Option Investor

Daily Newsletter, Wednesday, 03/22/2006

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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

Fits and Starts

Dictionary.com defines "fits and starts" as "repeated bursts of activity." That's what the markets saw Wednesday. Those bursts had produced both declines and bounces. Although the surprise drawdown in inventories predictably produced one move, others seemed less predictable. Jim Brown mentioned in Tuesday's Wrap that this might be a throwaway week, and today was certainly a throwaway day.

With little economic news scheduled Wednesday, Bernanke's Monday night speech already picked apart and the FOMC meeting still ahead next week, market participants had little to guide them. Company-related news dominated pre-market commentary, although many also kept a wary eye on bond yields and metals after yields inverted again Tuesday and silver reached a 22-year high. Futures were mixed, but indicated a flattish opening. Some worried about Microsoft's impact on the markets, with Jim Brown having reported Microsoft's delay of the introduction of its Vista Window's operating system program in Tuesday's Wrap. Some were cheered by earnings reports from various companies. Dow futures were higher, and Nasdaq futures lower.

In fits and starts, indices dropped but then retraced varying percentages of the collapse from yesterday's afternoon highs into today's lows. Relative out-performance in this regard by the big-cap OEX index would look suspiciously like flight to safety, but the RUT almost matched its performance. The mighty TRAN's performance beat the OEX's, with the TRAN driving past yesterday's new high. Two out of the three indicator indices--the RUT, TRAN and SOX--matched or even exceeded the OEX's performance, so bears can't claim a suspicious flight into big caps or blue chips.

By the end of the day, bears were left feeling as if a normal oversold bounce had gotten away from them once again. No resistance level, bearish divergence or technical development has proven trustworthy. Bears were exhausted by running today's sprints in fits and starts, only to be told to go back and start all over again. The day left participants questioning what had happened and which influence was the most important. Many indices ended right back where they'd started Tuesday morning.

Annotated Weekly Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The day's economic releases began when the Mortgage Bankers Association released mortgage applications for the week ending March 17 at 7:00 EST. With the existing home sales due tomorrow and new home sales on Friday, the focus tightens on the residential housing sector. The MBAA's figures showed that mortgage application volume fell 1.6 percent on a seasonally adjusted basis from the previous week. Four-week moving averages for Market, Purchase, and Refinance Indices all eased, while the average interest rate for a 15-year fixed-rate mortgage dropped to 5.99 percent from the previous week's 6.06 percent. Some credited the drop in applications with early weakness in the markets, but then some indices bounced from early lows into the release of crude inventories.

The second release of the day was that crude inventories number. That number showed that supply declined for the first time in six weeks. The Department of Energy reported a surprising decline of 1.3 million barrels in crude inventories for the week ending March 17. Motor gasoline inventories declined 2.3 million barrels, and distillates fell 800,000 barrels, with the decline in gasoline inventories particularly worrisome heading into the driving season. The release noted, however, that gasoline inventories are more than one percent higher than their year-ago level, despite last week's drop.


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Today, the Saudi oil minister assured the world that the current prices weren't hurting the global economy. The minister announced an IPO for the Petrorabigh petrochemical complex, to begin trading by the end of the year, and affirmed the desire for a stable oil market.

Other figures released today showed that OPEC's March production of crude dropped 300,000 barrels below March's due to the known problems in Nigeria. In other developments obliquely related, France and the U.K. stopped consultations with Russia and China in the bid to break a deadlock over what to do about Iran's nuclear program as the U.N. Security Council tries to break that deadlock.

Crude for May delivery bounced after the inventories release, but found resistance at $62.85 and dropped back again to end the day at $61.77, down $0.57. This was a close below the 200-sma at $62.16. As this report was prepared, crude traded at $62.03 in after-hours trading.

Also released today were a couple of economic numbers that may not have attracted much attention. One was the Chicago Fed National Activity Index for February. This index rose to 0.32 from January's 0.28. The component measuring production rose, those measuring consumption and housing fell and that measuring employment was unchanged. The U.S. mass layoffs was also released, showing that February's total of firms reporting mass layoffs dropped when compared to January's as well as to the year-ago level. However, the total number of workers impacted was up from January's number and the number of firms announcing (rather than reporting) layoffs also climbed. The number of factory workers impacted by mass layoffs rose significantly, from January's 29,541 to February's 45,073.

