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Daily Newsletter, Saturday, 06/17/2006

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Table of Contents

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

Market Wrap

Kick the Cat

The rally from Tuesday's lows was the biggest Dow gain since April 2005. All indexes surged on significant short covering after the Bernanke speech. While the talking heads are all rattling on about how the market found its bottom I think caution is in order. Somebody needs to kick the cat to see if it is alive otherwise Thursday was just a dead cat bounce.

Dow Chart - 180 Min

Nasdaq Chart - Weekly

Economic reports for the week were benign despite continued signs of rising inflation. Those signs were no worse than expected and they only guaranteed another rate hike in late June. The market was already expecting it and we got a small relief rally that it was not any worse. The only economic reports on Friday were the current account deficit at -$208.7 billion, no surprise, and the Consumer Sentiment at 82.4. The sharp jump in sentiment was a surprise with analysts expecting only 79.0. The present conditions component jumped even more sharply from 96.1 to 103.1 and far outdistancing the one point gain in the future expectations component. Consumer sentiment had fallen -8.3 points in May primarily due to the rise in gasoline prices, weakening housing market and the drop in the stock market. Several analysts felt the sharp gain in June was simply a snap back from the May drop while others felt the May drop was due to a statistical error and the June numbers corrected it. Whatever reason pushed the headline number higher it was a positive factor for Friday's markets.

Economic Calendar for Next Week

Next week the economic calendar is rather slim with no major reports capable of really moving the market. Every report should not stray far from the prior month and all eyes are going to be on the Fed meeting the following week rather than the eclectic group of reports on the calendar. The PPI and CPI last week were the keys for the Fed and the Fed funds futures are showing nearly a 100% lock on another quarter point hike.

There were nine public speeches by Fed officials last week with three by Bernanke himself. He is widely credited with some of the Thursday bounce after comments on energy but I doubt that was the real push behind the gains. On Friday we heard from Kohn, Kroszner and Poole. Kohn told a Boston audience that cutting inflation could be difficult and costly if it is allowed to gain a foothold. He also said widespread expectations of rising inflation can be self-fulfilling. Kroszner told a crowd that the Fed needs to always be looking ahead for future implications of current actions rather than looking in the rear view mirror. He also said the potential exists for current high energy prices to pass through to the consumer in the form of inflation. This is a break from the party line as most of the Fedspeak has suggested impacts from energy should be contained due to a slowing economy. Bernanke himself said on Thursday that the impact of energy prices would be manageable. This was one of his comments that was thought to have contributed to the market rally. Poole said on Friday that the Fed must persist in fighting inflation to prevent it from taking hold. Also, current inflation was outside the Fed's comfort range. This should be the end of speeches from the Federal Open Mouth Committee until after the meeting on the 28th. Next week begins the normal quite period before the meeting.

All of these speeches were seen to have been telegraphing continued Fed moves rather than a coming pause. Fed funds futures are now pricing in a 60% chance of another quarter point at the August 8th meeting to take us to 5.50%. There is also growing support in the futures for another hike before November. While most brokers are keeping their estimates at 5.5% as the top Lehman came out on Friday saying they expect a 5.75% top with a cut shortly thereafter. These rising estimates will continue to pressure the equity markets as investors manage fears of higher rates and a slowing economy.

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The economic calendar next week will be light but it will be replaced with anxious waiting for earnings guidance. We have started to see the warnings appear but the pace should begin to pickup next week. In the past week Carnival said that higher fuel costs and a sluggish Caribbean market reduced profits for the quarter. CCL still beat analyst estimates by a penny and CCL gained +2.02 for the day. Oracle told investors that revenue was +25% higher than the $3.88 billion in the year ago quarter. Oracle had previously guided analysts to +13% to +17% growth. Oracle gained only +49 cents. Not all the early guidance has been positive. Adobe warned that results for the quarter and year would be below current estimates. On Thursday Adobe said Q2 profits fell short of its own projections but the stock rebounded late in the day. Adobe warned last month that results would come in at the low end of estimates. Caterpillar reiterated its $50 billion revenue target by 2010 and expected a +15% to +20% annual growth rate to that target. This helped the equipment stocks and commodities on Thursday. CAT said 2004 was the best economy in 20 years and although 2005 slowed slightly it was still an excellent year and 2006 is expected to be on par with 2005. KB Homes warned Q3 and Q4 revenue to be "well below Wall Street forecasts" but the stock gained +37 cents. KBH said the housing market would remain challenging for the rest of the year and reduced the number of homes they expect to sell to 40,000 from 42,000. Apparently investors feel all the bad news is already priced into the builders.

Overall the number of warnings has been few and the reactions minimal. It was felt that most stocks were already severely oversold and no further damage was possible. That was last week and next week could be a different story. If warnings accelerate and some big names start surprising the street it could easily get ugly again and very quickly. Currently analysts are not expecting a difficult quarter so some unexpected surprises could sour that view. Intel is widely expected to miss earnings and lower guidance and Microsoft is also expected to have a tough quarter. If any of the big guys suddenly start appearing in the news headlines you should increase your caution level.

