Option Investor

Daily Newsletter, Monday, 02/27/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Nasdaq Gaps & Goes

The Nasdaq gapped higher at the open and led the way up this morning in what proved to be a "flagpole" rally. Stocks launched their way up a steep "flagpole" only to stall at the highs in a narrow, sideways range. That range broke to the downside in the final minutes of the cash session, but the pullback was too shallow to make much of a dent in the Nasdaq's gain for the day.

Although the Nasdaq led, the SPX was a lot closer to the year's high, and ran to new highs not seen since 2001. Bearish housing data and big issuances of new debt from the Treasury were ignored by equities, and while bonds got hit, resistance on the ten year note yield held at 4.6% (see below). Volume breadth on the indices was strong throughout the session, holding positive into the close despite the final pullback.

Daily Dow Chart

The Dow held above Friday's range, but failed to clear this month's resistance to 11200. Below that level, the current gains above 11000 remain vulnerable to a possible bear wedge, while bulls see the break above 11000 as a bullish triangle break currently retesting (and holding above) horizontal support. For the day, the Dow closed higher by 36 at 11098.

Daily S&P 500 Chart

The SPX gained 4.7 to close at 1294.13, failing from its afternoon high at 1297.57. The break to new highs was short-lived, but so was the pullback that followed. The chart is certainly more bullish than bearish at the highs at the highs, a pattern of higher lows and higher highs on the daily chart. Today's break didn't run far enough to rule out a double-top interpretation, but until we see a break of 1280 support, 1288 at minimum, the benefit of the doubt will have to go to the bulls.

Daily Nasdaq Chart

The Nasdaq blew through last week's high, adding 20.14 to close at 2307.18. The move returned to but failed to break above rising resistance at the broken trendline from the beginning of this month. Resistance to 2315 from late January is in play at current levels, today's high 2313, above which the year high should come quickly into view. If today's breakaway gap up open was a bull flag break on the daily chart, then the bulls could be treated to a new leg up to new highs.

On the liquidity front, the Fed's open market desk had no repos maturing this morning, but added a $2 billion overnight repo for a net add in that amount. This was followed up by another coupon purchase in the amount of $1.2 billion, which is effectively a permanent repo that never gets paid back from the dealers to the Fed, bringing the day's total to a $3.2 billion net add.

At 11AM, the Treasury announced the size of tomorrow's 4-week bill auction, which will be in the amount of $20 billion to refund $18 billion maturing. The net effect is to raise new cash in the amount of $2 billion, which drains available liquidity.

Today's auction was for 13- and 26-week bills, the Treasury offering $40 billion of new debt to refund $32.231 billion in maturing notes, raising new cash and effectively draining $7.769 billion. Foreign central banks purchased $10 billion of the $40 billion auctioned, the 13-week bills setting a high-rate of 4.51% with a 4.625% yield and generating 2.02 bids for each accepted. The 26 week bills set a high-rate of 4.58%, the yield 4.754% and a bid-to-cover ratio of 2.13.

Daily TNX Chart

The wave of treasury issuance has caused the ten year note yield (TNX) to rally from a higher low above 4.285%. On the daily chart, 4.6% resistance has been in play for a week, above which the previous 4.65%-4.7% confluence is in play. For the day, TNX closed higher by 2.3 bps at 4.590%.

There was no shortage of bad news from the Middle East over the weekend. However, Traders opened their screens to a drop in crude oil prices as Saudi spokesman Major-General Mansour al-Turki announced that two raids were carried out last night, resulting in the death of five suspects and a single arrest. All six were believed to be involved in last week's al-Quaeda attack. As well, AP reported that Iran and Russia had reached an agreement in principle to set up a joint uranium enrichment venture. The talks that led to the agreement had US support, and helped to ease concerns about Tehran's possible agenda to manufacture nuclear weapons. As well, this weekend's agreement reduces the likelihood that the UN Security Counsel will be forced to initial sanctions or take other actions against Iran. Those concerns remain, however, as many details remain unsettled, including the West's demand that Iran cease domestic uranium enrichment activities.

Crude oil closed the day lower by 1.975 at 60.925, 10 cents off its session low. Natural gas closed -.53 at 6.785, 8.5 cents off its low.

