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Daily Newsletter, Wednesday, 12/14/2005

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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

Timber!

The mighty fell last night. In the overnight markets, gold and the Nikkei 225 both tumbled from lofty levels, gold continuing a slide that had begun earlier in the week.

Some attributed gold's plunge at least in part to a change in margin requirements on the Tokyo exchange this week, leading to a liquidation of some positions. A disappointing Tankan quarterly survey supposedly led to the Nikkei's more-than-400-point tumble off its day's high.

Whatever the causes, by the dawn here in the U.S., the lumberjacks were roaming through our markets, looking for other mighty trees to fell. What they found were the trees that had been hiding the bears, forcing bears to take cover and send the SPX to a fresh 52-week high.

The Nasdaq was a reluctant participant in gains for a time in the afternoon, spending much of the day in negative territory and closing there, too. The Bank of America and Bear Stearns downgraded Apple (AAPL) to neutral and peer perform ratings, respectively, contributing to the Nasdaq's relative weakness. Jim Brown has mentioned the possible pressure on the Nasdaq this week due to the reweighting. So far, that pressure has worked only to dampen gains, not to send the Nasdaq below support.

Annotated Daily Chart of the Nasdaq:


That tactic of buying support may no longer work because of the Nasdaq's reweighting. Longs may not be a good idea at all this week on the Nasdaq.

Annotated Daily Chart of the SOX:


Annotated Daily Chart of the Russell 2000:


While the tech-heavy Nasdaq, SOX and Russell 2000 languished, blue chips helped the SPX and Dow to display much more strength. The SPX achieved new 52-week intraday and closing highs despite the retreat off its 1275.80 high of the day.

Annotated Daily Chart of the SPX:


Annotated Daily Chart of the Dow:


The day saw a number of economic releases. The Mortgage Bankers Association released mortgage applications for the week ending December 9 at 7:00 EST. The headline noted the continuing decrease of refinance applications, but mortgage loan application volume was also down 5.7 percent on an adjusted basis and 8.1 percent on an unadjusted basis. The purchase index, refinance index, conventional index and government index all fell. The four-week moving averages for the market and refinance indices fell while that for the purchase index remained unchanged. The average contract interest rate for a 30-year fixed-rate mortgage fell to 6.28 percent from the previous week's 6.32 percent, and points decreased. Despite the fall in some figures from the MBAA, the DJUSHB, the Dow Jones U.S. Home Construction Index, produced strong gains ahead of tomorrow's earnings announcements from a couple of homebuilders.

An AP article hit the wires this morning, speculating that the Pentagon will ask for $80-100 billion more for the effort in Afghanistan and Iraq. This number is in addition to the $50 billion that Congress may approve before adjourning, pushing the war costs up to a possible half-trillion dollars. No final proposal has been written and the ultimate request could differ from the figure now being bandied about, the article concedes, but critics have long accused President Bush of delaying requests as long as possible to keep budget deficit projections less dire than they would otherwise be, and a request anywhere near that amount will plead their case for them.

That press release and its implications for the trade deficit were to lend special significance to the 8:30 release showing that the trade deficit unexpectedly widened by 4.4 percent in October, to a new record $68.9 billion. For the year-to-date, the trade gap now stands at $598.3 billion, with the year now set to break last year's record $617.6 billion annual deficit. The deficit had been expected to narrow to $62.9 billion according to one report. Trade deficits with China, Canada, Mexico, the EU, and OPEC-member nations all reached new records. Exports rose during October by the largest amount in seven months, but that export number was driven by aircraft sales and not enough to overcome rise in import prices.

Bonds reacted, with the ten-year yield gapping lower and dropping, but the immediate reaction in equities was muted. That was to come later, when the markets pulled back from the early highs after the crude inventories release. Even that pullback was not to last, however.

Perhaps a separate release by the Labor Department showing that November's import prices dropped 1.7 percent, far more than the expected 0.7 percent, helped reassure investors, with the drop in crude prices mostly responsible for that decline. During the period covered, petroleum prices declined the most they had in almost a year.

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Treasury Secretary John Snow spoke reassuringly of the trade deficit in an interview on CNBC this morning, claiming that the way to undo that deficit was to continue efforts to grow the economy. He asserted that continuing tax cuts in the face of a record deficit would be a good idea because of the stimulus on the economy. He also noted that energy costs were not filtering through to core costs.