Next week could also be challenged from another direction. The Russell indexes are rebalanced each year at the end of June. The list of changes was posted after the market close on Friday and will be effective after the market close on June-30th. However, now that the deletions are known they will be sold beginning with the market open on Monday. It is not that the index funds will race to dump shares but everyone else hoping to profit on the June 30th change will short them immediately. Just deleting 185 or so stocks from the Russell-2000 index is not the only downward pressure on index. Russell will also be adding 21 new IPOs that now qualify for addition. Some of these IPO stocks have very large market caps like MasterCard (MA) currently at $3.37 billion. Russell states that the total market cap for the Russell indexes will increase from $14.3 trillion to $15.3 trillion after the rebalance, a +7% increase. Bear with me here as I try to explain how that will impact the market. According to Russell, funds worth $3.8 trillion are indexed to the Russell. This means that roughly 7% of the $3.8 trillion or $266 billion in index share value will have to be sold to make room for purchases of the new companies being added. This is a VERY broad explanation and does not take into account all the various methods for investing in and/or managing a fund tracked to the Russell indexes. It is also based on the entire Russell-3000 not just the R1K or the R2k. Russell ranks the top 3000 stocks by market cap which are eligible for inclusion in its indexes. The top 1000 become the Russell-1000 index and the bottom 2000 become the Russell-2000. A company like Mastercard will go into the top 1000 and that will push some other company out of the R1K and back to the R2K. That means funds indexed to the R1K have to sell the deleted company and buy Mastercard. Funds indexed to the R2K will have to sell other stocks and buy the stock dropping from the R1K into the R2K. Since a stock being pushed out of the R1K has a bigger market cap than any of the R2K stocks it requires an downside adjustment to all R2K stocks currently held. Trust me, the Russell rebalance is a giant headache for fund managers. Any portfolio shifting or hedging before June 30th will exert downward pressure on the indexes since only the deletions or reduction in position size counts towards index movement until July 3rd. Any buying of Mastercard or the 236 other companies being added on June-30th will have no impact on the indexes prior to July 3rd.

I will summarize this as briefly as I can. Roughly 189 companies are being removed from the Russell indexes and selling by speculators will begin on Monday morning. Furthermore, fund managers will have to reduce existing positions by something around -7%, which includes those being deleted as well as those being reduced to make room for the $1 trillion in additional market cap of companies being added. The vast majority of liquidations will not occur until June-30th since index funds are only charged to track the index not anticipate changes. Some will anticipate and try to game the change but the vast majority will not. Still, hedge funds and individuals will start shorting the deletions and buying the additions on Monday morning in hopes of capitalizing on the rebalance.

Link to stocks being deleted:
http://www.russell.com/us/Indexes/US/Reconstitution/recon_deletions.asp

Link to stocks being added:
http://www.russell.com/us/Indexes/US/Reconstitution/recon_additions.asp

Another challenge investors are likely to face over the next several weeks is market cap rotation. In times of rising interest rates and economic slowing it is typical for investors, especially funds, to rotate out of small caps and into big cap blue chips. Small cap companies are usually impacted more by rising interest rates since they borrow more and debt in a slowing economy is a drain on profits. Since nobody knows what is really ahead for the economy other than a projected slowdown we are going to see investors become more defensive. Moving into dividend paying blue chips for the next few months will be a strategy many will follow. If the economic correction is brief they will jump back into smaller and more speculative stocks on the first economic upturn. If the Fed goes too far or the economy slips into recession then they are already in the relative safety of blue chips and collecting their dividend checks while they wait for a rebound. This market cap rotation is already underway to some extent and will likely accelerate as this earnings cycle progresses. The pace of earnings warnings will likely dictate the pace of rotation until earnings are over. Investors are stubborn and most will refuse to bail from their speculative positions until after the earnings are announced. Regardless of how many times companies tank on the earnings announcement investors continue to hold over the event hoping for that jackpot that occasionally appears. Wise investors bail a couple days before earnings content to take the routine profits on the build in expectations rather than routine losses on post earnings reality. One of the most frustrating events in trading is to be holding profitable calls on a company that is tanking in after hours and you can't get out until tomorrow's open and watching those profits turn into losses. The next most frustrating thing is to be holding those calls on your favorite stock when a different company in the sector misses earnings and the entire sector tanks in after hours taking your profits down with it.

