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Daily Newsletter, Saturday, 01/07/2006

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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

All About The Fed

Thank the Fed for this weeks rally. Actually thank those traders betting the Fed is very close to its last hike. The rally started with the FOMC minutes on Tuesday and just when weakness was beginning to appear later in the week the weak employment report reenergized the buyers and pushed the indexes to a new high. You can also add Google to your list of market movers after the stock soared +56 points only two weeks after being added to the Nasdaq-100 index. As the 3rd largest Nasdaq weighted stock this +56 point gain was the strong push necessary to send the Nasdaq to new highs.

SPX Chart - Weekly

Dow Chart - Weekly

Russell-2000 Chart - weekly

Nasdaq Chart - weekly

Leading the markets on Friday was a weaker than expected growth in the employment market for December. The headline number at +108,000 was half the consensus estimate of +215,000 and only half of the previously reported +215,000 seen in November. However, there was some good news with the prior November number being revised higher to +305,000. This upward revision nearly erased the shortfall from December. The economy created 2.019 million jobs in 2005, which was slightly lower than the 2.194 million created in 2004 but still a decent rate for a recovery this old. Moodys expects employment to continue at +200K per month for the first half of 2006. The unemployment rate fell to 4.9% and a cycle low but it was mostly due to a drop in the total labor force as more blacks and teenagers dropped out of the labor pool. That type of comment always amazes me. What it really means is their unemployment benefits expired and they fell off the official rolls not that they just decided to drop out of the workforce. For whatever the reason it provides a strong headline for Saturday's papers of only 4.9% unemployment. Investors will not see in the Saturday headline that the BLS is still having trouble accounting for employment in the hurricane areas. They are using alternate methods to estimate jobs in the hurricane area and jobs impacted by workers moving out of the area. It is possible the numbers could have been higher but we are a long way from erasing that impact to the accounting process.

While the new jobs numbers were weaker than expected the benefit to the market came from the expectations for the Fed. The lower jobs coupled with the FOMC minutes from Tuesday pushed rate expectations to "one and done" at the January-31st meeting. While it is just speculation it would appear the Fed is on track to raise rates at Greenspan's last meeting and then move to the sidelines. This eases worries that the Fed will overshoot and force the economy into a recession.

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Historically the best time to invest in the market is typically just before the last rate increase. Despite the official consensus still calling for two more hikes the unofficial consensus is a "hope" that January will be the end of the line. With the release of the FOMC minutes on Tuesday this hope surged. The FOMC minutes stated "views differed on how much further tightening might be required" and "that policy decisions going forward would depend to an increased extent on the implications of incoming economic data for future growth and inflation." They also said "The federal funds rate had been boosted substantially, and, in the view of some members, it was now likely within a broad range of values that might turn out to be consistent with output remaining close to potential." This dissention among the members about the need for future hikes would probably hinge on future economic reports. The smaller than expected jobs report and the drop in the ISM to 54.2 from 58.1 suggested that the Fed would be looking at weaker economics at their Jan-31st meeting and they would not be able to maintain a consensus to raise rates after January. This is a huge leap of faith since the March-28th meeting is nearly three months away and there will be three more sets of all the economic numbers before that meeting. That did not keep some investors from taking another leap into the market.

The market on Tuesday was a perfect example of another big short squeeze as those investors leaped into the market. After loading up on short positions for most of the prior week the shorts were surprised by the reaction to the FOMC minutes and the race was on. After the monster short squeeze that pushed the SPX back to December resistance at 1275 the SPX went nowhere for two days as shorts tried to reenter at that resistance in anticipation of a roll over and a resumption of the prior trend. Friday's reaction to the Jobs report hammered these new positions and triggered buy stops again producing yet another squeeze higher. Needless to say the shorts are going to be very leery about trying to fight the trend again next week.

SPX Chart - 30 min

SPX Chart - 10 min

Google had an outstanding week tacking on +56 points from the Dec-30th close at 414.50 to Friday's intraday high at 470.50. This +56 point gain helped push the Nasdaq to a new closing high and helped erase weakness in Dell and Microsoft. Much of this gain was related to higher targets as rumors of new projects are leaked from Google's staff. Goldman Sachs raised their target to $500 but it was overshadowed by Piper Jaffray raising their target to $600. Both were left in the dust by Mark Stahlman at Caris & Company who said Google could hit $2000 within five years. He based that prediction on a sharp increase in revenue as Google's new projects began to generate additional revenue. Google is expected to produce $9B in revenue in 2006 but Mark said it could ramp to $100B within five years. Increased offerings on the web, some on a subscription basis, as well as new forays into insurance, finance, healthcare, software, TV and even hardware are expected. After the close on Friday Google announced a new video download service where suppliers can name their price contrary to the required $1.99 price from Apple. They announced that they had already signed up numerous content suppliers like Sony, CBS and the NBA. The NBA will be offering games on 24hr delay for $3.95. CBS will be offering nearly its entire video library including things like episodes of "I Love Lucy", "Twilight Zone" and the "Brady Bunch" as well as current content. Sony BMG will be offering music videos and Getty images will be offering historic videos from the past. These are just a sample of the tens of thousands of titles to be offered through Google. Google will get a commission of 30% for each download. Google claims they have 2.6 million viewers already registered to the service while they tested it over the last six months, mostly with home movies. You can expect that number to soar with real content given the estimated two billion cell phones worldwide. Add in the Video iPod and numerous other video capable devices including laptops and regular PCs and the market is virtually unlimited. Google jumped +$14 on Friday and has added nearly +$20 billion in market cap this week alone pushing it to $137 billion the 3rd largest Nasdaq company behind MSFT $286B and Intel at $158B. It has already surpassed Cisco at $115B, Dell $72B, QCOM $77B and YHOO at $61B. If you believe the hype the 2008 $600 LEAPS are "only" $71.70 per share. I believe a better deal would be to buy the stock and sell the LEAPS as a covered call. That would net you $668.40 by Jan-2008 ($135+68=$213 total profit) if GOOG actually hit $600.

