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Daily Newsletter, Saturday, 01/28/2006

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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

Economy Slows Significantly

The advance GDP for Q4 stunned everyone with only a +1.1% growth rate. This was well below the +4.1% rate for Q3 and well below the consensus estimates of +3.0%. The economy went from more than three years of strong numbers averaging better than +3.5% growth to almost a dead stop at +1% in only one quarter. The last quarter with growth of less than +3% was Q1-2003 at +1.9%. The cycle high was Q3-2003 at +7.4%. Obviously there were many excuses for the drop that were tied to the hurricane impact but many analysts discounted those excuses. A sharp drop in auto sales accounted for a -0.6% drop in GDP. Government spending slowed accounting for a -0.5% drop. A sharp rise in imports of oil and oil products after the hurricanes also knocked -0.5% off the Q4 GDP number. Those three factors only account for -1.6% of the total -3.0% GDP drop. That leaves a drop of -1.4% to be spread across a slowing housing market, weak tech sales and a sharp drop in non-residential investments. There was an -8.5% drop in non-residential investment spending and a -7% drop in government spending. Tech spending slowed substantially from +10.6% growth in Q3 to only +3.5% growth in Q4. Consumption also fell to only +1.1% growth from +4.1% in Q3. Inflation was also higher with inflation excluding food and energy up +2.2% in Q4 from +1.4% in Q3. Those numbers are on an annualized basis but the direction is clear. The minimal +1.1% GDP growth for Q4 was a real disappointment and the slowest growth rate in over three years. Remember however, the advance GDP numbers are highly volatile and could see some sharp revisions over the coming weeks. With Greenspan's last Fed meeting scheduled for next Tuesday he is probably glad to be exiting at this point in the recovery. Bernanke is being handed a live economic hand grenade and a pat on the back as Greenspan rushes out the door with his legacy intact.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Weekly

The Fed meeting on Tuesday should be exciting for the participants with a flurry of recent economics pointing to a slowing economy at a time when the Fed is reaching the end of its rate hike cycle. Bernanke may be seeing a potential recession in the not to distant future. His options are to halt the hikes now in hopes of heading it off or continue hiking through March in hopes of getting rates as high as possible to provide leverage if a serious recession does appear. I am sure Bernanke is approaching his new position with a considerable amount of apprehension. His term could be defined by the economy and his actions within his first 12 months.

The economic calendar for the coming week is very full and the Fed will have no shortage of information to work with. The highlights are the NAPM, PMI, ISM and Jobs on Friday.

Economic Reports for Week of Jan-30th

If the ISM follows the trend set by the Chicago Fed National Activity Index from last week, which fell sharply to .08 from .59 in November. The drop too barely positive in December from its .98 level in October has been fast and Friday's GDP confirms the drop. If the ISM follows suit then the Fed will be on notice that conditions have changed drastically. Given the sharp drops in the CFNAI and GDP the ISM could miss the consensus target of 56.0 by a substantial margin. A move below 50.0 would indicate a contraction in the economy but I doubt we will see that in this report.

The continuing signs of economic weakness as evidenced by the GDP on Friday suggests the Fed may be closer to a rate hike halt than previously thought. However, the Fed funds futures are still calling for a hike next week and at the March meeting. That may change after the announcement next Tuesday. If the wording changes dramatically then all bets are off for the March meeting. Investors cheered the weak GDP in hopes the Fed may be done soon.

In addition to the GDP on Friday there was also surprising news about home sales. December New home Sales jumped to 1,269,000 on an annualized basis from 1,233,000 in November. This month over month gain of +2.9% showed that the housing sector may not be as weak as previously expected. There was a change in the methodology of the survey so a direct comparison is difficult to obtain. The inventory of new homes for sale rose to 4.9 months and the highest level since 1996. This high inventory level has prompted builders to dust off some very strong incentives. For instance Centex ran a full-page ad on Friday offering a $100,000 discount for any home bought on Saturday between 10:AM and 10:PM in specific areas in the northeast.

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The high inventory levels did not scare investors and the headline number renewed hope that the bubble talk had failed to actually slow sales. Shorts were squeezed once again as investors celebrated the low GDP and jump in housing sales. The market rebound was aided by results from Microsoft on Thursday night that propelled MSFT to a +1.29 gain or +5%. This was a reversal of fortune for tech stocks after a two-week decline.

