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Daily Newsletter, Wednesday, 01/25/2006

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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

Animated Markets

Anyone tuning into market discussions this morning heard hopes for a third day of gains. Disney's (DIS) acquisition of Pixar (PIXR) animated those early discussions. In addition, SAP's encouraging outlook and upbeat earnings reports from other companies had boosted futures.

Companies deemed to have beat estimates early this morning included Bristol Myers Squibb (BMY), Rockwell International (ROK), Amerada Hess (AHC), General Dynamics (GD) and Colgate Palmolive (CL). Crude dipped ahead of an anticipated build in crude inventories. All the evidence, some concluded, pointed to a lively gain for the day. The real animation came on the downside moves, however. The S&P 500, Dow and Nasdaq all lost ground.

The Dow Jones Transportation Index and Russell 2000 certainly appeared animated in early trading. The Russell 2000 rushed up to a new high, challenging the top trendline of a rising wedge in which it has traded since late 2003. It could not maintain a breakout above the rising trendline of that wedge.

Annotated Daily Chart of the RUT:

Unlike many other indices, the Russell 2000 has mostly maintained the support of its 10-sma on daily closes over the last week. It did pierce that average, dropping down to test the neckline of a confirmed inverse head-and-shoulder before bouncing, continuing that bounce into today's new high. That test and subsequent bounce appears to confirm the support of that neckline, but these continuation-form inverse H&S's aren't as trustworthy as bottoming ones, and particularly not when they form within a rising wedge. This the third such formation the RUT has produced within that rising wedge. None has so far met its upside target before the RUT dropped back to the bottom trendline of the rising wedge, although the first one did come closer than the second to meeting its upside target.

Today's action left the RUT with a near doji at the top of a climb as the index challenges important resistance. The RUT is clearly at a key point as it challenges that upside wedge resistance again. Traders should pay close attention to the RUT, watching for a breakout and also being prepared for a potential move down through that rising wedge again. This is especially true since another market leader, the TRAN, also currently challenges important resistance.

Annotated Weekly Chart of the TRAN:

The TRAN punched higher in early trading today, achieving a high of 4298.16, challenging the December 27 high of 4306.09. The TRAN could not hold that high, however. It closed at 4240.80, well off the day's high, but also well off the 4223.18 low.

The SPX also challenges resistance, but in this case, it's resistance that many thought would be support instead.

Annotated Daily Chart of the SPX:

Rollovers from the 30-sma have provided good scalping opportunities the last several days as the SPX consolidates in what may be a "b" distribution pattern. Markets can and have broken to the upside out of such patterns, but for now, the pattern appears to suggest that the SPX has more downside to go.

The Dow shows a similar possible "b" distribution pattern.

Annotated Daily Chart of the Dow:

In some respects, the Nasdaq shows more strength than the other indices.

Annotated Daily Chart of the Nasdaq:

The SOX, too, shows a different pattern than some of the other indices. The SOX has been coiling throughout most of January, although few knew that the early January climb was only the first part of a coiling action.

Annotated Daily Chart of the SOX:

That well-defined neutral triangle allows traders to observe the direction of the breakout. So far, the usual momentum leaders--the SOX, Russell 2000 and TRAN, are being tentatively held back, but none has given up the quest for higher recent highs yet, either. They're not yet leading to the downside, and that tempers the bearishness seen on some other charts.

The day did see some relief from the dour earnings reports seen recently, but not enough relief to overcome negative economic news. If the Disney/Pixar deal animated television commentators' voices, so did the astonishment that Johnson & Johnson (JNJ) did not do whatever it took to make the Guidant (GDT) deal happen. GDT decided to accept Boston Scientific's (BSX) $80 a share bid and will pay JNJ more than $705 million for terminating its agreement with the company. JNJ dropped 1.44 percent but acquiring company BSX dropped more, 1.91 percent. GDT dropped by an even greater percentage, 2.07 percent.

Ahead of its earnings report tomorrow, Microsoft (MSFT) benefited from rival SAP's earnings report in early trading, although MSFT held onto only a 0.41 percent gain. SAP, a European software company, beat expectations for license revenue, saying that it saw growth in the U.S. MSFT also announced that it would license its Windows source code in compliance with a European antitrust decision, and perhaps there was some relief in that announcement. Oracle (ORCL) and Business Objects (BOBJ) also benefited, with ORCL climbing 2.45 percent and BOBJ, 1.91 percent.