Comparison Chart - Google, SOX, Nasdaq Compx

The gains pushed the index over 2300 for the first time since May-2001. The combination of a strong SOX and new 52-week highs in Google, AAPL, SNDK, FLSH, BEAS, CELG, BRCM, QCOM, NVDA, YHOO and more than 210 other stocks powered the index much higher on a relative basis than the other indexes excluding the SOX. Note the comparison chart of the major indexes below.

Comparison Chart - Compx, NYSE, SPX, Dow

Needless to say the short squeeze on Tuesday caught me off guard. I was short and expecting a big week to the downside after Santa had a sleigh wreck on his way to Wall Street. The best laid plans of mice and men sometimes go astray. I know I was in good company given the strength of the squeeze. Initially I did what every other short did and that was reenter at 1275 on Wednesday. When the SPX failed to roll over and break 1270 resistance for two days straight I began to reconsider the error of my ways.

As I reviewed the markets after Friday's close I had to determine if our chances were for further highs or a failure of this spike. The internals were very strong on Friday and it is just possible that an old fashioned January rally is underway. Four days of trading does not make a trend, especially when two of those four days were flat. Everybody is focused on the first five days indicator and after Friday it would take a major crash on Monday to turn this indicator negative. According to the indicator the market direction for the first five days of the year will be the market direction for the year. That is probably the least reliable indicator but there is one very reliable January indicator that deserves mention. According to the Stock Traders Almanac every down January since 1953 has preceded a bad year in the markets. The average loss was -13% in the S&P. January is the third best month for the markets behind Nov and Dec since 1950 and averages a +1.5% gain. So far the S&P has rallied +37 points or +2.9% but the month is still young.

The only real weakness I could find last week was in the Transports. After the Tuesday short squeeze the index barely held its ground on Wednesday and posted losses on Thr/Fri. Part of this weakness was due to the unbelievable spike in oil prices. I am sure more than a little weakness was due to the new highs in the index set only four days before year-end. Compared to the transportation losses in prior Januaries this weakness was just a blip in the trend despite the plunge to 4100 on Tuesday. That was -200 points off the prior weeks high. I am far from bullish on the transports and without the transports the Dow rally could be brief.

The most bullish indicator over the last week has been the Russell-2000. This is the index favored by mutual funds and the place where they put their year-end retirement contributions when they are bullish on the market. This index never showed any weakness the entire week other than an opening dip on Tuesday. That dip was bought and those slow on they trigger found themselves chasing it higher the rest of the week. It closed at a new all time high of 700 and well over prior resistance of 692 and well off the lows for the week at 667. This is very good evidence of funds entering the market and not waiting for a January dip. The Russell was far stronger than the Dow and SPX.

Russell Comparison Chart

SOX Chart - Weekly

The SOX was the single strongest index gaining +8.36% for the week. This was also a bull market indicator since gains in chips are normally a prelude to gains in other tech stocks. The logic is supposed to work like this. Manufacturers order new chips for new products. Delivery of those chips occurs 3-6 months before the products hit the shelves. In theory buying chip stocks ahead of this manufacturing wave positions you to be ahead of the street by six months or more. That theory works well if in fact a new manufacturing wave is coming. Based on the thousands of new products at the Consumer Electronics Show in Vegas this week we should be right at the beginning of a new chip wave. Whether investors actually did their homework or just bought blind in hopes of a chip rally the result was the same. The SOX rebounded +8.36% compared to the Nasdaq at +4.55%, Dow +1.63%, SPX +2.98%, Russell +3.89% and the Transports at +0.43%. In fact the Dow, Nasdaq and the Russell gained more on a percentage basis in the last four days than all of last year combined. Performance in 2005 from the Dow was -0.6%, Nasdaq +1.4% and Russell +3.3%.

