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Daily Newsletter, Tuesday, 04/25/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Political Posturing

As lawmakers returned to Washington, Democrats and Republicans applied pressure on President Bush to take action on rising gasoline prices. Despite some contrary economic numbers, rising prices are hurting consumers, ratcheting up pressure on their elected officials, and they're in turn ratcheting up pressure on the oval office. How much can a president accomplish, given the realities of geopolitical events and supply/demand?

In this weekend's Wrap, Jim Brown again outlined the supply/demand issues behind the price increases, increases he has been predicting for a couple of years. Whatever one's feelings for our president and his energy policies, he has also recently warned that demand has risen faster than supply and that gasoline prices will likely increase this summer, statements he reiterated in today's speech outlining his four-point plan.

That speech was to drive crude prices for June delivery lower, but as soon as the speech ended, crude began a choppy rise off the low to close at $72.85. Energy-related stocks such as XOM and COP dropped along with crude, but also executed a choppy rise off the low. Ahead of tomorrow's inventories numbers, the 10-sma support held for crude for June delivery, as that moving average has been doing since the middle of March.

The Russell 2000's 10-sma support also held today, but the RUT dipped below the several-week long resistance at about 767 and held there into the close. The mighty TRAN continued its consolidation at 4700, moving sideways as 30-sma support rises beneath it. Having challenged double-top resistance for a week and not yet able to press through it, the TRAN perhaps looks vulnerable to a dip down to that moving-average support at 4622, and tomorrow's crude inventories number could provide the excuse for that to happen, either with the TRAN dipping into that number or afterwards. If the TRAN dips and if trading the SPX, OEX or Dow, watch that test. Consider protective measures for bearish positions as the TRAN tests that average, if it should do so. The TRAN hasn't violated that average on a daily closing basis since mid-January, with the exception of one minor violation in February, soon reversed the next day. While many believe the TRAN's climb overdone, it's still climbing and nothing has happened yet to violate the rising channel it established last November. Sideways trading and then a quick dip to proven support sometimes precedes another climb, as it did in mid-April, early March, and February.

Annotated Daily Chart of the Wilshire 5000:

Annotated Daily Chart of the SPX

Despite the balancing on the 10-sma, the SPX spent most of the day beneath the 30-minute 100/130-ema's, unable to push back above that 100-ema, even temporarily. RSI rises on the 30-minute chart, suggesting a possible ongoing test of resistance, but bulls certainly want to see more upward price movement accompany that RSI price movement. Otherwise, this looks like sideways consolidation prior to another decline. The 30-minute 100-ema was at 1303.95 at the close and resistance from there up to 1305.75 on 30-minute closes looked relatively strong. Next Keltner resistance above that lies just under 1314, but at the close, 1303-1306 resistance looked as if it had a decent chance of holding on 30-minute closes. If there's an early pop to that level, watch for a potential rollover. Don't hold on to bearish plays if the SPX soars, however. All bears should have learned that lesson by now.

Annotated Daily Chart of the Dow

"Buying the dip" may be a slight exaggeration, but unlike many indices, the easily pushed around Dow did maintain support at its 30-minute 100-sma, at 1276.24 as of the close. On a nested Keltner chart, that action looked more neutral than positive, but there was a slight firming of support down to 11,234. The Dow confirmed a H&S today, with the neckline at about 11,350, but these formations have been of little predictive power in setting a downside target for a long time. However, if the Dow should rise to 11,320 or so, watch for a possible stalling or even a rollover possibility as Keltner support may have thinned by then.

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Much depends on the action of the TRAN, of course. On a Keltner basis, the TRAN looked the strongest of the indices detailed so far. Support at the 30-minute 100/130-ema's was solid, with those averages at 4693.74 and 4785.96 at the close. Watch for that support to hold or fail on a 30-minute closing basis for clues as to next direction.

The Nasdaq not only failed to hold 30-minute 100/130-ema support, but it also closed well beneath the 2338.52 level of the 100-ema at the close. It also closed beneath the 10-sma, but held to 30-sma support.

Annotated Daily Chart of the Nasdaq

As of the close, Keltner evidence suggested that the Nasdaq might rise to test Keltner resistance gathering near 2335-2338.50. That resistance looked relatively strong, with the 30-minute 100-ema also at 2338.52 as of the close. If the Nasdaq bounces first thing tomorrow morning, watch for rollover potential in that zone. If the Nasdaq pops through that, next Keltner resistance appears to lie near 2353.

