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Daily Newsletter, Wednesday, 03/29/2006

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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

Delayed Reaction?

Most market watchers have become accustomed to seeing the initial post-FOMC reaction sharply reversed by the end of the day. That didn't happen yesterday, so some questioned whether the other FOMC-related pattern--a down day the day after the meeting's conclusion--would also fail to appear. It certainly did fail to appear.

As some print articles noted, overseas markets didn't share the pessimism seen yesterday on U.S. bourses. Despite trading in negative territory most of the morning session, the Nikkei 225 broke sharply higher just before the end of the morning session and managed a 248-point gain by the close of the afternoon session. Despite protests that have sprung up across the globe--protesting possible immigration changes in the U.S. and a youth jobs law in France, and campaigning for better conditions among the metal workers in Germany--markets in Europe performed well, too.

Those other bourses foretold gains in the U.S. bourses. The SPX shot higher again, having yesterday hit the bottom of a short-term descending regression channel forming since March 16. The form of that two-week pullback looks like a bull flag. Yesterday's dip retraced between 38.2 and 50 percent of the last rally off the March 8 low, so the pullback has fit that parameter of a bull flag, too. However, RSI highs have been turning down at a descending trendline since November, and that certainly makes technical traders wary when viewing the SPX's current retest of rising wedge resistance.

Annotated Weekly Chart of the SPX:

Strongest resistance appears to be at 1310-1311 with nearest resistance a little lower, at about 1308-1309. Strongest support is at the 72-ema, currently at 1278.08, but nearest support lies at about 1299.50-1302.78 and then at 1294. If the SPX tests one of those resistance levels tomorrow, and the TRAN drops as the SPX tests resistance and rolls down, then cautious short positions might be tried, but only if the TRAN cooperates. Be ready to take profits quickly if there's a rollover, as bulls have not yet been vanquished.

As long as the TRAN climbs or even holds its position near recent highs, the SPX, OEX and Dow are probably not going to retreat far and may even attempt a breakout instead. If the TRAN continues to climb or hold near recent highs, then bulls might try cautious new longs on any dips to the 30-sma, if they're offered.

Annotated Daily Chart of the Dow:

The Dow today faced considerable resistance that lies in the 11,232-11,235 zone and succumbed to that resistance. It still looks strong, with next resistance at 11,299-11,302 and then near 11,305. Nearest support is near 12,220.71 on 30-minute closes, with that support tested near the close. The Dow closed just below that support, but not far enough below to say definitively that it had been broken or to suggest that down looks more likely than up over the very short term. Nearest significant support lies at about 11,165. Below that is support at the 30-sma and then at 11,075. On a Keltner basis, the Dow ended at a neutral level.

Annotated Daily Chart of the Nasdaq:

Nested Keltner channels suggest closest support at 2334.50-2336.45. Other support proves more difficult to define, as the Nasdaq then falls into a congestion zone that should at least slow its descent if not stop it while the Keltner channels show the opposite impression--thinning support after that 2334.50-2336.45 zone. The 2315-2320 zone might offer support, as might the 2307-2308 zone, but with strongest support currently near 2304.63.

Until the Nasdaq closes a 30-minute period below nearest support at 2334.50-2336.45, further climbs might be possible. If the Nasdaq keeps climbing, bouncing from that nearest support, the current Keltner setup suggests 2345-2350 may be next strong resistance. Bulls want bounces confirmed by strong performance on the SOX, and bears want rollovers confirmed by SOX and RUT rollovers, too.

Annotated Daily Chart of the SOX:

Keltner evidence suggests gathering support for the SOX at 501.80-503.64, but the resistance that usually holds it back is currently near 508.73, and the SOX turned down ahead of that resistance this afternoon. The nested Keltner channels do nothing more to clear up the next direction for the SOX than does the traditional charting types.

The day's economic releases began with the Mortgage Bankers Association releasing mortgage applications for the week ending March 10, at 7:00 EST. The headline for that release announced that 30-year fixed-rate mortgages had bumped up to their highest rate in almost four years. That rate was 6.42 percent, having risen from the previous week's 6.31 percent. Points decreased.

