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Daily Newsletter, Wednesday, 10/26/2005

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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

Bizarre Badminton

For a couple of weeks, traders have been engaged in a game of bizarre badminton, fielding a barrage of earnings results, some wrapped up in colorful shuttlecocks and some coming in the form of bullets or spitballs. Traders have also been batting away disturbing rumors about indictments of White House parties and a possible hedge fund failure. Those hedge fund rumors are being lobbed toward traders all the way from European forex markets, and although nearly invisible to U.S. traders and still unproven, they may still be contributing to that need to charge back and forth across the court. The missiles come at traders in a fast-and-furious pace, as traders race from one side of the court to the other, trying to dodge the most unpleasant of the missiles and keep the good ones afloat.

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The missiles related to what is now being termed Leakgate by some reporters flew thickly pre-market. Rumors included speculation that indictments would be handed down in the two-year criminal investigation in the leak of a CIA officer's identity as early as today, but the grand jury adjourned for the day without those indictments being handed down or at least made public, if they were. Some speculated that the indictments would be levied against I. "Scooter" Libby, Vice President's Cheney's chief of staff, and Karl Rove, President Bush's political adviser, among others. Wilder rumors, swirling for the last week, speculated that the indictments could reach higher. By yesterday, some articles were noting reports that Libby first learned the identity of the CIA officer from Cheney, with those speculations conflicting with other descriptions of the flow of information.

Traders tire of charging back and forth. For the past two days, some indices have stalled at resistance.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Weekly Chart of the SOX:

The indecision about the next direction intraday was apparent on many of those charts, but the overall view remains a bearish one until proven otherwise. The charts show indices retesting broken support to see if it's holding as resistance. Until it stops holding, the assumption is that there will be more downturns through the consolidation formations or, in the SOX, more churning between important averages.

The missiles, both pleasant and otherwise, continued being hurled by other entities. Before-the-open broker action included Deutsche Bank and Citigroup downgrades of Amazon (AMZN, down 13.92 percent), to a hold at Deutsche Bank and a sell at Citigroup. Other broker action included a Prudential trimming of Temple-Inland's (TIN, down 0.33 percent) rating to a neutral and a Merrill Lynch downgrade of ITT (down 3.46 percent) on valuation concerns. Citigroup upgraded International Paper (IP, up 2.42 percent) to buy from a hold rating.

In addition, Piper Jaffray cut its estimates and price target on Research in Motion (RIMM, up 0.92 percent). The firm thought Nokia would gain market share and was worried about the possibility of BlackBerry sales being interrupted. RIMM's attempt to dodge unpleasant missiles failed, with later news stating that the Supreme Court would not block the decision to shut down BlackBerry sales, but that RIMM could file a second request with the court.

Other news included Guidant's (GDT, down 2.25 percent) announcement that the U.S. Attorney's offices in Boston and Minneapolis had subpoenaed documents related to pacemakers, ICDs, leads and other similar products. GDT wasn't alone. St. Jude Medical (STJ, down 0.75 percent) and Medtronic (MDT, down 0.23 percent) also received subpoenas, and all were to decline after the open. Johnson & Johnson (JNJ, down 0.73 percent) suffered along with them because of its pending acquisition of GDT.

Wal-Mart Stores (WMT, up 0.19 percent) was to hold an analyst meeting later in the day, so was already in focus, but The New York Times also unveiled purported suggestions from an executive vice president for trimming spending on healthcare and other benefits, including dissuading unhealthy people from working for the company and other similarly disturbing proposals.

Lockheed Martin (LMT, down 1.16 percent) was also the subject of a newspaper report, this one speculating that the company was considering a buyout bid of Computer Sciences Corp. (CSC, up 1.29 percent).

Before-the-bell earnings bombarded traders with missiles to be dodged or batted back. They included third-quarter earnings results from Boeing (BA, down 1.87 percent) that were deemed disappointing by some but were confusing to decipher since the reported number included several one-time items. Profit more than doubled in the third quarter. The company earned $1.01 billion or $1.26 a share against expectations of $0.80 a share, but the earnings included a $0.62 a share tax benefit and a hit of $0.25-0.30 a share from the machinists' strike. The year-ago earnings had been $0.56 a share on earnings of $456 million. Revenue was lower, dropping to $12.63 billion from the previous quarter's $13.15 billion. The company raised full-year earnings estimates for 2005 and 2006 but warned that full-year sales for those years would not meet estimates.