MSFT dropped 2.12 percent today, impacting many indices. In addition to the Microsoft news covered last night, stock-related news that caught attention today included the announcement that GM, auto-part supplier Delphi and the UAW had reached agreements that would hopefully result in the buyouts of 30,000 employees. If approved in bankruptcy court, the deal would be offered to 13,000 hourly Delphi employees and as many as 100,000 GM hourly workers. Up to 5,000 of Delphi's employees would be allowed to return to GM, and GM would also take over some post-retirement benefits for the Delphi employees who return to work for GM. An analyst on CNBC this morning mentioned that up to 36,000 of these workers were nearing retirement, and many believed that it would be likely the company would find 30,000 to accept the buyouts. GM bounced, but couldn't maintain all gains, and closed higher by only 0.04 percent.

Bristol-Myers Squibb Co. (BMY) and Sanofi-Aventis (SNY) benefited from their agreement with Apotex Inc., a Canadian drugmaker. Apotex had been suing to invalidate Plavix's patents so that it could introduce a generic competition, one that has already gained approval by the FDA. Under the terms of the agreement, BMY and SNY will grant Apotex a license and royalty, and Apotex agrees not to market their generic version of Plavix in the U.S. until September 2011 unless another drug-maker invalidates Plavix's patents first. Another company, India-based Dr. Reddy's Laboratories (RDY), already seeks to do just that. RDY has been approached about a possible settlement, too. The agreement reached with Apotex prompted UBS, Citigroup and Merrill Lynch to upgrade Bristol-Myers. BMY gained 10.55 percent, SNY jumped 9.61 percent, and RDY climbed 7.02 percent.

While BMY and SNY were benefiting from their news, Biogen Idec (BIIB) was suffering from news related to its Tysabri drug. The FDA will extend its review of the drug. The company's stock dropped 0.43 percent.

Morgan Stanley's (MS) net income rose 17 percent in its first fiscal quarter, the company reported today. Like some of its peers, the firm reported that investment banking and fixed-income trading helped it achieve record revenues. The stock climbed 2.53 percent. FedEx Corp. also reporting rising profits, by 35 percent in the third quarter, but the company disappointed on its full-year profit forecast. Still, the stock gained 1.07 percent.

ADBE was due to report after the bell this evening, but the report was not yet out as this report was prepared. It's capable of moving the markets, however. Tomorrow's economic releases may have more impact on the markets. They include Initial Claims for the week ending March 18 at 8:30 EST and February's Existing Home Sales, due at 10:00. Many will be watching tomorrow's home sales numbers, as well as Friday's new home sales numbers. Forecasts for existing homes are for 6.40-6.5 million existing home sales, down slightly from the previous month's 6.56 million. Near 10:30, natural gas inventories will be released.

Companies reporting earnings include COMS, BGO, CAG, FDO, GIS, PALM, SCHL, and SLR.

I began this report much more cautiously bullish, but as I conclude it, I find that evidence has remained more on the caution than the bullishness. The TRAN inched just above yesterday's high, but not significantly so, verifying the resistance at that level. The OEX and SPX could not even match yesterday's high, nor could the RUT. The SOX's performance indicates weakness more than strength, and the Nasdaq just coils within a narrowing triangle. Although the TRAN's continuing strength argues that buying dips remains the wisest choice, that dip occurred today and it's too late for new bullish positions with the TRAN currently challenging resistance again. The SOX's behavior argues against buying dips for now, with that opportunity also having been presented already today. I would not be surprised to see some indices push a little higher but could not yet bet that they break out and hold a breakout.

The charts I study tell me that it's almost, but perhaps not quite, as likely that the SPX could drop to 1291-1293 as it is that it might climb to 1312, and that's the problem for all of us trying to interpret charts ahead of the FOMC meeting. Those charts indicate the possibility, if not yet the probability, of a choppy and perhaps doji-type day tomorrow. If you're long, keep moving your stops higher. If you're not long, it's probably too late since the dip you needed for a new entry occurred today. If you're short or decide to enter shorts based on evidence if resistance is tested tomorrow, keep your stops tight and don't let a bounce get away from you. Don't even consider a new short position if the SOX and TRAN drive higher, particularly if the SOX maintains values above its 72-3ma. For now, the strange underpinning of the markets continued, and bears can't do much more than sprint before the bulls take over again.