Energy stocks rose from the dead on Thursday with very strong gains across the board. The gains held on Friday with very little erosion despite an intraday drop in crude to $68.80. Oil inventories on Wednesday confused the picture with a draw of -1.0 mb in crude but a sharp jump of +2.8 mb in gasoline. Refinery utilization also jumped by +1.7% to 92.7%. It means the floodgates are open ahead of the July-4th weekend and gasoline is pouring into the system. The demand table is showing slightly less demand than in 2005 but it did increase +5% over the prior week. Demand is averaging only about 67,000 bbls per week below 2005 but some heavy usage weeks are just ahead. The average price for gasoline over the last six weeks has risen to $2.92 or +70 cents over the same time last year. Higher prices have produced less consumption but only slightly. The longer prices stay at this level the acceptance of those prices will improve. Ethanol hit an all time high of $4 per gallon in the cash market this week. Any questions why gasoline prices are rising? Did you know that gas mileage from ethanol blended fuels is lower than gasoline alone by -5% to -8% depending on the strength of the blend? Mileage on E85 vehicles is as much as -25% less than gasoline alone. Yes, you are paying more and getting less.
http://www.fueleconomy.gov/feg/noframes/20392.shtml

Gasoline Demand Table

Crude Oil Chart - Daily


Friday was options expiration and it occurred with barely a whimper according to the closing levels on the indexes. Much of the impact had been felt over the last week leading up to the actual expiration. We saw monster volatility and very high volume as positions were closed or adjusted. The average daily volume for the last four days was 5.995 billion shares making it one of the busiest periods on record. Note in the table below the 16:1 up to down volume on Thursday and nearly 4:1 advancers to decliners. This was the mother of proverbial short squeezes heightened by the expiring options. Everyone short on Wednesday going into the quadruple witching was caught off guard by the sudden reversal with time expiring rapidly. Note also the reversal of fortunes on Friday despite the minor losses on the indexes. Sellers showed up in volume but they were not able to take back the gains from Thursday. If you are looking for a silver lining to Friday's cloud that was it.

Table of Market Internals

Index Correction Table

The rebound for the week came after some new lows were logged on Wednesday. Many analysts are calling Wednesday a bottom but a few professional traders are not betting on it. They feel Thursday's rebound was the product of a severely oversold market, option expiration and a well timed buy program combining to produce a short squeeze bear-b-que. The Dow rambled for a +345 point rebound and came to a stop right at resistance of 11050-11060. This is right in the middle of the expected range of 10700-11300 we could see over the next several weeks. Dow 10700 was strong support and a perfect place for the bears to give up prior to OpEx. Friday's -0.64 Dow showing was actually bullish given the +345 point rebound. The gains held under strong declining volume. Chalk that one up for the bullish case. It would also match the big cap rotation scenario I laid out earlier with the smaller cap indexes Nasdaq -14 and Russell -8. Yes, compared to the Dow the Nasdaq Composite is a smaller cap index. Need more proof? The S&P-100, the bluest of the blue chips was only off -1.41.

The Nasdaq rebounded +83 points (+4%) from its Wednesday low of 2065. The dead stop just below strong resistance at 2150 was followed by a -14 point decline. It was a bullish rebound but far from being confirmation of a new bull market. That 2150 level on Monday will be exactly downtrend resistance from where the May-9th decline started. Even if the Nasdaq manages to find additional traction the resistance only grows stronger as it nears 2200. The Nasdaq also has strong resistance in the form of earnings worries from Intel, Microsoft and quite a few other major techs that have been strangely quiet heading into the warning period. If a couple of those large names pops up with a surprise warning then overhead resistance will be even more difficult to break. Of course the obvious question arises. If everyone is expecting Intel and Microsoft to warn/miss would it actually be a surprise? Could just getting it over with actually be positive for the market? It would not be the first time a warning cleared the air. It is the unknown that bothers investors the most.

The S&P-500 ran out of steam at 1258 on the Thursday spike and that is exactly in the middle of the 1255-1260 resistance band. It is also right in the middle of our recent range where biases tend to evaporate. The S&P hit a low of 1219 on Wednesday and only 25 points away from the 1194 level needed for a -10% correction. Heck, that is close enough for me given the decline from the 1327 high but I don't make the rules. If we do roll over below 1260 next week I would expect that 1194 level to be reached.

S&P-500 Chart - Weekly

The market declines have not dampened any bullish spirit by the noted market strategists. In a CNBC poll of top money managers the average target for the S&P before year-end was 1359. That would be a +8.5% gain from Friday's close but there is a catch. Nearly everyone expected lower lows before that level was reached. If you are a student of market history then you know summers are not noted for bullishness and the Aug/Sep/Oct period is know for market bottoms. October is know as the bear killer month because of the number of market bottoms seen during those 31 days. This brings me back to my market projections I have been making over the last couple months. Despite the low last week and the nice rebound I still expect the S&P to trade in a range that is flat to down until later this summer. I do believe the highs are in for the coming months but I do expect new lows. My range target is 1175 as a potential support level for summer but we could bleed down to 1150-1165 and long term support. I still expect the upper range to be 1295 but would be very surprised to see it again in the near future. You can see that gives us plenty of room to wander and I think we will need it. I suspect we will spend most of our time wandering in the middle but opposing forces are very strong and we could see spikes to extremes on either side.

