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Daily Newsletter, Wednesday, 06/21/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Tick Tock

The clock is ticking down to the end of month FOMC meeting and the daily swings in the market resemble the pendulum on that clock. Positive to negative then back to positive. Support to resistance and back to support as that pendulum swings but always returning to the middle of the range. Today's rally was credited to strong earnings from Federal Express and Morgan Stanley, both of which said the economic outlook was strong.

The following bullish chart has been edited to remove the symbol. The bullish trend over the last two years has not broken over the last month with the rest of the market. It has attracted a lot of money and there are no signs of a letup. While you read this commentary try to decide what symbol belongs to this chart.

Bullish Mystery Chart

The economic calendar was not a market mover today. The only report was the MBA Mortgage Application Survey and a drop to 567.6 from 571.9. This drop in applications was minimal and the headline number was right in the same range we have seen for several months with only a slightly negative bias. Purchase applications were unchanged but refinance applications dropped -2.2%. With mortgage rates on 30-year fixed loans at a four-year high at 6.73% it is not surprising refinance activity has slowed. Adjustable rate mortgages also fell as borrowers fear higher rates ahead. The resetting of prior ARM loans has accelerated defaults as housing prices slide. Foreclosure.com shows more than 111,000 homes in foreclosure across the United States. According to analysts nearly $2 trillion in ARM loans are in the process of resetting from their initial discounted rate to current market rates. As this process continues we can expect even more foreclosures ahead. If the Fed hikes rates as expected next week the flow of home purchases and mortgages will continue to slow and those ARM loans will become even more expensive.

The only other report on today's calendar was oil inventories and there was a surprise in those numbers. Oil inventories rose +1.4 mb compared to estimates of +1.3 mb and right inline. The surprise was in gasoline inventories with only a minimal +300,000 bbl gain compared to estimates for a gain of +1.25 mb. Distillates were also inline with estimates with a gain of +1.7 mb. The drop in gasoline supplies despite a jump in refinery utilization to 93.3% surprised traders. Gasoline demand rose for the second consecutive week and took a sharp jump over the same week in 2005. With only two weeks left in the early summer demand cycle, which ends after July-4th, gasoline consumption appears to be rising despite high prices. I would not be surprised to see a negative number for gasoline next week. The average price for the last seven weeks is $2.91. Refinery utilization at 93.3% is well below the normal 96% to as much as 98.5% for this time of year. This is due to the lingering impact of last year's hurricane damage. There are currently no tropical storms on the National Hurricane Center radar.

Gasoline Demand Table

Oil prices had declined to $68.65 on Monday as the July contract neared expiration. The August contract became the current month today and we saw a strong bounce to $70.75 before profit taking hit just prior to the close. Oil ended the regular session at $70.30 for a gain of +91 cents. Other than the sharp drop in gasoline the other factors driving the bounce were the additional kidnappings in Nigeria and the announcement by Iran. The unrest in Nigeria is already priced into the market but the Iran premium had faded. Iran said they would reply to the incentive package by mid to late August despite warnings that a response was needed immediately. The announcement triggered a round of warnings from the various countries that are party to the incentive process. All reinforced the "weeks" limitation given when the package was initially delivered. It was thought that July-15th was the drop dead date back then and that appears not to have changed. This puts the process back in the limelight and should keep a floor under oil prices. Should a tropical storm appear headed for the Gulf that floor will become a launching pad. Just remember prices normally weaken as the summer closes and gasoline demand begins to slip. Prices then rise again once the refinery shift to the heating oil cycle begins.

