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Daily Newsletter, Wednesday, 03/15/2006

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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

Moderation in All Things

Yesterday, market watchers credited Goldman Sachs (GS) with producing yesterday's bounce or at least contributing to the exuberance of that bounce. Pre-market this morning, Lehman's (LEH) impending earnings report was blamed for the overnight hesitation in our markets. Before the open, Morgan Stanley had raised GS's price target to $165.00, and all awaited LEH's earnings announcement.

LEH was to beat expectations, but the articles touting LEH's influence had oversimplified the forces at work in the markets. They underemphasized the impact of economic releases to come, especially as they might factor into interest-rate considerations. Yesterday's move higher in the ten-year note had been the biggest gain since December, and with the release of the Beige Book scheduled for the afternoon and the CPI for tomorrow morning, SPX, OEX and Dow traders remained cautious during the pre-market session and morning hours. Those indices at first refused to follow the lead of the transports and the small caps. Yesterday's rise in crude costs also focused attention on the day's inventories number and the energy sector.

Investors were to receive reassuring news on all counts: strong manufacturing numbers, moderating import prices and moderate growth for the economy. "Moderate" was to be the battle cry for the bulls. Once the Beige Book had been released, indices charged higher. Ten-year yields had climbed to a high of 4.751 percent, but began backing off just ahead of the Beige Book release and they moderated afterwards.

When writing the weekend Wrap, I had noted an expectation that Monday and Tuesday could see a continuation of the bounce that had begun at the end of the week, but that Wednesday could be a reversal day. I'd thought that the day could be a consolidating one if not an actual reversal day, and that's what it appeared to be until the Beige Book release. That release was to change the look of the charts.

Annotated Weekly Chart of the SPX:

The Dow, taking its turn lately as the engine that powers the indices higher, stopped cold on next resistance.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The DJUSHB, the Dow Jones Home Construction Index, exhibited the hesitation that was afflicting many indices today. At 7:00 am, the Mortgage Bankers Association released mortgage applications for week the ending March 10. The association noted that the rate for 30-year fixed-rate mortgages had climbed to 6.42 percent, their highest rate since July 5, 2002. Points decreased.

The Market Composite Index inched down 0.2 percent on a seasonally adjusted basis. On an unadjusted basis, the activity fell 20.4 percent when compared to the year-ago level. The Refinance Index, Conventional Index, and Government Index all decreased, by 1.9 percent, 0.1 percent, and 1.4 percent, respectively. The Purchase Index climbed by 1.0 percent, however. Four-week moving averages for the Market Index and Purchase Index increased by 0.1 and 0.5 percent, respectively, while that for the Refinance Index fell 0.3 percent.

Few note this report, however, especially with other economic releases on the agenda. Those reports included the March NY Empire State Index, measuring manufacturing activity. The Index was expected to come in at 18.5-20.00, down from the prior 20.3. That February number was revised to 21.00, and March's showed a whopping gain to 31.2, its highest level since the summer of 2004. Components measuring shipments, unfilled orders and new orders all rose, with the first two of those rising more than they had in a year. Even better news to market watchers was the prices-paid component, as that component tumbled to 40.2 from February's 53.3. Not such good news for those on inflation watch, at least until the release of the Beige Book reassured them, was a sharp increase in the average workweek, to 25.3 from the previous 5.5. The employee index rose to 21.8 from the previous 6.0.

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A tight labor market could contribute to inflation pressures, and markets reacted negatively to that fear last week. However, the Empire State release improved futures for a short time, long enough for some headlines to tout the effect, although the effect wasn't long lasting.

Released at the same time were the Import/Export prices for February. Import prices fell 0.5 percent, and export prices climbed 0.1 percent. Bernanke's warnings about the effect of the deficit on the U.S. economy, covered last night in Jim's Wrap, shone a spotlight on this release, but this report lags others and so is sometimes considered old news.

While some commentators tended to focus on the lower import prices, the sharpest decline in almost two years, export prices did not increase as much as they had in the previous month. That perhaps negated some of the beneficial effect of the decrease in import prices. As Jim explained in last night's Wrap, our products must remain competitive in the global marketplace if we're to ameliorate those record deficits. Import prices were driven lower by declining costs of imported foods, with the 0.5 percent decrease a bit sharper than the forecast 0.4 percent decrease. Petroleum imports are excluded, but natural-gas imports plummeted 18 percent, also contributing to the decline.

