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Daily Newsletter, Saturday, 05/06/2006

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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

Goldilocks Lives!

A jobs number Goldilocks would have been proud of produced a massive short squeeze and a breakout over prior resistance levels on the S&P-500. The Dow soared +138 points to nearly 11600 and the Nasdaq managed to post two consecutive days of gains. It would appear on the surface the bull found new life. With bullishness breaking out all over noted market analysts started predicting new highs. Morgan Stanley analyst Joe McAlinden grabbed his five minutes of face time on CNBC to predict Dow 13,000 over the next 3-6 months. Cramer was busy last week with appearances on Leno, Conan and Meet the Press. Does all this market attention remind anyone of the times past? When the markets and market timers start appearing on magazine covers and the front page of newspapers it is normally time to be cautious.

Dow Chart - Daily

Nasdaq Chart - 180 min

The big news for Friday was the tame employment report. Nonfarm payrolls rose by +138,000 jobs in April and well below the +200,000 consensus. Not only did April come in well below trend but February and March were revised down by a total of -36,000 jobs. February had initially been released at +225,000 and March at +211,000. Both months were revised down to a flat +200,000 jobs. With only +138,000 added in April it brought the three-month average at +180,000 and right in the sweet spot for the market.

The markets wanted evidence the economy was still adding jobs but not at a rate strong enough to cause the Fed to continue its rate hikes. While the top line number may have fallen into that range there were some problems internally. The unemployment rate remained at the cycle low at 4.7% and a level that is considered full employment. The problem came from a sharp +0.5% jump in average hourly earnings. This was the sharpest increase since Oct-2005 at +0.6%. This pushed the gain for the year at +3.8% and the highest pace since 2001. This suggests the competition for jobs is pushing wages higher and wage inflation is a key indicator for the Fed. The jump in wages was even more important given the slow pace of job creation in April. On the bullish side the average hours worked rose to 33.9, which indicates growing demand. Manufacturing jobs jumped by +19,000 and the strongest gain since Nov-2005. The average manufacturing gain since November was only +3,000 jobs. This month's +19,000 represented a very strong jump in the manufacturing sector.

The jobs report should be very Fed friendly since the headline number came in less than the +150,000 required just to absorb new workers coming into the job market each month. However, this has been a strong week for economics and the Fed will have a lot to consider at next Wednesday's meeting. Strong economic numbers came from the ISM at 57.3 (+2.1), ISM Services 63.0 (+2.5), Construction Spending +0.9%, Factory Orders +4.2%, Productivity +3.2% and a -$5 drop in the price of crude oil. These are all very positive events for the economy and the markets. They could also be seen as Fed negative as evidence the economy is stronger than previously expected.

The Fed is widely expected to hike rates to 5.0% next Wednesday but the outlook is very mixed after that meeting. The market is factoring in only one more hike and the hope of a pause after next week's meeting. There is a small contingent of traders who think the Fed may even take a pass at this May meeting. This could be seen as real irrational exuberance.

The Fed is comfortable knowing they have caused a slowdown in the housing market but not an implosion. They want a cooling off period rather than a crash and burn. Toll Brothers announced on Friday that signed contracts for its homes fell -29% over the last quarter and that home deliveries will be 200 lower than previously expected. They will deliver somewhere around 9000 to 9700 homes in 2006 so -200 is not really material. Toll said they were entering the ninth month of slowing sales and that cancellations rose to 8.5% in April. Inventories are currently at 5.5 months of sales but Toll feels like the correction has nearly run its course. New home sales rose +13.8% in March but most see that as an abnormality given the sharp decline in the prior months. If the Fed does stop the hikes in the 5.0-5.25% range then home buying should begin to rise again once rate fears abate.

The Fed is poised to end its hike cycle and over the long term it really does not matter if it is in May or June. The economy is progressing nicely and worries over a second half decline are evaporating. This is being seen in the current market rally. It is not tech stocks leading the charge but cyclicals, materials and commodity stocks. These are clearly stocks, which are benefiting from the first complete global boom in 70 years. All the major global economies are booming and America's multinational blue chips are booming with them. 28 of the 30 Dow components posted gains on Friday with Procter Gamble the only loser and Honeywell flat. The biggest gainers were BA +1.83, CAT +1.17, UTX +1.14, HD +1.03, AXP and Citicorp +1.00. Wal-Mart, IBM, MMM, XOM and JPM were also strong contributors. Financials were very strong with GS +6.35, BSC +3.60, LEH +3.42 and Morgan Stanley (MS) +1.73. For a broad market rally you could not ask for better leadership other than the combination of cyclicals, financials and energy. The Nasdaq finally put two back-to-back gains together to add techs to the mix thanks to the SOX.