The market moving news today was not oil and not economics. It was strong earnings reports from Morgan Stanley and Federal Express. FedEx was the most important since its view of economic health spans the globe. FedEx revenue rose +10% with net earnings jumping +25% over the same period in 2005. Earnings were $1.82 and better than analyst estimates of $1.77. More importantly was the FedEx outlook and they boosted their expectations for the current quarter and the full year. The FDX CEO said, "We remain optimistic about the global economic environment for fiscal 2007," which for FedEx began on June-1st. Total package volume grew by +4% for the quarter. The CEO said on CNBC that India and China were exploding. He quoted a statistic that India had more than 250 cities of 2.5 million or more residents. This also confirms the expectations that oil demand will continue to spike. Since 2000 oil demand in India has risen +12% while China's demand has risen +45%. With economic expansion in India running 3-5 years behind China it is only a matter of time until they reach the demand levels currently seen in China. Population in both countries totals 2.4 billion, India 1.095 bil, China 1.313 bil, and eight times the population of the United States. China is expected to have more cars and consume more oil than the U.S. by 2025 with India 5-7 years behind. Federal Express is in the right place at the right time to profit from this economic explosion. Since the U.S. is the largest consuming nation much of the goods those countries produce will head to the U.S. with FedEx getting some of that business as well. The solid outlook by FedEx calmed many investors who feared the Fed would drive the economy into ruin later this year. The FedEx assurance of strong global economics was comfort food for the bulls.

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Morgan Stanley earnings jumped from $.86 to $1.86 for the current quarter on a +48% jump in revenue. MS jumped +2.46 on multiple upgrades. Profit for the quarter was $1.96 billion and earnings per share at $1.86 was significantly over the $1.45 per share analyst consensus. CEO John Mack said Morgan Stanley was poised to capitalize on the current environment and the best first half in the company's history. There were the obligatory cautious comments about how the market downturn in May/June had impacted profitability and the CFO said it was still too soon to tell. The various MS talkers on the conference call would also not commit to calling the May drop either a temporary speed bump or a fundamental shift in market conditions. Vagueness was the game plan and they carried it out perfectly. The MS earnings helped send the broker/dealer sector higher but financials in general were barely positive. The Morgan Stanley sentiment helped the broader markets in addition to the FedEx news.

Sending drug stocks lower was news that Merck was going to offer Zocor to United Health cheaper than the price of a generic once the patent expires on Thursday. This sent Teva Pharmaceutical (TEVA) and Barr Pharmaceutical (BRL) plunging along with the rest of the generic players. This makes a material shift in policy for Merck and could send some strong ripples through the industry for years. Over the next two weeks Merck will lose its patent on Zocor, a $4.4 billion drug and Pfizer will lose its patent on Zoloft, a $3.2 billion drug. This year will see patents expire on more than $21 billion in drugs and the generic manufacturers were expected to reap substantial profits from the rotation into those generics. If this step by Merck is propagated throughout all the expiring drugs the generic sector is in serious trouble. Merck is expected to give the formula for Zocor to Reddy's, an Israeli drug manufacturer in exchange for payments over the next six months on the generic result. By law this arrangement has a six-month limit. After that date it is a drug pricing war. After today's news from Merck it is anticipated that the cost for generic Zocor six months from now could be -95% lower than current Zocor prices. This is a shockwave not only for generic drug manufacturers and but for pharmacy benefit companies. Those companies will suddenly see enhanced profits from the cheaper drugs. BRL fell -2.54 and TEVA lost -3.33 or -9%. Express Scripts (ESRX) gained +2.32, Caremark (CMX) +1.05, Wellpoint (WLP) +1.63, Medcohealth (MHS) +2.16 but United Health barely budged from its recent decline with a +36 cent gain. UNH sentiment is still ugly.

Not all the stock news was good with Jabil Circuit warning after the close. JBL reported profits that were up +8% but company executives said they were disappointed that they would have to lower forecasts for the rest of the year. Traders lower their stock price in after hours trading. The company said the lowered forecast was due to operational issues in the company's electromechanical operations and certain production and repair facilities in America. Sounds like the classic earnings shell game to me. Warn and then confuse investors with generic reasons hoping they assume it was a one-time event. The CEO tried to push the warning to the back burner by assuring investors that demand remained very strong but he also said they were closing some plants and making layoffs. Strong demand always leads to plant closings, right?