A Taser (TASR, down 0.44 percent) representative fielded questions, as hard as bullets, about its earnings report when interviewed on CNBC this afternoon. The former momentum darling saw declining sales after questions about the safety of its stun guns. Although the TASR representative said that global opportunities existed, including in the U.K., where every police officer was to be equipped with a stun gun, but that didn't impress investors who dropped the stock. The gross margin widened, the company declared, and one wrongful-death suit has been dropped. However, quarterly income was less than $0.01 a share, down from last quarter's $0.11 a share. Net sales dropped 38 percent from the previous quarter. CNBC commentators also questioned the company representative about insider sales of the stock near the top, but the executive countered with the information that insiders had been selling the stock all the way up, too.

Utility company Exelon (EXC, down 1.25 percent) disappointed, pressuring the entire sector. Like BA's, the comparisons with expectations proved difficult. The disappointment stemmed at least in part from the company's full-year EPS estimate of $3.00-3.15 against expectations for an EPS of $3.13. The midpoint of that range proved lower than the expected number.

Another much-watched release came from ConocoPhillips (COP, up 0.36 percent), with the company saying that third-quarter profit jumped 89 percent. Earnings were $2.68 a share, beating expectations of $2.57 a share and also topping the year-ago earnings of $1.43 a share. Revenue rose 43 percent. The strong commodity price environment helped offset the impact from Katrina, Rita and Dennis, the company's chairman and chief executive stated. The company's Lake Charles, LA refinery should return to normal operations by next week, the company added.

In a climate when this company and two others in the sector report this week and the inflationary impact of higher gasoline and other energy costs are hotly debated, the weekly crude inventories release assumed some importance. At about 10:30, the Energy Department announced that crude inventories rose 4.4 million barrels and gasoline inventories climbed 200,000 barrels, but that distillates fell 1.6 million barrels. Gasoline and distillate inventories were reportedly in the lower end of the average range for this season while crude was in the upper range for the season. This could perhaps be reflecting the impact of reduced refining capacity.

Crude reacted by reaching down to test $61.50 support and then climbing, but eventually dropping all the way to neckline support on a potential head-and-shoulder formation.

Annotated Daily Chart of Crude for December Delivery:

Traders must bat various ideas back and forth concerning a possible decline in crude prices. Is the decline due to softening demand as economies slow or due to ramped-up production as refineries come on line again? Is the decline a seasonal effect? At any rate, that potential H&S remains a potential one only and the potential violation of the 30-week sma on a weekly closing basis also remains only a possibility. Crude costs are as close to a bounce point as they are to a failure.

The barrage of information showed that traders occasionally batted some nice shuttlecocks to the ground and kept afloat some spitballs, although sometimes they fielded those missiles as expected. Commentators liked the pre-market earnings reports from Monster Worldwide (MNST, up 0.26 percent), Sprint Nextel (S, down 0.65 percent) and Wellpoint (WLP, down 4.37 percent), but WLP and sector peer Cardinal Health (CAH, down 0.58 percent) were to be punished because of their in-line guidance. Other pre-market releases included Lucent's (LU, down 0.18 percent) report of $0.08 earnings versus last year's $0.23. LU had been expected to earn only $0.05 according to some sources. Net income fell 69 percent from the year-earlier period. Other upside reports included L-3 Communications' (LLL, down 2.28 percent) report of $1.11 a share against expectations of $1.09. Later, investors were to focus on its in-line guidance, however, sending it lower.

Flextronics (FLEX, down 2.9 percent) reported a second-quarter loss or breakeven per-share earnings, compared to a profit of $0.16 a share and higher revenue in the year-ago period. If one-time charges were excluded, FLEX earned $0.17 a share against expectations of $0.19 and against higher revenue than the company reported. Starwood Hotels & Resorts Worldwide (HOT, down 1.26 percent) reported falling net profit for the third quarter and earnings of $0.17 a share. Excluding some tax expenses related to repatriating earnings and its 1998 sale of ITT World Directories, the company would have beat analysts' expectations of $0.52 a share, the company claimed, and would have reported $0.58 a share. Together with IP's upgrade, Air Products' (ADP, up 2.44 percent) earnings results, beating expectations, were to help the materials sector post gains in early trading.

What should be apparent from those releases and the subsequent drops or bounces is that some releases deemed encouraging in the pre-market session were dropped to the court by the close. The same was true of some releases deemed disappointing. The perverse badminton game continued.

