Option Investor
Newsletter

Daily Newsletter, Saturday, 04/01/2006

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

A Prediction That Didn't Come True

"It's going to be a wild day," a television commentator forecast Friday morning. He based his prediction on the number of economic releases and Fed speakers scheduled for the day and on an expected sell bias at the close due to Google's (GOOG) addition to the S&P 500. As Jim Brown noted in an email, GOOG's addition meant that funds had to buy 18 million GOOG shares and sell $7 billion dollars of their existing positions in S&P 500 companies.

Added to the mix was the expected bullish bias of window dressing, somewhat volatile crude prices and an announcement that auto-parts-supplier Delphi was asking a judge to throw out its labor contract. Company-related news had not been entirely positive in the pre-market session, with Cognos (COGN) disappointing and Dow Chemical (DOW) receiving a downgrade from Prudential.

Overnight action on foreign bourses and our own futures did little to predict wild action. The Nikkei coiled around the flat-line level all night. Until the open of U.S. markets, the DAX churned in a 40-point range just below the flat-line level. Our futures had dipped with the European open, but not far. Although the SPX futures lagged the others, Nasdaq and Dow futures were near fair value again thirty minutes before the open, not reacting much to February's Personal Income and Spending numbers released at 8:30 EST. Futures were right and the commentator was wrong: that early prediction for a wild day didn't turn out to be true.

An early bounce was met with selling, but the selling was fairly orderly, if relentless, all day in the SPX, OEX, and Dow. The RUT and TRAN perhaps proved more volatile, although perhaps it would be a stretch to term their churning actions wild, either, unless viewed through the narrow lens of a five-minute chart. At the end of the day, most indices showed modest losses, with some, such as the RUT, showing modest gains, but with headlines able to crow about a quarter that ended in the black. Despite the down day, the S&P 500's first quarter was the strongest in seven years, a Marketwatch.com article noted, and the Dow's, its best since 2002.

Bond traders didn't think much had happened, either. The yield on the ten-year note closed at 4.85 percent, showing only a two-thousandth difference with Thursday's close. Despite the reassurance offered by economic numbers that showed tame wage-inflation, the steadiness in the ten-year's yield validated the thought that Friday's action had not accomplished much and markets were in a wait-and-see mode ahead of next week's data.

Along with the pressure due to GOOG's addition, the failure of this yield to retreat much probably also pressured the markets. In addition, after first dipping, crude prices bounced ahead of the weekend and on continued geopolitical concerns and closed at $67.93 after Thursday's $68.33 close.

The SPX retreated this week, but the retreat was modest and the index managed another weekly close above the 10-week moving average.

Annotated Weekly Chart of the SPX:

Wednesday's Wrap noted some resistance levels that might prompt a rollover but suggested that as long as the TRAN was either climbing or trading sideways, the SPX, OEX and Dow weren't likely to fall far. The TRAN tends to lead those indices.

Daily Keltner channels suggest the possibility that the SPX may dip toward 1285-1287, while the 30-minute nested-Keltner chart suggests closer support, perhaps at 1292-1293. If the SPX should dip to 1287, watch the TRAN's action to gauge whether buying the dip would be wise or inadvisable. If the TRAN drops strongly, too, caution might be advisable. If the TRAN drops heavily, it might be time to switch to a sell-the-rallies mode. So far, no such TRAN drop has taken place.

If the TRAN does remain strong, those buying the SPX dips should be aware that resistance may be strengthening near 1300, and resistance has been proven at the top of the rising wedge. With important economic releases expected next week, be quick to take offered profits in either direction.

The Dow fell back through the former rising wedge resistance and closed below its daily 30-sma's support on Friday.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner chart suggests that 11,064-11,074 could be tested, but there's bullish divergence on that chart and on the 30-minute nested Keltner channel. The possibility exists that the selling was overdone Friday and that the Dow could bounce back above that daily 30-sma, with that target just overrun. If the Dow can't maintain values above that average, especially if the TRAN is weak, watch for a possible dip to the 50-sma. If the Dow bounces harder, watch the 10-sma for rollover potential unless the TRAN is breaking higher again.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily Keltner chart suggests that it's likely to face rather strong resistance in the 2352-2362 zone. Guard bullish profits if the Nasdaq should bounce into that zone and appear to stall there. Daily RSI does not yet suggest that the movement is overdone to the upside, but upside gains may still be limited, especially without the participation of the SOX. The 30-minute chart shows an equal likelihood that the Nasdaq will bounce up into that resistance zone or drop toward the 2234 first thing Monday morning, with the Nasdaq having created a neutral triangle during Thursday's and Friday's trading. No prediction of next short-term direction is possible with that setup. Watch for the direction of the break, but be wary of that mentioned upside resistance if bullish and of the 10-sma's possible support if bearish.

The SOX has been holding back the Nasdaq, and it continued to do so into the end of the week.

Annotated Daily Chart of the SOX:

Friday's economic releases included February's Personal Income and Spending. One source forecast Personal Income up 0.4-0.5 percent after a prior 0.7 percent gain, but the actual number was a little softer, up 0.3 percent. Real disposable income rose 0.2 percent, the slowest growth in seven months. These numbers did not suggest any upside inflation pressure from wages.