Investors in the transportation sector had already decided that the news was all good, and had pressed the TRAN up to a new all-time high ahead of the release of the crude inventories. Railroad stocks were credited with sending the transportation sector higher, with Union Pacific (UNP) in turn credited for sending the railroad stocks higher. Union Pacific raised its first quarter and full-year forecast.

The Energy Department reported the second whopping gain of the day. Those inventories rose 4.8 million barrels for the week ending March 10. Gasoline inventories fell 900,000 barrels, and distillate inventories dropped 3.9 million barrels. The immediate focus was on the larger-than-expected build in crude inventories, with crude costs dropping as a result.

The American Petroleum Institute's release was delayed, and this industry's report differed from the government's. The API showed a build in crude inventories, too, but by 2.2 million barrels, significantly different than the government's 4.8 million number. The API reported gasoline supplies rising 184,000 barrels rather than declining as the government's figures had shown.

An analyst with Moody's Economy.com warned that the last month has seen a significant decrease in refinery utilization due to unexpected shutdowns and other maintenance issues, and that refiners needed to gear up to meet summer gasoline demand. As Jim had warned subscribers to expect last night, the IEA revised lower its estimate for global demand for oil. The agency blamed the higher recent costs for that decrease in demand. However, the Paris-based agency also lowered its estimate for new crude supply, noting that Russian and Nigerian output would slow.

The last economic release of the day was the Beige Book release at 2:00 EST. Investors found the statement that the Fed found no evidence of labor cost pressures reassuring, just as the Fed has been reassuring in recent months that crude costs are not percolating through the economy. While some hear those reassurances with some skepticism, little cynicism appeared in the market's response.

Employment was higher in many regions and sectors. While costs have risen for firms, retail prices have not. Economic conditions remain moderate, and the Fed continues to predict steady and moderate growth for the U.S. economy.

Some company-related reports also contributed to a positive tenor for the day. When Lehman's beat expectations, it also bested any other broker's quarterly profit. Expectations were that the company would earn $3.17 a share, but the company turned in earnings of $3.66 a share, including accounting-change gain of $0.16 a share. Earnings were $1.08 billion on net revenue of $4.46 billion. The company did note that a weakening U.S. mortgage market weighed on fixed-income capital markets revenue, but that revenue still rose 2 percent. The investment-management unit's revenue jumped 33 percent to a record $580 million.

"Moderate" was apparently what market watchers wanted to hear. After a week of ignoring warnings from various Fed governors and Bernanke, that word appeared to spur new gains for the day. Within thirty minutes of the release of the Beige Book, the SPX had hit and climbed above 1300, the TRAN was charging back toward the early morning new record high and would eventually beat it, the Nasdaq was piercing 2300 again, the Wilshire 5000 was hitting a new high, the RUT was within four points of its all-time high, and the BKX was testing its February high. Despite gains for the day, the Nasdaq was perhaps dragged down by the underperformance of the SOX.

Company news today also included an earnings report from Sears Holdings (SHLD), the company formed when Kmart and Sears merged. At $4.03 a share with revenue of $16.06 billion, the earnings beat expectations for $3.62 a share with revenue of $15.99 billion. Pro forma revenue dropped, however, as did domestic comparable store sales.

Dupont (DD) did its share to create a positive bias for the day. The company raised its estimates for its first-quarter adjusted earnings to $0.80 a share, up from the previous $0.70, and raised its 2006 full-year forecast to $2.70, up from $2.60. The company noted better operating performance, while also mentioning weaker European market conditions. DD gapped higher and reached a high of $43.50, although it was to close well off that high at $42.87.

Although not a component of the Dow Jones Industrials, some credited reports that Lockheed Martin (LMT) had received a new contract worth $19.25 billion from the U.S. Army with also helping to boost the industrials. LMT closed higher, but at the opening level, creating a doji for the day's candle.

