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Daily Newsletter, Wednesday, 04/19/2006

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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

Bright Dawning: Partially Cloudy Day

As Wednesday dawned, the dollar trailed near recently achieved lows against the euro and yen. Futures steadied near overnight highs. Both actions reflected bright hopes that the FOMC might be near the end of its rate-hike cycle. Of course, as Keene Little has also pointed out, without reference to M3 money-supply figures, the dollar's decline could have been produced by a flood of new money, too, but few early morning watchers noted that as a possibility. Television commentators lauded crude's dip back below $71 a barrel, wondering if the dip would survive the day's reports. All were aware, however, that within a few hours, that bright dawning could be followed by thunderclouds produced by the CPI and crude inventories.

Both the headline and core CPI numbers proved slightly hotter than economists preferred. That hotter number knocked a few points off the futures and pushed bond yields up and the dollar higher against the yen and euro, with the dollar's action to be soon reversed. To further complicate matters, real hourly earnings turned lower again for the second month out of three, suggesting that higher energy costs might cut into consumer spending.

SPX futures were knocked back to unchanged. However, despite the negative information, equities climbed after the cash open as the dollar weakened again even as yields climbed. The TRAN and its sister index, the narrow Dow, led the way along with another often-leading index, the Russell 2000. Behind the scenes, however, the interest-rate-sensitive BIX, BKX and DJUSHB dropped from their opening levels. The RLX struggled.

The CPI had darkened the bright horizon, and the release of the crude inventories numbers was to further darken it, with gasoline inventories dropping far more than anticipated and crude inventories dropping against an expectation of a rise. Crude futures for June delivery began their steep ascent that would carry them closer to a $75.00 target predicted a couple of weeks ago.

Political thunderclouds gathered on the horizon, too, despite jubilant reports coming out of Chinese President Hu Jintao's visit to the U.S. In an ongoing staff shakeup, White House press secretary Scott McClellan announced his resignation, and a senior administration official reported that Karl Rove will no longer oversee policy development, but will instead focus on the upcoming mid-term elections this fall. The White House's current deputy budget director, Joel Kaplan, will assume new duties as the deputy chief of staff for policy. Yesterday, President Bush announced that trade representative Rob Portman would be the new White House budget director, and last week, Joshua Bolten assumed duties as the new chief of staff.

However, was it those distant thunderclouds, those economic releases or even reactions to the various earnings announcements that produced the gain and then the dimming the bright sky for some indices while others continued to gain in the sunlight? I noted in last night's Wrap that after such a large-range and positive day, the usual expectation would be for some upside initial follow-through and then a stalling. Charts and experience with action after such large-range days led to that call, and today's economic and political developments just provided the excuse to do what some indices appeared primed to do anyway.

Annotated Daily Chart of the Wilshire 5000

The TRAN's action today signals concern but not yet alarm for bulls in the SPX, OEX and Dow. After punching up almost to its all-time intraday high from earlier in April, even in the face of rising crude costs at the time, the TRAN fell back sharply. It did not violate any key moving averages on the daily chart, 4700 historical support, nor the rising envelope line at 4524.40 on the weekly chart, but its action left behind an anything-but-bullish daily candle. The TRAN may be pressured lower into a retest of 4698-4700, a test that short-term bulls want to see it pass. The TRAN coiled most of the day.

The SPX's intraday coil was in a rising wedge shape rather than a triangle, but by day's end, the SPX had produced the small-bodied candle at the top of a rise that was the most expected outcome of the day's trading.

Annotated Daily Chart of the SPX

As long as the SPX is finding support on 30-minute closes on a line currently at 1308 and still rising slightly, the action keeps alive the possibility of a climb toward the next Keltner target at 1316. As the day ended, the SPX was bouncing less ambitiously from the Keltner support, indicating that bullish fervor wasn't quite as strong, but a similar look late yesterday was followed by an immediate bounce this morning.

If the SPX climbs tomorrow morning, make particular efforts to guard bullish profits at 1314-1316 and then again at 1324-1325, but don't assume the SPX will climb much at all if the TRAN should turn down and dive lower tomorrow. Keep a watch on that index, too, when gauging what the Dow is likely to do.

Annotated Daily Chart of the Dow

As the day ended, the Dow was finding resistance on 30-minute closes at a Keltner line then at 11,284, showing a slight weakening through much of the afternoon. The Dow attempted--if you allow a little anthromorphic leeway when describing index actions--to push through that resistance but then would fall back by the close of most 30-minute periods. Still, the Dow was essentially coiling at the top of its climb, Keltner weakness or not, and the direction of the breakout of such triangles is nearly impossible to predict. The TRAN may provide the leverage to break the triangle one direction or the other.