The Dow Transports flew to a +135 point gain on the strength of the FedEx profits. This extended their recent gains off the June bottom to +350 points and put them right back at the 4775 resistance we have seen since April. However, sentiment appears to be improving and this could be the first signs of returning buyers. Today they closed right at the top of their recent range and they will have to break that 4775 resistance in order to provide bullish confirmation. Railroads and even airlines have been playing supporting roles. Union Pacific tacked on +2.65 to close right at strong resistance at $90 and a breakout there could give the sector wings. Speaking of wings Continental Airlines (CAL) added another buck to stretch its five day run to +$5 or +21%. In this rebound AMR added +4 but the winner was US Airways (LCC) with a +8 gain.

Dell broke a seven-day losing streak with a +41 cent gain but the trend is still down. Ford sank to a 14 year low at $6.38 after massive selling on Tuesday at the close. Investors clinging to hope as the new 2007 models appeared finally threw in the towel despite assurance from the Ford CEO that they would return to profitability in 2008. With two more years of pain investors probably figured Ford could drop another $3-$4 before the misery was over. At this rate picking up Ford under $5 in the near future would be equivalent to a non-expiring LEAP. Expiration would only come if they eventually filed bankruptcy.

We are only three days away from the Fed meeting and every conceivable option other than a pass has already been priced into the market. Fed funds futures are nearly 100% for a quarter point hike. Farther dated futures are showing an 80% chance of 5.5% by September and 85% of 5.75% by November. About the only option not factored into the mix would be a 50-point hike next week. Since the futures are already factoring it in long term Bernanke could shake up the markets by taking a 50 point bite now and putting real rate uncertainty into the bond market. It could really through a wrench into the works and possibly negate any further rate increases. Bond yields would spike and the long end would do the Fed's work for it.

The problem with a 50-point hike is the death knell it would represent for the housing market. The jump in housing starts this week with housing sentiment at an 11-year low means higher inventory levels ahead. On the surface this means lower prices and more builder deals. But, higher rates means fewer shoppers can afford to buy. What some analysts failed to take into account today was the continued backlog by some builders. The jump in starts could be just filling those orders or with a 4-6 month completion window builders could be targeting the end of rate hikes with that additional inventory. The falling housing market is widely seen as the leading indicator for Fed policy. If they go too far and really tank housing it would spread to the feeder sectors and could produce a recession. Housing is the canary in the coalmine and right now it is on life support. Hopefully Bernanke will not smother it with a +50 point hike while trying to recover his credibility. Current analyst rate estimates are UBS 5.5% in August, JP Morgan 6.0% by year-end, Lehman 5.75% this year and Nuveen 5.25% next week then 12 month pause and Fed funds futures are showing 5.75% by November.

A positive sign for the markets, especially the commodity markets was a global price increase for steel of +19%. China, the biggest steel maker in the world finally buckled under the pressure and accepted the price increase for iron ore. This is bullish for global growth that demand is strong enough to absorb a price increase of this magnitude. Steel companies led the metal sector higher with BHP tacking on +1.55, NUE +1.59, FCX +1.79 and PCU +2.24. Unfortunately those gains only took most back to near current resistance.

The weekly Investors Intelligence survey showed 35.6% of responders bullish and 35.6% bearish with 29.8% expecting a correction. This is actually bullish because rarely does the bearish contingent overtake the bulls. Historically the acceleration of bearishness to this level is seen as a market bottom. While this is a very generic indicator and one that can take weeks to be felt it is very reliable. It does not mean we are not going to retest the lows or even set new ones but it suggests the bottoming process is well underway.

The rally today was yet another short squeeze driven by the FedEx and Morgan Stanley news before the bell. The advance decline line went from zero to +2763 in the first 20 min of trading. A buy program at 11:00 added another +1250 advancers but that run to 12:15 was the end of the gains. Despite several halfhearted attempts in the afternoon the indexes all declined into the close. It was not a material decline but more cautious profit taking instead. The appearance of a possible bottom may have kept the afternoon selling from being any worse.

Advance - Decline Chart

Dow Chart - 180 min

Twenty-five of the Dow components closed positive with GE, AIG, DIS, T and PFE bucking the trend. DuPont, Caterpillar and Boeing were the leading gainers accounting for nearly +35 Dow points between them. The Dow sprinted above 11100 intraday to a +156 gain but barely kept its triple digit status with a +104 close at 11073. Technically it is above recent resistance at 11050-11060 but just barely. Regardless of which direction it chooses on Thursday it is still in the middle of our expected range until after the Fed meeting. A move higher from here would encounter strong congestion from 11100-11275 and it is not likely to break that band. The summer doldrums are still ahead as is the pothole of the Fed post meeting statement. I could see a move higher on a positive statement but either way we need to get past the Fed before we start predicting new highs, or new lows.