Personal Spending was forecast to climb 0.0-0.1 percent, down from the prior 0.8 percent, and the number came in line with expectations at 0.1 percent. Core inflation figures climbed 0.1 percent and the savings rate was down 0.5 percent, continuing an eleven-month streak of negative savings rates. On a yearly basis, core prices rose 1.8 percent, termed a little hotter than expected by one commentator. While market reaction was muted, futures did rise after this number was reported.

Advertisement

31 Closed Trades; 28 Winners

Jonas Ferris picks good companies whose insiders are buying, too. With this record, it's easy to see that tracking insiders works; now see how we make it easy.

http://www.insidermoves.com/default.asp?aid=887

The University of Michigan's March Consumer Sentiment and Factory Orders for U.S.-made manufactured goods were next on the economic calendar. The Consumer Sentiment index rose more than the expected 86.9 number, to 88.9. February's Consumer Sentiment had been 86.7. Some were perplexed by the timing of the rise in sentiment, given the concurrent rise in gasoline prices, but the expectations and current conditions components both increased.

Factory orders disappointed, rising only 0.2 percent when they had been expected to rise 1.4 percent after January's revised 3.9-percent drop. Shipments, orders for core capital goods equipment and inventories fell, and unfilled orders rose. The drop in crude prices in February was at least partly responsible for the drop in the value of shipments since no adjustments are made for price changes. Transportation orders jumped 13.6 percent, driving orders for durable goods higher, too, but new orders dropped 2 percent when transportation orders were excluded. Some economists opined that this number would do little to impact rate-hike decisions, particularly with the ISM number that's due next week being considered of more importance.

The Chicago PMI also gave a glimpse of what the ISM might report next week and perhaps one in which many invested more trust. March Chicago PMI increased to 60.4 percent, up from February's 54.9 percent. The 50 percent level is a boom-or-bust level for this figure, with the majority of businesses reporting improving conditions when the number is over 50 percent. Components that rose included new orders, to 62.2 from the previous 54.9 percent, and employment growth, to 55.6 from the previous 54.9 percent. Prices paid eased to 71.1 from the previous 71.6 percent. Predictions for Monday's ISM had been from 57.7-58.0 percent prior to the release, but afterwards some were predicting numbers as high as 59.0 percent.

Company-related news dominated news reports Friday, with Delphi's decision domineering. Delphi reportedly took the drastic step of asking that union contracts and some GM contracts be set aside after the United Auto Workers rejected the company's latest demand for wage and benefit cuts. (Note: This report discusses developments without taking the side of either the union or the company. Nothing here is said in the spirit of a statement favoring one or the other.) Delphi also seeks to rid itself of some GM contracts it deems unfavorable.

One analyst likened Delphi's request to the pulling of the trigger in the company's negotiations with the unions. The UAW perceived it that way, too, immediately commenting that there was no basis upon which to continue talks with the company and charging that the company was misusing the bankruptcy procedure. One immediate effect of Delphi's request, some believe, is to ensure that weeks or months may be required to sort out union and company demands although some would reason that the company's step would hasten a resolution.

GM's CEO Rick Wagoner was not happy with the development but said that it was an anticipated possible step, and an analyst on CNBC concurred that GM could suffer from the Delphi development. Delphi's cost-trimming steps could subject GM to taking on more costs and charges. GM did drop to a day's low of $20.34, but rebounded to close $0.21 higher.

Delphi also announced that it could cut about 8,500 jobs across the globe, freeze the current hourly pension plan on October 1 and current salaried pension plan on January 1 of next year. Delphi will eliminate some product lines and trim the number of executives.

Other company news included GOOG's addition to the S&P 500, of course. GOOG traded 36.5 million shares today with the 30-day average volume at 13 million shares. All that volume produced a doji, however, with price changing only 0.40 percent for the day.

In addition to economic releases and company news, many paid attention to what FOMC members might have to say. One of the Fed speakers Friday was Kansas City Fed President Hoenig. As has been mentioned lately by others and covered previously on these pages, he expects the robust rebound of the first quarter to moderate, with his expectation for 3.5 percent growth for the full year. He mentioned an expectation that job growth would slow, too, but feels that the economy is vigorous and that core inflation should remain steady for this year, toward the upper end of the Fed's comfort level. All in all, his take on the economy and inflation trends might have encouraged those who hope for a pause soon, although he made no promises.

Earnings reports slow next week. So do the economic releases, but some of those reports could impact financial markets. That is particularly true when the FOMC has reiterated lately that committee members will be watching data as they make decisions about rates.

Economic reports next week start off with February's Construction Spending and March ISM at 10:00 Monday morning. February's Pending Home Sales will also be released. March Auto and Truck Sales follow, with those numbers expected to take a hit due to fewer fleet sales, according to one headline. Wednesday's reports include March ISM Services at 10:00 and the usual Crude Inventories at 10:30. Thursday's contingent includes the normal Initial Claims at 8:30 and then Natural Gas Inventories. Friday's schedule is busy and potentially market moving, with March's Non-Farm Payrolls, Average Workweek, Hourly Earning and Unemployment Rate at 8:30, February's Wholesale Inventories at 10:00 and February's Consumer Credit at 3:00.

