Option Investor

Daily Newsletter, Monday, 05/08/2006

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Table of Contents

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

Market Wrap

Letters of engagement.....

It truly was a mixed session for the major indices with the Dow Industrials (INDU) as well as the S&P 500 (SPX.X) both edged up to multi-year highs at one point in the session.

Modest gains and losses were found by the close considering Friday's display of bullish optimism.

In the OptionInvestor.com Market Monitor, I like to "keep a pulse" of market internals and key index benchmarks during the day, as well as other "trading" measures such as the TRIN, TRINQ and VIX.X.

Energy sectors as well as June Crude Oil futures (cl06m) were under pressure early in the session after comments from Iran hinted at a moderating posture over its nuclear program.

An Iranian government spokesman told reporters that President Ahmadinejad wrote a letter to President Bush proposing "new solutions" to their differences.

June Crude (cl06m) fell as low as $68.20 in the first minutes of its floor trade at the NYMEX, only to settle down a modest 17 cents, or -0.24% at $69.77.

Later in the session, U.S. Secretary of State Condoleezza Rice dismissed the surprise letter, saying it didn't seriously address the standoff over Tehran's disputed nuclear program.

In an interview with the Associated Press, Ms. Rice said the letter from the Iranian leader was about 18 pages long and covered history, philosophy and religion. "This isn't it. This letter is not the place that one would find an opening to engage on the nuclear issue or anything of the sort," Rice said. "It isn't addressing the issue that we're dealing with in a concrete way."

U.S. Market Watch - 05/08/06 Close

Shares of chip-giant Intel (INTC) $20.11 +3.07% jumped higher at the open and built gains to the close after American Technology's analyst Dough Freedman sent a "letter" to clients saying the company could be gearing up to sell or take its flash-memory business public. Mr. Freedman raised his investment rating on Intel to "buy" from "hold."

But the gains for Intel weren't enough to bridge the recently widening gap (see 20-dayNet%) among many 4 and 5-lettered NASDAQ stock symbols and the 1, 2 and 3-lettered variety at the NYSE.

There will be times when there isn't just "one equity market," but two, perhaps three markets depict various measures of strength and weakness.

The U.S. Dollar Index (dx00y) edged fractionally higher. A note of interest here may be that the U.S. Treasury Department said it plans to release a semi-annual report on currency policies of major trading partners at 04:00 PM EDT on Wednesday. The report will be watched closely for assessments of foreign exchange policy in China.


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With the Dow Industrials (INDU) up an impressive 4.6% the past four weeks, it might behoove traders/investors to consider foreign exchange and "foreign trade" as it relates to the 4.8% decline in the Dollar Index (dx00y) during the same period.

It has been discussed that the tumbling dollar could mean "doom and gloom" for U.S-based assets. It has also been discussed that the weaker dollar could benefit large multi-nationals that derive revenue earnings from overseas/border trading partners.

We're at multi-year highs for some of the major equity indices. Dollar Index has retraced about 61.8% of its January 05 low to October 2005 relative high.

Dollar Index (dx00y) - Weekly Intervals

Ask anyone (bull/bear) their opinion on what the dollar is telling you, and you'll get a minimum of at least two, if not three different answers.

In October of last year it was "bearish" that the dollar was showing strength. My "bear notes" had it that the dollar's rise from January 2005 was a clear market signal that hyperinflation was at hand.

It is not uncommon for any security to retrace 38.2%, 50%, or 61.8% of "its move." However, when a security does retrace more than 61.8% of "its move" as the U.S. Dollar Index (dx00y) has done (from Dec05/Jan06 to Oct05/Dec05 relative high) there's another "four letters" that could drive dollar action this week.

The Federal Open Market Committee (FOMC) meets on Wednesday and many market participants see another 25 basis point tightening.

I want to quickly discuss "one item" that still sticks in my mind regarding ex-Fed Chairman Alan Greenspan's comments regarding Fed policy. And I think we should tie some of his comments to the dollar.

Mr. Greenspan had mentioned that the rapid rise in housing prices was JUST ONE (emphasis on just one) indicator of inflation that was on his radar screen and having some influence on future Fed policy.

