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Daily Newsletter, Saturday, 10/22/2005

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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

Whiplash!

Don't like the current market direction just wait until tomorrow and catch the next wave in the opposite direction. This has been a very volatile week for traders with alternating triple digit moves and bipolar indexes. On Friday the Dow was down -54 while the Nasdaq was up +15. What market are you going to trade? On Thursday the Dow lost -133 and more than the +128 it gained on Wednesday. Confused? Join the club you are in good company.

Dow Chart - Weekly

Nasdaq Chart - Weekly

SPX Chart - Weekly

NYSE Composite Chart - Weekly

The main reasons for Friday's divergence were CAT and PFE on the Dow and GOOG and SNDK on the Nasdaq. Earnings continue to be either very hot or very cold and stock reactions have been dramatic. On Friday CAT reported earnings and warned that future results would be lower due to higher costs and supply shortages. CAT dropped -$5 and put the Dow into another tailspin. Pfizer was also down another buck and traded 100 million shares for the second consecutive day after warning about patent expirations on Thursday. With CAT and PFE falling off the cliff the Dow never had a chance. The Nasdaq benefited from Google gains with a whopping jump of +$36 or +12% on earnings that surprised even the most optimistic analysts. Google revenue rose +108% and profits jumped more than seven hundred percent. Analysts were quick to raise price targets on GOOG. First Albany, Lehman and RBC raised targets to $450 and Piper Jaffray nudged just under at $445. There were a host of other increases but most now average around $400. Also helping the Nasdaq and the SOX was very strong earnings by Sandisk of 55 cents and 20 cents over analyst estimates. SNDK jumped +$10.70, a gain of +22%.

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With the strong gains by GOOG and SNDK the Nasdaq shook off the weakness in the other major indexes and powered ahead to test resistance at 2090 at the open and again after lunch. Both times resistance held and the Nasdaq finished with a gain of only +14 points. The Dow was the weakest link once again losing -65 points with CAT -5.11, BA -1.28, UTX -.91 and PFE -.65. Only 12 Dow stocks were positive but only four had gains over 25 cents with SBC the biggest gainer at +46 cents. It was definitely not a strong showing by the blue chips. Big losers for the week were HON -3, BA -3, PFE -3, XOM -3 and of course CAT -7. These losses offset very nice gains for the week by SBC, JPM, MO, HD and MMM.

As I illustrated on Tuesday the Dow, an index of 30 stocks, is the least reliable indicator of market direction despite it being the most watched. The NYSE composite of 2057 stocks ($NYA) posted a gain of +20 on Friday, the Wilshire-5000 (DWC) gained +43 and the Russell-2000 added +5. The index with the most money indexed to its performance is the S&P-500 and the SPX barely broke even on Friday with a gain of only 1 point. These conflicting indexes are providing investors with a strong dose of confusion. If you are feeling frustrated by the markets you are not alone.

We have discussed for the last couple weeks that this earnings cycle could be rocky. Expectations were for double-digit earnings growth in the +15% range but expectations for guidance were mixed. We have definitely gotten mixed guidance. We have warnings that revenues have fallen due to hurricanes and evidence of slowing computer sales in Q3. Companies are also warning that energy prices are raising their costs and in many cases they can't pass these costs on to the consumer. Those that can pass along the costs increase the chance of inflation at the consumer level. This is providing a host of problems for market watchers.

Earnings are expected to be bolstered by the energy sector when it announces next week. Schlumberger reported earnings on Friday and they grew +70% over the prior year. +70% is right inline with what analysts are expecting for the sector. What is even more amazing is that SLB lost 25 days of operations in the Gulf due to hurricanes and still posted strong earnings. SLB posted earnings of 86 cents and inline with analyst estimates. They said the hurricanes knocked -6 cents or -$36 million off their potential earnings due to that 25-day outage. Unfortunately SLB is not impacted by lost production as we might see from many other energy stocks. If we start seeing some high profile misses next week the +15% overall earnings scenario could be in trouble. Those refiners with plants still offline and likely to be offline for weeks to come are going to be hurting. Conversely those refiners still online have been reaping the benefits of higher gasoline and diesel and falling oil prices.

We have seen investors running from the sector over the last week with a 24 million share block trade on XOM ($1.4billion) on Tuesday and on Thursday a 6.2 million share trade on Chevron worth a paltry $353 million. On Friday oil fell below $60 for the first time in three months. This weakness in the oil sector ahead of next week's earnings suggests there is some consternation about those earnings and confusion about rising inventory levels. We did see some buyers appear Friday afternoon but I believe it was short covering and speculation ahead of Wilma. Currently it is not expected to hit the oil patch but until it actually makes the right turn towards Florida there is still a risk.

DDecember Crude Oil Chart - Daily

Currently 65.79% of oil is still offline in the Gulf along with 53.37% of gas production. Those numbers actually rose over the last two days as some companies took precautions ahead of Wilma. There was also news of an oil strike in Nigeria at a facility that produces 240,000 bbls per day. Just because oil stocks are taking a well deserved breather does not mean the oil crisis is over. It just means the disaster in the Gulf has disrupted demand and production patterns and the price spike around the globe has not yet been digested. Give it time and all of these clouds will clear and by summer prices will be soaring again. For now the weakness in the oil sector is crimping the potential gains in the broader market. Without support from energy the broader market is at risk for those conflicting earnings now being given by techs, industrials and manufacturing companies.