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If the TRAN's daily candle signaled concern for Dow, OEX and SPX bulls, the RUT's and SOX's strong gains signaled concern for Nasdaq bears. The RUT achieved a new closing high of 778.42, jumping past the previous 771.54 intraday high that had looked about right for an intermediate high based on a fitted Fib bracket. Did the RUT just overrun that target? Tomorrow will tell, but the RUT ended the day butting its head against the top of one version of a rising regression channel and still a distance away from the 788-ish top of a longer-term one in place since last October. Daily nested Keltner charts suggest that the RUT could be approaching a short-term top at least, in the 780-782 range, but Russell 2000 bulls who see 780 are going to be thinking "800," and those bulls can stampede. I'd be guarding bullish profits, however, with the RUT's run looking overdone up through the 120-minute chart, just in case.

Annotated Daily Chart of the Nasdaq

The 30-minute RSI has been suggesting overbought conditions for the Nasdaq since yesterday, but the Nasdaq so far maintains 30-minute closes above a Keltner line currently at 2363.25. As long as it's doing that, it also maintains an upside target currently near 2374, higher within the 2367-2378 resistance zone.

Whether or not it continues to maintain that 30-minute support may depend on the reaction to INTC's earnings report. That eventual reaction was impossible to gauge as this report was prepared, as after-hours trading had driven INTC to a low of $19.32 and a high of $20.10, if QCharts was to be believed. After all that jumping around, prices as this report was prepared were at $19.72, up $0.16 from the $19.56 close. Headlines declaimed INTC's loss of market share to AMD and INTC's lower quarterly profit. The company produced earnings a penny above the expected $0.22 a share, but was well below the year-ago $0.35 a share. Early reaction to the earnings appeared to be relief that the results weren't worse than they were, but that early reaction should not be trusted. Watch overnight reaction, particularly in Japan, and particularly to determine whether participants appear to punish or reward techs in general or to consider INTC's report applicable to INTC only.

AAPL's, QCOM and EBAY's after-the-close reports should not be ignored, although reactions were mixed and not particularly predictive of index action tomorrow. Like INTC, AAPL was trading higher in after hours, up to $66.10 as this report was prepared, rising from its $65.65 close. The company said surging iPod sales, to the tune of 8.5 million units, helped it to earn $0.47 a share, beating expectations of $0.43 a share. Revenue jumped almost 35 percent, but still failed to meet expectations of $4.54 billion, coming in at $4.36 billion.

QCOM dipped to $51.67, down from the $52.50 close, in after-hours trading as this report was prepared. The company earned $0.34 a share or $0.41 a share excluding stock-option expenses and other one-time items, with analysts expecting $0.40 a share. Revenue appeared to be slightly above expectations, too.

EBAY met expectations, reporting $0.17 a share, down from the year-ago $0.19. Without stock expenses, the company would have posted a gain of $0.21. Higher operating expenses also hurt profit. The outlook for the ongoing quarter and the full year were slightly below analysts' forecasts, and EBAY was pushed lower in after-hours trading. As this report was prepared, it was trading at $38.46, down from the $40.35 close.

Reaction to earnings, particularly Intel's, could impact the SOX, too.

Annotated Daily Chart of the SOX

As the day ended, the SOX stretched toward the next 30-minute target, currently at 528.82, looking extended and showing tentative bearish price/RSI divergence. The climb looked choppy today, but it was a climb nonetheless, and as long as the SOX produces 30-minute closes above a Keltner line currently at 523.67, it maintains that 528.82 upside Keltner target. With the SOX in another triangle, ultimate direction proves impossible to predict, but watch the SOX for help gauging the direction of the Nasdaq.

Market watchers had much information to digest. Coming on the heels of yesterday's worrisome housing starts data, the Mortgage Bankers Association released mortgage applications for the week ending April 14 at 7:00 EST. The component measuring mortgage loan application volume decreased 1.7 percent on a seasonally adjusted basis and fell 14.9 percent on an unadjusted basis from the year-ago level. Most other components, with the exception of the Government Index, fell, too. Four-week moving averages still benefit from better reports a few weeks ago and rose for all components except for the Refinance Index. The average contract interest rate for a thirty-year fixed-rate mortgage rose to 6.56 percent from the previous 6.50 percent, and today's action was to produce fears that hikes in mortgage rates might not be finished as soon as hoped.