The day was light on economic releases, at least giving traders a little relief on that front. Economic numbers included the Mortgage Bankers Association's mortgage applications figures for the week ending October 21, with that group of numbers released at 7:00 EST. The Market Composite Index fell 7.9 percent from the previous week's number, with that figure measuring mortgage loan application volume. The seasonally-adjusted Purchase Index dropped 7.4 percent; the Refinance Index, 8.5 percent; the Conventional Index, 8.1 percent and the Government Index, 4.9 percent. The four-week moving average of the Purchase Index dropped 0.9 percent; the seasonally adjusted Market Index, 1.5 percent and Refinance Index, 2.3 percent. The refi share of mortgage activity also dropped. The average contract interest rate for the 30-year fixed-rate mortgage fell to 6.06 from the previous 6.09 percent and points decreased, too.

President Bush was playing his own game of bizarre badminton, reputed by some to be making a number of gambits to deflect attention from the possibility of pending indictments, as yet just rumored. Some suspected that his naming of Greenspan's successor was one of those gambits, coming earlier than some had anticipated. Today, as survey results revealed that 55 percent of Americans disapprove of his policies, some expressed disappointment in the lack of concrete steps to decrease the deficit in today's address to The Economic Club. While reassuring listeners that the U.S. economy was strong and resilient, President Bush did call for Congress to "push the envelope" on spending cuts but also asked that his tax cuts be made permanent. He expressed disappointment that more Democrats have opposed free-trade measures he wants. This reporting of various theories in no way implies a political viewpoint, but was only part of the trading environment, and so a necessary part of this report. The speculations, some believe, contributed to unease in the markets, although there appeared to be no discernable direct correlation between anything said today and a particular market turning point.

Speaking before the Center for National policy, U.S. Treasury Secretary Snow also called on Congress today to continue the tax cuts about to expire and to control spending. He called for a simpler tax code that was more pro-growth.

After-hours earnings reports continued to hurl missiles into the air. Applied Micro Circuits Corp. (AMCC) eased lower in after hours, and Pulte Homes (PHM) dropped more than a dollar as of this reporting, but no earnings reports were showing up in news at the time of this report, so it was unclear whether they were reacting to earnings reports or just in advance of those reports. Applebee's International (APPB) eased after its report showed that quarterly profit dropped. Biogen (BIIB) reported lower earnings but higher revenue and sales for the third quarter, and was dropping in after-hours trading. As reported by Jeff Bailey on OptionInvestor's Market Monitor, after-hours reporting companies included LSI Logic (LSI), dropping after its report; Sallie Mae (SLM), steady; Digital River (DRIV), dropping after its report; Callaway Golf (ELY), higher in after-hours; WellChoice (WC), steady; Raymond James (RJF), higher after its report and Wright Express (WXS), higher.

Many more were due, and Thursday's schedule shows no letup in the barrage of missiles hurled at traders. Thursday's reporting companies include AET, ALA, AEP, APA, ARLOY.PK, AZN, ABX, BEBE, BDK, BR, BOBJ, COG, CAJ, CRA, CRDN, CCE, CGI, CAM, CFC, DENN, EMN, ELN, EMCI, XOM, GTW, GP, GSK, HMC, IMCL, IDC, KLAC, LTR, MSO, MFE, MSFT, NCR, NWL, NXTP, PHS, PXR, PD, RTN, RSAS, SBP, SAPE, SMI, SWIR, SKYW, SNE, SWN, STA, SPF, SU, TRA, TCC, UNP, UHS, VZ, VMC, WASH, WMI, WEN, XMSR and YELL, just to name a small percentage of reporting companies.

Thursday's economic releases begin with the usual 8:30 release of jobless claims, with September Durable Goods Orders, Help-Wanted Index and New Home Sales following at 10:00 am.

Eventually traders will be able to see through that barrage of missiles, better able to decide whether to keep playing or leave the court until a better season, but that may not happen until Friday. For now, despite the alternating bullish and bearish days, what we're seeing is volatile consolidation after support was broken. Until key levels are broken to the upside, pointed out on the charts above, but including the daily 72-ema's on some charts, the best plan may continue to be selling tests of resistance and taking at least partial profits as the bottoms of the consolidation zones. An opportunity to sell a rollover beneath the SPX's 200-sma was offered several times this week. I'm not sure it will be tomorrow, but if there's an early bounce, watch for rollovers beneath 1999-1203 for new bearish entries. Decide first if you want to enter any new trades ahead of Friday's important release, however, as that could change the court rules in this bizarre badminton game.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None BCR

New Calls

None today.
 