The impact of crude costs on trade deficit and the deficit's impact on the economy put special emphasis on the crude inventories on this day of many economic releases. Crude inventories rose 0.9 million barrels; motor gasoline, 1.8 million barrels; and distillates remained flat. Expectations had been that crude inventories would drop 1.5 million barrels; gasoline, climb 1.0 million barrels; and distillates, rise 800,000 barrels. While crude and gasoline builds proved better than expected, the distillate number was a disappointment, with distillates the most important component this time of year.

Considering the average range for this time of year, crude was above the upper end of the range, gasoline in the lower half, and distillates in the middle. A couple of minutes before the release, crude had traded at $61.45 a barrel, but quickly dropped to a low of $60.80 before beginning a rebound that took it to a new high for the day. When crude again reversed from that new high, at about 11:00, equities began a climb that was at first labored, but then gained steam as crude dropped to a new low for the day.

Sectors that performed well from early in the day included retailers, utilities and industrials, with blue chips in general performing well. An afternoon push carried financials higher, too.

Many specific-stock related developments probably contributed to the trading pattern today, too, but in the interest of keeping this already-too-long Wrap as short as possible, they will be covered briefly. If these impact your positions, check your preferred news source for more information. AAPL's two downgrades, already mentioned, were due to valuation concerns after recent gains. Electronic Arts (ERTS), ConocoPhillips (COP), PPG Industries (PPG) and Best Buy (BBY) also received downgrades. Safeway (SWY) provided disappointing guidance.

Big caps General Electric (GE), Boeing (BA), Honeywell (HON), Pfizer (PFE) and Wal-Mart (WMT) offered good news, helping to stabilize the big-cap heavy OEX. GE CEO Immelt gave an encouraging state-of-the-company speech to investors. Australia's Quantas Airways chose BA over Airbus for new orders. BA has reached a record number of new orders for the year. HON reaffirmed guidance for fiscal 2005 and 2006, with its fiscal 2006 EPS growth now expected to be 20-30 percent. Yesterday, PFE announced a dividend boost, and today the CEO said that the lifting of the dividend was only the first of a series of developments the company planned to increase shareholder return. WMT bought Sonae, a Brazilian retailer. In other news, General Dynamics (GD) will buy Anteon International (ANT), with the price tag at about $2.2 billion. Citigroup upgraded Nike (NKE).

Near the close, Amgen (AMGN) announced that it would acquire Abgenix (ABGX) for a significant premium to the $14.65 closing price, at $22.50. ABGX understandably shot up during after hours trading. JNJ also announced that its Paliperidone drug had been shown effective in schizophrenia studies. Symantec (SYMC) was granted a new antivirus technology patent.

The failure of the usual market leaders to lead today questions the sustainability of the rallies on other indices, but none of those usual leaders led to the downside, either. There was an obvious preference for the safety of blue chips, so those blue chips better continue to lead the way if the rally is to be sustained. GE has been in a possible bearish right triangle on its daily chart, with a flat supporting line at about $35.25, so bulls want to see GE stay above that level. BA was a market leader today, but saw a close well off its high of the day on strong volume, a sign that big-money people were selling into the rally. Some were expressing concern that BA could not keep up its record orders into next year. BA was approaching the top of a rising regression channel in place since January 2003, a long time for a climb within such a channel, and it was testing the previous swing high at $70.93 back in December 2000. It traded above that today after testing it yesterday. It has the possibility of rising a little further before it hits the top of the rising regression channel, but no guarantee that it will.

Tomorrow is a busy day for economic releases again. At 8:30 are the usual initial claims, but also CPI for November and the NY Empire State Index for December. CPI and employment figures will prove important for market direction. A strong labor number (fewer claims than expected) might worry markets, as the Fed is known to be watching for upward pressure from wages. A core CPI that shows that inflationary tendencies are being passed on to the consumer might, too. At 9:15, capacity utilization and industrial production for November will be released. At 10:30 come the natural gas inventories, with those currently probably more important than the crude inventories. Noon sees the Philly Fed number for December.