An hour and a half later, March's CPI was released. The headline number was expected to rise 0.2-0.3 percent, depending on the source giving the forecast, after the prior 0.01 percent gain. The 0.4 percent gain proved a little hotter than expected, as mentioned earlier. Core CPI was expected to rise 0.2-0.4 percent, depending on the source, after its prior 0.1 percent gain. Although the 0.3 percent gain dropped into the middle of that range, some also deemed it slightly hotter than expected, and all wanted it to be lower. That gain was the biggest in a year, with higher shelter costs pegged as the culprit. Energy prices also rose 1.3 percent for March.

Core CPI rose 2.8 percent for the first quarter. The annualized headline number eased to a 3.4 percent gain, down from the previous 3.6 percent gain. More importantly, the annualized core CPI produced a 2.1 percent gain, still testing the top of the FOMC's comfort zone, and reemphasizing the conclusion in yesterday's FOMC minutes that data must be watched. Although one early morning guest television commentator opined that this Fed statement did not mean that the Fed thought there would be more hikes than past the next one, the CPI results will keep the Fed on the alert.

In a separate release, a decline in real earnings suggests that energy prices are beginning to hit the consumer spending. U.S. worker's real hourly earnings fell 0.3 percent in March and were 0.1 percent lower than the year-ago level. Weekly earnings rose 0.2 percent month over month and 0.1 percent year over year. With crude prices rising during April, analysts expect another decline in real earnings for April.

One analyst expected to see crude inventories gain 1-3 million barrels, gasoline inventories drop 1-2 million barrels and distillates drop a similar amount. Another source had pegged expectations at a climb of 1.8-2.3 million barrels in crude inventories and drops of 2.2-2.5 and 1.6 million barrels in gasoline and distillates, respectively.

The actual numbers revealed larger-than-anticipate drops in inventories. The Energy Department reported that crude inventories dropped 800,000 barrels rather than climbed as anticipated. That brings crude stocks 4.6 percent below the year-ago level, although gasoline and distillate inventories remain above year-ago levels. Gasoline inventories dropped 5.4 million barrels, more than double the anticipated drop. Distillates dropped 2.8 million barrels. Refinery utilization climbed to 86.2 percent, up from the previous 85.6 percent.

The API's data showed an even bigger drop in crude inventories, down by 4.0 barrels, but a smaller--3.3 million barrels--decline in gasoline inventories. The two sources showed agreement on the decline in distillates.

After the release of the crude inventories, Chief Mandil of the IEA said that the drop doesn't necessitate dipping into the oil reserves. Mandil doesn't expect significant decisions to be made at OPEC talks at Doha. Crude futures for May delivery, expiring tomorrow, spiked down to a day's low of $70.70 per barrel as the crude inventories were released, but soon began climbing again. Those for June delivery never dipped below $72.60. The TRAN began falling shortly before 10:00, but it, too, bounced right along with the bounce in crude prices.

The International Monetary Fund also released its latest world economic outlook. Despite risks engendered by higher energy prices and global imbalances, the IMF believes that the global economy remains on track to grow 4.9 percent in 2006 and 4.7 percent in 2007, up from previous forecasts. Growth in the previous two years had been 4.8 percent for 2005 and 5.3 percent in 2004. China and the U.S. will drive the growth in the global economy, the IMF said, with China and India then seeing the strongest resultant growth. Emerging economies are expected to show the strongest growth, 6.9 and 6.6 percent for the next two years, while advanced economies are forecast to grow only 3 and 2.8 percent, respectively, for the next two years.

The IMF warned that high energy prices posed a risk, with the forecast for growth in global economies predicated on an average crude price of $61.25 in 2006 and $63.00 the next year. With some still believing that the rise in crude costs is a temporary development, producers may not have yet passed prices on to consumers, the IMF suggests, but if there's consensus that the higher prices are here to stay, that could change. Even now, the possibility exists that the push-through to core prices has only been delayed, the IMF says. However, on a day when many are on inflation watch, the IMF's statement that global inflation was largely contained must have sounded a reassuring note.

The IMF cautioned, however, that the risks were weighted to the downside. The current accounts of the U.S., China, emerging Asia and the oil-exporting countries show large imbalances that could threaten growth, and, so far, little has been accomplished in ameliorating those imbalances. The IMF has been warning of the risks posed by those imbalances for many months. The IMF warns that an adjustment will occur, whether that adjustment is orderly or calamitous, and that countries should take steps now to ensure that it's orderly. Americans should save more and consume less, the IMF cautions, singling out the U.S. when it says that the risks are weighted to the downside. The U.S. housing market creates uncertainty, the fund noted, and too much weakness in housing could undermine consumer demand.

