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Daily Newsletter, Monday, 06/19/2006

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Table of Contents

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

Market Wrap

Stocks slide on China's rate move, weak U.S. housing data

The major indices were showed mixed results in early morning trade as investor's mulled Friday's announcement out of China's central bank that it was raising the deposit reserve requirements for commercial banks by a half-point to 8%. Global strategists saw the move not only as an attempt to cool down surging loan growth on mainland China, but additional action by the country's government to let the yuan appreciate against the U.S. Dollar.

After some sign of Asian equity market stability late last week, Hong Kong's Hang Seng Index ($HSI.X) shed 73.79 points, or -0.47% on Monday to close at 15,768.

After writing last Monday's Market Wrap, the $HSI plunged as low as 15,250 on its point and figure chart (see Monday's Wrap), and Tuesday's trade out of Asia will should be monitored closely.

China's central bank move pressured commodities on a broader measure with the CRB Index ($cr00y) 333.57 -1.66% still hovering just above its starting to round flat 200-day SMA (332.75).

July Crude Oil futures (cl06n) settled down $0.90, or -1.29% at $68.98, but continues to hold critical support above $68.00. A trade at $68.00 would have this contract breaking below its point and figure chart's bullish support trend, and triggering a spread triple bottom sell signal. The current bearish vertical count for this contract is $65.50, which would currently be negated with a trade at $72.00.

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Japan's Nikkei-225 ($NIKK) trades down 19 points at 14,860 as we await the 01:00 AM EDT Bank of Japan meeting minutes, which could give traders insight into any interest rate decisions and monetary policy shifts.

Adding to this morning's mixed session was the U.S. saying North Korea has finished loading fuel into a long-range ballistic missile, which the U.S. says is sign that the reclusive communist state will soon test a weapon that could reach the U.S.

Stocks were mixed until the 01:00 mark, but buyers pulled their bids when the National Association of Home Builder's (NAHB) said its index for sales of new single-family homes fell to 42 in June from May's 46 reading. The NAHB said it was the lowest reading since April 1995.

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 455 home builders, who answer several questions about sales prospects now an in the near-term.

The June decline in builder confidence again was broad-based and apparent in every region, the association said. Regional indexes were down seven points to 40 in the Northeast, down four points to 25 in the Midwest, down two points to 49 in the South and down one point to 60 in the West.

Further data on the housing market will be released tomorrow morning at 08:30 AM EDT. May housing starts are forecasted at an annual rate of 1.90M, up from April's 1.85M. Building permits are forecasted to have fallen to an annual rate of 1.95M from April's 1.97M.

Market internals were weak throughout the session. I do note that the NASDAQ's 10-day NH/NL ratio, an intermediate-term indicator of bullish/bearish leadership signals further bearish leadership at tonight's close having broken below May's relative low reading of 24%. I also highlight today's 144 new lows at the NASDAQ and I'll be monitoring this closely in coming sessions. On Tuesday, June 13 the NASDAQ recorded 291 new lows and should that number be exceeded to the downside, traders/investors might begin to think that last week's "bounce" was largely short-covering into weakness.

With bullish leadership very anemic (see NH/NL readings) most traders/investors should be cognizant of further softening among market internals.

U.S. Market Watch - 06/20/06 Close

Miners, energy and homebuilders paced Monday's declines, while lower energy prices had the Airline Index (XAL.X) atop today's list of sector winners in my U.S. Market Watch.

Small caps as depicted by the Russell-2000 Index ($RUT.X) 680.76 -1.77% were notably weak as institutional rebalancing takes hold. The iShares Russell 2000 (AMEX:IWM) $67.50 -1.96% traded just over 71.7 million shares, which is heavy considering 3-month average daily volume comes in at 52.3 million shares per day.

What would Monday be without a merger?

Today's top M&A news had shares of Siemens AG (NYSE:SI) $83.90 +5.13% trading up $4.10, but well off their April highs of $99.50 after Nokia (NYSE:NOK) $20.09 +0.60% said it will merge its infrastructure unit with the telecom infrastructure operations of Germany's Siemens. If the deal is consummated, it would create the world's third-largest telecom infrastructure company with assets valued at roughly $30 billion.

Canadian-based telecom equipment maker Nortel (NT) $2.04 -10.13% fell sharply on heavy volume of 57.2 million shares and closed at levels not seen since early 2003. Investors grow increasingly wary of the stock after chief rival Lucent (NYSE:LU) $2.38 -2.45% and French telecom equipment maker Alcatel (NYSE:ALA) $12.24 -0.40% announced their intentions to merge.