Network Appliance (NTAP) was the recipient of an optimistic analyst commentary, and SanDisk (SNDK) received an upgrade. Both gapped higher but produced relatively small-bodied candles. Credit Suisse raised Lam Research (LRCX) to an outperform rating and raised its price target to $48, but cut Novellus Systems (NVLS) to a neutral rating. LRCX closed at $45.40, up from yesterday's $43.64 close. Another early morning announcement was news that Kohlberg, Kravis & Roberts (KKR), Wachovia Corp. (WB), Merrill Lynch (MER), General Electric (G) and the Bank of Nova Scotia (BNS) were joining the bidding for GMAC, offering to buy General Motors Acceptance Corp. for a price between $12.5-13 billion. The WSJ reported the offer, but GM denied that the offer was firm and also noted some aspects of the deal that it didn't like. GM posted a high of $22.00 but couldn't hold those gains and closed at $21.50.

Other early morning news included a UBS upgrade of PMC-Sierra to a buy rating, a J.P. Morgan downgrade of Palm Inc. and EchoStar's report that its profit had climbed 13 percent. The WSJ also speculated that the Chrysler unit of DaimlerChrysler (DCX) would reduce health-care benefits for its salaried workers.

Although much of the company-related news was positive, nothing positive could be found in the news that New York state's attorney general Eliot Spitzer had filed suit against H&R Block (HRB). The charges related to the company's Express IRA, a retirement vehicle that the state alleges was marketed fraudulently, had high fees, and proved unsuitable. The interest rate offered on the money market account is lower than the fees, the state claimed, so that the account decreases in value. The company disputes the state's claims. Refco Inc. has also been the subject of a probe, and today news circulated that the broker's problems may extend deeper than had been previously thought.

In other news, Sony (SNE) announced a delay until early November for the introduction of its PlayStation 3. The delay was forced by delays in copy-protection technology for the Blue-ray Disc player the console uses. Some theorized that this development would benefit Microsoft and hurt game makers. RBC Capital started Microsoft, maker of the Xbox 360, at an outperform rating. Some believed that IBM and Chartered Semiconductor, equipment suppliers for the Xbox, could benefit. The Xbox will be released this week in several countries, and SNE's delay gives the Xbox an advantage in gaining market share. MSFT closed at $27.35, leaving both upper and lower shadows but producing that close above yesterday's $27.23 close.

Today's action was mostly positive, but tomorrow's will present a new slate for investors to consider. Tomorrow's economic releases begin with Initial Claims, Building Permits and Housing Starts, and CPI at 8:30 EST. Natural gas inventories will be released at 10:30, followed by the March Philly Fed at noon. Tomorrow evening, the semi book-to-bill number will be released.

Expectations for February's CPI are for a gain of 0.1-0.2 percent, with January's number having jumped 0.7 percent. Core CPI is expected to rise 0.2 percent, following January's 0.2 percent gain. This number could move the markets. Signs of an overheating economy could trouble those who fear that the Fed will go too far with rate hikes, and the coincidence of the Building Permits release and the CPI could remind market participants what's at stake for the residential housing market if the Fed goes too far.

Earnings tomorrow include Bear Stearns', following on the heels of GS and LEH earnings this week.

The SOX has been lagging other indices, having first shown signs of topping, then breaking down, and now lagging other indices. The TRAN, however, an engine driving the SPX, OEX and Dow, charged higher again. Despite some signs that it should be topping, it continues to break to new highs. As I've often repeated, as long as that continues, the SPX, OEX and Dow aren't going to drop too far.

So, market participants face a conundrum, but when hasn't that been true? We have bifurcated markets again, with the Nasdaq not able to move too high with the SOX holding it back and many other indices not likely to drop too low with the TRAN tugging them higher. I use the SOX and TRAN, along with a few other indices, as indicator indices, and when they indicate opposite possibilities, I tend to expect choppy market behavior.

Last weekend, I noted that some of the levels shown in the charts above would be levels to watch for potential rollovers. Now that indices have charged up to those levels, watching for rollovers seems risky, and it is, but these are the levels identified late last week. New heights in the TRAN suggest breakouts more than rollovers, but bulls, at least, need to be watchful of potential rollovers and careful to protect their gains. Would-be shorts might prefer to wait for breakdowns and then retests of broken support to see if it holds as resistance. Those who live and breathe risky behavior might begin watching for those rollovers now while being as ready and willing to accept the possibility for new breakouts.