We are half way through the Q3 earnings cycle and the markets still can't decide if the outlook is positive or negative. We have seen huge wins and huge disappointments and massive swings in the market. However I am not convinced those massive swings were the result of earnings concerns. OptionsXpress said on Thursday that five of the top ten all time volume days for options have been in this October and two of those were this week. With Friday OpEx day there is a very good chance the market swings were option related rather than earnings related. Actually there is still a very strong rumor in the market that both swings were related to the liquidation of Refco. They are said to have had billions of dollars in options and futures positions for themselves and their hedge fund customers primarily in energy and techs. I believe we saw a perfect storm of a lackluster market with no conviction and the sudden unwinding of billions of dollars in options and futures positions. Thursday was the last trading day for November crude futures and a better than -$2 drop was the result. This knocked support from under the sector and many oil stocks were down -$3 to -$5 on the news.

The lack of conviction continues to come from a barrage of Fedspeak from nearly every board member. The deluge of dread has people talking now about a Fed funds rate of as much as 6% in 2006. This has exceeded the bounds of what investors can reasonably expect to ignore. When the target rate being discussed was in the 4.0% to 4.5% range that is right on the edge of acceptability. Once you get over 5% the bond yields will be another point or so higher and putting money safely into bonds for that kind of return becomes very attractive to institutions compared to a risky market.

The market risk comes from the historical fact that of the last 14 Fed rate hike cycles 12 resulted in recessions. The Fed typically tends to be behind the curve, as it appears they may be now, and by the time they quit they have gone too far. The constant pounding on the inflation issue by Fed heads this week helped to kill any positive market sentiment.

The recent economic data has been positive with the October Philly Fed on Thursday blowing past consensus estimates of +10 to post a scorching 17.3. You may remember that September's reading was only 2.2 and a major drop from 17.5 in August. That one month pause was likely hurricane related with Katrina hitting in the last week of August. We saw dips in several economic reports for the September period as a direct result of Katrina. Now it appears the economy is heating up again despite the higher energy costs as orders for replacement of goods lost in the hurricane are filling up the supply chains. You would think this would be a positive scenario but the earnings warnings and the fear of the Fed is holding investors back. At least those not invested in Google.

There are no positives for Research in Motion after an appeals court denied their request for a stay on an injunction keeping them from marketing the BlackBerry. Despite several errors in the case the court refused to grant the stay and sent the case back to the lower court to decide if there is enough discrepancy for a new trial. NTP claims it will seek to enforce the injunction and force RIMM to cease selling BlackBerry devices unless RIMM settles on NTP terms. RIMM is trying to make the court force NTP to settle for $450 million as both parties had previously agreed but NTP is now claiming their was never an agreement. Time is running short for RIMM and they will either have to pay up, rumors are as much as three times the prior $450 million number or quit selling Blackberry's until the Supreme Court hears the case. RIMM has traded between $60-$80 for three months as the case nears completion and Friday's close at $62 may be the calm before the storm. Puts anyone? Jan-$60's are $5.00. The downside for put buyers is the possibility for a settlement. Even if it is a massive number at least the cloud would be gone. Jan $70 calls are $3.50. Either side could be deep in the money by then depending on the outcome. If you could only see the future!

Next week is a big week for economic reports culminating in the first look at Q3-GDP on Friday along with Consumer Sentiment, NAPM-NY and the Employment Cost Index. Initial Q3-GDP is expected to be +3.7% compared to +3.3% in Q2. Overall the reports should confirm that the impact from Katrina was temporary and give retailers a chance to rebound from what appeared to be a dreary holiday season headed their way. The ISCS said this week that the majority of retailers were already discounting heavily as they headed into the selling season on worries that higher gasoline prices would crimp buying habits. If oil prices languish in the $60 range consumers could benefit from the drop in panic prices for gasoline and see numbers back in the $2.50-$2.65 range. These are still high but well off the sticker shock levels.

The forecast for next week is very tough. Regardless of reason for the huge buy spike on Wednesday it was completely erased on every index but the Nasdaq and Russell. The least reliable index, the Dow, is right back at 10200 and looking very ugly once again. Only five stocks are causing most of the damage but there is little support from the rest of the gang. It looks very likely that it could easily retest the 10150 level from the prior week if not go all the way to 10000.

The Nasdaq in a reverse of the Dow got all its support on Friday from only a couple of stocks led by GOOG and SNDK. Those rockets provided copycat buying in other Internets like BIDU, NTES, COHU and chips like CREE, FLSH and QCOM. Other than that the rest of the Nasdaq stocks were relatively quiet.

