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Daily Newsletter, Saturday, 07/15/2006

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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

What A Week!

Various factors combined to produce a very rocky week for the markets but next week could be even more unpredictable. The earnings picture over the last week was rife with warnings and speculation making the impact of the geopolitical news even worse. Next week earnings speculation will fade with hundreds of companies reporting actual numbers. Speculation this weekend is what Israel will do before those earnings releases are made. With increasing risk that Syria and Iran could enter the battle the focus on earnings could pale in comparison with an escalation of that magnitude. It is shaping up as a volatile week unless the conflict fades over the weekend. If that should happen mediocre earnings could be welcomed as a relief by anxious investors.

Dow Chart - 120 min

The economic reports on Friday were less than spectacular and were mostly ignored given the events in the Middle East. Import prices rose slightly by +0.1% due mostly to the increase in oil prices. No surprise there. Retail sales for June slowed only slightly by -0.1% but that was substantially below the expected gain of +0.4%. Auto sales led the decline as gasoline prices slowed interest in buying autos. Ex-autos sales rose +0.3% and nearly in line with estimates. Unfortunately gas stations receipts headed the list of positive components with a +20.4% year over year gain. No other retailing segments even came close to those gains. Business inventories jumped significantly by +0.8% compared to estimates for only a +0.4% gain. The jump in inventories came from slowing sales allowing those inventories to climb. On the positive side business sales rose +1.4%. Also pushing inventories higher was a jump of +3.2% in auto inventories. This skewed the numbers to the upside giving us a lopsided view. Overall inventories are +4.1% higher than the same period in 2005.

Consumer sentiment fell to 83.0 in the first reading for July compared to 84.9 in June and consensus estimates for a rise to 85.5. The second reading in June, comprising survey results from the last half of the month was 87.4 bringing the June final reading up to 84.9. This spurt of positive sentiment was evidently reversed in early July and most likely due to higher gasoline prices. Expectations were flat at 71.6 from the final reading of 72.0 in June. However, present conditions fell sharply to 100.8 from 105.0. This is further evidence it was the impact from the sharply higher gasoline prices depressing sentiment ahead of the holidays.

Consumer Sentiment Chart

The economic calendar for next week is chock full of potholes that could trip up the market. Leading the list is the Producer Price Index (PPI) on Tuesday. Evidence of rising inflation in producer prices would be negative for the interest rate outlook. However, more important will be the Consumer Price Index (CPI) on Wednesday. This will show how much inflation has filtered through to the consumer level and this will be a direct impact to future rates. Just after the CPI is reported Bernanke will appear on Capitol Hill to testify on the state of the economy. He will be grilled relentlessly on current inflation levels and his rate outlook. His record as a public speaker has been peppered with mixed results early in his tenure but late appearances have shown him to be more cautious in his remarks. With the market under attack investors will be looking for any crumbs he may toss that suggest rate hikes may be nearing an end. This testimony on the same day as the CPI has a very good chance of moving the market. He gets to correct any misstatements on Thursday when he appears again to repeat his performance. Bernanke may not want to give the market too much hope and keep the bond groupies guessing. As we saw with Greenspan talking rates higher is almost as effective as raising rates. Other global institutions are also seeing the inflation risk rising with the Bank of Japan raising rates by +25 points on Friday. This may be the time Bernanke will elect to duck the issue as much as possible knowing he will get another entire month of data before he has to make that decision for real at the Aug-8th meeting. We will also get the FOMC minutes on Thursday to show us what the FOMC members were thinking in the June meeting.

Economic Calendar

The economic calendar has plenty to cause market volatility even without the earnings schedule. Over 400 companies report next week with many of the majors making their confession. After a week of warnings and global events pushing the market lower it may be time for an earnings surprise. Tech has been punished for weeks with the Nasdaq being pushed to a new nine month low on Friday. Nobody expects techs to be positive and most expect the big caps like INTC, MSFT and others to disappoint. This could be a prime opportunity for an earnings surprise that produces a market rally. Remember, very seldom do we every see an earnings rally when investor expectations are positive. Those expectations are already baked into the cake. Earnings rallies appear when least expected and this could easily be the case now. Earnings and guidance would not even have to be good, just not as bad as expected!

Obviously speculating on earnings ahead of next week is just that, speculation. I have been expecting negative results for weeks but so has the market. You might be surprised to learn that 44 S&P companies have already reported. They beat the estimates by an average of +6% with earnings up +31.5% and revenue +17% over the same quarter in 2005. This good news was overlooked by nearly everyone since all but a couple of those companies were small fry and the results were not highly publicized. If this trend continues when the big names report next week the bears are going to be running for cover.

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With the confluence of events early next week the odds of a positive market event are growing substantially. There is still a strong element of risk but only a couple of things have to happen to reverse sentiment completely. As of Friday's close the odds of another rate hike in August had fallen to nearly a coin toss at 52% chance. This is due to the market drop, soaring oil prices and the violence in the Middle East. Analysts think Bernanke will not further penalize the markets with another hike given the current situation. Of course August 8th is still quite a ways off to be counting rate hike chickens. Still there are several events, which could change directions instantly.

