Option Investor

Daily Newsletter, Monday, 03/06/2006

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Table of Contents

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

Market Wrap

Monday Blues

After a strong sell off on Friday afternoon I think there were many traders coming into today's market feeling a little nervous about their long positions. And then we woke up to see the futures in the green and a little bounce started in the morning and it looked like we were going to avoid another down day. But alas the buyers were not to be found and the sellers took over again. But all is not lost for the bulls. This looks like it could be just part of a normal pullback so far. As I'll show in the charts, the techs actually look more vulnerable to a deeper pullback than do the large caps.

I (Keene Little) will be filling in for tonight's Market Wrap and I apologize for the brevity of the report as compared to my usual dose of verbosity (is that applause I hear?) but I'll be sure we cover the meat of what we're mostly interested in--the charts--and then I'll wrap it up with what I think the market is up to and what we might expect for tomorrow.

Today was quiet in the way of economic reports.

The big news from the corporate front was the merger and acquisition news about AT&T (T 27.02 -0.97) and BellSouth (BLS 34.47 +3.01) margining. I worked for NY Telephone in 1983 just after the split-up and was to help them redefine themselves and sponsor "intrapreneuership" within the new company. I took them at their word, silly me, and found myself mired in bureaucracy similar to the government. Needless to say the partnership between us didn't last long. So here we are 20-some years later and all the bell companies are coming back together like the liquid metal character on one of the terminator movies. The deal between T and BLS will create the largest telecom company with a market cap of as much as $170B. The purchase gives AT&T full ownership of Cingular Wireless, the number one mobile-phone company in the U.S.


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The news prompted buying of telecoms which was the leading sector to the upside today. Unfortunately they were about the only green sector today as the selling was across the board. Not helping investor mood was the Factory orders report this morning. Even though it fell less than expected, down -4.5% vs. -5.4% expected, it was still another sign of a potentially slowing economy. Many economists were quick to point out evidence to the contrary about a slowing economy (I think some times they feel the need to defend their position rather than report what's really going on). The report had little effect on the market at the time but it was just part of the negative tone for the day.

Bonds continued to sell off today which jacked yields up to new highs. The 10-year closed at 4.74%, the highest it's been since June 2004. The 30-year is up sharply over the past week as well, closing at 4.72%. The yield curve remains inverted from the 6-month rate to the 30-year. This yield inversion may be starting to get investors worried about the banks since the banks have pulled back from a near breakout to new highs.

Gold and oil sold off today and I was thinking that that could be bullish for equities. I'm not sure why they sold off (the pundits say oil dropped because of oversupply concerns so that's as good an excuse as any for traders to take profits in oil) but if there's a chance we'll see easing tensions around the world, the subsiding fear factor may be deflating gold and oil. That would in turn be bullish for equities, unless of course the bulls need that wall of worry to climb over.

So let's get right to the charts so that I can finish this report and get it to you before most of you go to bed.

DOW chart, Daily

The pullback in the DOW looks corrective. What that means to me is that we should be looking for another push higher once the pullback is finished. Natural support for a potential end to the pullback is at its 50-dma (which shows up a lot tonight as potential support across the board) and October uptrend line, both just above 10900. If the DOW breaks much below that then I'd be worried about long positions. Until then we could still be in buy-the-dip mode.

SPX chart, Daily

SPX looks a little closer to support than the DOW. This means either the DOW will hold above support or SPX will briefly break support which is its 50-dma, October uptrend line and broken January downtrend line at 1273-1275. The lower number there would get the DOW closer to 10900. Similar to the DOW, if SPX breaks much below 1270, I'd be worried about long positions. If you have longer term longs, you may want to trim lighten up with a break there. Otherwise look to get long on this pullback since we should press to at least a minor new high (1312.72 Fib target).

Nasdaq chart, Daily

The COMP looks more bearish. It has not been able to recapture its broken October uptrend line and looks like the daily chart is getting ready to roll back over again. The broken January downtrend line, 50-dma and new October uptrend line are at 2278, 2276 and 2272, respectively so potential support is nearby. But the plethora of sell signals and bearish divergences on this index make me want to run away. The whole bounce from the February low is a choppy mess and is a screaming sell signal. This could continue to chop higher if support is found above 2270 but I would use any rallies in this index to unload my tech stocks. I think the coming decline in this one is going to be nasty. Downside target, based on two equal legs down from the January high, is 2225. It's possible though that we'll see the COMP make it down to its uptrend line from October 2002 which is at a lower Fib projection of 2163.