At 10AM, the day's lone economic report was released. The Commerce Department reported that sales of new homes declined 5% to an annual rate of 1.233 million homes in January (seasonally adjusted). That reading marks a two year low. Inventory rose 2.5% to a new record of 528,000 units, and at the lower annual rate, the record number of homes for sale represents a 5.2 month supply, the largest in 9 years. The median sale price of a new home rose 6.7% from the year-ago reading to $238,100. December's new home sales figure was revised from 1.269 million to a 1.298 annualized rate.

This will be a busy week for economic data. Tomorrow, we will be treated to the Preliminary Q4 GDP and Chain Deflator, Chicago PMI, Consumer Confidence and Existing Home Sales. On Wednesday, in addition to the weekly Mortgage Bankers and EIA Petroleum reports, we'll get Auto & Truck Sales, Personal Income and Personal Spending, Construction Spending and the ISM Index. On Thursday, it's the weekly Initial Claims and EIA Natural Gas Storage Reports, followed by ISM Services and Michigan Sentiment on Friday.


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In corporate news, there was good news from Lowe's (LOW), who reported Q4 earnings that rose from $508 million or 64 cents per share on sales of $8.55 billion to $695 million or 87 cents on sales of $10.81 billion. Consensus estimates were for EPS of 80 cents on $10.44 billion sales. LOW forecasts Q1 EPS of 92-94 cents and $4.03-$4.13 for the full year ending January 2007, compared with current consensus of 88 cents for Q1 and $3.95 for the year. LOWE closed higher by 5.63% at 69.22.

GE reported that it will divest itself of its remaining 71 million Class A and 15 million Class B shares in Genworth Financial (GNW). GE added .18 to close at 33.33, GNW losing .23 to close at 32.41.

The world's largest gold producer, Newmont Mining (NEM) reported Q4 earnings that fell from $190 million or 42 cents per share in the year-ago quarter to $62 million or 14 cents. The company cited legal settlements and asset write-downs for the decline. Earnings from continuing operations fell from 34 cents to 16 cents per share, while revenues rose from $1.2 billion to $1.31 billion. Estimates were for earnings from continuing operations of 36 cents on $1.4 billion revenue. Tne company sold 2.4 million ounces of gold during the quarter at an average realized price of $472 per ounce. NEM got smoked for a 5.88% loss at 54.69.

Barrons released an article this weekend speculating that AAPL could bid for DIS, noting that AAPL CEO Steve Jobs is also PIXR's CEO, and is on Disney's board as its largest individual shareholder. Neither DIS nor AAPL released any news to confirm or deny the rumor, but AAPL traded lower today against the broader market, while DIS was up. AAPL lost .66% to close at 70.99, while DIS gained 1.47% to close at 28.39. PIXR closed higher by 1.96% at 65.06.

For tomorrow, traders will be watching for a continuation of today's equity festivities. So far, the Treasury's heavy supply of debt has been sparing equities, with bonds getting hit as stocks rally. Liquidity analysis would suggest that a reduction in the supply of money should ultimately hurt all markets, while today's action felt more like asset allocation from bonds into stocks. As always, the chart you're trading is the only one that counts, and so while the weakness in bonds is ominous, equity bulls continue to benefit from a rising tape.

Tomorrow will also be my last day posting in the Market Monitor. It was not an easy decision to take, and I'm going to miss you as well as my colleagues enormously. You're in the best of hands here, with a team comprised of analysts who really care and give it their best, every day. May all of your longs rally, your shorts tank, and your option writes expire worthless. A friend and trading mentor wrote something a few years ago that I've had stuck to my second monitor ever since, and I can think of no better a parting quote:

"I'd just like to remind you, that no matter how important trading the market may be in your life, NEVER let it interfere with that which is most important, your loved ones. Now, go give your spouses and kids a hug, and if your Mom and Dad are still around, give them a call to let them know you are thinking of them. Then go see them this weekend and give them a hug too."