Earnings include those from ADBE, APOL, BSC, FCEL, GS, KBH, LEN, ORCL, PIR, and RAD, among others, with a number of financials and homebuilders among that group. That could prove important given the importance of the homebuilders and financials in today's rally

LLumberjacks weren't able to fell many stocks or indices on our markets today, as was obvious by the new 52-week high on the SPX, but the bifurcation in the tech-related indices and the others cautions bulls to keep close stops. The Nikkei's steep decline last night shows what happens when weak bulls are shaken out, but a number of recent sharp 300+ point gains on the Nikkei have shown what can happen when you try to catch a top, too. Watch the levels indicated on the charts above, but remember the tendency for technical analysis to become less useful beginning mid-morning on opex Thursdays.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Alcon - ACL - close: 141.45 change: -4.22 stop: 139.90

Wow! ACL displayed some volatility today. The stock immediately spiked lower at the open this morning and continued to drift lower throughout the entire session. We could not find any news or catalyst to explain the $4.00 decline. A bounce from the $140 level could be used as a new bullish entry point but we would be hesitant to initiate new positions with this sort of unexplained decline. More conservative traders may want to consider tightening their stops or exiting early.

Picked on December 11 at $144.60
Change since picked: - 3.15
Earnings Date 02/08/06 (unconfirmed)
Average Daily Volume = 524 thousand

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Apache - APA - close: 73.34 change: +1.18 stop: 65.95

Oil stocks continued higher on Wednesday despite a minor pull back in crude oil prices today. APA added 1.6% after rebounding from the $71.60 level this morning. It may be worth noting that some market pundits are labeling APA a potential takeover target and that could keep a bullish bias in the stock, especially after this week's COP/BR merger announcement. Our end of January target for APA is the $76.00-77.00 range. The Point & Figure chart points to an $83 target.

Picked on December 08 at $ 70.98
Change since picked: + 2.36
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Dominion Res. - D - close: 80.91 chg: +0.91 stop: 74.75

D continues to rally and today's gain pushed it above round-number resistance at the $80.00 level. It didn't hurt that the M&A activity has spread to the utility sector with today's news that FPL is in talks to buy CEG. Our target for D is the $84.50-85.00 range compared to the P&F chart, which points to a $92 target.

Picked on November 27 at $ 78.24
Change since picked: + 2.67
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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FMC Corp. - FMC - close: 53.76 chg: -0.59 stop: 51.95

FMC continues to struggle under technical resistance at the 200-dma. This is having a negative impact on its technical picture. More conservative traders may want to exit early or tighten their stops. We would not suggest new positions until FMC traded over $55.00 and its 100-dma (55.26). The Point & Figure chart points to a $62 target. We are targeting a run into the $59.85-60.00 range.

Picked on December 01 at $ 55.04
Change since picked: - 1.28
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

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Femsa Fomento - FMX - close: 69.36 chg: +1.18 stop: 67.75

FMX is showing some strength again and looks poised to try another breakout attempt at the $70 level. Our strategy suggests going long calls if FMX trades at or above our trigger 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.

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

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Garmin ltd - GRMN - close: 63.49 change: -0.05 stop: 57.90

GRMN dipped to $62.40 before rebounding quickly this morning. We mentioned that more patient traders may want to wait for a dip toward $62. This morning may have been it. However, we suspect GRMN may give us another chance to buy a dip toward $62. As you know there aren't any guarantees and the stock could just keep climbing following Tuesday's bullish breakout. Our mid-January target is the $69.00-70.00 range. We do not want to hold over the January earnings report.

Picked on December 13 at $ 63.54
Change since picked: - 0.05
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Hydril - HYDL - close: 70.68 change: +0.98 stop: 65.95

HYDL is looking a lot stronger today with a 1.4% gain and another move over the $70 level. We would use this as a new bullish entry point but it's perfectly fine to wait for another move over the $71.00 or $71.50 levels before initiating positions. Our target is the $78.00-80.00 range before HYDL's January earnings report, which we do not want to hold over.

Picked on December 12 at $ 71.01
Change since picked: - 0.33
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 263 thousand

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Kerr Mcgee - KMG - close: 95.05 chg: +0.45 stop: 88.99

KMG continues to climb in a narrow rising channel. The oil stocks added another day of gains despite a pull back in crude prices. Watch for a dip back toward $93.25 or even the 10-dma at 91.68. A bounce from either level could be used as a new bullish entry point. Our mid January target is the $98.50-100 range.