While the Dow and S&P hit new five-year highs several others broke out to new historic highs. The Russell-2000, NYSE Composite and the Transports hit blue sky on full afterburner. The chart below should give everyone cause for concern despite the positive fundamentals. The most notable was the transports given the high price of oil. The package shippers, UPS and FDX, are thriving on the global shipping boom. The railroads, CSX, UNP, BNI, NSC and CNI are thriving on strong demand to ship lumber, coal, oil and metals over the entire continent. There is a backlog of railcars on order approaching 40,000 units according to one analyst. The railroads claim the only thing holding them back from greater profits is the lack of those cars. Trinity (TRN) received orders for 12,941 cars in Q1 alone. That was their highest order volume since 1998. FreightCar America (RAIL) said their backlog at the end of Q1 was 17,794 cars.

Dow Transport Chart - Daily

Chart of EXPD - Daily

The strength in the shipping sector can be easily seen by the results in Expeditors International this week. EXPD posted a +24% increase in revenue for the quarter and a +70% jump in profit. Analysts were quick to upgrade estimates and in some cases out to 2008. Analysts were impressed with the jump in their forwarding revenue and profits on that revenue. EXPD jumped from $87 to $107 over the last two days. Even though their results and forecast were outstanding I could not resist buying some puts at the close on Friday because a spike like that is normally unsupportable in most cases.

Airlines are also booming with AMR, CAL, ALK and LCC leading the pack but loads are up system wide. Frontier (FRNT) announced on Thursday that load factors for April hit a record high of 80.7%, up +4.4% from March. Traffic also increased +27% on a +20.1% increase in capacity. Business travel is back and the vacation season is about to begin. Lest we forget those top four airlines are breaking out to new highs with oil prices over $70 a barrel. If oil prices do moderate then airline profitability will rise. Because of my Peak Oil view I refuse to buy an airline stock but somebody is taking those trades.

June Crude Oil Chart - Daily

Energy stocks also participated in the Friday romp despite oil prices stuck at $70. The rebound to $75 on Tuesday was followed by a two-day drop to just below $70 on Thursday after oil inventories showed an unexpected rise of +1.7 million barrels. A guick glance at the chart shows why $70 held. Personally I think the inventory build was a statistical aberration. Oil imports actually fell for the last two weeks but inventories rose. Crude oil imports were down -53,000 bpd and domestic production was down -5,000 bpd. Wednesday's number had to be a result of the refinery maintenance cycle currently underway. Consumption at the 144 US refiners was 15.390 million bbls per day in the week ended 4/28 and up only +108,000 bpd over the prior week it would seem that simple math shows there was something wrong. Refineries received only +756,000 bbls of oil more than the prior week but the EIA inventory numbers jumped +1.7 million bbls. There is a lot of confusion in the market due to the problems with the switch to ethanol and a refinery maintenance schedule that is worse than normal. Refinery utilization rose only slightly to 88.8% last week compared to 91.7% for the same week in 2005. Oil imports were down and refinery utilization down but oil held at $70. The consensus opinion in the market is still $80 before $60. The talking heads were consumed with chatter about falling demand due to $3 gas. Unfortunately that drop in demand will only be temporary. Very few drivers will change their driving habits substantially for more than a few days. Old habits die hard and an average of 1.5 million new cars/trucks are sold in the US every month. Think about it. 1.5 million new vehicles every month just in the US. Only 12% of the world's population has a vehicle. Demand is not going down materially any time soon.

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There has been a surge in hybrid sales over the last month but they are still just a trickle at 21,734 units compared to the 1.5 million conventional vehicles sold. Yes, they will use less gas but until the numbers grow tenfold it is not material in the greater scheme of things. The new Toyota Camry hybrid began to hit dealers lots this week but they cost +$4,500 more than a similarly equipped conventional model. When comparing the savings for 6000 annual miles ($222) of the hybrid (43mpg) to the standard model (28mpg) it would 20 years using simple math to recapture the added cost. Carmakers quote 7-10 years but they must be using a lot more miles per year to make it work. Bottom line for me is that we are not going to become less dependent on foreign oil by driving hybrids as long as 1.5 million conventional cars/trucks are added to the fleet every month. Analysts expect hybrids to reach 4% of the total autos sold, about 60,000 a month, by 2010. I still say it is a drop in the proverbial bucket. Using the April total below those 21,734 hybrids will use 6,209 barrels of oil per month compared to 8,926 for a standard Toyota Camry at 28mpg. The 2,717 bbl savings per month is .0000058% of the nearly 462 million bbls currently consumed in the U.S. each month.