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The mortgage loan application volume also decreased, by 0.2 percent on a seasonally adjusted basis. On an unadjusted basis, it was down 20.4 percent when compared to the year-ago level. Some components of the index rose and some fell, as was true of the four-week moving averages, too. Those averages rose 0.1 percent for the Market Index, rose 0.5 percent for the Purchase Index and fell 0.3 percent for the Refinance Index.

Crude inventories were released as usual at about 10:30 EST. Experts expected a build of 950,000 to 1.3 million barrels in crude inventories, and a drop of 1.5 and 1.2 million barrels in gasoline and distillates, respectively. The Department of Energy announced a build of 2.1 million barrels in crude inventories, a drop of 5.4 million barrels in gasoline--the biggest in more than two and a half years--and a drop of 2.5 million barrels in distillates.

None of the numbers matched expectations, with the crude inventories rising more than expected, and the gasoline and distillate inventories dropping far more than expected. Gasoline supplies now move into the area of primary concern with the summer driving season approaching. Crude pumped higher, with equities continuing the drive higher than had begun at the open. Crude closed up $0.38, at $66.45. Whether or not that gain moved it above the latest rising regression channel off the February low remains questionable, but it did break above the January gap.

Despite higher crude costs and the World Organization for Animal Health's revelation of its expectation that avian flu would hit the U.S. this spring, equities moved higher. Not all equities did, however. In its ongoing battle with Microsoft (MSFT), the European Union cautioned the company not to bundle certain search features into Windows Vista, the company's new operating system. If that feature is prepackaged with Vista, the company won't be allowed to sell it in Europe, the E.U. warned. The E.U. also doesn't want the company to include some software-security functions in prepackaged versions. MSFT still managed a 0.44 percent gain.

Google (GOOG) and Symantec (SYMC) were poised to benefit from any decision adverse to MSFT, or at least not suffer any setbacks from a decision that would have allowed MSFT to bundle some functions into Vista. IBM, SUNW and ORCL have also issued formal complaints asking that other functions aren't bundled into Vista. In other action, the European Commission begins closed-door sessions tomorrow, considering whether MSFT has met their March 2004 antitrust order concerning Windows XP.

Other developments included the filing of General Motors' (GM) delayed annual report. The company noted that GMAC's financial results would be restated from 2003 through the third quarter of 2005, and said that a possibility existed that it wouldn't be able to sell the financing arm as it hoped to do. Rumors also surfaced that the company might sell part of its stake in Isuzu. GM closed lower by 2.63 percent.

Other company-related news included a Merrill Lynch upgrade of 3M (MMM) to a buy rating from its previous neutral rating and a Morgan Stanley upgrade of Sun Micro (SUNW) to overweight from its previous underweight rating. UBS downgraded Caterpillar (CAT) to a neutral rating from its previous buy rating. UBS also downgraded Intersoll-Rand (IR). Merrill Lynch noted that MMM's international presence would position it to gain from faster global expansion. Morgan Stanley thought SUNW's cost-cutting efforts would create financial benefits. UBS noted that CAT's stock price was approaching what the firm perceived as fair value for the stock and thought end-market growth was decelerating. Together, CAT and GM contributed to the Dow's underperformance of some other indices while MMM helped it to gain, even if those gains underperformed. CAT dropped 1.60 percent, and MMM climbed 1.65 percent.

In other company-related developments, Boeing benefited from news that it had won an order from GE's Commercial Aviation Services for 30 airplanes. The stock rose 2.15 percent. MEL and AEOS reportedly were also upgraded, and TD Ameritrade (AMTD) raised its guidance. Investors greeted Accenture's (ACN) second-quarter profit decline by sending the stock's price lower.

Other developments were political ones. Reports resurfaced that the U.N. Council would demand that Iran halt its program to enrich uranium.

Tomorrow's economic releases will include Initial Claims, final GDP and the Chain Deflator for the fourth quarter, all released at 8:30 EST. February's Help-Wanted Index will be released at 10:00, with the number expected to inch up to 38 from the prior 37. At 10:30, natural gas inventories should be released. Earnings include those from ACN, BBY, KMX, GLBC and TXI.