Russell 2000 Chart - Daily

For next week I would look to short or buy puts on any failure below S&P 1260. One way to do this and capture the Russell rebalance volatility would be with the IWM, or Russell-2000 Ishares. The July puts would be cheap and plentiful but a quick check shows others had the same idea. Nearly 300,000 puts traded on Friday with the largest volume of 105,000 at the money. That leaves the Russell futures as the only pure play left. The other option would be to pick a couple stocks from the Russell addition or deletion list from the links above and buy calls on the additions and puts on the deletions. Hint, the bigger the market cap the more buying you will see on the additions. That would target MasterCard (MA) or Burger King (BKC) as big cap entries. There are others but you will have to scan the list to find them. Next week is devoid of any scheduled events that could produce positive results so be on guard for any unscheduled events like earnings warnings that could sour sentiment fast. While everyone would like to think that the bullish sentiment from Thursday would carry over next week I would want to see high volume confirmation before entering any new long positions from this level. It is summer, a week before a Fed meeting, Russell rebalance notice week and the first week of the earnings warning cycle. Anything is possible but for me the risk of downside far outweighs the upside possibilities.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CMG AAPL None
CTSH DRIV  
GD EXPD  
LM ISRG  
  SUPX  

New Calls

Chipolte Mex Grill - CMG - cls: 61.76 chg: -0.12 stop: 57.45

Company Description:
Chipotle Mexican Grill offers a focused menu of burritos, tacos, burrito bols (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. (source: company press release or website)

Why We Like It:
CMG is one of our favorite places to eat and we've never heard anyone complain about their service and food. Investors also seem pretty smitten with shares of CMG. The stock has been climbing in a wide, rising channel. The recent sell-off stalled at support at the bottom edge of its channel and now CMG is bouncing. The P&F chart shows a bearish signal quickly reversing into a new buy signal. Plus, the MACD on the daily chart has produced a new buy signal. We would consider buying calls right here but our preferred entry point would be a dip back towards $60.00 (maybe even $59.00). Our target is the $67.50-70.00 range. We do not want to hold over the late July earnings report. FYI: The P&F chart points to a $75 target.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 60.00 CMG-GL open interest=154 current ask $5.10
BUY CALL JUL 65.00 CMG-GM open interest=325 current ask $2.80

Picked on June 18 at $ 61.76
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

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Cognizant Tech. - CTSH - close: 63.62 chg: +0.61 stop: 62.49

Company Description:
Cognizant is a leading provider of IT services. Focused on delivering strategic information technology solutions that address the complex business needs of its clients, Cognizant uses its own on-site/offshore outsourcing model to provide applications management, development, integration, and reengineering; infrastructure management; business process outsourcing; and numerous related services, such as enterprise consulting, technology architecture, program management, and change management. (source: company press release or website)

Why We Like It:
If the market does continue higher then CTSH may be able to breakout over resistance in the $64.00 and $65.00 levels. Shares broke down below their bullish pattern in May but since then the stock has produced a bullish double-bottom pattern. The Thursday-Friday bounce has produced a new MACD buy signal on the daily chart. We are suggesting a trigger to buy calls at $65.05. More aggressive traders may want to jump in early around $64.35. Our target is the May highs in the $69.50-70.00 range.

Suggested Options:
We are suggesting the July calls. We do not want to hold over the July earnings report.

BUY CALL JUL 65.00 UPU-GM open interest=3425 current ask $2.45
BUY CALL JUL 70.00 UPU-GN open interest=1463 current ask $0.90

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.4 million

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General Dynamics - GD - cls: 66.12 chg: +1.35 stop: 63.99

Company Description:
General Dynamics, headquartered in Falls Church, Va., employs approximately 72,700 people worldwide and had 2005 revenue of $21.2 billion. The company is a market leader in mission-critical information systems and technologies; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and business aviation. (source: company press release or website)

Why We Like It:
The market wrap this weekend mentioned how investors might choose to protect their money and put it in highly liquid large cap blue chip stocks. GD may be one of the beneficiaries of such a move. The stock displayed relative strength on Friday with another 2% gain and a breakout over resistance at $65.00 and its 50-dma. The stock could have more room to run after a three-week consolidation above the $62.00 level. Volume on Friday's move was above average, which is bullish. We would consider new call positions here but our preferred entry point would be on a pull back into the $65.50-65.00 region. Broken resistance near $65.00 should be new support. Our target is the $69.00-70.00 range.

Suggested Options:
We are suggesting the July calls. We do not want to hold over the July earnings report.