Company-related developments may have impacted trading behaviors, too. On a day when CPI and crude inventories were on the agenda, it probably was not a coincidence to read headlines noting Wal-Mart's (WMT) plans to focus on customers by transforming stores, increasing the variety of higher-cost products and focusing more on better-made products. The company intends to follow Best Buy's (BBY) model of identifying their customers and their shopping patterns in various communities and doing a better job of tailoring the product mix to those optimal for those communities.

John Fleming, the executive in charge of the new campaign, promises that the company will not desert the price-sensitive customer, and WMT's customers are known to be price sensitive. When Dallas-area news stations want to focus on how higher gasoline costs are impacting consumers, they send a reporter and camera person over to one of the local Wal-Marts to waylay customers in the parking lot. That's true of national commentators, too.

Pfizer (PFE) announced earnings before the bell, with the news mixed. Revenue fell from last year's $13.09 billion to $12.66 billion, below the anticipated $12.98 billion. Sales of Global Lipitor were lower than expected. Earnings were $0.56 a share and would have been $0.61 without charges for non-recurring items. That was above the expected $0.53 a share.

Coca-Cola Company (KO) reported flat revenue with earnings of $0.47 a share including a charge of $0.02. Analysts had expected $0.48 a share, but early information did not indicate whether that was with or without the charge. KO announced that it would raise its dividend by 11 percent and would buy back $2.0-2.5 billion in shares.

J.P. Morgan Chase Co. (JPM) earned $0.86, with previous estimates at $0.84. Revenue rose 6 percent, to $15.24 billion, with revenue expected to be $14.85 billion. Net profit rose 36 percent. News from the fixed-income side of the report was not as pleasing, with that revenue falling 13 percent from the year-ago comparisons.

Thursday's economic reports include initial claims for the week ending April 15 at 8:30 am and March's leading indicators at 10:00 am. Despite the name, the information in leading indicators is usually predictable and often not market moving. At noon, the Philly Fed number will appear, and that could well be market moving although it will have to fight the usual opex Thursday torpor to move the indices. Expectations for this April number range widely from 12.0-14.3, with the prior number at 12.3.

Thursday's earnings include those from AFFX, ALK, MO, BAC, BGG, BRCM, CHRT, CAL, CBE, CY, ELNK, LLY, EMC, NPTH, FRC, FDRY, GM, ITW, MAR, MEDI, MRK, NEM, NOK, NUE, PMCS, RS, RYL, SGP, SHW, LUV, SYK, HSY, and UNP. MO, CAL, LLY, GM, NOK, SGP, LUV and UNP are likely to be closely watched.

This afternoon, the seasoned Art Cashin mentioned on CNBC that most indices had gained about 1.8 percent yesterday, with that concurrence suggesting that "program after program after program" buying was kicking in and responsible for producing the momentum. I would add that there was probably some short-covering, too, when those programs allowed little pullback that would have allowed shorts to exit in a more orderly fashion. With that momentum at least partially withdrawn today, it was natural to see retail buyers and others push the indices slightly higher again, but then for prices to stall to allow gains to be consolidated or distributed. When the stall didn't produced a needed downturn in the tech-related indices, shorts were pushed into exiting again, driving those indices higher into the close.

Which was it at play today in the SPX and some other indices? Was it distribution or consolidation of gains? Probably, it was a bit of both with the ultimate outcome as yet unknown. Many indices were left with small-bodied candles after tall white candles, presenting the possibility of a third candle in the series, a tall red candle, tomorrow, completing a reversal signal.

If you thought I was going to call that the strongest possibility for tomorrow, you're wrong. I think it is a possibility, but yesterday's action should convince you that whatever or whoever it is that's providing this persistent underpinning hasn't let go of the markets yet. If yesterday didn't convince you, then today's equity follow-through to the upside while crude for June delivery charged to an intraday high of $74.40 and the ten-year's yield charged to an intraday high of 5.05 percent while the curve steepened again should convince you. Frankly, today scared me. Although charts presented the possibility that we could get the very action that came and I mentioned that as the most likely result in normal times, there should have been more of a pullback after the day's events. The follow-through was expected and natural, but that data and those events should have hit equities a little harder. This is true even if markets are going to eventually and benignly absorb the impact of crude prices where they are and interest rates where they might be. I can only believe that market participants today don't think that crude will stay where it is and have determined that the Fed really is almost through, even if the CPI was a little hotter than expected.