The NYSE composite gained +20 to 72.54 but finished -30 off its highs. The sell off on Thursday took it to a new four month low at 7211. It is heavily weighted to financials (22%) and industrials (17%) with consumer goods and services accounting for 26%. Oil and Gas is only 7% and techs only 5%. The index represents more than $17 trillion in market cap in 2057 companies. Given its component weightings and its lackluster rebound from Thursday's carnage I am basing most of my market bias today on its performance. This is a broad representation of corporate America without the hyper activity of the tech stocks.
With the NYSE Composite showing considerable weakness that cannot be blamed on energy at only 7% it would appear there is some selling left in our future.

The S&P gave anyone following my 1185 advice whiplash this week with a failure at 1185 on Tuesday to hit 1170 at Wednesday's open. The rocket ride on the buy program and related short squeeze took it from 1170 to 1197 by Thursday morning only to reverse back to a low of 1173 on Thursday afternoon. If you were adept enough to change sides on each cross of 1185 you profited greatly. On Friday we saw 1185 return as strong resistance and a failure into the close to 1179. 1185 just happens to be the down trending overhead resistance since early October.

For next week we are faced with multiple opportunities. That sounds more optimistic than saying multiple problems. First there are the energy earnings beginning with ACI, ASH, FDG, HYDL, MVK, NBR and WLL to name a few. However, they are just a footnote to the flood of major earnings from other sectors including financial, healthcare and semiconductors. More than 150 companies report on Monday and another 500 over the rest of the week. Over 100 of those are energy stocks. We thought that by last Friday we would know what the earnings picture looked like. Unfortunately we have seen good news, bad news and a lot of noise in the middle but there is really no clear guidance picture forming yet other than negative comments about energy costs. The Q4 rally out of the October depths has yet to appear and the dips are not being bought with any conviction.

On Tuesday I mentioned that a big miss by a major company could provide the capitulation dip we needed to stimulate buyers to rush into the market. From my keyboard to buyers ears it appeared on Wednesday as the market gapped down substantially only to finish +185 points higher on that massive burst of buying. I could not believe it since the Intel dip was weak at best and really did not fit the picture I had in mind. But, sometimes the smallest things can provide the needed spark to light a fire under buyers. Oil prices may have provided the spark on Friday to ignite an energy fire next week. Oil fell on Friday morning to a low of $59.10 before rallying to close at 60.65 and +.61 for the day. It appears to me that oil retreated to strong support at $59 in advance of energy earnings to be ready for a strong move next week. It could be just my imagination or maybe wishful thinking but this is the level where it could begin a meaningful rebound. The price of oil has corrected -$10 from the Katrina high of $70. It corrected -$10 in April-May and -$8 in Nov-Dec-2004. That is the only three times the 100-day average has been tested since early 2002. The 200-day average, currently $57, has not been touched since Feb-2002. This is definitely the ideal place for a rebound if one is headed our way. If companies beat strongly and hurricane damage is not too extensive then buyers may decide that +70% growth in energy is far better than they can get an any other sector. Conversely, a drop under $59 is lights out for the oil rally until all the hurricane confusion evaporates. We also have the Wilma problem. If Wilma fails to take that right turn around Cuba it may just end up running smack into the oil patch and prolong the confusion. In theory the jet stream is working against that possibility and providing a solid wall of resistance to the northern portion of the Gulf. We all know how theory works in practice. The oil sector will not breathe easier until Wilma is moving up the Eastern seaboard and providing all the easterners with torrential downpours.

That leaves the rest of us to wonder about the market direction rather than hurricane direction. I dissected index charts for nearly an hour Friday night and came up with no solid answers. The tech sector as evidenced by the NDX appears to be struggling higher from a solid low on the 13th. The Nasdaq Compx however is still fighting that strong resistance at 2090. It has not broken out from its October congestion range. If the Compx had broken above 2100 I would not hesitate to suggest the ugly was over and blue skies ahead. Unfortunately reality continues to rear its ugly head in the form of the Dow and NYA. While the Dow is not relative in terms of market health it still functions as a broken thermometer that suggests to traders that the patient is deathly ill. The NYA seems to be confirming the Dow weakness and I am hoping it is not contagious for the other indexes. While there is no vaccine for the bird flu a strong bought of positive earnings guidance this week could go a long way in staving off a bad case of bear-itus.