New Plays

New Option Plays

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

New Calls

Burlington NrthSanta Fe - BNI - cls: 81.10 chg: +1.65 stop: 78.99

Company Description:
Burlington Northern Santa Fe Corporation's subsidiary BNSF Railway Company operates one of the largest railroad networks in North America, with about 32,000 route miles in 28 states and two Canadian provinces. The railway is among the world's top transporters of intermodal traffic, moves more grain than any other American railroad, transports the components of many of the products we depend on daily, and hauls enough low-sulphur coal to generate about ten percent of the electricity produced in the United States. (source: company press release or website)

Why We Like It:
The Dow Jones Transportation index closed at another new all-time record high. Pushing the index higher is strength in the railroads. Shares of BNI rebounded with a 2% gain today although volume was light on the rally. The stock looks overbought on a long-term chart so you'd have to consider this a momentum play. Investors seem to be turning to railroads since trains offer better efficiency than trucks given the price of fuel. Strong demand for commodities across the country is also keeping business strong for the railroad industry. More aggressive traders might want to consider long positions on today's bounce. We are going to wait for a breakout over resistance in the $82.00 region. We're suggesting that traders use a trigger at $82.51 to open new call positions. If triggered we'll target a rally into the $87.50-90.00 range. We do not want to hold over BNI's late April earnings report.

Suggested Options:
We are suggesting the April and May options but our preference is for May strikes so we can hold the position right up to the April earnings date. Our trigger to buy calls is at $82.51.

BUY CALL MAY 80 BNI-EP open interest= 60 current ask $4.00
BUY CALL MAY 85 BNI-EQ open interest=146 current ask $1.70

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million


Bear Stearns - BSC - close: 136.37 change: +3.07 stop: 131.99

Company Description:
The Bear Stearns Companies Inc. is the parent company of Bear, Stearns & Co. Inc., a leading global investment banking, securities trading and brokerage firm. Since 1923, we have helped corporations, institutions, governments and individuals reach their financial objectives. Clients have come to rely on the breadth of our expertise, our commitment to client service and our innovative approach to problem-solving. (source: company press release or website)

Why We Like It:
Morgan Stanley (MS) reported earnings today and beat analyst estimates by a mile. This sparked a strong rebound in the broker-dealer sector, which had seen many stocks in the group consolidate back toward various support levels. Today's bounce in BSC could be used as a new entry point to buy calls, especially given the bullish engulfing candlestick pattern. However, we are going to wait for a breakout over resistance in the $137.00 region. The current high is $137.55 so we're going to suggest a trigger to buy calls at $137.65. If triggered we're going to target a rally into the $144.00-145.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 135 BSC-EG open interest=186 current ask $5.60
BUY CALL MAY 140 BSC-EH open interest=104 current ask $2.95
BUY CALL MAY 145 BSC-EI open interest=122 current ask $1.35

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/15/06 (unconfirmed)
Average Daily Volume = 1.1 million


Deere Co - DE - close: 77.29 change: +0.95 stop: 74.95

Company Description:
John Deere is the world's leading manufacturing of agricultural and forestry equipment; a leading supplier of equipment used in lawn, grounds and turf care; and a major manufacturer of construction equipment. Additionally, John Deere manufacturers engines used in heavy equipment and provides financial services and other related activities that support the core businesses. (source: company press release or website)