Dow Jones Home Construction Index (DJUSHB) - Weekly Intervals

At different times, I do believe "markets are telling a story." I received a question just more than a week ago from a trader/investor that had set some downside alerts on the Dollar Index (dx00y) and DJUSHB and was wanting some follow up as to "why" both indices triggered his downside alerts (per 04/24 and 04/27 Market Wraps).

My historical "research" (looking at charts of the dx00y and DJUSHB) was inconclusive that there has been much of a "lasting tie" between dollar (up/down) and DJUSHB (up/down).

But that does NOT mean that some near-term relationships aren't being developed that might need to be monitored, or understood.

Scenario stated: The dollar's recent weakness is a sign from currency traders that the Fed may be reaching a near-term end to its tightening policy as one of the Fed's inflation concerns (housing prices) abates to more realistic growth measures.

We've heard the term "one and done" for Fed raising its target for Fed Funds so many times, I truly have lost track.

However, the dollar does/has tended to move higher/lower the past year based on FOREIGN market participant's views of Fed policy regarding rates. Where the dollar tends to "bid" or rise in anticipation of Fed tightening. Where Fed tightening has been construed with "economic growth" that could accompany, or lead to inflation.

As I look at the dollar's recent decline, one could draw a conclusion (which should be continually tested over time) that FORIEGN (substitute GLOBAL) market participants see a "key" indication of housing prices (falling if DJUSHB is a measure) as reasoning that the Fed may begin to pause.

S&P 100 Index (OEX.X) - Daily Intervals

In last week's Market Monitor at OptionInvestor.com, I got a little "excited" (my convictions get me excited) I feverishly started explaining how important I thought SECTOR analysis was as it relates to DAY trading, SWING trading, or INVESTING. And how important I (and most institutions) feel (based on historic observation) how important it is to know what stocks and sectors have "more importance" or weighting on an index that other stocks, or sectors.

As a trader or investor observes tonight's U.S. Market Watch, it might be worthy to observe that the "financials" (BIX.X, BKX.X, XBD.X and IUX.X) have had a relatively IMPORTANT role in the S&P 100's (OEX.X) recent advance the last couple of weeks.

"Financials" as an industry make up the GREATEST WEIGHTING of the SPX, OEX and RUT.X. Yes! Even the "small caps" are heavily weighted on the financial side. When we see these small, relatively obscure, yet publicly traded banks jumping 25% in a day due to their being acquired, the small cap RUT.X reflects some of that weighting too.

In a recent "Trader's Corner" article (5/03/06), fellow analyst Leigh Stevens discussed the potential reverse head/shoulder pattern in the OEX.

Which looks to be "in play" after Friday's action.

With the dollar showing weakness (market once again thinking Fed pause?), and financials strong the several weeks, combined with some "cooling" in the homebuilders (Fed/FOMC point of interest), it would have to be a CONSIDERATION that different portions of the market may have put some of this together.

It should be "clear" that the equity index fluctuations aren't ENTIRELY DRIVEN by dollar action (up/down), but a tie with past Fed commentary, dollar action, and DJUSHB price decline certainly get the letter A for "Attention!"

New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Apple Computer - AAPL - close: 71.89 chg: +0.00 stop: 68.45

Shares of AAPL tried higher this morning on news that a British Judge ruled that AAPL is within its legal rights to use an apple logo for its online iTunes store. The Beatles-owned record label Apple Corps is appealing the decision. Unfortunately for shareholders of AAPL the stock was unable to hold its gains and closed unchanged on the session. We do not see any changes from our weekend update. Our plan to buy calls over $72.25 remains our bullish 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.

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


Autoliv - ALV - close: 58.59 change: +0.44 stop: 54.99

The rally in ALV marked its fifth straight gain but we're concerned by the lack of volume. Overall the stock continues to look very strong but we suspect a pull back is in order. Our short-term target is the $60.00 level but our mid-June target is the $62.50-63.00 range.

Picked on May 04 at $ 57.53
Change since picked: + 1.06
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 513 thousand


Bear Stearns - BSC - close: 141.78 chg: -0.42 stop: 137.99

BSC displayed some strength early on today but failed to hold its gains. We'd look for a dip back toward the $140 region. Aggressive traders may want to consider bullish positions on a bounce near $140. We are suggesting a trigger at $144.10 to buy calls. 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.