Markets were positioned for breakouts tomorrow, having moved right up to next resistance and retaining most of the day's gains. The Nasdaq even managed such a breakout, to a five-year intraday high. It led the pack after some weeks of following, held back as it had been by the SOX. The Nasdaq's breakout today was accompanied by a strong SOX gain, but not a SOX breakout. The SOX remained within a congestion zone it's been building for more than a month. The SOX shows little evidence of which way it will break out of that choppy congestion zone, and the Nasdaq still needs it to maintain breakouts.

Whether the markets break out or roll over will depend not only on the GDP, but the market's reaction to it. Expectations are for 1.6-1.7 percent growth, steady with the prior 1.6 percent, and for a 3.3 percent number for the chain deflator.

The GDP should be important to the markets, but this may be a case when very good news is bad news and very bad news is also bad news. After Tuesday's FOMC decision and the unrevised wording on future rate hikes, bonds dropped and yields moved higher. Today, yields dipped in the morning but then rose strongly again, with some nervousness apparent ahead of tomorrow's GDP number. Yields on the ten-year note rose to 4.81 percent, their highest levels since the fall of 2004. Some interest-rate sensitive indices such as the BIX, BKX and DJUSHB produced doji, clearly in a wait-and-see mode ahead of the end-of-week economic reports.

It's my personal opinion that markets were dealt at least a short-term blow yesterday with the prospect of more rate hikes than had been hoped, but that the known seasonal window-dressing pattern has blunted some of the reaction to that short-term concern. That reaction might be blunted the rest of the week, too, depending on how strong the GDP number might be. If it's too strong or too weak, window-dressing might not be able to prop up the markets, but if it's just right, they might be propped up long enough for bulls to feel that former resistance has been confirmed as support, and it's time to charge higher again. With the SPX right at long-term rising wedge resistance, a pullback seems at least possible, but in the eternal tub-sloshing efforts to push first one and then another index higher, the RUT and Nasdaq now suggest that breakouts are more likely.

There's confusion between the indices and in the kind of technical indicators often studied. Watch the future's reaction overnight and then after the GDP announcement for information as to whether the markets are rolling over under the tested resistance today or gapping higher above it. With several forces producing crosswinds on the markets, be ready to take either bullish or bearish profits too early. This impression is also confirmed by chart setups, with some showing the possibility for chop, as mentioned earlier.

If you're watching the TRAN as an indicator index, as I would suggest doing if trading the SPX, OEX or Dow, note that for much of March, the TRAN has been bouncing off the 60-minute 100/130-ema's. Those averages might be watched for clues as to the TRAN's strength or weakness. If the SPX, OEX and Dow do appear to roll over again tomorrow morning on an adverse reaction to the GDP and the TRAN is also punching lower, watch the TRAN again near those averages. If it bounces again, those other indices are likely to do so, also, and it might be wise to lessen bearish exposure.

If you're counting on a continued bounce or rollover in the Nasdaq, watch both the RUT and the SOX. You want them pulling the same direction.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL None None
COP    
PCU    

New Calls

Apple Computer - AAPL - close: 62.30 chg: +3.59 stop: 57.65

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and iLife and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. (source: company press release or website)

Why We Like It:
Tech stocks really helped lead the market-wide rally today. This helped the NASDAQ composite index breakout through resistance at the top of its three-month trading range and close at a multi-year highs. Given this sort of development we suspect that the oversold bounce in shares of AAPL may have legs. AAPL had drifted toward technical support at its simple 200-dma. This looks like a classic bounce from support. However, volume was extremely high today and we could be witnessing a panic by the shorts. AAPL still has various levels of resistance in the $64.00, 65.00 and $66.00 levels so we would classify this play as an aggressive, high-risk speculation. We have a wide stop loss given the range of today's trading. Our target will be the declining 50-dma. Currently the simple 50-dma is at 68.57. We're going to use a temporary target in the $67.50-68.50 range.

Suggested Options:
We do not want to hold over the April 19th earnings report so we're suggesting April calls.