The Nasdaq was very strong intraday with a +46 gain at the highs but that 2150 resistance came back to haunt it at the close. The Nasdaq chart is far less bullish than the Dow despite a historically bullish period ahead. The first two weeks of July typically see the Nasdaq outperform the S&P as end of quarter window dressing and retirement fund flows seem to find their way into techs. The Nasdaq has strong resistance at 2150, 2160 and 2180 on its way to very strong resistance at 2225. Until the Fed has come and gone I would be surprised with any substantial gains.

Nasdaq Chart - Daily

S&P Chart - Daily

The S&P fell short of strong resistance at 1260 with an intraday high of 1258 and collapsed back to near 1250 at the close. Like the Nasdaq the S&P chart is far less bullish than the Dow and continues to be stuck in the middle of its expected range. The Dow is the hero simply because it is composed of big blue chip companies in a period of market instability and high pre Fed volatility. Blue chips are considered to be a safe haven in periods of economic instability. The SPX may be pinned to 1250 for the next week with strong support at 1240 and strong resistance at 1260. Without Fed direction we could see a flat S&P but our direction is likely to come from new earnings guidance. This is earnings warning season and while the MS and FDX earnings today produced a strong reaction any major warnings could produce an equally strong reaction in the opposite direction.

Despite the cautious comments about market direction the internals were very lopsided in favor of the advancers. Note the advancing volume at better than 6:1 over declining volume and advancers 2:1 over decliners. This is bullish but it is also a factor of the morning short squeeze. After the Tuesday decline the bears were setting up for another retest of the lows and everybody was leaning to the downside. The morning surprise had everyone running for cover. Note also the flip-flop back and forth over the last week with huge imbalances in both directions. There is no trend and volatility is still in play.

Market Internals

We are approaching the end of the quarter and the possibility for EOQ window dressing is abnormally high. Funds were blown out of many positions over the last month that cash balances are very high. With quarterly retirement funds headed their way they will want to put that excess cash to work before the quarter is over. With the Fed meeting a two-day event ending on June 29th it is very possible we could see a very strong Thursday afternoon and Friday going into month end. That is of course assuming the Fed doesn't do anything stupid.

Funds have been on a cash diet over the last month according to Lipper. Equity funds received only $10.5 billion in May, down -60% from April. However, money market funds took in $45.5 billion. The reason for this flood of cash is the chart below. It is the current risk free money market interest rate. In times of economic instability it is very comforting to be able to sit on the sidelines while earning the current 4.8% rate. It is also the reason the equity markets are not showing any conviction. Safe money hoards are growing while risk money is shrinking.

Current Money Market Interest Rates

Russell Chart - Daily

For Thursday and Friday I would remain cautious and question any rallies that fail to break 1260 on the S&P. I would target any failure at or below that level to enter new shorts/puts. The Russell rebalance produced a -2.4% decline on Monday as expected and now all the speculators should have their positions established. The bounce today gave those who were slow on the trigger a second chance. Now the index should be neutral as we wait for the June 30th sell off by funds. Late next week we should get some additional declines as some funds try to beat the Friday close and not wait until the last minute. This selling could run headfirst into the end of quarter window dressing so it will be interesting to see how the picture develops. If the Fed sours the party on Thursday that window dressing may be light but a surprise by the Fed could cause a rush into the market that would offset the Russell rebalance momentum. One thing about summer markets there is always an event to worry about.
 


