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Daily Newsletter, Saturday, 12/10/2005

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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

Warning, Volatility Ahead

After two weeks of consolidation and waiting for things like mid-quarter chip updates and economic reports traders are starting to worry that Santa has lost his way. The old adage states this worry perfectly. "If Santa Claus should fail to call, Bears may come to Broad and Wall." While the Santa rally alluded to in the rhyme is the last five days of Dec and first two days of Jan it does not prevent traders from worrying about the current market weakness. Historically December sees an average gain of +1.8% over the last 33 years but that statistic is not providing much comfort today with the Dow down over -150 points from its November highs.

Dow Chart - 30 min

Nasdaq Chart - Daily

NYSE Composite Chart - Weekly

What difference does that 150 points make? None in the long-term view of things but quite a lot for investors nervous about protecting profits from the strong November rally. The dynamics of the recent decline have been orderly and there is no evidence of any material change in the trend. Until those dynamics change the outlook for the end of December is still the same. That outlook is for another run at the highs beginning on the 19th with new highs possible. While I doubt any new highs will be significantly higher nothing has changed in my view to prevent the attempt.

However, as I stated last week the longer we find fund managers selling the rallies the more that strategy will increase. Those managers with profits will begin to doubt the normal end of December rally and begin to lighten the load as well. This was a critical week for market sentiment and so far it was only dented and not damaged.

All week traders waited for the mid quarter updates from the chip sector with TXN and Intel the headliners and Xlinx, QCOM and National Semi the supporting cast. Texas Instruments updated guidance as expected but traders were not impressed. TXN fell nearly -2.00 after the news. XLNX boosted its outlook but investors knocked it for more than a $1 loss on less than hoped for margins. NSM posted better than expected profits and beat the street by +4 cents. After a brief spike on the news NSM dipped over -$2 on what traders said was weaker than hoped for guidance despite a boosted outlook by NSM. QCOM raised its earnings outlook to 38-39 cents, up from 36-38 cents, with analysts expecting 37 cents. Intel closed the show with narrowed guidance to the middle of the current range and investors promptly hammered the stock for a -$1 loss. Intel had fallen from last Friday's close at $27.42 to a low this Friday's of $25.17. Analysts said cracks were beginning to form in Intel's armor in the battle with AMD for market share. AMD (+$1.25) chips are said to provide equal or better performance for less cost. Intel is seen to be struggling to maintain its lead and companies that use only Intel chips, like Dell, are losing ground as well. Dip buyers found the $25 level attractive on Friday and Intel managed to post a minor gain on Friday and helped rejuvenate the devastated SOX.

SOX Chart - Daily

The SOX had reached a new 20-month high at 510 on Tuesday ahead of the chip updates but the hang time at that level was brief. The -5% drop back to prior resistance turned support at 485 was very sharp but the rebound was sharp also. The rebound began before Intel reported and the bounce in Intel on Friday helped power it back to close near 500 once again. The best news of the week was a common thread of warnings from nearly all of the chip companies that inventory levels in the channel were very low. National Semi said whenever channel inventories had reached this level in the past a strong build cycle emerged. This was good news for chip buyers and for techs in general. This rebound in chips helped push the Nasdaq back to 2256 and the middle of its recent range from 2230-2275. The Nasdaq could be the spark that eventually rescues the December rally but it has one more hurdle to jump first.

Dick Arms was on CNBC this week saying the markets at the end of November were as overbought as he had seen since the peak of the Internet bubble in 2000. The +8% jump in the indexes from the October lows had everybody with an extra dollar going long in hopes for a breakout into year end. Unfortunately there is that lack of conviction problem now that we have touched the highs without a convincing breakout. Historically the Oct/Nov rebound has produced a 1%-3% gain over the last 35 years. December normally adds another +1.8% and is considered the strongest month of the year. However, if you go back and study years when November gains were the strongest you will find that December was normally flat to slightly down. Essentially strong November gains cannibalize early December buying as surplus cash is put to work earlier. There is no guaranteed December rally and with the markets at multi year resistance highs the problem becomes more complicated. Resistance highs require stronger conviction and higher volume to break than resistance at lower levels. Currently fund managers are sitting on only 3.8% cash and very close to historically low levels. They don't currently have the purchasing power to push the markets over the top with conviction. They are forced to hold some cash in reserve for withdrawals and early December typically sees withdrawals as investors gather cash for holiday gifts. While that may be the norm we did see $1.96 billion flow into funds for the week ended on Wednesday. As we near the end of the month those bonuses are going to start flowing with 160,000 Wall Street employees expecting nearly $20 billion in bonuses and millions of employees across America expecting their annual Christmas bonus checks. Some of that money will find its way into funds. End of quarter and end of year retirement contributions will also begin hitting fund accounts in late December and the combinations of all these factors powers the end of year rally.

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This normally bullish period is also being restrained by the conflicting signals coming from the economy and the Fed rate hikes. Toll Brothers announced record earnings last week with a +72% jump in earnings and raised their expectations for 2006. While that is very good on the surface you need to understand that their contracts are normally signed up to a year in advance and their homes sell for prices in the $600,000 range and higher. This is the high end home market that is said to be showing the most signs of stress. For this reason Toll warned that 2007 sales could be lower that the +20% growth they had previously expected. The CEO said, "these are uncertain times and results could be better or worse than prior guidance" and "the increases of 2004 and 2005 were not sustainable and were fueled in part by speculation." This does not paint a strong picture for the future and confirms to some extent the easing housing bubble.

Adding to the fears of investing at this level is the fear of a January decline. Over the last few years January has not been kind with declines rather than gains in all but one year. Last years performance is probably etched into their memory as the nearly perfect year end rally scenario and everyone is waiting for a repeat. So far the pattern has been nearly perfect. If you were confident of a repeat then you should be long now and exit on December 29th. Since patterns never repeat exactly that means fund managers are hoping for a repeat but are probably watching carefully for signs of a stampede to the exits. They want to add another +3% to their gains for the year (11250) but don't want to lose the gains they already have. This is a very tough time for marginally profitable funds. Every day is another step in the December minefield and brings them a day closer to a profitable January exit. As long as support at Dow 10720, SPX 1250, Nasdaq 2230 holds the odds are good there will be another set of higher highs. Should those levels break even slightly it could trigger that stampede to the exits.