Why We Like It:
Both Caterpillar (CAT) and Deere (DE) have been flirting with new highs over the last few weeks. Both have been displaying relative strength over the past few months. We like DE as a bullish candidate because shares are just now bouncing near the bottom of its rising channel. It is noteworthy that the bounce today was not as close to the bottom of its channel as we would have liked it. A better entry point would have been on a bounce near $75.00 and/or its simple 50-dma. However, given the strength in the major market indices today and DE's reaction we may not see a bounce near $75 any time soon. Thus this is a more aggressive, higher-risk entry point. Another risk by opening call positions here is that DE still has overhead resistance in the $79.00-79.40 range. More conservative traders may want to wait for a move over 79.50 or even the $80.00 mark before considering new bullish plays. Our target is the $84.00-85.00 range. The P&F chart is bullish and points to a $112 target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 75 DE-EO open interest= 17 current ask $4.20
BUY CALL MAY 80 DE-EP open interest=149 current ask $1.65

Picked on March 22 at $ 77.29
Change since picked: + 0.00
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million


Grainger W.W.Inc. - GWW - close: 76.00 change: +1.34 stop: 73.95

Company Description:
W.W. Grainger, Inc., with 2005 sales of $5.5 billion, is the leading broad line supplier of facilities maintenance products serving businesses and institutions throughout North America. Through a highly integrated network including nearly 600 branches, 18 distribution centers and multiple Web sites, Grainger's employees help customers get the job done, saving them time and money by having the right products to keep their facilities running. (source: company press release or website)

Why We Like It:
GWW is a bullish breakout play. The stock is breaking from a trading range between $70 and $75.50. Today's session produced a new bullish engulfing candlestick pattern but volume has been very low over the last few days. The low volume is a concern. Therefore we want to see some confirmation that this breakout has legs. We're going to suggest a trigger to buy calls at $76.51. More aggressive traders may want to open positions here or over $76.25. If triggered we'll target a rally into the $79.90-80.00 range. The P&F chart is bullish with a triple-top breakout buy signal pointing to a $90 target.

Suggested Options:
We do not want to hold over the mid April earnings report so we're suggesting April calls.

BUY CALL APR 75 GWW-DO open interest=812 current ask $2.60
BUY CALL APR 80 GWW-DP open interest=553 current ask $0.65

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/15/06 (unconfirmed)
Average Daily Volume = 449 thousand


Lehman Brothers - LEH - close: 144.61 change: +2.62 stop: 140.79

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. The Firm is headquartered in New York, with regional headquarters in London and Tokyo, and operates in a network of offices around the world. (source: company press release or website)

Why We Like It:
A better than expected earnings report from Morgan Stanley (MS) launched a rally in the broker-dealer sector. Shares of LEH had drifted back toward support at its rising 50-dma. Today's bounce from support looks like a great place to consider new bullish positions. Short-term technical oscillators are turning positive and its daily MACD is hinting at a bullish turnaround. Please note that there appears to be bad tick during today's session. Most services will quote that the low today was $140.80. If you look on an intraday chart we don't see LEH trading under $141.40. We're going to stock our stop loss at $140.79. Buying calls right here is a little bit aggressive. LEH still has a short-term trend of lower highs. More conservative traders may want to wait for a move over $145.50 or $146.00 before initiating new bullish positions. We do expect some resistance in the $149-150 region but LEH looks like it has the momentum to breakout higher. Conservative traders may want to exit near $149. We're going to aim for the $153.00-155.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 140 LES-EH open interest=107 current ask $8.10
BUY CALL MAY 145 LES-EI open interest= 95 current ask $4.80
BUY CALL MAY 150 LES-EJ open interest=105 current ask $2.60

Picked on March 22 at $144.61
Change since picked: + 0.00
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million


MedcoHealth - MHS - close: 59.19 change: +0.54 stop: 57.95

Company Description:
Medco Health Solutions, Inc. is a leader in managing prescription drug benefit programs that are designed to drive down the cost of pharmacy healthcare for private and public employers, health plans, labor unions and government agencies of all sizes. With its technologically advanced mail-order pharmacies and its award-winning Internet pharmacy, Medco has been recognized for setting new industry benchmarks for pharmacy dispensing quality. Medco serves the needs of patients with complex conditions requiring sophisticated treatment through its specialty pharmacy operation, which became the nation's largest with the 2005 acquisition of Accredo Health. Medco, the highest-ranked prescription drug benefit manager on Fortune magazine's list of "America's Most Admired Companies," is a Fortune 50 company with 2005 revenues of nearly $38 billion. (source: company press release or website)