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

Chipolte Mex Grill - CMG - cls: 63.00 chg: +2.33 stop: 57.45

A market-wide bounce on Wednesday re-inspired the bulls and buyers drove shares of CMG to a 3.8% gain. Volume failed to hit its daily average. If you haven't opened new positions yet then we'd wait for another pull back, this time toward the $62 region. 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: + 1.24
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

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Cognizant Tech. - CTSH - close: 64.91 chg: +2.43 stop: 62.49

The market strength also propelled shares of CTSH to a strong session. The stock added 3.88% on strong volume. The stock has broken out above resistance in the $64.25-64.35 zone. Our trigger to buy calls was at $65.05, which was hit today. The rally today also produced a new triple-top breakout buy signal on the P&F chart, which points to a $74 target. Our target is the May highs in the $69.50-70.00 range.

Picked on June 24 at $ 65.05
Change since picked: - 0.14
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.4 million

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General Dynamics - GD - cls: 65.52 chg: +0.31 stop: 63.99

We are unhappy with GD's performance so far. The market produced a widespread rally today and GD fails to really participate and volume was below average. This sort of relative weakness flashes a warning sign for us. We're suggesting caution and hesitate to suggest new bullish plays. Our target is the $69.00-70.00 range.

Picked on June 18 at $ 66.12
Change since picked: - 0.60
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Google - GOOG - close: 402.13 chg: +14.96 stop: 384.50

It was a big day for GOOG. The stock soared higher adding 3.8% by the closing bell and breaking out past resistance at its 50-dma, the $395.00 level and the $400.00 mark. Our trigger to buy calls was at $401.00 so the play is now open. Driving the stock higher were some positive analyst comments. GOOG posted a gain in its domestic market share for search grabbing just over 44% of the pie, up from 43.1% a month ago and up from 37.5% a year ago. This news inspired talk that GOOG might surprise to the upside with its next earnings report. Plus, there was news that GOOG had signed a multi-year deal with Adobe Systems (ADBE) to have its Google Toolbar bundled with several of ADBE's products. If shares see any profit taking tomorrow look for the 50-dma and the $395 level to act as new support. Our target is the $440-445.00 range but we do not want to hold over the July earnings report.

Picked on June 21 at $401.00
Change since picked: + 1.13
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 9.8 million

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Legg Mason - LM - close: 100.88 chg: +0.96 stop: 96.99

A strong earnings report from Morgan Stanley (MS) sparked a 2.66% gain in the XBD broker-dealer index. Shares of GS and BSC are looking pretty bullish with their follow on rallies today. We're a little disappointed that LM did not participate more but we won't ignore a 0.9% gain. However, while the bounce from today's lows looks like a new entry point in LM, we'd probably wait for a move over $102 and maybe over $102.50 before initiating new call positions. Currently our target is the $107.50-108.00 range but we might adjust it to account for the falling 50-dma, which could be resistance.

Picked on June 18 at $102.45
Change since picked: - 1.57
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Manpower - MAN - close: 66.30 change: +1.07 stop: 64.45

The market rally inspired new strength in shares of MAN and the stock broke out past the $66.00 level and its trendline of lower highs. The strength today (+1.6%) helped confirm the new MACD buy signal on its daily chart. Our trigger to buy calls was at $66.05 so the play is now open. Our target is the $69.85-70.00 range. The P&F chart now points to an $80.00 target so more aggressive traders may want to aim higher. We do not want to hold over the mid-July earnings report.

Picked on June 21 at $ 66.05
Change since picked: + 0.25
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 959 thousand

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Reynolds American - RAI - cls: 112.25 chg: +0.76 stop: 107.45

Shares of RAI continue to creep higher. Our only complaint today would be the very lackluster volume, which doesn't inspire a lot of confidence in the current rally. We are suggesting two targets. Our conservative target is $115.00. Our aggressive target is $119.00.

Picked on June 15 at $111.15
Change since picked: + 1.10
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

---

United Tech. - UTX - close: 61.49 chg: +0.51 stop: 58.75

Technicals continue to improve with UTX and the MACD indicator's recent buy signal is looking stronger. We did warn readers to watch out for resistance near $62.00 and UTX is still struggling with that area and its 50-dma. More conservative traders may want to think about tightening their stops toward the $60 level. Our target remains the $64.00-65.00 range.