Chart of Dow - Oct 2004 to Feb-2005

Dow Chart - Aug-Dec 2005

The major markets may also be experiencing cash drain as money chases performance in gold stocks. The gold ETF (GLD) hit another high on Friday at $52.90 as gold continued its ramp with a $531 intraday high. Around the globe countries are pouring their oil dollars into gold as a hedge against a future energy induced recession and countries are adding gold to their currency investments in record amounts. I personally believe Middle Eastern OPEC nations are leading this buying spree because they alone know how close we are to a production shortfall in oil. Other Asian countries like China are trying to rebalance their currency portfolios and raise their gold allocations to something more than the current 2% range. Strong demand is also being seen for gold jewelry and for gold in manufacturing applications like circuit boards and electrical contacts. All these factors are creating a perfect storm for the gold bears that have been predicting a top since $350. Reportedly fund managers and many hedge funds have been parking excess cash in gold investments rather than risk it on regular equities in this period of instability. Volume in GLD on Friday was 5.88 million shares compared to the 30-day average of only 2.02 million. Volume has been increasing steadily for the last month. As more investors resort to the GLD shares as an investment in gold the fund must continue to buy more gold to cover the open interest. The fund sponsor is World Gold Trust Services and they hold the gold represented by the shares. As demand grows they issue new blocks of 100,000 shares each and buy gold with the proceeds to back the shares. The last reported quantity held was 7,469,219 ounces valued Friday at $3,851,491,895.52 per the StreetTracksGoldShares.com website. This is up from the 5,638,445 ounces held on June-30th or nearly a two million ounce gain. Looking at the picture below of their vault I kept expecting to see Scrooge McDuck appear.

Picture of World Gold Trust Vault

GLD Chart - Daily

Energy stocks were knocked down again on Friday after a week of gains despite oil rising to $61.50 in overnight trading. There is little reason for oil to be trading higher other than following natural gas to a new historic high at $15.50 on Thursday night. The cold weather blanketing the U.S. is just a preview of what may be ahead but it was enough to send both oil and gas spiking to two-month highs. That produced the "buy the forecast, sell the storm" trade we saw last week. Traders took profits quickly knocking oil back to close -$2 off its Friday highs and gas back to a still expensive $14.28. This time last year it was selling for $7.20 and producers were locking in profits at what they thought was an absurd level by selling futures well in advance. Now they are paying the penalty for that hedging and are delivering gas for $7 now they could be selling for $14. But, that is not the point.

The factor we should be watching now is the forecast. The American Gas Association president said on Friday that current gas supplies (3.166 trillion cubic feet in storage) would be enough for a moderate winter but that a protracted period of colder weather could create shortages. The current storage level is +6.7% above the five-year average for this period but -45 bcf below last years level for the same period. Analysts are expecting a drop of up to -300 bcf in storage over the next two weeks due to the current cold snap. That is -10% of current storage. Last year we saw the spike from $4 to $7.20 that nearly doubled the price due to several near shortages where pressure in the pipelines dropped to dangerous levels. This year we have nearly one million more homes and several new generating plants consuming gas at a faster pace. However, we are seeing some demand destruction due to price. Setting the thermostat lower may help somewhat but Americans are not likely to sit and shiver for very long. The real cost of gas has not made it through into home heating bills yet. Utilities that bought gas futures at $7 from the producers a year ago are enjoying a cheaper price today but that will eventually end. Even at the lower prices most electric companies are paying for gas today it still costs 7 cents per KWH for gas-fired plants compared to 2 cents for coal fired plants. Most analysts expect higher prices to hit utility bills in January just as the holiday credit card bills arrive in the mail.

Real demand drop is coming from businesses that use large amounts of gas. The impact of higher prices is causing them to be more conscientious about conservation and that could help offset SOME of the additional annual demand that grows every year. We already consume more than we produce during the winter months and that is not likely to change. The coldest months of the winter are December through February and the cold weather is just getting started after four weeks of an unseasonably warm fall. For energy investors I would continue to buy the dips until January. There are still some good trades to be made before we begin to see spring in the forecast.

Crude Oil Futures Chart - Daily

Natural Gas Futures Chart - Daily

Another reason for the price drop in oil was the OPEC meeting on Monday. The president of OPEC said again on Friday that he was recommending continued production at the current reported level of 30.3 mbpd. This comment helped knock oil from its $61.50 overnight high to close at $59.40. Since the OPEC decision was already expected to remain at full production this was another case of simple profit taking ahead of the actual news announcement. Nothing changed in the demand pattern or available production. This is just volatility ahead of an expected decline in January as seasonal demand begins to slow. OPEC will probably discuss the price they want to defend and where production cuts will occur to defend that price. Some feel $50 on the OPEC basket of crude is the line in the sand. Currently the composite basket of 11 crude oils representative of actual OPEC production is $52.88. Crude Oil futures for light sweet crude currently at $59.40, should return to the lower $50s by March but it will just represent another long term buying opportunity for the next cycle. If OPEC chooses to defend $50 on the OPEC basket that sweet crude price should remain above $55.

It was announced after the close on Friday that Viacom was going to acquire Dreamworks SKG through its Paramount Pictures unit. Dreamworks had been in talks with Viacom and NBC Universal seeking $1 billion in cash and assumption of debt reportedly as much as $500 million. This is different from the DreamWorks Animation (DWA) company that controls over 60 titles including films like Saving Private Ryan and Shrek. Though related they are separate.

Also rumored to be close to a deal was TheStreet.com. (TSCM) TheStreet has been shrinking for years and openly in search of a takeout. The company has been shedding employees and services like its research and brokerage unit blaming slow growth and shifting dynamics in the industry. The unit spent more than twice its revenue in 2004. TheStreet reported a +26% increase in ad revenue in Q3, which was the first sequential quarterly increase since 1999. This was probably due to Crammers Mad Money show on CNBC attracting more viewers to the website. TSCM currently has a market cap of $154 million and a drop in the bucket to any real media player but it is seen as too much of a niche market. If Crammer stepped in front of a truck the company would take a serious hit in subscriber numbers. TSCM has risen a buck to $6.13 over the last two weeks on speculation on a takeout.

The Mizuho Bank of Japan is probably looking for a new trader this weekend after an improperly entered order cost it $225 million. The trader wanted to sell one share of J-Com a new IPO at 610,000 yen. ($5,041) Instead the order was entered to sell 610,000 shares at 1 yen. Traders quickly scooped up the incorrectly priced offering causing a reported $225 million loss. The number of shares offered was 41 times the amount of outstanding stock. The company did not disclose the error until after the market was closed and late estimates tonight suggest the loss to cover the problem could rise from $225 million to as much as $800 million. Once traders realized there was an error there was a rush to cover positions and shares of J-Com jumped to 772,000 yen ($6,379) before trading was halted. Covering that short squeeze for Mizuho could be a real headache.