New Puts

Bard C.R.- BCR - close: 61.70 change: -1.16 stop: 64.25

Company Description:
C. R. Bard, Inc., headquartered in Murray Hill, N.J., is a leading multinational developer, manufacturer and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology and surgical specialty products. (source: company press release or website)

Why We Like It:
BCR peaked back in May near $73 and has struggled ever since. The stock managed a bounce from support near $63 back in August but that rebound stalled under new resistance in the $67-68 range near its simple 200-dma. The stock continued to sell off even after reporting earnings that came in three cents higher than analysts' estimates. Today's decline puts the stock under last week's low with above average volume fueling the move. The P&F chart is bearish and points to a $55 target. Our first target is the $58.00 level. More aggressive traders might want to aim for the $55 region. Our time frame is less than six weeks.

Suggested Options:
We are suggesting December puts.

BUY PUT DEC 65.00 BCR-XM open interest= 0 current ask $4.00
BUY PUT DEC 60.00 BCR-XL open interest= 5 current ask $1.25

Picked on October 26 at $ 61.70
Change since picked: + 0.00
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 745 thousand

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Infosys Tech. - INFY - close: 67.95 chg: -1.14 stop: 70.51

Company Description:
Infosys defines, designs and delivers IT enabled business solutions. These provide our clients with strategic differentiation and operational superiority, thereby increasing their competitiveness. Each solution is delivered with the industry-benchmark Infosys Predictability that gives our clients peace of mind. With Infosys, they are assured of a transparent business partner, business-IT alignment with flexibility, world-class processes, speed of execution and the power to stretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered. Infosys has over 46,000 employees in over 30 offices worldwide. (source: company press release or website)

Why We Like It:
INFY reported earnings back on October 11th. The company beat expectations and raised guidance but investors were still not happy. The stock gapped higher following its earnings report and broke through resistance at the $75 level but quickly reversed course. Now the stock has in a bearish pattern and its P&F chart points to a $57 target. The recent oversold bounce has failed near $70.00 and its simple 200-dma and the move looks like a new entry point to buy puts. We are going to target a decline into the $62.00-60.00 range. Please note that Microsoft (MSFT), the biggest software company in the world, is going to report earnings on Thursday afternoon after the closing bell. What MSFT has to say about their business could set the tone for the software sector. More conservative traders may want to wait until Friday morning and see how shares of INFY react to the MSFT news before considering any new positions here. Also note that INFY will host an analyst meeting on November 11th.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 70.00 IUN-XN open interest= 12 current ask $5.40
BUY PUT DEC 65.00 IUN-XM open interest= 0 current ask $2.70

Picked on October 26 at $ 67.95
Change since picked: + 0.00
Earnings Date 10/11/05 (confirmed)
Average Daily Volume = 698 thousand
 

New Strangles

Abercrombie&Fitch - ANF - cls: 49.23 chg: -0.25 stop: n/a

Company Description:
The Company operated 352 Abercrombie & Fitch stores, 163 abercrombie stores, 289 Hollister Co. stores and 6 RUEHL stores at the end of fiscal September. (source: company press release or website)

Why We Like It:
It has been a rough end of summer for ANF. Investors are worried that high gas prices and higher heating bills will take a big bite out of consumer spending. So why do we like ANF as a strangle candidate? The stock has been consolidating sideways the last five weeks and that consolidation is narrowing. Fundamentally we might be tempted to bet on a decline but it would be a tough decision to fight the historical bullish trend in retailers during the fourth quarter. Plus, ANF's recent same-store sales report looked pretty darn good. That's why we're suggesting a strangle. ANF is due to report earnings in mid November and we plan to hold over the report.

Suggested Options:
We would use an entry window of $49.00-51.00 to open the play. Obviously the closer ANF is to $50.00 the better the strangle entry "should" be. We're suggesting the December options although traders could also use Januarys. At these prices our cost should be $2.70. Try and keep it under $3.00. Our target will be a rise to $5.00 but traders may want to consider exiting in the $4.50 or higher range.