Picked on June 08 at $ 60.13
Change since picked: + 1.36
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million
 

Put Updates

Apple Computer - AAPL - close: 57.86 chg: +0.39 stop: 60.05

The lack of a real rebound in AAPL sticks out like a sore thumb. Shares tried to rally midday but a late day sell-off cut its gains. We're suggesting a trigger to buy puts at $56.85 in an attempt to capture the next leg lower. 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

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Amgen Inc. - AMGN - close: 65.56 chg: +0.60 stop: 68.05

AMGN produced an oversold bounce today, adding 0.9%, but it failed near the $66.00 level and shares were headed lower into the closing bell. We do not see any changes from our previous updates. 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: - 1.92
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

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Carpenter Tech. - CRS - close: 104.70 chg: +3.95 stop: 105.01

The market rally today inspired a new wave of buying in the steel and metal stocks. Shares of CRS added 3.9%. Thankfully we're still sitting on the sidelines. Our trigger to buy puts is at $99.25. We're going to keep CRS on the play list as a bearish candidate for now but if the stock closes over $105 we'll drop it. The P&F chart is still bearish and currently points to a $76 target.

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

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Digital River - DRIV - cls: 41.51 change: +1.51 stop: 42.05*new*

The widespread market rally on Wednesday definitely helped DRIV, which saw a 3.77% gain and a new MACD buy signal. The stock is trading under resistance at $42.00 and its 21-dma and 100-dma. We are going to lower our stop loss to $42.05. We are not suggesting new plays at this time.

Picked on June 19 at $ 39.45
Change since picked: + 2.06
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

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Express Scripts - ESRX - cls: 67.79 chg: +2.33 stop: 70.10

ESRX produced another oversold bounce but overall we don't see any big changes from our previous updates. We're not suggesting new bearish plays. Shares of ESRX still have overhead resistance near $70.00.

Picked on June 08 at $ 69.59
Change since picked: - 1.80
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Group 1 Auto - GPI - close: 52.54 chg: -1.00 stop: 58.46 *new*

We thought volume was big on Tuesday at five times the daily average. Volume today was over nine times the daily average. Today's 1.8% decline is a huge sign of relative weakness considering the market-wide rally. We are not suggesting new bearish positions. Traders should seriously consider exiting early right here for a gain. We're thinking about it. Our target is the $51.50-50.00 range. We are lowering the stop loss to breakeven at $58.46.

Picked on June 11 at $ 58.46
Change since picked: - 5.92
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

---

Intl. Bus. Mach. - IBM - cls: 78.30 chg: +0.31 stop: 80.05

IBM posted a meager gain today and the stock remains inside its bearish trend. We would not consider new put positions while the market is bouncing right now. More conservative traders may want to exit early if IBM trades over $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: - 0.45
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

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IDEXX Labs - IDXX - close: 75.63 chg: -0.11 stop: 80.05

IDXX displayed more relative weakness today. The stock tried to bounce this morning but it quickly failed. We were expecting a bounce near the $75.00 level and one could still occur. We have two targets. Our conservative target is the $75.25 mark. Our aggressive target is the $72.00 level. Odds are good that IDXX will see some kind of bounce near $75.00.

Picked on June 12 at $ 77.95
Change since picked: - 2.32
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

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Intuitive Surgical - ISRG - cls: 102.06 chg: +3.07 stop: 108.25

ISRG bounced back to the $104 region and then began to fade. The close back under its simple 200-dma may be the sort of failed rally traders can use as a new entry point to buy puts. However, the market bounce may not be over yet. We'd wait for a new decline under $100.00 before initiating new plays here. The stock's volatility makes this an aggressive, higher-risk play.
Our target is the $91.00-90.00 range. The P&F chart points to a $74 target.

Picked on June 19 at $102.45
Change since picked: - 0.39
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Oshkosh Truck - OSK - close: 50.19 chg: +1.09 stop: 51.51 *new*

OSK added 2.2% and managed to breakout back above resistance at the $50.00 mark and its 200-dma. This could be bad news for the bears. We are not suggesting new plays and instead we're lowering our stop loss to $51.51.