Table of hybrids sold in America

Since my commentary on Tuesday there has been a lot of press about the nationalism of Bolivia's energy resources. Most of the press has highlighted the trend in South America towards the left and the taking back of investments made by large energy companies in an effort to produce energy in those countries. For instance Petrobras invested $1.7 billion in Bolivia since 1997 to build the gas infrastructure that enabled Bolivian gas to be transported and used. Now Bolivia has seized that infrastructure. Petrobras announced on Thursday that they were canceling plans to invest another $5 billion over the next five years to expand that gas infrastructure in Bolivia and would spend the money on LNG projects to import gas into Brazil from other sources. History has shown that whenever energy resources are nationalized that production slows and eventual income to the country decays. But, some have to learn the lesson first hand. Venezuela has been on a nationalism binge for a couple years and the results are bearing fruit. It was announced this week that Venezuela was forced to contract to Russia for 100,000 bpd of oil to supply its Ruhr Oel refinery in Germany. Numerous reports claimed this was due to the drop in production from Venezuela to 2.6 mbpd from the 3.3 mbpd prior to the anti Chavez strike in 2002. VZ production has been declining for several years due to a lack of investment under the Chavez regime. Venezuela was quick to deny the reason for the contract but did admit they bought the oil. With nearly all of South America turning to the left we should not expect production to grow. Venezuela and several other South American countries have turned to China for financing of exploration and infrastructure in exchange for some of the oil produced. I doubt China would take any nationalism of its investments quietly. It also means that any new oil produced will not be heading to the US but to China.

There was a flurry of interest about removing the 54-cent per gallon tax on imported ethanol in order to help consumers with the high price of gasoline. Since Brazil is the number one producer of ethanol and Brazil is friendly to the US it appeared that a possible change was coming. However, the Senate Finance Committee, which would likely review tariff changes, is chaired by Sen. Charles Grassley of Iowa, the largest producer of corn. Grassley was quick to say that dropping the tariff would have little impact on gasoline prices and would harm U.S. farmers. He said "providing duty free treatment for Brazilian ethanol would send the wrong signal to Americans who are devoting their careers to help America become more energy independent." Don't expect any change in the current tariff despite the sound bites from those politicians trying to grab their 60 seconds of airtime. Grassley also pointed out that currently Caribbean nations could ship 269 million gallons to the U.S. before the tariff kicks in and current exports are less than 80 million gallons. That is further evidence that the sound bites are just political posturing ahead of the coming elections.

Iran took another shot at the U.S. on Friday by granting a license to a bourse to trade oil based on euros rather than dollars. Iran said they wanted to free the global market of U.S. influence by removing the dollar as the normal method of payment. Currently oil trading is only conducted in dollars on markets in New York and London. If they are successful and volume appears it would force the conversion of billions of dollars into euros and to some extent force some devaluation of the dollar. Approximately $6 billion of oil is sold daily or roughly $178 billion per month. Obviously not all of it would trade on the Iran bourse based on the Persian Gulf island of Kish but how much would move there remains to be seen. The bourse still has to solve the credibility problems associated with trading billions of euros and guaranteeing the delivery and payment. Since the New York and London exchanges have extreme credibility in this area it would be an uphill fight for Kish. Iran is the fourth largest oil producer in the world and they could jumpstart the process by selling their oil only on the Kish exchange. This is just another bargaining chip in the nuclear standoff currently in play.

Vice President Dick Cheney fired a shot at Russia on Thursday in what will eventually become a global energy war. That will be years into our future but the players are choosing sides today. Cheney correctly accused Russia of using its energy reserves as "tools of intimidation or blackmail" in a speech to Eastern European leaders. He warned that the current backsliding on democratic reforms could harm Moscow's relations with the U.S. and Europe. Russia supplies gas to most of Europe and raised gas prices sharply to Western-leaning Ukraine last winter. This caused a halt of gas supplies throughout Europe. Russia warned last week if it did not get some concessions from other European nations it would divert the gas flow to Asia rather than Europe. This would literally leave most of Europe out in the cold since several nations get up to 40% of their gas from Russia. Russia has renationalized all of its energy assets in the last couple of years and taken back the privatization that was the hallmark of their democracy movement. Now they are warning nations that supplies may or may not be available to them depending in some instances on their political affiliations. Of course they don't say that in print but it is plain truth for anyone reading between the lines. Do not doubt that the world will be fully involved in a war over energy, probably within the next ten years. China and Russia are already preparing for it. One of China's Generals said last year that China expected to be at war with the U.S. by the end of the decade. He may no longer be among the living after making that public statement of fact but it was reported on all the major news services. China currently has 56 submarines including six nuclear subs and has up to 80 more on order. 25 are under contract now, 16 under construction, with two classes of boats being built by Russia for China. The U.S. is currently building only three. Their newest boats are super quiet and can run under water for up to 30 days on battery alone and are virtually inaudible to existing U.S. surveillance technology. They carry Russian SKVAL torpedoes, which can reach 200 knots along with anti-ship cruise missiles. They are not spending these untold billions of dollars just to maintain the status quo! Rant over.