News on the home-sale front was mixed. Last night, Centex (CTX) had reported earnings that were better than expected. This morning, the Mortgage Bankers Association released mortgage applications for the week ending January 13 at 7:00 EST. The headline number, the Market Composite Index increased 2.2 percent on a seasonally adjusted basis when compared to the week-earlier figure, and 31.4 percent on an unadjusted basis, but was 10.9 percent lower than the year-ago level. Other components showed mixed results. The Purchase Index fell 3.00 percent, the Refinance Index rose 9.9 percent, the Conventional Index rose 1.2 percent and the Government Index climbed 18.9 percent. The Refinance Index fell 19.7 percent when compared to the year-ago level, however.

With the improvements seen in recent weeks after a five-week decline, the four-week moving averages have risen 0.8 percent for the seasonally adjusted Market Index, down 0.05 percent for the Purchase Index, and up 4.1 percent for the Refinance Index. Refinance activity has increased as a share of total applications, to 42.2 percent. The average contract interest rate for a 30-year fixed-rate mortgage eased to 6.07 percent from the previous week's 6.08 percent, and points remained the same as the previous week's number.

Although home prices rose 10.5 percent year over year, according to the National Association of Realtors, other figures did not prove encouraging. The NAR reported another record year of sales, the fifth year in a row of record sales. However, the trend has been down the last three months, with the chief economist for NAR reporting that speculators are pulling out of the housing market. December's existing home sales fell 5.7 percent, to a 6.6 million rate. With expectations of a more modest decline to 6.89 million, the number disappointed. Inventory stands at a 5.1-month supply.

The news hit homebuilders hard, with at least two more due to report tomorrow. One source tagged the homebuilders as leading to the downside in today's decline. The DJUSHB, the Dow Jones Home Construction Index, dropped 2.37 percent.

Many indices had just hit the tops of their flag-shaped climbs off Monday's lows when the housing news hit, and they dived to the bottom of those flags ahead of crude inventories numbers. Ultimately, after another tepid bounce attempt from the flags' support, markets were to hit lower lows in the afternoon.

Although many market watchers had expected a build of 1.4-1.5 million barrels in crude stocks, crude inventories dropped 2.3 million barrels last week. According to the EIA, those inventories still remain higher than the upper end of the average range for this time of year, however, and distillate and gasoline inventories rose, more than compensating for the drop in crude inventories. Distillate inventories rose 1.8 million barrels, and gasoline inventories rose 3.2 million barrels. Distillates also remain above the upper end of the average range for this time of year, and gasoline inventories rose into the upper half of the average range.

Crude prices had already dropped before the inventories number, dropping below their 100/130-ema's. After a brief pop higher due to the unexpected drop in crude inventories, crude dove to a new low for the day of 65.45, dropping into level not seen since the breakout on January 17. Crude bounced off that low, however. With inventories above the average range for this time of year in crude, gasoline and distillates, and with warmer-than-usual weather in many parts of the country, traders who sent crude down into the low of the day had discounted concerns about Iran and Nigeria. As this report is prepared, crude futures were again at $65.46.

Equity prices at first bounced as crude dropped, trying to reestablish the old crude down/equity up paradigm, but that paradigm no longer consistently works. Heavy drops in energy companies such as COP and XOM dragged equity indices down, too. ConocoPhillips (COP) had today joined Amerada Hess (AMH) in reporting earnings that some deemed stellar, but COP dropped as crude did, bouncing as it did in the afternoon. Despite what some called stellar earnings, expectations were that COP would earn $2.62 a share on revenue of $49.8 billion, and the company reported $2.61 but with revenue at $52.2 billion. AMH reported Q4 earnings of $4.31 a share on revenue of $7.15 billion, above expectations for $3.26 a share. COP was to close 1.45 percent lower, while AMH held onto a 1.18 percent gain. Refiners and oil-and-gas-equipment companies also had a tough day.

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Materials performed well. Morgan Stanley upped its price targets for copper, zinc, gold and aluminum. Both the BIX and the BKX, the S&P Banks Index and the Kbw Bank Index, gained. Other sectors posting gains included the DRG, the Pharmaceutical Index; the SOX; the XTC, the North American Telecoms Index; the NWX, the Networking Index, and the HMO, the Morgan Stanley Healthcare Index.

Underpinning specific developments in the U.S. was the meeting among the globe's economists. Economists meeting at Davos issued reassuring statements about global developments in 2006. Admitting that 2007 could see economic growth slow to 3.5 percent and acknowledging the risks in the U.S. economy, the forecasters at the Centre for Economics and Business Research think 2006 will see steady growth. The risks include a new FOMC chairman, a growing U.S. budget deficit, higher energy costs, a softening U.S. housing market, and tightening interest rates. Growth for this year is expected to ease, the forecasters say, but the real danger occurs if France, Germany and China slow down as they project in 2007.