BUY CALL JUL 65.00 GD-GM open interest=1890 current ask $2.45
BUY CALL JUL 70.00 GD-GN open interest= 498 current ask $0.50

Picked on June 18 at $ 66.12
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Legg Mason - LM - close: 102.45 chg: +1.97 stop: 96.99

Company Description:
Legg Mason, Inc., headquartered in Baltimore, is a global asset management firm, structured as a holding company. (source: company press release or website)

Why We Like It:
It looks like the selling may be over in shares of LM. The stock has produced a bottom over the last four weeks and now shares are gaining ground again. We noticed the breakout over $100 on Thursday but wanted to see more strength and LM delivered with a 1.9% gain on Friday. Volume came in above its daily average. The Point & Figure chart looks pretty attractive with a double-top breakout buy signal and a $114 target. Please note that the XBD broker-dealer index is still in a bearish trend and if the sector index turns lower next week that will put pressure on LM. We're going to suggest calls with LM over $100. Readers can choose to open positions here or wait for a potential pull back toward the $100 level. We're going to put our stop loss under the lower edge of the recent gap. More conservative traders might want to put their stop under the top edge of the gap (around 98.75). We are going to target the $107.50-108.00 range. We would aim higher but the descending 50-dma will probably be overhead resistance.

Suggested Options:
We are suggesting the July and/or August calls. Remember our plan to exit ahead of LM's July earnings report.

BUY CALL JUL 100.00 LM-GT open interest=1674 current ask $5.70
BUY CALL JUL 105.00 LM-GA open interest= 879 current ask $3.10

BUY CALL AUG 100.00 LM-HT open interest=2680 current ask $7.50
BUY CALL AUG 105.00 LM-HA open interest= 787 current ask $4.90

Picked on June 18 at $102.45
Change since picked: + 0.00
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.8 million
 

New Puts

Apple Computer - AAPL - close: 57.56 chg: -1.82 stop: 60.05

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and iLife and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. (source: company press release or website)

Why We Like It:
Shares of AAPL may look oversold from their six-week sell-off but they could get a lot more oversold pretty soon. On Thursday the stock looked poised to breakout over the $60.00 level with a bullish engulfing candlestick pattern. There was no follow through higher after one analyst firm downgraded their earnings estimate on the company. More importantly word has gotten out that Microsoft is about to launch a rival for AAPL's iPod products. Whether the product is better or not it's more competition for AAPL's revenue stream. We suspect the next move could be lower. Once AAPL trades under support at $57.00 the next level of significant support appears to be the $50 level. The P&F chart looks pretty bearish with a $44.00 target. We're going to suggest a trigger to buy puts at $56.85. If triggered our target will be the $50.50-50.00 range. We do not want to hold over AAPL's mid July earnings report.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 60.00 QAA-SL open interest=49406 current ask $4.50
BUY PUT JUL 57.50 QAA-SY open interest=17154 current ask $3.00
BUY PUT JUL 55.00 QAA-SK open interest=49027 current ask $1.95
BUY PUT JUL 52.50 QAA-SX open interest= 6779 current ask $1.25

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Digital River - DRIV - close: 40.21 change: -0.96 stop: 42.55

Company Description:
Digital River, Inc., a global leader in e-commerce outsourcing, builds and manages online businesses for more than 40,000 software publishers, manufacturers, distributors and online retailers. Its multi-channel e-commerce solution, which supports both direct and indirect sales, is designed to help companies of all sizes maximize online revenues as well as reduce the costs and risks of running an e-commerce operation. (source: company press release or website)

Why We Like It:
We are going to add DRIV back to the play list as a put candidate again. The stock did well for us on the initial breakdown in early June. Now it looks like the oversold bounce is failing under its 100-dma. The Point & Figure chart points to a $26.00 target. We suspect that DRIV could fall toward the $35.00 region. Our plan is to use a trigger at $39.45 to open new plays. More aggressive traders may want to open positions now given Friday's failed rally. Or consider a bounce and failed rally under $42.50 as another entry point to buy puts. If triggered at $39.45 our target will be the $35.25-35.00 range.

Suggested Options:
We are suggesting the July puts. We do not want to hold over the July earnings report.

BUY PUT JUL 40.00 DQI-SH open interest=1526 current ask $2.30
BUY PUT JUL 35.00 DQI-SG open interest=1383 current ask $0.65

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Expeditors - EXPD - close: 99.35 chg: +0.86 stop: 100.35

Company Description:
Expeditors is much more than getting a piece of freight from one point to another. The Council of Logistics Management defines logistics as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements. Our job is to make sure that from raw material to finished goods sitting on the retail shelf, we provide the critical services and information necessary to give our clients a competitive advantage in the management of their supply chains. (source: company press release or website)

Why We Like It:
This is an aggressive bearish play. Not only does EXPD have plenty of upward momentum but the P&F chart is bullish with a $119 target. Technicals on the daily chart look positive given the three-day bounce but it looks like the rally is stalling under resistance at the top of its six-week bearish channel. We're suggesting a trigger to buy puts at $97.85. If triggered our target is the $90.50-90.00 range, where shares found support a few days ago. We want to reiterate that this is an aggressive play. EXPD could be building a big bull-flag pattern. If that's the case then traders will want to buy calls on a breakout over the $102.00-102.50 region.

Suggested Options:
We are suggesting the July and August puts but we do not want to hold over the early August earnings report. Our preference is for the August strikes.