AccuWeather's Joe Bastardi said this week that a much warmer than normal spring in the Gulf was a bad omen for the hurricane season that begins in three weeks. Warmer weather and warmer water tends to produce stronger storms. He also said New York's Long Island and the Carolina coastline face very high probabilities of being hit by a storm due to unusually warm waters in the northwest Atlantic. The Minerals Management Service issued their last report on the 2005 damage this week and it was ugly. According to the MMS they upgraded their number of pipelines damaged from 183 to 457. The number of large pipelines damaged, over 10 inches, rose from 64 to 101. Only 32 of those pipelines have returned to service ahead of the 2006 hurricane season. 113 production platforms were destroyed and only four replacement platforms have been proposed by the operators and approved by MMS. Those four will replace eight and account for 16,700 bpd. The MMS also surveyed the owners of the four largest platforms that were damaged asking when they might return to production. The MMS said 324,000 bpd of returning production was still offline but the three major platforms produce more than that according to numbers from other sources. Chevron was producing 320,000 bpd before the storms but only returned to 200,000 bpd in the first quarter. Chevron said they would never return to pre storm levels because it was uneconomical to restore several platforms and what was restored would be offset by normal field declines. I will end this section on that cheerful note.

The Dow completed its third week of gains and closed at 11577 and the highest level since Jan-18th 2000. This is only -145 points away from its highest close ever at 11722 on Jan-14th 2000. The intraday and all time high on that day was 11750. Needless to say the Dow run has been amazing more for its steady progress than its one-day gains. Only two days saw major gains over the last three weeks, Apr 18th and this Friday. After the March rally topped out on March 16th there were four weeks of declines to retrace to 11040 on April 17th. Since the rebound from that bottom the move higher has been steady with the last two weeks a constant fight at resistance around 11400. That resistance was shattered on Thr/Fri as positive economics sent the blue chips higher. Friday's romp was due to the weak jobs report and the expectations that the Fed was trumped and would have to pause.

The Nasdaq rebounded from two weeks of declines and a retest of 2300 to close just over 2340. This is far from its recent highs at 2375 but it was far better that we have been expecting of late. The tech weakness in the face of a bullish Dow had been very disturbing. The SOX rebounded from 511 to 530 on a sharp jump in semiconductor billings from a -2.2% decline in February to a +2.3% increase in March. Also helping the Nasdaq was a very strong Russell-2000. The small caps literally exploded above downtrend resistance on a 2:PM buy program on Wednesday afternoon and they never looked back. The index gained +22 points from Wednesday's low to Friday's high at 784 for nearly a +3% rebound.

Russell Chart - Daily

SPX Chart - 180 min

The S&P-500, the indicator we have been watching for confirmation for the last couple of weeks showed almost no indications of bullishness for the entire week as of Thursday's close. The SPX remained trapped in the 1300-1315 range until Friday's jobs report. There was a substantial number of sellers sitting on that 1315 level but the jobs report blew right past them at the open causing a giant bear-b-que. It was clearly a monumental short squeeze and once over 1315 on volume the buyers appeared and pressed their advantage. However, it should be noted that volume on both Thursday and Friday was well below the volume from the past two weeks. Friday's volume was only 4.8 billion shares compared to numbers in the high 5B and low 6B range over the last two weeks.

I have been cautioning everyone for the last couple of weeks that the internals were significantly different than the bullishness the Dow was showing. My position recommendation was to remain short under 1310 but to buy a breakout over 1315. I cautioned that a breakout event over 1315 would produce severe short covering and that is exactly what we got. Now, the $64 question is "what's next?"

There are no really earth shaking economic reports next week but the FOMC meeting would trump them anyway. The meeting is Wednesday, which gives the market plenty of time to exhaust its bullishness with a retest of the Dow high at 11722-11750. We have seen many times in the past where a market index had overextended itself in a climax spike to reach a prior high only to implode once that level was reached. With the extreme bullishness we saw in dozens of analysts on Friday it would not surprise me to see that kind of event soon.

The wildcard is of course the Fed. If they did take a pass on a Wednesday it would catch the majority of investors by surprise and could produce another reaction spike. There is less than a 30% chance of a pass according to one bond analyst. More than likely they will raise a quarter of a point to a nice round 5% and then issue a statement suggesting they were on the sidelines and data dependent for any future hikes. Since this is now what most investors expect it should be already factored into the market with Friday's breakout. We could see some follow on buying on Monday after the weekend newspapers talk up the breakout with catchy headlines. But, there is always Fed risk until 2:15 on Wednesday. Until that announcement Fed speculation is just that, speculation. A negative surprise could send us back to 11300 or lower very quickly.