The Semiconductor Index (SOX.X) 449.18 -0.95% traded down after last week's test of a still falling 21-day SMA (457.74) despite an upgrade of Intel (NASDAQ:INTC) $18.24 -0.32% by UBS to "buy" from "neutral". The firm upped their price target on the company to $23, from $21, saying the upgrade was due to improved longer-term gross margins and near-term operating margin leverage that should make the company more competitive.

Intel's rival Advanced Micro Devices (NYSE:AMD) $24.95 -2.69% fell 69 cents.

Earnings announcements had home-electronics retailer Circuit City (NYSE:CC) $28.63 -2.88% reversing earlier gains and session high of $30.80 after the company posted Q1 net income of $6.4 million, or $0.04 per share, as revenues increased 17% year-over-year to $2.62 billion. Consensus was for EPS of $0.01 on revenue of $2.47 billion. The company said same store sales jumped 15%.

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

Supply remains in control of the broader S&P 500 Index ($SPX) where a lower low found buyers to 1,250, with today's close 4-points above last Monday's.

A trade at 1,210 could bring a notably decline to current downside risk assessment of 1,170 as Dorsey/Wright & Associates' S&P 500 Bullish % (BPSPX) hovers at critical support with tonight's closing reading of 47.79%. In essence, if we were to take all 500 point and figure charts of those stocks comprising the S&P 500, 238 of the components would still have a "buy signal" intact, while 262 would now show a "sell signal" associated with the supply/demand chart.

S&P 500 Bullish (BPSPX) - 2% box size

Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) holds above 46%, but traders/investors can begin to see how tentative the recent lows for the S&P 500 Index (SPX.X) 1,240.14 -0.91% are.

In August of 2004 (after blue 8) and then again in late October 2005 (after blue A) this indicator of internal strength/weakness reversed course back higher from readings above 46.00 (48 on the above chart). A reading of 46% would be DIVERGENCE to recent history and could see sharp price declines as internals deteriorate further.

Additional internal charts I might suggest trader's review are Stockcharts.com's (wwww.stockcharts.com) NASDAQ Summation Index ($NASI) 10-point box size which shows advance/decline ratio falling below its late May's low reading of -560 to -770 at tonight's close. The NYSE Summation Index ($NYSI) has also broken below its late-May advance/decline ratio of -310 to -440 at tonight's close.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None CRS None
  NUE  

New Calls

None today.
 

New Puts

Carpenter Tech. - CRS - close: 100.47 chg: -2.08 stop: 105.01

Company Description:
Carpenter Technology Corporation based in Wyomissing, PA, is a leading manufacturer and distributor of specialty alloys and engineered products. (source: company press release or website)

Why We Like It:
We have been bit by CRS' volatility in the past but we're going to try again. The metal, steel and mining stocks were hit hard today and we don't think the selling is over yet. Volume on today's decline was above average and shares almost produced a bearish engulfing candlestick pattern (bearish reversal). Shares of CRS are flirting with another breakdown below the $100 level and its 100-dma. We're going to suggest a trigger under today's low at $99.25. If triggered our target will be the $92.00-90.00 range, which is above potential support at $90.00 and its exponential 200-dma at $89. We do not want to hold over the late July earnings report. The P&F chart currently points to a $76 target.

Suggested Options:
We are suggesting the July and August puts. You choose which strike works best for you. We do not want to hold over the July earnings report.

BUY PUT JUL 105.00 CRS-SA open interest= 69 current ask $10.00
BUY PUT JUL 100.00 CRS-ST open interest= 75 current ask $ 7.20
BUY PUT JUL 95.00 CRS-SS open interest=204 current ask $ 4.90
BUY PUT JUL 90.00 CRS-SR open interest= 91 current ask $ 3.10


BUY PUT AUG 105.00 CRS-TA open interest= 0 current ask $12.20
BUY PUT AUG 100.00 CRS-TT open interest= 10 current ask $ 9.30
BUY PUT AUG 95.00 CRS-TS open interest= 0 current ask $ 7.00
BUY PUT AUG 90.00 CRS-TR open interest= 0 current ask $ 5.10

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume = 651 thousand

---

Nucor - NUE - close: 48.62 chg: -1.93 stop: 51.61

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities in seventeen states. Products produced are: carbon and alloy steel - in bars, beams, sheet and plate; steel joists and joist girders; steel deck; cold finished steel; steel fasteners; metal building systems; and light gauge steel framing. Nucor is the nation's largest recycler. (source: company press release or website)

Why We Like It:
NUE is another stock in the iron, steel and metals group that experienced some heavy selling pressure today. Not only did the stock produce a failed rally near the top of its bearish channel but it produced a bearish engulfing candlestick pattern (bearish reversal). Bulls do have their argument that the P&F chart is still positive and the MACD is trying to produce a new buy signal. However, we suspect that the next move will be lower. We're starting the play here under $50.00 with a stop loss above today's high. Our target will be in the $42.75-42.50 region near the bottom of NUE's channel (see chart). We do not want to hold over the July earnings report.