By the time trading opens tomorrow, we may have a hint of how markets will react, as the CPI will already have been released.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ITT None None
MAC    
SLAB    
SUN    

New Calls

ITT Industries - ITT - close: 53.84 change: +0.34 stop: 51.69

Company Description:
ITT Industries, Inc. supplies advanced technology products and services in key markets including: fluid and water management including water treatment; defense communication, opto-electronics, information technology and services; electronic interconnects and switches; and other specialty products. Headquartered in White Plains, NY, the company generated $7.4 billion in 2005 sales. (source: company press release or website)

Why We Like It:
We like ITT as a technical breakout play. The stock has been consolidating sideways for the last six months in a neutral pattern of lower highs and higher lows. Shares finally broke out from this pennant-shaped pattern yesterday on a surge in volume. Today also saw another strong session for volume. We're going to suggest buying calls here above $53.00. More conservative traders may want to wait for a little more follow through and look for a move over $54.00 before initiating positions. Our target will be the $57.00-58.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the April calls but some readers may want to consider buying Julys if you plan to hold the position right up to ITT's earnings report in late April.

BUY CALL APR 50.00 ITT-DJ open interest= 590 current ask $4.40
BUY CALL APR 52.50 ITT-DX open interest=1185 current ask $2.30
BUY CALL APR 55.00 ITT-DK open interest=1459 current ask $1.00

Picked on March 15 at $ 53.84
Change since picked: + 0.00
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 1.4 million

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Macerich Co. - MAC - close: 73.11 change: +1.60 stop: 69.95

Company Description:
The Macerich Company is a fully integrated self-managed and self-administered real estate investment trust, which focuses on the acquisition, leasing, management, development and redevelopment of regional malls throughout the United States. The Company is the sole general partner and owns an 84% ownership interest in The Macerich Partnership, L.P. Macerich now owns approximately 80 million square feet of gross leaseable area consisting primarily of interests in 76 regional malls. (source: company press release or website)

Why We Like It:
REITs, or real estate investment trusts, as a group, are doing very well. Many of them are breaking out to new highs. We like MAC as a bullish candidate because the stock looks ready to breakout to new highs soon but doesn't yet look overbought. The stock has a bullish trend of higher lows and today's gain was fueled by volume well above its daily average, which is bullish. A glance at the daily chart and it looks like MAC may have an inverse or bullish head-and-shoulders pattern that has formed over the last three months. More aggressive traders may want to go long calls right here. We are going to suggest a trigger to buy calls at $74.05. If triggered we will target a rally into the $79.00-80.00 range.

Suggested Options:
We would suggest the April or June calls.

BUY CALL APR 70 MAC-DN open interest= 7 current ask $4.30
BUY CALL APR 75 MAC-DO open interest= 0 current ask $1.35

BUY CALL JUN 70 MAC-FN open interest=27 current ask $5.30
BUY CALL JUN 75 MAC-FO open interest= 5 current ask $2.40

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 371 thousand

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Silicon Labs - SLAB - close: 50.19 change: +0.18 stop: 45.95

Company Description:
Silicon Laboratories Inc. is a leading designer of high-performance, analog-intensive, mixed-signal integrated circuits (ICs) for a broad range of applications. Silicon Laboratories' diverse portfolio of highly integrated, patented solutions is developed by a world-class engineering team with decades of cumulative expertise in cutting-edge mixed-signal design. The company has design, engineering, marketing, sales and applications offices throughout North America, Europe and Asia. (source: company press release or website)

Why We Like It:
The SOX semiconductor index has broken its bullish up trend but the index is bouncing from support at its 100-dma and psychological support at the 500 level. Should the sector really start to rebound we want to take advantage of it. SLAB has been resistance to selling over the last few weeks and looks poised to breakout to new highs. The daily MACD is near a new buy signal. A move over $51.00 would produce another new bullish P&F chart buy signal. We're going to suggest a trigger to buy calls at $51.05. If triggered we will target a rally into the $54.90-55.00 range. More aggressive traders may want to target the $58.00-60.00 range.

