Option Investor

Daily Newsletter, Monday, 05/15/2006

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Table of Contents

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

Market Wrap

Profit taking finds gold under $700; oil back under $70

Commodity prices retreated Monday with the StreetTracks Gold Trust (NYSE:GLD) $67.41 falling 5.22%, while June Gold (gc06m) settled down $26.80/oz, or -3.76% at $685.00 on the COMEX.

Trader's cited profit taking in the precious metals complex for much of today's decline, but China's central bank setting a key trading benchmark for the yuan under the psychologically important level of 8.0 to the dollar for the first time, may be a signal out of Beijing that the Chinese government may allow its currency to appreciate more rapidly versus the dollar.

June Crude Oil (cl06m) settled down $2.63, or -3.65% at $69.41, its lowest settlement in more than a month.

Saudi Arabia's oil minister Ali Naimi told reporters that "there is no lack of capacity right now." When asked about the impact of high prices on global demand, Naimi said: "In general, when prices are high, people check their pockets and when they are lower, they open them."

Bantering between the United States and Venezuela did little to stem oil's decline prior to settlement.

Late in the afternoon the Associated Press reported that a State Department official said the U.S. is set to impose a ban on arms sales to Venezuela because of what it claims is a lack of support by President Hugo Chavez's leftist government for counter terrorism efforts.

The official said Venezuela has been providing a safe haven for the two main leftist guerrilla groups in Colombia. The official spoke only on the condition of anonymity because the arms sale ban hadn't yet been announced.

Moments later, Dow Jones reported that Venezuelan President Hugo Chavez brushed aside the U.S.'s suspension of arms sales to his country, saying "this doesn't matter to us at all."

"It's the empire and it has a great capacity to do harm to the countries of the world," said Chavez, referring to the U.S. as "an irrational empire."

U.S. Market Watch - 5/15/06 Close

The U.S. Dollar Index (dx00y) 84.66 +0.83% rebounded from 52-week lows found late last week.

The dollar's strength helped put a bid under the iShares MSCI Japan Index (AMEX:EWJ) $14.98 +0.94% after its recent retreat from $15.55 last week as investors in that region fear a weaker dollar's impact on exports.

The Airline Index (XAL.X) $51.06 +2.34% finished atop today's list of sector winners. Discounter JetBlue Airways (JBLU) $9.90 +4.21%, which has lost nearly half its value since the beginning of the year rose $0.40 after Raymond James upgraded the stock to "outperform" from "market perform" saying a "Return to Profitability" plan unveiled in April looks promising.

Despite a 3.3 basis point decline in the 10-year Treasury Yield ($TNX.X), homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 752.50 -1.96% fell to a fresh 52-week low.

The National Associates of Home Builder's index for sales of new, single-family homes fell to 45 in May from 51 in April, marking its lowest point since mid-1995, the association said Monday.

The April index was revised up one point from last month's preliminary estimate.

When the Housing Market Index is over 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales. The index, which is adjusted for seasonal variations, was based on a survey of 385 homebuilders, who answer questions about sales prospects now and in the near-term.

Additional economic data released today had The Federal Reserve Bank of New York's general economic index falling to a 12.4 reading, the lowest since June 2005, from 15.8 in April. Readings exceeding zero signal that more surveyed manufacturers reported business improvement than deterioration. The index averaged a 15.6 last year.

For those that have access to the OptionInvestor.com Market Monitor, I posted a 05/05/06 to 05/12/06 sector bell curve comparison from Dorsey/Wright and Associates at the bottom of today's Market Monitor.

This would encompass any sector strength/weaknesses found during last week's trade (Friday close to Friday Close).

Ideally I would like to update as of tonight's close for the Market Wrap, but with over 6000 point and figure charts to tabulate, I don't get these very revealing and institutionally monitored sector bullish % updates until well after my editor's deadline.

One sector bullish % that does signal further downside RISK for bulls is the Oil Service Sector Bullish % (BPOILS) where Friday's action had this sector bullish % reversing back lower to "bear confirmed" from a relatively HIGH level of bullish RISK.