RIMM surged +3.38 after rumors surfaced that they had reached an agreement with NTP to settle for what appeared to be a very reasonable amount compared to estimates as high as a billion dollars. Rumors had RIMM paying $450 million to NTP plus 5.7% royalties through 2012. Since RIMM has been escrowing money for years from sales this would amount to about the same terms as the prior settlement that was never completed and a sweet deal for RIMM. Unfortunately, NTP was quick to respond that they had not accepted the offer and there was no settlement. The patent office has now issued preliminary rejections of all five patents that were the basis of the initial suit in 2002. NTP is downplaying the rejections as procedural while RIMM claims it has been vindicated. The judge, critical of RIMM's delaying tactics refused to stay the injunction until the patent office issues its final ruling. This puts RIMM square in NTP's sights but NTP is smart enough to realize there is a time limit involved and they could lose everything. Also shutting down the Blackberry product would also harm its eventual payouts since it has claim on all sales through 2012. NTP should be taking the cash and calling it a day. NTP said late Friday that it made an offer to RIMM that included an up front payment of all royalties through 2012. Since nobody knows what those will be and competitors are cropping up everywhere I doubt RIMM will accept unless there is a significant discount involved. The judge has asked both sides to submit briefs outlining their offers. NTP said they might ask the judge next week to shutdown the network if a settlement cannot be reached. The clock is ticking on this high stakes game of chicken but I am betting on RIMM to eventually escape the NTP clutches through a settlement or a win in the Supreme Court. NTP claims it has a workaround to avoid the NTP patents in question but it has yet to see the light of day. If it works the payment equation could change quickly since NTP could no longer force a shutdown.

Next week we face another Fed meeting on Tuesday and there is strong disagreement on the outcome. Everyone expects another quarter point hike but nobody can agree on the change in statement. Some feel the "accommodation" language will disappear with others feel the "measured pace" phrase will change. After a month of Fedspeak concerning the need to change the statement soon the analysts have been working overtime trying to diagram potential changes in the statement. It should not impact the markets UNLESS there is no change. No change would indicate there is at least two more rate hikes in 2006 and that puts us at 4.75% after the March meeting. One additional hike to cement Bernanke's image could occur at the May meeting to round the neutral rate out at 5.0%. The fear of a statement change, or maybe no change, could keep the markets in check until Tuesday.

Also adding to volatility next week is the annual rebalancing of the Nasdaq-100. Nasdaq announced after the close that the following changes would be made to the Nasdaq-100 at the close next Friday to coincide with quadruple witching. The S&P-500 will also undergo changes in components on Friday but the details have not been disclosed yet. Maybe Google will finally get its shot at the S&P-500 and the Nasdaq in the same week.

Nasdaq-100 Change Table

Next week should be the make or break week for the December rally. If the Fed does not spoil the party with something unexpected on Tuesday the markets should be free to continue higher. The week is back end loaded with economic reports with all the market critical reports on Thursday. Headed by the CPI we also get NY Empire Manufacturing, Industrial Production and the Philly Fed Survey. This means a positive Fed meeting could give us a head start Wednesday and Thursday's reports could add fuel to the fire, or douse it completely. But, after adding in the quadruple witching, Nasdaq-100 rebalance and the S&P changes all on Friday the volume and volatility is going to be huge. We would hope the chip rebound will continue based on the low inventory levels and that will give the Nasdaq enough lift to break the 2275 resistance convincingly but I would not count on it.

There are two problems to this scenario. One comes from the 12 companies being kicked out of the NDX. They could be a drag as index funds dump them ahead of the switch while they are still part of the index. Adding to this confusion is the QQQQ rebalance. The QQQQ must also make the switch within three trading days of the change. There are 498 million QQQQ shares outstanding representing $20 billion in market cap that must be adjusted. Unfortunately for the NDX the market cap of companies going into the index is over $179 billion while the cap of those coming out is less than $39 billion. The Nasdaq-100 is not purely market cap weighted the weighting is "calculated under a modified capitalization-weighted methodology using a proprietary algorithm" according to the Nasdaq site. This means there will have to be a lot of other Nasdaq-100 issues sold to make up for the $140 billion market cap difference in the additions. The Nasdaq does take into account companies with market caps over 4.5% of the Nasdaq-100 group. In 2003 the Nasdaq changed from a pure weighting to their modified weighting when they found the top five stocks compromised 61% of its value. Under their new weighting algorithm their value was lowered to only 40% to give the index more diversification. Later that was modified to allow the top ten stocks to represent 40% of the index. How the addition of $140 billion in additional market cap will impact the rankings under their algorithm is impossible to determine. With a total market cap of $1.98 trillion you would not think $140 billion addition would make much difference but it does represent 7% of the current index. It would not be accurate to say that 7% of the current positions would have to be sold but even if it was only 2% under their algorithm it would be a lot of shares. The second problem is the S&P changes to be announced next week and you see the problem for the markets. The last two days of the week could be under serious pressure. This is always a volatile time of year and the change in the indexes just makes it crazier.

I suggested everyone wait to add to positions until after the Intel update and that tuned out to be wise advice. The markets all posted losses for the week despite the gains on Friday. The lows for the week came at Thursday's close ahead of the Intel data. If you bought the dip on Friday you probably have as good an entry as could be expected for a short-term trade. Monday could open weak and I would only add to those positions sparingly until after the Fed meeting. I would then plan a strategic exit ahead of the index rebalancing.

I went back to see how the Nasdaq re-ranking went last year and I was very surprised. The Thursday before the announcement, 12/9/04, was the low for the month as was last Thursday 12/8/05. Monday 12/13/04 saw a +20 point jump ahead of the Tuesday Fed meeting. That rally continued through the Fed meeting and quarter point hike and continued through Wednesday's open to set a new high for the year and a +43 point gain for the week to date by 10:30. A decline began almost immediately after that opening spike. The entire +43 point gain was completely erased by a drop starting that Wednesday morning and continuing through the close the following Monday as index funds rebalanced to the new weightings. This drop also corresponded to the announcement of the new S&P changes on Wednesday. That Monday, 12/20/04, after the expiration and rebalance was the start of a new rally that ran for +60 points and lasted until a new yearly high was reached on Dec-31st at 2185. I don't know about you but I would be perfectly happy if this year's rebalance followed the script from last year. I would doubt it would follow exactly since the market cap added last year was less than half this year's amount and the largest addition was ERICY at $50 billion, far less than Google's $120 billion. I have tried to illustrate the potential scenario as simple as possible but execution will never be simple. We just need to play the cards as they are dealt.

