Option Investor

Daily Newsletter, Monday, 06/12/2006

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Table of Contents

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

Market Wrap


As World Cup fever heats up, bears put another one in the back of the bull's net early in the week on a light volume rush.

A mixed trade in Asia and weakness among European bourses had stocks here in the U.S. opening mixed to modestly lower.

Japan's government said the country's gross domestic product rose 0.8% quarter-over-quarter (+0.5% prior quarter), which was ahead of the 0.5% forecast. However, the Corporate Goods Price Index jumped 0.7% month-over-month (+0.5% prior month), which was much stronger than the 0.2% forecast.

The United Kingdom said producer price inputs fell 0.5% month-to-month (+2.5% prior), which was less than the +0.2% forecast. Meanwhile, producer price outputs rose 0.3% (+0.4% prior), which was slightly above the +0.2% forecast.

These data set the table for tomorrow morning's U.S. PPI (forecast +0.4% vs. prior +0.9%), with the core rate, which excludes the volatile food and energy components forecasted at +0.2%, compared with a 0.1% rise in April.

Other economic data slated for release here in the U.S. has economists looking for no change in May retail sales following a 0.5% increase in April. Ex-autos, economists look for a 0.5% increase after a +0.7% gain in April.

U.S. Market Watch - 06/12/06 Close

A strong Q2 earnings report from Lehman Brothers (LEH) $62.01 -5.48% set a modestly bullish tone prior to the cash open, but came up limping just after kickoff. The broker said net revenue jumped 35% to $4.41 billion, but fell 1% shy from the record level in Q1. Earnings came in at a healthy $1 billion, or $1.69/share, easily topping Wall Street's expectations of $1.61/share.

When listening to a somewhat muted stadium of onlookers, I did not hear any jeers calling for a windfall profit tax on the brokers.

Fed officials were talkative again today with the overriding theme of "inflation above my comfort level," still present.

As markets pulled and tugged either side of unchanged in mid-morning trade, buyers were seemingly dealt a "red card" late in the afternoon after the Treasury said the U.S. posted a $42.38 billion deficit in May. Spending rose 25% while revenue jumped 26%. The budget gap is more than the $39 billion deficit the Congressional Budget Office expected. The year-to-date deficit remains narrower than a year earlier


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There was plenty of merger-related news today.

Hedge fund Jana Partners said it proposed to acquire Houston Exploration (THX) $57.97 +6.07% for $62 a share. The hedge fund said it currently holds a beneficial stake of 12.3% of THX's outstanding stock.

I (Jeff Bailey) already see shareholders holding up a "yellow card" in the form of a shareholder lawsuit if THX's board approves the merger, which may explain the stock's lackluster trade in today's session. Shares of THX trade well off last-year's hurricane highs of $71.00. However, the way things or going in the energy complex, $60.00 might look good in a couple of months.

The reason I say there might be a shareholder lawsuit in the making is that Kinder Morgan (KMI) $99.51 -0.32% was slapped with a shareholder lawsuit recently. The stock surged back to last year's "hurricane highs" of $102/share from May's lows of $84 after The Carlyle Group and Riverstone Holdings LLC, submitted a proposal to acquire all of the outstanding common stock of KMI at a price of $100/share.

While Jana Partners seems willing to embrace THX for $60/share, Plains All American Pipeline (PAA) $44.65 -3.14% agreed to buy Pacific Energy Partners (PPX) $32.99 +2.80% for $2.4 billion, including the assumption of debt and estimated transaction costs. The deal calls for PPX unitholders to receive 0.77 of a newly issued PAA share. Plains All American said it expects the combined companies to generate near-term growth and savings of $30 million a year, growing to $55 million annually over the next few years.

Other merger-related news had electricity producer Mirant (MIR) $24.38 -0.28% blowing the whistle on its unsolicited takeover bid of NRG Energy (NRG) $46.92 -7.72% a week after NRG alleged Goldman Sachs improperly gave Mirant confidential information about NRG during months of merger negotiations.

The Networking Index (NWX.X) 227.07 -4.67% fell sharply with Comverse Technology (CMVT) $20.48 -13.10% shareholders playing things defensively after the communications-technology firm didn't file its quarterly report by Friday's deadline because of its ongoing stock-option review. The delay in filing quarterly financials could result in the stock's delisting from Nasdaq.

Online job poster Monster Worldwide (MNST) $38.60 -8.07% continued its horrific decline after The Wall Street Journal reported the company frequently granted options to top executives ahead of sharp share-price run-ups. Monster said it has received federal subpoena regarding its stock-option grants.