Going into Friday's close there was nearly unanimous agreement that Israel would invade Lebanon over the weekend to crush Hezbollah resistance one more time. The preparations they made by bombing bridges, airports and blockading avenues of escape as well as avenues for incoming support suggest they were gearing up to close the noose and sweep through Lebanon on a terrorist hunt. There were fears that Syria and Iran could join the fight but late day commentary suggests Iran had told Syria to lay low and told the Hezbollah and Hamas leaders through their Syria channels to disappear rather than continue pressing the fight. If it appears by Monday that the conflict has cooled rather than escalated then that will remove a major hindrance for the market.

If the PPI and CPI are tame that will also remove a major stumbling block. Add in a dovish Bernanke testimony on Wednesday and investors could begin coming out of their caves. By Wednesday night we should have a much better idea about the quality of Q2 earnings and future guidance. A surprise there in addition to a dovish Bernanke could spark that building bullish sentiment and another bear-b-que develop.

I do realize that is a lot of "If" statements. I was a programmer back in the 60s and all those qualifications would be called nested ifs. If A, B, C, D and E are true then a rally would develop. Unfortunately in market terms there is never a guarantee and there are various definitions of true. Israel may cool but not back down. Bernanke may cool rate hike fears but not entirely. The CPI may not be overtly inflationary but not moderate either. Earnings may be better than expected but guidance may be weak. As an example GE tanked on Friday after beating on revenue and announcing earnings inline with expectations. Guidance was the culprit. They were not as bullish as investors had hoped. This is a very gray area in the earnings cycle where good guidance is simply not good enough to overcome the post earnings blues.

Key earnings events will include Intel, Microsoft, Yahoo, Google and Ebay. Intel announced they were firing 1000 managers in their current reorganization attempt. Most analysts expect thousands more to be terminated with some details released with earnings. Normally cost reductions are met with investor approval but in the case of Intel they may fear the reason for the reductions rather than the benefits. Sales of PCs are slowing and how slow is still a big question.

Microsoft is expected to guide lower based on the delay of Vista. Since Gates rumored last week of further potential delays that lowered guidance could be for several more quarters. I would not morn for Microsoft regardless of their news. I ran across some numbers last week suggesting there are 800 million to as many as one billion Windows PCs in the world. Kicking out a few as servers, some more running pirated software and a few more that are old enough not to qualify as upgradeable you could easily get a number in the 500-600 million range that would qualify for an upgrade to Vista over the next couple years. That represents a conversion base of nearly $150 billion in potential sales. Add in another 100 million upgrading to Office 2007 and that equates to nearly $200 billion in new revenue on just their two basic software offerings. Analysts think there could be another wave of two million new computers ordered from Dell, HP and others, in addition to their normal order flow, once Vista becomes available and the numbers just keep getting bigger. Can Microsoft disappoint? Absolutely! Are they going to quit printing money with the Microsoft logo on the boxes? Heck no. That makes MSFT a buying opportunity on any dip back to $21.50 but it would have to be a very long-term hold. I got off topic with this Microsoft discussion but I thought it was worth a few sentences.

Ebay is expected to disappoint due to whispered reports that item listings are shrinking. If that is true it would be a major blow to the business model. Ebay has been a constant grower although slower than investors had hoped over the last couple years. Any revelations about shrinking item counts could get really ugly. Ebay is already under the gun with the expected drop in PayPal revenue once Google Checkout is running. Google is probably one of the few tech stocks where expectations are still high. Unfortunately there are rumors of cracks in their foundation as well. Google has always promised too much in the form of new offerings and almost always failed to deliver. Most of their recent new product announcements never seem to get out of test mode despite throwing billions of dollars into continued development. There are also rumors of falling ad sales. If Google disappoints there could be real bloodshed. Picking up the Internet pieces is Yahoo. They are expected to beat estimates and show sizeable gains. According to published reports they saw an additional one billion page views due to the World Cup with multiple ad impressions on each one. Over 31 million new video streams were delivered with World Cup content. Yahoo seems to be nibbling away at Google's audience and they may be a bright spot for tech earnings.

Take the drama I described surrounding only five tech companies and multiply it by four hundred for next week. That is the kind of sensory overload traders will be facing. Add in the economic and geopolitical events and the possibilities for the market outcome are unbelievably complex.

The markets imploded last week with drops of -2% to -5% across all the major indexes. The only sector to brave the storm was energy. It was mostly positive but only barely so despite the new high for crude of $78.40 on Thursday night. Israel and Lebanon don't have any oil but there were fears Iran could enter the fray and use their oil card to force world outrage to squelch the battle. That could still happen but it would be wise for them to remain quietly on the sidelines with their nuclear ambitions back in front of the UN Security Council. The spike was also prompted by new attacks on oil pipelines in Nigeria cutting even more production capability and by the -6mb drop in crude inventories in the US last week. Gasoline demand over the July-4th weekend surged nearly +2% over the same week in 2005 despite prices averaging over $3 a gallon in most areas. Gasoline inventories fell -426,000 bbls and refinery utilization dropped -2.6 points to 90.5% due to the closing of the ship channel and associated oil spill. It was the perfect storm for oil prices with supply problems, refinery problems and geopolitical problems with only a real tropical storm missing from the equation. So far the Caribbean/Gulf areas have been quiet but should a storm appear in addition to those other factors above the price of oil could rocket over $80 very quickly.