Nasdaq Chart - 2004 NDX Re-Ranking

If I had to bet on a low for the week I would obviously pick Friday due to the index changes. This means we should look to exit any short-term trades on any post Fed bounce and look to reenter at Friday's close or Monday's open. There is normally a post balance dip as arbitragers dump the new stock they bought in advance of the rebalance hoping to sell it to the funds on Friday as funds swapped index stocks at Friday's close. My plan will be to short any post Fed bounce and buy any post balance dip on Monday in hopes of a two-week ride into year-end. How you play it is up to you and the odds of it playing out exactly as I explained it are nearly zero. Just consider my game plan a rough draft and use it to build your own strategy. Next Sunday I will recap it and see how close we came.

You probably saw the end of year renewal special email in your inbox last week. We believe Option Investor provides you with better market insight, informed commentary and more profitable trades than anything else available on the Internet. In addition to Option Investor you will get the Couch Potato Trader, LEAPS Trader, Option Writers, Premier Investor and the new Covered Call newsletter starting in the first quarter. Don't delay and lose your locked in price.

Sincerely, JIM BROWN
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ACL None None
CEG    
ZMH    

New Calls

Alcon - ACL - close: 144.60 change: +1.60 stop: 139.90

Company Description:
Alcon, Inc. is the world's leading eye care company. Alcon, which has been dedicated to the ophthalmic industry for more than 50 years, develops, manufactures and markets pharmaceuticals, surgical equipment and devices, contact lens care solutions and other vision care products that treat diseases, disorders and other conditions of the eye. Alcon's majority shareholder is Nestle, S.A., the world's largest food company. (source: company press release or website)

Why We Like It:
You've all heard the market maxim "the trend if your friend." The trend in ACL is pretty hard to miss. The stock's upward momentum has not stalled even though ACL's advance is getting close to one-year old. The stock is starting to bounce from the $140 level after a four-week consolidation in its long-term trend higher. We're going to use the recent bounce from $140 as a bullish entry point. More conservative traders may want to wait for a move over 145.50 before considering new long positions. We'll try and limit our risk with a stop loss under short-term support at $140. More aggressive traders may want to put their stops under proven support at the 50-dma. We plan to ride ACL up to its early February earnings report. Our target is the $154-155 range.

Suggested Options:
We are suggesting the February calls although we do not want to hold over the February earnings report.

BUY CALL FEB 140 ACL-BH open interest=292 current ask $11.00
BUY CALL FEB 145 ACL-BI open interest=327 current ask $ 8.30
BUY CALL FEB 150 ACL-BJ open interest=312 current ask $ 6.00

Picked on December 11 at $144.60
Change since picked: + 0.00
Earnings Date 02/08/06 (unconfirmed)
Average Daily Volume = 524 thousand

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Constellation Energy - CEG - cls: 55.60 chg: +2.26 stop: 53.39

Company Description:
Constellation Energy, a FORTUNE 200 company based in Baltimore, is the nation's largest competitive supplier of electricity to large commercial and industrial customers and the nation's largest wholesale power seller. Constellation Energy also manages fuels and energy services on behalf of energy intensive industries and utilities. It owns a diversified fleet of more than 100 generating units located throughout the United States, totaling approximately 12,000 megawatts of generating capacity. The company delivers electricity and natural gas through the Baltimore Gas and Electric Company (BGE), its regulated utility in Central Maryland. In 2004, the combined revenues of the integrated energy company totaled $12.5 billion. (source: company press release or website)

Why We Like It:
Utility stocks were able to avoid the profit taking in the energy sector on Friday. Leading the way was CEG. The stock broke out over multiple levels of resistance at the $54.50 level, the 50-dma, the 200-dma and round-number resistance at $55.00. Volume on the two-day rally has come in well above the average, which suggests more strength ahead. The Point & Figure chart for CEG has reversed into a new buy signal that points to a $64 target. We are suggesting calls with CEG above $55.00. There is some potential resistance at the 100-dma (56.67) but if the UTY utility sector can build on Friday's strength then we'd expect CEG to follow the sector higher. We'll target a run into the $60-62 range.

Suggested Options:
Right now we can choose from January or April options. Aprils look a bit expensive since we do not plan on hold over the late January earnings report.

BUY CALL JAN 50 CEG-AJ open interest= 191 current ask $8.40
BUY CALL JAN 55 CEG-AK open interest= 511 current ask $4.80
BUY CALL JAN 60 CEG-AL open interest=2066 current ask $3.40

Picked on December 11 at $ 55.60
Change since picked: + 0.00
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume = 947 thousand

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Zimmer Holdings - ZMH - close: 68.62 chg: +1.51 stop: 65.75

Company Description:
Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is the worldwide #1 pure-play orthopaedic leader in designing, developing, manufacturing and marketing reconstructive and spinal implants, trauma and related orthopedic surgical products. Zimmer has operations in more than 24 countries around the world and sells products in more than 100 countries. Zimmer's 2004 sales were approximately $3 billion. The Company is supported by the efforts of more than 6,500 employees worldwide. (source: company press release or website)

Why We Like It:
Many of the medical device makers surged higher in early December as takeover rumors began circulating again. ZMH certainly participated in the speculation and rallied from the low 60s to over $70. The move helped produce a double-bottom pattern and a breakout over resistance. The surge higher also produced a new buy signal on the P&F chart that now points to a $90 target. The recent pullback looks like a new bullish entry point. More conservative traders may want to wait for a move over $70 before considering positions. If the market's continue to dip we'd expect ZMH to fall to its 10-dma near 66. Our target is the $74.00-75.00 range under its simple 200-dma.

Suggested Options:
Readers can choose to buy January or March options. We're going to select March calls so we can play ZMH right up to its late January earnings report.

BUY CALL MAR 65 ZMH-CM open interest=5064 current ask $6.90
BUY CALL MAR 70 ZMH-CN open interest=2658 current ask $4.00
BUY CALL MAR 75 ZMH-CO open interest=2215 current ask $2.00

Picked on December 11 at $ 68.62
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 2.6 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apache - APA - close: 69.80 change: -1.18 stop: 65.95 *new*

After a strong week the energy sector experienced some profit taking on Friday. APA was not exempt and the stock closed back under the $70 level. Overall we remain bullish on the group, especially long-term, but the short-term looks good as long as crude oil can maintain its recent breakout over $60. This week the oil stocks could see some volatility surrounding the December 12th OPEC meeting even though the markets expect no change from the cartel's production quotas. Readers have a choice with APA. You can watch for another bounce from minor support near $68.00 or wait for a move over $70.00 or $71.00 as a new entry point. We are going to make an adjustment to our stop loss. At 66.99 it looks a little tight and due to our bullish bias we don't want to be stopped out too early. More conservative traders may want to leave it at $66.99. We're going to adjust ours to $65.95. Our end of January target is the $76.00-77.00 range. The Point & Figure chart points to an $83 target.