SOX index, Daily chart

The SOX stopped dead at its January downtrend line and has broken below its October uptrend line again. This is usually bearish since the 2nd break is often the real one. Second mouse gets the cheese and all that. But watch 50-dma at 524 for potential support since we could see a bounce back up to the uptrend line near 540. It's even possible the SOX will trace out a sideways triangle type of consolidation which would mean another high is coming. But like the COMP, the number of sell signals and bearish divergences on this index tell me to unload all my tech and semis on any gift of strength.

BKX banking index, Daily chart

With the 10-year yield at highs not seen since June 2004, which most directly affects mortgage rates, especially ARMs, this will tend to choke off new and refinancings which has been a very significant source of income for banks. There was a bad tick that caused that spike down on the chart so ignore that. The actual low today was 105.85 so just above its 50-dma. Do you see what I mean about this 50-dma? It will either provide support for the market and at least give us a good bounce if not new highs, or a break of it, in unison, could give us quite a toilet flush. Next support for the banks though would be its October uptrend line nearing 103.50. My best guess on this pattern is that price will bounce off the uptrend line and make for another minor new high to finish the move up from October. It should then fall hard.

U.S. Home Construction Index chart, DJUSHB, Daily

The home builders do not like rising interest rates either. The number of mortgage applications and refinancings continues to drop and home sales are slowing while inventory is building. Except for hope that things will improve in the spring, there's not a lot to hope for in this sector. I think once spring sales do not show much of an improvement we'll start to see broader recognition that this sector is in trouble. I anticipate we'll see a drop to the trend lines around 835, get a bounce and the break down. That H&S pattern, more easily seen on the weekly chart, has a downside projection near 500 so it's not likely to be just a small pullback.

Oil chart, April contract, Daily

Oil continues to consolidate just above a potential H&S neckline just above $60. The fact that the bounce off the February low looks so choppy and corrective tells me it will very likely fail and we'll see oil back under $60 sooner rather than later. With a neckline break the next support level is the longer term uptrend line near $57 but the downside projection at $50 is a very likely target.

Oil Index chart, Daily

The drop in the oil stocks took price down to its uptrend line from October which could also be a H&S neckline. A break of the February low of 539.37 would likely mean this will head to its 200-dma and longer term uptrend line from January 2005, both near 530.

Transportation Index chart, Daily

Dare I say the TRAN has found a top? Each time I've said it I've been proven wrong but the bearish divergences continue to build at new highs, the final rally leg from the February low is an ascending wedge inside the ascending wedge from the January low and the EW count can count complete at the last high. This one looks like it's toast, done, finit, kaput, start selling your transport stocks. Find a couple of weaker candidates in this index and think about shorting them or buying some long term puts (don't tell Mike Parnos I just recommended a directional trade).

U.S. Dollar chart, Daily

The US dollar didn't quite make it down to either its 200-dma at $89.37 or its 50% retracement of its rally off the January low at $89.42. It's possible we'll see the dollar make one more new low to hit this support level but it looks close to ending its pullback, including by its EW pattern. Unless the dollar drops much below $88.50 I'm expecting the rally to continue.

Gold chart, April contract, Daily

Gold pulled back sharply today and as discussed earlier I'm wondering if some of the fear factor premium is coming out of this. First support is at its 50-dma and November uptrend line at 551. While it's possible we'll see gold consolidate in a sideways move, I'm thinking support will give way and we'll get another sharp drop in gold. I would say short any drop below $550 or a break of its uptrend line and a failed retest.

Results of today's economic reports and tomorrow's reports include the following:

As can be seen in the table above, tomorrow's economic reports are light--revised Productivity and Consumer Credit, neither of which should move the market. Friday should be the first day of importance with the payroll report. Obviously the market wants to see job growth that shows economic growth but not too much to spook the Fed into worrying growth is coming too fast. It's a delicate balance for the market right now.

As I had mentioned earlier, sector action was mostly red today. The only green sectors were telecoms and some internets. Leaders to the downside were the energy indices, gold and silver, utilities, healthcare and SOX. Internals also looked bearish today--down volume and declining issues beat up volume and advancing issues by about 2:1 on both. The 52-week highs continue to beat 52-week lows but the spread between the two measures is narrowing. New highs have been dropping for the past week while new lows have been increasing. Even with a market bounce last week, we see a worsening picture in this new high/new low measure.