Picked on December 02 at $ 90.26
Change since picked: + 4.79
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Kinder Morgan - KMI - close: 93.74 chg: -0.14 stop: 87.45

We are a little puzzled that KMI isn't performing better given the rally in natural gas this past week. The overall pattern for KMI remains bullish but shares are consolidating under resistance at the $95 level. 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.

Picked on December 02 at $ 92.75
Change since picked: + 0.99
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

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Polaris Ind. - PII - close: 50.58 change: +0.80 stop: 48.49

PII is bouncing today with a 1.6% gain. The stock is about to challenge resistance at the bottom of its gap down near $51.00. If it can breakout over $51 then there's a good chance it will fill the gap near $53.00-53.50. We're going to keep our target in the $54.00-55.00 range. We're not suggesting new positions.

Picked on November 21 at $ 48.47
Change since picked: + 2.11
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 60.27 chg: +0.34 stop: 57.95 *new*

ROK is almost there. The stock hit a high of $60.67 today and our target is the $61.00-62.00 range. Today marks the first close over the $60 level since early March 2005. We are not suggesting new positions. More conservative traders may want to strongly consider exiting right here. We are raising our stop loss to $57.95.

Picked on November 03 at $ 55.90
Change since picked: + 4.37
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Ryland Group - RYL - close: 75.83 change: +1.87 stop: 69.90

RYL is off to a decent start. The stock added 2.5% and confirmed its breakout over short-term resistance at the $74 level. Its MACD indicator is nearing a new buy signal. The DJUSHB home construction index added 2.6% today and broke out over its 100-dma. The sector index is poised to challenge its November highs as are shares of RYL. The P&F chart for RYL suggests an $89 target. There is some resistance near $77 but we suspect the stock can trade into the $79.50-80.00 range (our target) before its earnings report in January.

Picked on December 13 at $ 73.96
Change since picked: + 1.87
Earnings Date 01/17/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Questar Corp - STR - close: 84.19 chg: +3.34 stop: 77.45

STR is off to a strong start as a call candidate. The stock gapped open to $81.95 and continued to rally throughout the session. Volume came in very strong and that suggests more strength ahead. Our target is the October highs in the $89.00-90.00 range. FYI: STR is also a current strangle play on the newsletter's play list.

Picked on December 13 at $ 80.85
Change since picked: + 3.34
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 752 thousand

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Sunoco Inc. - SUN - close: 83.82 chg: +0.64 stop: 76.45

It was a relatively quiet day for shares of SUN. The stock traded mostly sideways. We don't see any changes from our previous updates. The P&F chart for SUN points to a $93 target. Our target is the $89.90-90.00 range.

Picked on December 02 at $ 81.75
Change since picked: + 2.07
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Total S.A. - TOT - close: 131.62 change: +1.92 stop: 126.49

TOT also enjoyed the strength in energy stocks today. The stock added 1.48% and closed at a new two-month high. Our target is the $136.00-137.00 range. Our time frame is before the mid-February earnings report. The P&F chart for TOT points to a $152 target.

Picked on December 13 at $130.25
Change since picked: + 1.37
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 936 thousand

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Tractor Supply - TSCO - cls: 54.84 chg: -0.19 stop: 51.95

We don't see any change from our previous update on TSCO. We're not suggesting new positions at this time. Our target is the $57-58 range.

Picked on November 30 at $ 52.75
Change since picked: + 2.09
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

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Valero Energy - VLO - close: 109.10 chg: +0.10 stop: 99.49

VLO continues to consolidate under the $111 level but the stock did rebound from its lows near $107.65. We mentioned that VLO might dip toward $107 and today might have been it. 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.

Picked on December 08 at $106.56
Change since picked: + 2.54
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 9.8 million

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Zimmer Holdings - ZMH - close: 69.51 chg: +0.71 stop: 65.75

This morning after the opening bell ZMH issued a press release stating that the company has received an approval letter for its ceramic hip replacement system. The stock rebounded off its lows of the session and was climbing higher with volume rising sharply near the closing bell. Our target is the $74.00-75.00 range under its simple 200-dma.