Crude Oil Chart - Daily

Oil stocks did not generally react strongly to the spike in oil prices. All these events are reactionary and should not impact oil long term unless Iran does something stupid and joins the conflict. Otherwise inventory levels are still adequate and the peak of the driving season has passed. If a storm does not appear or Iran joins the conflict I expect oil prices to ease sooner rather than later. Oil stocks generally report earnings next week and this will give the S&P earnings percentages a boost making them appear stronger than they really are. Energy is expected to produce +32% earnings growth and that will cover up a lot of tech sins in the totals. Energy earnings could be the saving grace for the market next week even if oil prices begin to decline.

The sharp drop in the indexes prompted me to dust off my correction table for further review. In the table below the first column is the Pre June highs and the next to last column is the post May lows. The difference in these gives us the correction percentages for each index/commodity. The highlighted indexes are the indexes with more than a 10% correction and the orange ones are those indexes with new lows last week. The Dow came within two points of making a new low below 10700.

Table of Index Corrections

This table illustrates the grossly oversold conditions in the tech sector. The charts below show that the Friday lows for several indexes were right on strong support. The combination of oversold and strong support would lend credence to the potential for a rebound if at least a couple of our conditions came true. A break below these support levels could give us an entirely new wave down and without some kind of positive earnings news to sustain us it could be a long drop. I have been warning for several weeks that we would see lower lows before October and I still believe that even if we get a temporary rebound next week. It has already happened on the Nasdaq and SOX with the Dow and S&P only a few points behind. Any news event over the weekend could easily produce those new lows on Monday and prime the pump for the rebound I discussed above. Of course all bets are off if the geopolitical situation worsens or Bernanke develops foot in mouth disease. As of Sunday the S&P has gone 845 days without a -10% correction and that is the second longest streak in history. I am betting that this streak is about to end.

Market Internals Table

The market internals on Friday deteriorated despite an increase in volume on the upside. 37 new highs is very weak even after a strongly negative week in the market. The were still 104 new highs on the Friday after the May 11th implosion. New 52-week lows are also accelerating with 7.2% of all stocks listed on the major exchanges at new 52-week lows. That is an astounding figure for a market with supposedly bullish undertones.

The Dow cascaded from the 11256 high we saw last week to 10701 on Friday. That is a drop of -555 points. 10700 should be very strong support, support that previously held on the June test. A break here targets 10200 if not 10000. Any rebound attempt only puts us right back in the middle of the range that has held since late May. There is a lighter uptrend support line not shown on the chart around 10600 but I don't give it much credence if 10700 breaks. The target would clearly be 10200.

Dow Chart - Weekly

The Nasdaq rebounded almost perfectly to retest 2200 only a week ago before crashing back to earth and support at 2030. Both resistance and support are clearly visible on the chart as is the next target if 2030 breaks. A sub 2000 drop would be very damaging to sentiment but 1900 is the next most likely target if we do get another round of tech disappointments.

Nasdaq Chart - Weekly

S&P-500 Chart - Weekly

The S&P is the strongest chart of the bunch. Currently resting on uptrend support at 1225 it has survived much better than the Dow or Nasdaq. This is our best indicator of a bullish undertone to the markets. If that uptrend support fails then a drop to the correction level of 1194 seems guaranteed with an additional target of 1150.

Supporting the S&P are the energy stocks, which represent 12-15% of the total weighting. The gains in energy and materials have balanced serious declines in other sectors like homebuilders. The biotechs had been providing support as well but they cratered this week with a drop in the BTX of -4.1% to strong support at 630 ahead of earnings. The Broker Dealer Index (XBD.x) saw a strong rebound from 190 to 218 and joined with the energy sector to produce strong earnings and strong support. That bubble burst on the 5th and it has been a straight drop back to Friday's close at 198. Lehman, Merrill and Bear Stearns all cratered about the time Crammer was pounding the table on them a week ago. Labranche warned that earnings were going to be miserable due to a tough market and losses in their trading and the rest of the sector, even those only remotely related, were painted by the same broad brush. With market leaders being knocked off one by one any disappointments by the energy sector next week and it will be lights out for the indexes.

I have mentioned the election year cycle several times over the past six months. Historically it projects market lows on the second year of an election cycle with greater frequency for a second term president. When that cycle runs into a Fed tightening cycle the results are even worse. On average the Dow lost -22% from the election year high to the mid-term lows. Add in the shock of oil prices above $75 and you get a witches brew nearly guaranteed to make the markets dizzy. The good people at the Stock Traders Almanac put out an alert last week targeting Dow 8500, S&P 950 and Nasdaq 1750 by year-end. They have a pretty good record when it comes to predictions and they have every conceivable statistic available when it comes to the markets. Even if you don't believe them or even if you do and those targets are not hit, the research suggests lower lows ahead.