The indexes were helped by a sharp jump in oil prices of +$1.50 to $67.80. Oil stocks rallied back from their midweek lows with many setting new highs. Even the transportation index rallied to a new high, oblivious to the fact that oil was creeping towards $70 once again. OPEC meets again on Tuesday in Vienna and there are no production cuts on the table for Q1. They are talking about a potential cut in Q2 or Q3 if needed but also an increase in production in Q4. They are managing expectations amazingly well and prices are not expected to dip below $60 any time soon despite some comments from OPEC members last week that prices over $60 were too high. That is like a crack dealer 100 miles from his closest competition saying he is charging too much and prices should be lower. He would be kidding nobody but the non-users and those addicted would continue to pay whatever price he asked until a new dealer appeared. OPEC is not kidding anyone but the general public with their constant announcements. OPEC deliveries actually fell last month as supply constraints, production outages and problems with rebels in Nigeria restricted output. OPEC realizes that inventory levels are not rising and that is fine with them.

The SOX broke out of strong resistance at 538 on Friday to trade over 550 most of the day. The jump was largely attributed to earnings gains by Sony (SNE) and Broadcom (BCM) +$11.15 or +20%. Broadcom beat the street by +6 cents and raised guidance to +5% to +7% growth compared to analyst's expectations for a decline of -2%to -3%. This enabled the sector to shake off some questionable earnings from the last two weeks and in two days rebound from 515 to Friday's high of 560.

SOX Chart - Weekly

The SOX gain was even more surprising because SanDisk did not take part in the rally. SNDK fell -$7.30 or -10% after saying they were going to cut prices up to -35% in order to maintain high production levels. The CEO said they were seeing very soft Q1 sales and wanted to support those sales by sharply cutting prices. SanDisk is facing growing competition from Hynix Semi and Micron and a price war appears to be developing as competition for slowing sales increases. Chipmakers must maintain high volume to keep costs down and margins up and stronger competition will depress both of those factors.

Friday was a day of big moves by individual stocks as evidenced by the BRCM and SNDK news above. Affiliated Computer (ACS) rallied +$6.10 or nearly +11% after saying they were going to buy back up to 45% of their outstanding stock. This is really a strange announcement. ACS said they were going to use debt provided by Citigroup to buy back the $3.5 billion in stock. Something is going on under the headlines here. Companies don't normally go into debt to buyback stock, especially this large of an amount. ACS has been in talks to be acquired by some private equity firms for the last couple months but those talks reportedly fell apart on Jan-17th. I say reportedly because the buyback suggests there is some news we have not been told. Maybe the talks were put on hold until ACS changed its acquisition profile through the buyback. It still poses a lot of questions since any acquiring company would still end up with the debt. ACS is going to conduct a Dutch auction between Feb-6th and March-6th with prices between $56 and $63 per share. They will purchase 55.5 million shares at the lowest price possible in that range. Shares closed at $63.27 on Friday, which suggests they could be stuck buying at the top of the range. Reducing the number of shares outstanding increases the earnings attributable to the remaining shareholders. Buying back the stock in advance of a buyout does fix the price of that stock which has been repurchased. This would allow a buyout firm to offer a higher amount for the remaining shares knowing that 45% of the stock cannot appreciate. If I see any decline in the stock price I am going to speculate in some distance call options. Keep a watch on ACS and I bet we will see the buyout reappear in the not two distant future.

George Soros is making news again and he is making waves contrary to current investor sentiment. According to Soros, investors today are cruising into the sunset. Unfortunately they are cruising on the Titanic according to him. He is predicting a global recession stimulated among other things by a slowdown in housing prices and higher energy prices. He feels it will accelerate into 2007 as consumers run out of purchasing power as home equities shrink. Speaking at the World Economic Forum in Davos Switzerland he said, "The conference is remarkable for its complacency. It's a bit like dancing on the Titanic. They're having a very good time and there's a very cheerful atmosphere." However, he said the veneer of relative calm both in the U.S. and international markets is masking some troubling problems in the global economy. He said the Russian gas crisis should be a wake-up call for Europe. Russia has shown that they are willing to use their energy assets to control other countries. Starting with Georgia and the Ukraine as examples it is only a matter of time before their economic reach stretches over nearly all of Europe.