Why We Like It:
Drug stocks got a boost today after BMY and SNY settled their legal dispute with Apotex Inc. Market reaction influenced the whole sector and the DRG drug index rose 2% to breakout to new 18-month highs. We suspect that if the DRG drug index continues to rally, now that it has broken out above resistance, then shares of MHS will produce a breakout of its own. Shares of MHS are consolidating sideways under resistance at the $60.00 mark. The stock is already trading near its all-time highs so a breakout over $60 would put MHS in blue-sky territory. We're going to suggest a trigger to buy calls at $60.05. If triggered we'll target a rally into the $64.50-65.00 range. The P&F chart already points to a $68 target.

Suggested Options:
We are going to suggest the May options but we plan to exit ahead of MHS' April earnings report. Our trigger is $60.05.

BUY CALL MAY 55 MHS-EK open interest= 0 current ask $5.60
BUY CALL MAY 60 MHS-EL open interest=75 current ask $2.35
BUY CALL MAY 65 MHS-EM open interest=85 current ask $0.70

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Cummins Inc. - CMI - cls: 107.00 change: +1.68 stop: 103.85

Wednesday's market rebound helped fuel a bounce in shares of CMI and the stock added almost 1.6% on average volume. The overall pattern remains bullish but short-term we're feeling a bit cautious. More aggressive traders might want to use this bounce as a potential entry point. Keep in mind that our short-term target is the $109.75-110.00 range. Aggressive traders may want to aim higher assuming CMI can breakout over the $110 level.

Picked on March 13 at $105.25*gap higher*
Change since picked: + 1.75
Earnings Date 04/20/06 (unconfirmed)
Average Daily Volume = 867 thousand


Hartford Fin. Srv. - HIG - cls: 82.87 chg: +0.82 stop: 79.95

HIG's bounce today erased yesterday's losses but volume on the rally was about average. We would not suggest new bullish entries until HIG can breakout over technical resistance at the simple 50-dma near 83.36. Currently our target is the $87.50-90.00 range.

Picked on February 14 at $ 82.12
Change since picked: + 0.75
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 1.1 million


Hydril - HYDL - close: 74.55 change: +1.79 stop: 69.49

Oil stocks rebounded a little bit today and HYDL out performed most stocks in the group with a 2.4% rebound. Volume was a bit light on the move. More conservative traders may want to plan an exit in the $74.50-75.00 region. Our target is the $77.50-80.00 range.

Picked on March 12 at $ 70.23
Change since picked: + 4.32
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 289 thousand


ITT Industries - ITT - close: 56.53 change: +0.52 stop: 51.69

The good news here is that there was no follow through on yesterday's bearish reversal in ITT. The stock remains near our target and we're not suggesting new positions at this time. We are aiming for a rise into the $57.00-58.00 range.

Picked on March 15 at $ 53.84
Change since picked: + 2.69
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 1.4 million


Macerich Co. - MAC - close: 73.13 change: +0.14 stop: 69.95

The overall pattern remains bullish for MAC but we remain cautious. We are not suggesting new bullish positions at this time. Wait for a new move over $74.15 before considering buying calls. Our target is the $79.00-80.00 range.

Picked on March 16 at $ 74.05
Change since picked: - 0.92
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 371 thousand


Altria Group - MO - close: 73.29 chg: +0.83 stop: 71.85

Wow! We thought for sure that MO would hit our stop loss today. Instead the stock turned higher this morning after one analyst firm raised their price target on MO to $81 a share. Bulls are not out of the woods yet. We would not consider new bullish positions until MO traded back above the $74.00 level. Tomorrow could see a little bit of volatility. MO owns a controlling stake in Kraft (KFT) and KFT rival ConAgra (CAG) is due to report earnings tomorrow morning. Estimates for CAG are at 34-cents a share.

Picked on March 14 at $ 74.11
Change since picked: - 0.82
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 8.1 million


Silicon Labs - SLAB - close: 49.26 change: +1.56 stop: 45.95

The SOX semiconductor index is still under performing but that's not stopping SLAB from rebounding from support near its 50-dma. We're suggesting that readers use a trigger at $51.05 to buy calls. 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. Should SLAB close under its 50-dma we'll drop it as a bullish candidate.