Global developments should not be ignored. Big events in the Eurozone next week include PMI and Service PMI on Monday and Wednesday, respectively. Both are expected to rise, with the accidental release of Germany's PMI on Friday confirming that expectation. February's Retail Sales come on Wednesday, and are expected to slip after January's sharp rise. Here, too, Germany's release preceded that of the Eurozone and showed a softening, confirming Eurozone expectations for next week. Thursday, the ECB meets. No rate change is expected, but as happens here in the U.S., many may be particularly attentive to what is said and how that might impact expectations for their May meeting. An ECB member spoke today, praising the central bank's steps toward stability, keeping inflation risks contained, employment and growth strong, and rates low.

The Bank of Japan's much-watched Tankan survey will be released April 3 (Tokyo). The diffusion indices are expected to rise for large manufacturers, large non-manufacturers and small manufacturers, while that for small non-manufacturers is expected to remain unchanged. Higher costs are not expected to hit profits.

The SPX ended the week between strongest support in the 1283-1287 zone and strongest resistance in the 1307-1311 zone, so not in a good place to establish new positions on either the bearish or bullish side. The best tactic might be waiting until one of those is hit and assessing market conditions, including the TRAN's actions, before initiating new positions. Until the SPX breaks out of the choppy rise that's predominated for two months, selling at the top of the rising wedge and buying on bounces from the 10-week moving average might be best idea around, but with only small positions.

The TRAN's importance as a leading index has been mentioned several times in this article. Last week, the TRAN produced a doji at the top of a climb, but it failed to confirm the potential reversal signal this week. The week's candle was a small-bodied candle indicative of indecision, but it was not a tall red candle confirming an evening-star pattern. For the seventh week in a row, the TRAN has closed a week above a weekly envelope that had always before provided resistance on weekly closes, with that envelop now at 4472.51. The TRAN's performance remains bullish, despite a long-in-the-tooth rally, and bears should continue to exercise caution with bearish SPX, OEX and Dow positions while it is performing bullishly.

In contrast, the SOX continues to show some weakness, and Nasdaq bulls should continue to exercise caution until the SOX shows more strength. The Nasdaq ended the week consolidating above just broken resistance. In contrast to the SOX, the RUT ended the week at yet-another record weekly closing high, also rejecting a confirmation of a possible reversal signal that had been forming. While the sustainability of a Nasdaq rally is in question as long as the SOX remains weak, the RUT's strength argues against too strong a dip in the Nasdaq until the small caps weaken. Mixed evidence such as this can predict choppy behavior.

The three indices that often lead--the RUT, SOX and TRAN--lead different directions, and the indices are pulled different directions, too. The ten-year yields produced a doji, with bonds failing to predict next direction, either. However, some interest-sensitive sectors such as the DJUSHB, BIX and BKX had a rough week. Perhaps they're taking on the leadership role, and we should be watching them instead of the old standards. Keep them on your radar screen, too.

Trade with care next week until all these different market strands line up in closer juxtaposition and expect chop until they do. No indices ended up at strongest support or strongest resistance, so wait until you've got better levels against which to test your play before entering new plays in either direction. If there's a bounce to strong resistance or a dip to strong support ahead of Monday's 10:00 release of the ISM, study the TRAN, SOX and RUT before taking a position.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ACGL BMET None
PNRA TXI  

New Calls

Arch Cap. Grp. - ACGL - cls: 57.74 chg: +0.93 stop: 55.95

Company Description:
Arch Capital Group Ltd., a Bermuda-based company with approximately $2.8 billion capital at December 31, 2005, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries. (source: company press release or website)

Why We Like It:
ACGL appears to be on the verge of a significant breakout near resistance at the $58.00 level. The stock has been consolidating mostly sideways for the past several months. However, what is noteworthy is the stock's relative strength compared to its peer group. Friday's gain was actually a breakout to a new high and volume was above average on the move. We want to see more confirmation before initiating positions. Therefore we're suggesting a trigger at $58.15 to buy calls. If triggered then we'll target a move into the $62.50-63.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We're suggesting the May calls so we can hold the position right up to (but not over) the earnings announcement. June strikes have more open interest.

BUY CALL MAY 55.00 UOZ-EK open interest= 1 current ask $4.10
BUY CALL MAY 60.00 UOZ-EL open interest= 0 current ask $1.10

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/06 (unconfirmed)
Average Daily Volume = 195 thousand

---

Panera Bread - PNRA - close: 75.18 chg: +0.37 stop: 71.95

Company Description:
Panera Bread Company owns and franchises bakery-cafes under the Panera Bread and Saint Louis Bread Co. names. The Company is a leader in the emerging specialty bread/cafe category due to its unique bread combined with a quick, casual dining experience. (source: company press release or website)

Why We Like It:
We realize that our local Panera Bread is not a proxy for the whole company but they certainly do a booming business. Evidently business must be pretty good all over. Remember the Atkins or no carb diets? They appear to be forgotten by the masses. Shares of PNRA are hitting new highs. The P&F chart for PNRA points to a $102 target. We see this as a momentum play and are suggesting calls right here over $74.00. Our target will be the $79.50-80.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 70.00 UPA-EN open interest=1007 current ask $6.80
BUY CALL MAY 75.00 UPA-EO open interest=1420 current ask $3.50
BUY CALL MAY 80.00 UPA-EP open interest=1085 current ask $1.35

Picked on April 02 at $ 75.18
Change since picked: + 0.00
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 458 thousand
 