Suggested Options:
We are suggesting the April calls.

BUY CALL APR 50 QFJ-DJ open interest=1822 current ask $2.65
BUY CALL APR 55 QFJ-DK open interest=1073 current ask $0.85

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

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Sunoco Inc. - SUN - close: 79.51 change: +0.10 stop: 74.99

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, approximately 4,800 retail sites selling gasoline and convenience items, approximately 4,500 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. Sunoco is a significant manufacturer of petrochemicals with annual sales of approximately five billion pounds, largely chemical intermediates used to make fibers, plastics, film and resins. Utilizing a unique, patented technology, Sunoco also has the capacity to manufacture over 2.5 million tons annually of high-quality metallurgical-grade coke for use in the steel industry. (source: company press release or website)

Why We Like It:
It looks like SUN's four-week consolidation under resistance at the $80.00 level and its simple 100-dma is about to end. We are going to suggest a trigger to buy calls at $80.26. If we are triggered at $80.26 we're going to target a rally into the $87.50-90.00 range. Currently the P&F chart is bullish and points to a $90 target. More conservative traders may want to plan an exit near $85.00, which could act as round-number resistance. We'll also need to keep an eye on the 50-dma near $82, which could also act as overhead resistance.

Suggested Options:
We are suggesting the April or May calls.

BUY CALL APR 75 SUN-DO open interest=159 current ask $6.70
BUY CALL APR 80 SUN-DP open interest=850 current ask $3.50
BUY CALL APR 85 SUN-DQ open interest=618 current ask $1.65

BUY CALL MAY 80 SUN-EP open interest=1286 current ask $5.00
BUY CALL MAY 85 SUN-EQ open interest=1329 current ask $3.00

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cummins Inc. - CMI - cls: 108.17 change: +2.17 stop: 102.49

Another market rally on Wednesday helped keep the rebound alive in shares of CMI. The stock has now broken out above its simple 10-dma. Our short-term target is the $109.75-110.00 range. The $110 level looks like short-term resistance but more aggressive traders might want to aim higher.

Picked on March 13 at $105.25*gap higher*
Change since picked: + 2.92
Earnings Date 04/20/06 (unconfirmed)
Average Daily Volume = 867 thousand

---

Hartford Fin. Srv. - HIG - cls: 82.99 chg: +0.74 stop: 79.95

HIG continued to bounce for the fourth day in a row. Today's gain was noteworthy only for the above average volume. If you're looking for a new bullish entry point here then we'd wait for a move over $83.75 or a move above its simple 50-dma, currently at 83.94. Our target is the $87.50-90.00 range.

Picked on February 14 at $ 82.12
Change since picked: + 0.87
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 1.1 million

---

Hydril - HYDL - close: 72.91 change: +0.51 stop: 67.99 *new stop

HYDL is still creeping above its simple 50-dma but the rally stalled a bit after crude oil slipped lower and took the wind out of the oil sector's sails. We'd probably not consider new bullish positions right here. Watch for a dip toward $70.75-70.00 as a new entry point. We are raising our stop loss to $67.99. Our target is the $77.50-80.00 range.

Picked on March 12 at $ 70.23
Change since picked: + 2.61
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 289 thousand

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Altria Group - MO - close: 73.87 chg: -0.59 stop: 71.85

MO experienced a little bit of profit taking today and readers might want to use the pull back as a new bullish entry point to buy calls. Our target is the $77.50-78.00 range but more aggressive traders may want to aim higher. The Point & Figure chart points to a $107 target.

Picked on March 14 at $ 74.11
Change since picked: - 0.24
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 8.1 million

---

Toyota Motor Corp. - TM - close: 108.39 chg: +0.35 stop: 104.75

TM traded near its February highs near $108.85 this afternoon before succumbing to some profit taking. The pattern remains bullish but readers might want to watch for a dip toward the $107.50 region as a new bullish entry point. Our target is the $112.50-115.00 range. Traders with a longer-term horizon may want to aim higher.