Picked on June 13 at $ 49.49
Change since picked: + 0.70
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand

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Supertex - SUPX - close: 36.43 change: +0.81 stop: 39.25

It looks like SUPX 2.2% bounce today is also a failed rally under its simple 200-dma, which should be acting as technical resistance. Watch for another decline under $36.00 as a potential entry point to buy puts or wait for a new relative low under the $35.00 level. If SUPX continues to bounce the $38.00-38.50 level appears to be the next level of resistance.

Picked on June 19 at $ 35.99
Change since picked: + 0.44
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 263 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Barr Pharma - BRL - close: 48.60 chg: -2.54 stop: 52.65

Target achieved. BRL spiked under the $50 level this morning, bounced and then sold off again hitting a low of $47.83 before a late day rebound. Our target was the $48.00-47.50 range. Volume was very strong on today's show of relative weakness and the MACD is nearing a new sell signal. We do not see any specific news to account for the breakdown but investors may have panicked after hearing that drug-giant Merck was going to lower their price on Zocor to compete with generic versions. Teva was the big loser on that story but BRL has a generic division and investors might be worried that MRK could be starting a trend that would damage the generic drug makers.

Picked on June 05 at $ 52.20
Change since picked: - 3.60
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Expeditors - EXPD - close: 104.77 chg: +4.37 stop: 100.35

We are dropping EXPD as a bearish candidate. The stock has broken out through the top of its bearish channel. Volume on today's breakout was above average. We have been suggesting that if EXPD did breakout higher that traders might want to buy calls on a move past the $102.50 region. Our bearish strategy involved a trigger to buy puts at $97.85, which was never hit.

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

---

Nucor - NUE - close: 50.77 chg: +1.59 stop: 51.61

We have been stopped out of NUE at $51.61. The rally in the steel stocks was pretty strong today and NUE hit $51.64, trading above Monday's high. Studying the charts again it looks like the $52.00 level is the key level to watch. Traders might want to consider buying calls if NUE trades over $52.50 or its 50-dma. A drop back under $48.00 could be used as a new entry point for puts.

Picked on June 19 at $ 48.62
Change since picked: + 2.15
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 5.9 million
 

Dropped Strangles

None
 


Trader's Corner

Gauging If a Bottom Has Formed

This column will repeat some of the ideas I wrote about last week in my 6/14 Trader's Corner when I sent what I thought was my most recently written article but failed to notice I attached my 1-4-06 article rather than the correct 6-14-06 column. OPPS!

My oversight was corrected on the web site issue for Wednesday (6/14) the next day but your e-mail version looked pretty strange with my Jan 4th comments along with my June 14th charts. My last week Trader's Corner ("Capitulation") is seen by clicking here:

The term 'capitulation' refers to the final stage of these relentless type free fall declines such as was seen into the 6/13-6/14 low. Capitulation is a final emotional selling phase where the greatest number of still-bullish investors and traders feel that stocks are NEVER going to stop going down. Bulls can capitulate (to the Bears) at bottoms and vice versa with bears giving in to the bullish impulses at tops.

Since the market is so driven ultimately by investor psychology and expectations, capitulation can be a powerful cathartic event often associated with market bottoms and stabilizing prices. When everyone who is a potential seller finally dumps stock, selling pressure dries up and even limited buying causes a sharp rebound.

Charles Dow talked about the same emotional state of mind of a final panic selling. Last week I listened to an analyst on one of the market wrap shows talking about bottoms coming with a final 'accidental event', or some final bit of news that causes the last selling wave for awhile; after this news comes out, traders figure the worst is over.

MARKET 'SENTIMENT'
For a gauge of capitulation, I most often rely on my equities call to put daily volume indicator for the CBOE. I look for a simple ONE-DAY reading that suggests put volumes are close to equaling call volume. This event tends to reflect that same type emotional trigger as discussed above.

However, there was only what is a common 'capitulation' type reading in my call to put volume ratio back in early-June (6/2), as seen in the following chart of the S&P 100 (OEX). A bearish 'sentiment' extreme associate with bullish capitulation is seen in heavy put volume relative to daily call volume; put volume becomes close to being equal to call volume; i.e., near 1. This is seen last on the lower indicator on 6/2 as I noted.