Levels above 70% are deemed "overbought" and levels below 30% are deemed "oversold."

Bullish % for Oil Service - As of 05/12/06 Close

Imagine you are hand charting 100 point and figure charts of "oil service" stocks. Charles Dow did this on a nightly basis for the vast number of holdings he held in his portfolio, long before computers allowed for the computerized tracking of stocks on a supply (O) and demand (X) basis.

At the end of each night, Mr. Dow might have had two stacks of "oil service" point and figure charts on his desk. One stack contained those charts that still had a point and figure "buy signal" associated with the chart, the other stack containing those charts that had a point and figure "sell signal" associated with the chart. If Mr. Dow were tracking 100 oil service stocks, then at the close of Friday's trade, roughly 69%, or 69 out of 100 oil service stock charts he was plotting by hand (graph paper and a pencil) would still show a "buy signal" associated with its chart.

RISK (bullish or bearish) is a term that is sometimes "thrown around." However, the point and figure methodology using the 70% to 30% range helps give traders/investors a QUANTIFIABLE measure for defining RISK.


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Let's focus on the above bullish % chart for a minute and note that the recent 78% reading in May (blue 5) is/was a SIMILAR reading found in, say mid-January (blue 1 is early January) and (blue 2 is early February). This gives me (perhaps you) the observation that the oil service sector has recently experienced the same level of RISK as found in mid-January.

Let's also provide some focus to the BPOILS chart and that relative low bullish % reading of 46% in early March.

Once a "range" of RISK is observed, let's use our retracement tool on the Oil Service Index (OSX.X) from its recent high to March lows. I like to attach my retracement from a CLOSE to CLOSE.

Oil Service Index (OSX.X) - 05/15/06 Close

The MARKET is quick to remove RISK from a broader market index, but even more so from a SECTOR or individual stock. Bulls have the same level of bullish found earlier this year, when the OSX.X fell roughly 15% from its late January highs. Remember, RISK isn't found just among BULLS. When internals shift to the positive/bullish, BEARS will also experience RISK.

I see the OSX.X currently vulnerable to 200.00.

Of the various sector bullish % that Dorsey/Wright & Associates measures, the PRECious metals sector bullish % is most "overbought" at 86.76%. Yes, VERY strong, but VERY overbought.

I want to quickly follow up on the S&P 100 Index ($OEX.X). Here is a widely followed index of 100 very large U.S. based company's. According to Dorsey/Wright, of the 100 stocks, 63% (or 63 out of 100) still showed a point and figure buy signal associated with their chart as of Friday's close.

Let's stick with the same chart we viewed last week. The reverse h/s pattern still looks to be "in play" longer-term, but the odds of a 611.50 or 615 close on Friday is highly unlikely.

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

OEX May calls/puts do not expire until Friday's close, but I think the OEX hard-pressed to settle above 600.00 by Friday's closing tick. May's "Max Pain" theory based on May call/put open interest is 595. Today's action did find what I consider to be PREMIUM SELLERS as the VXO.X spiked as high as 14.32, to then close at 12.87 -4.8%.

Other major index "Max Pain Theory" values are $113.00 for the DIA ($1.00 increments). For the SPX.X "Max Pain" is 1,300 (5-point increments), 1,700 for the NDX (25-point increments) and $41.00 for the QQQQ ($1.00 increments).

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

Autoliv - ALV - close: 55.64 change: -0.87 stop: 54.99

Hmmmm... now may be a good time to worry. We can't find the news that sparked a gap down in shares of ALV today. Plus, the stock has closed under technical support at its 50-dma near $55.70. The MACD has produced a new sell signal. We are not suggesting new bullish positions at this time. Hopefully, if the major indices continue the late Monday afternoon bounce into Tuesday then ALV will rebound with them. A move back over $57.00 might be considered a new entry point. Our mid-June target is the $62.50-63.00 range.

