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Daily Newsletter, Wednesday, 01/18/2006

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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

Stampeding the (Live)door

Investors in Japanese stocks stampeded last night. Everyone had crowded into the same bullish building and the stampede was prodded by a broadening investigation of Livedoor, an Internet company. The volume threatened to swamp the capacity of the Tokyo Stock Exchange, forcing a close of trading twenty minutes earlier than normal and prompting a planned later starting time in tonight's afternoon session. Last night, the Nikkei 225 closed almost 1,150 points below Friday's intraday high.

Traders, print articles and television commentators talked about the Nikkei's action, with some traders worrying that such a stampede could hit our markets. The fear had certainly spilled over into Taiwan and South Korea, with the bourses of those countries down 3.16 and 2.64 percent, respectively. Although moderate in comparison to the Nikkei's drop, the FTSE 100, CAC 40 and DAX had down days well underway by the time most U.S. traders opened their eyes. At one point during the pre-market period, a CNBC commentator mentioned that each component of the CAC 40 and DAX was lower, most by more than one percent. Rising crude prices this week, disappointments from Yahoo (YHOO) and Intel (INTC)--coupled with Citigroup, UBS and Piper Jaffray downgrades of INTC--increased the fear.

J.P. Morgan stood in front of the stampeding crowd, holding them back at least momentarily while it announced forecasts deemed slightly better than anticipated, at least until investors decided that its revenues were disappointing. Mellon (MEL) added its weight, also beating expectations. Although reporting Q4 profit, gross margins and worldwide service bookings that beat expectations, IBM had also reported revenue that didn't quite meet expectations, but investors ignored those revenue numbers in favor of the other strengths the report showed.

The December CPI release also turned a few stampeding traders away from the door, with the headline figure falling 0.1 percent and the core number staying a tame 0.2 percent. By the end of the day, dip-buyers anticipating a Nikkei bounce tonight and reassured by the day's economic releases bought support levels on some indices, and tempered the losses. If after-hours action is any guide, they might not be glad they did so.

Annotated Daily Chart of the Wilshire 5000:

That bounce up to retest the 10-sma was a theme repeated on several indices, and the retests should prove important to watch. The SPX, however, found resistance below the 10-sma and below the 38.2 percent retracement of the drop over the last week, a level some other indices hit. A weekly chart shows an unhealthy looking potential for the SPX, depending on the action across the rest of the week.

Annotated Weekly Chart of the SPX:

The SPX closed between the potential support offered by December's high and potential resistance offered by the 10-sma and the top of the wedge, with the two coinciding. The Dow also closed between support and resistance, although in the Dow's case it was the 50-sma offering support.

Annotated Daily Chart of the Dow:

Similarly, the Nasdaq closed between support and resistance. On a 60-minute chart, the last bounce looked corrective, however, and likely to break to the downside. Tomorrow will tell.

Annotated Daily Chart of the Nasdaq:

The SOX found support at December's high and bounce up to the 10-sma, although it did not close above it.

Annotated Daily Chart of the SOX:

The Russell 2000 did manage a close just above its 10-sma, but just barely above a 38.2 percent retracement of the decline over the last week.

The CPI number combined with comments from Fed Governor Susan Bies and the release of the Beige Book helped to temper declines. Economists had expected the headline CPI number to rise 0.2 percent, so the 0.1 percent drop was a surprise. For the full year, CPI rose 3.4 percent, about the same as 2004's 3.3 percent increase, but the increase was still the largest since 2000. Core CPI for 2005 rose 2.2 percent, as it had in 2004. With an ongoing debate about whether the FOMC will stop raising rates in January or March, the figure cheered those who believe it will end in January, although most believe that the Fed would like to keep core inflation in the 1-2 percent range.

The news wasn't all benign, however. Energy prices rose 17.1 percent for the year. For the fourth quarter, core CPI rose an annualized 2.8 percent. Higher gasoline prices might drive January's CPI higher, too, warns an economist with High Frequency Economics. Here in Dallas, evening news programs address both higher heating and gasoline bills. Two nights ago, a local news station interviewed a woman who has switched to meals that require either no cooking or little cooking, to save on natural gas bills, and this is in a city that has been having record highs, forcing residents to break out their summer wardrobes.