Suggested Options:
We are suggesting the July and August puts. You choose which strike best suits your strategy.

BUY PUT JUL 50.00 NUE-SJ open interest=5560 current ask $3.90
BUY PUT JUL 47.50 NUE-SW open interest=6557 current ask $2.55
BUY PUT JUL 45.00 NUE-SI open interest=6226 current ask $1.60

BUY PUT AUG 50.00 NUE-TJ open interest= 42 current ask $4.70
BUY PUT AUG 45.00 NUE-TI open interest= 22 current ask $2.40

Picked on June 19 at $ 48.62
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 5.9 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Chipolte Mex Grill - CMG - cls: 60.98 chg: -0.78 stop: 57.45

Shares of CMG experienced an initial dip this morning and then proceeded to churn sideways in a narrow range for the rest of the session. We suggested over the weekend that readers wait for a pull back as a new entry point. While this qualifies we suspect that if you're patient we'll get a chance to buy calls closer to the $60.00 level (maybe $59.00). Just to make things clear would we buy calls here? Yes. However, our preferred entry would still be on a pull back closer to $60.00. 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.

Picked on June 18 at $ 61.76
Change since picked: - 0.78
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

---

Cognizant Tech. - CTSH - close: 62.21 chg: -1.41 stop: 62.49

CTSH turned in a rather bearish session with a 2.2% decline and what almost looks like a bearish engulfing candlestick pattern. Thankfully we're still on the sidelines. Our strategy calls for a trigger to buy call options 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.

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

---

General Dynamics - GD - cls: 65.50 chg: -0.62 stop: 63.99

Over the weekend we said that our preferred entry point to buy calls would be a pull back into the $65.00-65.50 range. Well, shares of GD have delivered just such a pull back for us. The late afternoon bounce was off the simple 50-dma. Obviously if the major indices continue lower tomorrow then GD may follow suit. If you're feeling patient then sit back and wait to see if GD dips toward the $64.50 region or just wait for signs of a bounce from here before initiating positions. Our target is the $69.00-70.00 range.

Picked on June 18 at $ 66.12
Change since picked: - 0.62
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Google - GOOG - close: 388.14 chg: -2.56 stop: 384.50

GOOG tried to rally again this morning but was stymied by overhead resistance at its simple 50-dma. Short-term technical oscillators are actually starting to look bearish. Traders might want to consider put plays if GOOG trades under its 200-dma ($379) and the $375.00 level. We're sticking to our plan to buy calls with a trigger at $401.00 for now.

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

---

Legg Mason - LM - close: 100.14 chg: -2.31 stop: 96.99

Be careful here! We warned readers over the weekend to watch the XBD broker-dealer index. Well the XBD produced a failed rally today under its 200-dma and the sector index looks poised to move lower. You can see the affect the sector weakness had on LM today. We would definitely wait for some signs of strength in LM before considering new plays. More conservative traders may want to bail out early if shares traded under $98.80.

Picked on June 18 at $102.45
Change since picked: - 2.31
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Manpower - MAN - close: 63.77 change: -0.53 stop: 64.45

MAN continues to suffer some profit taking after last week's big bounce. Another worrisome sign is the weekly chart's MACD has produced a new sell signal. We're still on the sidelines with a suggested trigger to buy calls at $66.05. We do not want to hold over the mid-July earnings report.

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

---

Reynolds American - RAI - cls: 110.81 chg: -0.14 stop: 107.45

For a second day in a row shares of RAI have bounced around the $110.00-111.50 range. Shares were on the rebound higher heading into the closing bell. Not only is the technical picture somewhat bullish and the P&F chart bullish but investors tend to think of tobacco stocks as defensive plays. As the market's move lower RAI might be seen as a safe haven stock. We would continue to suggest calls with RAI above $110.00 but more conservative types might want to wait for a move over $111.50 first. 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.

Picked on June 15 at $111.15
Change since picked: - 0.34
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

---

United Tech. - UTX - close: 60.90 chg: -0.85 stop: 58.75

A down day for the DJIA weighed on component stock UTX. Shares lost 1.3% but volume came in below average. Traders bought the dip near $60.25 and its 10-dma and 100-dma. The bounce off its lows this afternoon looks like a new bullish entry point to buy calls. More conservative traders may want to wait for signs of strength in the major averages first before considering new call positions here. Our target remains the $64.00-65.00 range.

Picked on June 08 at $ 60.13
Change since picked: + 0.77
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million
 

Put Updates

Apple Computer - AAPL - close: 57.20 chg: -0.36 stop: 60.05

AAPL is inching closer to a breakdown under support at the $57.00 level. Shares actually hit $57.00 this morning before bouncing. We're suggesting a trigger to buy puts at $56.85 in an attempt to capture the next leg lower. For more info see this past weekend's newsletter. 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.