BUY CALL APR 60.00 QAA-DL open interest=34935 current ask $4.60
BUY CALL APR 62.50 QAA-DZ open interest=16885 current ask $3.20
BUY CALL APR 65.00 QAA-DM open interest=47320 current ask $2.05

Picked on March 29 at $ 62.30
Change since picked: + 0.00
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 34.2 million

---

ConocoPhillips - COP - close: 64.80 chg: +1.05 stop: 61.45

Company Description:
ConocoPhillips is an integrated petroleum company with interests around the world. (source: company press release or website)

Why We Like It:
It's no secret that we're bullish on oil and oil stocks. COP is one of the biggest companies in the sector and their stock just recently broke out higher. Shares had been consolidating under a trend of lower highs since last September. Yesterday the stock broke out over that trendline paving the way for a rally higher. We are going to suggest bullish positions here over $64.00. More conservative traders may feel more comfortable waiting for a move over today's high (65.04) since the $65 level might act as round-number resistance. Our target is the $69.00-70.00 range but we plan to exit ahead of the late April earnings report. Please note that COP is due to complete its acquisition of Burlington Resources (BR) on April 1st. Unfortunately, we do not know if the completion of that transaction will have any adverse impact on the share price of COP.

Suggested Options:
We are going to suggest the May calls.

BUY CALL MAY 60 COP-EL open interest=15014 current ask $6.00
BUY CALL MAY 65 COP-EM open interest=27568 current ask $2.65
BUY CALL MAY 70 COP-EN open interest=14566 current ask $0.85

Picked on March 29 at $ 64.80
Change since picked: + 0.00
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 10.5 million

---

Southern Peru Copper - PCU - close: 82.95 chg: +2.10 stop: 79.95

Company Description:
Our mining operations are located in Peru and Mexico. We own and operate four open pit mines and three metallurgical complexes that make SCC a fully integrated copper producer with significant byproducts of molybdenum, zinc and precious metals. (source: company press release or website)

Why We Like It:
We are bullish on some of the commodity stocks, especially copper. You may remember that Citigroup recently joined the bulls after a much publicized reversal of opinion. Shares of PCU have been consolidating in a two-month trend of lower highs inside its larger bullish up trend. The MACD on the daily chart is on the verge of a new buy signal. We want to suggest a trigger at $84.05 to buy calls. This should mark a breakout over this two-month trendline of resistance. More aggressive traders might want to consider jumping the gun if PCU can trade over today's high at $83.50. If we are triggered at $84.05 our target will be the $89.50-90.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting May calls.

BUY CALL MAY 80.00 PCU-EP open interest= 287 current ask $6.20
BUY CALL MAY 85.00 PCU-EQ open interest= 207 current ask $3.60
BUY CALL MAY 90.00 PCU-ER open interest= 119 current ask $1.95

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petrol. - APC - close: 102.65 chg: +1.55 stop: 96.95

Oil stocks turned in a strong session. Investors looked past a rise in crude inventories and reacted to a big draw down in gasoline. The OIX oil index rose 1% and the OSX oil services index rose 1.69%. Shares of APC bounced back above the $102 level and its 50-dma. This looks like a new bullish entry point to buy calls. Our target is the $109.50-110.00 range. We do not want to hold over the late April earnings report.

Picked on March 28 at $102.10
Change since picked: + 0.55
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 2.5 million

---

Burlington NrthSanta Fe - BNI - cls: 82.27 chg: +1.20 stop: 78.99

The rally in the transport stocks lagged behind the rest of the market but not so for railroad shares of BNI. The stock rose 1.48% on decent volume to close above the $82.00 level. This looks like a new bullish entry point to buy calls but more conservative traders may want to wait for a new high. Our target is the $87.50-90.00 range. We do not want to hold over BNI's late April earnings report.

Picked on March 27 at $ 82.51
Change since picked: - 0.24
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Bear Stearns - BSC - close: 139.03 change: +1.48 stop: 131.99

The broker stocks reversed yesterday's weakness and BSC came very close to erasing its own losses from Tuesday. The stock looks poised to breakout over the $140.00 level. Our target is the $144-145.00 range.