New Puts

Biomet - BMET - close: 35.52 chg: -0.52 stop: 36.21

Company Description:
Biomet, Inc. and its subsidiaries design, manufacture and market products used primarily by musculoskeletal medical specialists in both surgical and non-surgical therapy. The Company's product portfolio encompasses reconstructive products, including orthopedic joint replacement devices, bone cements and accessories, and dental reconstructive implants; fixation products, including electrical bone growth stimulators, internal and external orthopedic fixation devices, craniomaxillofacial implants and bone substitute materials; spinal products, including spinal stimulation devices, spinal hardware and orthobiologics; and other products, such as arthroscopy products and softgoods and bracing products. Headquartered in Warsaw, Indiana, Biomet and its subsidiaries currently distribute products in more than 100 countries. (source: company press release or website)

Why We Like It:
This oversold bounce in BMET is failing at technical resistance at the simple 200-dma. This looks like a low-risk entry point to buy puts and ride the stock lower for a few points. We are suggesting puts here with a stop loss at $36.21. Our target is going to be the $32.50-32.00 range.

Suggested Options:
We are suggesting the May puts. Our preferred put would be the $37.50 or $35.00 strike.

BUY PUT MAY 37.50 BIQ-QU open interest= 395 current ask $2.70
BUY PUT MAY 35.00 BIQ-QG open interest=1724 current ask $1.30
BUY PUT MAY 32.50 BIQ-QZ open interest= 518 current ask $0.45

Picked on April 02 at $ 35.52
Change since picked: + 0.00
Earnings Date 03/21/06 (confirmed)
Average Daily Volume = 1.8 million

---

Texas Industries - TXI - cls: 60.49 chg: -0.99 stop: 61.35

Company Description:
TXI is the largest producer of cement in Texas and a major cement producer in California. TXI is also a major supplier of construction aggregates, ready-mix concrete and concrete products. (source: company press release or website)

Why We Like It:
TXI is another technical play. On Thursday the stock produced a bearish reversal with a big bearish engulfing candlestick pattern. The move was fueled by the company's earnings report and volume on the reversal was very big. Friday's session was not a strong follow through but the intraday chart shows another failed rally pattern. Meanwhile the daily chart has a new MACD sell signal. We are going to suggest a trigger under Friday's low at 59.25. If triggered then we will target a decline into the $55.50-55.00 range.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 60.00 TXI-QL open interest= 66 current ask $2.90
BUY PUT MAY 55.00 TXI-QK open interest=100 current ask $1.15

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/30/06 (confirmed)
Average Daily Volume = 392 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

SECTION 3 BODY-->

Call Updates

Apple Computer - AAPL - close: 62.72 chg: -0.03 stop: 57.65

Shares of AAPL churned sideways on Friday with its trading range narrowing somewhat into the afternoon. Volume was light. This remains an aggressive, speculative buy the bounce play. AAPL's P&F chart is bearish and points to a $52 target but the stock rebounded pretty sharply on Wednesday from its simple 200-dma. Most of the technical indicators on the daily chart have been stuck in oversold territory and shares were due for a bounce. Traders can choose to buy calls here but it might be better to wait. Look for a dip toward the $60 region and then look for a bounce. We have been aiming for the simple 50-dma but that means we have a moving target. Currently the 50-dma is at $67.85. We're going to adjust our target to the $67.00-68.00 range. More conservative traders might want to tighten their stops closer to the $60 level.

Suggested Options:
We are suggesting the April calls but watch for a dip back toward $60.00. We do not want to hold over the April earnings report.

Picked on March 29 at $ 62.30
Change since picked: + 0.39
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 34.2 million

---

Anadarko Petrol. - APC - cls: 101.01 chg: -1.99 stop: 97.90*new*

A pull back in crude oil prices on Friday sparked some end of the week profit taking in the oil sector. Shares of APC gapped lower and dipped to the $99.91 level before bounce. This actually looks like a potential entry point to buy calls but we would wait for a new move over the $102.00 level before initiating new positions. The P&F chart for APC is bullish with a spread triple-top breakout buy signal pointing to a $121 target. We are aiming for the $109.50-110.00 range. We are adjusting our stop loss to $97.90. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the late April earnings report.

BUY CALL MAY 100 APC-ET open interest=3877 current ask $5.70
BUY CALL MAY 105 APC-EA open interest=1834 current ask $3.40

Picked on March 28 at $102.10
Change since picked: - 1.09
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 2.5 million

---

Burlington NrthSanta Fe - BNI - cls: 83.33 chg: +0.22 stop: 78.99

A dip in oil prices lent some strength to the transports but gains were muted. Shares of BNI closed higher but only after another failed breakout at the $84.00 level. The overall pattern for BNI remains bullish. This past week the stock broke out over resistance in the $82.00-82.50 region to hit new all-time highs. The P&F chart hit a new buy signal and points to a $105 target. We would consider new bullish positions here but traders should be ready for a dip back toward the $80.00 level, which should be round-number support. Our target is the $87.50-90.00 range. We do not want to hold over BNI's late April earnings report. In the news on Friday BNI announced plans to expand rail capacity in Missouri, New Mexico, Texas, Washington, and Wyoming.

Suggested Options:
We are suggesting the May calls but we plan to exit ahead of the April earnings announcement.