SPX Chart - Weekly

I am going to continue to use the S&P as the best indicator of market strength despite the stronger performance of the Dow and Russell-2000. I believe those indexes will eventually track with the S&P. If the SPX holds its gains over 1315 the next major resistance is 1385. That gives us plenty of running room on a favorable Fed announcement but I am not holding my breath. The Fed announcement is now our pivot point and will control our fate. I will continue to remain long over 1315 until we see what next week brings. I am raising the short signal to 1315 from 1310. Should the SPX fall below 1315 again it could signal a reversal and a change in trend. If a strong breakout rally like we saw on Friday retraces all of its gains it is normally a very bad sign. For now, the trend is our friend and lets ride this bull until it runs out of steam.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BSC None None
CDWC    
CLF    
GS    

New Calls

Bear Stearns - BSC - close: 142.20 chg: +3.60 stop: 137.99

Company Description:
Founded in 1923, Bear, Stearns & Co. Inc. is a leading investment banking and securities trading and brokerage firm, and the major subsidiary of The Bear Stearns Companies Inc. With approximately $57.6 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales and trading, securities research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers financing, securities lending, clearing and technology solutions to hedge funds, broker-dealers and investment advisors. Headquartered in New York City, the company has approximately 12,000 employees worldwide. (source: company press release or website)

Why We Like It:
We suspect that the profit taking in the brokerage and investment stocks is over. Bulls are stepping in to buy the dip and the recent bounce looks like a new entry point to buy calls. Shares of BSC did break support near $140.00 but it failed to truly break technical support at its rising 50-dma. Now short-term technical oscillators are turning higher with Friday's rebound. We are concerned a little bit about the lack of volume in BSC so we are going to suggest that readers wait and use a trigger to buy calls at $144.10. That should confirm the rebound. We do see some resistance at $148 but our target is going to be the $149.50-150.00 range. Our time frame is six weeks. Please note that we are suggesting two plays in the brokerage sector. We're not suggesting you play both of them. Find the stock that you like the best. The other candidate is GS. The bounce in LEH looks tempting but we're going to watch it for another day or two.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 140.00 BSC-FH open interest=1465 current ask $6.10
BUY CALL JUN 145.00 BSC-FI open interest= 496 current ask $3.40
BUY CALL JUN 150.00 BSC-FJ open interest= 461 current ask $1.70

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/15/06 (unconfirmed)
Average Daily Volume = 1.2 million

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CDW Corp. - CDWC - close: 59.33 chg: +0.60 stop: 57.99

Company Description:
CDW was founded in 1984 and employs approximately 4,350 coworkers. In 2005, the company generated sales of $6.3 billion. CDW's direct model offers one-on-one relationships with knowledgeable account managers; purchasing by telephone, fax, the company's award-winning CDW.com web site, customized CDW@work(TM) extranets, CDWG.com web site and macwarehouse.com web site; custom configured solutions and same day shipping; and pre- and post-sales technical support, with approximately 120 factory-trained and A+ certified technicians on staff. (source: company press release or website)

Why We Like It:
Shares of CDWC are beginning to bounce from its recent consolidation and this looks like an entry point to buy calls. The stock spiked higher a couple of weeks ago after announcing a strong earnings report but then proceeded to retrace back to the $58.00 level virtually filling the gap. The P&F chart is bullish and points to a $70.00 target. We are going to aim for a rise into the $64-65 range but we do expect some resistance in the $61.50-62.00 zone.

Suggested Options:
We are suggesting the June or July calls. Select which strike best suits your risk and trading style.

BUY CALL JUN 55.00 DWQ-FK open interest= 42 current ask $4.90
BUY CALL JUN 60.00 DWQ-FL open interest=707 current ask $1.50

BUY CALL JUL 60.00 DWQ-GL open interest=2140 current ask $2.25
BUY CALL JUL 65.00 DWQ-GM open interest= 392 current ask $0.70

Picked on May 07 at $ 59.33
Change since picked: + 0.00
Earnings Date 04/25/06 (confirmed)
Average Daily Volume = 880 thousand

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Cleveland Cliffs - CLF - close: 93.51 chg: +1.96 stop: 89.95

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:
Metal and mining-related stocks continue to show strength. The U.S. and global economies are still running strong and that's boosting demand for commodities. It would be tempting to go long calls on CLF here with the breakout over $90.00 and the breakout over its 100-dma but we still see resistance at the $95.00 level. Therefore we're suggesting a trigger to buy calls at $95.11. If triggered we'll target an eight-week run towards the $104.50-105.00 range. More conservative traders may want to exit near potential resistance at the $100.00 mark. A move over $95.00 should produce a new P&F buy signal. More aggressive traders may want to think about buying a bounce from the $90.00 level if one presents itself.

Suggested Options:
We are suggesting the June and July calls. Select the strike that best suits your risk and trading style.