Picked on March 12 at $106.68
Change since picked: + 1.71
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand

---

Ultra Petrol. - UPL - close: 58.49 change: +2.69 stop: 53.49*new*

UPL shrugged off any relative weakness in the oil sectors and charged higher. The stock broke out over its simple 100-dma and closed with a 4.8% gain on above average volume, both of which are bullish developments. Our target is the $59.50-60.00 range. FYI: the high today was $58.95. We are raising our stop loss to $53.49.


Picked on March 14 at $ 55.05
Change since picked: + 3.44
Earnings Date 05/09/06 (unconfirmed)
Average Daily Volume = 1.7 million

---

Valero Energy - VLO - close: 57.68 change: +1.00 stop: 53.49

We have been triggered in VLO. The stock finally broke out over resistance in the $57.00-57.50 range and hit our trigger at $57.55. Now that the play is open our target is the $62.50-63.00 range. If VLO trades over $58.00 it should produce a new P&F chart buy signal.

Picked on March 15 at $ 57.55
Change since picked: + 0.13
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Put Updates

KB Home - KBH - close: 65.12 chg: -1.33 stop: 68.05

The rebound in the homebuilders is struggling. There was no follow through today and the sector was one of the few to close in the red. Shares of KBH lost 2%. We remain wary and we're not suggesting new bearish positions.

Picked on March 06 at $ 64.75
Change since picked: + 0.37
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.)

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Encana Corp. - ECA - close: 47.40 chg: +0.81 stop: n/a

ECA's rally continues following yesterday's bullish breakout over its significant moving averages. 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: + 1.84
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Loews Corp. - LTR - close: 98.91 change: +0.58 stop: n/a

Time is running out for our speculative, high-risk strangle play in LTR. We have two days left before March options expire. We are not suggesting new strangle positions.

Picked on February 13 at $ 95.72
Change since picked: + 3.19
Earnings Date 02/16/06 (confirmed)
Average Daily Volume = 513 thousand

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Ryland Group - RYL - close: 67.41 change: -1.01 stop: n/a

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: - 7.78
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Cigna - CI - close: 130.98 change: +3.72 stop: 121.90

Target achieved. This morning Prudential reiterated their "overweight" rating on Cigna and raised their price target for the stock from $150 to $160. The positive broker comments helped spark a 2.9% rally in the stock that pushed shares through the $130.00 level. Our target was the $129.75-130.00 range.

Picked on February 26 at $124.57
Change since picked: + 6.41
Earnings Date 02/08/06 (confirmed)
Average Daily Volume = 944 thousand

---

Garmin Ltd. - GRMN - cls: 76.97 change: +1.67 stop: 69.75

Target achieved. Some positive analyst comments helped re-awaken the rally in shares of GRMN. Before the bell an analyst firm reiterated their "buy" rating and raised their price target on GRMN from $80 to $90. This helped fuel a 2.2% gain in the stock price and GRMN hit an intraday high of $77.49. Our target was the $77.00-78.00 range.

Picked on March 02 at $ 72.70
Change since picked: + 4.27
Earnings Date 02/22/06 (confirmed)
Average Daily Volume = 1.2 million
 

Dropped Puts

Unibanco Brasilrs - UBB - close: 83.58 chg: +2.79 stop: 83.26

We have been stopped out of UBB at $83.26. The stock continued to rally after yesterday's bullish reversal. Volume remains low suggesting a lack of conviction on the part of buyers but we remain stopped out nonetheless. The stock should have short-term resistance near $84.00 and then stronger resistance at the $90.00 level.

Picked on March 09 at $ 77.44
Change since picked: + 6.14
Earnings Date 02/16/06 (confirmed)
Average Daily Volume = 755 thousand
 

Dropped Strangles

None
 


Trader's Corner

Moving Averages and 'Optimal' Settings (2)

In my Trader's Corner article of last week I discussed the basic characteristics of the different TYPES (Weighted, Exponential or 'smoothed' and Simple) of moving averages last week, as well as a basic view of the procedure to 'optimize' moving average LENGTHS for most profitable results; that is, assuming you used a two moving average 'crossover' systems to make buy and sell decisions.