Picked on March 24 at $137.65
Change since picked: + 1.38
Earnings Date 06/15106 (unconfirmed)
Average Daily Volume = 1.1 million

---

Deere Co - DE - close: 79.42 change: +0.91 stop: 74.95

Good news. This morning an analyst firm downgraded the heavy machinery sector. While the news affects shares of CAT more than DE investor reaction in DE could have been more bearish. The stock did gap down this morning but traders bought the dip near $78.00. The stock rallied back into the green for a decent gain and looks close to breaking out over the $80 level. Our target is the $84.00-85.00 range. The P&F chart is bullish and points to a $112 target.

Picked on March 22 at $ 77.29
Change since picked: + 2.13
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Grainger W.W.Inc. - GWW - close: 75.63 change: +0.71 stop: 73.95

GWW is inching back toward the top of its short-term trading range near $76.00. We want to catch a breakout over $76.00 but we're suggesting a trigger at $76.51 to buy calls. 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.

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: 143.92 change: +1.59 stop: 140.79

LEH bounced strongly from the market open this morning but it struggled near the $146 level. Volume was well above the daily average on today's rebound but we remain somewhat cautious given the afternoon pull back. The overall long-term pattern remains bullish. Traders can choose to buy calls here or wait for a move over $146.00. We do expect some resistance near $150 but our target is the $153-155 range.

Picked on March 22 at $144.61
Change since picked: - 0.69
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

MedcoHealth - MHS - close: 58.86 change: -0.50 stop: 57.95

MHS is still stuck in its $58-60 trading range. We would not suggest new positions until MHS trades over $60.00 or better yet over Monday's high at $60.64.

Picked on March 24 at $ 60.05
Change since picked: - 1.28
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Nabors Inds. - NBR - close: 70.70 chg: +0.87 stop: 64.99

NBR displayed a little bit of volatility today with a dip back to $69.31 but traders bought the dip and shares broke out over the $70.00 level. This marks the seventh gain in a row. NBR is short-term overbought and due for a pull back. We would expect the simple 50-dma overhead to act as resistance. The $68 level should act as support. Our target is the $74.00-75.00 range. Please note that NBR is set to split 2-for-1 on April 18th. Our post-split target will be $37.00. We do not want to hold over the late April earnings report.

Picked on March 28 at $ 68.85*gap higher*
Change since picked: + 1.85
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 3.7 million

---

Pantry Inc. - PTRY - close: 62.48 chg: +0.37 stop: 58.85

It was a relatively quiet session for PTRY until the afternoon spike higher. Volume was pretty low today. Traders can choose to buy calls here or look for a dip into the $60.50-60.00 region. Our target is the $67.00-68.00 range. We do not want to hold over the late April earnings report.

Picked on March 26 at $ 61.85
Change since picked: + 0.63
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 364 thousand

---

Rio Tinto - RTP - close: 198.99 chg: +3.94 stop: 189.90

RTP almost completely erased yesterday's losses. Some weakness in the U.S. dollar and the market-wide rally helped fuel a big gain in the metal and mining stocks. The XAU index rose 3.4%. Shares of RTP added 2%. Traders might want to add new call positions on a move over $200. Our target is the $210-212 range.

Picked on March 26 at $198.60
Change since picked: + 0.39
Earnings Date 02/06/06 (confirmed)
Average Daily Volume = 326 thousand

---

Schlumberger - SLB - close: 126.80 chg: +2.22 stop: 118.99

It was another strong day for oil stocks and a nice day for SLB. Shares of SLB added 1.78% to close near a new two-month high. We are targeting a rally into the $129.75-130.00 range. The P&F chart is bullish and points to a $144 target. Please note that SLB is due to split 2-for-1 on April 10th. Our post-split target will be the $64.87-65.00 range. We do not want to hold over the April 21st earnings report.

Picked on March 23 at $123.02
Change since picked: + 3.78
Earnings Date 04/21/06 (unconfirmed)
Average Daily Volume = 6.2 million

---

Toyota Motor Corp. - TM - close: 109.26 chg: +1.74 stop: 104.99

TM completely erased yesterday's losses with a 1.6% gain today. The stock is now approaching round-number resistance at the $110 level. Volume continues to be very light, which doesn't suggest a lot of conviction either way. We are not suggesting new bullish 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: + 2.58
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand

---

Tenaris - TS - close: 180.65 chg: +2.56 stop: 177.79

TS did rebound today but the stock pared its gains late in the session. We remain on the sidelines. We are suggesting a trigger to buy calls at $186.75. If triggered we will target a rally into the $198-200.00 range, which is consistent with the bullish P&F chart target.