Housing trends were on the mind of Susan Bies today, but at least some of the news was good over the short term. The Mortgage Bankers Association released mortgage applications for the week of January 13 at 7:00 EST. The Market Composite Index measuring the volume of mortgage loan applications rose 2.2 percent, the second week of increases after a several-week period of downturns. Compared to the year-ago level, however, this number was down by 10.9 percent. The seasonally adjusted Purchase, Refinance, Conventional and Government indices all increased, too, but the Refinance Index was 19.7 percent lower than the year-ago level. The four-week moving average for the Market Index and Refinance Index rose 0.8 and 4.1 percent, respectively, while that for the Purchase Index fell 0.5 percent. Refinances increases as a percentage of total applications.

Capital flow figures showed that China's and Japan's holdings of U.S. treasuries rose in November. Foreign official institutions bought $5.9 billion of securities. Foreigners purchased $103.2 billion of U.S. securities. November capital flows for November fell to $89.1 billion.

Federal Reserve Board Governor Susan Bies spoke about the time that economic release hit the markets. She said in a speech to a business group that the housing market might cool, but that a big drop wasn't anticipated. Other comments included a possible short-term risk to spending brought about by heating bills. Bies anticipates 2006's economic growth would slow to the mid-three percent range, a rate she considers more sustainable. She called decisions for the Fed this year "more data dependent" than previously and noted that the Fed would watch employment, capacity utilization and inflation carefully.

The Fed's Beige Book, a resource for the FOMC in the January 31 meeting, was released at 2:00. Notable trends included a lessening of input price pressures toward the end of the year, a tempering of the housing market and some tightening in labor markets although wage gains remained moderate.

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Other releases passed mostly unnoticed with much air time taken up with discussion about the Nikkei. For the week ending January 14, U.S. chain store sales fell 1.4 percent when compared to the prior week's figures. UBS Securities and the International Council of Shopping Centers release these figures. Warmer weather, higher gasoline costs and weaker consumer confidence were blamed for the decrease, but an ICSC economist still predicts a 3.0-3.5 percent rise in sales for the month. The RLX, the S&P Retail Index, gapped lower this morning, but then rose to test the gap, bouncing into a confluence of the 10-, 30- and 50-sma's. Those look like potentially strong resistance for the RLX, and it, too, looks vulnerable to it 72-ema. If you're trading the OEX, watch how the RLX reacts tomorrow and whether it can push through those moving averages or rolls down under them.

Earnings disappointments helped prompt the early decline. Although its earnings release was at first cheered, J.P. Morgan Chase disappointed on at least one measure. It reported earnings of $0.76 a share, with earnings excluding non-operating items at $0.73 a share. This was above the $0.72 a share some analysts expected. The year-ago level had been $0.46. The CEO did mention disappointing trading results, and some found revenue light. JPM gapped lower, ran higher, but ended the day with a long upper shadow, the body of its daily candle sitting on the 50-sma. Mellon Financial (MEL) beat forecasts, but produced a doji with the open and close below the 10-sma. Financials Northern Trust (NTRS) and Charles Schwab (SCHW) disappointed, and both declined.

In other news, Guidant (GDT) decided that Boston Scientific's (BSX) offer was superior to Johnson & Johnson's (JNJ). GDT closed lower by 0.40 percent; BSX, higher by 0.12 percent; and JNJ, high by 1.48 percent.

While today's initial sell off was attributed to the Nikkei's decline and the Nikkei's to the Livedoor investigation, the truth is that the markets were overbought, due for a pullback, and just waiting around for the impetus that would start the stampede. That's especially true of the Nikkei, but generally true of most bourses across the globe. This pullback was needed.

In the U.S., some had again been chanting "it's different this time" with reference to relatively high crude costs, inversions of the yield curve such as the one that occurred again today and other concerns. Some of those investors dropped equities and commodities on their way to the exits. They were suddenly wondering if perhaps it's not different this time, but a brave group stayed behind and bought the dip again ahead of important earnings after the close.

Companies reporting after the bell today included eBay (EBAY), Advanced Micro (AMD), QLogic (QLGC) and Apple Computer (AAPL). As this report was prepared, eBay traded at $41.66, down from its $44.44 close. Some blamed the drop on a disappointing outlook. The company reported earnings of $279.22 million or $0.20 a share, on revenue of $1.33 billion. Excluding certain items, earnings were $0.24 a share. The outlook in question was for net earnings of $0.14-0.15 a share and pro forma earnings of $0.22-0.23 a share on revenue of $1.365-$1.38 billion.