Russia has shown it is also willing to use its energy supplies to punish countries leaning toward western values in order to bring them back into the fold. I warned about this as far back as early 2004. As oil and gas supplies shrink those countries with surpluses will control the fate of those who don't. Those countries with large populations and energy shortages will try to take them by force from their smaller neighbors. Russia's recent natural gas blackmail attempt is just another sign that the energy future is going to be rocky. Europe relies on Russia for 25% of its natural gas supplies. Turn that off and Europe comes to a halt economically. Russia also supplies 10% of all the oil exports in the world, over 5 mbpd, with the majority of that oil going to Europe. Would you want Russia to control your future? They will even if you don't live in Europe. If they cut off supplies Europe will turn to other sources for oil and gas. Those sources are the same ones America uses and competition for those supplies will send prices soaring. Don't think just because Russia is waging economic war with Europe it is not our concern. You may be surprised.

Iran is still being listed as the main reason for $68 oil and there appears to be no resolution in the near future. The U.S. said Special Forces are already in Iran marking targets and generals are on TV talking about taking out not only the nuclear targets but the government as well in a single 24 hour bombing campaign. Regardless of whether this will ever come to pass it is increasing the speculation over future supplies. Iran exports 2.7 mbpd of crude.

Earnings over the past week were better than the prior week but were still nothing to get excited about. Guidance remains generally weak with only a few exceptions. Last week was the heaviest week for earnings for the Q1 cycle and while there are still some notables ahead it is mostly down hill from here. The highlight for next week will probably be Google on Tuesday. Google is expected to report +$1.76 in earnings but they do have a history of beating estimates. Eventually this trend will change but nobody expects it to be Tuesday. A positive report could benefit the Nasdaq and other Internets. Amazon reports on Thursday and is expected to post a gain of +21 cents. There are dozens of energy stocks reporting as well and any post earnings dips should be seen as buying opportunities but give them time to settle first.

Two days of short covering pushed the indexes back to some strong resistance levels. The Dow jumped +225 points on Thr/Fri with the majority of those gains coming in the first 30 min of trading on both days. The rebound took the Dow to just over 10900 where it stalled at resistance at 10925. This was where it failed back on Jan-19th and it will be a critical area to watch as earnings begin to fade. The next material resistance is +200 points higher at 11025.

The Nasdaq performed an identical bounce to resistance at 2310 that held on the last rebound attempt on the 19th. Both indexes sold off slightly at the close on profit taking but are poised to take another run at that resistance on Monday if investors feel bullish.

Our directional indicator of choice, the SPX, spent the first three days of the week bumping its head on our 1270 long/short indicator. That level broke on Thursday but the 1275 overhead resistance I told you to watch last Sunday held firm. On Friday the Broadcom earnings sent the SOX into overdrive and a nearly +20 point gap open. That SOX gap and strong oil prices powered the SPX through the resistance at 1275 and right to the same Jan-19th resistance that held the Dow and Nasdaq. That resistance on the SPX is just over 1285. Technically we should all be long over 1275 if you followed my advice from last Sunday.

I have really mixed emotions about next week. Everyone appears to be thinking the Fed is going to surprise investors with a sudden halt to rate hikes at Tuesday's meeting. Since everyone seems to be whispering about this surprise it would be an even bigger shock if they kept language that said further rate hikes would still be needed. This sets up the potential for a big move based on the outcome of the Fed meeting. Monday could be positive as retail investors push the envelope thinking that there are only blue skies ahead. Tuesday should bring some hesitation and probably some profit taking ahead of the Fed announcement. After the announcement it is up to the Fed statement to provide direction. Without any surprise we are likely to wander without sufficient power to break the overhead resistance at 11025, 2330 and 1295.

A positive for the bulls is new all time highs by the NYSE Composite ($NYA.x), Russell ($RUT.x), S&P Smallcaps ($SML.x) and Transports ($TRAN). The Wilshire 5000 is also very close to a new high over 13000 with Friday's romp to 12994. All of these broader indexes are showing far more bullishness than the standard Dow, Nasdaq and S&P. The weighting of individual stocks in the Dow and Nasdaq is keeping those indexes from flying as earnings disappointments wreak more havoc in those smaller indexes.