Picked on March xx at $xxx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/01/06 (unconfirmed)
Average Daily Volume = 553 thousand

---

Valero Energy - VLO - close: 60.33 change: +0.47 stop: 54.49

It was a minor victory today with VLO's close over the $60.00 mark. Volume is improving somewhat. The simple 10-dma appears to be acting as short-term support. We do not see any changes from our previous updates. Our target is the $62.50-63.00 range.

Picked on March 15 at $ 57.55
Change since picked: + 2.78
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Put Updates

Biosite Inc. - BSTE - close: 51.15 chg: +1.33 stop: 52.05 *new*

Watch out! Bears should go on red alert. The stock completely reversed yesterday's losses and Tuesday's breakdown now looks like a bear trap. BSTE still has some resistance overhead but if the market continues to rally higher then odds rise significantly of getting stopped out. We are not suggesting new put positions. We are going to lower our stop loss to $52.05 but more conservative traders might want to try 51.75 or 51.65.

Picked on March 28 at $ 49.75
Change since picked: + 1.40
Earnings Date 03/25/06 (unconfirmed)
Average Daily Volume = 261 thousand

---

Gannett Co Inc. - GCI - close: 59.40 chg: +0.50 stop: 60.65 *new*

We are growing more cautious with GCI as well. The stock rebounded to the top of its short-term trading range and closed over the 10-dma. At this point we would expect shares to test resistance at $60.00 and maybe the $60.50 level. We're going to adjust our stop loss down to $60.65. Don't forget that we plan to exit ahead of the April 12th earnings report.

Picked on March 19 at $ 59.04
Change since picked: + 0.36
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: 47.97 chg: +0.89 stop: n/a

ECA appears to be on the verge of a bullish breakout near $48.50 and its six-month trendline of resistance. 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: + 2.41
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 71.06 change: +0.15 stop: n/a

There was no follow through on yesterday's bearish reversal in RYL. That's bad news for the bears but it may be noteworthy that the homebuilders were some of the worst performers in today's widespread rally. 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).

Picked on January 22 at $ 75.19
Change since picked: - 4.13
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Cleveland Cliffs - CLF - close: 89.76 chg: -0.19 stop: 89.45

Metal and mining stocks rebounded pretty strongly today but not so for shares of CLF. The stock continued to under perform and we were stopped out at $89.45. The MACD indicator on the daily chart looks like it's hinting at a new sell signal. Volume was very strong on today's session.

Picked on March 26 at $ 94.14
Change since picked: - 4.38
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 545 thousand

---

Silicon Labs - SLAB - close: 55.88 change: +5.61 stop: 47.65

Target achieved. This morning before the bell an analyst firm released their opinion that SLAB's first half for 2006 could be positive based on the company's growth into the cell-phone industry's use of FM-tuner chips. The stock soared to close with an 11.15% gain on big volume. Our target was the $54.90-55.00 range. We are closing the play but more aggressive traders may want to keep the play open. The weekly chart suggests that SLAB could reach the $59-60 region. This is a new 18-month high for the stock.

Picked on March 23 at $ 51.05
Change since picked: + 4.83
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 1.2 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Time Frames in Trading Decisions; 'DMI' Indicator

In response to a SUBSCRIBER E-MAIL I was prompted to consider: "Your recent three articles on moving averages, indicators and oscillators made me look at, evaluate and test some of my screening, entry and exit parameters. Still to soon to tell what changes I want to make but I'm liking what I'm seeing.

So here's my next question. For short term/swing trading, what time periods (Example, 1 year, 6 month, 20 day, 5 day, 1 day?) do you recommend for:

1. Identifying trend, support, resistance, chart patterns, etc.
2. Determining entry points based on directional or momentum strategy.
3. Monitoring the trade and determining trade progress and exit points."