BUY CALL JUN 90.00 CLF-FR open interest=254 current ask $7.30
BUY CALL JUN 95.00 CLF-FS open interest=903 current ask $4.60
BUY CALL JUN100.00 CLF-FT open interest=633 current ask $2.70

BUY CALL JUL 95.00 CLF-GS open interest=555 current ask $6.70
BUY CALL JUL100.00 CLF-GT open interest=427 current ask $4.60

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 692 thousand

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Goldman Sachs - GS - cls: 164.39 chg: +6.35 stop: 157.95

Company Description:
Goldman Sachs is a leading global investment banking, securities and investment management firm. (source: company press release or website)

Why We Like It:
GS is another brokerage stock that showed a lot of relative strength on Friday. Shares had consolidated back toward support near its rising 40 and 50-dma's but that's where traders stepped in to buy the dip. Now with the financial stocks and the broader market indices pushing higher we suspect that the brokers will return to new highs. We're going to suggest call positions right here but traders have a choice. You can look for a dip back toward $160-161.00 or wait for a rise past $165.00. We would definitely prefer a dip. After Friday's 4% rise the call options are probably a little rich and a dip would help us get a better price. Technically the picture for GS is improving. The MACD is hinting at a bullish reversal while short-term oscillators are already turning positive. The P&F chart points to a $172 target. We are going to target a rise into the $174.00-175.00 range. We'll plan to exit ahead of the June 13th earnings report. GS is one of two brokerage stocks we're adding to the newsletter. We suggest you pick the stock that you like best instead of trying to trade them all.

Suggested Options:
We are going to suggest the June calls since we plan to exit ahead of the June earnings report.

BUY CALL JUN 160 GPY-FL open interest=1174 current ask $8.20
BUY CALL JUN 165 GPY-FM open interest=1046 current ask $5.30
BUY CALL JUN 170 GPY-FN open interest=1698 current ask $3.20

Picked on May 07 at $164.39
Change since picked: + 0.00
Earnings Date 06/13/06 (unconfirmed)
Average Daily Volume = 3.9 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Computer - AAPL - close: 71.89 chg: +0.76 stop: 68.45

AAPL is not having the best week. It is true that shares posted a gain on the week but the stock seems to be under performing the broader market indices. So far AAPL has maintained its bullish trend of higher lows but it's struggling with resistance at the $72.00 level. Some of the short-term oscillators don't look too healthy. Yet we remain somewhat optimistic here. Our plan to buy calls over $72.25, which happens to be today's high and our previous trigger, still looks like a decent strategy. More patient traders can keep an eye on a dip and bounce from the $70.00 level, which should be supported by the 100-dma and the 10-dma. Technical traders may find comfort in AAPL's Point & Figure chart with its bullish triangle breakout buy signal and its $101 target. Plus, AAPL appears to have created a bullish or inverse head-and-shoulders pattern over the last few months. Our target is the $77.45-80.00 range.

Suggested Options
We are suggesting the June calls, which gives us six weeks.

BUY CALL JUN 67.50 QAA-FU open interest=2340 current ask $6.30
BUY CALL JUN 70.00 QAA-FN open interest=3106 current ask $4.60
BUY CALL JUN 72.50 QAA-FE open interest=3326 current ask $3.20
BUY CALL JUN 75.00 QAA-FO open interest=6216 current ask $2.20

Picked on May 04 at $ 72.25
Change since picked: - 0.36
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 36.0 million

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Autoliv - ALV - close: 58.15 change: +0.62 stop: 54.99

ALV turned in another gain on Friday breaking out over potential resistance at the $58.00 level. We don't see any changes from our new play description on Thursday night so we're reposting it here:

Honestly we are surprised by the strength in ALV. As an auto parts maker we would naturally think business is tough with the U.S. automakers struggling so much. However, ALV is a global company so maybe they're making up the difference with foreign automakers. To simplify matters "the trend is your friend" and ALV is bouncing from the bottom (support) of its rising channel (see chart). The MACD has just produced a new buy signal on its daily chart and the P&F chart is very bullish with a $94 target. We are going to suggest call positions now but traders can choose to either wait for a breakout over $58.00 or look for a dip back towards $56.00. Our short-term target is the $60.00 level but our mid-June target is the $62.50-63.00 range.

Suggested Options:
We are suggesting the June options. Double check these prices!

BUY CALL JUN 55.00 ALV-FK open interest=533 current ask $4.60
BUY CALL JUN 60.00 ALV-FL open interest= 23 current ask $1.75

Picked on May 04 at $ 57.53
Change since picked: + 0.62
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 513 thousand

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Red Hat - RHAT - close: 31.35 chg: +0.38 stop: 28.81

Friday proved to be a bullish day for most technology stocks and RHAT enjoyed a 1.22% gain to close at a new five-year high. In spite of this apparent strength we remain somewhat cautious with RHAT since the stock failed to maintain most of its gains and was sliding lower into the closing bell. We suspect that traders might get another chance to buy a dip near the $30.50-30.00 region soon even though broken resistance at $31.00 should now act as support. What we do find encouraging is the new triple-top breakout buy signal on RHAT's P&F chart. Our target is the $34.75-35.00 range.