New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Amer. Science. - ASEI - cls: 74.56 chg: -0.35 stop: 67.84

ASEI is still struggling with round-number resistance at the $75.00 level but neither is it giving back recent gains. We are suggesting that readers pick their new entry points. A move over today's high (75.50) or a pull back toward the $72.00 region could be used as a new entry point. There hasn't been any new rumors about GE making a bid to buy ASEI in the last couple of days nor has there been any new data about ASEI's short interest. The latest data put short interest at over 15% of the eight-million share float. Our target is the $79.75-80.00 range.

Picked on February 23 at $ 74.05
Change since picked: + 0.51
Earnings Date 02/08/06 (confirmed)
Average Daily Volume = 178 thousand


Ashland - ASH - close: 66.16 change: -0.15 stop: 64.75

Oil-related stocks didn't do so great today after a relatively steep drop in crude oil futures. News that Russia and Iran are making progress on a deal that might avoid a confrontation with the west was seen as good news today. Plus, there was more news on the recent attack on a major Saudi oil facility. What's interesting here with ASH is that the stock did not see much profit taking. Shares dipped but were on the rebound this afternoon. Meanwhile the OIX oil index fell 1.1% and the OSX oil services index slipped 2.4%. Our strategy with ASH still stands. We're suggesting a trigger to buy calls at $67.05. If triggered then we'll target a rally into the $72.00-72.50 range.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 689 thousand


Beazer Homes - BZH - close: 64.11 change: -1.33 stop: 62.65*new*

Economic data out this morning was not positive for the homebuilders. New home sales fell about 5% in January. Naturally the markets reacted negatively to the report but January is not normally a strong month for home sales. What you may have not heard is that sales for December were revised higher. We have been somewhat cautious with BZH lately and remain even more so now. Odds are looking pretty good that BZH will retest the simple 200-dma now at $62.71. We hate to do it but we're going to lower our stop loss to $62.65 placing it under the 200-dma. More conservative traders may just want to exit early right now and limit your losses you can always re-enter should BZH rebound over the $66 or $67 level again.

Picked on February 15 at $ 65.05
Change since picked: - 0.94
Earnings Date 01/19/06 (confirmed)
Average Daily Volume = 1.2 million


Cephalon - CEPH - close: 80.68 change: +4.28 stop: 74.99 *new*

The biotech sector helped lead the rally today. The BTK index rose 1.65% and closed at new multi-year highs. Helping lead the way was CEPH. An analyst firm upgraded CEPH to a "strong buy" this morning and the stock responded with a 5.6% gain on above average volume. The MACD on its daily chart has confirmed its buy signal and today's close over the $80.00 level is a bullish breakout. Our target is the $82.00-82.50 range but traders may want to seriously consider taking some profits right here or significantly tightening your stop loss. We're going to put our stop at $74.99.

Picked on February 23 at $ 76.65
Change since picked: + 4.03
Earnings Date 02/14/06 (confirmed)
Average Daily Volume = 2.5 million


Chico's FAS - CHS - close: 47.32 change: -0.09 stop: 45.89

CHS under performed the market today. The stock churned sideways to down while the broader indices and the retail index turned higher. Maybe it's nervousness over CHS' earnings report. Our plan is to exit on Tuesday afternoon near the closing bell to avoid holding over the Wednesday earnings announcement.

Picked on February 14 at $ 47.61
Change since picked: - 0.29
Earnings Date 03/01/06 (confirmed)
Average Daily Volume = 1.8 million


Cigna - CI - close: 123.68 change: -0.89 stop: 119.90

CI gave us a scare this morning with a gap down to open at $121.75 but the move proved to be a new bullish entry point as traders quickly bought the dip. We could not find any specific news to account for this morning's weakness. We don't see any other changes from our weekend update. Most of the technicals and the P&F chart are bullish. We are going to suggest bullish call positions in CI in the $123-126 region. Our short-term target is $129.75-130.00.

Picked on February 26 at $124.57
Change since picked: - 0.89
Earnings Date 02/08/06 (confirmed)
Average Daily Volume = 944 thousand


F5 Networks - FFIV - close: 68.78 chg: +1.62 stop: 63.85

Technology stocks were bullish today and the NASDAQ composite appears to have broken out to the upside from its recent consolidation. This helped FFIV power to a new relative high after traders bought the dip this morning near $66.30. Volume came in pretty strong again. We plan to exit in the $69.95-70.00 range. More aggressive traders may want to aim higher say the $72.50-75.00 region.