Energy commodities gave back the bulk of Friday's gains as Tropical Storm Alberto, the first named storm of the 2006 Atlantic hurricane season missed many Gulf of Mexico platforms. Shell USA's CEO said the company saw no oil, or natural gas production disruption from the storm.

July Crude Oil futures (cl06n) settled down $1.27, or -1.77% at $70.36, while July Nat. Gas futures (ng06n) finished up $0.052, or +0.84% at $6.224. July Unleaded (hu06n) settled down $0.0285, or -1.32% at $2.1243.

Over there... Over there...

The weakness is coming, the weakness is coming, the weakness is coming from over there.

In Thursday evening's Market Monitor, I was clicking through some supply/demand charts, also known as Point and Figure charts and was noting the "domino effect" that was taking place.

In this weekend's Market Wrap, Jim Brown noted some of the staggering declines that have taken place in various markets around the globe. Some of the sharpest have come in what I might consider "developing" markets like Brazil, South Africa, India, and one could argue Mexico and Hong Kong still in a development stage.

Depending on your age, you might remember the Sesame Street show. One of their educational attempts was surely targeted at future market technicians like myself. The game was called "Which one of these things is not like the other? Which one of these things are just the same?"

Something like that anyway. See if you can pick up on the pattern and what I've deemed "An aversion to risk."

Japan's Nikkei-225 ($NIKK) - 50-point box

One of the overriding concerns we tend to hear out of Japan is the impact of the weaker U.S. dollar potentially having on demand for the goods being imported into the U.S.. Since giving a triple bottom "sell signal" in May at 16,750, the $NIKK has yet to give a "buy signal." If there's any positive news coming from the above chart, it is that the $NIKK has achieved, and slightly exceeded its bearish vertical count of 14,500.

Please remember, the point and figure methodology of bullish and bearish vertical counts is based on the science of ballistics and is used by market technicians as a way to observe and understand POTENTIAL risk. Point and figure chartists will NOT encourage NEW BULLS to load the wagon when a bearish vertical count is neared, achieved, or exceeded, but a BEAR will likely look to lock in gains at an objective.

Now, let's come further west and check out Hong Kong's Hang Seng Index.

Hong Kong's Hang Seng ($HSI.X) - 50-point box

In late May, early June, the HSI.X looked to be consolidating a notable retreat. A double top "buy signal" at 15,950 was quickly retraced back to the May lows earlier this month (June) and the more recent trade at 16,050 did begin to signal some demand returning. However, the recent break of support and trade at 15,600 with further decline into this spring's base is a bit troubling and suggests further downside yet to come.

A great test for strength out of China can be "stock specific."

In my 05/22/06 Market Wrap, I mentioned that I was more eager to "sell option premiums" and had profiled the selling of the Petrochina (PTR) $95.04 -2.95% June $95 Put (PTR-RS) for $1.10, when the stock was trading at roughly $104.00/share.

With one eye on PTR and another on the above chart of the HSI.X, I decided we should have an "aversion to risk" as the HSI.X continued to exhibit weakness, where that MARKET risk might well exhibit itself in an "oil stock" of all places. While traders could have closed the trade for a small gain ($+0.65/contract, or 59.09%), it was indeed some MARKET RISK that recently found PTR plunging further lower to $93.70 on Thursday and challenging that low again today.

Petrochina (PTR) - $1 & $2 box scale

The main reason I revisit the past and current trades that I've profiled in PTR is this. "Common sense" would say that of all sectors and perhaps stocks getting drilled to the downside, oil would be less likely. However, MARKET, SECTOR and then STOCK specific risk currently play out to the DOWNSIDE. The tide will/can turn to BEARS having the risk, but looking at many stocks really shows how weakness is the overriding theme. Even in Asia.

Let's travel further west. Here's Germany's DAX Composite ($DAX).

German DAX ($DAX) - 50-point box

As we start to "click through" some of the major global indices, they begin to look VERY SIMILAR. Germany's DAX actually looks as if it is getting pulled lower by what has taken place in Asian indices.

France's CAC-40 Index ($CAC) has given two consecutive double bottom sell signals. You can visit stockcharts.com and view a FREE PnF chart using the symbol $CAC.

If there's an index that is showing some technical strength, it would be London's FTSE ($FTSE).

London Financial Times Index ($FTSE) - 50-point box

I'd argue that the FTSE "needs to give a sell signal!" It hasn't given a sell signal since it broke above downward trend at 3,900 way back in April, 2003!