My official outlook depends a lot on those conditions I discussed earlier in this article. A lot can happen to move the market over the next week and none of it is under our control. The three-day drop was the biggest loss for any three-day period since April 2005 and that has produced severely oversold conditions. I went into the close short index futures and long oil futures just in case Israel decides to flatten a 40-mile wide neutral zone inside Lebanon's border or Iran/Syria decided to enter the conflict with more than sharp words. If nothing happens by Monday morning I will reverse those positions and go long the indexes and short oil for a reaction trade as those oversold conditions equalize on Monday. I plan to be flat or long if the bearish conditions ease and wait to see what the PPI/CPI/Bernanke/Earnings news produces in the way of market reaction. I believe we will be directional again by next Friday but that direction is anybody's guess until a few of those events have passed.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BHI CAH None
D ESRX  
EOG JEC  
RAI    

New Calls

Baker Hughes - BHI - close: 83.65 change: +1.76 stop: 79.75

Company Description:
Baker Hughes is a leading provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and gas industry. (source: company press release or website)

Why We Like It:
Oil stocks were showing strength again on Friday. The outbreak of war in the Middle East is pushing crude oil to all-time highs. We don't believe the conflict with Israel is going to be over any time soon and if it was there is still Iran and N. Korea to keep geo-political tensions high. Plus, Nigeria is still experiencing trouble and the country is a major exporter. We like BHI as a bullish candidate. The stock is in the oil services sector and it has been out performing some of its peers and the market over the last few weeks. Shares are consolidating under short-term resistance at the $84.00 level. We are suggesting that readers buy calls now however more conservative traders may want to wait for a breakout over the $84.00 mark. Our target is the $89.00-90.00 range. The Point & Figure chart is bullish with a $100 price target. We do not want to hold over the late July earnings report.

Suggested Options:
We're suggesting the August calls. You, the individual trader, need to decide which strike best suits your risk profile.

BUY CALL AUG 80.00 BHI-HP open interest= 866 current ask $6.40
BUY CALL AUG 85.00 BHI-HQ open interest=2091 current ask $3.70
BUY CALL AUG 90.00 BHI-HR open interest= 524 current ask $1.85

Picked on July 16 at $ 83.65
Change since picked: + 0.00
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 4.3 million

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Dominion - D - close: 75.61 change: +0.61 stop: 74.49

Company Description:
Dominion is one of the nation's largest producers of energy, with an energy portfolio of about 28,100 megawatts of generation. Dominion also serves retail energy customers in nine states. (source: company press release or website)

Why We Like It:
If the market continues to see weakness or volatility then investors might decide to park their money in a traditional "safe haven" sector like dividend-paying utilities. We think shares of D make a good choice. Not only is D an electric utility with a 3.6% dividend yield. The company also has an oil and gas exploration business so rising crude and gas prices should also benefit the company. Bank of America came out with some positive comments on D this Friday and helped push the stock to a 0.8% gain. Shares of D have been consolidating under $76 and near its 200-dma for the last couple of weeks. We are suggesting that readers use a trigger at $76.05 to catch any bullish breakout. If triggered then we'll target the $81.00-82.00 range. More conservative traders might want to consider exiting near $80. If D can trade over $76.00 it will produce a fresh P&F chart buy signal. Please note that we do not want to hold over D's early August earnings report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 75.00 D-HO open interest=1882 current ask $2.40
BUY CALL AUG 80.00 D-HP open interest= 380 current ask $0.45

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.5 million

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EOG Resources - EOG - close: 70.15 change: +0.65 stop: 69.90

Company Description:
EOG Resources, Inc. is one of the largest independent (non-integrated) oil and natural gas companies in the United States with proved reserves in the United States, Canada, offshore Trinidad and the United Kingdom North Sea. (source: company press release or website)

Why We Like It:
EOG is another bullish candidate in the oil sector. The stock has been consolidating mostly sideways this past week and traders bought the dip on Friday morning. We suspect that oil will continue to be strong and strength in the sector and the commodity should be able to fuel a bullish breakout in EOG above its six-month trendline of resistance (see chart). We are suggesting that readers use a trigger to buy calls at $72.55. If triggered our target will be the $77.50-80.00 range. More aggressive traders might want to consider an early entry on a move past the 200-dma near $71.00. The P&F chart is bullish with a $76 target. We do not want to hold over the early August earnings report.

Suggested Options:
We are suggesting the August calls. Our trigger to buy calls is at $72.55.

BUY CALL AUG 70.00 EOG-HN open interest=2025 current ask $4.50
BUY CALL AUG 75.00 EOG-HO open interest= 798 current ask $2.45

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 3.5 million

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Reynolds American - RAI - close: 119.44 chg: +1.75 stop: 117.45

Company Description:
Reynolds American Inc. is the parent company of R.J. Reynolds Tobacco Company, Conwood Company, L.P., Santa Fe Natural Tobacco Company, Inc., Lane Limited and R.J. Reynolds Global Products, Inc. R.J. Reynolds Tobacco Company, the second-largest U.S. tobacco company, manufactures about one of every three cigarettes sold in the country. (source: company press release or website)

Why We Like It:
In spite of all the market weakness this past week shares of RAI are still trading near all-time highs. The stock has spent the last few days consolidating sideways under the $120 level and Friday saw a strong bounce from the rising 10-dma. Not only is RAI a relative strength play but investors could be moving money into the stock as a "safe haven" play during this market turmoil. RAI still has a 4.1% dividend yield and that's pretty attractive. Currently the Point & Figure chart points to a $148 price target. We are going to suggest a trigger to buy calls at $120.20. If we are triggered our short-term target is the $124.50-125.00 range. We have a limited amount of time for this play to work since we plan to exit ahead of the late July earnings report.

Suggested Options:
We are suggesting the August calls. Our trigger to buy calls is at $120.20.

