.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 130.00 TOT-KF OI= 427 current ask $8.00
BUY CALL NOV 135.00 TOT-KG OI=1068 current ask $4.70
BUY CALL NOV 140.00 TOT-KH OI=1435 current ask $2.35
*the 140s are the highest strike available today.

Picked on September 28 at $137.23
Change since picked: - 1.41
Earnings Date 08/05/05 (confirmed)
Average Daily Volume = 872 thousand
 

Put Updates

Black & Decker - BDK - close: 82.09 chg: +0.30 stop: 85.05

The next move in BDK could be painful for us. The stock is losing some of its downward momentum. Thus far shares have traded according to our script. We expected a bounce at round-number resistance at the $80.00 mark. We also expected the exponential 200-dma near 83.50 to act as resistance. Unfortunately, this sideways consolidation is allowing many of BDK's oversold technical indicators to revert back toward a bullish bias. The stock may be able to bounce back toward resistance near $84.00 or even the $85.00 level (and its simple 200-dma) before turning lower again. This would be bad news for us because the put option values will shrink relatively quickly and we are already facing a time crunch with BDK's earnings due out in late October. We are not suggesting new plays at this time. Our target is the $78-77 range. The P&F chart points to a $74 target.

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

Picked on September 14 at $ 83.31
Change since picked: - 1.22
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 636 thousand

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Hershey Co. - HSY - close: 56.31 change: -0.16 stop: 58.01

Our bearish play in HSY has lately been a game of patience. The stock bounced at the $55 level like we expected it too. Thus far shares continue to trade within its eight-week bearish trend. If there is any sort of bounce next week we would look for the $57.00 and 57.50 levels to act as overhead resistance. Our target remains the $54.00-53.50 range. Meanwhile the P&F chart points to a $45.00 target.

Suggested Options:
We are not suggesting new plays at this time but a failed rally under $57.50 could be used as a new entry point. Don't forget that we plan to exit ahead of the October 20th earnings report.

Picked on September 14 at $ 57.90
Change since picked: - 1.59
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume = 760 thousand
 

Dropped Calls

Apollo Group - APOL - close: 66.39 chg: -0.32 stop: 64.99

There is still a decent chance that APOL will produce an oversold bounce from the $65-66 region. Unfortunately, the stock is showing too much relative weakness for our liking. We like to see a stock bounce higher with more conviction. We're going to exit early (per our comments on Thursday) and look for new bullish candidates elsewhere.

Picked on September 25 at $ 66.09
Change since picked: + 0.30
Earnings Date 10/04/05 (confirmed)
Average Daily Volume = 1.8 million
 

Dropped Puts

None
 


Trader's Corner

Try to top this - the Tale of Two Tails

Trading should be as simple as possible and the tailing pattern is one of those simple tools that is easy to spot and, once mastered, is likely to become your new best friend.

The tail pattern can be one of the best indicators of tops or bottoms because they show where the balance of power shifts from the bears to bulls or bulls to bears. They show where fear runs out and greed takes over or where greed runs out and fear takes over.

Like a key reversal bar, the bottoming tail indicates a price low where professionals are beginning to accumulate the stock. It is formed by a strong move to the downside that suddenly reverses and has a nice rally.

The topping tail is, of course, just the reverse. It signals a dramatic move to the upside and just when the general public starts to take notice the professionals start dumping. The result is a sharp move to the downside.

I have summarized the characteristics needed to form the perfect tail. We, of course, usually dont have a perfect world in the stock market, so we try for as close as we can.

Lets look at some examples.

Here is a daily chart of the Crude Oil futures contract (QM on most charting platforms). I have marked the bottoming tail with a red arrow. Lets review each of the criteria for a bottoming tail:

1. Most powerful when it occurs after a multi-bar drop this bottoming tail formed after an 11 day drop.

2. Best ones are wider in range than the last three bars The range on the day this tail formed was 53.35 51.43 = $1.92, which was wider in range than the previous three bars.

3. The open and close are very close together. As you can see this criteria has been satisfied because the body is a very small.

4. Closes in the top 1/2 of the daily range. QM closed at 52.41 which is about the 50% of the daily range.

The next day look to go long at the high of the bottoming tail which would be 1 tick above 53.35 and look for a 3 to 5 bar advance.

Ok, so you are now in this trade, you are now long the Crude Oil futures. The easy stuff is done. We all know the market will do just what it wants to do not what you want it to do. Just because it formed a bottoming tail doesnt mean it will reverse. Although there is a good probability that it will, what if it doesnt? How do you protect yourself? Where do we draw the line in the sand, say adios, exit stage left? Well you can put a stop at the bottom of the tail, which would be 51.42, and risk 1.94 points. If that fits your money management plan sounds like a good idea. Bottom line is that everyones exit point will be different depending on ones pain level (size of account), level of aggressiveness or style of trading - day trader or short-term investor. A number of things go into a persons exit strategy and Im not here to tell you what your exit strategy should or shouldnt be but just to say HAVE ONE!!

Next lets look at an example of a topping tail.

Here is a daily chart of 10-year treasury notes. I have marked the topping tail with a blue arrow. Lets review each of the criteria for a topping tail:

1. Most powerful when it occurs after a multi-bar climb this topping tail formed after an 11 day climb.

2. Best ones are wider in range than the last three bars The range on the day this tail formed was 11410 11354 = 20/64, which was not wider in range than the previous three bars.

3. The open and close are very close together. As you can see this criteria has been satisfied because the body of the candle is a very small.

4. Closes in the bottom 1/2 of the daily range. TY closed at 11357 which is in the bottom 25% of the daily range.

The next day look to go short at the low of the topping tail which would be 1 tick below 11354 and look for a 3 to 5 bar drop. For 3 days the drop was straight down.

When a topping or bottoming tail is spotted, successful traders not only know what to do, they know when to do it and where. These three Ws are crucial ingredients in a proper trading plan, and are key items that typically separate the haves from the have-nots in the market.

You may have noticed this discussion is just a discussion of candlesticks. We are talking about the candlestick formations called the umbrella (or a reverse umbrella) and doji which are the simplest reversal pattern. Umbrellas can be either bullish or bearish depending on where they appear in a trend. If they occur during a downtrend, they are called hammers (bottom tail) and are bullish, as in "the market is 'hammering out' a base." If an umbrella appears in an uptrend it is bearish, and is referred to as a hanging man (topping tail). The latter's ominous name is derived from its look of a hanging man with dangling legs.

Picking tops and bottoms with tails and using the method above to profit from them in one of those simple trading methods. But dont mistake its simplicity for lack of power. This single tool, once mastered, is sure to give the old Wall Street axiom, buy low and sell high a brand new meaning.

Remember trade your plan and plan your trade.
 

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

DISCLAIMER

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

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