NDX Chart - 30 min

Nasdaq Chart - 30 min

NYSE Composite Chart - 30 min

Whichever direction the markets choose I expect it to happen quickly and not take all week to pick that direction. Microsoft does not report until Thursday after the close and I am hoping the decision has already been made before that event. I expect MSFT to beat but I don't think anybody really cares at this point. As for the markets I am still hoping for that big capitulation dip that clears out the rest of the weak holders and sends institutions rushing into the gap for bargains. A strong breakdown under 2050 on the Nasdaq would be troublesome, as would a Dow drop under 10000-10050. The SPX has support at 1170 and disaster support at just under 1150. With October heading into Halloween with no rally in sight it is time for something to happen and happen quickly or funds are going to start boarding up the windows and doors and go into hoarding mode with their cash. Managers wait all year for the October buying opportunity and should it not appear soon the fear will begin to grow. Personally I am not going to try and pick a direction and continue to go with the flow using SPX 1185 as my guide. I will continue to short the bounces below that level and buy the dips above it. Use a move over SPX 1200 as confirmation of any breakout and a move under 1170 as confirmation of a new leg down. That gives us a 30-point range to play and a range that has held since Oct-5th. Until that range breaks to either side I would not get too excited about loading up on lots of positions. Keep positions small and be alert as October volatility continues to plague investors. A lot of money can be made on these swings if you don't get married to your positions. I normally end my commentaries suggesting passive entries but in situations like we saw last week you need to act quickly to any abnormal dips/spikes and then act just as quickly to exit those positions when the next reversal appears within that 30 point range. Once the range breaks it is time to load up and hang on. Until then you are either quick or dead. If you would rather not play in traffic just watch calmly until 1200 breaks and then join the crowd.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None BRCM ASF
    LTR

New Calls

None today.
 

New Puts

Broadcom - BRCM - close: 42.45 chg: -1.85 stop: 45.01

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. (source: company press release or website)

Why We Like It:
Investors decided to "sell the news" despite a positive earnings report from BRCM. The stock spiked higher on Friday to $45.45 and then promptly fell. The end effect was a bearish engulfing candlestick on very big volume, which suggests more weakness ahead. We want to see some confirmation that BRCM has indeed reversed course so we're going to use a trigger at $41.95 to open the play. More conservative traders may want to use a trigger under the simple 100-dma (41.37) or under the August low near $41. If triggered we'll target a decline toward the simple 200-dma currently at 36.50 (we'll use $37.00-36.50 as our target for now). The Point & Figure chart points to a $35 target.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 45.00 RCQ-WI OI=8140 current ask $3.60
BUY PUT NOV 42.50 RCQ-WS OI=8278 current ask $2.00
BUY PUT NOV 40.00 RCQ-WH OI=4965 current ask $0.95

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/05 (confirmed)
Average Daily Volume = 7.3 million
 

New Strangles

Administaff - ASF - close: 39.40 change: +0.96 stop: n/a

Company Description:
Administaff is a leading personnel management company that serves as a full-service human resources department for small and medium-sized businesses throughout the United States. (source: company press release or website)

Why We Like It:
Investors are in love with ASF. The stock began its current bull run after report earnings back in May. Shares have steadily climbed higher and spiked again after reporting earnings in August. Now ASF nears the next earnings report on November 1st. Will the company deliver again and its stock spike to new relative highs? Or will the stock finally see some overdue profit taking? Expectations are probably running pretty high and that makes conditions ripe for a negative surprise. We think the stock's sideways consolidation over the last two weeks make ASF an attractive strangle candidate. We would not suggest new positions once ASF moves out of the $39-41 range.

Suggested Options:
This is a strangle play so traders need to buy both an out-of-the-money call and an OTM put. We're suggesting the Novembers. Our investment should be about $1.60. Try to keep it under $1.75-1.80. We'll exit if either option rises to $2.75 or higher (+65%).

BUY CALL NOV 45.00 ASF-KI OI= 37 current ask $0.80
-and-
BUY PUT NOV 35.00 ASF-WG OI=154 current ask $0.80

Picked on October 23 at $ 39.40
Change since picked: + 0.00
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 433 thousand

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Loews - LTR - close: 89.94 change: +1.06 close: n/a

Company Description:
Loews Corporation, a holding company, is one of the largest diversified financial corporations in the United States. Its principal subsidiaries are CNA Financial Corporation (NYSE: CNA), Lorillard, Inc., Boardwalk Pipelines, LLC, Diamond Offshore Drilling, Inc. (NYSE: DO), Loews Hotels, and Bulova Corporation. (source: company press release or website)

Why We Like It:
The upward momentum in LTR has stalled and shares have been consolidating sideways with a downward tilt over the last few weeks. Indictors are giving mixed signals. Oscillators on the weekly chart have turned bearish while its P&F chart remains bullish. Earnings are coming up on Thursday, October 27th. We're going to suggest a strangle to capture any post-earnings reaction. We would use an entry window of $89.50-90.50. You'll want to enter before LTR reports earnings.

Suggested Options:
We are going to suggest the December options for this strangle. Currently this will cost about $3.05. Try to keep your investment under $3.25-3.30. We'll plan to sell/exit if either option rises to $5.00 or more.

BUY CALL DEC 95.00 LTR-LS OI= 555 current ask $1.50
-and-
BUY PUT DEC 85.00 LTR-XQ OI= 258 current ask $1.55

Picked on October 23 at $ 89.94
Change since picked: + 0.00
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Cardinal Health - CAH - close: 64.06 chg: -0.11 stop: 61.95

We need to be planning our exits here in CAH. The company is due to report earnings on Wednesday, October 26th before the market's opening bell. We'd probably exit on any strength on Monday and worse case we'll close the play on Tuesday.