After the close, QCOM reported Q1 profit that climbed 21 percent. Low-cost cell phones sold well in developing countries and high-end handsets sold well in wealthier countries. Excluding one-time items and investment results, the company reported earnings of $667 million or $0.39 a share, against expectations of $0.38. The company's forecast included an expectation that normal seasonal patterns would assert themselves and result in a softening in the first three months of 2006. It forecast $0.35-0.37 on revenue of $1.63-1.73 billion. Expectations had been for profit of $0.36 on sales of $1.73 billion. The outlook for the year remained the same. As this report was prepared, QCOM last traded at $46.84, down from its $47.58 close.

Juniper Networks announced a fourth-quarter profit of $105.5 million or $0.17 a share on revenue of $575.5 million. Excluding charges, the company met expectations for $0.10 a share, but revenue expectations had been for $579 million. As this report was prepared, JNPR last traded at $20.32, down from its $21.52 close.

InfoSpace (INSP) last traded at $23.69 after closing at $24.34. The company reported fourth-quarter net profit of $37.9 million or $1.13 a share on revenue of $86.5 million. If a tax benefit was excluded, the earnings were $0.39 a share against expectations of $0.27 and revenue of $85.4 million.

Other reporting companies included Novellus (NVLS), Altera (ALTR), and LSI Logic (LSI). NVLS last traded at 29.60 after closing at $27.92, ALTR last traded at $19.50 after closing at $18.92, and LSI last traded at $9.39 after closing at $9.04.

The reaction to earnings during after hours has been mixed. There's not a clear downward or upward bias to be gleaned from that information.

In other news, Teva Pharmaceuticals announced a plan to offer $2.75 billion of debt securities. The company will use the funds to refinance debt that it incurred when acquiring Ivax Corporation. In addition, a bulletin announced that the injunction hearing on RIM's Blackberry had been set for February 24.

Tomorrow, initial claims and natural gas inventories will be released as usual, at 8:30 and 10:30, respectively. December's Durable Orders and Help-Wanted Index will also be released tomorrow, at 8:30 and 10:00, respectively. The Census Bureau of the Department of Commerce releases the Durable Goods Orders, and they often do catch the market's attention since they serve as a leading indicator of manufacturing activity. Lately, Boeing's (BA) big orders have sometimes skewed the number, so it's important to look beyond the headline number as big-money market participants will be doing. The market wants gains, if any, to occur across all sectors. This time, the forecast is for a gain of 1-2 percent, down from the prior 4.4 percent.

Earnings will be flooding the market, too, with reporting companies as diverse as Alaska Airlines (ALK) and Frontier Airlines (FRNT), Alberto-Culver Co. (ACV), a number of mortgage-related and other financials, Amgen (AMGN), AT&T (T), Broadcom (BRCM), Cardinal Health (CAH), Caterpillar Inc. (CAT), Chartered Semiconductor (CHRT) and Cypress Semiconductor (CY), Eli Lilly (LLY), Foundry Networks (FDRY), Halliburton Company (HAL), Honeywell (HON), KLA-Tencor (KLAC), Lockheed Martin (LMT), Microsoft (MSFT), Newell Rubbermaid (NWL), a number of energy-related companies, Sherwin-Williams (SHW), Sony Corporation (SNE), Stryker (SYK), Dow Chemical Company (DOW) and Verizon (VZ). This list is by no means exhaustive, so be sure to check reporting days for the stocks that interest you or are in the same sector as the ones that interest you.

However, this list does show that, just as the Durable Goods number should give some indication of how various manufacturing sectors perform, the reporting companies include sectors diverse enough to provide an idea of how the economy performs. Energy, tech, pharmaceutical and chemical, consumer goods, medical devices and other sectors are included in that list.

The charts of the SPX and Dow appear bearish, complete with potential "b" distribution patterns. If those charts were the only ones reviewed tonight, I would have a clear statement to give: sell rallies up toward the averages that have been providing resistance this week. Protect profit at the bottom of the consolidation zones from this week. Watch for a potential breakdown.