BUY CALL DEC 55.00 ANF-LK open int= 431 current ask $1.25
-and-
BUY PUT DEC 45.00 ANF-XI open int= 20 current ask $1.45

Picked on October 26 at $ 49.23
Change since picked: + 0.00
Earnings Date 11/15/05 (unconfirmed)
Average Daily Volume = 2.6 million

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Hutchinson Tech. - HTCH - cls: 24.89 chg: -0.12 stop: n/a

Company Description:
Hutchinson Technology is the leading worldwide supplier of suspension assemblies for disk drives. Hutchinson Technology's BioMeasurement Division provides health professionals with simple, accurate methods to measure the oxygen in tissue. (source: company press release or website)

Why We Like It:
There seems to be a big disconnect between shares of HTCH and the DDX disk drive index. The stock has taken a beating over the last several months with big gaps down on July 22nd and August 30th both of which were sparked by an earnings warning. There is no telling what the company will say when the report earnings on November 1st but odds are it could produce a sharp move in the stock price and it's why we're suggesting a strangle.

Suggested Options:
We are suggesting the January options although traders could also use December strikes if they prefer. At these prices our investment should be about $1.65. We would try and keep it around $1.75 or less. We'll target a rise to $3.00. We are suggesting a $24.75-25.25 entry window ahead of the company's earnings report.

BUY CALL JAN 30.00 UTQ-AF open int= 472 current ask $0.90
-and-
BUY PUT JAN 20.00 UTQ-MD open int= 459 current ask $0.75

sa

Picked on October 00 at $ 00.00
Change since picked: + 0.00
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Target Corp - TGT - close: 53.86 change: -0.19 stop: 52.74*new*

Continued weakness in the retailers does not bode well for TGT and the stock did not bounce from yesterday's low. This is a poor sign for our breakout play. Conservative traders may want to exit now to avoid further losses or tighten their stop loss significantly closer to the 50-dma or the 53.50 region. If TGT breaks down under the 50-dma (53.60) we will consider exiting early! We are raising the stop loss to $52.74.

Picked on October 19 at $ 54.01
Change since picked: - 0.15
Earnings Date 11/10/05 (unconfirmed)
Average Daily Volume = 3.8 million
 

Put Updates

Broadcom - BRCM - close: 42.93 chg: -0.05 stop: 45.01

BRCM tried to rally again this morning but the rally failed under its simple 50-dma. We remain cautious. If the SOX can turn lower from its current sideways consolidation over the last few days and breakdown under the 200-dma then the picture should improve with BRCM. We are not suggesting new put positions in BRCM until the stock trades under Monday's low. If this occurs our target remains the $37 level.

Picked on October 24 at $ 41.95
Change since picked: + 0.98
Earnings Date 10/20/05 (confirmed)
Average Daily Volume = 7.3 million
 

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: 73.39 chg: -1.05 stop: n/a

ABC continues to sink following yesterday's news. The stock has broken support at the $74 level and is nearing support at its 100-dma near $72.50. We would not suggest new strangle positions at this time. The move out of our suggested entry window puts us in a wait-and-see mode. Earnings are due out next week.

Picked on October 16 at $ 74.81
Change since picked: - 1.42
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Administaff - ASF - close: 40.58 change: -0.07 stop: n/a

ASF provided another dip to the $40.00 level this morning and traders could have used that as a preferred entry point to consider launching new strangle positions. The options we are suggesting for the strangle are the November $45 call and the November $35 put. Try and keep your investment under $1.80. Our plan is to exit if either option hits $2.75 or more.

Picked on October 23 at $ 39.40
Change since picked: + 1.18
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 433 thousand

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Avid Tech. - AVID - close: 42.19 chg: +2.63 stop: n/a

Wow! AVID turned in a huge move today. The stock gapped higher to $39.71 and surged above last week's highs. Volume came in well above average and shares closed with a 6.6% gain. If you were quick this morning (the first 30 minutes of trading) there was an opportunity to launch a strangle in our suggested 39.50-40.50 window. Unfortunately, the sudden show of strength probably pushed the cost of our calls higher than we would have liked. We would not suggest new strangle plays at this time unless AVID were to pull back into the 40.50-39.50 trading window ahead of its earnings report due out tomorrow after the closing bell. Hmm... no news on today's spike. We wonder if AVID's earnings news may have leaked out early today. The options in our suggested strangle are the December $45 call and the December $35 put. We plan to exit if either side of the strangle rises to $4.50 or more.