Suggested Options
We are suggesting the June calls. We prefer the $30's.

BUY CALL JUN 30.00 RCV-FF open interest=23493 current ask $2.55
BUY CALL JUN 35.00 RCV-FG open interest= 3176 current ask $0.50

Picked on May 04 at $ 31.11
Change since picked: + 0.24
Earnings Date 06/27/06 (unconfirmed)
Average Daily Volume = 3.4 million
 

Put Updates

Affiliated Mangers - AMG - cls: 100.05 chg: +2.04 stop: 102.55

The bulls are making this painful for us. The market rally on Friday was partially lead by the financial stocks and the bounce in the broker-dealer/investment sector proved to be pretty strong. The XBD broker-dealer index rebounded 3.2% on Friday. This helped propel AMG to a 2% gain and a close back over round-number, psychological resistance at the $100.00 mark. Yet shares remain under their five-week trendline of lower highs. Plus, the P&F chart remains bearish and points to an $86 target. More conservative traders might want to think about exiting early given the strength in the market right now. We still see technical resistance overhead at the 50-dma near $101.50. However, one BIG concern for us right now is the weekly chart. The weekly chart has produced a "hammer" style candlestick, which tends to act as a bullish reversal pattern. At this time we're not going to suggest new put plays but a decline back under $99.00 could be used as a new entry point. Our target is the $92.00-90.00 range although the $95 level does look like short-term support. If AMG does continue to rally nimble traders may want to switch directions and buy calls on a breakout in the 102.50-103.00 zone.

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

Picked on May 01 at $ 97.45
Change since picked: + 2.60
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 637 thousand

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Amazon.com - AMZN - close: 35.04 chg: +0.57 stop: 36.51

Okay, now we are starting to grow a little worried. The rally today didn't really seem to affect shares of AMZN until this afternoon when the stock really began to rise. By the closing bell AMZN had gained 1.65% and closed over broken support, now new resistance, at the $35.00 level. Short-term technical oscillators have turned bullish. We are not suggesting new bearish positions at this time and more conservative traders may want to think about tightening their stop loss. One concern we have is the weekly chart has now produced what comes close to a bullish reversal candlestick. Our target remains unchanged at $31.00-30.75. The P&F chart remains bearish and points to a $17.00 target.

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

Picked on May 01 at $ 34.85
Change since picked: + 0.19
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 6.3 million

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Atheros Comm. - ATHR - close: 25.99 chg: +0.13 stop: 26.51

After Friday's big market rally we gave serious thought to exiting early in ATHR. More conservative traders may want to do the same. If the major indices continue to climb then odds are really good we'll be stopped out. We're choosing to keep the play open for now since ATHR under performed the market on Friday and remains under short-term resistance at the $26.25 level. We are not suggesting new bearish positions but should a drop under $25.00 present itself traders can use it as a new entry point.

Suggested Options
We are not suggesting new bearish plays in ATHR at this time.

Picked on May 01 at $ 23.77
Change since picked: + 2.22
Earnings Date 04/24/06 (confirmed)
Average Daily Volume = 1.6 million

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Research In Motion - RIMM - cls: 75.50 chg: +0.69 stop: 79.01

This past week was a somewhat volatile one for RIMM. Weeks after solving its legal dispute with NTP, RIMM is hit by a patent-infringement lawsuit by Visto, who is fresh from its own legal victory. RIMM is now counter-suing Visto but it probably won't remove the new black cloud over RIMM shares. A study of the daily chart shows that the bounce back from Monday's sell-off has been fueled by a steady decline in volume. This decline in volume suggests there is no strength behind the bounce. Traders can watch for a failed rally in the $76.50-77.00 region as a new bearish entry point. We want to remind readers that RIMM can be volatile and this should be considered an aggressive, higher-risk play. Our target is the $71.00-70.00 range.

Suggested Options
Wait and watch for a failed rally under $77.00 before considering new positions. We would play the June puts.

Picked on April 30 at $ 76.63
Change since picked: - 1.13
Earnings Date 07/06/06 (unconfirmed)
Average Daily Volume = 5.8 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.)

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Fedex - FDX - close: 119.31 chg: +1.11 stop: n/a

Our strangle play produced a relatively good week. FDX offered us multiple chances to open plays in the $114.50-115.50 entry zone. Now it looks like the stock has verified its new direction. A sell-off in crude oil prices has sparked a big rally in the transports. The Dow Jones transportation index has rallied to a new all-time high. FDX broke out from its consolidation pattern and its daily chart has produced a new MACD buy signal. We're not suggesting new strangle positions at this time. We were suggesting the June $120 calls and the June $110 puts. This is a bet that FDX will trade significantly north of $120 or under $110 by June option expiration. Our estimated cost is about $2.60.

Suggested Options
We are not suggesting new strangles in FDX at this time.