However, it's not that easy, because the usual market leaders are trying to lead to the upside, and haven't given up the fight yet. The TRAN's resistance should hold and the RUT's might, but the SOX's consolidation looks neutral. Any or all of these could lead markets either direction. Keep these three on the radar screen no matter what you're trading. You want to know the direction they're headed. Believe only half of what you see and maybe trade with only half a usual position until there's a clear direction and you know that you haven't just been caught in a trap on that trade setup that had looked so beautiful. Positioning ahead of next week's FOMC meeting is going to take precedence over technical developments on the chart soon, maybe as soon as tomorrow.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AMH None None
CRI    
SFCC    

New Calls

AmerUS Group - AMH - close: 60.85 change: +0.71 stop: 59.88

Company Description:
AmerUs Group Co. is an Iowa corporation located in Des Moines, Iowa, engaged through its subsidiaries in the business of marketing and distributing individual life insurance and annuity products in 50 states, the District of Columbia and the U.S. Virgin Islands. Its major operating subsidiaries include AmerUs Life Insurance Company, American Investors Life Insurance Company, Inc., Indianapolis Life Insurance Company and Bankers Life Insurance Company of New York. (source: company press release or website)

Why We Like It:
This is a short-term bullish play. AMH is expected to report earnings on or around February 1st and we don't want to hold over the report. What we like about the stock is that shares are beginning to rebound from broken resistance, now new support, at the $60.00 level. The stock soared from technical support at the 100-dma a couple of weeks ago on rumors that a British rival was in talks to buy the company. There was some speculation that another (unnamed) American company might step in and produce a larger bid. The British company eventually denied they had produced a bid to buy AMH and shares have been slowly consolidating lower. What could make things exciting is the potential for a short squeeze especially if the takeover rumors persist. The latest data puts short interest at 8.5% of AMH's 38.6 million shares outstanding. We are going to suggest bullish call positions here with AMH above $60.00. Our short-term target will be the $64.00-65.00 range. Our time frame is four to five days.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 55 AMH-BK open interest= 10 current ask $6.40
BUY CALL FEB 60 AMH-BL open interest=142 current ask $2.30

Picked on January 25 at $ 60.85
Change since picked: + 0.00
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume = 325 thousand

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Carter's Inc. - CRI - close: 66.62 chg: +0.41 stop: 64.75

Company Description:
Founded in 1865, Carters has dressed generations of children. It all began when William Carter decided to knit mittens in his kitchen. Today, Carters is the number one childrens brand, selling over 10 products for every child born in the U.S. We have a childlike point-of-view that reflects our heritage of innovation and expertise. We make clothing for children from newborn through size 7: baby, sleepwear, play clothes and accessories. We provide trusted products that are super comfy, easy care, adorable and dont break the bank. (source: company press release or website)

Why We Like It:
CRI looks like a strong bullish candidate based on its technical picture. The stock has broken out through two levels of resistance in the past week. Traders were quick to buy the dip back toward broken resistance, now new support, at the $65.00 level. The P&F chart is very bullish with an $85 target. We see today's afternoon bounce as a new entry point for calls. Short-term traders could target a quick move into the $69.85-70.00 range. We are going to target a rally into the $72.50-75.00 range before the company's late February earnings report. We'll use a relatively tight stop loss so if we're wrong we'll be taken out quickly.

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

BUY CALL MAR 65 CRI-CM open interest=206 current ask $5.10
BUY CALL MAR 70 CRI-CN open interest=568 current ask $2.70

Picked on January 25 at $ 66.62
Change since picked: + 0.00
Earnings Date 02/20/06 (unconfirmed)
Average Daily Volume = 313 thousand

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SFBC Intl. - SFCC - close: 20.92 chg: +1.46 stop: 18.95

Company Description:
SFBC International, Inc. provides early and late stage clinical drug development services to branded pharmaceutical, biotechnology, generic drug and medical device companies around the world. SFBC has more than 30 offices located in North America, Europe (including Central and Eastern Europe), South America, Asia, and Australia. In early clinical development services, SFBC specializes primarily in the areas of Phase I and early Phase II clinical trials and bioanalytical laboratory services, including early clinical pharmacology. SFBC also provides late stage clinical development services globally that focus on Phase II through IV clinical trials. SFBC also offers a range of complementary services, including data management and biostatistics, central laboratory services, medical and scientific affairs, regulatory affairs and submissions, and clinical IT solutions. (source: company press release or website)

Why We Like It:
This is an aggressive, higher-risk short-term play. SFCC is expected to report earnings on February 2nd and we do not want to hold over the report. That only gives us about five or six days depending on whether the company reports before the bell or after the close. Looking at SFCC it appears that the stock has produced a noteworthy bottom. One could argue that the stock has produced an inverse head-and-shoulders pattern, which would be bullish. The breakout over the $20.00 level and its 50-dma today looks like a new bullish entry point. Traders should also note there is a big chance for a short squeeze here. The latest data we could find puts short interest at over 74% of the company's 18.4 million shares outstanding. More conservative traders may want to take a wait and see approach before opening positions. First of all conservative traders may want to wait and see how the markets react to Amgen's earnings report tomorrow morning. That will impact the sector's strength. Secondly, SFCC has not broken out above what looks like short-term resistance at the $21.00 level. One could wait for SFCC to trade over today's high (21.10) before initiating new positions. Our target is the $24.90-25.00 range. FYI: the P&F chart points to a $35 target.