Picked on May 04 at $ 57.53
Change since picked: - 1.89
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 513 thousand


Omnicom - OMC - close: 92.11 chg: +0.30 stop: 89.99

We have been triggered in OMC. The stock continued to show strength today and broke out over resistance at the $92.00 level. Our trigger to buy calls was at $92.05. More conservative traders should monitor their stop losses carefully as OMC continues to look overbought and due for a dip. The MACD on the daily chart is somewhat worrisome. If shares do pull back we'd look for short-term support at $91.00 and again near $90.00. A bounce from either could be used as a new entry point. Our target is the $97.50-98.00 range. The P&F chart is very bullish with a $110 target.

Picked on May 15 at $ 92.05
Change since picked: + 0.06
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

Put Updates

Amazon.com - AMZN - close: 32.78 chg: +0.05 stop: 35.51

AMZN spent most of the session churning sideways before finally bouncing in the last few minutes. We suspect that shares will continue to bounce tomorrow. Watch for overhead resistance near its 10-dma in the $34.00 region. We are not suggesting new positions. Our target is the $31.00-30.75 range.

Picked on May 01 at $ 34.85
Change since picked: - 2.07
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 6.3 million


Apollo Group - APOL - close: 52.78 chg: +0.52 stop: 55.05

APOL temporarily broke down under support at the $52.00 level this morning but thankfully we remain on the sidelines. Shares hit $51.96 this morning but our trigger to buy puts is at $51.75. We remain bearish and if triggered will target the $47.75-47.50 range.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/22/06 (unconfirmed)
Average Daily Volume = 2.1 million


Black Box - BBOX - close: 43.10 chg: -1.29 stop: 45.55 *new*

BBOX continued to sink and hit $42.10 as the low today but like many stocks shares produced a decent oversold bounce. The bounce may not be over yet. Watch for the $45.00 level to offer resistance. We're lowering our stop loss to $45.55. Our target is the $40.75-40.00 range.

Picked on May 12 at $ 44.85
Change since picked: - 1.75
Earnings Date 06/01/06 (confirmed)
Average Daily Volume = 90 thousand


Franklin Res. - BEN - close: 88.75 chg: -0.55 close: 92.55

BEN produced another failed rally this morning, this time at $90.35, before moving to a new two-week low. Volume was well above the daily average, which is bearish. The P&F chart for BEN points to a $77.00 target. We are suggesting puts here under $90.00 with a target in the $85.00-84.50 range. Be advised that we do expect a bounce at the $87.50 region.

Picked on May 14 at $ 89.30
Change since picked: - 0.55
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.1 million


IDEXX Labs - IDXX - close: 76.44 chg: -0.59 stop: 79.51 *new*

Uh-oh! Traders need to be cautious here. IDXX spiked lower to $74.37 this morning but produced a strong rebound almost to unchanged. While it does look like the bounce was beginning to fail late this afternoon the overall pattern is one of a bullish reversal. We are not suggesting new bearish positions at this time and expect shares of IDXX to rebound back toward overhead resistance near its 10-dma (currently 78.50). We are lowering our stop loss to $79.51.

Picked on May 11 at $ 77.93
Change since picked: - 1.49
Earnings Date 04/28/06 (confirmed)
Average Daily Volume = 125 thousand


Merrill Lynch - MER - close: 72.50 chg: -0.24 stop: 76.26*new*

MER continues to sink but we suspect a bounce tomorrow. Watch for overhead resistance near $74.00 and again at $75.00. We are lowering our stop loss to $76.26. The P&F chart points to a $67 target. We're going to target a decline into the $70.50-70.00 range.

Picked on May 11 at $ 74.00
Change since picked: - 1.50
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 4.7 million


USG Corp. - USG - close: 96.66 chg: -5.29 stop: 105.05

Our play in USG is now open. Shares broke down under support at the 50-dma and the $100 level. Our trigger to buy puts was at $99.75. The breakdown was fueled by heavy volume almost twice the daily average, which is bearish. Bear in mind that we would not be surprised by an oversold bounce toward $100 but broken support near $100 should now act as resistance. Our target is the $92.00-90.00 range.