BUY PUT JUL 100.00 URP-ST open interest=381 current ask $4.60
BUY PUT JUL 95.00 URP-SS open interest=607 current ask $2.55
BUY PUT JUL 90.00 URP-SR open interest=372 current ask $1.25

BUY PUT AUG 100.00 URP-TT open interest= 513 current ask $6.60
BUY PUT AUG 95.00 URP-TS open interest=1495 current ask $4.40
BUY PUT AUG 90.00 URP-TR open interest= 821 current ask $2.80

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Intuitive Surgical - ISRG - cls: 104.76 chg: -3.08 stop: 108.25

Company Description:
Surgical robotics was little more than a medical curiosity until 1999, the year Intuitive Surgical introduced the da Vinci Surgical System. Today, Intuitive Surgical is the global leader in the rapidly emerging field of robotic-assisted minimally invasive surgery. Since its inception, the company has consistently provided surgeons and hospitals with the tools needed to improve clinical outcomes and to help patients return to active and productive lives. (source: company press release or website)

Why We Like It:
ISRG is a high-flying winner from 2005 that has seen a lot of volatility in 2006. Shares produced a lower high around $130 in early May and now the stock is testing support and looks poised to breakdown under support at its rising 200-dma. Volume on Friday's 2.8% decline came in above the daily average. ISRG failed to participate during the market's big bounce last week. Aggressive traders may want to initiate put positions now with the stock under $107.50. We're going to suggest a trigger at $102.45, which is under the technical support at the 200-dma. More conservative traders might feel better waiting for a breakdown under the $100.00 mark before buying puts. The Point & Figure chart is bearish and points to a $74.00 target. We are only going to target a decline into the $91.00-90.00 range. We do anticipate some time of bounce at $100 and probably another bounce near $95.00. We do not want to hold over the late July earnings report.

Suggested Options:
We are suggesting the July puts. Unfortunately, at this time August strikes are not yet available. Our trigger to buy puts is at $102.45.

BUY PUT JUL 105.00 AXQ-SA open interest= 879 current ask $6.50
BUY PUT JUL 100.00 AXQ-ST open interest=1027 current ask $4.40
BUY PUT JUL 95.00 AXQ-SS open interest=1145 current ask $2.75

Picked on June xx at $xxx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.2 million

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Supertex - SUPX - close: 37.00 change: -1.68 stop: 39.25

Company Description:
Supertex, Inc. is a publicly held mixed signal semiconductor manufacturer, focused on high voltage interface products for use in the telecommunications, networking systems, medical, automotive and industrial electronics industries. (source: company press release or website)

Why We Like It:
The SOX semiconductor index produced a big bounce on Thursday but the sector saw no follow through on Friday. The SOX index remains inside its six-week bearish channel and under resistance at the 460 level. Meanwhile shares of SUPX, which have been out performing its peers in the semiconductor sector these last several weeks, are starting to falter. The stock has produced a bearish double-top pattern (see chart) and shares are now poised to breakdown under significant support at its rising 200-dma. The P&F chart for SUPX has already turned bearish with a $31.00 target. We want to catch a breakdown under the 200-dma. Our plan is to use a trigger at $35.99. More aggressive traders may want to jump in early with a drop under $36.50. More conservative traders can wait for a drop below the $35.00 level, which could be round-number support. Our target is the $31.00-30.00 range. We do not want to hold over the early August earnings report.

Suggested Options:
We are suggesting the July puts. At this time August strikes are not yet available. Traders might want to play the September strikes since they have more open interest.

BUY PUT JUL 40.00 SQO-SH open interest= 12 current ask $4.20
BUY PUT JUL 35.00 SQO-SG open interest= 86 current ask $1.50

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 263 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Google - GOOG - close: 390.70 chg: -0.30 stop: 384.50

The market bounce stalled on Friday and shares of GOOG remain under resistance near $395.00, the 50-dma (394.60) and the $400.00 mark. Shares traded in a relatively narrow range for GOOG on Friday with buyers defending the stock at $388.00. Since our market view is not very optimistic we're going to stick to our strategy with a trigger to buy calls at $401.00. One thing to be aware of is GOOG's upcoming earnings report in the second half of July. If GOOG doesn't break out soon we won't have enough time for shares to rise toward our target in the $440-445.00 range. FYI: the P&F chart points to $444.

Suggested Options:
We are suggesting a trigger to buy calls at $401.00. If triggered we're suggesting the July calls since we plan to exit ahead of the company's earnings report.