Suggested Options:
We are suggesting the February calls since we plan to exit in a few days.

BUY CALL FEB 20.00 JQE-BD open interest=1875 current ask $2.00
BUY CALL FEB 22.50 JQE-BX open interest= 564 current ask $0.75

Picked on January 25 at $ 20.92
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.5 million
 

New Puts

None
 

New Strangles

None
 


Play Updates

In Play Updates and Reviews

Call Updates

Freeport Mcmoran - FCX - cls: 60.47 chg: +0.25 stop: 55.79

Metal and mining stocks trended higher again on Wednesday after another analyst firm upgraded their forecasts for copper, gold and other metals for 2006. This is certainly a positive for the sector but FCX's inability to hold its early morning gains today is a potential concern. A bounce from here (60.00) could be used as a new bullish entry point but patient traders may want to hold out for a possible dip back toward the $58 level. Our target is the $64.75-65.00 range. Please note that there is some headline risk involving rival Phelp Dodge's (PD) earnings report coming up on January 31st.

Picked on January 24 at $ 60.22
Change since picked: + 0.25
Earnings Date 01/17/06 (confirmed)
Average Daily Volume = 2.6 million

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Lehman Brothers - LEH - close: 134.95 chg: -0.87 stop: 131.05

The short-term outlook for LEH doesn't look very good. Technical oscillators are rolling over and its MACD is starting to lean back toward a sell signal, which would produce a bearish divergence between LEH's higher high versus a lower high in the MACD indicator. We are not suggesting new bullish plays and fully expect LEH to pull back into the $132.00-134 region. Our target is the $138.50-140.00 range.

Picked on January 09 at $131.05
Change since picked: + 3.90
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Selective Ins. - SIGI - close: 56.46 chg: -1.06 stop: 54.65

Traders need to be careful here and they should double-check their stop loss placement. Today's action is giving us mixed signals. Overall the session produced a one-day bearish reversal known as a bearish engulfing candlestick pattern. Yet the afternoon bounce from the $56 level near its 50-dma looks like a new buying opportunity. More conservative traders may want to inch up their stop loss toward the 50-dma (currently 55.64). We do not want to hold over the late 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 19 at $ 56.05
Change since picked: + 0.41
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 163 thousand

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Wynn Resorts - WYNN - close: 57.54 change: -0.16 stop: 54.99

We don't see any change from our previous update on WYNN. More conservative traders may want to wait for a move over $60.00 or the November high at 61.50 before initiating positions. We're going to target a rally into the 64.75-65.00 range. We do not want to hold over the February earnings report.

Picked on January 22 at $ 58.78
Change since picked: - 1.24
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Biotech HOLDRs - BBH - close: 194.60 chg: +0.03 stop: 201.55

We do not see any change from our previous update on BBH. As we expected the HOLDR did not move much on Wednesday and neither did shares of AMGN. Investors are waiting to see what AMGN reports and what they have to say in their earnings report and conference call tomorrow. AMGN should report before the opening bell so don't be surprised to see the BBH gap or spike (up or down) tomorrow at the open. Our target is the $187.00-185.00 range above the 200-dma on the BBH.

Picked on January 20 at $195.78
Change since picked: - 1.18
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 539 thousand

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Express Scripts - ESRX - close: 88.24 chg: +0.08 stop: 90.01

We don't see any change from our previous updates on ESRX. We remain on the sidelines. Our trigger to buy puts is under the 50-dma at $84.95. If triggered we'll target a decline to the rising 100-dma (currently 74.87). We will be adjusting our target to account for the rising 100-dma. At the moment we'll use an exit zone of $77.00-75.00.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/22/06 (confirmed)
Average Daily Volume = 2.1 million

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Johnson Controls - JCI - close: 70.30 chg: -0.05 stop: 72.51

Our new bearish play in JCI has been opened. The stock dipped lower enough to hit our trigger to buy puts at $69.90. Unfortunately the breakdown below the $70.00 level did not hold. This is somewhat dangerous and we would not consider new put positions until JCI trades back under $70.00 or today's low at $69.80. Our target is the $65.50-65.00 range.