As has been typical in this market for so long now, we have divergence between indices. The large caps show the potential to pull back marginally further but then rally to a new high. I do not expect significant new highs but instead only marginal new highs. For example I've been thinking the DOW might rally up to about 10300 and SPX up to 1310-1315. But the small caps (RUT) and techs give me a more bearish feeling here--they look like they're ready to resume a larger decline. For example, I see the possibility for the COMP to lose 100 points before it finds firmer support. That's obviously speculation at this point but that's the potential.

Tomorrow I'm expecting to see a little more downside to finish the leg down from Friday's high, and that's where we could see the DOW and SPX finding support at or above 10900 and 1273, respectively. That support level should be good for a bounce at least. If the techs and small caps are our leading indicator then we should be looking to sell the rallies. But we continue to be in a very choppy price environment, which itself is bearish since we're chopping our way higher and this looks like an ending pattern--part of the topping process the market appears to be going through. The choppy price action is making it difficult for both sides since the whipsaws are brutal for traders. Times will get easier so don't force your trades. Good luck and I'll see you on the Monitor.

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

Ashland - ASH - close: 65.24 change: -0.86 stop: 64.75

Weakness across the market and especially in the oil sector weighed on shares of ASH today. The stock lost 1.3% and its testing support at the $65.00 level (again). We are not suggesting new plays at this time.

Picked on March 03 at $ 67.11
Change since picked: - 1.81
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 689 thousand


Cameco - CCJ - close: 37.91 change: -0.10 stop: 35.29

Our new bullish play in CCJ has been triggered. The stock gapped higher this morning to open at $38.50 and then shares rallied to $39.25 before succumbing to the market-wide selling. Our trigger to buy calls was at $38.51. Currently our stop loss (35.29) is under the simple 50-dma. We are not suggesting new plays at this time. Wait for a new move over $38.50 again before considering new bullish positions. More aggressive traders might want to consider buying calls if we see a bounce from the $36.00 region. Our target is the $42.00-42.50 range.

Picked on March 06 at $ 38.51
Change since picked: - 0.60
Earnings Date 02/01/06 (confirmed)
Average Daily Volume = 2.7 million


Cigna - CI - close: 122.02 change: -1.50 stop: 119.90

Our bullish play in CI is in jeopardy once again. The stock is still churning sideways but shares are testing short-term support near $122.00 and look poised to hit the $120.00 level pretty soon. Considering the weakness in the major indices more conservative traders may just want to bail out early right here. We are not suggesting new bullish positions.

Picked on February 26 at $124.57
Change since picked: - 2.55
Earnings Date 02/08/06 (confirmed)
Average Daily Volume = 944 thousand


Garmin Ltd. - GRMN - cls: 75.21 change: +1.21 stop: 67.75

GRMN continues to display relative strength. The stock hit another new high today and volume came in above average. We could be witnessing a short squeeze. GRMN came within 30-cents of hitting our target in the $77.00-78.00 range. We are not suggesting new bullish positions right here.

Picked on March 02 at $ 72.70
Change since picked: + 2.51
Earnings Date 02/22/06 (confirmed)
Average Daily Volume = 1.2 million


Hartford Fin. Srv. - HIG - cls: 81.79 chg: -0.24 stop: 79.95

We see no change from our weekend update on HIG. We are not suggesting new bullish plays at this time. We'll be looking for a bounce from the $80.00 level as a potential entry point.

Picked on February 14 at $ 82.12
Change since picked: - 0.33
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 1.1 million


Monster Wrldwde - MNST - close: 48.43 chg: -0.55 stop: 47.75

We see no change from our weekend update on MNST. We're suggesting a trigger to buy calls at $50.65. If triggered we will target a rally into the $54.85-55.00 range.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/03/06 (unconfirmed)
Average Daily Volume = 1.7 million


Altria Group - MO - close: 71.50 chg: -0.61 stop: 71.85

We see no change from our weekend update on MO. Shares are still holding above technical support at their simple 200-dma. We are suggesting that traders wait for a breakout over $74.00 and use a trigger at $74.10 to buy calls. If triggered we'll target a rally into the $77.50-78.00 range.

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: 91.60 chg: -3.40 stop: 89.49

Ouch! Heavy-duty profit taking in the oil and oil services sector helped pull OXY from its recent highs. The stock lost 3.5% and is headed for round-number support near $90.00. We are not suggesting new bullish positions at this time.