Russell 2000 Chart - Weekly

NYSE Composite Chart - Weekly

S&P SmallCap 600 Index Chart - Weekly

SPX Chart - 60 min

If you are only looking at the big three the picture is entirely different than that being projected by the broader market. Unfortunately, most market decisions are made based on those three common indexes. This puts us in the position of being bullish overall but held hostage to the Dow, Nasdaq and SPX as well as the Fed on Tuesday. It would be a remarkable event to see the Fed pause on Tuesday and the remaining indexes break final resistance. But, as Soros says, there is far too much bullishness among the partygoers and disaster does tend to strike when least expected. I will continue to suggest SPX 1270-1275 be our long/short indicator. Remain long over 1275 and short under 1270. This takes the guesswork and the emotion out of our trading decision and lets the market direction control our choices.

Challenger Explosion

January 25th was the 20th anniversary of the space shuttle Challenger disaster and the death of its seven crew members. Unfortunately it was not the only fatal shuttle accident. Three years ago on Feb-1st 2003 the shuttle Columbia exploded on reentry and seven more astronauts lost their lives. The sacrifices of these brave men and women make us appreciate the rather mundane risk we take as investors commuting to our own offices. On a brighter note Friday was the 250th birthday of Wolfgang Amadeus Mozart. Tune in to a classical station this weekend and be exposed to an incredible composer.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AET None GOOG
KBH    
ESRX    

New Calls

Aetna - AET - close: 92.69 change: +1.77 stop: 89.99

Company Description:
As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 14.65 million medical members, 13.03 million dental members, 9.34 million pharmacy members and 13.68 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 700,000 health care professionals, including over 418,000 primary care and specialist doctors and 4,231 hospitals. (source: company press release or website)

Why We Like It:
We suspect that the consolidation in AET is about over. The stock's upward momentum stalled under the $100 level back in December. Now shares are trying to bottom against rising technical support at the simple 100-dma. The short-term technical oscillators like the RSI and stochastics are already turning positive and its MACD has already produced a new buy signal. Shares still have some resistance at the 50-dma near $94.00. If the stock can breakout over the $94 level it will produce a new Point & Figure chart buy signal. We are going to suggest a trigger to buy calls at $94.05. If triggered we'll target a rally into the $99.00-100.00 range. Part of the risk with this play is the time frame. AET is due to report earnings on February 9th. That gives us less than two weeks. FYI: during Friday's session last week AET announced a 2-for-1 stock split set for February 17th. Management also announced a $750 million share buy back program.

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

BUY CALL FEB 90 AAF-BR open interest=3771 current ask $4.40
BUY CALL FEB 95 AAF-BS open interest=4793 current ask $1.65

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/09/06 (confirmed)
Average Daily Volume = 1.7 million

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Express Scripts - ESRX - close: 92.42 chg: +3.20 stop: 87.45

Company Description:
Express Scripts provides integrated PBM services, including network- pharmacy claims processing, home delivery services, benefit-design consultation, drug-utilization review, formulary management, disease management, and medical- and drug-data analysis services. The Company also distributes a full range of injectable and infusion biopharmaceutical products directly to patients or their physicians, and provides extensive cost- management and patient-care services. (source: company press release or website)

Why We Like It:
The bullish breakout in ESRX on Friday is very positive. The stock has been consolidating under resistance at the $90.00 level for the last six weeks. Now shares have turned higher again and the technicals look very attractive. Friday's breakout produced a new quadruple top breakout buy signal on its P&F chart with a new $105 price target. We are suggesting call positions with ESRX above the $90.00 mark. If you're the patient type then consider waiting for a pull back toward $90.00-90.75 as an entry point to buy calls. It's very common for stocks to pull back and retest broken resistance as new support. Our target is the $99.50-100.00 range. We do not want to hold over the February 22nd (unconfirmed) earnings report.

Suggested Options:
We are going to suggest the March calls so we can hold positions up to but not over the February earnings report.

BUY CALL MAR 90 XTQ-CR open interest=236 current ask $6.50
BUY CALL MAR 95 XTQ-CS open interest=191 current ask $3.90
BUY CALL MAR 100XTQ-CT open interest=138 current ask $2.05

Picked on January 29 at $ 92.42
Change since picked: + 0.00
Earnings Date 02/22/06 (unconfirmed)
Average Daily Volume = 2.1 million

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KB Home - KBH - close: 76.30 chg: +1.10 stop: 73.30