As this report was prepared, AAPL had last traded at $77.20 in after hours, down from its $82.49 close on disappointment with its forecast. The company reported profit that grew 95 percent due to iPod sales, with earnings of $565 million or $0.65 a share on $5.75 billion in sales. Excluding options cost, the company would have earned $0.68, and analysts had expected $0.61 on this basis. Expectations for the current quarter are for $0.38 or $0.42 excluding options costs on sales of $4.3 billion, below the $0.48 a share before costs that analysts had expected.

AMD last traded at $34.20, up $0.05 from its close, although one headline announced that the company's profit missed expectations. The company announced net profit of $95.6 million or $0.21 a share on revenue to $1.84 billion, but expectations were for earnings of $0.27 a share. Revenue had been expected to be only $1.65 billion, however, according to one article, and others noted that the after-hours price increase was pegged on AMD's topping of revenue estimates. The earnings were also being compared to last year's loss for the comparable quarter.

A week's decline into support doesn't prove much. Not yet. Weak hands needed to be shaken out, and they were to some degree this morning, but many have decided, perhaps prematurely and based in some part on an anticipated Nikkei bounce, that support has been found and it's time to move higher again. It was certainly time last week for indices and stocks to seek their true support so that more savvy investors would feel comfortable buying, but I'm not sure that's who was doing the buying today. Tomorrow might provide a part of that answer, but only a part.

Where support lies and what the markets do after rising from that support will give us more information about what will happen next with the markets. A theme appeared across many indices today. The 10-sma's did not hold as support, one component of the theme. Today, some indices bounced from or held at their 50-sma's, some from tests of their December highs, so the nailing of at least temporary support was another theme. Indices probed for support, and dip buyers found the right places to buy the dips.

That doesn't mean that the support will continue to hold, however. Many 10-sma's haven't yet been retested from the underside, for example, except for in a few cases. The SOX and the RUT are two indices that did retest their 10-sma's. The SOX closed just below its 10-sma and the RUT just above.

It's still possible that indices could roll over again. Rollover possibility exists at the 10-sma's and bounce potential exists at either the December highs in those indices in which those highs have not yet been breached or at a zone defined by the 50-sma and 72-ema in those indices in which those December highs have been breached. The SOX and RUT may give us clues tomorrow as to what to expect, as we see whether they continue their bounces up past the 10-sma.

The SPX, OEX, Dow and Nasdaq ended the day between the 10-sma's and what I deem to be strongest support near the 72-ema's, not a good entry point for either bullish or bearish positions. Watch the SOX and RUT for guidance tomorrow morning. The SOX stopped at a 38.2 percent retracement of the decline off last week's high and the RUT at a 50 percent retracement, so both might have been merely retracing part of a decline before continuing a downward path.

If they and other markets bounce tomorrow, watch for that rollover potential. Don't assume a rollover will occur and don't enter bearish trades if the SOX and RUT and then other indices blast through their 10-sma's on strong volume and head higher.

If markets do roll over, protect bearish profits at the 72-ema, although bears should prepare for a bounce that might begin sooner. Opex week, a focus on the ending of rate hikes by the FOMC and the months' long success rate of a buy-the-dip strategy may combine to limit any pullback, even if the setup appears stellar.

So far, this is just a to-be-expected shakeout, but if indices fall below December lows on anything other than a brief stop-running move, I'll be scrapping that scenario for a more bearish one.

Companies reporting tomorrow include homebuilders Beazer Homes (BZH) and D.R. Horton (DHI), both reporting before the open; Merrill Lynch (MER), along with a number of other financials; Pfizer (PFE), reporting before the open; Briggs & Stratton (BGG); United Health Group (UNH), reporting before the open, and former momentum darling and recent strong gainer Rambus (RMBS).