Suggested Options:
You can choose the January or April calls. We do not plan on holding over the late January earnings report.

BUY CALL JAN 65 APA-AM open interest= 8524 current ask $6.30
BUY CALL JAN 70 APA-AN open interest=13866 current ask $3.10
BUY CALL JAN 75 APA-AO open interest= 8894 current ask $1.25

Picked on December 08 at $ 70.98
Change since picked: - 1.18
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Dominion Res. - D - close: 79.06 chg: +1.97 stop: 74.75

It's alive! Shares of D displayed plenty of relative strength on Friday. The stock added 2.55% on volume well above its average. The move is a technical breakout over the 50-dma, 100-dma and last month's highs near $78.25. This move can be used as a new bullish entry point or look for a dip back toward the $78.50-78.25 range. Our target is the $84.50-85.00 range compared to the P&F chart, which points to a $92 target.

Suggested Options:
We are suggesting the January calls. We prefer the $75 or $80 strikes.

BUY CALL JAN 75 D-AO open interest=2452 current ask $5.20
BUY CALL JAN 80 D-AP open interest=9975 current ask $1.85
BUY CALL JAN 85 D-AQ open interest=1100 current ask $0.45

Picked on November 27 at $ 78.24
Change since picked: + 0.82
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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FMC Corp. - FMC - close: 54.05 chg: +0.38 stop: 51.95

FMC is a technical breakout play. The stock broke through the top of its four-month descending channel a couple of weeks ago. A week ago FMC broke through technical resistance at its simple 200-dma. While the stock has not been able to mount a follow through on that last breakout the overall pattern remains bullish. We've been expecting a dip back toward the $52.50 region. Yet a new look at some of the short-term technical oscillators suggests that FMC may not pull back much further. Depending on your trading style you can look for a new bullish entry point on a move over $54.50, which would be a minor breakout over its one-week consolidation; a move over the 200-dma, or a move over its 100-dma and the December high ($55.41). The Point & Figure chart points to a $62 target. We are targeting a run into the $59.85-60.00 range.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50 FMC-AJ open interest= 6 current ask $5.10
BUY CALL JAN 55 FMC-AK open interest=599 current ask $1.80
BUY CALL JAN 60 FMC-AL open interest=148 current ask $0.45

Picked on December 01 at $ 55.04
Change since picked: - 0.99
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

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Femsa Fomento - FMX - close: 67.54 chg: -0.73 stop: 67.75

Our bullish play in FMX may be over before it ever gets started. The stock lost another one percent on Friday and fell below short-term support near $68.00. What makes this more significant is that the Mexican markets hit a new high on Friday. We are currently on the sidelines waiting. Our strategy suggests a trigger to buy calls at $70.65. If we are triggered we'll target a run into the $74.75-75.00 range. The P&F chart points to an $81 target. Should FMX fail to rebound on Monday or Tuesday next week we'll drop FMX as a candidate.

Suggested Options:
We are not suggesting new positions at this time. If FMX hits our trigger we like the January calls.

iu

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 308 thousand

---

Hydril - HYDL - close: 69.60 change: +0.16 stop: 65.95

HYDL is a new bullish candidate from our Thursday newsletter. We do not see any change from our original play description so we're reposting it here:

HYDL is part of the oil services sector. A quick look at the OSX oil services index and you'll see that the group is hitting new all-time highs. HYDL looks tempting because it's been consolidating under resistance in the $70.00-70.85 range for the last few months. The pattern actually looks like an inverse or bullish head-and-shoulders pattern with the neckline near $70.00. If the pattern holds true then it points to an $85 target. Coincidentally the P&F chart for HYDL points to an $88 target. We don't want to initiate longs with HYDL under resistance. Therefore we're suggesting a trigger at $71.01. If triggered we'll target a run into the $78-80 range by its January earnings report.

Suggested Options:
Traders can choose the January or March calls. March options have more open interest but remember that we don't plan on holding over the late January earnings report.

BUY CALL MAR 65 HBQ-CM open interest=319 current ask $9.00
BUY CALL MAR 70 HBQ-CN open interest=213 current ask $6.10
BUY CALL MAR 75 HBQ-CO open interest=170 current ask $3.80

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 263 thousand

---

Kerr Mcgee - KMG - close: 91.88 chg: -1.82 stop: 87.99

KMG is another energy stock that experienced some profit taking on Friday after a strong week. A few days ago the stock broke out from a two-month consolidation pattern and over resistance at the $90.00 level. We think KMG will be able to challenge its September highs. The P&F chart points to a $106 target. Readers can choose to enter positions here or look for a dip back toward support at $90.00 and its 10-dma. Our mid January target is the $98.50-100 range.

Suggested Options:
We do not want to hold over KMG's late January earnings report so we're suggesting the January calls.

BUY CALL JAN 85 KMG-AQ open interest= 881 current ask $8.60
BUY CALL JAN 90 KMG-AR open interest=1500 current ask $5.00
BUY CALL JAN 95 KMG-AS open interest=2659 current ask $2.50

Picked on December 02 at $ 90.26
Change since picked: + 1.62
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Kinder Morgan - KMI - close: 93.17 chg: -0.74 stop: 87.45

Oddly enough the new highs in natural gas have not translated to new relative highs for KMI. The stock did breakout from its consolidation pattern in early December and rallied to the $95 level but KMI has struggled to produce any upward follow through. Wednesday's session looks like a bearish engulfing candlestick but there was no follow through on that pattern either. We remain bullish on the stock but traders may wan to wait for a dip toward the $92.50-92.00 region before entering new positions. The 10-dma looks like short-term support near $92.50. Now that winter has begun (well technically the first day of winter is December 21st this year) investors are likely to worry more and more about potential natural gas shortages, which should underpin the commodity and stocks in the sector. The P&F chart for KMI points to a $104 target. Our target is the $98.50-100 range. We do not want to hold over the mid January earnings report.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 90 KMI-AR open interest=1819 current ask $5.30
BUY CALL JAN 95 KMI-AS open interest=1418 current ask $2.35

Picked on December 02 at $ 92.75
Change since picked: + 0.42
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

---

Polaris Ind. - PII - close: 50.10 change: +0.19 stop: 48.49

PII is still struggling after Thursday's downgrade from Banc of America. The stock tested support again at the $49.00 level on Friday morning but was unable to rebound much higher. We are not suggesting new plays at this time although a move over 50.75 could be used as a potential entry point. More conservative traders may just want to exit early right here or raise their stops toward $49.00. We're going to keep our target in the $54.00-55.00 range. We do expect some resistance near $53 at the top of the gap down.