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


Toyota Motor Corp. - TM - close: 108.97 chg: -0.13 stop: 104.75

It was a weak day for the Japanese markets and the NIKKEI's decline was probably influenced by the U.S. market's decline yesterday. TM did slip under the $109 level but we remain bullish although we're not suggesting new call positions at this time. 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: + 2.29
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand


Valero Energy - VLO - close: 57.46 change: +0.63 stop: 53.49

We do not see any change from our previous update on VLO. We are not suggesting new bullish positions in VLO at this time. Our target is the $62.50-63.00 range.

Picked on March 15 at $ 57.55
Change since picked: - 0.09
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million

Put Updates

Biosite Inc. - BSTE - close: 51.00 chg: +0.70 stop: 52.55

We are still on the sidelines with BSTE. The stock bounced today but failed near $52.00 for the second day in a row. We are suggesting a trigger at $49.75 to buy puts since the $50.00 mark is acting as round-number support. The $49.00 level is also support and more conservative traders may want to wait for a breakdown under $49.00 before initiating positions. Our target will be the $45.25-45.00 range.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/25/06 (unconfirmed)
Average Daily Volume = 261 thousand


Gannett Co Inc. - GCI - close: 59.05 chg: -0.07 stop: 61.76

Yesterday GCI produced a bullish reversal but today the stock failed to follow through on the move. That's good news for the bears. Watch for a failed rally near $60.00 or its 10-dma as a new bearish entry point. Our target is the $55.25-55.00 range.

Picked on March 19 at $ 59.04
Change since picked: + 0.01
Earnings Date 04/12/06 (confirmed)
Average Daily Volume = 1.1 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.)


Encana Corp. - ECA - close: 46.30 chg: +0.18 stop: n/a

We do not see any changes from our weekend update on ECA. 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: + 0.74
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million


Ryland Group - RYL - close: 68.08 change: +0.44 stop: n/a

We do not see any changes from our previous updates on RYL. 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: - 7.11
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million

Dropped Calls

Vertex Pharma - VRTX - close: 37.85 chg: -0.10 stop: 37.49

VRTX continued to show relative weakness today. The stock dipped under its simple 50-dma on an intraday basis and we were stopped out at $37.49. Shares did manage to bounce from their lows but VRTX appears to have a precarious grip on support at the 50-dma. Traders might want to keep an eye on VRTX. A breakdown under $36.00 might be considered a bearish entry point. Meanwhile a bounce back above the $40 level could be used as a bullish entry point.

Picked on March 19 at $ 40.56
Change since picked: - 2.71
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 1.5 million

Dropped Puts


Dropped Strangles


Trader's Corner

Moving Averages; Final Article (3)

I've been writing about the use of moving averages in the past two weeks (Wed, 3/8 and 3/15). I'll finish today. The first two articles may be seen in your Option Investor Daily e-mails for those dates, or by going to the OI.com website and viewing the Wednesday 3/8 article by clicking here.

... and the second article (Wednesday, 3/15) by clicking here.

PLEASE SEND ANY COMMENTS OR INDICATE HOW YOU'VE MADE EFFECTIVE OR GOOD USE OF MOVING AVERAGES IN YOUR TRADING. Send e-mails for use in a future Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

I've discussed previously 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; assuming you used a two moving average 'crossover' systems to make buy and sell decisions.

Good results in upside moving average crossovers in suggesting upside momentum was seen by using two Simple Moving Averages (SMA), resulted in a best pair of 6 and 21 for the S&P 100 (OEX) and 7 and 25 for the Nasdaq 100 (NDX) on a daily chart basis.

A more 'sensitive' moving average crossover that is quicker to react was also seen in use of a weighted moving average (WMA) for the shorter moving average and an SMA for the longer. An update of those daily charts follows:

Use of this moving average crossover set led to the resumption of an upside moving average crossover (a buy 'signal') by mid-February, that was only briefly reversed from 3/9 to 3/13. Use of an unweighted simple moving average for the shorter moving average length (6) also led to a brief DOWNside crossover. On balance, this moving average crossover indicator is showing good upside momentum in this Index.