BUY CALL MAY 80.00 BNI-EP open interest=428 current ask $5.40
BUY CALL MAY 85.00 BNI-EQ open interest=298 current ask $2.45

Picked on March 27 at $ 82.51
Change since picked: + 0.82
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

---

Bear Stearns - BSC - close: 138.70 change: +0.25 stop: 131.99

The XBD broker-dealer index managed to close in the green on Friday and close near an all-time high. The sector remains positive although the trading action in BSC is starting to look like a short-term top. Short-term technical oscillators for BSC are hinting at a further consolidation, probably toward the $136 region. Yet the stock could bounce at the 10-dma (137.25) or the 21-dma (134.92). We would watch for a dip before considering new bullish positions at this time. Our target is the $144-145.00 range.

Suggested Options:
We like the May calls although we'd watch for a dip before considering new positions.

Picked on March 24 at $137.65
Change since picked: + 1.05
Earnings Date 06/15106 (unconfirmed)
Average Daily Volume = 1.1 million

---

ConocoPhillips - COP - close: 63.15 chg: -1.33 stop: 61.45

After a bullish week COP suffered some profit taking on Friday following a dip in crude oil futures. It looks like the bulls were defending the stock near technical support at the 200-dma (62.65). We would use any bounce above the $62.00 level as a new bullish entry point. More conservative traders may want to wait for a new move over $64.00 before initiating new call positions. Our target for COP is the $69-70 range. The P&F chart for COP is bullish with a triangle breakout and an $82 target. Statistics show that a bullish triangle breakout in a positive market is one of the best performing patterns to trade. Don't forget that COP is due to complete its acquisition of BR this weekend and we don't know if the transaction will have an impact on COP's shares come Monday.

Suggested Options:
We are suggesting the May calls but we plan to exit ahead of the April earnings report.

BUY CALL MAY 60.00 COP-EL open interest=14888 current ask $4.60
BUY CALL MAY 65.00 COP-EM open interest=28249 current ask $1.85

Picked on March 29 at $ 64.80
Change since picked: - 1.65
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 10.5 million

---

Deere Co - DE - close: 79.05 change: -0.73 stop: 74.95

DE displayed relative strength most of the week and the stock hit a new high just under the $80.00 mark so it's not too much of a surprise to see some profit taking on Friday. We would watch for a dip into the $77.50-78.00 region and use it as a new bullish entry point to buy calls. More conservative traders may just want to wait for a breakout over the $80.00 mark. Our target is the $84.00-85.00 range. The P&F chart is bullish and points to a $112 target.

Suggested Options:
We would suggest the May calls but watch for a dip toward the $78 region.

BUY CALL MAY 75.00 DE-EO open interest=157 current ask $5.70
BUY CALL MAY 80.00 DE-EP open interest=875 current ask $2.50

Picked on March 22 at $ 77.29
Change since picked: + 1.76
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Grainger W.W.Inc. - GWW - close: 75.35 change: -0.41 stop: 73.95

We are urging caution here. We were triggered on a morning spike higher this past Thursday but GWW failed to hold the breakout over resistance at the $76.00 level. The short-term technical oscillators are starting to roll over into bearish signals and the MACD doesn't look very healthy on the daily chart. The bottom of GWW's two-week trading range is $74.00. Aggressive traders might want to consider buying a bounce near $74.00. We are suggesting that traders wait for a new move over $76.00 or $76.50. Our target is the $79.90-80.00 range.

Suggested Options:
We are not suggesting new positions with GWW under $76.00. Please note that we do not want to hold over the April earnings report.

Picked on March 30 at $ 76.51
Change since picked: - 1.16
Earnings Date 04/15/06 (unconfirmed)
Average Daily Volume = 449 thousand

---

Lehman Brothers - LEH - close: 144.53 change: +0.99 stop: 140.79

LEH is still consolidating sideways. The stock did out perform the broader market on Friday but shares are stuck between support ($141 and the 50-dma) and resistance. The overall pattern remains bullish for LEH and this looks like an attractive area to consider call positions with shares near support. The MACD indicator on the daily chart is nearing a new buy signal. We are keeping our stop under support near $141. More conservative types might want to play their stop loss closer to the 50-dma near $142.50. We do expect some resistance near $150 but our target is the $153-155 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 140.00 LES-EH open interest=274 current ask $7.80
BUY CALL MAY 145.00 LES-EI open interest=568 current ask $4.60
BUY CALL MAY 150.00 LES-EJ open interest=326 current ask $2.35

Picked on March 22 at $144.61
Change since picked: - 0.08
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

Nabors Inds. - NBR - close: 71.58 chg: -2.20 stop: 68.85

NBR has been in a sharp rally mode for over a week. We are surprised the stock has gone this long without some profit taking so Friday's pull back wasn't too much of a surprise. More conservative traders may want to lock in some profits. We continue to target the $74.00-75.00 range. We would watch for support near $70.00. Don't forget that NBR is due to split 2-for-1 on April 18th. Don't forget that we plan to exit ahead of the late April earnings report.

Suggested Options:
We are not suggesting new bullish positions at this time. Look for a bounce in the $70 region.

Picked on March 28 at $ 68.85*gap higher*
Change since picked: + 2.73
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 3.7 million

---

Southern Peru Copper - PCU - close: 84.48 chg: -0.02 stop: 79.95

Metal and mining stocks turned in a strong week and the group was hit with profit taking on Friday. Fortunately, the bulls were ready and bought the dip in PCU at $82.60. We see the intraday rebound on Friday as a new entry point to buy calls. The P&F chart points to a $102 target. We are aiming for a rally into the $89.50-90.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the late April earnings report.