Absent this persistent underpinning, I would anticipate that the indices producing those small-bodied candles would see either another consolidation-type day or an actual downturn tomorrow, and the tech-related indices would produce either their first consolidation candle or a pullback. The consolidation-type day would fit with the typical action of an opex Thursday. However, my recent mantra must be repeated: as long as the TRAN is climbing or consolidating sideways, the Dow, SPX and OEX are not going to drop far. As long as the RUT and SOX are climbing, neither is the Nasdaq. The TRAN's bearish daily candle and drop from the day's high alert traders to watch for the possibility that it could decline further and tug the DOW, SPX and OEX lower with it, because they're not going to sustain climbs for long if the TRAN dives. Similarly, if any of tonight's earnings result in a steep pullback in the SOX and RUT, the Nasdaq will not be able to sustain gains.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CLF None None
LEND    

New Calls

Cleveland Cliffs - CLF - close: 94.11 chg: +1.41 stop: 92.45

Company Description:
Cleveland-Cliffs Inc, headquartered in Cleveland, Ohio, is the largest producer of iron ore pellets in North America and sells the majority of its pellets to integrated steel companies in the United States and Canada. Cleveland-Cliffs Inc operates a total of six iron ore mines located in Michigan, Minnesota and Eastern Canada. The Company is majority owner of Portman Limited, the third-largest iron ore mining company in Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore. (source: company press release or website)

Why We Like It:
We found a lot of bullish candidates but many of the stocks we are interested in the companies are expected to report earnings in the next couple of days. Even with CLF we are facing a time crunch. Our time frame is just five trading days and that includes waiting for CLF to hit our trigger to open the play. Metal and mining-related stocks have been relatively strong and we suspect that shares of CLF are on the verge of breaking out over resistance at the $95.00 mark. Volume has been strong on the stock's two-day rebound and the P&F chart is on the verge of a new buy signal. We are going to suggest a trigger at $95.05 to buy calls. If triggered then we'll target a quick rally into the $99.85-100.00 range. We plan to exit near the closing bell on Wednesday, April 26th to avoid the company's earnings report later that day after the close. More aggressive traders may want to open positions now or on a dip back toward $92.00.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 90.00 CLF-ER open interest= 561 current ask $7.50
BUY CALL MAY 95.00 CLF-ES open interest=2879 current ask $4.70
BUY CALL MAY100.00 CLF-ET open interest= 393 current ask $2.80

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 650 thousand

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Acc. Home Lenders - LEND - cls: 56.57 chg: +3.38 stop: 51.99

Company Description:
Accredited Home Lenders Holding Co. is a mortgage company operating throughout the U.S. and in Canada. Accredited originates, finances, securitizes, services, and sells non-prime mortgage loans secured by residential real estate. Founded in 1990, the company is headquartered in San Diego. (source: company press release or website)

Why We Like It:
LEND has produced a big bullish technical breakout over significant resistance at the $54.00 (and $55.00) level. Shares have been consolidating sideways under resistance for months but the recent bounce from its 100-dma has been fueled by above average volume. Today's volume was more than double the daily average. The move has also produced a quadruple top breakout buy signal on the P&F chart, which now points to a $72 target. We also like LEND's breakout today because it's a push through the neckline to an inverse or bullish head-and-shoulders pattern. The H&S pattern points to a $61.00 target. We're going to aim for a rally into the $59.75-60.00 range. Traders have a choice. You can open positions here (chase it) or wait (hope) for a pull back toward the $55.00 or $54.00 levels. We do not want to hold over the May 2nd earnings report and that gives us about two weeks.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 55.00 QFW-EK open interest=413 current ask $4.40
BUY CALL MAY 60.00 QFW-EL open interest= 68 current ask $1.60

Picked on April 19 at $ 56.57
Change since picked: + 0.00
Earnings Date 05/02/06 (confirmed)
Average Daily Volume = 693 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Arch Cap. Grp. - ACGL - cls: 59.27 chg: +0.69 stop: 55.95

Good news. ACGL's relative weakness yesterday has been replaced with some relative strength today. The stock broke out over minor resistance at the $59.00 level to close at a new high. Our target is currently the $62.50-63.00 range but we plan to exit ahead of the April 27th earnings report. ACGL is announcing after the closing bell.