Both 30-minute and daily charts proved ambiguous on the SOX.

Annotated Daily Chart of the SOX

Reportedly, AMD helped the SOX stabilize, although my last Wrap, written last Wednesday, had already pointed out the strong moving-average support just where the SOX did find support. In the first quarter, AMD is thought to have gained global market share for corporate server chips. AMD's strong gain brought that stock up to 30-sma resistance, resistance that has held for a couple of months, so it's unclear whether AMD will continue to contribute to a SOX gain tomorrow. Some will consider the SOX's hold above the 50-sma into the close as bullish, so that might be enough to prompt a bounce attempt, but the SOX still looks too tangled up in support/resistance to predict how well such a bounce would be sustained, if it occurs.

The reaction to today's economic numbers confused some. April's consumer confidence rose to 109.6, with the 2.1-point rise to its highest level in nearly four years a surprise. A decrease to 106.3 was expected. The present-situation component rose to 136.2 and the expectations index increased to 91.9. Many considered that the strong employment situation pushed confidence higher, with component measuring the respondents saying that jobs are plentiful rising to 29.1.

March's existing home sales also were expected to decline and also surprised by rising 0.3 percent to a seasonally adjusted rate of 6.92 million. Sales had been expected to drop to 6.70 million.

Bob Pisani commented on the market's downturn after these relatively good numbers, but others deemed the existing home sales number a mixed one. Sales dropped 4 percent year-to-date. Inventories, particularly of condos, rose. The median price of a home rose to $218,000, but that's the smallest price gain in median prices in more than two years.

Some also posited that Tuesday's stronger-than-expected economic numbers renewed inflation fears. Recent higher fuel and commodity costs have fueled those fears, and today's downturn in bond prices and upturn in yields emphasized them. Shortly after the release of the data, the ten-year's yield jumped to 5.08 percent, although they were to close at 5.07 percent. By early afternoon, expectations that the Fed will raise rates twice more, to 5.25 percent, had risen to 50 percent.

The day also featured many discussions of energy's impact on the consumer. President Bush outlined a four-point plan for addressing energy costs. Covering the details of President Bush's plan have pushed the length of this Wrap out of the bounds of what should be a readable summary, so those who do not want to read that summary might skip now to the end of the Wrap, detailing tomorrow economic and earnings releases.

Although many commented that some of the content of President Bush's speech was already known, the immediate and temporary effect was to knock down the price of crude, an effect that carried some energy names such as COP, XOM, VLO and others lower with it and brought other equities lower, too. CNBC commentators noted that the address didn't draw much attention on the floor of the stock exchange, but it certainly may have drawn attention from those watching daily news programs. Over the last twenty-four hours, the reports this reporter have seen have detailed how a woman was forced to pawn her grandmother's ring to pay for the gas her husband needs to get to work and other such effects. Despite what the consumer confidence survey and other economic numbers may be saying, some consumers are focused on and alarmed by rising energy prices.

Even if President Bush's speech drew little attention from those on the floor of the exchange, it did draw much applause from the gathered audience. President Bush's speech began with what he termed good news, an attempt to build into his concerns. He included the steps made toward moving toward a free Iraq in that good news. He applauded the economy, saying that 5.1 million new jobs had been created, and that the unemployment rate was lower than that of the 60s, 70s, 80s and 90s. One way to keep it that way is to make the tax cuts permanent, he said. He segued into the one area of concern, high energy costs, with the U.S. "addiction to oil" being a matter of national security concern. We rely on countries that are often unstable or have agenda hostile to the U.S. he explained. The price also threatens our economy, he said, with gasoline price increases being a tax on farmers, small businesses and workers.

What can the government do? he asked. A past proposal by Democrats was to fix prices, but he claimed those hadn't worked. He wants to encourage conservation, expand production, and encourage alternative energy sources. He wants Americans treated fairly at the gas pump, but the sophisticated and knowledgeable readers on these pages might question how much different President Bush expects to make and how much of his state intention that Americans should be treated fairly at the pump might have been a politically necessary statement.

The FDC is investigating manipulation, President Bush said, although previously he has claimed that rising prices are a function of supply/demand issues. He believes that energy companies with large cash flows need to reinvest that cash into increased production and take other steps. They don't need unnecessary tax breaks, including tax-supported research into deep-water drilling.