For example, testing 5000 days of data for the S&P 100 (OEX) and Nasdaq 100 (NDX) and assuming only a buy the next day after there is an upside crossover (a shorter average crosses ABOVE a slower average on the close) of two Simple Moving Averages (SMA), resulted in a best pair of 6 and 21 for OEX and 7 and 25 for NDX. You can see those charts next and you can go back and see last week's article online by clicking here.

The following OEX daily chart has the two moving averages, 6 and 21 applied to it. Both are Simple Moving Averages. I never use a two moving average 'crossover' as a sole reason to get into calls or puts. However, suppose I liked the signs suggesting that the recent correction had run its course. The Index came to a point where we could draw an up trendline. OEX then rallied back above the 21-day moving average and here the use of the moving average is as an indication of 'resistance'.

We might then wish to use a moving average crossover that has 'tested' well (optimization) on the buy side and wait to buy or perhaps only as a trigger to add to initial OEX call buy. The 6-day SMA crossed above the 21-day SMA only based on yesterday's close, so theoretically the buy indication would have occurred on this morning's (3/15) opening at 589.

We could have anticipated that such a crossover would happen based on the strong move that developed yesterday when OEX opened at 584 and climbed during the day closing over 589, but a more 'subjective' judgment like this might not suit everyone. We could use a 6-day moving average that would give more weight to the most recent close(s) and was more 'objective'.

Using the 'weighted' moving average of my charting application (TradeStation), the upside crossover occurred on the 3/13 close at 584, so the call buy was indicated on the 3/14 OEX Open at 584, which in hindsight improved our entry considerably; not only by the 5 point lower Index value but by the fact that the index options premiums werent as inflated on the opening.

I say 'in hindsight' because that's what it is here. Had we used this set of moving averages as a 'signal' to enter/exit the S&P options over the period since December, there were a number of short-lived crossovers, but on balance the use of the shorter-term WEIGHTED average kept us in more of the move. The last downside crossover was very short-lived, and given the bullish up trendline that was forming, might have been ignored.

Or, in the above example, exit of calls bought down in the 579 area (last upside moving average crossover), might have been done in the 582 area, and retry made at 584. In short, there are many uses of moving averages crossovers short of as a 'mechanical' system, but some stock traders use them successfully just that way. However successful options trading requires a different level of trend sensitivity for the most part.

Let's see where the crossovers of the 7 and 25-day Simple Moving Averages (SMA) are showing us on the Nasdaq 100 (NDX):

Well, as we know the Nasdaq has lagged well behind the S&P and the NDX fell to the low end of its multi-month trading range. The upswing from this recent low is still rather far from achieving a bullish upside crossover of the 7-day Average ABOVE the 25-day SMA.

The NDX held the low end of its trading range and provided the kind of trade entry I am endlessly advocating; e.g., buy on pullbacks to prior well-defined lows and don't wait for upside momentum to develop, rather just assume it may and put a very close-by 'stop' or exit point just under the line of prior support. Still, we could use an upside moving average crossover perhaps as a 'confirming' signal of upside momentum and/or a place where we might add to calls. But that's yet to come on with a moving average CROSSOVER set of two moving averages like this.

Use of a Weighted moving average for the 7-day is closer to a bullish crossover, but it's yet to come also, but is of course nearer to happening as this average, versus the SMA (giving EQUAL weight to the last 25 days' closes), generates more of an upside move based on the strength seen in the last two days.

Since NDX made a triple bottom around 1640, crossed ABOVE 'resistance' implied by the 21-day (Simple) Average and ABOVE the down trendline shown below, it seems that the lagging 'rear-view' mirror analysis provided by moving averages is of limited use as far as an everyday decision tool.


PER MY DISCUSSION OF LAST WEEK:
The advantage of the quicker reacting weighting of a weighted moving average is getting out of a position quicker when the trend momentum, up or down, slows. A principle disadvantage, assuming you are mostly relying on the moving average to get you into or out of a position is being 'whipsawed' and having an increased number of losing trades.

In what can be a more effective use of giving STRONGER weight to the most recent close(s), making it a more 'sensitive' average, is as a tool to exit a trend AFTER a big/prolonged move already.