Crude Oil Chart - Weekly

Probably the biggest surprise of the week is the bounce in crude oil prices back to more than $64 from last weeks $57.30 low. There has not been any material change in fundamentals with only a drop of -1mb from inventory last week. That drop in oil was offset by a sharp increase in gasoline and distillates showing that the oil was refined. The report was expected to knock oil prices back to the prior weeks levels but instead they continued to rise. The gains were blamed on a massive influx of mutual fund money and reinvestment by hedge funds after cashing out to collect 2005 performance commissions the prior week. Friday's close at $64.20 was better than a two month high and prices are not showing any signs of fading. One analyst said it was in expectation of shortages when driving season begins in four months. While I agree with the potential for tight summer supply it is not normal for traders to take long positions ahead of the March supply glut. We do have a likely OPEC production cut late this month but again, this is too far in advance of the actual cut, probably March 1st, since a lead-time is always given. If it is just fund money chasing a repeat of 2005 gains this bounce is likely to end badly. Warm weather continues to blanket the U.S. with temperatures in the Rockies nearing 70s for the last two weeks with a forecast of another warm week ahead. This has hammered gas prices back to $9.65 and well off the $15.78 high back on Dec-13th when cold weather was raging.

We are still a week ahead of the start of the January earnings cycle. We will see some earnings next week from AA, DNA, MTG and about 40 others but the main flurry does not begin until Jan-17th when Intel and IBM kick it off with a bang. We have not heard much about earnings but that will change beginning next week as analysts dust off their outlooks and try to get some face time on stock TV. That face time will likely give some stocks a little more push as we saw from upgrades on AFL, BEAS and CRM on Friday. Positive upgrades in a volatile market tend to generate strong responses. As analysts upgrade their forecasts it could continue to add fuel to this market.

I hesitate to publish my thoughts about the market for next week after being blindsided by Tuesday's short squeeze. Had the SPX failed to break 1275 as it appeared it would on Wed/Thr I would have been content to say short the bounce again and try again. However, if you remember my commentaries in the past I have always been bullish over 1275. I believe that is the make or break level for sentiment. Under 1275 and the markets are deemed to be stuck in the ever present trading range and money on the sidelines is content to watch the battle from afar. Over 1275 and that money can't afford to watch and must get involved or risk losing out on potentially strong gains if the stalemate at 1275 has really broken to the upside. I believe that jobs spike on Friday tipped the scales in favor of the bulls and we could be going higher. However, the influx of year-end contribution money should be about over and the markets will have to exist on their own momentum now rather than those year-end funds. This could produce a hollow thud as markets crash back to earth next week but I doubt they will retrace much. Once the bull has broken free it is hard to convince investors it was just a head fake. After strong gains like we saw last week there is always the chance for profit taking to appear but I have been caught flat-footed while waiting for it far too many times to suggest buyers wait on the sidelines. Breakout rallies tend to feed on themselves and I would hate to miss that run.

Instead of a hard and fast call for next week we need to revert to the tried and true pivot point of 1275 for guidance. Actually I am going to use 1270 as first support under the 1275 breakout. As long as we remain above 1270 I will remain bullish and looking for further gains to the upside. A break under 1270 could have the bears coming back for another feast but I suspect it will be only crumbs and not a buffet. I would hate to see this breakout turn into a repeat of 2003 where the first nine days were bullish followed by two months of declines with the SPX losing more than -130 points. January 2002 had four days of gains to a new high only to be followed by 33 days of weakness and -102 SPX points. Both years started out with a bang only to fall flat once the year-end contributions slowed. This year has an added factor that could prevent those declines. That is the anticipation of an end to the Fed rate hikes. That is the prime mover at present and takes precedence over nearly every other factor. Even bad economics get a pass since they would only hasten the end to rate hikes. The only bad news would be good news with a sudden spike in economic activity that puts the Fed back in hike mode by the Jan-31st Fed meeting. Until conditions change buy the dips above 1270 and short a break below that level.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL None None
APOL    
CAT    
GS    
LEH    
SHLD    

New Calls

Apple Computer - AAPL - close: 76.30 chg: +1.92 stop: 69.99

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and iLife and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. (source: company press release or website)

Why We Like It:
Pure and simple this is a momentum play. AAPL has been a huge part of the strength in the hardware sector. Friday's rally is a bullish technical breakout above resistance at the top of its one-month trading range. Friday's move also produced a new triple-top breakout buy signal for its P&F chart, which points to a $118 target. We also see that the MACD is nearing a new buy signal. If you consider that once again the ipod and its many mutations were the must have gifts for the holidays this year then you can understand investor enthusiasm for the upcoming earnings report. The report is coming up quick on January 18th and that doesn't give us much time. We are going to be aggressive and use January calls. We'll set our stop loss at $69.99 under the bottom of its trading range. More conservative traders may want to use a tighter stop. Our target is the $79.85-80.00 range. FYI: it's been almost one year since AAPL had a stock split and shares are in range to split again. We're not predicting a split announcement but we would not be surprised if AAPL announced one with its earnings report.

Suggested Options:
We are suggesting the January calls. We plan to exit ahead of the January 18th earnings report, which is three days before January options expire.