Picked on December 11 at $ 68.62
Change since picked: + 0.89
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 2.6 million
 

Put Updates

Magna Int. - MGA - close: 69.06 chg: +1.05 stop: 70.31

Okay, it may be time for us to start looking for the exits. The rebound in MGA has been rather substantial. It is true that MGA is still trading under its multi-month trendline of resistance and is still trading under technical resistance at its 200-dma near $70.00. The fact that it's still under significant resistance is why we're going to keep the play open but today's move over the 50-dma is a major flag of concern. We are not suggesting new positions at this time but we will be looking for a failed rally under $70 as a potential entry point. Our target is the $63-62 range.

Picked on December 04 at $ 68.14
Change since picked: + 0.92
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 318 thousand

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Netflix - NFLX - close: 24.43 chg: +0.38 stop: 27.45 *new*

NFLX almost reached our target today. The stock dipped to $22.54 and our target is $22.50. Unfortunately, shares rebounded very sharply and the session produced a bullish hammer candlestick pattern. Today teaches a good lesson. We weren't the only ones looking to exit near $22.50 and others decided to exit ahead of the crowd near $22.55. Use that same strategy to your advantage. We are not suggesting new positions. Today's action looks like a short-term bullish reversal. Conservative traders may want to significantly tighten their stops. Odds are that NFLX could rebound to $25.50 or higher toward the 10-dma near $26.60. We are lowering our stop loss to $27.45 near the 50-dma. We're also going to adjust our target to $22.55.

Picked on December 09 at $ 25.99
Change since picked: - 1.56
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.)

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AmerisourceBergen - ABC - cls: 81.42 chg: -0.08 stop: n/a

We're running out of time for ABC. The stock traded in a 40-cent range today. December options expire this Friday. More conservative traders may want to exit right here to salvage some of their capital. 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 $3.50. Currently the December $80 calls (ABC-LP) are trading at $1.50bid/$1.65ask.

Picked on October 16 at $ 74.81
Change since picked: + 6.54
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 21.74 chg: -0.01 stop: n/a

We don't see any change from our previous updates on AEOS. 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 $1.50bid/$1.65ask.

Picked on November 13 at $ 25.47
Change since picked: - 3.73
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 63.92 chg: +1.20 stop: n/a

ANF is still trying to rebound and if the Santa Claus rally shows up we'd expect shares to breakout over the $65 level. We have about 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.

Picked on November 13 at $ 59.67
Change since picked: + 4.25
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 45.54 chg: +0.51 stop: n/a

If you have not opened a position yet in BCSI you might want to wait until next week to see if February strikes will become available. We would certainly prefer Februarys over January strikes. 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 about six weeks left before January options expire.

Picked on December 04 at $ 45.43
Change since picked: + 0.11
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Chicago Merc. Exchg. - CME - cls: 369.35 chg: +0.10 stop: n/a

We don't see any changes from our previous update. 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.

Picked on November 20 at $375.90
Change since picked: - 6.55
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 37.94 chg: +1.13 stop: n/a

All aboard! It looks like the DHI train has left the station. Yesterday was a breakout from a bull flag pattern. Today's 3% gain appears to really confirm the move. 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. FYI: the DHI-AG calls are currently trading at $3.70bid/$3.90ask.

Picked on November 13 at $ 32.56
Change since picked: + 5.38
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 48.40 chg: -0.08 stop: n/a

We don't see any change from our previous update on FS. The stock continues to show relative weakness. 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 $2.55bid/$2.75ask.

Picked on November 08 at $ 55.37
Change since picked: - 6.97
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 28.53 chg: -0.08 stop: n/a

LEA is currently struggling under the 50-dma and the $29.00 level. If we don't see more follow through to the downside over the next few days it may be prudent to try and exit 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.

Picked on November 06 at $ 30.24
Change since picked: - 1.71
Earnings Date 01/25/06 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 96.90 change: +0.52 close: n/a

Time is almost up. More conservative traders may want to exit right now and try to salvage some of their capital. The December options expire after Friday's close. 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. 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 $1.90bid/$2.15ask. The high today was $2.15.

Picked on October 23 at $ 89.94
Change since picked: + 6.96
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 24.22 chg: +0.52 stop: n/a

PAY is starting to look more bullish and today's 2% gain didn't hurt. 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 $2.05bid/$2.85ask.