Picked on October xx at $ xx.xx
Change since picked: + 0.00
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 929 thousand

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Genentech - DNA - close: 89.52 chg: +1.15 stop: n/a

DNA continues to show relative strength. The stock added another 1.3% on above average volume despite a decline in the BTK biotech index. We would not suggest new strangle positions at this time. The options in our suggested strangle are the December $95 call and the December $75 put. We plan to exit if either option rises to $4.50-5.00 or more.

Picked on October 20 at $ 84.83
Change since picked: + 4.69
Earnings Date 10/10/05 (confirmed)
Average Daily Volume = 3.9 million

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eBay Inc. - EBAY - close: 38.30 chg: +0.29 stop: n/a

We see no changes from our previous update on EBAY. We're not suggesting new plays at this time. The options in our suggested strangle are the November $45 call and the November $35 put. If either option rises to $2.00 or more we'll exit. Right now it looks like the put side may end up being the winning side.

Picked on October 18 at $ 40.42
Change since picked: - 2.12
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 18.3 million

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General Dynamics - GD - cls: 115.67 chg: -0.75 stop: n/a

Today's failed rally in shares of GD looks pretty bearish. The stock is nearing potential support at $115.00 and its simple 100-dma (114.80). We are not suggesting new strangle plays. 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: - 3.92
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand

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Harman Intl - HAR - cls: 100.91 chg: -3.13 stop: n/a

HAR is almost back to where we started and that does not bode well for the bulls. We are not suggesting new plays at this time but traders looking for new plays might want to consider a strangle using December options. 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: + 0.11
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 739 thousand

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Intl Rectifier - IRF - close: 35.11 chg: +0.16 stop: n/a

IRF did try to rally midday but the momentum faded. IRF is still offering an entry point to launch new strangle positions ahead of its earnings report due out Thursday afternoon. We are suggesting the December $40 call (IRF-LH) and the December $30 put (IRF-XF). Try and keep your total investment under $1.40 if possible. We'll look for a rise to $2.40 as our target.

Picked on October 25 at $ 34.95
Change since picked: + 0.16
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 1.5 million

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ITT Industries - ITT - close: 107.40 chg: -3.46 stop: n/a

Hmmm... the action in ITT was interesting. The company is not due to report earnings until tomorrow morning before the opening bell. Yet the stock gapped down this morning on no apparent news. Shares opened at $108, managed a quick bounce to the $110 level but the rally failed. Shares of ITT then plunged late this afternoon under support at the $108 level. This doesn't bode well for tomorrow. We are not suggesting new strangle positions. Our current strategy involves the November $115 call and the November $105 put. We'll plan to exit if either option rises to into the $4.50-5.00 range.

Picked on October 20 at $109.96
Change since picked: - 2.56
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 532 thousand

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Kos Pharma - KOSP - close: 63.00 chg: +1.72 stop: n/a

KOSP continues to bounce and is challenging resistance at its trendline of lower highs. We are not suggesting new strangle positions at this time. The options for our previously suggested strangle are the November $65 call and the November $55 put. We'll plan to exit if either option rises to $5.00 or more.

Picked on October 20 at $ 59.80
Change since picked: + 3.20
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 460 thousand

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Legg Mason - LM - cls: 108.48 chg: +5.00 stop: n/a

The volatility in shares of LM has got to be driving some traders crazy! The stock got an upgrade this morning before the bell. This pushed shares to gap higher at $105.50 and soar to $109.90 (near three-month resistance at the $110 level). We are not suggesting new strangle positions. Our suggested strangle involves the November $110 call (LM-KB) and the November $90 put (LM-WR). We'll plan to exit if either rise to $4.50 or higher, which is an adjustment from our previous target of $5.00.

Picked on October 12 at $102.59
Change since picked: + 5.89
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 966 thousand

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Loews - LTR - close: 90.67 change: -0.68 close: n/a

Tomorrow is the big day for LTR. The company is due to report earnings before the opening bell on Thursday. Wall Street expects profits of 0.72 a share. We are not suggesting new positions at this time. The options in our strategy are the December $95 calls and the December $85 puts. We'll plan to exit if either option rises to $5.00 or more.