BUY CALL JAN 75 QAA-AO open interest=57666 current ask $3.70
BUY CALL JAN 80 QAA-AP open interest=39922 current ask $1.55

Picked on January 08 at $ 76.30
Change since picked: + 0.00
Earnings Date 01/18/06 (confirmed)
Average Daily Volume = 25.5 million

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Apollo Group - APOL - close: 62.40 change: +1.60 stop: 59.95

Company Description:
Apollo Group, Inc. has been providing higher education programs to working adults for almost 30 years. Apollo Group, Inc., operates through its subsidiaries: The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Western International University, Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 95 campuses and 153 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, Netherlands, and Mexico. (source: company press release or website)

Why We Like It:
The latest earnings report for APOL in mid December was pretty uninspiring. The company missed the revenue estimates and guided lower for revenues in 2006. Since then the stock has been pretty weak until the last four days where shares suddenly started bouncing. The stock is rebounding from the $60 level and all the daily technical indicators are pointing higher. Of course after being so oversold it doesn't take much to push the oscillators higher but we think this bounce might have legs. Technical traders will note that weekly chart has produced a bullish engulfing candlestick pattern at the end of a downtrend. This is usually interpreted as a bullish reversal pattern. We would consider buying calls here or anywhere in the $61.40-62.60 region. Our target is going to be the $67.00-68.00 range. If APOL fails to push past the $63.50 level in the next several days we'll probably pull the plug early.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 60 OAQ-BL open interest= 260 current ask $4.10
BUY CALL FEB 65 OAQ-BM open interest= 495 current ask $1.45

Picked on January 08 at $ 62.40
Change since picked: + 0.00
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 1.9 million

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Caterpillar - CAT - close: 60.45 change: +1.18 stop: 56.95

Company Description:
For 80 years, Caterpillar Inc. has been building the world's infrastructure and, in partnership with its worldwide dealer network, is driving positive and sustainable change on every continent. With 2004 sales and revenues of $30.25 billion, Caterpillar is a technology leader and the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. (source: company press release or website)

Why We Like It:
We're adding CAT to the list as a bullish candidate following Friday's breakout over significant resistance at the $60.00 level. The stock has been consolidating sideways under $60 for the last five weeks. This past week's rally has seen an influx of volume and Friday's move represents a buying opportunity. Technical indicators are bullish and the P&F chart points to a $72 target. We are going to target a run into the $64.75-65.00 range. We do not want to hold over the late January earnings report so we have just less than three weeks.

Suggested Options:
We are suggesting the February calls so we can hold the position right up to CAT's earnings report.

BUY CALL FEB 55.00 CAT-BK open interest=10354 current ask $6.20
BUY CALL FEB 57.50 CAT-BY open interest= 6632 current ask $4.20
BUY CALL FEB 60.00 CAT-BL open interest=18261 current ask $2.55
BUY CALL FEB 65.00 CAT-BM open interest= 5069 current ask $0.70

Picked on January 08 at $ 60.45
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 4.0 million

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Goldman Sachs - GS - close: 128.84 chg: +1.80 stop: 125.59

Company Description:
Goldman Sachs is a leading global investment banking, securities and investment management firm. However, to our clients and those associated with us, we are much more than that. (source: company press release or website)

Why We Like It:
The XBD broker-dealer index is looking pretty bullish right now. After consolidating under resistance at the 200 level for the last five weeks the XBD index broke out to new all-time highs in the last few days and produced a new MACD buy signal on its daily chart. We think shares of GS will follow suit. The stock is currently consolidating under resistance at the $130 level but short-term technicals are turning more positive. The Point & Figure chart is already bullish with a $177 target. We are going to suggest a trigger to buy calls at $130.05. If triggered we will target a rally into the $134.80-135.00 range. More aggressive traders might want to aim higher.

Suggested Options:
We are going to suggest February calls since the next available are Aprils and we don't plan to hold the play that long.

BUY CALL FEB 125.00 GS-BE open interest= 509 current ask $6.10
BUY CALL FEB 130.00 GS-BF open interest=1179 current ask $3.10
BUY CALL FEB 135.00 GS-BG open interest=1024 current ask $1.30

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Lehman Brothers - LEH - close: 130.24 chg: +1.59 stop: 125.90

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. The Firm is headquartered in New York, with regional headquarters in London and Tokyo and operates in a network of offices around the world. (source: company press release or website)

Why We Like It:
LEH is another play on the bullish broker-dealer sector. The stock has been consolidating sideways between $130 and $125 for the last five weeks. Now that the XBD index has broken out we expect LEH to follow in its tracks. We're going to suggest a trigger to buy calls at $131.05. More conservative traders may want to wait for a new high over the November peak near $133. If triggered we will target a rally into the $138.50-140.00 range over the next several weeks. Coincidentally LEH's P&F chart points to a $177 target, which is the same as GS' P&F chart.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 130 LES-BF open interest=505 current ask $4.10
BUY CALL FEB 135 LES-BG open interest=675 current ask $1.80

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Sears Holding - SHLD - close: 119.46 change: +1.56 stop: 114.99

Company Description:
Sears Holdings Corporation is the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as one of the leading retailers of tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. Holdings is the nation's largest provider of home services, with more than 14 million service calls made annually. (source: company press release or website)