Picked on February 21 at $ 92.00 *gap higher*
Change since picked: - 0.40
Earnings Date 05/09/06 (unconfirmed)
Average Daily Volume = 3.4 million


Ultra Petrol. - UPL - close: 51.15 change: -3.45 stop: 51.95

We are still on the sidelines with UPL. Our plan called for a trigger to buy calls at $55.05. The weakness in the oil sector has pulled UPL back toward the $50 level. More aggressive traders might want to watch for a bounce from $50.00 as a higher-risk entry point. For now we'll stick to our trigger at $55.05. If triggered then we will target a quick rebound into the $59.50-60.00 range, which is under resistance at the 50-dma. More aggressive traders may want to use a wider stop loss.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/09/06 (unconfirmed)
Average Daily Volume = 1.7 million


Valero Energy - VLO - close: 54.78 change: -1.74 stop: 53.49

There is no change from our weekend update on VLO. We're suggesting a trigger to buy calls at $57.55. If triggered we'll target a move into the $62.50-63.00 range.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = million

Put Updates

Apple Computer - AAPL - cls: 65.48 change: -2.24 stop: 70.11

AAPL is off to a good start with a 3.3% decline today. The MACD on the daily chart has produced a new sell signal. Our target is the $63.00-62.00 range, which should line up with the small head-and-shoulder pattern projection. More aggressive traders might want to aim lower like $60.

Picked on March 05 at $ 67.72
Change since picked: - 2.24
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = million


Intl. Bus. Mach. - IBM - cls: 80.00 chg: +0.04 stop: 81.05

There is no change from our weekend update on IBM. We suspect that the next move will be lower. We're suggesting that traders use a trigger to buy puts at $78.89, under the February low. If triggered then we'll target the $74.00-73.00 range.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/18/06 (unconfirmed)
Average Daily Volume = 6.2 million


KB Home - KBH - close: 64.04 chg: -1.43 stop: 68.05

As we expected the homebuilders continued to sink and shares of KBH hit a new three-month low. The stock also hit our trigger to buy puts at $64.75 opening our play. Our target is the $60.50-60.00 range. Volume on today's breakdown was strong, which is usually a bearish signal.


Picked on March 06 at $ 64.75
Change since picked: - 0.71
Earnings Date 03/22/06 (confirmed)
Average Daily Volume = 1.9 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: 64.54 chg: -4.07 stop: n/a

BMHC broke down to new eight-month lows today and volume was very strong on the sell-off. The March $70 puts (BGU-ON) hit a high of $6.50 and is currently trading at $5.70bid/$6.10 ask. We recently adjusted our target to breakeven at $8.20. More conservative traders may want to think about exiting early to recoup some of their capital. More aggressive traders might even want to aim for a profit. Everything depends on if BMHC continues lower.

Picked on December 18 at $ 80.95
Change since picked: -16.41
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 527 thousand


Encana Corp. - ECA - close: 43.05 chg: -0.86 stop: n/a

We don't see any change from our previous updates. 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: - 2.51
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million


Loews Corp. - LTR - close: 93.89 change: -0.70 stop: n/a

There is no change from our previous updates on LTR. 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: - 1.83
Earnings Date 02/16/06 (confirmed)
Average Daily Volume = 513 thousand


Ryland Group - RYL - close: 67.28 change: -1.15 stop: n/a

The MACD on RYL's daily chart is nearing a new sell signal. 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: - 6.92
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million

Dropped Calls

Potash - POT - close: 93.39 chg: -4.26 stop: 92.49

Enter your favorite cuss word right here: __________! POT was almost to our target late last week but shares took a dive this morning. An analyst firm downgraded the stock to an "under perform" and POT gapped lower to open at $94.71. The selling pushed POT under the simple 200-dma on an intraday basis and hit our stop loss at $92.49.

Picked on February 23 at $ 93.05
Change since picked: + 0.34
Earnings Date 04/29/06 (unconfirmed)
Average Daily Volume = 826 thousand


Total - TOT - close: 124.50 change: -1.89 stop: 124.95

Look out below! Worries about oversupply, and talk about a potential deal with Iran undercut the oil sectors today. TOT has broken down under significant support at the $125.00 level and its simple 200-dma. We were stopped out at $124.95.

Picked on February 16 at $127.61
Change since picked: - 3.11
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 836 thousand

Dropped Putss


Dropped Strangles



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