Get back in the stock or Index only when a quicker reacting indicator and trend analysis suggest getting back in the direction of the dominant trend; and possibly then only for SHORTER-term price objectives. OR, get back in when the intermediate chart pattern (e.g., a break of a major trendline) or OTHER intermediate indicators suggest (e.g., a Moving Average Crossover) suggest that the intermediate trend has reversed.

WEIGHTING IN MOVING AVERAGES:
I usually assume that the weighted moving averages are most appropriate for shorter-term TRADING, where the average transaction is completed in 1-day to 1-week. Simple moving averages, especially in the 50-200 length range, are appropriate for an investment-oriented time frame of longer duration, which is many weeks to months, or as long as a major trend continues; especially if you base a broad 'in' or 'out' of the market based on only when the 50-day average is trading ABOVE the 200-day SMA.

The importance of the exponentially smoothed average will principally be of interest to most users of basic technical indicators because the popular Moving Average Convergence-Divergence indicator or MACD ('macdee'), uses the Exponentially Smoothed method of calculating a price average, which I went into in depth in a prior recent Traders Corner article on use of an exponential average in the MACD oscillator indicator

MOVING AVERAGE TIME PERIODS (LENGTH)-
There have been many questions that I received in the past such as from readers of my past (CNBC.com or Option Investor) columns, as to what moving average length is 'better'. The answer is that it depends on your trading or investing horizon.

A 5 to 21 period 'length' will track the very short-term or minor trends. 9 (or 10), 14 and 20 are fairly common moving average lengths also. You will often see the 'default' number in moving average studies as 9.

I prefer a 21-day moving average as a means of tracking the week-to-week trends and a '21' setting on hourly charts. The result of using 21, versus the more common length setting of 20, is virtually indistinguishable.

Use of 21 would be explained by my fondness for using 8, 13 or 21 as a 'fibonacci' number; i.e., the number series 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc., where each number is the sum of the prior two numbers. I tend to use 8 as my length for moving averages on weekly and monthly stock and index charts and a 21-day (or hour) moving average on daily charts.

For the intermediate or secondary stock trends, there is little question that the 50-day moving average or 10 weeks (5 trading days in a week: 10 X 5 = 50), is a 'convention' or common length setting that is very common for stocks.

The reason for this particular length, versus some other, is partly convention - however, I also think that it is because 50 is 1/2 of 100 in terms of days, and 1/10 of 100 in terms of weeks 100, its fractions and multiples, is a significant number in our decimal system and in trading. I suspect also that 10 weeks is simply long enough to capture the trends in the market that are of intermediate or secondary duration.

For displaying or capturing the long-term (major) trend, the 200-day moving average wins hands down as the single most widely used Simple Moving Average in the Market in general; the 200-day SMA (sometimes the 150-day SMA) is used or noted daily or weekly by many, if not most, investment-oriented stock market participants. Some chart books and commentators refer to equivalent average in weekly terns; i.e., the 40-week moving average.

If you follow my Index Trader columns you will see endless examples of my use of the 21-day moving average as part of moving average 'envelopes'. You will also see many examples where the 21-day moving average appears to define an area of support OR area of resistance in the major stock INDEXES, which I also discussed above with the NDX chart; also the same can be said of the 50-day and 200-day simple moving averages appearing to provide support or define resistance in the stock indices.

I will get into more of a discussion of the topics of moving averages as support/resistance and the use of moving average ENVELOPES in my next Trader's Corner article next Wednesday.

MY INDEX TRADER COLUMN:
This Wed. Trader's Corner article also serves as an adjunct to my weekend 'Index Trader' column. In the article you're reading here I can briefly update a technical picture of the market as of midweek, and then use recent chart/indicator patterns to more fully explain their relevance to trading decisions in general.

More on my specific predictions, support and resistance, etc. is found in my weekend Index Trader column, available on the Option Investor.com WEB site (not part of the e-mailed weekend OI Daily). You will normally see a web LINK to the Index Trader at the top of your weekend Option Investor Daily e-mail, but in the rare event that the link goes missing (as happened this past weekend), my Index Trader can still be found on the OptionInvestor.com web site. My most recent (Sat, 3/11) Index Trader can be seen online by clicking here.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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

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