Company Description:
Building homes for nearly half a century, KB Home is one of America's premier homebuilders with domestic operating divisions in some of the fastest-growing regions and states: West Coast-California; Southwest-Arizona, Nevada and New Mexico; Central-Colorado, Illinois, Indiana, Louisiana and Texas; and Southeast-Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia. Kaufman & Broad S.A., the Company's publicly-traded French subsidiary, is one of the largest homebuilders in France. In fiscal 2005, the Company delivered homes to 37,140 families in the United States and France. KB Home also offers complete mortgage services through Countrywide KB Home Loans, a joint venture with Countrywide Financial Corporation. (source: company press release or website)

Why We Like It:
The new home sales figures that came out on Friday were better than expected and it may have stalled the current two-week sell-off in the homebuilding sector. Shares of KBH are bouncing from its three-month old trendline of support. This looks like an attractive entry point to buy the bounce and ride KBH back to its January highs and probably beyond. We are going to set our stop loss just under the simple 50-dma and its trendline of support. We are suggesting calls here with KBH above $76.00. More conservative traders might want to wait for more confirmation and a move over the $77.50 or $78.00 levels before buying calls. We're going to target a rally into the $84.00-85.00 range. Short-term traders can target the January highs near $82.00. The P&F chart is bullish and points to a $93.00 target.

Suggested Options:
We are suggesting the March calls.

BUY CALL MAR 75.00 KBH-CO open interest=314 current ask $4.80
BUY CALL MAR 80.00 KBH-CP open interest=141 current ask $2.40

Picked on January 29 at $ 76.30
Change since picked: + 0.00
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 2.0 million
 

New Puts

None today.
 

New Strangles

Google Inc. - GOOG - close: 433.49 chg: -0.77 stop: n/a

Company Description:
Google is a public and profitable company focused on search services. Named for the mathematical term "googol," Google operates web sites at many international domains, with the most trafficked being www.google.com. Google is widely recognized as the "world's best search engine" because it is fast, accurate and easy to use. The company also serves corporate clients, including advertisers, content publishers and site managers with cost-effective advertising and a wide range of revenue generating search services. Google's breakthrough technology and continued innovation serve the company's mission of "organizing the world's information and making it universally accessible and useful." (source: company press release or website)

Why We Like It:
We are going to try it again. Back in October we were successful with a strangle play centered on catching the volatility produced by the company's earnings report. The last earnings report saw GOOG gap open and close with a $36 gain and two weeks later the stock had pushed that gain to almost $100 (+33%). Expectations are still extremely high for GOOG and the stock could easily see another huge move. That is of course why the options are so darn expensive. This is a high-risk, aggressive play so if you can't handle the volatility or the potential loss don't play it! GOOG is set to report earnings on Tuesday, January 31st after the market's closing bell. Estimates are for the company to report earnings of $1.77 a share. We are suggesting the February $450 call and the February $420 put. At current prices our estimated cost is $40.10. We will look for a rise to $60.00 or more before February options expire. Translation = we expect GOOG to hit $475 or fall under $370 before February expiration. You could try a straddle (where you buy a call and a put at the same strike) at the $430 strike price for about $55.00. You could also try our strangle with March strikes for about $54.00. We don't expect a lot of movement in GOOG ahead of its earnings report although the FOMC announcement on Tuesday afternoon might produce some volatility. Be prepared.

Suggested Options:
We are suggesting a short-term, aggressive, high-risk strangle on GOOG. This requires that traders buy an out of the money call and an out of the money put. We would not suggest new strangle positions after Tuesday.

BUY CALL FEB 450 GOP-BJ open interest=15294 current ask $19.90
-and-
BUY PUT FEB 420 GOP-ND open interest= 6495 current ask $20.20

Picked on January 29 at $433.49
Change since picked: + 0.00
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 11.1 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Carter's Inc. - CRI - close: 68.00 chg: -1.56 stop: 64.75

As expected shares of CRI have stalled under the $70.00 level, which is acting as round-number resistance. The trend in CRI is still very bullish given the breakout over major resistance at the $65.00 level. We can look for the stock to probably dip again early next week and potentially retest the $65 level as support before moving higher. Any bounce above $65 could be used as a new bullish entry point. The P&F chart is bullish and points to an $85 target. Our target is the $72.50-75.00 range. We do not want to hold over the late February earnings report.

Suggested Options:
Watch for a bounce above $65 as an entry point. We are suggesting the March calls so we can hold positions up to but not over the February earnings report.