Why We Like It:
This is a simple play. We are just trying to play the ups and downs in SHLD's trading range. The stock has been bouncing around the $114-126 region for more than three months now. Currently shares are starting to rebound. We'll suggest a trigger to buy calls at $120.05. If triggered we'll target a rally into the $124.90-125.00 range. We are going to put our stop loss under the recent low at $114.99. That doesn't offer a great risk-reward ratio but leaves room for shares to maneuver.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 115 KTQ-BC open interest= 393 current ask $8.00
BUY CALL FEB 120 KTQ-BD open interest=2386 current ask $5.20
BUY CALL FEB 125 KTQ-BE open interest=1166 current ask $3.20

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/07/06 (unconfirmed)
Average Daily Volume = 2.7 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Biogen Idec - BIIB - close: 47.12 change: -0.15 stop: 44.45 *new*

Biotech stocks have had a good year so far, up four days in a row. The BTK index broke out over the 700 level and closed at new five-year highs. Unfortunately, BIIB has been consolidating the last couple of days instead of enjoying the market's strength. The overall pattern on BIIB remains bullish and the P&F chart points to a $62 target but the stock is still trying to regain its footing after the Thursday downgrade. Traders might want to consider buying a bounce from the $46.00-46.50 range but keep in mind that our target is not that far away in the $49.85-50.00 range. We are going to raise the stop a bit to $44.45. FYI: Amgen, a major component in the biotech index, has not been moving higher and looks vulnerable for a move lower. A decline in AMGN could slow any rally in the rest of the group.

Suggested Options:
We are not suggesting new calls in BIIB at this time.

Picked on December 27 at $ 46.11
Change since picked: + 1.01
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Cytec Ind. - CYT - close: 48.29 chg: -0.13 stop: 45.95

CYT's failure to rally on Friday with the markets and its failed rally on Thursday are certainly not bullish developments. The current two-month pattern remains positive but the stock might retrace back to the $47.00 region before moving higher again. We would not suggest new plays at this time but watch for a bounce from the $47 level. Our target is the $49.85-50.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $65 target. The biggest challenge to initiating new positions now is the time frame. We do not want to hold positions over the Jan. 19th earnings report (which is currently an unconfirmed date).

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

Picked on December 22 at $ 47.01
Change since picked: + 1.28
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 333 thousand

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Foster Wheeler - FWLT - close: 38.96 chg: +0.74 stop: 35.49

FWLT continues to look strong. The stock has broken out from its four-week sideways trading range and shares are now hitting new highs. Short-term technicals like the RSI and stochastics are bullish and its MACD is nearing a new buy signal. The Point & Figure chart points to a $73 target. Our trigger to buy calls was at $38.05 and we would still consider new bullish positions here although more patient traders might consider waiting for a dip back toward $38, since broken resistance there should act as new support. Our target is the $42.00-42.50 range.

Suggested Options:
We are going to suggest the February calls.

BUY CALL FEB 35 UFB-BG open interest=1771 current ask $4.80
BUY CALL FEB 40 UFB-BH open interest=2503 current ask $1.60

Picked on January 05 at $ 38.05
Change since picked: + 0.91
Earnings Date 03/15/06 (unconfirmed)
Average Daily Volume = 598 thousand

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Gilead Sciences - GILD - close: 57.03 chg: +0.41 stop: 51.99

New five-year highs in the BTK biotech index did hurt shares of GILD. The stock itself added 0.7% on Friday and closed at a new all-time high after an analyst reiterated their "out perform" rating. The technical picture is bullish and the P&F chart points to a $66 target. Our target is only a couple of points away in the $59.00-60.00 range. While our outlook remains positive we would not suggest new positions here. If GILD dips then watch for a bounce in the $55.00-56.00 range only then would we consider new positions. We do not want to hold over GILD's mid January earnings report.

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

Picked on December 22 at $ 54.51
Change since picked: + 2.52
Earnings Date 01/17/06 (unconfirmed)
Average Daily Volume = 4.3 million

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Ipsco Inc. - IPS - close: 84.90 change: +1.20 stop: 79.99

We still can't find any news to account for Thursday's sell-off in IPS. If we had to render a guess it might just be profit taking after IPS hit its projected price target (near $86) from the inverted or bullish head-and-shoulders pattern formed over September through November. Fortunately, there was no follow through on the selling and the stock has bounced from its simple 10-dma. This looks like a new bullish entry point but consider new positions carefully. IPS remains overbought and some of its technical indicators are also overbought and look ready to turn lower. We are willing to keep the play open because metal and steel stocks have been strong and we suspect IPS will continue to rally up to its earnings report in late January. We do not want to hold over the earnings report. Our target is the $89.00-90.00 range.

Suggested Options:
We are suggesting the February calls because we suggest holding any bullish position up to the company's late January earnings report.