BUY CALL AUG 120.00 RAI-HD open interest=3324 current ask $3.80
BUY CALL AUG 125.00 RAI-HE open interest= 653 current ask $1.70

Picked on July xx at $xxx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 636 thousand
 

New Puts

Cardinal Health - CAH - cls: 62.80 chg: -0.57 stop: 65.25

Company Description:
Headquartered in Dublin, Ohio, Cardinal Health, Inc. is a $75 billion, global company serving the health-care industry with a broad portfolio of products and services. Through its diverse offering, Cardinal Health delivers integrated health-care solutions that help customers reduce their costs, improve efficiency and deliver better care to patients. The company manufactures, packages and distributes pharmaceuticals and medical supplies, offers a range of clinical services and develops automation products that improve the management and delivery of supplies and medication for hospitals, physician offices and pharmacies. (source: company press release or website)

Why We Like It:
Shares of CAH look poised to begin a new leg lower. The stock broke down under support at its 200-dma and the $65.00 level back in June. Now shares have spent the last four weeks consolidating sideways between $65.50 and the $62.40 region. If you look at the daily chart it looks like CAH produced a big bearish engulfing candlestick pattern with a high for the day at $65.21. That looks like a bad tick since we don't see the rise to $65 on the intraday chart. However, the pattern remains bearish even without the bearish-reversal candlestick. Currently the P&F chart points to a $40.00 target. We are suggesting a trigger to buy puts at $62.25. If triggered then we'll target a decline into the $57.75-57.00 range. More aggressive traders might want to aim for the $55 region. We do not want to hold over the early August earnings report.

Suggested Options:
We are suggesting the August puts. Our trigger to buy puts is at $62.25.

BUY PUT AUG 65.00 CAH-TM open interest= 759 current ask $2.85
BUY PUT AUG 60.00 CAH-TL open interest=2611 current ask $0.75

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.6 million

--

Express Scripts - ESRX - cls: 69.85 chg: -1.50 stop: 71.51

Company Description:
Express Scripts, Inc. is one of the largest PBM companies in North America, providing PBM services to over 50 million members. Express Scripts serves thousands of client groups, including managed-care organizations, insurance carriers, employers, third-party administrators, public sector, and union-sponsored benefit plans. (source: company press release or website)

Why We Like It:
It looks like the oversold bounce in ESRX is fading. Shares have spent the last couple of weeks consolidating above support at the $70.00 level. Unfortunately for the bulls that support fell on Friday with ESRX's 2.1% decline. Aggressive traders might want to buy puts right here. We want to see a bit more confirmation so we're using a trigger at $69.30, which is underneath Friday's low. If triggered our target is the $64.50-64.00 range, near the June lows. We do not want to hold over the July 26th earnings report.

Suggested Options:
We are suggesting the August puts. Our trigger to buy puts is at $69.30.

BUY PUT AUG 70.00 XTQ-TN open interest=1541 current ask $3.50
BUY PUT AUG 65.00 XTQ-TM open interest=1564 current ask $1.55

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 2.0 million

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Jacobs Engineering - JEC - cls: 73.75 chg: -1.49 stop: 77.55

Company Description:
Jacobs, with over 40,000 employees and revenues exceeding $6.0 billion, provides technical, professional, and construction services globally. (source: company press release or website)

Why We Like It:
Concerns about a slowing economy may be weighing on shares of JEC. The stock's rally in June stalled near the $80 level and its descending 50-dma. This happens to be the top of its wide, descending, bearish channel. Friday's decline was a breakdown below technical support at its 200-dma and the $74.00 level. Friday also saw JEC's daily chart produce a sell signal on its MACD indicator. We are suggesting puts with JEC under the $75.00 level. Our target is the $69.00 level near the June lows. More conservative traders may want to exit at $70 while aggressive traders may want to aim lower. Bear in mind that we do not want to hold over the July 25th earnings report so we only have six trading days.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 75.00 JEC-TO open interest=273 current ask $4.10
BUY PUT AUG 70.00 JEC-TN open interest=234 current ask $1.90

Picked on July 16 at $ 73.75
Change since picked: + 0.00
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 583 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Fortune Brands - FO - close: 70.83 change: -1.18 stop: 69.74

We hope our readers were not surprised by the pull back in FO on Friday. We've been warning that shares would probably dip toward the $70.00 region. The market sell-off continued on Friday and FO finally gave into the pressure. Technical indicators are definitely turning weaker. Looking more closely we do see that the stock tried to bounce twice in the $70.40 area. FO's direction next week will probably be determined by the market's moves. The DJIA might bounce from its June lows and that could help things here but we remain cautious and we're not suggesting new bullish call positions at this time. Our target is the $74.00 level. We do not want to hold over the July earnings report (21st - unconfirmed).

Suggested Options:
We are not suggesting new call positions in FO at this time.