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

---

Amgen Inc. - AMGN - close: 65.75 chg: -1.07 stop: 68.55 *new*

Investors appeared to shrug off any positive news from the anemia drug tests that AMGN released today. The stock lost 1.6% and shares fell through recent support in the $66.50 region. Hastening the stock's decline was a 1.85% loss in the BTK biotech index. We do expect some sort of bounce at the $65.00 level but overall the pattern looks very weak for AMGN. We're lowering the stop loss to $68.55. Our target is the $62.65-62.25 range. We do not want to hold over the mid July earnings report.

Picked on June 05 at $ 67.48
Change since picked: - 1.73
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

---

Barr Pharma - BRL - close: 50.72 chg: -0.33 stop: 53.05

BRL is drifting lower toward support at the $50.00 level. If the markets continue to sink then we expect BRL to breakdown. The daily technicals on BRL are growing more negative. Our target is the $48.00-47.50 range. More conservative traders might want to adjust their stop toward Thursday's high (52.61).

Picked on June 05 at $ 52.20
Change since picked: - 1.48
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Digital River - DRIV - close: 39.37 change: -0.84 stop: 42.55

DRIV continued lower on Monday following Friday's failed rally. The stock lost 2.08% today and traded through our entry point to buy puts at $39.45. The play is now open. Our target is the $35.25-35.00 range.

Picked on June 19 at $ 39.45
Change since picked: - 0.08
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Express Scripts - ESRX - cls: 66.82 chg: -1.26 stop: 70.10

Some positive analyst comments today were not enough to keep the oversold bounce alive. Shares of ESRX lost 1.85% on above average volume. This may be a new entry point for puts although we do not that shares found support at $66.50 today. 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.

Picked on June 08 at $ 69.59
Change since picked: - 2.77
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Expeditors - EXPD - close: 99.16 chg: -0.19 stop: 100.35

Our aggressive put play with EXPD remains untriggered for now. The stock tried to rally higher but stalled at $100.37 and then spent the rest of the session churning sideways in a very narrow range for EXPD. 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.

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

---

Group 1 Auto - GPI - close: 57.70 chg: +0.20 stop: 60.15

We do not see any changes from our weekend update on GPI. 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.

Picked on June 11 at $ 58.46
Change since picked: - 0.76
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

---

Intl. Bus. Mach. - IBM - cls: 77.67 chg: -0.28 stop: 80.05

IBM didn't do much today. Shares traded inside a $1.00 range. The action was bearish but IBM out performed the major averages and its peers in the hardware sector. We don't see any changes from our weekend update. 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.

Picked on June 06 at $ 78.75
Change since picked: - 1.08
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 76.63 chg: -0.86 stop: 80.05

IDXX continues to consolidate lower. The stock lost 1.1% while its MACD on the daily chart is nearing a new sell signal. We don't see any changes from our weekend update. 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.

Picked on June 12 at $ 77.95
Change since picked: - 1.32
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

---

Intuitive Surgical - ISRG - cls: 99.80 chg: -4.96 stop: 108.25

Our put play on ISRG is now open. The stock continued to sell-off and shares lost 4.7% on above average volume today. The decline proved to be a breakdown below support at $102.50, the 200-dma and the $100.00 mark. Our trigger to buy puts was at $102.45. Now that the play is open our target is the $91.00-90.00 range. The P&F chart points to a $74 target. Please note that the P&F chart does appear to have some support near $98.00. We may see an oversold bounce soon. Any of the broken support levels over the last week can act as overhead resistance.

Picked on June 19 at $102.45
Change since picked: - 2.65
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Oshkosh Truck - OSK - close: 48.94 chg: -0.69 stop: 52.05

Monday's decline would suggest that the oversold bounce in OSK is now over. The stock lost 1.39%. Our only concern is that volume came in pretty low, which doesn't suggest a lot of conviction behind the move. Our target is the $45.50-45.00 range. The P&F chart looks pretty bearish with a $34.00 target.

Picked on June 13 at $ 49.49
Change since picked: - 0.55
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand

---

Supertex - SUPX - close: 35.98 change: -1.02 stop: 39.25

Our play in SUPX is now open. The semiconductor sector could not hold on to any strength today in spite of the largest chip stock, Intel, being upgraded this morning. Shares of SUPX were actually weak right from the start this morning and broke down under technical support at its 100-dma and 200-dma. Our trigger to buy puts was at $35.99. Now that the play is open our target is the $31.00-30.00 range. We do not want to hold over the early August earnings report.

Picked on June 19 at $ 35.99
Change since picked: - 0.01
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 263 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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