BUY CALL FEB 80 IPS-BP open interest= 18 current ask $7.80
BUY CALL FEB 85 IPS-BQ open interest=173 current ask $4.80

Picked on December 30 at $ 83.55
Change since picked: + 1.45
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 396 thousand

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Lennar Corp. - LEN - close: 62.62 chg: -0.29 stop: 59.99

Homebuilders were one of the few sectors that did not rally on Friday and that is a surprise. If the markets rallied higher due to the jobs report assuming that the economic data suggests the Fed is closer to ending its tightening cycle on interest rates then the builders should have enjoyed some strength. Lower rates usually equals lower mortgage rates and that means more home sales. Yes, it's true that home sales are expected to decline from 2005's blistering pace but 2006 is still expected to be one of the best years ever for the number of homes sold. The DJUSHB home construction index still looks poised for a breakout as do shares of LEN. The P&F chart for LEN is very bullish. The stock has produced a bullish triangle breakout pattern with a $75 target. We are going to suggest a trigger to buy calls at $64.01. If triggered we'll target a rally into the $69.50-70.00 range by February option expiration.

Suggested Options:
We are suggesting the February calls because March strikes aren't available and we don't want to pay for Mays.

BUY CALL FEB 60 LEN-BL open interest=2459 current ask $4.60
BUY CALL FEB 65 LEN-BM open interest=6679 current ask $1.80
BUY CALL FEB 70 LEN-BN open interest=1394 current ask $0.50


Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 2.6 million

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Mohawk Ind. - MHK - close: 88.56 change: -0.60 stop: 85.90

MHK continued to show relative weakness on Friday. The stock's failure to rally with the rest of the market is a danger sign. We liked MHK as a bullish candidate because the Tuesday rally put shares above its long-term trendline of resistance. Wednesday's strength confirmed the move and pushed MHK above round-number resistance at $90.00. Our trigger to buy calls was at $90.25. A little profit taking we understand and we are okay with it but it makes us nervous that MHK slid lower when the markets were hitting new highs on Friday. Aggressive traders might want to consider new positions here since MHK was bouncing off its lows of the session on Friday afternoon. For the rest of us we would wait for another move over $90 or even $91 before considering new bullish positions. Our target is the $94.85-95.00 range. It might be notable that last week's rally did produce a new triple-top breakout buy signal on the P&F chart. Don't forget that we want to exit ahead of its February earnings report.

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

Picked on January 04 at $ 90.25
Change since picked: - 1.69
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 355 thousand

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Petrochina Co - PTR - close: 85.75 change: +1.32 stop: 79.99

Oil stocks continued to rise on Friday. The OIX oil index added 2% and the OSX oil services index really moved with a 3.5% gain. Shares of PTR hit a new four-month high with Friday's 1.5% gain. We probably wouldn't chase PTR here. If you're looking for a new entry wait for a potential dip back into the $84.00-84.50 region. Our end of February target is the $89.50-90.00 range.

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

Picked on January 03 at $ 83.50
Change since picked: + 2.25
Earnings Date 03/00/06 (unconfirmed)
Average Daily Volume = 488 thousand
 

Put Updates

Netease.com - NTES - close: 57.14 chg: -0.96 stop: 58.01

It looks like shorts in NTES may have run for cover a little bit on Friday. The stock rallied to resistance near $60 before turning lower in the afternoon. The move was probably fueled by the general market bullishness and some positive analyst comments over Chinese Internet and technology companies. Friday's action looks like a failed rally so we'll keep NTES on the list as a candidate. Our trigger to buy puts on the stock is at $54.95, under the November low. If triggered we'll target a decline into the $50.25-50.00 range. We do not want to hold positions over the February earnings report.

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

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/21/06 (unconfirmed)
Average Daily Volume = 4.2 million

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Progressive Corp - PGR - cls: 116.26 chg: -0.74 stop: 120.05

We're impressed. The markets climbed higher for the first four days of January but PGR continued to show relative weakness. Thursday's failed rally at the $118 level was repeated early on Friday morning. This looks like a new entry point to buy puts but that takes guts with the rest of the market in breakout mode, plus we have a time crunch issue. It looks like PGR is due to report earnings on January 18th. That gives us less than a week and a half to reach our target so we are not suggesting new positions. Don't forget that January 16th is a market holiday. We do not want to hold over the earnings report. More aggressive traders might want to enter new positions here carefully and consider tightening your stop loss. We are adjusting our target to $111.50-111.00 to account for potential support at the rising 100-dma.

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

Picked on December 30 at $117.45
Change since picked: - 1.19
Earnings Date 01/18/06 (confirmed)
Average Daily Volume = 836 thousand

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Scotts Miracle grow - SMG - cls: 46.73 change: +0.78 stop: 47.55

Uh-oh! The market strength on Friday inspired SMG to rebound again and shares closed just under resistance near the $47.00 level. If the broader market continues to rally on Monday we would expect shares of SMG to breakout higher and retest stronger resistance near $48.00. More conservative traders may just want to exit early right here or tighten their stop closer to the $47 level. We are not suggesting new positions at this time.

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

Picked on January 01 at $ 45.24
Change since picked: + 1.49
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 354 thousand

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Stryker Corp. - SYK - close: 45.14 chg: +0.29 stop: 46.51

In spite of last week's market strength shares of SYK still look poised to move lower. The two-month oversold bounce ended with a failed rally near $48 and its 200-dma in December and now SYK is in a narrow, descending channel. Yet we need to consider that the market's strength may continue so traders looking for new positions may want to wait for a decline under the 50-dma and the $44.50 level or wait for a new relative low under $44.00. We do want to issue one note of caution. The weekly chart shows a hammer-type candlestick, which is normally seen as a bullish reversal pattern. The Point & Figure chart points to a $23.00 target. Our target is the $40.25-40.00 range, near its October lows. We do not want to hold over the January earnings report.