MY RESPONSE:
Your question may be a bit too broad or my answer too general for me to nail down what would be a helpful response, but you can always send a follow up e-mail on this, as needed to clarify. You'll note that I tend to use 2, 3, 5, 8, 13, 21 as key time frames, as they're part of the 'fibonacci' number progression.

I tend to take the meaning of 'swing trading' as attempting to capture and profit from the short-term trend, which I define as the 2-3-5 day price swings, although a short-term trend can extend to 8-10 trading sessions.

For me, the short-term trend in practical terms? It's basically the length of time that a 21-day hourly RSI will tend to go from 'overbought' (65-70) to oversold' (35-30) or vice versa, in a market that is experiencing moderate to strong price momentum.

I don't tend to use a moving average on hourly charts, but do use 21 as the 'length' setting for the hourly oscillators like RSI. On daily charts I use the 21-day moving average and 21-day moving average envelopes as most helpful for timing intermediate (2-3 week) price swings. I assume trade ABOVE the 21-day average will tend to have more upside potential than not, and trade BELOW the 21-day average more downside than not.

I use a 13-day RSI most often on daily charts, but like the 21-day stochastic for the Dow Jones Average.

The 50 or 55-day moving average and the 200-day moving average are helpful in terms of seeing the long-term trend. Trade above the 200-day moving average is a good gauge of a long-term uptrend and vice versa as to a downtrend.

On the weekly chart, I tend toward the equivalent 10 and 40-week moving averages. I use an 8, sometimes, 13-week RSI to judge overbought/oversold on a weekly chart basis. MACD is helpful on weekly charts at the 12-26-9 default settings on my TradeStation, which is what the inventor of the study used.

In terms of time, I rely on hourly charts the most to define the short-term trend and look the most at the last 2-5 days worth of data. For the intermediate-term trend of 2-3 week price swings I use daily charts. For the longer-term 2-3 month trend I also use daily charts, but also look at weekly charts.

I look at the intermediate trend, in terms of trading OPTIONS, as the 2-3 week price swings. The 'long-term' trend for me is the 2-3 month dominant trend.

I don't look at definitions of trend, support/resistance, and chart patterns as having particular time duration. I might start looking at prior lows or highs as support and resistance for the past 3-5-8 days then broaden that out to look for prior lows or highs as potential support and resistance for the past 2-3 weeks. That is as far as prior highs or lows.

As far as trendlines, the relevant factor is using the steepest up or down trendline that has 2-3 lows or highs with which to define it. Then look at the next trendline with a less steep slope or angle.

Resistance has been seen such as at the recent top when OEX reached a daily chart trendline drawn through prior highs on the daily S&P 100 chart below. Recent lows found support in the area of prior highs; prior resistance, once broken, 'became' support later on. This thinking was supported by the support found in the area of the 21-day moving average. There was one close under the average yesterday, but as occurred at the early-March low, there was not more than a 1-day close under this key trading average.

A swing trader might buy today's higher opening, with an exit point just under the prior day's low. A minor down trendline is drawn from the top that must be pierced (at 592) to suggest that OEX was going to re-test the previously mentioned trendline drawn through the prior highs and intersecting currently around 597.

The 21-day moving average envelope line, set to float 2.5% above the average and at 605 currently, is where OEX would begin to be 'extended' on the upside, relative to its normal trading fluctuations above/below this average in recent weeks/months.

As with moving averages, I tend to wait for a second consecutive day's close above or below a trendline to 'confirm' a break. An example being the ONE daily close seen in February at the long-term up trendline on the chart above and the low for that move.

An overbought reading in the 65-70 range on the 13-day RSI above was seen in the daily chart and occurred close to the onset of the current short-term (it appears) downside correction. As is typical of up trends, past months downswing lows didn't reach the 'fully' oversold reading typically seen at 35-30 in my RSI.

HOURLY S&P 100 (OEX) CHART:
The hourly OEX chart, which is a 'close up' view of the unfolding chart pattern below, showed a well defined uptrend price channel WITHIN which there were shorter-term term trading swings, with two taking place over 5-6 trading days and one of around 10 days. Hourly trendline breaks are useful in deciding to EXIT a profitable trade. I rely a lot on hourly charts for monitoring trades.