Picked on July 06 at $ 71.30
Change since picked: - 0.47
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 674 thousand
 

Put Updates

Alcon Inc. - ACL - close: 95.73 chg: +0.12 stop: 100.05

Hmm... we find ACL's relative strength on Friday surprising. There was no follow through lower after Thursday's breakdown. The overall pattern remains bearish so we're keeping the play open. Don't be surprised to see a bounce towards the $98 region. We don't see any changes from our new play description from Thursday so we're reposting it here:

Historically investors tend to run toward drug-related stocks as "safe haven" plays in times of turmoil. Not this time - at least not with ACL. The stock lost 3.7% on above average volume Thursday to make a new two-month low. The move produced a new Point & Figure chart sell signal that currently points to a $91 target but we expect that to fall even lower. We are suggesting that traders open put plays with ACL under $98.00. More conservative traders might want to wait for a decline under $95.00 or the late April low near $94.44 before initiating positions. We're suggesting two targets. Our conservative target is the $90.50 mark. Our aggressive target is the $87.00-85.00 range. We do not want to hold over the July 24th earnings report so we don't have a lot of time.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 100.00 ACL-TT open interest=1854 current ask $6.70
BUY PUT AUG 95.00 ACL-TS open interest=1933 current ask $4.10
BUY PUT AUG 90.00 ACL-TR open interest= 949 current ask $2.30

Picked on July 13 at $ 95.61
Change since picked: + 0.12
Earnings Date 07/24/06 (confirmed)
Average Daily Volume = 805 thousand

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Air Products Chem. - APD - close: 61.95 chg: -0.47 stop: 65.01

As the market sell-off continued on Friday, shares of APD lost another 0.75%. The stock dipped intraday under its simple 200-dma. The weakness has turned the technical picture bearish and its MACD on the daily chart has produced a new sell signal. If APD does bounce next week watch for the $63-64 region to act as overhead resistance. A failed rally under $64.00 and its 50-dma could be used as a new entry point to buy puts. At this time we're not suggesting new plays. We don't want to hold over the late July earnings report. Our target is the $59.00-58.00 range.

Suggested Options:
We are not suggesting new put plays in APD at this time.

Picked on July 09 at $ 62.95
Change since picked: - 1.00
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

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Apollo Group - APOL - close: 48.30 chg: -0.77 stop: 52.01

So far so good. Shares of APOL continue to slip lower. The stock had been range bound between $50.00 and $56.00 for four months. During that time APOL produced what appears to be a bearish double top pattern. In the last few days the stock has broken down under support at the $50.00 level and looks poised to move lower. We do expect a bounce near its March lows around $47.50 and it wouldn't surprise us to see APOL bounce towards $50.00, which as broken support should now act as new overhead resistance. APOL is one of many companies being investigated by the SEC during this new backdating stock options scandal for executives. Our target is the $45.50-45.00 range. The P&F chart points to a $40.00 target. FYI: More conservative traders might want to consider tightening their stop loss (maybe around $51).

Suggested Options:
We are suggesting the August puts. You, the individual trader, need to choose which strike price best suits your risk profile.

BUY PUT AUG 50.00 OAQ-TJ open interest=1765 current ask $2.95
BUY PUT AUG 45.00 OAQ-TI open interest= 826 current ask $0.85

Picked on July 09 at $ 49.92
Change since picked: - 1.62
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

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Caterpillar - CAT - close: 69.70 chg: -1.61 stop: 74.01

We are down to the final four days for our CAT play. The company is due to report earnings on the morning of Friday, July 21st. We do not want to hold over the report. Considering our time frame we're not suggesting new put plays although technicals continue to worsen and volume is still slowly rising on the sell-off. Our target is the $67.50-66.50 range, which is just above the rising, simple 200-dma. Readers should be prepared for a bounce in CAT if the DJIA bounces from its June low.

Suggested Options:
We are running low on time so we're not suggesting new puts in CAT.

Picked on July 12 at $ 71.31
Change since picked: - 1.61
Earnings Date 07/21/06 (confirmed)
Average Daily Volume = 5.1 million

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IDEXX Labs - IDXX - close: 72.82 chg: +0.13 stop: 76.51 *new*

We have nothing new to report on for IDXX. The stock hit a new five-month low at $72.45 on Friday morning but then quickly tried to bounce. The rebound did fade but shares closed in the green versus a 1.78% decline in the BTK biotech index. Our conservative target at $75.25 has already been hit and we're aiming for the $72.00 level. More conservative traders may want to seriously consider exiting right here. The market has been down three days in a row and looks a bit overdue for a bounce. We are adjusting our stop loss to $76.51.

Suggested Options:
We are not suggesting new plays in IDXX at this time.

Picked on June 12 at $ 77.95
Change since picked: - 5.15
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

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Whole Foods - WFMI - close: 58.39 chg: -1.42 stop: 63.01*new*

The sell-off continues in shares of WFMI. The stock lost 2.3% on Friday to breakdown to a new one-year low. This also looks like confirmation of a break below the neckline to its bearish head-and-shoulders pattern. The June retail sales figures came in below expectations and this fanned the flames of concern about a slow down in the consumer. Another record high for oil doesn't help either since higher fuel prices could hurt a high-end grocer like WFMI. We probably would not chase WFMI right here. The stock is down about $6 in just the last few days. Look for a bounce and a failed rally near $60.00-61.00 as a new bearish entry point. Our target is the $56.00-55.00 range. The P&F chart points to a $43 target. We do not want to hold over the late July earnings report. Please note that we're lowering our stop loss to $63.01. More conservative traders may want to adjust theirs closer to $62.

Suggested Options:
We are not suggesting new bearish plays in WFMI at this time.