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

Picked on December 30 at $ 44.29
Change since picked: + 0.85
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 2.1 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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Amer. Eagle Out. - AEOS - cls: 24.09 chg: +0.08 stop: n/a

Time is running out. We have two weeks left before January options expire. For this strangle play to have a chance at exiting at breakeven or better then AEOS needs to trade above $27.50 or under $22.50. We are 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 changing our target to breakeven at $2.35.

Suggested Options:
We are not suggesting new strangle plays in AEOS.

Picked on November 13 at $ 25.47
Change since picked: - 1.38
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 66.38 chg: +0.36 stop: n/a

Time is running out for our ANF strangle as well. We have two weeks left before January options expire. Currently ANF is trading over the $65 strike but not by much. We need to see the stock make a run for the $70 level if we want to exit near breakeven. We are not suggesting new plays at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our target has been adjusted to breakeven at $5.15. FYI: the Jan. $65 calls (ANF-AM) are trading at $2.45bid/$2.50ask.

Suggested Options:
We are not suggesting new strangle plays in ANF.

Picked on November 13 at $ 59.67
Change since picked: + 6.71
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 41.82 chg: +0.46 stop: n/a

BCSI's oversold bounce got some more help from the analyst community on Friday. The stock was started with a "buy" rating. Shares responded with a 1.1% gain but volume came in below average. We only have two weeks left and BCSI needs to trade under $39 or well over $50 if we are going to be able to exit at breakeven. Last week we adjusted our target to breakeven at $3.25. We are not suggesting new plays. Our current play involves the January $50 call and the January $40 put.

Suggested Options:
We are not suggesting new strangle plays in BCSI.

Picked on December 04 at $ 45.43
Change since picked: - 3.68
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Building Materials - BMHC - cls: 76.43 chg: +1.41 stop: n/a

A positive market environment really helped BMHC's oversold bounce. Friday the stock continued to rise following a broker upgrade and volume came in above average. Yet there is a chance that the bounce is over. The Friday rally failed near the $77.50 region, which was previous support and broken support usually becomes resistance. We are not suggesting new strangle positions at this time. The options in our strangle play are the March $90 calls (BGU-CR) and the March $70 puts (BGU-ON). Our estimated cost is $8.20. Our target is $12.50 by March expiration.

Suggested Options:
We are not suggesting new strangles in BMHC at this time.

Picked on December 18 at $ 80.95
Change since picked: - 4.52
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 527 thousand

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Chicago Merc. Exchg. - CME - cls: 374.95 chg: +10.95 stop: n/a

CME will just not pick a direction and go with it. Every time it looks like CME has broken out higher or broken down it quickly reverses course. We are running out of time too. There are only two weeks left before January options expire. At the moment if we have any hope of exiting near breakeven we need to see CME trade under $340 or above $410 and do it pretty quickly. Odds of that happening don't seem very high at the moment. We are not suggesting new plays. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA).

Suggested Options:
We are not suggesting new strangles in CME.

Picked on November 20 at $375.90
Change since picked: -00.95
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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Four Seasons - FS - close: 54.54 chg: -0.42 stop: n/a

We have nothing new to report on for FS. Last week's breakout over its 50-dma and its multi-month trendline of resistance and lower highs has all but killed this strangle play. We have two weeks left before January options expire. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). We have adjusted our target to breakeven at $2.60.

Suggested Options:
We are not suggesting new strangles in FS at this time.

Picked on November 08 at $ 55.37
Change since picked: - 0.83
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 29.34 chg: +0.09 stop: n/a

In the news on Friday Fitch Ratings lowered their rating on Lear Corp. to junk status over worries about the company's free cash flow (source: Reuters). The news had little impact on shares of LEA, which traded in a narrow range on Friday. We have two weeks left before January options expire. If we have any hope of exiting near breakeven then LEA needs to trade over $35 or under $25 pretty soon. 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). We have lowered our target to breakeven at $1.60.

Suggested Options:
We are not suggesting new strangles in LEA at this time.

Picked on November 06 at $ 30.24
Change since picked: - 0.90
Earnings Date 01/25/06 (confirmed)
Average Daily Volume = 1.8 million

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Questar Corp. - STR - close: 79.51 chg: +0.39 stop: n/a

STR tried to rally over the $80 level for the second day in a row but weakness in the natural gas futures may have weakened investors' resolve. The short-term technicals are bullish but if we're going to see this strangle reach our target we need to see STR trade over $85.00 before January options expire. We have adjusted our target to breakeven at $5.10. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN).

Suggested Options:
We are not suggesting new strangles in STR at this time.