Picked on February 26 at $ 67.16
Change since picked: + 1.62
Earnings Date 01/19/06 (confirmed)
Average Daily Volume = 1.0 million


Google Inc. - GOOG - close: 390.37 chg: +12.97 stop: 358.00*new*

Monday proved to be a positive day for GOOG shareholders. The stock launched higher and by the closing bell it rang up 3.4% in gains. Volume was a little bit below average but we're not complaining. However, what we do notice is that the rally stalled right under its simple 100-dma currently near $392. The high today was $391.70. More conservative traders may want to seriously consider exiting right here, especially since GOOG is relatively close to our target at $394.00. We're going to raise our stop loss to $358. Very aggressive traders may want to aim higher but we'd expect resistance at the $400.00 mark and the bottom of its gap down near $406.00 and again at its 50-dma now at $413. Please note that GOOG has an analyst meeting on Thursday, March 2nd.

Picked on February 16 at $366.46
Change since picked: +23.91
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 12.4 million


Goldman Sachs - GS - close: 143.82 change: -0.34 stop: 141.45

Broker-dealer stocks were uncharacteristically weak today. The sector index closed fractionally in the red and shares of GS followed suit. GS continues to consolidate sideways but the trend of lower highs, however minor, is bearish. More aggressive traders may want to give GS more room to maneuver and put their stop loss under $140.00. More conservative traders may want to tighten their stops toward the $143.00 level. We're going to leave our stop where it is at $141.45. The Point & Figure chart points to a $169 target. We are only going to target the $149.85-150.00 range.

Picked on February 22 at $145.53
Change since picked: - 1.37
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 3.4 million


Hartford Fin. Srv. - HIG - cls: 83.27 chg: +0.38 stop: 79.95

We see no change from our weekend update on HIG. The stock remains weak and we expect a dip toward $82.00. Earlier we suggested that more conservative traders could have exited near $85 and if you did not you might want to think about exiting early here or at least adjusting your stop loss toward $82.00. We are not suggesting new bullish positions at this time.

Picked on February 14 at $ 82.12
Change since picked: + 1.55
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 1.1 million


MDC Holdings - MDC - close: 62.29 chg: -1.03 stop: 61.15

There is no change from our weekend update for MDC. Today's economic report that said new home sales fell 5% in January pulled MDC to a 1.6% loss. We remain on the sidelines with MDC. Our plan is to catch the next leg higher with a trigger to buy calls at $65.05. If triggered we will target a rally into the $69.50-70.00 range.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/18/06 (unconfirmed)
Average Daily Volume = 856 thousand


Altria Group - MO - close: 72.72 chg: +0.27 stop: 71.85

MO managed a minor bounce today but we remain concerned. Some of the technical oscillators are not looking very healthy. Fortunately, we remain spectators until MO hits our trigger. We want to catch a bullish breakout over resistance at $74.00 and we're suggesting a trigger to buy calls at $74.10. More conservative traders may want to wait for MO to trade over its simple 50-dma (currently 74.29) before initiating positions. If triggered we are going to target the $77.50-78.00 range. We will also keep an eye out for a bounce from support at its rising 200-dma, now at 70.93.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 8.1 million


Occidental Petrol. - OXY - cls: 90.81 chg: -1.57 stop: 85.95

OXY remains volatile. The stock lost 1.69% as crude oil futures turned lower today. Watch for a bounce from the $90.00 level as a potential entry point for new call positions. Our target is the February highs in the $97.50-98.00 range.

Picked on February 21 at $ 92.00 *gap higher*
Change since picked: - 1.19
Earnings Date 05/09/06 (unconfirmed)
Average Daily Volume = 3.4 million


Potash - POT - close: 96.05 chg: +1.58 stop: 89.95

Monday was a bullish day for POT. Before the opening bell the stock was downgraded from a "buy" to a "neutral". This sparked the gap open lower at $93.19 but traders quickly bought the dip, which was near the simple 200-dma, and POT closed the day with a new three-week high on above average volume. The stock looks poised to make a run at our target in the $99.50-100.00 range. As expected the move over $96 today produced a new P&F chart buy signal that now points to a $111 target.