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

Picked on September 25 at $ 61.95
Change since picked: + 2.11
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 2.0 million

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SurModics - SRDX - close: 42.23 chg: +0.74 stop: 39.99 *new*

The relative strength displayed by SRDX on Friday is very encouraging. Unfortunately, we're running low on time. The company is expected to report earnings on Wednesday, October 26th after the market's close. Just to be safe we're going to plan on exiting Tuesday afternoon at the close instead of Wednesday afternoon. We are not suggesting new plays. We are raising our stop loss to $39.99.

Suggested Options:
Time is running low. We are not suggesting new plays.

Picked on October 18 at $ 40.95
Change since picked: + 1.28
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 249 thousand

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Target Corp - TGT - close: 54.64 change: -1.12 stop: 52.49*new*

There are no surprises here. On Thursday we said that the stock appeared to have produced a short-term top and we would expect TGT to trade lower on Friday. The only bad news here is that TGT traded a bit lower than we expected and fell below what could have been round-number support near $55.00, bolstered by its simple 100-dma. Compounding the problem is that RLX retail index, which has failed to breakout over resistance at its 200-dma. Oh, and let's not forget about worries over rising inflation, high gasoline prices and rising heating bills. Yes, this is a technical play on TGT and not based on any rosy fundamental outlooks. Watch for a bounce from the $54.00 level and/or its simple 50-dma (53.70) before considering new positions. We are going to raise our stop loss to $52.49.

Suggested Options:
We are not suggesting new positions at this time but if TGT does bounce then we'd look to the November calls. Remember, we plan to exit ahead of TGT's November 10th earnings report.

Picked on October 19 at $ 54.01
Change since picked: + 0.63
Earnings Date 11/10/05 (unconfirmed)
Average Daily Volume = 3.8 million
 

Put Updates

Teleflex Inc. - TFX - close: 65.49 chg: +0.52 stop: 68.01*new*

Time is running out for our play on TFX. The company is due to report earnings after the closing bell on Wednesday, October 26th. That means we'll want to exit on Tuesday afternoon at the close. More aggressive players might consider holding positions until Wednesday afternoon. However, keep in mind that TFX has spent the last three days trying to breakdown under support at the $65.00 level and its 100-dma. Thus far support has held. With the stock at support and time running low we are not suggesting new positions. We are adjusting our stop loss to $68.01. More conservative traders may want to put their stop just above the 10-dma near 66.65. We would not hesitate to exit on any dip toward $63.50, which is the top of its July gap higher.

Suggested Options:
We are not suggesting new plays in TFX.

Picked on October 13 at $ 66.49
Change since picked: - 1.00
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 174 thousand
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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AmerisourceBergen - ABC - cls: 75.06 chg: -0.30 stop: n/a

Share of ABC continue to vacillate around the $75.00 mark, which offers us another opportunity to launch new strangle positions. The stock is testing support at $75.00 and its simple 50-dma, which is also the bottom of its rising channel. The stock is throwing off mixed signals. ABC spent three weeks trying to breakout over the $79 level and failed. Its weekly chart has produced some technical sell signals. Meanwhile its Point & Figure chart is very bullish with a triple-digit price target. We're choosing to use a strangle to capture any significant moves from this pivotal level near $75.00. ABC is expected to report earnings on November 3rd and we will hold over the report.

Suggested Options:
This is a strangle play which requires the trader to buy both an out-of-the-money (OTM) call and an OTM put.

BUY CALL NOV 80.00 ABC-KP OI=643 current ask $0.90
-and-
BUY PUT NOV 70.00 ABC-WN OI=953 current ask $1.05

This would put our total cost around $1.95. Try not to pay more than $2.25. We plan to exit if either option trades at $4.00.

Picked on October 16 at $ 74.81
Change since picked: + 0.25
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Genentech - DNA - close: 85.04 chg: +0.21 stop: n/a

Shares of DNA continue to consolidate in a very narrow range. This looks like an attractive entry point to initiate new strangle positions. We are reposting our play description from Thursday night. However, we have corrected a typo in the cost of the option prices and our price target.

The BTK biotech index has been producing a lot of volatility lately. In the last four weeks the BTK index has produced both a bullish buy signal and a bearish sell signal and both were quickly reversed. This state of confusion has left shares of DNA narrowing into a neutral pattern. You could argue DNA is bearish given the breakdown under the $90 level and its 50-dma. You could argue bullish given the short-term double-bottom from support near $80. We're going to suggest a strangle to capture the next move in the stock. This way we don't care what direction it goes as long as the move is significant!

Suggested Options:
We are going to suggest a strangle using December options although one could certainly launch a strangle using November strikes. We like the Decembers because it gives us more time. Investors using a strangle need to buy both an OTM call and an OTM put.

BUY CALL DEC 95.00 DWN-LS OI=6949 current ask $1.15
-and-
BUY PUT DEC 75.00 DWN-XO OI=3630 current ask $1.10

This should put our total investment around $2.25. Try not to pay more than $2.50.

*We would not initiate a new strangle position if DNA gaps open tomorrow outside the $84.50-85.50 range. We plan to exit if either option trades into the $4.50-5.00 range (100% profit).

If you want to try November strikes we would consider the November $90 call and the November $80 put.