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

Picked on November 21 at $ 48.47
Change since picked: + 1.63
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 59.38 chg: +0.20 stop: 55.75

ROK hasn't made any progress for a week. The stock has traded sideways in a $1.50 range for the last five sessions stuck under resistance at the $60.00 level. We are not suggesting new positions at this time. Our target is the $61-62 range but more conservative traders may want to exit near $60. FYI: the P&F chart points to a $69 target.

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

Picked on November 03 at $ 55.90
Change since picked: + 3.48
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

---

Sunoco Inc. - SUN - close: 81.59 chg: -2.05 stop: 76.45

SUN is another energy stock that hit some profit taking on Friday. The pull back toward the $81.50 level looks like a new bullish entry point. However, keep in mind that SUN may continue to dip toward the $80.00 mark before bouncing. SUN is a refiner and the refining industry has been one of the best performing groups all year long. The P&F chart for SUN points to a $93 target. Our target is the $89.90-90.00 range. Don't forget that we could see some volatility in the group as investors react to the December 12th OPEC meeting.

Suggested Options:
We're going to suggest the January options. Be sure to double-check your option symbol. There are some odd symbols out there due to SUN's 2-for-1 split back in August.

BUY CALL JAN 80 SUN-AP open interest=2455 current ask $4.90
BUY CALL JAN 85 SUN-AQ open interest=3606 current ask $2.45
BUY CALL JAN 90 SUN-AA open interest=1197 current ask $1.15

Picked on December 02 at $ 81.75
Change since picked: - 0.16
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million

---

Total S.A. - TOT - close: 127.65 change: -1.77 stop: 126.49

TOT is a new bullish candidate from our Thursday newsletter. We do not see any change from our original play description so we're reposting it here:

TOT has been consolidating between its rising 200-dma and the $130 region for the past two months. Now with crude oil breaking out we believe TOT is poised to breakout over resistance at the $130 level. We'll suggest a trigger to buy calls at $130.25. If triggered we'll target a rise into the $136-137 range before its February earnings report. The P&F chart for TOT points to a $152 target.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 125 TOT-BE open interest=413 current ask $7.00
BUY CALL FEB 130 TOT-BF open interest=172 current ask $4.20
BUY CALL FEB 135 TOT-BG open interest=213 current ask $2.35

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 936 thousand

---

Tractor Supply - TSCO - cls: 54.27 chg: -0.67 stop: 51.95 *new*

TSCO has still not been able to recover yet from Wednesday's downgrade. The stock was on a tear hitting new three-month highs in December and on rising, above average volume until Wednesday. We remain bullish but suspect that TSCO could dip back toward previous resistance and what should now be support near $52.50. Of course the only problem with that is our stop loss, which was recently moved to $52.75. More conservative traders may want to keep their stops where they are. We're going to give TSCO some room to maneuver and adjust our stop lower to $51.95. TSCO's P&F chart points to an $87 target. Our target is the $57.00-58.00 range. We do not want to hold over the mid January earnings report.

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

Picked on November 30 at $ 52.75
Change since picked: + 1.52
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

---

Valero Energy - VLO - close: 105.46 chg: -1.10 stop: 99.49

VLO is a new bullish candidate from our Thursday newsletter. We do not see any change from our original play description so we're reposting it here:

Refining stocks have been one of the best performing groups all year and they're not showing any signs of stopping. We like VLO because today's 2.4% gain appears to be a breakout over its two-month trendline of resistance produced by its lower highs. This is also a breakout from a two-month consolidation pattern and its weekly technical oscillators are looking bullish again. The P&F chart for VLO points to a $127 target. We are going to suggest call positions with VLO above $102.50. Our target is the September highs at $117.00. Please note that VLO is due to split 2-for-1 on December 16th. That means your option positions will double in number while halving in value. Our post-split target will be $58.50. Our post-split stop loss will be $49.74. FYI: VLO is also a current strangle play in the strangle section.

Suggested Options:
We are suggesting the March calls because we want to hold VLO right up to its end of January earnings report.

BUY CALL MAR 100 VLO-CT open interest=8049 current ask $12.80
BUY CALL MAR 105 VLO-CA open interest=6162 current ask $10.10
BUY CALL MAR 110 VLO-CB open interest=5168 current ask $ 7.90
BUY CALL MAR 115 VLO-CC open interest=11314 current ask $6.10

Picked on December 08 at $106.56
Change since picked: - 1.10
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 9.8 million
 

Put Updates

Magna Int. - MGA - close: 67.45 chg: +1.34 stop: 70.31

Shorts may have gotten spooked on Friday. MGA spiked higher at the opening bell after rival parts maker ARM was upgraded by Goldman Sachs. Shares of ARM rallied 15%. We believe the technical and fundamental outlook for MGA is bearish. Technically the stock is in a four-month bearish trend with a P&F chart that points to a $61 target. Fundamentally the restructuring programs from GM and Ford are likely to include a smaller production schedule, which means less business for MGA. A failed rally under the 50-dma near $69 could be used as a new bearish entry point. Our target is the $63-62 range.

Suggested Options:
We would not suggest new positions right here. Watch for a failed rally under the 50-dma first. If that occurs we'd consider the January 2006 puts.

Picked on December 04 at $ 68.14
Change since picked: - 0.69
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 318 thousand

---

Netflix - NFLX - close: 25.74 chg: -1.76 stop: 28.15 *new*

Drum roll please... NFLX has finally broken down and fallen through support at the bottom of its rising channel. The stock consolidated sideways for two weeks between $27 and $28. On Friday the stock lost 6.4% on above average volume. Our suggested trigger to buy puts was at $25.99 so the play is now open. Broken support at $27.00 should now act as new resistance. If you missed the entry on Friday you could open positions here at 25.74 or look for a failed rally/oversold bounce back towards $27. We are lowering our stop loss to $28.15. Please note that we do expect some support near $25.00 and its rising 100-dma (24.63). NFLX is heavily shorted with the latest data putting short interest at 27.2% of the 54.3 million-share float. Any bounce from $25.00 may be a big exaggerated but Friday's decline looks like a trend change. Our target is the $22.50 level. We do not want to hold over the mid January earnings report.