Tomorrow's economic reports include Initial Claims and December's Building Permits and Housing Starts, all released at 8:30. Those will be followed by crude inventories at 10:30, released a day late as is usual during a holiday-shortened week. The much-watched Philly Fed follows at noon.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
GI None None
HYDL    

New Calls

Giant Ind. - GI - close: 59.55 change: -0.57 stop: 55.45

Company Description:
Giant Industries, Inc., headquartered in Scottsdale, Arizona, is a refiner and marketer of petroleum products. Giant owns and operates one Virginia and two New Mexico crude oil refineries, a crude oil gathering pipeline system based in Farmington, New Mexico, which services the New Mexico refineries, finished products distribution terminals in Albuquerque, New Mexico and Flagstaff, Arizona, a fleet of crude oil and finished product truck transports, and a chain of retail service station/convenience stores in New Mexico, Colorado, and Arizona. Giant is also the parent Company of Phoenix Fuel Co., Inc. and Dial Oil Co., both of which are wholesale petroleum products distributors. (source: company press release or website)

Why We Like It:
We don't believe the issue with Iran and its nuclear aspirations is going away any time soon. The country has already threatened that sanctions against them would have an unwelcome effect on global oil prices. Therefore we see the dip in oil today as a potential temporary event. Aggressive traders may want to use the intraday rebound in GI today as a new bullish entry point. We're going to suggest that traders wait for a more convincing breakout. Our trigger to buy calls will be above Tuesday's high at $60.85. If triggered we are going to target a rally into the $66.00-67.00 range before GI reports earnings in late February. We do not want to hold over the earnings report.

Suggested Options:
We are suggesting the March calls so we can hold our position right up to, but not over, GI's February earnings report.

BUY CALL MAR 55 GI-CK open interest= 51 current ask $7.10
BUY CALL MAR 60 GI-CL open interest=248 current ask $4.30
BUY CALL MAR 65 GI-CM open interest=220 current ask $2.25

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/20/06 (unconfirmed)
Average Daily Volume = 279 thousand

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Hydril - HYDL - close: 73.94 change: -1.22 stop: 68.99

Company Description:
Hydril Company, headquartered in Houston, Texas is engaged worldwide in engineering, manufacturing and marketing premium connections and pressure control products used for oil and gas drilling and production. (source: company press release or website)

Why We Like It:
Technically HYDL looks very bullish. The stock broke out over major resistance in the $70-72 region last week on above average volume. Its Point & Figure chart is also very bullish with a target in the high $90s. Fundamentally business sounds pretty strong as well. The recent breakout was fueled by news that HYDL's backlog of orders had more than doubled from September to December last year. We see today's dip as a new bullish entry point. There is a good chance that shares could dip lower, maybe toward the 10-dma, and we'd use any dip/bounce above the $70.00 level as a new bullish entry point. We do not want to hold over the company's earnings report no matter how good we might think it will be. Our target is going to be the $79.00-80.00 range. Currently we have an unconfirmed earnings date of 01/31/06.

Suggested Options:
We are suggesting the February calls since we plan to exit before the earnings report.

BUY CALL FEB 70 HBQ-BN open interest= 64 current ask $6.20
BUY CALL FEB 75 HBQ-BO open interest=143 current ask $3.40

Picked on January 18 at $ 73.94
Change since picked: + 0.00
Earnings Date 01/31/06 (unconfirmed)
Average Daily Volume = 259 thousand
 

New Puts

None
 

New Strangles

None
 


Play Updates

In Play Updates and Reviews

Call Updates

Biogen Idec - BIIB - close: 45.92 change: -0.47 stop: 44.45

BIIB is still slipping lower and after a day of trading sideways we noticed that volume spiked higher near the close. We don't see any change from our weekend update. It wouldn't surprise us to see BIIB dip toward the $45 level if the markets continue to slip lower. We would not suggest new bullish positions at this time. The Point & Figure chart remains bullish and points to a $62 target. Our target for BIIB is the $49.85-50.00 range.

Picked on December 27 at $ 46.11
Change since picked: - 0.19
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 3.2 million

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Caterpillar - CAT - close: 61.87 change: -0.84 stop: 58.95 *new*

CAT finally experienced some profit taking during today's pull back. We see no change from our previous update although technical traders will note that today's session looks like an "inside day". If there is any pull back in CAT the 10-dma near 60.85 and the $60.00 level should act as support. We are going to raise our stop loss to $58.95. Our target is the $64.75-65.00 range. The Point & Figure chart points to a $72 target.