I'd keep an eye on the STRONGER FTSE. If it should drop sharply, or at a fast rate of speed in coming sessions, then that could suggest that sellers are still quick to cut and run, even in other markets when the recent lows are broken.

Now let's bring it home to the S&P 500 Index ($SPX).

S&P 500 Index ($SPX) - 10-point box

As weak as the SPX has been, the above chart looks like a "little pullback" compared to some other supply/demand charts we've just reviewed.

I've been noting some of the foreign market action in the Market Monitor at night, or early the next morning in order to get a feel for how the U.S. markets might trade during the day.

Last week it was really the Asian markets that seemed to get hit hardest on the U.S. consumer credit figures. That might make some sense, as the U.S. is a BIG importer from those economies.

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

Google - GOOG - close: 381.54 chg: -5.03 stop: 384.50

As expected GOOG continued to consolidate lower toward the $380 level. If the markets continue to fall then GOOG may break down below its 200-dma and then its four-week trend of higher lows soon. We are still on the sidelines with a trigger to buy calls at $401.00. We see no changes from our weekend update.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 9.8 million


United Tech. - UTX - close: 59.62 chg: -0.43 stop: 58.75

Shares of UTX appear to at least be trying to resist the market sell-off. Unfortunately, it was another down day for the DJIA and UTX closed under round-number support at $60.00 and technical support at the 100-dma. More conservative traders, if you hold calls, may want to exit early right here! Almost any follow through on today's market weakness will probably drag UTX through our stop loss at $58.75.

Picked on June 08 at $ 60.13
Change since picked: - 0.69
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million


VF Corp. - VFC - close: 63.54 change: -1.44 stop: 62.45 *new*

As the market sell-off picks up speed investors will be looking for targets to lock in profits and VFC is a big target with shares closing at new highs on Friday. The stock lost 2.2% today. We are raising our stop loss to $62.45. More conservative types may want to put their stops closer to $63.00 (maybe last Thursday's low near $62.96). We are not suggesting new positions at this time.

Picked on June 01 at $ 63.51
Change since picked: + 0.03
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 545 thousand

Put Updates

Amgen Inc. - AMGN - close: 66.89 chg: -0.75 stop: 69.55

The BTK biotech index lost 1.69%, which appears to confirm last Friday's failed rally in the index. Meanwhile AMGN lost 1.1% in spite of positive news that the FDA has granted priority review status for AMGN's panitumumab drug. We continue to suggest buying puts in AMGN although more conservative traders may want to wait for a move under $66.75 as confirmation. Our target is the $62.65-62.50 range. The P&F chart for AMGN points to a $60 target.

Picked on June 05 at $ 67.48
Change since picked: - 0.59
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million


Franklin Res. - BEN - close: 83.86 chg: -3.10 close: 88.55 *new*

Look out below! The XBD index lost 3.2% as investors "sold the news" after Lehman Brothers (LEH) reported earnings today. Shares of BEN fell 3.5% and broke down under the $85.00 level. The MACD indicator on BEN has produced a new sell signal. Our first target at $85.25 has been achieved. Over the weekend we suggested that readers sell half or more of their position at $85.25 and then sell the rest at our second target in the $82.50-81.50 range, which is closer to the bottom edge of BEN's bearish channel. We are lowering our stop loss to $88.55.

Picked on May 14 at $ 89.30
Change since picked: - 5.44
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.1 million


Burlington Nrth.SntFe - BNI - cls: 71.25 chg: -1.03 stop: 77.55

BNI lost 1.4%, which was a little better than the 1.8% decline in the Dow Jones Transportation average. Shares of BNI are nearing support at its 200-dma and the $70.00 level. The P&F chart's bearish target has grown from $62 to $60. We would hesitate to buy new put positions here as BNI is likely to bounce near $70 again. Our strategy with BNI involves two targets. We suggested readers sell part of their position at $70.50 (already hit) and then sell the rest of your position at $67.00 near the bottom edge of its bearish channel. Be advised that BNI is due to present at the upcoming transportation conference next week (June 15th).

Picked on June 05 at $ 75.64
Change since picked: - 4.39
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 2.1 million


Barr Pharma - BRL - close: 50.51 chg: -1.25 stop: 54.25

BRL lost 2.4% and its MACD indicator is nearing a new sell signal. Keep a wary eye on the $50.00 level where BRL might try and bounce. We don't see any changes from our weekend update. Our target is the $48.00-47.50 range.