Suggested Options:
We are suggesting the January puts.

BUY PUT JAN 27.50 QNQ-MY open interest=3404 current ask $3.10
BUY PUT JAN 25.00 QNQ-ME open interest=3175 current ask $1.65
BUY PUT JAN 22.50 QNQ-MX open interest=3573 current ask $0.75

Picked on December 09 at $ 25.99
Change since picked: - 0.25
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 1.4 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.)

---

AmerisourceBergen - ABC - cls: 81.43 chg: -0.28 stop: n/a

This is it. We've got five days left before December options expire. ABC is in position to score if it can maintain its bullish trend. If the markets dip we expect ABC to dip toward the $80 level, which should be short-term support. We are not suggesting new positions. Our estimated cost for our strangle is $2.80. For the last couple of months we have been targeting a rise to $5.00 for the strangle but traders may want to adjust their target to something lower. We're going to adjust our target to $4.25. Currently the December $80 calls (ABC-LP) are trading at $1.70bid/$1.90ask.

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

Picked on October 16 at $ 74.81
Change since picked: + 6.62
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 21.10 chg: +0.26 stop: n/a

The oversold bounce in AEOS continued on Friday. The stock tested overhead resistance at its 10-dma. We're not suggesting new plays. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70. FYI: currently the January $22.50 puts are trading at $2.00bid/$2.15ask.

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

Picked on November 13 at $ 25.47
Change since picked: - 4.37
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 63.69 chg: +0.38 stop: n/a

ANF is slowly making a comeback and its MACD indicator is nearing a new buy signal. The stock's relative strength is impressive considering news out on Thursday night that the SEC had launched a nonpublic, informal inquiry into trading of its stock. Contributing to Friday's strength was news that an analyst had reiterated their "out perform" rating and raised their estimates on ANF's earnings. The stock is poised to assault resistance at the $65.00 level soon. We have six weeks to go before January options expire. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50. Right now our target may be out of reach. It really depends on how ANF performs during any Santa Claus rally should one appear.

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

Picked on November 13 at $ 59.67
Change since picked: + 4.02
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 44.98 chg: -0.35 stop: n/a

BCSI garnered some positive analyst comments on Friday following the company's analysts day but the news had no affect on the share price. The stock continues to trade inside its $44-46 range. We're suggesting that readers consider launching new strangles in the $44.50-45.50 entry window. We're suggesting the January $50 call and the January $40 put. Our estimated cost is $3.25. We're aiming for a rise to $5.50. Remember we have six weeks left before January options expire.

Suggested Options:
We'd like to buy February strikes but there aren't any available yet. That leaves us with January or April strikes and the Aprils are too expensive for us. As a strangle we want to buy an out of the money call and an out of the money put. At current prices our cost would be $3.25. We'll aim for a rise to $5.50.

BUY CALL JAN 50 IYU-AJ open interest=776 current ask $1.80
-and-
BUY PUT JAN 40 IYU-MH open interest=358 current ask $1.45

Picked on December 04 at $ 45.43
Change since picked: - 0.45
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Chicago Merc. Exchg. - CME - cls: 359.95 chg: +1.89 stop: n/a

CME continued to bounce on Friday but the stock seemed to stall under its simple 10-dma. We have six weeks left before January options expire. We are not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire. Some of our readers may want to plan an exit near the 100-dma no matter what the value of our strangle position is. Currently the CMJ-MA puts are trading at $13.40bid/$14.00ask.

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

Picked on November 20 at $375.90
Change since picked: -15.95
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 35.44 chg: -0.37 stop: n/a

DHI is still showing some resilience with an intraday bounce from its lows near $35.00 on Friday. We are not suggesting new strangles in DHI at this time. Our current play involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.

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

Picked on November 13 at $ 32.56
Change since picked: + 2.88
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 49.12 chg: +1.42 stop: n/a

Hmm... FS displayed some relative strength on Friday although we can't find any news to account for the nearly 3% rally higher. What is noteworthy is that the rally stalled near round-number resistance at the $50.00 mark. This may have just been an oversold bounce in an otherwise very bearish trend. However, the move did turn FS' latest weekly candlestick into a hammer pattern, which is normally seen as a bullish reversal pattern. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more. FYI: the FS-MJ puts are trading at $2.25bid/$2.55ask.

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

Picked on November 08 at $ 55.37
Change since picked: - 6.25
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 28.45 chg: +0.86 stop: n/a

LEA also displayed some relative strength on Friday. The stock's 3% gain looks like an oversold bounce that was inspired by an upgrade for rival parts maker ARM. While we have six weeks left before January options expire this rally on Friday might be a signal for more conservative traders to think about exiting early. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). Our estimated cost was $1.60. We are targeting a rise to $3.20 or more. FYI: the LEA-ME puts are trading at $0.50bid/$0.60ask.

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

Picked on November 06 at $ 30.24
Change since picked: - 1.79
Earnings Date 01/25/06 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 96.96 change: -0.32 close: n/a

Time is almost up for this play. We have five days left before December options expire. Our Dec. $95 calls are in the money but we need to see LTR make a run for the $100 level if we're going to be profitable. More conservative traders may want to exit early to protect/salvage their capital. We're not suggesting new plays. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. We plan to exit if our strangle rises to $5.00 or if shares of LTR hit 99.90. Currently the LTR-LS calls are trading at $2.10bid/$2.40ask.

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

Picked on October 23 at $ 89.94
Change since picked: + 7.02
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 23.31 chg: +0.03 stop: n/a

PAY hasn't made a lot of progress after reporting earnings on December 1st. Instead the stock has fallen into a new trading range in the $23-24 area. Fortunately, some of the longer-term trends remain bullish but we only have six weeks left before January options expire. We're not suggesting new positions. Our current strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more. Currently the PAY-AX calls are trading at $1.80bid/$2.30ask.

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

Picked on October 12 at $ 19.98
Change since picked: + 3.33
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

---

Protein Design Labs - PDLI - cls: 28.25 chg: +0.35 stop: n/a

Unfortunately, unless PDLI produces a drastic move either direction in the next few days this play is going to be a loser. The stock has been stuck in multiple sideways trading ranges and doesn't appear to be breaking out any time soon. We have five days left before December options expire. The options in our strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We have adjusted our target to breakeven at $1.80.