Picked on April 03 at $ 58.15
Change since picked: + 1.12
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 195 thousand

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Amerada Hess - AHC - close: 148.62 chg: +2.87 stop: 141.65*new*

The OIX and OSX oil indices have pushed to new all-time highs just as crude oil closes over $72.00 a barrel for the first time ever. This helped AHC to a 1.9% gain on above average volume. The stock is now challenging resistance near the $150 level. Our target is the $154.00-155.00 range. We do not want to hold over the April 26th earnings report. Please note that we're raising our stop loss to $141.65.

Picked on April 05 at $146.51
Change since picked: + 2.11
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 1.5 million

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Cummins - CMI - close; 111.77 chg: +2.03 stop: 104.99

So far so good. CMI continues to show relative strength and the stock broke out over resistance at the $110 level today. The stock has passed our conservative target in the $110 region and is headed toward our main target in the $112.00-112.50 range. More aggressive traders may want to aim higher (say $115.00) but keep in mind we do not want to hold over the earnings report next Friday, April 28th.

Picked on April 16 at $106.75
Change since picked: + 5.02
Earnings Date 04/28/06 (confirmed)
Average Daily Volume = 804 thousand

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Lehman Brothers - LEH - close: 155.32 change: +0.37 stop: 144.45

Broker stocks continue to rally and the XBD index hit another new all-time high today. Fueling the move today has been more positive news and positive earnings reports from stocks in the industry. Meanwhile shares of LEH took a bit of a break today to digest yesterday's gains. The stock has surpassed our conservative target at the $153.00 level. More conservative traders may want to exit now or significantly tighten their stops. We are suggesting that readers consider selling half their positions at $153.00 and then sell the second half of their position at $159.00. Don't forget that LEH is due to split 2-for-1 on May 1st.

Picked on March 22 at $144.61
Change since picked: +10.71
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

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Marvell Tech. - MRVL - close: 60.89 chg: +1.78 stop: 55.99 *new*

Breakout alert! The SOX semiconductor index turned in another strong session (+1.74%) and broke out over technical resistance at its 50-dma. This helped pave the way for MRVL's breakout session where the stock pushed past the $60.00 level and its 50-dma and 100-dma. Volume came in above average and we see this as a new bullish entry point to buy calls. Our target is the $65.50-66.00 range. We are raising the stop loss to $55.99.

Picked on April 06 at $ 60.18
Change since picked: + .71
Earnings Date 05/25/06 (unconfirmed)
Average Daily Volume = 5.9 million
 

Put Updates

Express Scripts - ESRX - close: 84.40 chg: -0.60 stop: 86.51

ESRX continues to show relative weakness and shares produced another failed breakout attempt at the $86.00 level this morning. Volume was definitely above average on today's pull back. Our target is the $80.25-80.00 range. We want to exit ahead of the April 26th earnings report.

Picked on April 09 at $ 85.39
Change since picked: - 0.99
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 1.6 million

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Overseas Shipping - OSG - cls: 48.99 chg: -0.44 stop: 50.01

OSG failed to produce any sort of follow through on yesterday's rally. That's good news but we are still suggesting that readers wait for a decline under $48.50 before considering new put positions. Our target is the $43.00-42.50 range. We do not want to hold over the early May earnings report.

Picked on April 11 at $ 48.10
Change since picked: + 0.89
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 469 thousand

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Reynolds American - RAI - cls: 105.65 chg: -0.33 stop: 106.75

We do not see any change from yesterday's update. RAI is still trading at a pivotal level where the stock will either roll over and confirm the relatively new bearish trend or the stock will push higher and probably retest resistance at the $110 level. We are not suggesting new plays at the moment. Bear in mind that tomorrow could be a crucial day. Larger rival Altria (MO) is due to report earnings tomorrow morning and MO's results and investor reaction to it will have an affect on shares of RAI. Wall Street is looking for $1.27 a share from MO.

Picked on April 09 at $104.97
Change since picked: + 0.68
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 637 thousand
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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Encana Corp. - ECA - close: 51.12 chg: +0.66 stop: n/a

Volume in ECA was decent for the second day in a row, which should help confirm the recent bullish breakout. We have two more days before April options expire. Traders can choose to exit now and recoup some of their trading capital or hope that ECA marks new gains into the weekend and then exit near Friday's close. Our strangle strategy involves the April $50 calls (ECA-DJ) and the April $40 puts (ECA-PH). Our estimated cost is $3.45.