BUY CALL MAR 65 CRI-CM open interest=172 current ask $5.50
BUY CALL MAR 70 CRI-CN open interest=572 current ask $2.95

Picked on January 25 at $ 66.62
Change since picked: + 1.38
Earnings Date 02/20/06 (unconfirmed)
Average Daily Volume = 313 thousand

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Freeport Mcmoran - FCX - cls: 62.97 chg: +1.17 stop: 56.85*new*

Last week was very strong for almost anything metal related. Miners like PD and FCX rebounded sharply while steel-related stocks rose on merger news. Last week the sector got a boost after an analyst firm upgraded their forecasts on metal demand for 2006. The copper producers are soaring on expectations that demand from the U.S. and China will continue to outweigh supply. Shares of FCX hit a new all-time high of $64.00 on Friday. Our target is the $64.75-65.00 range. At the moment we're not suggesting new bullish positions but we would watch for a dip back toward $60.00 as a new bullish entry point. We are going to raise the stop loss to $56.85. Don't forget that rival Phelps Dodge (PD) is expected to report earnings on January 31st. The stock has been soaring and traders might use the report as an excuse to lock in profits. This is a news event that could influence trading in FCX.

Suggested Options:
We are not suggesting new positions right here but look for a dip back toward the $60 level. We like the March calls.

Picked on January 24 at $ 60.22
Change since picked: + 2.75
Earnings Date 01/17/06 (confirmed)
Average Daily Volume = 2.6 million

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SFBC Intl. - SFCC - close: 21.91 chg: -0.77 stop: 18.95

Our short-term, aggressive rebound play in SFCC is holding up. The stock was downgraded to a "hold" on Friday morning and shares dipped to $21.13 before bouncing. The stock's bullish posture is still intact given the breakout over resistance near $20.00 and its 50-dma. Friday's dip actually looks like a new entry point but patient traders might want to wait before initiating new positions. The broader market indices could be due for a pause and it's almost guaranteed that we'll see some volatility on Tuesday after the FOMC meeting. A pull back into the $20.00-20.75 region would look like an attractive entry point. Remember that the stock has extremely high short interest and any sort of rally in the stock could spark another short squeeze. The latest data shows short interest rising from 74% to 92% of its 18.4 million-share float. If we were short we'd be worried given last week's bullish breakout. Plus, the Point & Figure chart is bullish with a $35 target. Our target is the $24.90-25.00 range. More conservative traders may want to exit in the $24.50-24.65 zone since the 38.2% Fibonacci retracement of its October-December sell-off is about $24.65. Meanwhile it looks like the earnings date has been moved back toward February 22nd. This is still an unconfirmed date but it gives us more time for the play to come to fruition.

Suggested Options:
Previously we suggested the February calls because the only earnings date we had was early February and we did not want to hold over the report. If opening new plays now we'd prefer March calls.

BUY CALL FEB 20.00 JQE-BD open interest=1839 current ask $3.20
BUY CALL FEB 22.50 JQE-BX open interest=1047 current ask $1.85

BUY CALL MAR 20.00 JQE-CD open interest=3072 current ask $4.40
BUY CALL MAR 22.50 JQE-CX open interest=1730 current ask $2.20

Picked on January 25 at $ 20.92
Change since picked: + 0.99
Earnings Date 02/22/06 (unconfirmed)
Average Daily Volume = 2.5 million

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Wynn Resorts - WYNN - close: 62.94 change: +2.86 stop: 58.45*new*

The rally continues in shares of WYNN on Friday. The stock added 4.7% to breakout over its November highs. Shares hit $63.89 on Friday. Our target is the $64.75-65.00 range. More conservative traders may want to think about exiting early right here for a profit. We are not suggesting new bullish positions with WYNN this close to our target. We are raising the stop loss to $58.45. We do not want to hold over the February earnings report.

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

Picked on January 22 at $ 58.78
Change since picked: + 4.16
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Biotech HOLDRs - BBH - close: 194.75 chg: +1.20 stop: 200.11*new*

Weakness in AMGN is weighing on the BBH but strength in the biotech sector in general is stalling any decline in the HOLDR. The P&F chart for the BBH is bearish but short-term technical oscillators are suggesting the BBH will turn higher. Plus, the weekly chart's latest candlestick is suggesting a bullish reversal. Expect a bounce into the $198-199 region before it moves lower again. We're going to lower our stop loss to $200.11. Truly conservative traders may just want to exit early right here. We're not suggesting new put positions at this time but a failed rally under $199 or better yet under $196 could be used as an entry point.