BUY CALL MAY 80.00 PCU-EP open interest=365 current ask $7.00
BUY CALL MAY 85.00 PCU-EQ open interest=341 current ask $4.20

Picked on March 30 at $ 84.50*gap higher*
Change since picked: - 0.02
Earnings Date 04/24/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Pantry Inc. - PTRY - close: 62.39 chg: +0.36 stop: 58.85

PTRY is still inching higher. The path of least resistance for PTRY seems to be up. However, the momentum has stalled and volume has dried up significantly. While we would consider new bullish positions here a preferable entry point would be a bounce from the $60 region. Our target is the $67.00-68.00 range. The P&F chart points to a $78 target. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 60.00 PQR-EL open interest= 43 current ask $5.00
BUY CALL MAY 65.00 PQR-EM open interest=149 current ask $2.45

Picked on March 26 at $ 61.85
Change since picked: + 0.57
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 364 thousand

---

Rio Tinto - RTP - close: 207.00 chg: -1.48 stop: 198.60

Friday proved to be another volatile day for RTP. The stock gapped lower and dipped toward the $201 level before bulls stepped in to buy the dip. Shares rebounded just high enough to fill the Friday morning gap. We remain bullish but we're not suggesting new call positions at this time. RTP is relatively close to our target in the $210-212 range. More conservative traders may want to plan an early exit right here or anywhere north of $209.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 26 at $198.60
Change since picked: + 8.40
Earnings Date 02/06/06 (confirmed)
Average Daily Volume = 326 thousand

---

Schlumberger - SLB - close: 126.57 chg: -1.66 stop: 119.99

SLB experienced some profit taking on Friday after a bullish week of gains. Traders bought the initial dip toward the $125.00 level. If you were nimble enough a bounce from $125 could have been used as a new bullish entry point. Our target is 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.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 23 at $123.02
Change since picked: + 3.55
Earnings Date 04/21/06 (unconfirmed)
Average Daily Volume = 6.2 million

---

Toyota Motor Corp. - TM - close: 108.90 chg: -1.25 stop: 105.95

TM did not escape the profit taking on Friday. It is unfortunate that the stock did not hold on to Thursday's breakout over the $110 level. If the current pattern of slowly drifting higher continues then we would watch for a dip back toward $107.00-107.50 before shares bounce higher again. 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.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 12 at $106.68
Change since picked: + 2.22
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand

---

Tenaris - TS - close: 180.67 chg: -1.83 stop: 177.79

We have nothing new to report on for TS. This oil services provider of steel pipe and other supplies has been stuck in a sideways consolidation pattern for more than three weeks. We are trying to catch a breakout over resistance in the $185-186 region. Currently we're 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. Keep your eyes and ears open for news this coming Thursday when TS will hold an investor conference.

Suggested Options:
We are not suggesting new positions at this time. Wait for the trigger at $186.75. We would choose from the May strikes.

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: 59.78 change: -0.54 stop: 56.45

VLO, like most of the oil sector, experienced some profit taking on Friday. Bulls bought the initial dip at the simple 10-dma. While the current trend is bullish the momentum seems to be slowing. Short-term oscillators are starting to roll over. We are not suggesting new bullish positions at this time. Our target is the $62.50-63.00 range.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 15 at $ 57.55
Change since picked: + 2.23
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Put Updates

Gannett Co Inc. - GCI - close: 59.92 chg: -0.02 stop: 60.65

This doesn't look good. GCI has been trying to inch higher the last couple of sessions and volume has come in above average. So far resistance near $60.00 and its 21-dma are holding but it doesn't look good for the shorts. We are not suggesting new bearish positions at this time. We will keep our stop loss at $60.65. We do plan to exit ahead of the April 12th earnings.

Suggested Options:
We are not suggesting new bearish positions at this time.

Picked on March 19 at $ 59.04
Change since picked: + 0.88
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: 46.73 chg: -1.57 stop: n/a

We have three weeks left before April options expire. If this is going to be a profitable strangle play ECA needs to trade over $53.50 or under $36.50 soon. Right now odds look better for the calls but the MACD on the daily chart is nearing a new sell signal. 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.

Suggested Options:
We are not suggesting new strangle plays.

Picked on January 10 at $ 45.56
Change since picked: + 1.17
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 69.40 change: -0.11 stop: n/a

The homebuilders continue to feel pressure from rising interest rates. Short-term technicals on RYL are looking more bearish. We have three weeks left before April options expire. Unfortunately, if this is going to be a profitable strangle play RYL needs to trade under $63. Conservative traders may want to plan an early exit now or on any dip toward the $65 region to salvage capital. 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).

Suggested Options:
We are not suggesting new strangle plays.

Picked on January 22 at $ 75.19
Change since picked: - 5.79
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

None
 

Dropped Puts

Biosite Inc. - BSTE - close: 51.93 chg: +0.33 stop: 52.05

Ah, yes... Murphy's law wouldn't have it any other way. Most of the market turned lower on Friday but not BSTE. The stock broke out over short-term resistance at the $52.00 level. Of course we shouldn't be surprised. We've been urging caution for the couple of days given the reversal. Our stop loss was at $52.05.