Picked on January 25 at $ 69.90
Change since picked: + 0.40
Earnings Date 01/20/06 (confirmed)
Average Daily Volume = 955 thousand

---

Omnicare - OCR - close: 52.96 change: -2.73 stop: 56.25 *new*

OCR fell to an intraday low of $51.79 and closed with a 4.9% loss on big volume after being downgraded to "under perform" before the opening bell. The volume was more than 4.6 times the daily average and is a positive sign for the bears. We are lowering our stop loss to $56.25 near the 100-dma. Our target is the $51.00-50.00 range before its February earnings report.

Picked on January 20 at $ 54.99
Change since picked: - 2.03
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Strangle Updates

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

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Building Materials - BMHC - cls: 75.25 chg: +0.26 stop: n/a

BMHC gapped open higher this morning after an analyst started coverage with a "buy" rating. The rally failed near its trendline of lower highs (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.

Picked on December 18 at $ 80.95
Change since picked: - 5.80
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 527 thousand

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Encana Corp. - ECA - close: 46.15 chg: -0.90 stop: n/a

ECA fell for a 1.9% loss on Wednesday and looks poised to test its short-term trend of higher lows. 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: + 0.59
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

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Ryland Group - RYL - close: 70.35 change: -4.82 stop: n/a

RYL finally reported earnings and beat estimates by 20 cents a share but reported that new orders were slowing. Investors focused on the new order news and pushed the stock lower. It didn't help matters that the National Association of Realtors also reported that home sales were slowing today, for the third month in a row. Plus, one analyst firm downgraded RYL to a "sell" rating. We are no longer suggesting new strangle positions. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN). Our estimated cost is $7.00. Our target is $12.00.

Picked on January 22 at $ 75.19
Change since picked: - 4.84
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Caterpillar - CAT - close: 62.07 change: +0.72 stop: 59.90

It was our plan to exit today near the closing bell. CAT is expected to report earnings tomorrow morning and we don't want to hold over the event even if we expect the results to be positive. Wall Street expects CAT to report earnings of $1.11 a share.

Picked on January 08 at $ 60.45
Change since picked: + 1.62
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 4.0 million

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Fortune Brands - FO - close: 77.36 change: -0.75 stop: 76.45

We are choosing an early exit in FO. The stock has failed to produce any sort of follow through on the January 18th breakout. Instead shares look poised to turn lower now. We would still consider buying puts if FO broke down below $76.50. Alternatively a move over the 100-dma (near 79.00) could be used as a new bullish entry point. We would not hold over the February earnings report.

Picked on January 18 at $ 78.65
Change since picked: - 1.29
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 803 thousand

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Holly Corp. - HOC - close: 66.90 chg: -2.36 stop: 63.95

Target achieved. The oil sector turned lower today after a sharp decline in crude oil futures. Yet that didn't stop shares of HOC from first making a rally attempt toward the $70.00 level. The high today was $69.92. Our target was the $69.75-70.00 range. The selling did stop near HOC's rising 10-dma but the failed rally at $70.00 is an ominous short-term bearish signal. We would watch for a bounce in the $64-65 range as a potential entry point for new bullish positions.

Picked on January 17 at $ 65.65
Change since picked: + 1.25
Earnings Date 02/06/06 (unconfirmed)
Average Daily Volume = 303 thousand
 

Dropped Puts

DRS Tech. - DRS - close: 50.23 change: +1.00 stop: 51.01

We are going to abandon this play. DRS has continued to bounce and shares have now broken back above the $50.00 level and its simple 200-dma. Volume on today's gain was way above average. The stock is still below its four-week trend of lower highs but it looks like the bears are losing this fight.

Picked on January 17 at $ 47.95
Change since picked: + 2.28
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 275 thousand

---

Sears Holding - SHLD - close: 122.61 chg: +0.91 stop: 124.05

The retail sector turned lower today but that didn't stop SHLD from spiking higher intraday and hitting our stop loss at $124.05. The overall trading range is still very much intact and aggressive traders may want to keep the play open.

Picked on January 23 at $119.95
Change since picked: + 2.66
Earnings Date 03/07/06 (unconfirmed)
Average Daily Volume = 2.5 million
 

Dropped Strangles

None
 


Trader's Corner

Opposites Attract

Well, opposites often attract an opposite result it's fair to say, when there is a buildup of a bullish or bearish outlook or market 'sentiment' of extremes. A significant reason technically as to why I was no longer holding Index calls before Friday's rout was that traders (as I measure it) were so relatively bullish on the decline, according to my 'Sentiment' Indicator.