Secondly, greater fuel efficiency is needed. Drivers need to be encouraged to purchase hybrid or clean-diesel vehicles. Tax credits have already been expanded as incentives, but these apply only to a limited number for each manufacturer, and that's a problem, he said. Congress needs to make all eligible for tax credits.

Thirdly, supplies of crude and gasoline need to increased. He directed the Department of Energy to stop making deposits this summer into the strategic petroleum reserve, saying the reserve was sufficient. We should ensure that there are not roadblocks to getting fuel to the pumps. He mentioned reformulated gas and said he was appreciative of the efforts of the ethanol producers, but said some were worried that supplies would not be sufficient and that some states had requested waivers stretching out the time in which the new formulations must be introduced. President Bush directed EPA administrator to grant waivers to relieve critical supply shortages. He added that there are too many localized fuel blends, or "boutique fuels." He believes that the fuel rules are uncoordinated and overly complex, causing price to go up. The governors need to form a task force on boutique fuels, decreasing the number of those fuels and simplify the process.

Refining capacity needs to be expanded, President Bush added. No new refineries have been built in thirty years. The permitting process is extremely complicated. Jim Brown has expanded on this topic many times, well before the recent developments. Congress needs to simplify the permitting process for construction and expansion, so that it can be accomplished within a single year, President Bush said.

Crude needs to be safely developed in our country in environmentally sensitive areas, the president noted. The passage of laws allowing the development of supplies in environmentally sensitive areas will not increase the supply immediately, but if such measures had been passed a decade ago, perhaps referencing Clinton's energy policies, our domestic production would have increased 20 percent, he opined. We need the additional supplies, he said.

He noted that these strategies are all interim and short-term, and we need to power our automobiles with something other than gasoline, if long-term solutions are to be found. The Advanced Energy Initiative will "get us off our addiction to oil," he claims, and technology could change technology for good. Years of development of ethanol put us on the threshold of change, he said. Others diversifications away from hydrocarbons include further development of hybrid vehicles and hydrogen technology. He said a little development can convert vehicles to flex-fuel vehicles. "When the agricultural sector is strong, America is strong," he said, eliciting hearty applause from the gathered audience, and relying more on ethanol will help rural America. Ethanol is "home grown." This industry is growing, particularly in the Midwest, where corn is grown, but some factories are springing up in other places.

Limits exist as to how much corn can be used for ethanol, he commented, and other sources needed to be explored, such as switch grass. He is recommending $150 million be spent on ethanol-related research.

He also supports bio-diesel fuel, signing the first-ever tax credit for bio-diesel producers. This is part of a comprehensive strategy for diversifying away from oil, he said. He also mentioned new battery technologies, saying we were "pretty close" to a breakthrough, being able to drive up to 40 miles on electricity alone. The budget includes $31 million for this technology.

Finally, $1.2 billion will be devoted to research into hydrogen technology, a technology that produces zero emissions. "There's an industry coming," he said, that will allow consumers to drive to work without relying on oil. (That's, of course, if the need for petroleum-based products in the components of the car are ignored.) A fueling station might include various choices, which seemed perhaps somewhat contradictory when he had earlier talked about the need to reduce the number of boutique fuels.

This was not meant to be an endorsement of or argument against President Bush's outlined new policy, but rather a report on what was said today, as it perhaps impacted today's market behavior and certainly might tomorrow, when crude inventories are released. Those who have been reading Jim Brown's learned theses on the growing oil crisis over the last two years will be able to judge for themselves the workability of President Bush's plans. Jim writes the Wrap tomorrow night, and will likely give a broad overview of the situation, but for tonight, our concern is more short-term, especially with crude inventories reported tomorrow.

Many important earnings reports were released today, too, although they struggled for attention with President Bush's speech this morning soon after the open. Consumer demand resulted in a 37 percent rise in net profit for Whirlpool (WHR). Earnings of $1.70 a share were far ahead of the expected $1.52, and the stock gained 2.4 percent. Another company with a household name, AT&T (T), formerly SBC Communications, increased revenue by 45.5 percent from the year-ago level when the results from the acquired old AT&T were included. On a pro-forma basis, earnings were $0.52 a share against expectations of about $0.48 a share. The stock gained 0.3 percent. DuPont (DD) also earned more profit per share than expected, $0.88 against an expected $0.80, but those earnings were below those from the year-ago level, and revenue disappointed. This company reported that it was hit by higher raw materials cost and the stronger dollar. DD dropped 1.3 percent

Lockheed Martin (LMT) reported earnings of $1.34 a share, far above the expected $1.14 a share, and the company raised expectations for full-year 2006, but the average range the company pinpointed may have been a couple of cents below that forecast by analysts. The stock dropped 1.79 percent. Fellow defense giant Northrup Grumman (NOC) reported earning that beat expectations, but both NOC and BNI, another company reporting better-than-expected earnings, dropped after a steep run-up into earnings. NOC fell 3.04 percent, and BNI fell 6.16 percent.