Picked on January 08 at $ 60.45
Change since picked: + 1.42
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 4.0 million

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Fortune Brands - FO - close: 78.57 change: +0.94 stop: 76.45

Our play in FO has been triggered. The stock displayed some relative strength this morning and broke out over its trendline of resistance (and the top of its neutral pattern of higher lows and lower highs). Our trigger to buy calls was at $78.65. Looking at the intraday chart you can see where the initial rally failed but traders stepped in to buy the dip near $78 around lunchtime. This looks like a new bullish entry point. However, more conservative traders may want to wait a day to see if FO produces any follow through since the broader market averages look vulnerable to more profit taking. Our short-term target is the $83.00-84.00 range. We do not want to hold any positions over the early February earnings report.

Picked on January 18 at $ 78.65
Change since picked: - 0.08
Earnings Date 02/03/06 (unconfirmed)
Average Daily Volume = 803 thousand

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Gannett Co - GCI - close: 64.68 change: -0.12 stop: 61.99

GCI failed to breakout over the $65.00 level and its 100-dma today but you'll notice that shares also rebounded off its lows near the rising 10-dma. More conservative traders may want to wait for GCI to clear the $65 level and/or its 100-dma before considering new bullish positions. Our target is going to be the $68.50-69.00 range. Remember that we do not want to hold any positions over the January 27th earnings report.

Picked on January 15 at $ 64.28
Change since picked: + 0.40
Earnings Date 01/27/06 (confirmed)
Average Daily Volume = 1.4 million

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Goldman Sachs - GS - close: 131.85 chg: -0.74 stop: 127.45

The broker-dealer group experienced a little bit of volatility today. Investors did not respond well to an earnings report from Charles Schwab (SCHW) this morning. Shares of SCHW lost more than 2%. Meanwhile shares of GS gapped lower at the open but immediately began to rebound and the stock closed with a minor loss. The excitement for the week is not over yet and earnings news from Merrill Lynch (MER) tomorrow could also impact the sector. We are not suggesting new bullish positions at the moment. Our target is the $134.80-135.00 range.

Picked on January 09 at $130.05
Change since picked: + 1.80
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Holly Corp. - HOC - close: 65.88 chg: -0.55 stop: 59.95

The oil sector hit some profit taking today after Tuesday's big rally. Shares of HOC fell to $63.75 but quickly bounced. The low today was near the rising 10-dma and was enough to fill the gap from Tuesday morning. This looks like a new bullish entry point to buy calls on HOC. Our target is the $69.75-70.00 range. We do not want to hold over the February earnings report.

Picked on January 17 at $ 65.65
Change since picked: + 0.23
Earnings Date 02/06/06 (unconfirmed)
Average Daily Volume = 303 thousand

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Lehman Brothers - LEH - close: 133.27 chg: -1.54 stop: 129.45

The reaction to SCHW's earnings news also weighed on LEH today. The stock produced an intraday dip toward its 10-dma near $132 before bouncing higher again. The move looks like a new bullish entry point but MER is due to report earnings tomorrow morning and the results could influence trading in shares of LEH. We are not suggesting new positions at the moment. The P&F chart points to a $177 target. We are going to maintain our target in the $138.50-140.00 range. We are raising our stop loss to $129.45.

Picked on January 09 at $131.05
Change since picked: + 2.22
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Ipsco Inc. - IPS - close: 84.27 change: -0.58 stop: 81.95

There was no continuation of Tuesday's rally for IPS today. The stock merely drifted lower and produced what looks like an "inside" day. We would hesitate to open new bullish positions here. Our target is the $89.00-90.00 range.

Picked on December 30 at $ 83.55
Change since picked: + 0.72
Earnings Date 02/06/06 (confirmed)
Average Daily Volume = 396 thousand

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Lennar Corp. - LEN - close: 63.36 chg: -0.07 stop: 61.90

Homebuilders continued to see some profit taking early on today but the group, and shares of LEN, managed a rebound off its lows of the session. This might be the end of the current short-term consolidation but we would not initiate new positions yet. Watch for a move back over $64.00 if you're looking for an entry point. Our target is the $69.50-70.00 range before February options expire.