Picked on October 12 at $ 19.98
Change since picked: + 4.24
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 27.92 chg: -0.43 stop: n/a

We do not see any change from our weekend update. We have two 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.

Picked on October 30 at $ 27.70
Change since picked: + 0.22
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

---

Spectrum Brands - SPC - close: 20.63 change: +1.90 stop: n/a

Now our strangle is in real trouble. Shares of SPC gapped higher at the open and closed with a 10% gain on big volume after a Bear Stearns analyst upgraded the stock to an "out perform". The analyst thought the company's valuation looks compelling and its long-term growth strategies realistic. Today's move is a significant breakout over multiple levels of resistance. It also puts SPC right back where we started this play. Unless shares move drastically (+/- 20%) either direction in the next two days we're have to mark this one a loser. 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).

Picked on November 08 at $ 20.63
Change since picked: - 0.00
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

---

Questar Corp. - STR - close: 84.19 chg: +3.34 stop: n/a

STR posted a very strong gain today adding more than 4% after yesterday's breakout over the $80.00 level. Volume came in well above its daily average on today's gain, which is a bullish development. There are about 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. FYI: the STR-AP calls are trading at $5.50bid/$5.80ask.

Picked on November 20 at $ 76.25
Change since picked: + 7.94
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

---

Texas Ind. - TXI - close: 52.20 chg: +0.51 stop: n/a

We don't see any change from our previous updates. We are not suggesting new strangle positions. 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.

Picked on November 27 at $ 49.57
Change since picked: + 2.63
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

---

Valero Energy - VLO - close: 109.10 chg: +0.10 stop: n/a

We don't see any change from our previous updates on VLO. 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.

Picked on November 21 at $101.00
Change since picked: + 8.10
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

Constellation Energy - CEG - cls: 61.10 chg: +4.83 stop: 53.39

Target achieved. News out this morning that FPL Group (FPL) is in advanced talks to buy Constellation Energy (CEG) for more than $11 billion sent shares of CEG soaring. The stock gapped open at $60.15 and traded to $61.60 at its high. Our target was the $60-62 range.

Picked on December 11 at $ 55.60
Change since picked: + 5.50
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume = 947 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

More on Intermarket Analysis

Recent SUBSCRIBER E-MAILS that I will answer, and riff on, today are of possible general interest relating to trading.

SUBSCRIBER E-MAIL:
"You write as if the Q's & Ndx were separate entities. Are they not "joined at the hip?" Since Microsofts special $3 per share dividend, the NDX price is usually within a point or two of this formula:

1.015 x 40 x QQQQ price = NDX price.

Do you agree with this relationship and if so is there any event on the horizon that might change it?"

RESPONSE:
I do tend to analyze Nasdaq 100 (NDX) charts and the QQQQ Nas 100 tracking stock to some extent AS IF they were/are separate markets. And, of course as you point out, they are 'joined at the hip'.

Yesterday (12/13), the Q's closed at 42.045, so plugging this number into your formula results in a 'theoretical' NDX price of 1707, which (as you say) was within 2 points of the 1705.7.

I tend to compute the ratio of QQQQ to NDX from time to time, such as on the weekly close, if I want to come up with a 'theoretical' QQQQ price. Since the Q's 'track' the NDX, I tend to look at the Index of the Nasdaq 100 stocks first, as I am usually am most interested in how closely the Q's are tracking its underlying index on any given day after that; e.g., the NDX 12/9 close of 1692.6 divided by the QQQQ close of 41.7 = (a ratio) of 40.59. Yesterday's (12/13) NDX close was 1705.77. If I divide last week's closing ratio of 40.59 by the 12/13 NDX close I would expect the 12/13 QQQQ close to be approximately 42.02; it was 42.04.

The implied question here I think is why analyze each chart as a separate entity? Mainly, its just easier to calculate support and resistance for QQQQ in terms of what I see on the QQQQ chart rather than calculate it off NDX support and resistance numbers. Of course these levels are going to be very nearly the same.

In answer to your stated question, I agree that the formula you give is the right approximate relationship for computing QQQQ prices based on any given day's close in the Nas 100 NDX Index.
And, I don't see anything that will change the NDX/QQQQ relationship anytime soon; e.g., such as a special dividend as was the case of Microsoft. However, I don't always have my ear to the ground on what an NDX component stock might have up its sleeve.