Picked on November 20 at $ 76.25
Change since picked: + 3.26
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

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Texas Ind. - TXI - close: 51.05 chg: +0.00 stop: n/a

We have nothing new to report on for TXI. The strangle play is pretty much dead. The company's earnings report, while coming in strong, failed to produce any sort of move in the stock price. Shares even failed to participate in the market rally on Friday. There is no reason to suspect the stock will breakout from its three-month trading range before January options expire. We are not suggesting new plays. 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 and we have adjusted our target to breakeven on the slim chance that TXI does produce a move.

Suggested Options:
We are not suggesting new strangle positions in TXI.

Picked on November 27 at $ 49.57
Change since picked: + 1.48
Earnings Date 01/05/06 (confirmed)
Average Daily Volume = 354 thousand

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Valero Energy - VLO - close: 55.89 chg: +1.12 stop: n/a

A strong week for oil and oil stocks was capped off with a big gain on Friday. Shares of VLO participated in the oil stock rally and added more than 2% on Friday. The move also marks a bullish breakout over resistance. We are not suggesting new plays at this time. We only have two weeks left before January options expire. Our target has been adjusted to breakeven at $2.93. The options in our strangle are the January $45 puts (VLO-MI) and the January $55 calls (VLO-AK)(both post-split). Currently the VLO-AK calls are trading at $1.90bid/$2.05 ask.

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

Picked on November 21 at $ 50.50
Change since picked: + 5.39
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

United States Steel - X - close: 51.17 chg: -0.01 stop: 44.99

Target achieved. Shares of X continued to rally on Friday morning and traded over the $51.10 level multiple times before fading lower into the closing bell. Our target was the $52.00-52.50 range. The stock looks short-term overbought and due for a dip.

Picked on December 23 at $ 47.05
Change since picked: + 3.12
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 3.8 million
 

Dropped Puts

None
 

Dropped Strangles

Verifone Holdings - PAY - cls: 27.00 chg: +0.94 stop: n/a

Target achieved. This past week has been bullish for PAY, which was bouncing from support near the $25.00 level. Friday's session was very strong with a 3.6% gain on very strong volume. The stock is now challenging its highs from last month. The surge higher on Friday pushed the options higher as well. Our target has been for a rise to $4.50. The January $22.50 calls (PAY-AX) closed at $4.30bid/$4.70ask. We are closing the play. More aggressive traders may want to think about holding their position a little while longer just to see if the rally continues. Our estimated cost was about $2.60.

Picked on October 12 at $ 19.98
Change since picked: + 7.02
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand
 


Trader's Corner

On Balance, It's a Good Indicator

As technical indicators go, on-balance volume grows whiskery with age. In the hyper culture of the frequent trader, the newest and most complicated indicator may appear best. OBV (on-balance volume) sounds simple-minded when compared to new strategies such as singular spectrum analysis, but whiskered as the OBV may be, its logic remains clear.

First introduced by Joe Granville in 1963, OBV measures positive and negative volume flow. The direction of the flow proves more important than the indicator's numerical value. OBV rises when volume is heaviest on up days and falls when volume is heaviest on down days, and it should normally rise and fall in accordance with price action.

Annotated Daily Chart of Dell:

To determine OBV's value, add the day's volume to the previous day's OBV on up days and subtract the day's volume from the previous day's OBV on down days. For this purpose, an "up" day is defined as one on which the closing price is higher than the previous day's close, and a "down" day is one on which the close is lower than the previous day's. If the closing price is the same as the previous day's close, volume is neither added nor subtracted. The OBV would remain at the previous day's level. These calculations are simple enough to be performed with a pencil and a scrap sheet of paper, although most charting services take care of the calculations for you.

Simple doesn't equate to antiquated, however. As the Dell example above illustrated, divergences in price and OBV action alert traders that the action of funds, institutions and traders with deep pockets do not support the current price action. Divergences can pinpoint times when wise money distributes stock into each rally or accumulates stock on each dip.

Annotated Daily Chart of Dell:

In this case, bullish price/OBV divergence occurred. OBV's higher low indicated that not as much volume was flowing into days when prices closed lower than it had on the first swing low. Logic holds again.

Traders might intuitively discount the other type of price/OBV divergence at swing lows: times when OBV swings to a lower low while price dips to a higher low. Discounting that type of divergence might be a mistake.

Annotated Daily Chart of Boeing:

Any price/OBV divergence at a swing high should make traders suspicious of the rally. Any divergence at a swing low should prompt traders to suspect that accumulation is occurring.

Volume tends to precede price action, so OBV may not be a good market-timing tool. As with any type of divergence, it offers a warning, allowing bulls and bears to take steps to protect profits and plan new entries the opposite direction. Those new entries should await price action that confirms that such entries are valid.

The previous charts employed examples of big-cap stocks. There's a reason for that. OBV may not be as reliable an indicator for a thinly traded stock vulnerable to pump-and-dump activities, although it does occasionally serve up a warning, even on those.

Annotated 15-Minute Chart of MGAM:

OBV may be one of the whiskered old fellows of technical indicators, but he's still got something to say. Newer and more complicated indicators can pinpoint divergences, too, but the value in this one is that it's derived from volume rather than price, so perhaps presents a stronger corroboration that the price action is not sustainable than might be obtained from an indicator derived from price action. OBV may be one of the old guys, but when he warns, pay attention.
 

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

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