JetBlue Airways (JBLU) gained 13.2 percent after the airline's losses proved less than anticipated. JBLU says that it will further cut costs, resulting in profitability for the airline.

Encouraging sales in China led Piper Jaffray and CIBC World Markets to upgrade Yum Brands (YUM), the operators of the Taco Bell, KFC, and Pizza Hut chains. YUM gained 3.5 percent.

Wednesday's economic reports include several that could move the markets. The weekly report from the Mortgage Bankers Association will be released at 7:00 EST. That won't be the only report related to the home builders. At 10:00, March's New Home Sales will be released, with sales expected to increase to 1100-1140 thousand, up from the previous month's 1080 thousand.

The Census Bureau releases the Durable Goods Orders at 8:30, with this number considered a leading indicator of activity in the manufacturing sector. Aircraft orders often distort this number, but it can still be market moving.

Another market-moving number, crude inventories for the week of 4/21, will be released about 10:30. The last in a list of potentially market-moving numbers comes at 2:00 with the release of the Fed's Beige Book.

Tomorrow's earnings include those from ABN, ACPW, AKAM, AHC, AHM, ABC, BUD, APPB, AMCC, ARBA, ATMI, BHI, BIIB, BOBJ, CD, CL, COP, FNF, FE, INSP, JNY, LPX, LSI, NTGR, ODP, PEP, PHM, RJF, ROL, SKX, SOHU, S, TBAC, TASR, TLAB, TIN, BA, FAF, UBSI, WNC, WY, and XLNX, among others.

As the day closed today, the Wilshire 5000, SPX, RUT and Nasdaq were all still trading below or along the 30-minute 100-ema's, averages they had grouped along or slightly under all day while RSI began rising. The easily pushed around Dow was balancing above that average, as was her sister index, the TRAN, while the Nasdaq was well below it. Some indices looked as if they might be ready to attempt a bounce or at least were prepared to go on challenging resistance that was holding through Tuesday afternoon, but they need to make some upward headway while the RSI rises. If not, this looks like sideways consolidation ahead of another decline. If indices do bounce, especially if the bounce is ahead of the inventories number, watch the resistance levels detailed above for possible rollovers, but remember that no index has done anything terribly bearish as of yet. Protect bearish positions. Most indices just decline within rising regression channels.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None BOT None

New Calls

None today.
 

New Puts

Cbot Holdings - BOT - close: 111.50 chg: -2.50 stop: 113.01

Company Description:
As one of the leading global derivative exchanges, the Chicago Board of Trade provides a diverse mix of financial, equity and commodity futures and options-on-futures products. Building on its 158-year history, the CBOT continues to advance into the future using the strength of deep liquidity, market integrity and member-trader expertise. Using superior trading technology in both electronic and open-auction trading platforms, the CBOT provides premier customer service to risk managers and investors worldwide. (source: company press release or website)

Why We Like It:
We are going to label this an aggressive play. Shares of BOT tend to be somewhat volatile and we need to start with a relatively wide stop loss. BOT's IPO was pretty successful back in October with a massive run up. After a three-month consolidation the stock produced another strong run up but the rally stalled at the October highs. Now the shares have produced what looks like a bearish head-and-shoulders pattern. Currently BOT is flirting with a breakdown under the neckline of the H&S pattern around support near $110. The P&F chart, which eliminates some of the noise seen on the daily chart, is bearish with a sell-signal pointing to a $92 target. We are going to suggest a trigger at $108.95, which is under Monday's low. If triggered then we'll target a decline into the $101.50-100.00 range. Our time frame is about three to four weeks.

Suggested Options:
We are suggesting the May puts although June puts would certainly work. We suggest double checking these prices, they seem a little high.