However, within the February 10-day downtrend, there were two trading swings of 3-5 days that a very short-term trader could have captured. Use of 30-minute charts rather than 60 (hourly) can be helpful in trading for shorter durations and objectives.
Use of a 21-period RSI on 30-minute charts remains useful also.

What characterized all the below short-term trends, was that there were fairly well defined up or down trendlines that developed in the course of the Index move. When a trendline got pierced, especially after a reversal at a BIGGER duration trendline (e.g., one measuring 30-60 day durations), the subsequent move was worth trading. In hindsight the below highlighted patterns look easy to define; NOT so easy is figuring out where one trend ends and a (trend) reversal begins WHEN it's happening. But, trendlines do provide a major help in trading in a large number of instances of making swing-trading decisions.

There was not always a higher or lower extreme seen on the RSI that touched the upper or lower lines as I have them set current (35,65), but the tops were at the upper extreme and at the lows the 21-hour RSI approached the lower extreme.

In an intermediate to long-term uptrend a general rule of thumb is to expect more times when an Index or individual stock gets to a fully 'overbought' extreme before there's a short-term top. In a downtrend, expect fewer times for a 'fully' oversold reading to be reached.

THE DIRECTIONAL MOVEMENT INDEX (DMI)

SUBSCRIBER E-MAIL: :
"I would like to see Trader's Corner address about the DMI buy signal; which people commonly use in Charts with some variable like as: ADX (14) 22.... This signal is reliable for Buy?"

MY RESPONSE:
Welles Wilder developed the Directional Movement Index (DMI) and he applied it to the commodity futures markets, which is what he traded. The DMI attempts to provide an indication of how much 'directional movement' (trend) is present and provides a way to compare trends in different markets. You can see that this might be of particular use in commodities markets, which are not as well correlated as stocks and indexes within the stock market. As well, there are more PROLONGED straight up or straight down price swings in commodities driven as they are by supply and demand; e.g., imagine what a freeze does to the coffee or orange crop.

There are 3 component lines to this Indicator and the DMI is seen on the S&P 500 (SPX) chart below. The ADX line (the cyan 'histogram' that looks like the outline of a mountain below) rates the directional movement on a 1 to 100 scale. The HIGHER the ADX line, the MORE that the market is trending and the better candidate it is for use in a 'trend following' system. A very low ADX line at or below 20, indicates a non-trending environment, which has been the case since early this year.

TTwo other lines are generated in the DMI Indicator, DMI+ (green line) and DMI- (the red line). DMI+ measures 'positive' or upward movement and DMI- measures 'negative' or downward movement. A buy 'signal' is given when the DMI+ line crosses ABOVE the DMI- line. A sell 'signal' is when the DMI+ line crosses BELOW the DMI- line. Buy/sell 'signals', but not the first buy in the yellow circle, are noted with up green arrows (buy) or red down arrows (sell). 14 is set as 'length'; this can be any number you wish.

As seems to be suggested in your question, you could decide to take ONLY the buy (DMI+ crosses above DMI-) 'signals' because you see the intermediate to long-term trend as UP. That improves the result in the chart shown above. It should be noted that this Indicator, like Moving Averages, is a 'LAGGING' Indicator. Therefore, as with all lagging indicators, it takes a period of time for rising prices to trigger an upside crossover and a similar period of time for a downside crossover in a downtrend. br>
Use of this Indicator in a strictly 'mechanical' way, will tend to lead to WHIPSAW trading 'signals'; i.e., by the time that a buy signal is given (except for the FIRST one), there is not a big further move before there is an opposite signal. Especially of course in a non-trending or 'trading range' market like we've seen since late last year. HOWEVER, here's where ADX comes in.

Trading results can be dramatically improved by taking ONLY the buy/sell signals when the ADX is ABOVE 20 (a trending market) and not taking crossover type signals with the ADX either falling (see chart above) and especially not with ADX at and below 20.

On this basis the DMI might only suggest taking a handful of trades in a year. This would be OK if you have the discipline to WAIT for just the right conditions. And why not! Not if you care only about ending the year at a decent profit!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

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, 3/25) 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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