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

Picked on October 30 at $ 27.70
Change since picked: + 0.55
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 18.54 change: +0.66 stop: n/a

Investors must have gone bargain shopping on Friday because SPC is yet another stock that produced a sharp rebound on Friday in spite of being stuck in a long-term bearish trend. That being said the stock remains under short-term resistance near $19.25. The larger problem here is that we're running out of time. The December options expire in five days. More conservative traders may want to plan an exit near breakeven assuming SPC provides another move lower. We're going to follow our own suggestion and adjust our target to $1.25. We are not suggesting new strangle positions at this time. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW).

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

Picked on November 08 at $ 20.63
Change since picked: - 2.09
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 78.25 chg: -1.25 stop: n/a

Energy stocks pulled back on Friday as investors lock in some profits after a strong week. This kept shares of STR under the $80 level. There are six weeks left before January options expire. We are no longer suggesting strangle positions in the stock. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more.

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

Picked on November 20 at $ 76.25
Change since picked: + 2.00
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

---

Texas Ind. - TXI - close: 51.42 chg: +0.24 stop: n/a

It looks like TXI's upward momentum has stalled as investors wait for the company's earnings report. The company is expected to report earnings on December 15th. Unfortunately, we've found another data source that lists TXI's earnings on December 22nd. We are not suggesting new strangle positions but traders looking for a new play might consider a strangle with the April options. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our estimated cost is $2.70. We're looking for a rise to $5.00 or more.

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

Picked on November 27 at $ 49.57
Change since picked: + 1.85
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

---

Valero Energy - VLO - close: 105.46 chg: -1.10 stop: n/a

VLO pulled back on Friday as traders took profits in the energy sector. Yet the pull back did not threaten the recent breakout. We are not suggesting new strangle plays. Our current play involves the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our estimated cost was $5.85 and we're aiming for a rise to $9.50. VLO is due to split 2-for-1 on December 16th so our post-split target will be a rise to $4.75.

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

Picked on November 21 at $101.00
Change since picked: + 4.46
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

Walter Inds. - WLT - close: 48.88 change: -1.35 stop: 47.95

WLT displayed some relative weakness on Friday. The stock lost 2.68% on no news with volume coming in way above its average. These are bearish developments. The breakdown under the $50 level looks like bad news. More aggressive traders may want to hold on a bit longer since WLT looks like it has some short-term support near $48. This could just be a bull flag pattern. We would rather exit now and just keep an eye on WLT for a new move over $51.50-52.00.

Picked on November 20 at $ 51.50
Change since picked: - 2.62
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 927 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

A Gap in Logic

On Thursday, December 1, the SOX concluded its test of the descending trendline off the summer high. At the open, it gapped higher, posting a strong gain that continued that day and the next. The gains punched the SOX past 500, a psychological barrier, moving it into a support/resistance band spanning from about 493-520.

With investors spurred into buying by a positive result in the October semiconductor sales figure and looking forward to a positive update by Intel, an outlook that was to reverse before the Intel report ever appeared, the SOX looked poised to make further gains.

There was a gap in that logic, however: specifically, the gap that occurred Thursday morning. That was at least the third gap in the SOX's rally off the October low.

Annotated Daily Chart of the SOX, as of 12/02:

Gaps come in three types: breakaway, measuring or continuation, and exhaustion. Breakaway gaps occur when prices gap out of a consolidation pattern. Breakaway gaps occur because accumulation or distribution has been occurring during the consolidation, and demand or supply has overwhelmed bears or bulls. Price gaps up or down, depending on whether a rally or a decline is beginning. Prices often do not retest these gaps. Prices never retreated into the breakaway gap marked by the numeral "1" on the SOX's chart, for example.

Measuring gaps tend to occur about halfway through a movement, although they are not required to be at the exact middle of a move. Although they often occur after another consolidation, they sometimes appear in the course of a straight-line rally or decline, and so are sometimes also called runaway gaps. These sometimes are retested, but if that retest doesn't occur during the next day or two after the gap forms, they often will not be reversed until the rally or decline has ended. Prices did not move back into the gap marked with the numeral "2," either.

Annotated Daily Chart of the SOX as of December 2:

Once a movement has racked up a breakaway and a measuring gap, as the SOX did in its rally off the October low, the possibility rises that the next gap could be an exhaustion gap, the last in the series before a reversal or consolidation period, the "last gasp" of the bulls, as technician John J. Murphy calls it. It need not be a sign of a major reversal, but it does signal to bullish investors that protective measures should be in place. Highly leveraged investors might want to lower their exposure by taking partial profits. This advice was provided to Market Monitor subscribers beginning Thursday, December 1.

Although charting services usually do not provide accurate volume figures for the SOX, volume considerations can help judge whether an exhaustion gap is occurring in equities. A small-range move on large volume suggests that the gap may be an exhaustion gap. Even without the volume figures, it's clear that the SOX's gap on Thursday, December 1 did not fit that parameter, however, because the SOX's price range for the day was large. Still, this gap occurred just where an exhaustion gap might have been expected and so should have been suspect.

Just as a rapidly moving car will not come to an immediate stop as soon as the driver stops pressing the accelerator, prices can move beyond an exhaustion gap. Confirmation of an exhaustion gap occurs when prices close back below the gap.

The presence of a potential exhaustion gap gained special relevance with Texas Instruments and Intel mid-quarter updates scheduled for the week after the gap appeared, and with the SOX having attempted a breakout of a long-term rising regression channel in which it had been traveling off the 2004 low. Depending on how that channel was drawn, the SOX had either ended the week on December 2 at the resistance of that rising regression channel or just above it.

Annotated Weekly Chart for the SOX as of December 2:

The opportunity for a pullback to retest the descending red trendline existed.

The third and probable exhaustion gap provided an alert that the SOX might be topping. A fitted Fib bracket and the resistance at the top of a long-term rising regression channel corroborated that evidence. The next week, the one just concluded, was to produce further corroboration that the gap might have been an exhaustion gap.

Annotated Daily Chart of the SOX:

With the likelihood increasing that the gap might have been an exhaustion gap, those long the SOX or semi-related stocks have further warning to protect profits. The spring up from gap support and follow through on Friday, December 9 clouded the ultimate picture, perhaps leaning toward a possibility for sideways consolidation rather than a deeper drop, but another chart presents evidence that might be watched closely.

Annotated 60-Minute Chart of the SOX:


The next time a gap occurs and some call it bullish or bearish, check for other gaps. If more than two exist, there may be a gap in that logic.
 

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

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