Picked on January 09 at $ 64.01
Change since picked: - 0.65
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 2.6 million

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Selective Ins. - SIGI - close: 55.34 chg: -0.11 stop: 53.79

SIGI did manage to trade over technical resistance at its 50-dma on an intraday basis today but the stock failed to hold its gains. The stock also failed to breakout over the $56.00 level so we remain on the sidelines. Our trigger to buy calls is at $56.05. If triggered our target will be the $59.50-60.00 range. We only have a couple of weeks for the play to perform since we don't want to hold a position over the end of January earnings report. FYI: SIGI might announce a stock split with its earnings report. The company last split its stock in December 1997 in the $50-52 region.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/06 (unconfirmed)
Average Daily Volume = 163 thousand

Put Updates

DRS Tech. - DRS - close: 47.03 change: -0.38 stop: 51.01

DRS produced another decline today losing 0.8% on above average volume, which remains a bearish signal. The stock is starting to look a little short-term oversold so traders should be prepared for a bounce sooner rather than later. A failed rally under $49 could be used as a new entry point. Our target is a decline into the $45.00-44.00 range. More aggressive traders may want to use a lower target. We do not want to hold over the February earnings report.

Picked on January 17 at $ 47.95
Change since picked: - 0.92
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 275 thousand

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Expeditors Intl. - EXPD - cls: 67.57 change: +1.19 stop: 68.55

Be careful here! EXPD is producing some volatility. The stock dipped lower enough to hit our trigger to buy puts and then quickly rebounded. A sharp bounce in the airline index (XAL +4.4%) helped fuel a rebound in the Dow transportation index (+0.9%). EXPD responded with a 1.79% gain and a rally to the $68 level and its trendline of resistance (lower highs). We are not suggesting new put plays here. If you were triggered this morning it might be prudent to exit early. We would only consider new positions if EXPD traded under today's low of 65.65.

Picked on January 18 at $ 65.80
Change since picked: + 1.77
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 972 thousand

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Scotts Miracle grow - SMG - cls: 45.76 che: -0.32 stop: 47.05

SMG is still inching lower and not really showing a lot of weakness despite more than a week of failing to breakout over the $47.00 level. We have about a week left before SMG is expected to report earnings on January 24th so we're not suggesting new bearish positions here. We do not want to hold over the report. Our target is the $41.50-41.25 range but watch out for potential support at the rising 100-dma near 44.44.

Picked on January 01 at $ 45.24
Change since picked: + 0.52
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 354 thousand
 

Strangle Updates

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

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Amer. Eagle Out. - AEOS - cls: 25.01 chg: -0.24 stop: n/a

We see no change from our weekend update. Our strangle play in AEOS is pretty much dead. There are two trading days 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 $29.50 or under $20.00. 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 have changed our target to breakeven at $2.35.

Picked on November 13 at $ 25.47
Change since picked: - 0.46
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 63.01 chg: +0.07 stop: n/a

We see no change from our weekend update. Murphy's law is alive and well. When ANF was above the $65 level we had a chance that shares might spike higher and give us an opportunity to exit at breakeven ($5.15). Friday's action may have just doomed the strangle play. ANF was downgraded Friday morning and the stock gapped lower to open at $65.00 and close with a 3.58% loss. We have two trading days before January options expire. 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.

Picked on November 13 at $ 59.67
Change since picked: + 3.34
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 40.87 chg: -0.00 stop: n/a

Time is almost up for the strangle on BCSI. 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.

Picked on December 04 at $ 45.43
Change since picked: - 4.56
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Building Materials - BMHC - cls: 75.86 chg: -0.46 stop: n/a

BMHC is still retreating after last week's failed rally near the 50-dma. 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.

Picked on December 18 at $ 80.95
Change since picked: - 5.19
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 527 thousand

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Chicago Merc. Exchg. - CME - cls: 378.00 chg: -4.00 stop: n/a

We see no change from our weekend update on CME. Time is almost up for our strangle in CME. 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).

Picked on November 20 at $375.90
Change since picked: + 2.10
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 879 thousand

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Encana Corp. - ECA - close: 47.61 chg: -0.72 stop: n/a

ECA dipped low enough on Wednesday to fill the gap from Tuesday morning. The afternoon bounce makes this look like a new bullish position if you're interested in trading calls. This is a strangle play and we're not suggesting new positions. Our strategy involves the April $50 calls (ECA-DJ) and the April $40 puts (ECA-PH). Our estimated cost is $3.45. We are aiming for a rise to $5.95.