By the way, the OEX rebound into today's High backed off from resistance implied by the 200-day moving average (initial support on the way down) and at the down trendline.

Sometimes the market will reach a bottom, rebound back to resistance, but then drop back to the area of the prior lows or even dip under the prior low. This then becomes where there is then a 1-day or more extreme in my 'sentiment' indicator; i.e., a big jump in put volume relative to call activity with the two getting close to being equal.

DOUBLE BOTTOMS
A retreat to a prior low is another way to gauge a milder form of 'capitulation'. Investors decide that they just arent going to buy unless a key major index or the indexes in general get back to some important prior low. The Nasdaq 100 (NDX) has now retraced all of its gains made since its October bottom.

If you had been observing some of the key Nasdaq biggies (big cap stocks), it was apparent by last week that many were finding some supporting buying interest. The key example of a retreat to a prior bottom marking the end of a decline in at least one of the major stock indexes is seen in the Nasdaq 100 (NDX) chart below.

Today's close above its 21-day moving average (as well as the breakout above a bull 'flag' pattern) was bullish and suggests a possible move to the low-1600 area or higher. Today's action also suggests that anyone who bought calls around the prior October low made a low risk trade by setting an call exit or stop to be triggered at just under that prior low in the index. Relative to that risk, the 'reward' potential still looks good.

BULLISH PRICE/RSI 'DIVERGENCES'

You can also see on the Relative Strength Index (RSI) above how the last low in NDX, was accompanied by a HIGHER reading in the RSI, which is considered to be a bullish divergent action. New lows accompanied by an already RISING trend in the RSI is suggesting rising 'relative' strength. This bullish divergence AND the potential double bottom made for a highly attractive option trade, although an upside reversal didn't look 'proven' so to speak until the upside surge of the following days.

It's my particular trading style to try and ANTICIPATE significant tradable lows. And it helps in not having to 'stay glued to the tube' or watching the market every minute. I myself have other business activities besides trading and just watching the markets, although I had many years of that too.

Buy at prior lows if prices appear to stabilize in that area. You don't have to wait for the first big upside surge, when premiums on calls rapidly inflate. Like the triple rule in real estate re location, anticipate, anticipate, anticipate.

RETRACEMENTS

I also like to buy the 50 percent and the 62-66% retracements, of a prior big advance. The S&P 500 (SPX) retraced 2/3rds or 66% of its last big run up. Once a retracement of a prior move gets to be more than 2/3rds, there is the strong possibility that the price will fall back to the area of the previous low as was the case in NDX.

TOTAL NYSE AND NASDAQ UPSIDE VOLUME

Quite frequently at major lows, a 10-day moving average of total daily NYSE and NASDAQ Up or Advancing Volume will retreat to at or a bit under 300 million; or, to around 600 million shares in other instances. When this the 'line' then turns up from these areas, look for a rally to follow.

The 300-600 million share levels is the 'zone' I look for; as it happened, NASDAQ fell first to a 10-day Up Volume average of 300 million shares, followed by a short-lived Index rally, although tradable in calls. Then the recent bottom and a lower low, was accompanied by a dip in the 10-day NASDAQ UP Volume average of 600 million shares, as seen in the chart below of the Nasdaq Composite Index (COMP).

Why, UP Volume? This is the measure of volume where there was buying on up ticks and nearly always is a gauge of the willingness to 'pay up' for stocks. You nearly always see a declining trend in Advancing/Up volume numbers as the market is in a declining/down trend. When this volume trend turns around after certain reoccurring 'baseline' amounts are reached, it's a good indication that buying interest has returned.

Nothing comparable exists as a volume type 'indicator' at tops, such as with Declining Volume on a 10-day moving average basis.

BUY REBOUNDS TO/FROM A LONG-TERM TRENDLINE

You have to look at all the major indexes to see the possible range of the various technical events that are suggestive of a significant bottom, offering a high potential index trader.

If you have been following and tracking the Russell 2000 (RUT), this index has been trading back and forth within a broad uptrend price channel. It's recent low reached a longstanding RUT up trendline, suggesting this was a good buying area, as can be seen in the chart below.


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** Good Trading Success! **
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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