The other aspect I would mention about tracking the charts separately and why, on any given day, there might be some variation between QQQQ and NDX prices, at least for a short period, is the effect of stops or buy or sell stop-loss orders that might heavily in place above or below a significant support or resistance level for NDX. While arbitrage activities will always tend to keep the QQQQ price within an equivalent relationship to NDX, we don't have completely 'efficient' markets at all times.

S&P futures premiums sometimes get significantly greater, or significantly less, than its theoretical value due to overly bullish or bearish short-term EXPECTATIONS for the trend of the market. Arbitrage-related (long stock versus short SPX futures) wouldn't occur without these occasional above 'fair value' futures to 'cash' premiums.

QQQQ may also get 'ahead' of or 'behind' the underlying NDX index price at times during a trading session. The index (NDX) is simply tracking the 'last' price of the 100 stocks composing it. (The largest stocks are weighted more of course as is true of any capitalization weighted index.) So, at times, especially intraday, QQQQ may rally or decline ahead of the underlying NDX index either due to bullish or bearish EXPECTATIONS (e.g., based on a Fed announcement, etc.) for the market or due to STOPS being 'run' before arbitrage activities bring QQQQ back in 'line' with the underlying NDX index.

TRENDLINES on the two charts, NDX and QQQQ, should show potential technical support and resistance levels in the SAME area or the same level, per the example provided in the charts that follow.
If the trendline you've drawn on the QQQQ chart doesn't reflect the equivalent NDX trendline as far as where it intersects, you likely need to re-draw the QQQQ trendline; or vice-versa. The fact that might be slight differences in the way you MIGHT draw the different trendlines, also reflects slight variations in the way the two instruments trade.

NASDAQ 100 (NDX) and QQQQ DAILY CHARTS
There are two levels in the Nasdaq 100 (NDX) in the following chart that I've highlighted as important technical support as noted by the green up arrows. One is at the 21-day moving average, an important 'benchmark' for trading options; this versus longer term investing in stocks, where the 200 day moving average is perhaps the key benchmark average.

The second lower arrow highlights an even more pivotal technical support at the up trendline, which is an extension of the straight line connecting three lows in Oct. This trendline is an example of an 'internal' trendline; one drawn through the MOST number of points, rather than only through lows that are only the lowest lows in this case. The trendline bisects or 'cuts through' one low. Never mind, this trendline is the one that counts as we're looking for the PREDOMINANT angle of ascent.

This trendline's current intersection as noted at the horizontal (level) dashed line on the chart above [directly underneath today's trading (not shown)] is at 1633. If 1633 was pierced, especially on a closing basis, the current intermediate-term UP trend would be in question.

Use of Friday's (12/9) NDX/QQQQ numeric ratio of 40.6 would see us divide 1633 by this number for a result of 40.22. You'll see on the QQQQ daily chart that follows this one, how close this is where the QQQQ up trendline intersects.

You may say that this is no big deal, but it helps to 'confirm' that you have the 'right' (i.e., equivalent to NDX) trendline support point on the Q's; and, the level where QQQQ sell stops may build up. You'll note on the QQQQ chart below that the trendline intersection is at 40.25, or within a hair's breath of 40.22. I actually re-drew my QQQQ up trendline when I saw that I had not drawn this trendline in just the same way; i.e., as an internal trendline connecting the most (3) number of lows.

The other very significant reason I also chart QQQQ separately, rather than just transposing support and resistance levels on the charts, is for the times that subtle, but key, differences are seen with the Relative Strength Indicator ('length' = 13) or RSI and the On Balance Volume Indicator or OBV.

Occasional good buy or sell 'signals' are given when the RSI makes a higher low at or near a possible bottom, when prices are still trendline down or moving sideways. If you go back up and look at the first chart regarding RSI versus price action at the point where the RSI line is circled, there was a second RSI low point about equal to the first low; meanwhile NDX was still trendline lower. A possible bullish 'divergence', but not as clear cut as the bullish RSI divergence noted on the QQQQ chart immediately above and highlighted by the light blue circle.

This was a subtle difference but signs of a bottom or top are often subtle, but potentially rewarding when you buy calls or puts before an OBVIOUS trend reversal.