Yesterday, after what has been a fairly substantial Dcorrection, my sentiment model or indicator shot to the highest bullish extreme registered since mid-January of 2004.

I can see the thinking by most investors, and many of the talking media heads, after the sharp decline of the end of last week: the market is holding and lets 'buy the dip', habitual thinking in a bull market.

Recapping what happened after a similar high level of bullishness as suggested by this indicator back in mid-January 2004: from an opening OEX peak at 573 on 1/26/04, the Index was down on balance over the next few months, until the 8/13/04 bottom at 518.

I'm not implying that the same kind of decline over any similar timeframe will be the result in the weeks and months ahead. But such a bullish extreme (or multiple extremes) in the particular 'sentiment' model I use does tend to precede significant further periods of market decline.

Along with such 'sentiment' extremes, it is most predictive when there's also a confirming extreme in the Relative Strength Indicator (RSI) or when it's declining from an extreme. Sometimes here it's necessary to also look at a 13-WEEK RSI on the Weekly chart. You've seen the big cap S&P, here's the Nasdaq 100 (NDX):

.

NDX not only got to resistance implied by the top end of a broad uptrend channel above, but the RSI was 'fully' at the overbought extreme ahead of this. The next, and last, advance did not
'confirm' a similar new high in the weekly RSI Indicator. The important thing however is that RSI is falling from its peak.

CONTRARY OPINION
To understand why extreme levels of bullishness or bearishness can or tends to lead to an opposite future market direction, relates to the theory of 'contrary opinion' and going back to Charles Dow's observations on market behavior. Dow was always as much a student of investor psychology as anything. He didn't call what he was talking about here a 'theory' or about 'contrary opinion'. Like many things based on his writings, various facets got popularized later, similar to early pioneers like Freud.

Dow noticed that when the mass of investors got extremely sure that stocks were going to keep going up, or keep going down, as 'far as the eye could see', this type of mass conviction was part of what happened near the END of bull, or bear, markets. Why?

The explanation for this is part of what it means to say that a market is 'over'bought or 'over'sold. In the case of a bear market or a bearish (down) swing, most traders or investors who have stock or options they will sell have done it already. That's what 'makes' a bottom so to speak. There are few left to sell. Therefore it doesn't take much buying to lift the market. In a bull market it's more common to take time to 'build' a top.

The chart pattern tends to be different in bear markets. Selling tends to be more of a once or twice decision when traders get really convinced that the market has no hope of advancing. In RISING market trends there is a lot piecemeal buying however. At tops, the mass of investors tend to keep buying, whereas more sophisticated professionals are selling, as they see that stocks have hit PE multiples that are 'over' done; there's that 'over' word again!

In terms of (technical/chart) patterns, this difference in tops versus bottoms explains why there are more 'broadening' or rounding tops, versus more 'spike' lows at bottoms. These two different pattern types tend to be the case whether we're assessing an hourly, daily or weekly chart.

There is a lot more about this subject in my book (Essential Technical Analysis) or in other guides to technical analysis. Mine is no longer being printed by J. Wiley & Sons, although it's readily available on Amazon, both new and used; although why anyone would sell such a 'gem' is beyond me as even I look up stuff in it! But, the market has spoken.

The reasons that market swings tend to be preceded by a build up or jump in bullishness is also part of the nature of mass/mob psychology to go from one extreme to another. What makes 'cycles' in markets is the pendulum like tendency to go from one extreme, then to start to swing back the other way, then all the way.

As part of large groups there is a tendency to be unrealistic in our expectations, somewhat less true of market professionals. When you work all the time with something, you know considerably more than layman about the ins and outs of a subject or process.

Another good book on such things as 'bubbles', when market mood swings go 'psychotic' or very delusional, is "Extraordinary Popular Delusions and the Madness of Crowds". A fun read.

MY SENTIMENT INDICATOR; CALCULATION
Very simple, and similar to the common 'Put-Call' Indicator EXCEPT for two key things:

1.) Well, not so key, but I like to use whole numbers and read 'oversold' as the bottom extreme and 'overbought' at the top, like the RSI and (Slow) Stochastics. Therefore, I divide daily Call volume by daily Put Volume (almost always half or less) AND

2.) I use only CBOE daily EQUITIES Volume and take out INDEX volumes; I don't also use the totals from all options exchanges.
Since there is a lot of hedging activity that goes on in Index options, I find that I get a more accurate reflection of bullishness or bearishness by the amount of activity in individual equities calls versus puts.