Picked on January 10 at $ 45.56
Change since picked: + 5.56
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

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Ryland Group - RYL - close: 68.58 change: -1.92 stop: n/a

Homebuilders were weak again today on interest rate fears but today's move is too late to help RYL. We have one more (slim) chance that tomorrow's earnings report for RYL will produce enough volatility that we can potential recoup more of our trading capital. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN). April options expire this week.

Picked on January 22 at $ 75.19
Change since picked: - 6.61
Earnings Date 04/20/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Burlington NrthSanta Fe - BNI - cls: 85.78 chg: -0.53 stop: 79.95

Target achieved. BNI displayed some relative strength this morning. The stock gapped open higher at $86.99 and hit an intraday high of $87.99 before paring its gains and finally closing lower. Our target was the $87.50-90.00 range. More aggressive traders may want to aim for the $90 mark given the new MACD buy signal but we're closing the play. BNI is expected to report earnings next Tuesday. It would not surprise us to hear the company announce a stock split but then again its last stock split (a 3-for-1) was back in September 1998 around $130.00 a share.

Picked on March 27 at $ 82.51
Change since picked: + 3.27
Earnings Date 04/25/06 (confirmed)
Average Daily Volume = 2.1 million

---

CNOOC Ltd - CEO - close: 87.40 change: +0.91 stop: 79.45

Target achieved. Another strong day for crude oil futures pushed the oil indices to new all-time highs. Shares of CEO hit an intraday high of $88.00. Our target was the $87.50-88.00 range. The $88 level looks like potential resistance so we'd keep an eye on CEO for a pull back and a potential entry point for new bullish plays.

Picked on April 17 at $ 82.26
Change since picked: + 5.14
Earnings Date 04/29/06 (unconfirmed)
Average Daily Volume = 193 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Following the Lewder; and Everything Else

I wrote in my Index Trader article this past weekend that I saw limited downside remaining in the market. To view, click HERE.

I wasn't a screaming bull but I didn't see that the market was going to get pushed all that much lower. I thought that the S&P 500 (SPX) could yet drop to the 1270 area. But it also looked like the S&P 100 (OEX) had solid support down around 580, suggesting that SPX wouldn't even get that low. The OEX Monday low was 580.6, versus today's close at 592.

An OIN Subscriber then wrote me saying that since I use TRENDLINE analysis a lot and SPX was trading well under the up trendline I was working with on the daily chart, didn't I think that their might not be a steeper decline in the market coming?

On Monday in fact the OEX did follow SPX to a close under ITS up trendline. There were some OTHER factors however. OEX had not yet sold down under a cluster of prior lows around 580. There is a kind of 'ranking' of technical factors that comes into play here.

In poker or bridge, certain combinations or suits 'trump' others. In technical analysis, a stock or index's ability to stay at or above its last significant downswing low ranking as a more significant event than a trendline break. Prices can break trendlines and then come back, whereas this tends not to happen as much with a break below a prior low; with downside penetration of prior lows previous buyers in that area do more selling than is the case with trendline breaks which many money managers do not follow that much anyway.

The other thing is it's important to see what's happening in OTHER important time frames, especially on the weekly chart and we'll look at that in a moment in the case of SPX piercing its well-defined up trendline on the daily chart.

Another minor factor is my 2-day rule on trendline breaks. Since "trendlines are 'made' to be broken" and because traders and floor brokers 'run' stops under important trendlines but only briefly, I look to see what happens the NEXT day with trendline breaks. Trendlines ARE important tools to suggest when a trend may be changing but, as I often say, I like to see TWO consecutive days of prices trading under a trendline before I'm ready to believe a new trend is underway. A case in point:

There was a 1-day close the OEX up trendline on Monday, but the next day saw a Open that was above the prior close, and in bullish technical action, there was never a low that under the prior day's close after that. In candlestick charting, they consider the open and close to the 'real' body or area to focus on. The intraday lows and highs above, and below the close, are not considered to be especially significant. Charles Dow only really considered the Close to be important.

I use intraday lows and intraday highs on bar charts and use them to construct trendlines, but I also draw trendlines, as can be seen above, that bisect or go through SOME intraday highs or lows, which is consistent with the use of trendlines that are looking for the PREDOMINANT cluster of highs or lows, especially when there are only no or only one Close above or below the trendline I'm working with.

I'll show one other chart before I get to my MAIN point about following the LEAD index, not unlike 'following the money' which we saw in the Watergate investigation and many others. This point relates to checking to see if daily chart trendlines 'confirm' hourly trendline breaks and if a daily chart trendline break is ALSO seen in a next higher order time scale, namely WEEKLY.