Picked on October 20 at $ 84.83
Change since picked: + 0.21
Earnings Date 10/10/05 (confirmed)
Average Daily Volume = 3.9 million

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eBay Inc. - EBAY - close: 39.29 chg: +0.14 stop: n/a

EBAY produced a bit of an oversold bounce on Friday and remains inside its $39-42 trading range. We are not suggesting new strangle positions at this time but readers might want to consider it if EBAY trades close to the $40.00 level again (within 25-cents). Our goal is to double our money so we'll plan on selling if either option trades in the $2.00-2.30 range. We are now in a wait and see mode.

Suggested Options:
We are not suggesting new positions at this time. The options we are using in our strangle are the November $45 call and the November $35 put.

Picked on October 18 at $ 40.42
Change since picked: - 1.15
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 18.3 million

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E*trade Financial - ET - close: 17.88 chg: +0.58 stop: n/a

Shares of ET soared to a new all-time high on Friday with a 3.3% gain on above average volume. We don't see any catalyst for the strength other than follow through on its recent earnings report (which is sort of what we expected). We are not suggesting new plays at this time.

Suggested Options:
We are not suggesting new plays. Our strangle involves the November $17 call and the November $15 put. If either option trades into the $1.60-2.00 range we'll exit. The call is getting close currently at $1.15bid/$1.25ask.

Picked on October 16 at $ 16.28
Change since picked: + 1.60
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 3.4 million

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General Dynamics - GD - cls: 116.54 chg: -1.44 stop: n/a

Thursday's bearish reversal in shares of GD have been followed by a breakdown through the bottom of GD's trading range and technical support at its 50-dma. We are no longer suggesting new strangle positions.

Suggested Options:
We are not suggesting new positions. Our strangle involves the November $125 call and the November $115 put. We plan to sell if either option rises to $4.00 or more.

Picked on October 09 at $119.59
Change since picked: - 3.05
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand

---

Harman Intl - HAR - cls: 102.04 chg: -3.21 stop: n/a

HAR continued to sell-off on Friday with a three-percent loss. We are not suggesting new plays at this time but if shares fall back toward the $100.00 region traders might want to consider new strangles. The worst case scenario here would be to see HAR churn sideways over the next few weeks without any clear direction.

Suggested Options:
We are not suggesting new positions. Our strangle involves the November $110 call and the November $90 put. We plan to exit if either option rises to $6.00 or more.

Picked on October 18 at $100.80
Change since picked: + 1.24
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 739 thousand

---

ITT Industries - ITT - close: 110.50 chg: +0.54 stop: n/a

We see no changes from our Thursday play description. ITT continues to trade in a narrow range around the $110 level and its 50-dma. This looks like another entry point to launch a strangle position. We're reposting our play description here:

ITT looks like another attractive strangle candidate. The stock's upward momentum has stalled with a bearish double-top pattern near $115.00. Yet even though the stock has broken below its five-month bullish trendline of support there has not been a lot of bearish follow through. Instead shares have been consolidating sideways the last few days. We're going to suggest a strangle and expect the October 27th earnings report (before the market open) to be the catalyst for ITT's next big move.

Suggested Options:
We are going to suggest the November strikes although more conservative traders could try January strikes.

BUY CALL NOV $115.00 ITT-KC OI=308 current ask $1.35
-and-
BUY PUT NOV $105.00 ITT-WA OI=514 current ask $1.30

This puts our total investment around $2.65. Try not to pay more than $3.00. We would not initiate new positions if ITT trades outside the $109-111 range. We considered a $120c/100p strangle but there aren't any $100 puts available for November. We'll plan to exit/sell if either option trades in the $4.50-5.00 range.

Picked on October 20 at $109.96
Change since picked: + 0.54
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 532 thousand

---

Kos Pharma - KOSP - close: 59.03 chg: -0.77 stop: n/a

Traders had about an hour on Friday morning to initiate new strangle positions before shares of KOSP sank lower. We are not suggesting new plays at this time but if KOSP manages to bounce back to the $60.00 level readers may want to consider a new strangle. The company is due to report earnings on November 3rd. We do plan to hold over the report.

Suggested Options:
We are not suggesting new plays at this time. The options in our strangle are the November $65 call and the November $55 put. We'll plan to sell if either option rises to $5.00 or more.

Picked on October 20 at $ 59.80
Change since picked: - 0.77
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 460 thousand

---

Legg Mason - LM - cls: 105.60 chg: +2.06 stop: n/a

LM continues to bounce higher and is now in the middle of its $100-110 trading range. We expect the company's earnings report on the morning of October 25th to produce the added volatility we need to see our play become successful. We are not suggesting new positions at this time.

Suggested Options:
We are not suggesting new plays at this time. The options in our strangle are the November $110 call and the November $90 put. We are adjusting our price target so that we'll exit/sell if either option rises to $5.00 or more (100% profit).