The study of volume is a ancillary technical study relative to the trend and possible trend changes. Is volume expanding in the direction of the trend? It should to 'confirm' the price trend. OBV is a specialized study of volume that highlights when the trend may be shifting direction. We are concerned with the DIRECTION of the OBV line only; whether it's going up or moving down.

In the A and D areas circled in the OBV line above there were upward shifts in the direction of the OBV line just prior to when it became obvious by, for example, a breakout above down trendlines. In the B and C areas, the reverse was true just before or around the time of the onset of corrections. Again, subtle changes, but indicator changes often 'confirm' what we're seeing in price action.

SUBSCRIBER QUESTION ON TRADING DIFFERENT INDEXES; ALSO, MY 'SENTIMENT' MODEL
"I trade OEX index options and a friend recently asked me why I trade OEX instead of the S&P cash index options? I said well......'I don't know, that is what I have always traded for the indices'. He asked what is the advantage from one to the other. Again I replied 'I'm not sure'. So, my question to you... is there a difference or advantage from one to the other?

[Part 2]
I have recently changed software providers from Qcharts (which I had for about 6-7 years) to Aspen Graphics. The 2 main reasons I went to Aspen is for the Tom DeMark TD Sequentail study and YOUR call/put study that I can get through them. Plus a few bells and whistles that the Aspen program offers.

I position trade OEX options for the bulk of my trading. While I am waiting for the better OEX trades with good risk to reward ratios I also trade stocks, stock options and the S&P emini. I now can have Aspen write the formula to YOUR call/put indicator. YIPPIE! :).

The formula is: CBOE daily equity options ONLY (NO index options). You divide the equities call volume by the equities put volume to get a daily value, correct? Then you add a 5 period simple moving average to the study, correct? I need to give all the info correctly to Aspen, that's way I want to make sure I have the correct info. They also asked me if I could send them a "current chart" with the study on it to help them. Leigh could you please send me a snap shot of your chart with the study for them?

I told them that you use TradeStation and the formula was written for TS. Aspen's formula writing is different from TS, but they said it will still help them to write it in the Aspen language."

RESPONSE:
TRADING OEX VERSUS SPX OPTIONS:
1.) I am uncertain what your friend means about why you trade the OEX instead of the S&P 'cash' options; I assume he means options on the S&P 500 (symbol: SPX). Futures traders have historically mostly traded the S&P 500 futures; i.e., a contract that 'settles' based on the cash value of 500 times the numerical value of the S&P 500 Index. The 'cash' index to them is the underlying Index of 500 S&P stocks or SPX. OPTIONS on this Index of course trade actively on the CBOE.

So, I suppose the question becomes why one would trade options on the S&P 100 or OEX versus the S&P 500 or SPX. The answer has usually been because the dollar value of a one index point change is $100, versus $500, making the OEX options cheaper to trade. The volatility of an index of the stocks of the 100 biggest companies is often less (true lately), which many view as an advantage. OEX options volume also dwarfs SPX.

Big institutions are invested heaviest in the biggest cap stocks and their best hedge is the OEX, making them significant volume players. My trading mentor, Mark Weinstein (not the public advisor), used to trade the OEX in the thousands on expiration day for small price swings; well, sometimes pretty big price swings! Who was on the other side of those trades? Institutions!

CREATING MY 'SENTIMENT' INDICATOR:
Your question #2
There is no 'formula' to give you on this one. My call/put 'sentiment' indicator is achieved by simply division daily of the daily CBOE equities call volume by daily put volume which I get via an e-mail or off the CBOE website. The result is a call to put volume ratio; e.g., 1.91 yesterday, 12/13.

I then enter this number into a 'custom' data item I named 'CPRATIO' in my TradeStation application. This item then plots or graphs like any other. I usually then apply a 5-day moving average to CPRATIO, but it's not usually critical to the study, more of general interest.

The question is then, can Aspen pull off the CBOE daily equities call and put volume numbers from their datafeed, compute this ratio and give you the ability to chart this as one of their indictors. ALTERNATIVELY, can you create (manually) a 'custom' data item in the Aspen graphics software, then chart it. I used to use their software some years ago and helped them create some indicators then, but this was not one I 'gave' them. I actually kind of hope they don't create this one that everyone can start using:-

** 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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