Picked on April 30 at $115.13
Change since picked: + 4.18
Earnings Date 06/21/06 (unconfirmed)
Average Daily Volume = 1.4 million
 

Dropped Calls

Progressive - PGR - close: 107.43 chg: +0.43 stop: 103.95

It has been our plan to exit PGR on Friday afternoon to avoid holding over any earnings report expected next week. We're going to follow through with our strategy to exit early even though the date of the company's earnings report remains unconfirmed. We checked multiple sources and no one has a firm date yet but one source suggests that PGR could announce earnings next week and as early as this Monday. We do not want to hold over the announcement even though PGR's 4-for-1 stock split does not take affect until May 19th.

Picked on April 23 at $106.46
Change since picked: + 0.97
Earnings Date 05/08/06 (unconfirmed)
Average Daily Volume = 846 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

The Tricky TRIN

An acronym for TRader's INdex, the TRIN appears to be a relatively straight-forward indicator. Bullish for equities when below 1.00 and bearish above used to be the standard lore. Is it that simple, however? Do the TRIN's cutoff levels for bullish and bearish activities need to be adjusted relative to recent levels? Does the trend of the TRIN matter? Some would say no and some yes, even among the OptionInvestor writers. What do the charts say?

Before we get into the evidence on the charts, it's important to understand what TRIN measures. Developed by Richard Arms and also termed the Arms index, it's determined by the following formula:

((Advancing issues/declining issues)/(advancing volume/declining volume).

If the ratio of advancing issues to declining issues is the same as the ratio of advancing volume to declining volume, TRIN equals 1. When TRIN moves below 1, that movement indicates that the ratio of advancing issues to declining issues is less than the ratio of advancing volume to declining volume. Relatively stronger volume was flowing into the advancing issues. When TRIN climbs above 1, the ratio of advancing issues to declining issues is larger than the ratio of advancing volume to declining volume. Relatively stronger volume flowed into declining issues.

The calculation method gives credence to those who believe that a bullish-below-1.00/bearish-above-1.00 cutoff level can be utilized without looking at recent trends. However, the action from April 13-18 questions that conclusion.

Annotated 15-Minute Chart of the TRIN and SPX

If bullish-above-1.00/bearish-below-1.00 doesn't appear to work in isolation, at least in this small sampling, is it the TRIN's trend that counts? A glance at the TRIN chart shows that on April 18 and 19, the TRIN's trend was nearly identical in shape, although beginning from different starting points. On April 18, the TRIN began the day under the benchmark 1.00 level and stayed there all day, with the drop through most the day emphasizing the continuing bullish fervor. On April 19, however, the TRIN began the day above the benchmark 1.00 and stayed there most of the day, with its downward trend coinciding with a sideways/sideways-up consolidation on the SPX. The day wasn't clearly bullish (in accordance with a down-trending TRIN), but the initial high TRIN reading didn't indicate undue bearishness, either, when coupled with the TRIN's downward trend.

A sideways trend in the TRIN April 13 and half of April 17 resulted in a general sideways trend in the SPX, too, although the TRIN was firmly beneath 1.00 during that period, and supposedly bullish, according to the claims of those who look only at the number. Note, however, that SPX prices did tend to move in opposition to each jot in the TRIN. A slight downward cast in the TRIN early on April 13 resulted in a bounce in equity prices, for example.

The correlation appeared less strong the afternoon of April 17, however. TRIN chopped around just above 1.00 while prices dipped. Then prices climbed toward the first strong candle on April 18 while TRIN also climbed.

Although this limited evidence is far from sufficient proof that both the trend and the empirical level of TRIN must be considered, it at least presents the possibility that both could be.

If trend is going to be important, too, is there a way to anticipate when a TRIN trend might continue or be reversed? Can TRIN approach resistance or support, just as prices do, and would that resistance or support change from day to day?

Pivot analysis springs to mind as one study to test.

Annotated 15-Minute Chart of the TRIN

In my opinion, nested Keltner channels have more relevance in helping to determine when those reversals might occur, but perhaps that's because I tend to favor this dynamic charting study, based on moving averages.

Annotated 10-Minute Chart of the TRIN

For those interested, the settings on the Keltner nested channels are as follows:
Outer, mauve channel: Length, 120; Source, AvgHLC, exponential; multiplier, 7.2
Middle, black channel: Length, 45; Source, AvgHLC, exponential; multiplier 3
Inner, blue channel: Length, 9; Source, AvgHLC, exponential; multiplier, 1.4

This brief article can not be considered definitive proof that Keltner channels, in conjunction with RSI, also pinpoint reversal levels in the TRIN, or that such reversals in trend can signal increasing bearishness or bullishness, regardless of the empirical level of the TRIN. I hope it provides food for thought for your own explorations, however, and some skepticism about using the number alone when looking at TRIN.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, 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.

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