Picked on October 12 at $102.59
Change since picked: + 3.01
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 966 thousand

---

O'Reilly Auto. - ORLY - close: 26.80 chg: +0.15 stop: n/a

Shares of ORLY continue to churn sideways just south of its simple and exponential 200-dma's. The company is expected to report earnings on Tuesday, October 25th. We expect the company's earnings report to produce the needed volatility to make our play successful. We are not suggesting new strangle positions at this time however if ORLY were to trade back to the $27.50 region (27.30-27.70) before its earnings report we might consider a new strangle.

Suggested Options:
We are not suggesting new positions at this time. The options in our strangle are the November $30 call and the November $25 put. We are adjusting our price target to $1.75-2.00. If either option rises to $1.75 or more we'll exit.

Picked on October 09 at $ 28.23
Change since picked: - 1.43
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 513 thousand

---

Verifone Holdings - PAY - cls: 21.21 chg: +0.19 stop: n/a

Shares of PAY are testing overhead resistance at its exponential 200-dma. More importantly the stock has moved away from our entry point to launch any strangle positions so we are not suggesting new plays at this time.

Suggested Options:
We are not suggesting new plays at this time. The options in our strangle are the January $22.50 calls and the January $17.50 puts. We plan to exit if either option rises to $4.50 or more. We also suggested an alternative strangle with the November $22.50 call and the November $17.50 put. We would exit the Novembers if either option rises to $2.00 or more.

Picked on October 12 at $ 19.98
Change since picked: + 1.23
Earnings Date 11/18/05 (unconfirmed)
Average Daily Volume = 259 thousand

---

P.F.Chang's - PFCB - close: 50.94 chg: +0.95 stop: n/a

PFCB is a new strangle from the Thursday night newsletter. We do not see any changes from our original play description. However, we would not suggesting new positions unless the stock traded back toward the $50.00 level (say 50.40-49.60). Here's a reprint of the Thursday night play:

Shares of PFCB have been churning sideways in a $4.00 range (48-52) since the company announced a mixed same-store sales picture back in early October. Currently the stock is trading right in the middle of its range and we expect that the earnings report next week (Wednesday, October 26th before the market open) will be the catalyst to push PFCB out of this trading range.

Suggested Options:
We are not suggesting new plays at this time. The options in our strangle are the November $55 calls and the November $45 puts. Try and keep your investment to less than $1.75. We plan to exit if either option rises to $2.50 or more.

Picked on October 20 at $ 49.99
Change since picked: + 0.95
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 912 thousand
 

Dropped Calls

Biosite Inc. - BSTE - close: 68.42 chg: +0.73 stop: 61.49

BSTE continues to show great relative strength by adding more than one-percent on Friday despite a lackluster performance in the biotech sector. The stock hit our primary target of $67.50 a few days ago and is close to hitting our secondary target near $69.50. However, we are choosing to exit early. The company is due to report earnings on Tuesday, October 25th and we do not want to hold over the report. We'll exit here before investors decided to do any profit taking!

Picked on October 13 at $ 63.39
Change since picked: + 5.03
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 261 thousand

---

Pre Paid Legal - PPD - close: 41.52 chg: +1.05 stop: 39.75

Time is almost up for our PPD play and we're choosing to exit a little early. The company is expected to report earnings on Monday, October 24th after the market's closing bell. The only problem is that this earnings date is not confirmed. We're exiting early because we'd rather be cautious than unexpectedly hold over a report and have the stock move against us.

Picked on October 10 at $ 40.10
Change since picked: + 1.42
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 72 thousand
 

Dropped Puts

None
 

Dropped Strangles

Google Inc. - GOOG - close: 339.90 chg: +36.70 stop: n/a

Target achieved and surpassed. Google was the story of the day on Friday. Reaction to the company's earnings report was impressive. The stock gapped open at $345.80 and closed at $339.90. It was a big day. The calls in our strangles have surpassed our price targets. The November $320 call hit a high of $30.50 and is trading at 24.90ask/25.00bid. The December $330 call hit a high of $28.10 and is trading at $23.10ask/23.10bid, which sort of looks like a typo not having any spread. Whichever strangle you chose we hope you locked in your profits. Our targets for both strangles were to sell if either option hit the $18.00-20.00 range.

Picked on October 16 at $296.14
Change since picked: +43.76
Earnings Date 10/20/05 (confirmed)
Average Daily Volume = 8.1 million
 


Trader's Corner

Not-So-Secret Diaries

Many a younger sibling has broken into an older sister's diary. Each morning, subscribers to the OptionInvestor's Market Monitor and Futures Monitor peek into this older sister's and those of the other contributors. Our trading diaries, that is.

An integral part of a trading diary consists of a post- or pre-market synopsis of what happened and what might happen next. I term these my scenarios for the day's action. Sometimes those scenarios unfold just as I expected, and sometimes they're dead wrong. Either way, the scenario allows me to test the action against my expectations and determine right away if those expectations are well founded or not. If my scenario is flawed, the scenario might need to be revised or I might need to be out of the market, or both.

My early morning scenarios tend to be too wordy to be pasted into this article, but the entry on September 20 noted the approach of Rita and the FOMC decision due later that afternoon. I chose that day for a discussion of a trading diary or log because it included two such momentous events. That day's first OEX-related entry noted the tendency of the OEX to churn either above or below the 72-ema, with that average having been tested the previous day.