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

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Manpower - MAN - close: 64.30 change: -0.97 stop: 64.45

Friday produced zero follow through on Thursday's breakout above MAN's trendline of resistance. We remain on the sidelines with a trigger to buy calls at $66.05. We don't see any change from Thursday's new play description so we're reposting it here:

We are cautiously adding new bullish call candidates to the play list. The major market indices are bouncing and bouncing strongly but they remain inside their bearish trends for now. This could be nothing more than a correction on the way down. Therefore traders entering new call plays will probably want to keep their finger ready to hit the sell button and exit quickly. MAN looks like a decent bullish candidate. The consolidation appears to be ending. Shares have produced a double-bottom (bullish pattern) in the last couple of weeks and now shares have broken out above its trendline of lower highs (see chart). We want to see some confirmation so we're suggesting a trigger at $66.05 to buy calls. If triggered then we'll target the $69.85-70.00 range, under what appears to be resistance near $70.00. This is somewhat aggressive since MAN is still showing a bearish Point & Figure chart with a $55.00 target. We do not want to hold over the mid-July earnings report.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65.00 MAN-GM open interest=104 current ask $2.45
BUY CALL JUL 70.00 MAN-GN open interest= 78 current ask $0.75

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 959 thousand

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Reynolds American - RAI - cls: 110.95 chg: -0.20 stop: 107.45

RAI spent Friday's session bouncing around the $110-111.50 range. The only new development is a new buy signal for the MACD indicator. We do not see any changes from the Thursday night new play description so we're reposting it here:

RAI looks like another attractive bullish candidate but again we want to caution traders about opening call positions. The two-day bounce in the markets may be just a bounce. RAI looks tempting because the short-term technical oscillators like the RSI and stochastics are turning positive. Plus, the MACD indicator is nearing a new buy signal. Meanwhile the P&F chart is very bullish with a $148.00 target. The daily chart also shows RAI bouncing from technical support at its rising 100-dma (twice in the last couple of weeks). Thursday's rally also appears to be a breakout above its five-week trendline of lower highs (resistance). We're going to suggest calls with RAI above $110. We're going to suggest two targets. Our conservative target is $115.00. Our aggressive target is $119.00. We would keep a wary eye on larger rival Altria (MO), which has a bearish chart. A breakdown in MO would probably weigh on shares of RAI. The P&F chart for MO is bearish and points to $62.00.

Suggested Options:
We are suggesting the July or August calls for RAI. We do not want to hold over the late July earnings report.

BUY CALL JUL 110.00 RAI-GB open interest=634 current ask $4.60
BUY CALL JUL 115.00 RAI-GC open interest=464 current ask $2.05

BUY CALL AUG 110.00 RAI-HB open interest=1521 current ask $6.10
BUY CALL AUG 115.00 RAI-HC open interest= 427 current ask $3.40
BUY CALL AUG 120.00 RAI-HD open interest=2876 current ask $1.70

Picked on June 15 at $111.15
Change since picked: - 0.20
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

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United Tech. - UTX - close: 61.75 chg: +0.94 stop: 58.75

UTX continued to see some follow through on Thursday's rebound. Shares added another 1.5% on Friday with volume coming in above average supporting the move. The stock appears to have broken out through the top of its short-term bearish channel but the rally stalled under resistance at $62.00 and its 50-dma. We warned readers that UTX would probably encounter some resistance in the $62.00-50-dma region. Our market view is still not very optimistic but money is likely to rotate into large-cap blue chip stocks like UTX for the liquidity. We'd look for a dip back toward $61.00-60.00 as a new entry point for calls on UTX. Our target remains the $64.00-65.00 range.

Suggested Options:
Look for a dip before considering the July calls. Remember, we do not want to hold over the mid-July earnings report.

Picked on June 08 at $ 60.13
Change since picked: + 1.62
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million
 

Put Updates

Amgen Inc. - AMGN - close: 66.82 chg: -0.62 stop: 69.05 *new*

Good news. On Friday there was no follow through with the market bounce and AMGN continues to trade under resistance at its descending 50-dma and trend of lower highs. Given the lack of follow through in the markets we remain somewhat bearish here, especially with the BTK biotech index's failed rally under the 660 level and its 50-dma and exponential 200-dma. We would still consider buying puts on AMGN right here but traders are probably better off waiting for a decline under $66.40 or $66.25 as their entry point. Our target is the $62.65-62.25 range. Please note that AMGN is due to hold an investor conference call on Monday, June 19th. This is a risk that the company might say something positive and move the stock price. We are going to tighten our stop loss to $69.05. We do not want to hold over the mid July earnings report.

Suggested Options:
We would consider the July puts. Remember to exit ahead of the earnings report.

BUY PUT JUL 70.00 YAA-SN open interest=8454 current ask $3.80
BUY PUT JUL 67.50 YAA-SU open interest=7585 current ask $2.15
BUY PUT JUL 65.00 YAA-SM open interest=17050 current ask $1.10

Picked on June 05 at $ 67.48
Change since picked: - 0.66
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

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Barr Pharma - BRL - close: 51.05 chg: -0.89 stop: 53.05

Lack of follow through on the bounce is good news for the bears in BRL. The stock lost 1.7% on Friday and looks headed back toward the $50.00 level. Now that the DRG drug index has produced a failed rally and new lower high we might see BRL actually break down under the $50 level next week. Our target is the $48.00-47.50 range. More conservative traders might want to adjust their stop toward Thursday's high (52.61).