Picked on January 10 at $ 45.56
Change since picked: + 1.75
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

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Four Seasons - FS - close: 54.66 chg: -0.09 stop: n/a

We see no change from our weekend update. January option expiration is just two trading days away and we see no reason that FS will move much from its current $54-55 trading range. Unfortunately, that means our strangle play will close with a loss. 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.

Picked on November 08 at $ 55.37
Change since picked: - 0.71
Earnings Date 02/26/06 (unconfirmed)
Average Daily Volume = 319 thousand

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Questar Corp. - STR - close: 83.43 chg: +0.35 stop: n/a

STR displayed some relative strength and closed in the green while most of the energy stocks turned lower today. We are running out of time for our STR strangle. 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). More conservative traders may want to exit right here to reduce their losses. Or if you think STR will make rise toward resistance at $85 before Friday's close consider waiting and try exiting near $85.

Picked on November 20 at $ 76.25
Change since picked: + 7.18
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 716 thousand

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Texas Ind. - TXI - close: 51.90 chg: -0.10 stop: n/a

We see no change from our weekend update. TXI is still stuck in its trading range and that's bad news for our strangle play. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our target has been reduced to breakeven at $2.70. A move into the $57-58 range might be enough to get our strangle there.

Picked on November 27 at $ 49.57
Change since picked: + 2.33
Earnings Date 01/05/06 (confirmed)
Average Daily Volume = 354 thousand
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Looking For Support On Corrections

When looking for potential support on corrections, and the reverse of all these points would also apply to resistance, I look at a number of technical aspects in a sequence. In corrections to the dominant trend, currently UP, holders of index or equity options (unless part of a covered strategy) have to be concerned as to the possible price and time duration of any correction, whether trading with, or against, the trend.

An effective way to judge where a pullback such as the current one will end is to look at whether support has developed in the areas I'll describe below, using individual stocks and the stock indexes for chart examples.

Sometimes of course, a correction might end at a point where its just 'done' and prices reverse again, but I find this to be infrequent. Sometimes a NEW low is made for the move BELOW a prior significant low, followed by a strong rebound; a 'bear trap' reversal, such as seen on the first trading day of January.

I will write more on point #1 about 'resistance 'becoming' support and vice-versa: 'support becoming resistance later on'.
Since my New Year's resolution for this (Trader's Corner) column was to work with mostly CURRENT market examples, I'll concentrate on where prior resistance 'became' support. [I'm also overlooking to some degree pullbacks to prior significant lows, where a subsequent rebound makes for a double bottom; thats a topic in itself; also, it's a more obvious buy point.]

#1 Pullback to a prior high
Assuming there was a prior significant high that was penetrated on the very last advance, does a pullback hold in the area of that prior HIGH? If so, it suggests the correction may be all that will be seen on the downside and becomes the best place to cover puts and/or buy calls.

Point #'s 2-6 ... PULLBACKS THAT HOLD AT:
#2 An up trendline
#3 A key moving average: 21, 50 or 200 day (the ones I use most)
#4 At an earlier (upside) price gap; especially promising is a strong rally after prices 'fill in' all of the price gap.
#5 A common retracement level: 38, 50 or 62-66 percent of the prior advance.
#6 A pullback to below the key 21-day moving average, but to or near to moving average envelope lines useful in stock INDEXES.

RESISTANCE 'BECOMING' SUPPORT
At a prior high, buyers who bought in that area and then exited after prices retreated from that peak will view this area as an opportunity again. You can imagine traders saying...'look, the market (or stock) is back down to THIS area again: lets buy it'.
In various ways a prior high is a benchmark.

When prices went above that old high, many short sellers/put buyers exited. They will tend to remember where they lost by shorting the market and are going to have more interest in buying this price area if seen again.

A picture perfect example of this principle is provided by the Weekly S&P 500 (SPX) chart below: the summer and fall highs in 2004 in SPX fell in the 1143 area, making a potential double top, but not for long. Several months later the S&P made a weekly low right in this same area and that was the bottom.

Purchase of S&P calls last April, on the pullback to the prior highs this area, is the kind of trade that I most like to find. Not just because of substantial upside potential, but especially because there was a 'defined' and relatively small risk point or exit level; e.g., buying that third week's low given repeated lows around 1140-1143, would have allowed an exiting-stop of only 5 points or so, or just under this implied 'line' of support.