For reference, here was the chart of the OEX as of the close September 19, with the 72-ema the aqua-colored line and the 200-sma, the blue one.

Annotated Daily Chart of the OEX:

My first OEX-related commentary that day, what would have constituted an integral part of my personal trading diary, concluded that the OEX might chop around pre-FOMC between that 72-ema and 200-sma's support and descending resistance at about 573.30. Then it might break through either support or resistance around the time of the FOMC decision. Further cautions to myself and readers included the tendency to see some volatility post-FOMC results, with the first direction not always the final direction.

The entire entry can be found on the Market Monitor archives, 9/20/2005 at 8:58:58 AM. Components of the entry, a typical sort of trading diary entry, included the following:

1. Economic reports or other developments due.
2. Weather-related factors impacting markets.
3. Support and resistance.
4. Chart formations.
5. Typical behavior of the OEX.
6. Conclusion or scenario.
7. Time and level to watch for trades.
8. Signs that the scenario was not unfolding as expected.

That day, weather-related factors were included because they impacted markets. On other days, that first entry might include geopolitical developments, "gut" feelings about what might happen, upcoming holidays on our or other markets that might change trading volume or any number of other events or factors that could impact the behavior of the markets. In personal trading diaries, including notations on the day of the week, family- or business-related stresses, and the profitability or losses of the previous day's trades can be important, too. While your previous day's trading record might not influence the behavior of the markets, that record can certainly change your trading behavior and can become important in determining why some trades work and some don't. Perhaps you find that you take more risks after a run of profitable or losing trades than you would otherwise, for example. It was through an examination of a trading diary that I determined long ago that Friday trades don't tend to be as profitable for me as trades initiated toward the beginning of the week.

On a recent October day, one blogger noted his difficulty in detaching his attention from a losing trade even though the day's trades had been profitable overall. He mentioned his ongoing dilemma of choosing between waiting for a target to be hit or trailing a stop. His trading diary was helping him identify a couple of issues he needed to resolve with his trading, one emotional and one technical. Perhaps future entries will help him identify which strategy proves most profitable.

A trading diary should also account for trades taken and provide some explanation of why they were entered or exited. Such accounts are made easier for those whose online brokers allow them to set up rather mechanized trade parameters. For the rest of us, notations can be made via spreadsheets downloaded from the online broker and then incorporated into a computer document that also includes the synopsis of information such as that I include in my first OEX update each morning. Notations can be hand-entered into an old-fashioned ledger or jotted on a printed-out copy of the day's trading activity.

For example, the trades I made on September 20 are documented below as they might be in my trading journal, although with identifying account information such as order numbers and profits excluded. I like to look at the time of each trade, too, when I'm studying whether time of day or length of time in a trade affects its profitability. I also added the OEX's value at the time of an entry or exit. My broker doesn't automatically download that information, but it is provided on trade confirmations. Note: Because my broker downloads these with the last trade first, begin at the bottom and move upward through the chart to see the progression of the trades for that day.

Table of Trades:

All trades on this day were profitable, although the last trade, the call position, netted only $4.10 per contract after commissions with my broker ($560-530=$30. $30-25.90 commissions=$4.10). This was because, in my haste in the post-FOMC environment, I chose an OTM option with a low delta, a poor choice for an expected scalp of a point or two. One conclusion from this day's trading diary is that future entries could perhaps include notations of the delta at the time of entry, although that's not actually a notation I usually need. After years of trading, I usually have a fairly good sense of how far ITM I want to be, but new traders might include this as a notation in their trading diaries. It can be an important component of identifying why some trades prove profitable and some not.

Because my day trades are often initiated or exited based on an examination of Keltner-based studies of the advdec line, some notations include information that the advdec line was at support or resistance, with support a time to look for long plays and resistance a time to look for bearish ones. Including those notations allows me to map how successful my strategy has been, although it's of course not as exact as some of the more mechanized setups offered by some other trading systems. If you're making entry and exit decisions based on RSI, Bollinger bands, Donchian channels, pivot points, Fib brackets or any other technical analysis tool, those notations should be included in your trading diary.

Some might include watch lists in their trading diaries. They might note point-and-figure targets for the stocks or indices in their portfolios, bullish percent figures for the indices that interest them, or any number of other figures or comments utilized in their trading methodology. Account balances at the beginning of the day might be noted.

Every day, subscribers to the Market and Futures Monitors peek into the trading diaries of the commentators, as our ideas and impressions are detailed real time. If I think a trade might be appropriate for the majority of readers, that's detailed real-time, too, although I don't drag readers into the riskier trades.

This article proposes ideas for you to use in your own trading log. Keeping such a log improves your performance. Although my trading diary is now mostly kept online for all to see, I once kept notebooks that detailed the same type of synopsis and live commentary that's now included on the Market Monitor pages. I once printed up charts and drew formation trendlines by hand to give me an actual tactile feel of the markets. Do something similar and perhaps someday you'll be writing for an online website, too, and I'll be peeking into your trading diary.
 

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

DISCLAIMER

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

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