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

Picked on January 20 at $195.78
Change since picked: - 1.03
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 539 thousand

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Johnson Controls - JCI - close: 69.99 chg: -0.62 stop: 72.51

The good news here with JCI was the stock's failure to rally with the broad market indices on Friday. The stock continued to drift lower and has now closed under the $70.00 level. This looks like a new bearish entry point to buy puts. The technical oscillators are also suggesting that JCI will continue lower. Our target is the $65.50-65.00 range but watch for a bounce from the 100-dma near 68.00.

Suggested Options:
We are suggesting the April puts because the March puts don't have much open interest.

BUY PUT APR 75 JCI-PO open interest=156 current ask $6.70
BUY PUT APR 70 JCI-PN open interest=210 current ask $3.70
BUY PUT APR 65 JCI-PM open interest=432 current ask $1.75

Picked on January 25 at $ 69.90
Change since picked: + 0.09
Earnings Date 01/20/06 (confirmed)
Average Daily Volume = 955 thousand

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Omnicare - OCR - close: 55.05 change: +0.97 stop: 56.25

Bears need to be on yellow alert here! Seeing OCR rebound on Friday is not a surprise given the strength in the major indices. What really concerns us is the last candlestick on the weekly chart, which looks like a "hammer" pattern or a bullish reversal signal. We strongly considered exiting early right here but upon closer inspection of OCR's trading on Friday we're going to let the play run for now. OCR did rebound higher on Friday but the stock only bounced high enough to fill the gap from Wednesday morning. Shares actually tried to breakout over the $55.50 level twice on Friday and failed both times. Plus, OCR still has what looks like significant resistance near $56.00-56.20. More aggressive traders may want to widen their stop a little bit. We'll leave our stop loss at $56.25 for now. A new decline under $54.00 could be used as a new entry point but keep in mind we're only targeting a slide into the $51.00-50.00 range. We do not want to hold over the late February earnings report.

Suggested Options:
Watch for a failed rally under $56 as a new entry point. We like the March puts.

Picked on January 20 at $ 54.99
Change since picked: + 0.06
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: 80.00 chg: +1.69 stop: n/a

BMHC has seen strong volume on its bounce over the last two days and shares have managed to breakout over its four-month trendline of resistance. Earnings are coming up around February 7th and will probably produce more volatility. 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 strangle positions at this time.

Picked on December 18 at $ 80.95
Change since picked: - 0.95
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 527 thousand

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Encana Corp. - ECA - close: 47.11 chg: +0.63 stop: n/a

ECA is still consolidating sideways and the stock may not be able to breakout of this pattern until its earnings report on February 15th or unless oil makes some drastic moves. 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.

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

Picked on January 10 at $ 45.56
Change since picked: + 1.55
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

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Ryland Group - RYL - close: 73.30 change: +1.49 stop: n/a

Homebuilders rebounded on Friday after the new home sales figures that came out on Friday morning were better than expected. RYL rallied just enough to fill the gap and test the $75 region and its 50-dma as overhead resistance. The move looks like a failed rally sort of bearish entry point to buy puts but we'd look for some confirmation first if you are bearish on the stock. With regards to our strangle play we are not suggesting new 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.

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

Picked on January 22 at $ 75.19
Change since picked: - 1.89
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

AmerUS Group - AMH - close: 61.04 change: +0.18 stop: 59.88

To be perfectly honest we're disappointed in AMH's performance. The markets have rallied strongly for the last two sessions and shares of AMH have been barely positive both days. Volume has also been very low. AMH is expected to report earnings on February 1st and while this is an unconfirmed date we are not going to hold over the announcement. Instead we're choosing to exit early right here. The action on Friday looks like a short-term failed rally pattern. More aggressive traders might want to think about holding a position for the next couple of days but exiting before Wednesday's potential earnings announcement.

Picked on January 25 at $ 60.85
Change since picked: + 0.19
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume = 325 thousand

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Selective Ins. - SIGI - close: 57.10 chg: -0.90 stop: 54.65

We are choosing to exit early with SIGI. The stock under performed the market and its peers on Friday. Given the stock's relative weakness during Friday's session we don't want to hold it going into next week. We had planned on exiting on Tuesday afternoon ahead of its earnings report due out later on Tuesday following the closing bell. By the way, we would not be surprised to see SIGI announce a stock split with its earnings report.