Picked on July 12 at $ 61.20
Change since picked: - 2.81
Earnings Date 07/31/06 (confirmed)
Average Daily Volume = 1.4 million
 

Strangle Updates

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

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D.R.Horton - DHI - close: 21.20 change: -1.66 stop: n/a

Friday was a big day for DHI. We told our readers on Thursday night that the company had issued an earnings warning and was trading lower after hours. The stock gapped down on Friday morning to open at $20.40. Shares dipped to $20.28 before bouncing. Volume on the session was almost four times the daily average. There were a lot of analyst comments on the news and the stock. A few reiterated their "buy" ratings but the overall tone was one of more caution. It is a little frustrating that the options didn't move just a little bit more. We are aiming for an exit at $2.55. The high for the put side of our strangle was $2.50 on Friday. Our estimated cost was about $1.70. We're still planning to exit if either options rises to $2.55 or more. We're not suggesting new strangle plays. The options in our strangle are the August $25 call (DHI-HE) and the August $22.50 put (DHI-TX). Don't forget that DHI is expected to report earnings on Thursday, July 20th and we do plan on holding over the report.

Suggested Options:
We're not suggesting new strangle plays in DHI at this time.

Picked on July 09 at $ 23.90
Change since picked: - 2.70
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 3.7 million
 

Dropped Calls

Investment Tech - ITG - close: 48.67 chg: -1.94 stop: 48.95

We've been stopped out of ITG at $48.95. Friday was yet another down day for the XBD broker-dealer index and the investment-related stocks. Shares of ITG lost 3.8% to break down below potential support at the $50.00 mark and its 50-dma.

Picked on July 11 at $ 51.00
Change since picked: - 2.33
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 700 thousand
 

Dropped Puts

Apple Computer - AAPL - close: 50.67 chg: -1.58 stop: 57.05

Target achieved. AAPL was weak from the start on Friday and slipped to an intraday low of $50.16. Our target was the $50.50-50.00 range. Helping drive the price lower was analyst firm UBS who lowered their earnings estimates and price target on AAPL while maintaining their "buy" rating. AAPL is due to report earnings on Wednesday, July 19th after the closing bell. We're considering a potential strangle play with shares near the $50.00 mark in an attempt to capture any post-earnings volatility.

Picked on June 28 at $ 56.85
Change since picked: - 6.18
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

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Intl. Bus. Mach. - IBM - cls: 73.57 chg: -0.67 stop: 78.75

Target achieved. It took a bit longer than we expected but IBM finally hit our target at the $73.50 level. The stock hit an intraday low of $73.37 and closed with a 0.9% loss on another day of above average volume. The company is due to report earnings on July 18th after the market's closing bell.

Picked on June 06 at $ 78.75
Change since picked: - 5.18
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

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Sears Holding - SHLD - cls: 141.60 chg: -2.42 stop: 152.05

Target achieved. The June retail sales number came in below expectations and that added more fuel to the fire that the consumer might be slowing down. This helped push shares of SHLD to an intraday low of $139.15. Our target was the $142.00-140.00 range.

Picked on July 12 at $148.37
Change since picked: - 6.77
Earnings Date 08/17/06 (unconfirmed)
Average Daily Volume = 1.9 million
 

Dropped Strangles

KB Home - KBH - close: 39.92 change: -1.75 stop: n/a

Target achieved. An earnings warning from DHI really rattled the homebuilding sector. The DJUSHB index lost over 4.1% on Friday. Shares of KBH followed suit with its own 4% decline and on big volume. Our estimated cost was about $1.45 and our plan was to exit if either option rose to $2.45 or more. The August $40 put (KBH-TH) hit a high of $2.50 on Friday. We're closing the play. More aggressive traders might want to keep the play open since you have so much time left - just be prepared for an oversold bounce or two.

Picked on July 09 at $ 45.76
Change since picked: - 5.84
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 2.4 million

 


Trader's Corner

Having a Backup Plan

One day not so long ago, contractors arrived in the alley behind a neighbor's house, their truck loaded with fencing supplies. Within a couple of hours, one of their new post holes had severed the neighborhood's cable line. Out went my broadband connection. I had no charts and no connection to my online broker or to OptionInvestor's Market Monitor. A trek down the alley to talk to the said contractors turned up the information that the severed cable would not be replaced until the next morning.

Not so long before that, a spring thunderstorm rolled through the area, knocking out power. Although my laptop had plenty of battery power, out went my desktop computer, my cable modem and my wireless router.

Shortly after these occurrences, my charting service went on the blink. Blank charts greeted me, even after multiple attempts to change servers. Subscribers writing on the charting service's message board complained of similar difficulties, so I knew the problem rested with the charting service and not with my equipment. Still, I had no charts.

Am I particularly unlucky? Not particularly. I was unlucky only in the sense that these three occurrences happened in rather short succession. Each of them or some version of them is likely to occur to you at some point in your trading careers. Each required a backup plan for monitoring open trades, a topic I've skirted in other Trader's Corner articles. It deserves attention again.

Your backup plan requires three steps. The first and most important backup plan concerns setting stops on any open play. These days, I mostly trade credit spreads, and my brokerage allows me to set stops contingent on the price of the underlying. If I have an SPX bull put credit spread, for example, I can set a stop that would be triggered if the SPX's last price dropped below a level I had pre-determined to be my "get out" level.

If you're trading stocks or single options positions, you may have even more choices when setting a stop, including a "one cancels other" order that allows you to set the protective stop you want if the play goes bad and the order that will take you out with your desired profit if the play goes right. If one is triggered, the other is cancelled. Especially in today's more volatile market climate, it's important to take profits on pure directional plays when offered, because the once-profitable play can reverse, resulting in a loss on the position instead. You might choose a trailing order if your broker allows such orders.