Picked on October 23 at $ 89.94
Change since picked: + 0.73
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Microsoft - MSFT - close: 25.11 change: +0.08 stop: n/a

MSFT continues to vacillate around the $25 level ahead of its earnings report due out tomorrow after the closing bell. This is still an entry point to consider a strangle position ahead of its earnings report. We are suggesting an entry window of 25.25-24.75. We are suggesting a strangle with the December $27.50 call (MSQ-LY) and the December $22.50 put (MSQ-XX). We're suggesting that readers keep their total cost under $40 cents if possible. As of yesterday the cost for both was $0.30 total. With the December options we're aiming for a rise to $0.80-0.90. Traders might want to consider an alternative and buy a strangle using the January $27.50 call and the $22.50 put for about $0.60 total.

Picked on October 25 at $ 25.03
Change since picked: + 0.08
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 64 million

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O'Reilly Auto. - ORLY - close: 27.42 chg: +0.42 stop: n/a

We see no changes from our previous update on ORLY. The options in our previously suggested strangle are the November $30 calls and the November $25 puts. We'll plan to sell if either option rises to $1.75 or more.

Picked on October 09 at $ 28.23
Change since picked: - 0.81
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 513 thousand

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Verifone Holdings - PAY - cls: 22.65 chg: +0.42 stop: n/a

We see no changes from our Monday update. We're not suggesting new strangle plays at this time. The options in our suggested January strangle are the January $17.50 puts (PAY-MW) and the January $22.50 calls (PAY-AX). We plan to sell if either of these hits $4.50 or more. We also suggested an alternative, more aggressive, November strangle with the November $17.50 puts (PAY-WW) and the November $22.50 calls (PAY-KX). We would sell if either of these hits $2.00 or more. We would definitely keep an eye on those November calls since they're rising!

Picked on October 12 at $ 19.98
Change since picked: + 2.67
Earnings Date 11/18/05 (unconfirmed)
Average Daily Volume = 259 thousand

---

P.F.Chang's - PFCB - close: 44.38 chg: -5.93 stop: n/a

Almost! The big gap down today almost pushed the put side of our strangle to our target. PFCB reported earnings this morning. The company missed earnings estimates by a penny and issued lower guidance for the fourth quarter. The stock opened at $45.83 and dipped to $43.63 this afternoon on huge volume! The November $45 put is trading at $1.95bid/2.15 ask and hit a high of $2.35, which is a 56% rise over our estimated $1.50 cost to launch the strangle. We're targeting a rise to $2.50 or more but some traders may want to exit early for a profit.

Picked on October 20 at $ 49.99
Change since picked: - 5.61
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 912 thousand
 

Dropped Calls

SurModics - SRDX - close: 42.71 chg: -0.28 stop: 39.99

Per our game plan (see Sunday's update) we needed to exit on Tuesday or Wednesday afternoon to avoid holding over SRDX's earnings report, which came out after the closing bell today. The company beat by one cent but that wasn't enough to satisfy investors. Shares of SRDX are trading down sharply after hours.

Picked on October 18 at $ 40.95
Change since picked: + 1.76
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 249 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

More on Trendlines

I got the following from a Subscriber and it seems that trendlines are still worth discussing for one more column.

SUBSCRIBER QUESTION:
"I enjoy your technical analysis insights and I read something recently (10/25) that I wondered if you could comment on.

Relating to the 30-minute charts of the Nasdaq and S&P 500, there was an observation that an uptrend had not yet formed on the SPX, but it had on the NDX. In comparing the two charts I see little difference except the channel is steeper on the Nasdaq.

If you place the bottom of the channel on the S&P 500 parallel to the line that is drawn through the rising tops it appears that it would roughly touch the lows of October 13th & 24th with the lows in-between cutting through the bottom of the channel but quickly returning inside the channel.

The S&P 500 only has 3 1/2 points to rise before it reaches resistance, whereas the Nasdaq has almost 17 so the Nasdaq allows for more room to run but both seem to be in a pretty well defined uptrend to me.

What am I missing?"

RESPONSE:
As far as the 'missing' element here, I would first note that your trendline question and discussion is somewhat backwards. An UP trendline is formed by a rising series of lows. The upper boundary of a rising uptrend price 'channel' is a line parallel to this (up) trendline. You started with an upper channel line and then drew a line parallel to it to make a point about the mid-October lows, rather than starting with the rising series of lows or a possible emerging uptrend and up trendline.

UP trendlines are formed by rising LOWS and DOWN trendlines by a series of declining rally HIGHS. Trend channel lines slant in the same direction (as up or down trendlines) and are lines running parallel to the underlying trendline. The upper or lower end of a price channel is secondary to the up or down trendline.