BUY PUT MAY 115.00 BOT-QC open interest=126 current ask $8.70
BUY PUT MAY 110.00 BOT-QB open interest= 10 current ask $5.70
BUY PUT MAY 105.00 BOT-QA open interest=110 current ask $3.70

Picked on April 25 at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/06 (confirmed)
Average Daily Volume = 322 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Arch Cap. Grp. - ACGL - cls: 59.11 chg: -0.15 stop: 58.49*new*

Tomorrow is our last day. We plan to exit near the closing bell tomorrow (Wednesday) to avoid holding over ACGL's earnings report expected on Thursday. More conservative traders may want to exit early tomorrow if the major averages continue to slide lower. We are raising our stop loss to $58.49.

Picked on April 03 at $ 58.15
Change since picked: + 0.96
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 195 thousand

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Alliance Res. Ptrnrs - ARLP - cls: 41.29 chg: +0.61 stop: 37.95*new*

The high price of oil continues to drive new focus toward the coal stocks. ARLP posted another gain today and is nearing our target in the $42.00-42.50 range. It doesn't hurt that ARLP beat Wall Street's earnings estimates by 21 cents a share. We are raising our stop loss to $37.95.

Picked on April 23 at $ 38.98
Change since picked: + 2.31
Earnings Date 04/24/06 (confirmed)
Average Daily Volume = 101 thousand

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Lehman Brothers - LEH - close: 150.95 chg: -3.05 stop: 147.75

The broker-dealer stocks finally hit some profit taking today. Shares of LEH gave up almost 2%. We recently warned readers that it might be prudent to lock in some profits near $155. Our concern was that LEH might pull back to the $150 level, which it has. The question now is whether or not the $150 level will hold up as support or will LEH dip to longer-term support at its rising 50-dma (146.64), in which case we'd be stopped out. Our suggested plan was to sell half the bullish position near $153 and the rest near $159. Don't forget that LEH has a stock split coming on May 1st.

Picked on March 22 at $144.61
Change since picked: + 6.34
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

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Acc. Home Lenders - LEND - cls: 54.75 chg: -0.76 stop: 52.95

We don't see any change from our previous updates. A bounce from $54.00 (or $55) could be used as a new entry point. Our target is the $59.75-60.00 range. We do not want to hold over the May 2nd earnings report and that doesn't give us much time.

Picked on April 19 at $ 56.57
Change since picked: - 1.82
Earnings Date 05/02/06 (confirmed)
Average Daily Volume = 693 thousand

---

Progressive - PGR - close: 104.92 chg: -2.58 stop: 103.95

Today's sell-off is a mystery. We can't see any specific news to account for the sharp 2.4% decline. Nothing happened with rival Allstate (ALL) today. The only other insurance news we could find was a really strong earnings report from Chubb (CB). That makes PGR's relative weakness today a real warning sign. More conservative traders may want to exit early right here. After such a sharp pull back odds are shrinking that support at the $104.00 level will hold up. We're not suggesting new bullish positions. We have a two-week time frame as we do not want to hold over the May 8th earnings report.

Picked on April 23 at $106.46
Change since picked: - 1.54
Earnings Date 05/08/06 (unconfirmed)
Average Daily Volume = 846 thousand
 

Put Updates

Overseas Shipping - OSG - cls: 48.65 chg: +0.02 stop: 50.01

OSG is not moving much. Shares spent most of the session churning sideways. We are not suggesting new bearish plays at this time. We do not want to hold over the early May earnings report.

Picked on April 11 at $ 48.10
Change since picked: + 0.55
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 469 thousand

---

Whole Foods - WFMI - close: 62.06 chg: -1.00 stop: 66.05

WFMI continues to move lower following the recent breakdown. That's good news for the bears. The P&F chart looks pretty bearish with a $43.00 target. We are only going to aim for a decline into the $60.25-60.00 range but more aggressive traders may want to aim lower. The biggest challenge is probably the time frame. We do not want to hold over the May 3rd earnings report.

Picked on April 23 at $ 63.91
Change since picked: - 1.85
Earnings Date 05/03/06 (confirmed)
Average Daily Volume = 1.8 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.)

---

There are currently no strangle plays.
 

Dropped Calls

Cummins - CMI - close; 110.23 chg: -0.47 stop: 105.95

Target achieved. CMI displayed some relative strength this morning with a gap higher and a spike to $112.85 before reversing course. Our target was the $112.00-112.50 range. Don't forget that CMI is due to report earnings on Friday.

Picked on April 16 at $106.75
Change since picked: + 3.48
Earnings Date 04/28/06 (confirmed)
Average Daily Volume = 804 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 

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.

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