In the SPX weekly chart above, the most recent pullback low (of late-Dec/early-Jan.) to around 1245, was at ... YOU GUESSED IT! ... the prior August weekly top as prior resistance 'became' new support.

A even more recent (this week) relevant example, and further trading ahead will 'tell' on this, is provided by the SPX Daily chart through today. The pullback has taken the Index back to the area of the prior highs around 1275, plus a little more as today's (1/18) low was 1272; right at one of the OTHER noteworthy points for possible support, the 21-day moving average.

What's noteworthy about today's dip under 1275 but followed by its 1278 Close, is that the prior high appears to be acting as at least initial support. More trading action is needed to see if this is about as deep as the current correction will go in SPX; or, if the S&P 500 Index might retreat to key technical support at its up trendline, also noted with an up (green) arrow.

The use of first, the red down arrow in my charts, followed by the same line being highlighted with the green (support) up arrow, is to visually show 'resistance once broken becoming support later on'.

In the Nasdaq Composite (COMP) daily chart below, today's pullback held both the 21-day moving average and Closed above the area of prior highs (Nov.) around 2257; resistance becoming support? Too soon to tell, but this was encouraging action today technically for the bulls. I remain bullish as long as there is not substantial downside penetration of these supports.

What will also be of interest on rally attempts in the near-term is whether those downside price 'gaps' of Tuesday and today (Wed) seen on the COMP chart above, act as resistance.

Of course where you see 'monster' price GAPS appear from one day to the next, is on individual charts especially in tech/internet. Yahoo's (YHOO) daily chart below is of interest in terms of my discussion. In this regard, the ability of recent lows to hold at or above YHOO's June cluster of several highs seemed significant.

However, the stock's close under it's 50-day average yesterday would have given me pause in holding Yahoo through it's end of day earnings announcement, especially after the formation of a triple top over Nov Dec. If you were betting on good earnings, and given this bearish looking chart, the risk to reward outlook wasn't what I would be looking for.

A last note on Yahoo's chart above is that the break of support implied by the 200-day moving average, now looks to be a key resistance at least short-term; the High of the day came right at this average.

As I have sometimes noted in the past, many if not most fund managers do look at charts, but make portfolio decisions based on their view of 'fundamentals', especially the profit and earnings growth outlook for companies. However, this one technical input, a stock's close above/below the 200-day moving average, does tend to get significantly noticed by fund managers.

Looking at the Indexes with the most actively traded options, the S&P 100 (OEX) and the Nasdaq 100 (NDX), there are some different 'stories' shown in their chart pictures.

The OEX daily chart aspects, reading from left to right: first, the prior double top that had formed with the OEX price peak of November, relative to the prior High Close of March ('05), was exceeded on the most recent rally. This double top was all the more reason why a pullback that held the 584 area would have been bullish. Not to be.

When I said that 'support, once broken, may become resistance later on', this applied to not only past price bottoms, but TRENDLINES also; that is, support (UP) trendlines, once broken, tend to (also) 'become' later resistance. Notice that the recent 589 OEX reversal was from an area of resistance implied by the previously broken up trendline.

My last read of the above OEX chart, is that today's lows importantly held and rebounded from, OEX's up trendline dating from the October bottom. Moreover, today's low helped better define this trendline, as more 'touches' (by lows or highs) to a trendline, gives that trendline more importance; as a 'line' of key support in this case.

In very similar action to the Nas Composite, the Nasdaq 100 (NDX) also pulled back to the area of its prior highs as seen in the next chart; NDX seemed to find support/buying interest in this area, so far at least. Support looks to be, so far, just under today's NDX lows, or around 1705. I would also note potential support just under the 1700 level, at the 21-day average.

With the NDX daily chart above, the past price pattern suggests that trendline support is well below the 1700-1705 area, so 'look out below' if there's a close under 1700, not reversed the next day. And stay tuned on further unfolding action from the Street of Dreams now that earnings' releases have begun in earnest.

MY INDEX TRADER COLUMN:
This Wed. Trader's Corner article is an adjunct to my weekend Index Trader column, which is available on the Option Investor web site only; it's not part of the OI Newsletter (OIN) sent by e-mail, although you'll see a LINK to the Index Trader at the top of your weekend OIN. My most recent (1/14) Index Trader can be viewed/reviewed by clicking here.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@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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