Picked on June 05 at $ 52.20
Change since picked: - 1.69
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million


Dril Quip - DRQ - close: 69.79 chg: -4.96 stop: 77.55 *new*

Oil service stocks were crushed again today. The OSX index lost 4.6% but shares of DRQ lead the way lower with a 6.6% sell-off. Our conservative target at $70.25 has been hit for the second time. Right now our aggressive target is the $67.50-67.00 range. We are lowering our stop loss to $77.55. More conservative traders may want to use a tighter stop.

Picked on June 07 at $ 74.77
Change since picked: - 4.98
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 390 thousand


Express Scripts - ESRX - close: 67.44 chg: -1.90 stop: 72.65

It was another down day for ESRX. Shares lost 2.7% to confirm Friday's close under support near $70.00. We were suggesting two targets at $65.25 and at $60.50. The P&F chart's target has fallen from $62 to $60.

Picked on June 08 at $ 69.59
Change since picked: - 2.15
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million


Group 1 Auto - GPI - close: 56.47 chg: -1.99 stop: 60.65

GPI gave up 3.4% today. Shares closed under technical support at their simple 50-dma, which is a bearish development. We do not see any changes from our new play description this past weekend. Our target is the $51.50-50.00 range. Look for a short-term bounce near $55.00.

Picked on June 11 at $ 58.46
Change since picked: - 1.99
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand


Garmin Ltd. - GRMN - close: 89.60 chg: -0.87 stop: 95.01

Our put play in GRMN has been triggered. The stock lost 0.96% to close under the $90.00 level. Our suggested entry point to buy puts was at $88.90. The low today was $88.81. While we remain bearish we're a little concerned by the failure to close at a new relative low and under its 50-dma. More conservative traders should seriously consider waiting for a decline under today's low near $88.80 before initiating new put positions.

Picked on June 12 at $ 88.90
Change since picked: + 0.70
Earnings Date 08/002/6 (unconfirmed)
Average Daily Volume = 1.0 million


Intl. Bus. Mach. - IBM - cls: 77.02 chg: -0.61 stop: 81.05

IBM tried to produce an oversold bounce this morning but it failed near $78.00 for the second day in a row. We do not see any changes from our weekend update. The P&F chart points to $73.00 target. Our target is the $73.50-73.00 range.

Picked on June 06 at $ 78.75
Change since picked: - 1.73
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million


IDEXX Labs - IDXX - close: 77.31 chg: -1.27 stop: 80.05

Our put play in IDXX is now open. Shares broke down under short-term support at $78.00 to hit our trigger to buy puts at $77.95. The stock closed near its lows for the day, which is bearish for tomorrow. The MACD is nearing a new sell signal. We don't see any changes from our new play description on Sunday. We are suggesting two targets. Consider selling half or more of your position at $75.25, which is above potential support at $75.00 and its simple 200-dma. We would then try and sell the rest of your position in the $72.00-70.00 range, near the bottom of its descending channel. The P&F chart is bearish and points to a $64.00 target.

Picked on June 12 at $ 77.95
Change since picked: - 0.64
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand


Oshkosh Truck - OSK - close: 49.60 chg: -1.00 stop: 52.05

Wow! Believe it or not we are still sitting on the sidelines here. Shares of OSK lost 1.97% to close under the $50.00 level for the first time since January 2006. The stock also closed under technical support at the simple 200-dma but shares have not yet hit our trigger to buy puts at $49.49. More aggressive traders may want to open positions now. We'll stick to our published plan. Our target would be the $45.50-45.00 range.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand


Schlumberger - SLB - close: 56.58 chg: -2.64 stop: 65.01

SLB is another oil-service stock that was hammered today. Shares lost 4.4% and closed near their lows for the session. We would expect almost any follow through lower to hit our target in the $55.75-55.50 range.

Picked on June 07 at $ 60.51
Change since picked: - 3.93
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 10.0 million


Wynn Resorts - WYNN - close: 67.47 chg: -1.79 stop: 73.51

WYNN lost 2.58% on Monday but volume came in pretty low. The low volume sparks a warning flag for us. More conservative traders may want to tighten their stops. We are suggesting two targets. Consider selling half your position in the $65.25-65.00 range and then sell the rest of your position in the $61.00-60.00 range. The simple 200-dma near $60 could be support. The P&F chart is bearish and points to a $60 target.

Picked on June 05 at $ 69.11
Change since picked: - 1.64
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 1.2 million

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles



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