Picked on January 19 at $ 56.05
Change since picked: + 1.05
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 163 thousand
 

Dropped Puts

Express Scripts - ESRX - close: 92.42 chg: +3.20 stop: 90.01

The sell-off in ESRX never materialized. Our plan was to buy puts on a breakdown below its 50-dma and the low last week. The stock never neared our trigger at $84.95. Thus we're dropping ESRX as a bearish candidate. Last Thursday we suggested that if ESRX broke out to a new high we'd consider bullish positions. Please see today's new plays for a bullish strategy on ESRX.

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
 

Dropped Strangles

None
 


Trader's Corner

It's a Record

On January 12, Steve Nison probably would have advised bulls to prepare for the SOX pullback that occurred over the next few days. That's when the SOX had produced eight record session highs.

Steve Nison has written at least two books on candlestick charting methods. Record session highs are sessions in which prices reach a higher high than the previous session high. Prices hitting a lower low than the previous candle's low produce a record session low. Many candlestick enthusiasts begin looking for other signs of a reversal or consolidation when prices have achieved eight to ten record session highs or lows, as this suggests that the trend may be extended. This candlestick pattern requires a longer time period to develop than do many others, but Nison calls it one of the most reliable.

The record-session concept was discussed earlier in the year in a series of articles on candlestick reversal patterns, but it's perhaps appropriate to return to the discussion after this month's action. Please note that charts were chosen to illustrate the pattern, and do not reflect current prices.

Annotated Daily Chart of the SOX:

In addition to producing eight record sessions, the SOX provided another confirmation that the trend might be changing or morphing into a consolidation period over the short term--that bearish engulfing candle produced the same day as the eighth record session. As this report is completed mid-morning on January 27, the SOX has broken out of a consolidation pattern to the upside, leaving behind another possible exhaustion gap. A trader with a long-term option or long SOX stocks could have benefited from that upside breakout, but a trader who had been holding a January call as that eighth record session high was produced was to see chop the rest of the way into the expiration of that position. Understanding what the record session highs were showing would have allowed a short-term trader to make reasonable decisions about holding onto that short-term position or closing it out.

The SOX's behavior was a near-perfect illustration of eight record session highs, but perfection doesn't always occur, of course.

Annotated Daily Chart of the TRAN:

The TRAN corrected sharply again after that eighth record session high, restarting the count again, and the index then climbed into a retest of December's high, where it sits mid-morning Friday as this report is prepared. Choppy or coiling sideways-up trading is of course one way to dissipate overbought pressures, but as of this writing, the TRAN has not yet begun a new trend.

The same theory works with record session lows.

Annotated Daily Chart of Dell:

Candlestick aficionados would have been warned to begin stepping out of short-term bearish positions or planning profit-protecting moves as Dell's eighth record session low was produced. Someone in a short-term bearish position would have been forewarned of the hard bounce coming that would reverse 50 percent of the drop from the December high. While a trader with a longer-term bearish position might have been able to benefit from Dell's eventual move back toward the November low, a trader holding a January put might have seen that position's value shrink considerably by the time Dell made it back to its pre-reversal level just before January option expiration. Those in longer-term bearish positions would have been forewarned to take profit-protecting measures or make decisions about exit points. Although not shown on the chart, Dell's eventual progress back toward the November low has been choppy, with such choppy movements sometimes chopping up premium on a short-term option's value, too.

Although eight to ten sessions usually proves helpful to watch, some securities tend to reverse after slightly fewer or slightly more record session highs or lows. With the SOX's habit of overrunning targets, its short-term reversal in mid-January after a classic eight sessions of record highs perhaps proves surprising.

Momentum stock GOOG produced an astonishing 15 record session highs before its first sharp but short-term correction as it moved off its October low.

Annotated Daily Chart of GOOG:

After the sharp correction, GOOG began a new count and produced another eleven record session highs before its late November sharp reversal. After that, another seven record session highs were recorded, followed eventually by a move of six record session highs. GOOG's pattern has since disintegrated with January's big moves.

GOOG may or may not eventually move higher again, too, after dissipating overbought pressures. That won't have mattered to the short-term bull heading into January option expiration. A bull who had watched GOOG's shortening pattern with respect to the number of record session highs that it was creating before a sharp pullback might have seen that deterioration coming.

Whatever the trading vehicle, whenever you see eight-to-ten record session highs or lows in the stock or index you're trading, it's time to start planning, especially if you're in a short-term option position.
 

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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