It's important, of course, to educate yourself about the types of orders available on your broker's site and the way those orders are handled. It's particularly important to understand the risks of setting a regular stop or a stop limit order. If you set a stop order, that order becomes a market order once your stop is hit and triggered. If markets are moving fast or bid/ask spreads are widening, that may mean that you get a worse fill than you anticipated.

However, if you set a stop limit order for the purposes of loss control, a limit order rather than a market order is triggered when the stop price is hit, with you presetting that limit. If the market moves so quickly through your stop level that it skips your limit price or trades there only once, your order won't be filled. If you're trading options and you've guessed wrong what the option's price or bid/ask spread will be when the stop is hit, your order won't be filled. You won't be protected from further losses.

Your broker's site should be your first resource for information on setting stops. If you broker's site doesn't offer information, a good resource book such as Lawrence G. McMillan's OPTIONS AS A STRATEGIC INVESTMENT offers explanations and examples.

You may plan to watch the market each day, and may know yourself well enough to be certain you'll be disciplined enough to exit a position when a mental stop is hit. However, when a contractor pulls up in the alleyway behind your neighbor's fence and subsequently severs the cable line, all the discipline in the world isn't going to help you if markets make a big move while you're sorting out what happened with your charts. Those stops will protect you and give you peace of mind while you pull together the other parts of your backup plan.

The second step involves setting up an alternative Internet link to your brokerage. That can come in the form of a handheld, a telephone connection or a dial-up connection. If you're not a chart technician, a telephone connection to your broker might allow you to check prices on your portfolio. Keep that number posted somewhere near your computer because you're not going to be able to look it up if your connection is down.

A third backup step concerns charting services. Those charting services struggle to provide reliable and steady service, but not all succeed, particularly during heavy-volume periods. Sometimes the feed they receive is at fault, as happened for a period a year or two ago when quotes on the OEX were sometimes not available and as is currently apparently happening with the SOX. According to some charting services, the Philadelphia Board of Trade (PBOT) voted to charge a subscription fee for feeds and inaugurated that change rather suddenly, with some charting services claiming that they didn't receive adequate notice. Some quote services never blinked in their service, some scrambled to get those quotes to their subscribers as quickly as possible, and some still haven't. Mine hasn't.

If the source feed is at fault, then any charting service using that same feed source will suffer from the same problem. However, traders will benefit from having an alternative charting service from those times when the issue is with the charting service itself, and they may be surprised that even when the problem is supposedly with the feed, with some quote services having few problems providing them.

Several free charting or quote services exist, but many employ delayed quotes. The CBOE's site at www.cboe.com provides delayed quotes, for example, with the site also listing a free streamer service that requires registration. My choice and that of many others looking for a free alternative charting source is QuoteTracker (www.quotetracker.com). This service requires downloading, but includes streaming real-time quotes, 50 technical indicators and many other services, including integrated trading through many online brokers. This service will not work for all traders, because QuoteTracker doesn't actually provide the quotes. Those come from your own broker, if that broker is supported on Quote Tracker, or from a feed source for which you will be charged, if you choose that route. Interactive Brokers, OptionsXpress and BrokersXpress are all supported on QuoteTracker, with many OptionInvestor subscribers using one of those three brokers.

After downloading QuoteTracker, sign on through your broker's password. Other participating brokers or feed sources are eSignal and StockWatch. My online broker is brokersXpress, but my feed is provided through the affiliated optionsXpress. Unfortunately, my broker does not provide backfill, so my intraday charts include information garnered only from the time I'm actually signed on. It is my understanding that Interactive Brokers does provide backfill, but it will still be several days before you have the full component of 10 days worth of data.

Partial Screenshot of Streaming Quotes Page on QuoteTracker:


Sample Historical Chart with Candlesticks, SMA's, Regression Channel and Trendline:

A message board is available to peruse, with comments and new threads available only to those who register, with such registration also free. A quick search of the comments board turns up raves for QuoteTracker's service, however, and many more positives exist for this free charting service than I've noted here. For a small fee, you can subscribe to the paid version of this charting service, with that service offering a few more amenities and getting rid of the ads.

Other services such as www.bigcharts.com, often available on your broker's website, exist.

Big Charts Intraday Chart for the Dow:

Some of you may know of other services. While it's always a clunky practice to switch suddenly to an alternative chart service, it certainly beats guessing whether that trendline or Bollinger band has been touched when your primary charting service won't tell you. Slow market days would be good times to try out some of these services, running them and getting acquainted with their peculiarities.

The day the neighbor's contractor severed my cable modem, I might have muttered under my breath, but I was able to use my alternative dial-up connection to pull up my broker's page and my charting service, although it ran slow. The day a storm knocked out the electricity, the same dial-up connection kept me connected on my laptop long enough to make sure that all "t's" were cross and "i's" dotted on my open plays, the stops just where I wanted them. When my charting service is not available, I might chafe at the unfamiliarity of the alternative charting service's setup, but I'm glad it's available. While I won't say that employing these backup measures was always easy, they certainly served to keep me calmer and help me protect my trading account. Employing them will do the same for you.

I will not be posting Trader's Corner articles for the next two weeks, but will return after that. Look for Leigh's articles on Wednesday for tips on technical analysis.
 

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

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