Picked on May 15 at $ 99.75
Change since picked: - 3.09
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 888 thousand

Strangle Updates

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


Fedex - FDX - close: 115.44 chg: +0.38 stop: n/a

FDX spent almost the entire session bouncing sideways inside our suggested entry zone of $114.50-115.50. If you were looking for a new entry point to consider a strangle position then this is it! 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: - 0.31
Earnings Date 06/21/06 (unconfirmed)
Average Daily Volume = 1.4 million

Dropped Calls

B P Prudhoe Bay - BPT - close: 70.90 chg: -1.84 stop: 72.45

Oil stocks continued to get hammered today. A drop in crude oil prices to under $70 a barrel just poured fuel on the profit-taking fire that began last week. Shares of BPT gapped open lower at $71.74, which is under our stop loss at $72.45. Shares dipped to $70.30 before reversing course near support at $70.00. More aggressive traders might want to use a bounce from $70 as a new entry point. We're closing the play at this morning's open.

Picked on May 11 at $ 75.05
Change since picked: - 4.15
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 120 thousand


Nexen - NXY - close: 55.22 chg: -2.16 stop: 56.75

NXY is another oil stock that was hit hard today. The stock gapped lower and open at $55.03. Shares eventually dipped to $53.64 before bouncing late this afternoon. This play was never opened because shares never hit our trigger to buy calls at $61.75. More aggressive traders might want to consider new positions soon if NXY continues to rebound since the 100-dma has
been technical support in the past.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/13/06 (unconfirmed)
Average Daily Volume = 500 thousand


Red Hat - RHAT - close: 29.15 chg: -0.37 stop: 28.99

Tech stocks continued to feel the selling pressure today and the NWX networking index slid under its 200-dma late this afternoon before bouncing. In a similar pattern shares of RHAT slowly consolidated lower until the stock finally dipped under the $29.00 level and stopped us out at $28.99 before bouncing. We would keep an eye on a bounce back above the $30.00 or $31.00 levels as potential (aggressive) entry points for new bullish positions.

Picked on May 04 at $ 31.11
Change since picked: - 1.96
Earnings Date 06/27/06 (unconfirmed)
Average Daily Volume = 3.4 million

Dropped Puts

Allegheny Tech - ATI - close: 75.50 chg: -2.95 stop: 82.55

We are going to abandon the ATI play early. We expected some weakness today but we did not expect a gap down to open at $73.25. The stock spent the session bouncing sideways in a three dollar range. Should the major averages produce an oversold bounce soon then ATI could easily fill the gap and maybe more. We'd rather exit early. More aggressive players may want to keep the play open but tighten their stops significantly.

Picked on May 14 at $ 78.45
Change since picked: - 2.95
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 2.2 million


Bear Stearns - BSC - cls: 133.85 chg: -0.65 stop: 142.55

We are going to suggest an early exit in BSC. Our target was the $132.00-130.00 range and we were cautiously worried about support at its rising 100-dma (currently 131.85). It's possible that some investors were looking to the 100-dma as an entry point for a bounce and some of them jumped in early. BSC's low today was $132.20. We remain bearish on the stock but suspect BSC is due for a bounce. We'd rather exit early than see BSC bounce higher enough to stop us out. We'll keep an eye on BSC for a failed rally near its 50-dma or the $140.00 level as a potential entry point for new put plays. Aggressive traders who can stomach the volatility might want to keep the play open and just adjust their stop loss.

Picked on May 11 at $137.48
Change since picked: - 3.63
Earnings Date 06/15/06 (unconfirmed)
Average Daily Volume = 1.2 million


Research In Motion - RIMM - cls: 70.66 chg: -3.60 stop: 77.55

Target achieved. RIMM suddenly lost its footing on Monday and broke down under support near $72.00 and its simple 200-dma. Our target was the $71.00-70.00 range. More aggressive traders may want to aim lower since this looks like a significant break down under a long-term trendline of support (see a weekly chart) but keep in mind that the $70 level might offer additional support.

Picked on April 30 at $ 76.63
Change since picked: - 5.97
Earnings Date 07/06/06 (unconfirmed)
Average Daily Volume = 5.8 million

Dropped Strangles



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