Picked on February 23 at $ 93.05
Change since picked: + 3.00
Earnings Date 04/29/06 (unconfirmed)
Average Daily Volume = 826 thousand


Prudential - PRU - close: 77.48 change: +0.06 stop: 74.59

Monday was not the sort of bullish follow through we would have expected from PRU. The stock broke out over resistance on Friday but there was no follow through today. The overall pattern remains bullish but traders may want to double check their stop loss placement and make sure they're happy with the amount of risk you're taking. Our target is the $82.00-82.50 range. We do expect some resistance near $80.00.

Picked on February 24 at $ 77.10
Change since picked: + 0.38
Earnings Date 02/08/06 (confirmed)
Average Daily Volume = 1.9 million


Total - TOT - close: 126.93 change: -0.73 stop: 124.95

There are no real surprises here. We've been telling readers to look for a dip back toward the simple 200-dma, now at 126.21, as a new bullish entry point. We would actually wait for a bounce from $126.00 before initiating new positions instead of going long on the dip. More conservative traders may want to wait for a move over $130.00 or its 50-dma before initiating plays. Our target is the $137.00-140.00 range.

Picked on February 16 at $127.61
Change since picked: - 0.68
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 836 thousand


Tenaris S.A. - TS - cls: 160.48 chg: +0.07 stop: 149.95

TS almost hit our target today. The stock gapped open at $164.51 before fading back toward the $160 level. Our target is the $164.00-165.00 range. More aggressive traders may want to aim higher since a move over $165.00 would be a new high and a breakout over its January highs, which could act as resistance.

Picked on February 21 at $156.22
Change since picked: + 4.26
Earnings Date 03/01/06 (unconfirmed)
Average Daily Volume = 516 thousand

Put Updates

Apollo Group - APOL - close: 58.47 chg: +0.38 stop: 60.01

We remain on yellow-alert here with APOL. The bullish market today helped fuel another bounce in APOL and the stock is now testing technical resistance at its simple 50-dma (58.76). If shares push past the 50-dma there is still resistance near $60.00. We would not suggest new bearish positions at this time. Our target is the $53.00-52.50 range.

Picked on February 19 at $ 58.06
Change since picked: + 0.41
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 2.0 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.)


Building Materials - BMHC - cls: 68.94 chg: -3.52 stop: n/a

Good news! BMHC under performed the market and lost 4.8% on very strong volume. Today's decline puts the March $70 puts in the money. We recently adjusted our target to breakeven ($8.20). We are not suggesting new strangle positions. 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. More aggressive traders may want to aim higher.

Picked on December 18 at $ 80.95
Change since picked: -12.01
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 527 thousand


Encana Corp. - ECA - close: 40.50 chg: -1.54 stop: n/a

Weakness in crude oil fueled a sell-off in the oil stocks and ECA seemed only too happy to comply. Shares lost 3.6% and are nearing round-number support at the $40.00 mark. We are not suggesting new strangle positions. Our strangle 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: - 5.06
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million


Loews Corp. - LTR - close: 92.52 change: -0.68 stop: n/a

Volume was huge in LTR today. The stock under performed the market and lost 0.7%. What's impressive is that volume was more than four times the daily average. We are not suggesting new strangle positions. Buying this strangle was a bet that LTR will be trading at more than $102 (above resistance) or less than $88 (under support) by March expiration. The options in our strangle are the March $100 calls (LTR-CT) and the March $90 puts (LTR-OR). Our estimated cost is $1.75.

Picked on February 13 at $ 95.72
Change since picked: - 3.20
Earnings Date 02/16/06 (confirmed)
Average Daily Volume = 513 thousand


Ryland Group - RYL - close: 71.12 change: -0.99 stop: n/a

We do not see any change from our weekend update for RYL. There is still about two months to go before April expiration. There is no way to know where RYL will be two months from now but this rebound may suggest the stock is stuck in a range. More conservative traders might want to consider just exiting early. We are not suggesting new strangle positions at this time. 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: - 3.08
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million

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