For example, an upper trend channel line is not usually a dominant resistance area; rather, it most often is an area where an index or stock may have reached a temporary high on the way up. Subsequent pullbacks to the up trendline ARE the key focus, as they often represent new or further buying opportunities.

I don't have the comments you refer to, so will just look at those charts and tell you what I think. On the 30-minute chart of the S&P 500 (SPX) BELOW, there are 3 points that form an up trendline, as noted by the 3 up green arrows on the chart below.

[Two points (2 lows in the case of an uptrend) are enough to begin to draw a trendline, but 3 points are preferable, less 'tentative' and more definitive usually; this makes for a trendline that is better 'defined' so to speak.]

There are 3 lows on the SPX 30-minute chart ABOVE that define an up trendline. Drawing a line parallel to the up trendline that touches the highest high makes for a 'tentative' upper trend channel line. If there is a subsequent higher future rally high in the area of, at or on this upper channel line, this trendline would start to (also) be better defined.

The other question on trendlines is HOW they are constructed, as the method (of construction)can lead to different interpretations of whether a trendline has formed or not. I tend to look for the predominate areas where an index or stock forms bottoms or tops and draw my trendline through these areas, on a 'best fit' basis.

An 'internal' trendline (not a 'standard' technical term) is one drawn through the MOST number of lows or highs; and, will usually cut through one or more extreme lows or highs as seen ABOVE in the case of the rising line connecting the SPX lows.

The Nasdaq 100 (NDX) half-hourly (30-minute) chart is seen below. The up trendline has a sufficient number of lows to construct it. This up trendline cuts through one low also. The upper channel line has better definition than the SPX upper channel line (in the chart above) with three connecting peaks. The 3rd and most recent high reversed from the upper channel line.

USE OF HOURLY CHARTS:
I strongly favor the use of hourly (60-minute) charts, rather than half-hourly (30-minute) charts, since I find that hourly charts better show short-term trends. For example and starting with the S&P 500 (SPX) chart below:

There is a DOWN trendline apparent on the hourly chart below and the second point (of/on that line) was made today as highlighted by the red down arrow. Not that this line would not also appear with the use of a 30-minute chart. Hourly charts do tend to better show the unfolding trend in my opinion.

The same down trendline does NOT appear on the hourly Nasdaq 100 (NDX) chart. The key technical aspect of the NDX hourly chart below is the up trendline intersecting currently near 1560. As long as this line is not pierced, at least not by more than a single 'bar' or single hourly low, the uptrend is intact.

In an uptrend we are most concerned about whether to stay with bullish trading strategies; and, where to buy on pullbacks. For example, the ideal place to buy index calls is on pullbacks to an up trendline.

You can watch to see if that trendline has 'held'; i.e., defined an area where buying interest again comes in. At that point, on pullbacks to an up trendline, we assume upside potential and the prospects of a rebound are better than average. And, this strategy allows use of a 'tight' protective or exiting stop point, at just under the trendline; e.g., 3 points under.

IF YOU CAN'T FIND A SIMILAR TRENDLINE ON ONE INDEX, LOOK FURTHER

If we've seen a down trendline on one of the S&P charts, such as was apparent in SPX and a similar trendline is NOT seen on the Nasdaq 100 (NDX), it's of potential interest to look at the related Nasdaq Composite (COMP) Index.

On the hourly COMP chart below, a down trendline intersects currently around 2145. This line intersects a progressive lower level over time of course. Such a down trendline should or may define a more stubborn area of resistance; a place where we would want to be alert to a trend reversal.

By the way, I would extend this comment and observation to looking also at the other principle S&P index, the S&P 100 or OEX. An even better 'defined' (a greater number of highs) down trendline is apparent on the OEX hourly chart. Today's downside reversal started right from (you guessed it!) this line. Imagine that.

Whether today's reversal means that the OEX will remain in a downtrend is not known. We can say is that the downtrend pattern in OEX remains intact; and is not reversed until there is an hourly close above 555.

In effect an uptrend has NOT been achieved until OEX pierces 555. In the case of the Nasdaq Composite Index chart (shown prior to this last one above), an upside breakout or reversal of the recent downtrend, is not achieved unless COMP rallies above 2145 current or wherever the down trendline intersects later on; e.g., 2140, etc.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens and all other plays and content by the Option Investor staff.

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