In the S&P 500 daily chart below, which is often but not ALWAYS the 'lead' index in the blue chip, mostly NYSE traded stocks, there is a very well-defined up trendline (more so than the OEX) with a fair number of intraday lows that 'define' this up trendline. The downside penetration of this trendline seemed significant but not as significant as a break of the cluster of prior lows in the 1270-1270 area would have been, as noted at the green up arrow.

Moreover, you'll note that lows were predominately forming in the same area; under the trendline to be sure but a look at the this, or the hourly chart (not shown) would suggest that SPX was finding support above 1280. Tuesday's strong rebound in SPX on a the common 'reversal day' of Tuesday or Thursday, wasn't too surprising.

The bullish rebound above was especially NOT surprising given the still quite bullish WEEKLY chart pattern, which is where examination of the next higher order time frame is useful.

An 'external' trendline is what is most commonly known as a 'trendline' and it connects 2-3 or more of the lowest lows in the case of an UP trendline [and 2-3 or more (the more the better) of the highest highs in a down trendline]. There is an important weekly low in 2003 and 2-3 weekly lows last year (2005) that define this conventional trendline.

Even more useful and more reliable usually is an 'internal' trendline that connects the MOST number of lows (or highs). A very strong SPX bullish picture in the weekly chart below is suggested by use of the weekly internal up trendline as seen in my next chart:

The substantial rebound in this week's price action so far in SPX tends to confirm a still-strong bullish pattern as the rebound was right from the internal up trendline in the chart above.

As long as SPX stays above 1245-1250 a long-term bull market or trend is still suggested by WEEKLY chart considerations.

There is another thing that could lead you to discount the trendline break in the daily SPX chart and this involves the question of what sectors and what index has been LEADING the overall market higher in recent weeks.

# 1, the Nasdaq market has been leading. #2, within the popular NYSE related indexes, the DOW 30 (INDU) has been leading the S&P. The technical picture in the recent decline is quite different when you look at the INDU daily chart.

The Dow held right at ITS well-defined up trendline in a picture-perfect fashion so to speak. The was one close just under the line, but only by a hairs breath and the low the next morning was right at the trendline and INDU rallied strongly from there.

So, it's important to always look at what sector or major index is leading the market to see what pattern presents itself there within each market, Nasdaq or the NYSE.

I also pointed out how the Nasdaq had been leading the market higher in the weeks prior to this most recent correction. Its recent decline held and rebounded from, its up trendline without even a single close under it. The fact that the up trendline we're looking at here is a 'best fit' or 'internal' up trendline is seen in the 3 instances where intraday lows poked briefly under this line.

You can also see that the 3 lows that dipped under the (internal) up trendline in the daily COMP chart above were all 'extreme' days with those lows well under the cluster of prior lows around that day. This type action is fairly typical of the emotional nature of bottoms. So called 'bear trap reversals' and key upside reversals are in fact defined by a sharp final decline under the prior day(s) low, followed by a strong rebound.

I mentioned in the start of my rant here that its important to look at EVERYTHING going on that influences the market; and, to go beneath and beyond common explanations or expectations. John Murphy, who I toiled with for a time at Merrill Lynch, has developed the topic of INTERMARKET analysis, or the analysis of other markets to understand how say the stock market is going to perform.

It's been puzzling that sharply rising oil prices have not been more of a damper on this market, especially this week:

While I think that if energy prices rise high enough, eventually they'll prove to have more of a dragging effect on the stock market then is currently true as consumers feel the pinch. [Not me as much for those of us with the oh so numerous now (on the 'left coast' anyway) Prius hybrid.]

However, along with these record high oil prices (not yet in inflation adjusted terms) you also start to realize how much the big oil companies account for in the S&P capitalization weighted index as THEIR profits go through the roof. So, we see the oil sector leading the S&P indices higher with a very strong advance, such as reflected in the CBOE Oil Index (OIX) weekly chart below. What is sauce for the goose is goose for the gander or something like that!

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

MY INDEX TRADER COLUMN:
This Wednesday Trader's Corner article also serves as an adjunct to my weekend 'Index Trader' column. In the article you're reading here I typically also do a brief midweek update of my in-depth weekend column.

You will normally see a web LINK to the Index Trader at the top of your weekend Option Investor Daily e-mail. Moreover, my Index Trader can always be found by going directly to the OptionInvestor.com web site and clinking on the Index Trader section at top.

** 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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