Picked on March 28 at $ 49.75
Change since picked: + 2.18
Earnings Date 03/25/06 (unconfirmed)
Average Daily Volume = 261 thousand
 

Dropped Strangles

None
 


Trader's Corner

Going Fishing

Long-time Option Investor subscribers understand the site's emphasis on education. For many years, the "feed a man a fish" analogy was often quoted on the site. Our pages are filled with helpful advice on trading techniques, indicator usage, historical tendencies and the emotional aspect of trading, but it's not always easy to locate that information. No central listing of the Trader's Corners articles exists in the current format.

It's about time to go fishing through my listing of Trader's Corner articles produced for weekend editions of the newsletter. I thought I'd provide this reference for those who might want to investigate some aspect of technical trading and not know where to find the article. Unless otherwise indicated, I (Linda Piazza) was the writer of each of these articles, but I've included descriptions of articles written by other writers substituting for me on the weekend Trader's Corners.

To access any of the articles listed here, sign in on the website, click "Option Investor Daily" on the left-hand sidebar, and then scroll back until you find the date of the article. When you've clicked on that date, just click "Trader's Corner," and you'll be taken right to the article you seek.

"What's Your Favorite Indicator": January 30, 2005
This article advises traders to vary the technical indicators according to market conditions and gives tips on finding the right indicator for those conditions.

"Free Website: What's to See at the CBOE": February 6, 2005
The CBOE website offers a wealth of educational material for the beginning through advanced options trader. The article provides an overview of some useful information to be found at the CBOE's site.

"Repairing Losing Positions": February 13, 2005
This article discusses the pros and cons of some tactics for repairing an options position gone bad, based on techniques found in Lawrence McMillan's OPTIONS AS A STRATEGIC INVESTMENT.

"Technical Analysis Is for the Birds": February 20, 2005
Technical analysis doesn't always work as well as traders hope, but this article suggests that even the technical analysis failures reveal much about market action.

"Waiting for the Retest": February 27, 2005
This article discusses a conservative technique for entering plays: waiting for a retest of broken support or resistance.

"Got the Right Time?": March 6, 2005
Choosing the right time interval on your charts can help pinpoint successful trades.

"Building Better Trendlines with Logs": March 13, 2005
Some successful traders prefer to view semi-log versus arithmetic charts to study long-term movements. This article tackles that subject.

"Using Keltner Channels to Set Targets": March 19, 2005
Nested Keltner channels assist traders in setting price targets. This article shows examples and pinpoints possible settings to use for the channels.

"Maintaining Control": March 26, 2005
This article discussing controlling emotions and trades.

"Trust Yourself and Nobody Else": April 2, 2005
This article uses several examples to prove that traders should test formulas and chart techniques before following another trader's advice or assuming information is correct.

"Turning the Abstract into the Concrete": April 9, 2005
As a continuation of the April 2 article, this one illustrates how traders might perform a few formula calculations or delve beyond the odd names of candlestick formations to better understand how they work and the reasoning behind them.

"Sweeping Up": April 16, 2005
Many traders are unaware of what happens to the excess cash in their brokerage accounts. How is it handled and why should it matter?

"PDQ (Pretty Darn Quick Customer Support)": April 23, 2005
Many brokers now employ instant messaging capabilities to provide quick support for their customers. The article discusses how this capability is employed and how it would not be used.

"If/Then Statements with Keltner Channels": April 30, 2005
Is a trade still viable? Nested Keltner Channels allow traders to ask and answer "if this happens, then this might be more likely" type of questions to determine whether a trade is still viable and what target might be set.

"Keltner-Style Divergence": May 7, 2005
Bullish and bearish divergences can be discovered using nested Keltner channels, and they're just as useful as other types of divergences. Through the use of charts, this article shows several examples.

"Just for Newbies: What on Earth Are We Talking About?": May 14, 2005
This article discusses many commonly used but perhaps confusing terms on the site.

"Going Keltnering": May 21, 2005
This article pulls together information from previous articles on nested Keltner channels to show how they can be used to initiate and exit a specific trade.

"When It's Good to Feel Bad:" May 28, 2005
We often chastise ourselves when our trades go bad. Those negative emotions are natural and perhaps, behavioral scientists believe, even serve a useful purpose. This article discusses what they mean to traders.

"Range Bound or Trending?": June 4, 2005
This article discusses several ways in which a range bound or trending market might be identified.

"Basics of Candlestick Charting, Part 1": June 11, 2005
This article provides an introduction to candlestick charting.

"Dragonflies, Gravestones and Shooting Stars: the Doji as a Reversal Signal in Candlestick Charting": June 18, 2005
Through the use of multiple charts, this article introduces the doji, a specialized single candlestick, and shows its importance in potential reversals.

"Other Candlestick Reversal Signals": June 25, 2005
Following the previous two articles on candlesticks, this one introduces potential reversal signals produced by two-candlestick formations.

"Candlestick Reversal Signals: Multiple Candlestick Formations: July 2, 2005
In a continuation of previous articles, this week's installment discusses potential reversal signals created by multiple-candlestick formations.

"The Buck Stops Here": July 9, 2005
Candlestick reversal signals gain more significance when produced at support or resistance. This article illustrates this principle through the use of several charts.

"Summing Up": July 16, 2005
Summing up the information from the previous articles on candlestick formations, this article provides examples that reiterate some hints and cautions about their use.