The rally that we've been seeing in the NYSE and S&P listed stocks has not been as strong in the tech-heavy Nasdaq and upside momentum in the Nasdaq 100 (NDX), as suggested by the 7 and 25-day moving averages has faltered some already; at least the shorter weighted moving average (with the 'weighted' average reacting more quickly to the most recent closes), has turned down.

This action is coupled with a failure for an upside penetration of the prior highs around 1700 and for a sustained move above the down trendline on the NDX daily chart below:

If NDX is unable to make much further upside traction, and the shorter moving average crosses BELOW the longer, it will remind us of a significant biggest 'problem' in the use of moving averages in making major trading decisions; or, simply their use in 'defining' the trend, which is the tendency to get 'whipsawed' when an Index or a stock doesn't maintain a trend.

It's time to turn to one of the best uses of moving averages which is simply to provide clues to support and resistance. This use also includes the use of moving average envelopes which can provide some clues as to the possible upper and lower support and resistance areas. More on that shortly... FIRST ...

The S&P 100 (OEX) has been seeing resistance at the trendline shown, connecting the prior price peaks of the past few months. Today it rebounded back to this area and may now get through it. It will be a significant test of the staying power of this rally since OEX is also 'overbought' on a short to intermediate-term basis.

Some encouragement for a continued bullish trading stance is provided by my sentiment indicator, which is suggesting that traders are not going overboard in their activities and in a bullish view of the market. Pivotal near support is at 588, with more major support suggested at the trendline currently intersecting at 582. Key near-resistance remains 595.

The Nasdaq 100 (NDX), has NOT managed to break out above the very important 1700 level, but hasn't broken any significant technical support yet either; it still is finding support on a closing basis either the previously broken up trendline or the pivotal 21-day moving average, which was the case today. NDX is at an important juncture too. To maintain bullish potential in terms of the technical/chart pattern picture, NDX needs to stay above 1663-1668 and eventually manage to achieve a couple of consecutive closes above 1700.

You see examples fairly frequently in stocks, and often in the stock indices, where the most watched 200-day simple moving average acts as a support or resistance area. Often I use the e 50 or 55-day moving average along with the 200-day. And, as long as the 50-day is trading above the 200-day, or vice versa, the direction (shorter above/below the longer average) of the dominant trend is in that direction.

With the S&P 500 chart, when the major trend is predominately up, you may see brief dips below the 200-day SMA but these periods are not months long; more often 1-2 weeks.

If you want to reassure yourself as to the DOMINANT trend, look to see if the 50/55-day moving average continues to trend above the 200-day, which is the case below and true since the 11/9 upside crossover during the period shown in the yellow circle in the SPX chart below:

For the option trader, there are occasionally very useful periods to our bottom line where you can buy Index calls on just about every dip to the 200-day moving average, as is the case with the period shown in the S&P 500 (SPX) Index.

When there finally is a break below the 200-day SMA in the period shown below (September), and a subsequent rebound to the Average that is met with continued selling pressure, it was time to buy puts in the S&P.

There are other periods over many months in a dominant downtrend that were prime time windows to buy puts when an Index even got close to its 200-day average, such as in the period shown for SPX below.

Downside momentum was again 'confirmed' so to speak when the rallies failed to reach the 200-day SMA and then crossed back below the 50-day average (the lighter magenta line). Decisions are not made on the basis of the moving average alone, but the rally failures shy of the average are telling when coupled with indications provided by other indicators (e.g., an overbought RSI) and especially a break of an up trendline.

In individual stocks the usefulness at times of the 200-day moving average in defining potential support or resistance can be even more pronounced, as institutional money mangers often base some of their trading decisions on the price moves above or below the 200-day SMA. Examples from my (Essential Technical Analysis) book are seen below, both being charts of Home Depot (HD):

As I've been saying, the usefulness of other technical tools and patterns to determine the trend and to make trading decisions is compounded when coupled with a study of key moving averages:

I will make this a separate article and separate discussion next time in my Wednesday Trader's Corner.

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, 3/18) Index Trader can be seen online by clicking here.

** 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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