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


CDW Corp. - CDWC - close: 59.56 chg: +0.23 stop: 57.99

Uh-oh! We are not suggesting new call positions at this time. CDWC did continue higher this morning but the pull back from its highs is a failed rally. We would expect shares to dip toward the $59.00-58.50 region before moving higher. Thus we'd wait for the bounce to appear before considering new positions. Our target is the $64.00-65.00 range.

Picked on May 07 at $ 59.33
Change since picked: + 0.23
Earnings Date 04/25/06 (confirmed)
Average Daily Volume = 880 thousand


Cleveland Cliffs - CLF - close: 96.33 chg: +2.82 stop: 89.95

Wow! We believe CLF looks strong but we honestly did not expect a breakout over resistance at $95.00 today. Our strategy over the weekend was to use a trigger at $95.11 to catch a breakout over resistance. The play is now open and our target is the $104.50-105.00 range although we do expect some resistance near $100. It wouldn't surprised us to see shares rally to $100 then pull back toward $95.00, which should now act as support. More conservative traders may want to take the quick exit/target near the $100 mark. The good news is that CLF has been climbing on above average volume for the last three days in a row.

Picked on May 08 at $ 95.11
Change since picked: + 1.22
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 692 thousand


Goldman Sachs - GS - cls: 163.53 chg: -0.86 stop: 157.95

Shares of GS spiked higher this morning but the market malaise sucked the wind out of the stock's sales and shares fell back under the weight of Friday's rally. We would prefer to buy a bounce near the $160.00 level but another move over $165 could also be used as a new bullish entry point. 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 currently in the newsletter. We suggest you pick the stock that you like best instead of trying to trade them both.

Picked on May 07 at $164.39
Change since picked: - 0.86
Earnings Date 06/13/06 (unconfirmed)
Average Daily Volume = 3.9 million


Red Hat - RHAT - close: 32.27 chg: +0.92 stop: 28.81

RHAT displayed relative strength today and out performed its peers and the wider market with a 2.9% gain. Considering the market's lack of strength today readers may not want to chase RHAT here. Our target is the $34.75-35.00 range.

Picked on May 04 at $ 31.11
Change since picked: + 1.16
Earnings Date 06/27/06 (unconfirmed)
Average Daily Volume = 3.4 million

Put Updates

Amazon.com - AMZN - close: 34.69 chg: -0.35 stop: 36.51

AMZN tried to bounce higher today but ultimately fell back into the red and back under its simple 10-dma. We are not suggesting new bearish positions at this time and more conservative traders may want to think about tightening their stop loss. Our target remains unchanged at $31.00-30.75. The P&F chart remains bearish and points to a $17.00 target.

Picked on May 01 at $ 34.85
Change since picked: - 0.16
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 6.3 million


Atheros Comm. - ATHR - close: 25.42 chg: -0.57 stop: 26.26*new*

We're still holding our breath with ATHR. The stock's recent oversold bounce appears to be fading but the stock continues to have potential support at the 50-dma and the $25.00 level. We're not suggesting new plays at this time and we are adjusting our stop loss to $26.26.

Picked on May 01 at $ 23.77
Change since picked: + 1.65
Earnings Date 04/24/06 (confirmed)
Average Daily Volume = 1.6 million


Research In Motion - RIMM - cls: 75.15 chg: -0.35 stop: 79.01

We see no change from our weekend update on RIMM. 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.

Picked on April 30 at $ 76.63
Change since picked: - 1.48
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.)


Fedex - FDX - close: 119.06 chg: -0.25 stop: n/a

The Dow Jones Transportation index closed unchanged today in spite of news that the President of Iran sent President Bush a letter on possible "solutions". This news helped pull crude oil back under $70 a barrel but the transports failed to respond. This left FDX churning sideways under resistance at the $120 level. 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.

Picked on April 30 at $115.13
Change since picked: + 3.93
Earnings Date 06/21/06 (unconfirmed)
Average Daily Volume = 1.4 million

Dropped Calls


Dropped Puts

Affiliated Mangers - AMG - cls: 101.38 chg: +1.33 stop: 102.55

Before the opening bell Goldman Sachs upgraded shares of AMG to an "out perform". This sparked shares of AMG to gap open higher at $102.75, which is above our stop loss at $102.55. We are closing the play at the opening trade.

Picked on May 01 at $ 97.45
Change since picked: + 3.93
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 637 thousand

Dropped Strangles



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