Suggested Options:
We are suggesting the July puts although the August puts also work.

BUY PUT JUL 50.00 BRL-SJ open interest=1209 current ask $1.55

BUY PUT AUG 50.00 BRL-TJ open interest=1400 current ask $2.30

Picked on June 05 at $ 52.20
Change since picked: - 1.15
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Express Scripts - ESRX - cls: 68.08 chg: +1.42 stop: 70.10

ESRX continues to bounce. We warned readers on Thursday that it looked like the stock would rally towards the 10-dma or the $70.00 level. It looks like the 10-dma is holding as short-term overhead resistance. Wait for signs that the rally is failing before considering new put plays on ESRX. Our conservative target at $65.25 has already been hit so we're now aiming for the $60.50 level. The P&F chart is bearish and points to a $52.00 target. We do not want to hold over the late July earnings report.

Suggested Options:
Wait for the rally to fail then consider the July or August puts. Remember to exit ahead of the earnings report.

Picked on June 08 at $ 69.59
Change since picked: - 1.51
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Group 1 Auto - GPI - close: 57.50 chg: -1.15 stop: 60.15

The oversold bounce in GPI is stalling and this looks like a new entry point to buy puts. The stock has produced another new lower high and failed to test the $60 level. The weekly indicators are starting to roll over into bearish signals while the daily chart shows a double-top type pattern. We would suggest new puts with GPI under $58.50. Our target is the $51.50-50.00 range. The P&F chart points to a $50 target. Our stop is at $60.15 but more aggressive traders may want to leave their stop above $60.50, which was resistance several days ago.

Suggested Options:
We don't see any August options yet so we're stuck with Julys.

BUY PUT JUL 60.00 GPI-SL open interest= 457 current ask $4.60
BUY PUT JUL 55.00 GPI-SK open interest=1037 current ask $2.00

Picked on June 11 at $ 58.46
Change since picked: - 0.96
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

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Intl. Bus. Mach. - IBM - cls: 77.95 chg: -0.61 stop: 80.05

The breakout in IBM did not last very long. The stock spent most of the last several days trying to breakout over the $78 level. It managed a breakout on Thursday's big market rally. Unfortunately for shareholders IBM turnaround and closed under $78 again on Friday. Volume came in above average on Friday's decline and that's good news for us. The MACD on the daily chart is looking oversold and acting like it wants to produce a buy signal but the rest of the technicals don't look so hot. The P&F chart is bearish and points to a $73 target. If you look at the weekly chart it's easy to see a bearish H&S pattern and IBM's broken support. We are suggesting new put plays with IBM under $79.00. Our target is the $73.50-73.00 range. Please note that we will be running into a time crunch soon. We don't want to hold over the mid-July earnings report.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 80.00 IBM-SP open interest=28621 current ask $2.95
BUY PUT JUL 75.00 IBM-SO open interest=15311 current ask $0.85

Picked on June 06 at $ 78.75
Change since picked: - 0.80
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

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IDEXX Labs - IDXX - close: 77.49 chg: -0.12 stop: 80.05

This looks like a new entry point to buy puts on IDXX. The BTK biotech index has produced a failed rally and lower high under its 50-dma and exponential 200-dma. Meanwhile IDXX has produced a failed rally under broken support at $78.00. We would suggest new puts here or more conservative traders can wait for a decline under $77.00 before initiating plays. IDXX does appear to have minor support at $76 and $75 and probably again at the 200-dma but the overall trend is bearish with the breakdown of its longer-term bullish channel. The P&F chart is bearish and points to a $64.00 target. We have two targets. A conservative target at $75.25 and a more aggressive target at $72.00. IDXX should have overhead resistance at $78.00, the $80.00 level and its 50 and 100-dma's near $80.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 80.00 UID-SP open interest=244 current ask $3.70
BUY PUT JUL 75.00 UID-SO open interest=149 current ask $1.45

Picked on June 12 at $ 77.95
Change since picked: - 0.46
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

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Oshkosh Truck - OSK - close: 49.63 chg: -0.40 stop: 52.05

The action in OSK on Friday looks like a failed rally near its 10-dma, exponential 200-dma and the $50.50 ($50.00) region. At face value this looks like a new entry point to buy puts on OSK but we're not sure the bounce is over yet. The stock may still try and rally toward the $52 level. We are suggesting new puts here but traders may want to take a wait and see approach before opening new positions. Our target is the $45.50-45.00 range. The P&F chart looks pretty bearish with a $34.00 target. Please note that the weekly chart, which its various trendlines, is showing a potential danger zone with regards to buying puts.

Suggested Options:
We are suggesting the July options since August strikes are not yet available.

BUY PUT JUL 50.00 OSK-SJ open interest=1144 current ask $2.15
BUY PUT JUL 45.00 OSK-SI open interest= 577 current ask $0.60

Picked on June 13 at $ 49.49
Change since picked: + 0.14
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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