Yes, there is always some amount of Covered Call writing going on and selling of puts as a mildly bullish play (or attempt to get put the stock). And, at times due to some big event in a big stock (e.g., payment of a special dividend), there will be significant related option activity. However on balance, plotting the ratio of daily CBOE equities call to put volume, results in a useful 'sentiment' indicator showing bullish/bearish extremes.

The quirk about using this formula is that you can only chart it yourself; or, write down the daily ratio and track it. You can sign up for an end of the day e-mail that will give you the number as part of the "CBOE Daily Market Summary". Also, a check can be made of the CBOE web site sooner and just after the Close; the final hourly summary will allow a close to exact ratio.

Just in case my yesterday's (1/24/06) CBOE summary e-mail was incorrect, what with equity call volume so much more (2.6 times) than puts, I double-checked at the web site today. Same figure!

'FLAGGING' THE VALUE OF TECHNICAL ANALYSIS
Based on a read of the charts an options related play was not indicated if you know technical analysis, and most investors and traders DO NOT, giving you who do a significant advantage.

Working against a bullish interpretation of simply 'buying the dip' as that's what you do in a bull market, are some observations on the following charts. I'll use the lead S&P 500 (SPX) and Nasdaq Composite (COMP) charts for some illustrations.

In the SPX chart, what I notice most is that the rally into yesterday, and repeated today, couldn't gain traction to carry above resistance implied by the previously broken up trendline, now acting as initial resistance; along with the 21-day moving average. What was support 'became' resistance, at least for now.

The next couple of days should tell the story on whether SPX falls some more. Tomorrow (Thursday) could be a key day. I anticipated (in my weekend Index Trader...see LINK to that below) that the market would rally some early in the week, but might falter after. Stay tuned on that!

FLAGS
There is another pattern that would have made me feel that I was being premature in buying any Calls based on the SPX pattern. So called bull or bear 'flag' patterns arent always seen in the indexes, but not many patterns are seen all the time. And, they don't always have the expected outcome, but tend to more than on a 'chance' basis.

A flag pattern refers to the outline that can be made of a relatively narrow price consolidation of a few days where the range between highs and lows is relative tight. Especially after a strong advance or decline and sometimes after a sharp advance (or decline), which could be construed as a 'flagpole'.

Flag patterns are drawn or imagined lines through the highs and the lows, the outline of which usually slopes AGAINST the direction of the dominant or preceding trend direction. Sometimes the direction of the two lines is sideways, particularly when the sideways and narrow price-range days were preceded by a sharp move up (or down). The direction of the next move is usually in the same direction as the preceding move; and contrary to the direction of an up-sloping or down-sloping flag.

Some examples of bull and (1) bear flag patterns are seen on the SPX daily chart below. Sometimes, when you can imagine a flag type consolidation pattern preceded by a flagpole (i.e., a very sharp move such as the run up in early-Nov.), the NEXT move if/when prices piece the flag top, will be equal to the distance of the first run up. This distance is added to the top/bottom of the flag: distance 'a' equals 'b' in the below bull flag example.

It remains to be seen if SPX will start to fall again, and decline another 15 points, as measured from either 1265 or 1260. SPX pierced the low end the apparent (up-sloping) bear flag but then prices stabilized, contrary to what we would anticipate with a typical flag pattern. The SPX chart above reflects a pattern that is still bearish on balance however.

In the case of the Nasdaq Composite daily chart (COMP) below, the same bear 'flag' can be imagined; even more so than with the SPX chart above. I notice most that after the sharp decline from last week, the rally has to date reversed from the 'line' of prior highs around 2275 and at the 21-day moving average. This is where we could expect technical resistance, typically, before the Index headed still lower than Monday's bottom.

My guess is that COMP will at least decline to its up trendline, which currently intersects in the 2235 area. Other possible targets are to the prior 2190 low or to the area of the lower 'envelope' line: 3.5% below the 21-day average. However, a close back above 2275 not reversed in subsequent days, would suggest that the Composite was finding buying support and interest again.

MY INDEX TRADER COLUMN:
This Wed. Trader's Corner article serves as an adjunct to my weekend Index Trader (IT) column, where I can both update a technical picture of the market as of midweek, using it as a means to discuss, and more fully explain, relevant chart pattern types and technical indicators. The IT is only available on the Option Investor (OI) web site, as it's not included in the e-mailed weekend OI Newsletter. You will see a LINK to the Index Trader at the top of your weekend e-mail. My most recent (1/21) 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 Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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

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