"Fair Is Fair, or Is It?": July 23, 2005
This article discusses fair value and premium: how they're calculated and used.

"Curbing the Markets": July 30, 2005
Exchanges have rules for when trading curbs or collars might be instituted. This article discusses those rules.

"Put/Call Ratio: August 6, 2005
Jane Fox wrote this article describing the put/call ratio's construction and uses.

"Easy, Breezy Identification of Historical Support and Resistance Using Donchian Channels": August 14, 2005
Donchian channels were invented as a means of identifying breakout plays, but they're great at providing an easy reference for historical support or resistance.

"Technical Analysis of Breadth and Volatility Measures": August 20, 2005
Did you ever wonder whether the VIX or advdec line could be studied using standard technical analysis tools such as trendlines or stochastics? This article provides several chart examples that argue that they can.

"Think Again": August 28, 2005
Building on the August 20 article, this one shows that Keltner channels can be used to help determine when the advdec line's move might be overdone to the upside or downside and when a reversal might be due, likely carrying equities in the direction of the reversal.

"That Hidden Average": September 4, 2005
Few watch the 72-ema, but this average turns up again and again as support or resistance on the charts of some indices and equities.

"A Primer on Elliott Wave Theory": September 10, 2005
Keene Little offers information on EW theory.

"What Day of the Week Is It?": September 17, 2005
Historical and personal trading patterns can impact trading results for the days of the week. This article discusses some of those patterns.

"Where's My Stop?": September 24, 2005
Determining where to place as stop is as important--and some would argue more important--than deciding when to enter a play. This article proposes some ideas for setting stops.

"Try to Top This--the Tale of Two Tails": October 1, 2005
Jane Fox contributes an article on the tailing pattern.

"The Best Fit": October 8, 2005
Fitting retracement brackets to market moves can help determine targets. Several charts illustrate this technique.

"Ozzy Osbourne's Option Advice": October 15, 2005
This article discusses the choice of the right option for an anticipated short-term move.

"Not-So-Secret Diaries": October 22, 2005
The importance of trading diaries should not be underestimated, especially when testing a new trading methodology. This article discusses data that might be included in such a diary.

"New Kid on the Block": October 29, 2005
This article discusses the new BuyWrite indices that have been introduced on some exchanges, allowing traders to assess the profitability of a buy-write strategy.

"Early Birds Get the Worms": November 5, 2005
This article discusses a setup for trades that are entered the first hour of trading.

"Opex Action Every Week of the Month": November 12, 2005
Weekly OEX and SPX options have been introduced, offering all the risks and the advantages of trading during opex week, all month long.

"Continuing Education": November 19, 2005
Opportunities for advancing your knowledge of options and futures trading abound. This article discusses information disseminated via a CBOT webinar. Its topic was volume/price-spread analysis, and it illustrates the amount of free information available to watchful traders.

"Thankfulness": November 26, 2005
Options trading as we know it began on April 26, 1973. This article discusses the history of exchange-traded options.

"Old School, New School": December 3, 2005
Two market gurus have approaches that are poles apart but do share some opinions.

"A Gap in Logic": December 10, 2005
Gaps can signal the beginning of a strong move or warn of the ending of one. This article discusses the different types of gaps.

"Divergence": December 17, 2005
This article discusses bullish and bearish divergences.

"The Transformers": December 25, 2005
When chart formations morph or transform into something different, traders are alerted that markets have an underlying bid or sell bias. Several charts illustrate this principle.

"Yielding Up the Answers": December 31, 2005
This article discusses the yield curve.

"On Balance, It's a Good Indicator": January 7, 2006
Volume is an independent factor that can corroborate or diverge from a movement. This article discusses the venerable on-balance volume indicator.

"It's All About Commitment": January 14, 2006
The Commitment of Traders Report, discussed in this article, proves to be an important tool for some traders.

"Double-Crossed": January 21, 2006
The double crossover method uses crossovers of two averages to produce buy and sell signals. The article discusses the methodology.

"It's a Record": January 28, 2006
Candlestick record sessions are sessions in which a lower low or higher high is made. Counting the number of record sessions can suggest when a reversal is due, and this article expounds on that technique.

"Step Away from the Computer": February 4, 2006
External or personal situations can create conditions under which it's best not to trade. This article discusses some of those situations.

"Your Cup of Tea": February 11, 2006
This article introduces some old and new ideas about the cup-and-handle formation.

"Shivers": February 18, 2006
Know what to investigate before you consider trading your system or anyone else's.

"A Primer on Elliott Wave Theory--Part 1": February 25, 2006
At readers' request, Keene Little discusses Elliott Wave Theory.

"A Primer on Elliott Wave Theory--Part 2": March 4, 2006
Keene Little continues his discussion of Elliott Wave Theory

"Relatively Speaking, It's a Simple Indicator": March 11, 2006
Many traders use the RSI indicator. This article discusses some strengths and cautions about this indicator.

"Overdone Moves": March 18, 2006
We all hesitate to buy when indicators show overbought conditions or sell when they indicator oversold ones, but sometimes we need to do just that. This article pinpoints some times when it's dangerous to assume a rollover or bounce is imminent.

"'Tis the Season": March 25, 2006
Some believe that a seasonal pattern of selling exists into April 15-17. This article explores patterns on the SPX for the last five years.
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives