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Daily Newsletter, Wednesday, 07/26/2006

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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

Market Wrap


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
NoneNoneNone

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Dominion - D - close: 78.66 change: +0.61 stop: 74.99

The market's upward momentum slowed today and shares of D, a defensive stock, experienced another decent gain. Today's session saw D breakout and close over minor resistance at the $78.00 level. We remain bullish and continued to target the $81.00-82.00 range although more conservative types may want to exit near $80.00. Please note that we do not want to hold over D's early August earnings report.

Picked on July 17 at $ 76.05
Change since picked: + 2.61
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.5 million

---

EOG Resources - EOG - close: 71.83 chg: +2.45 stop: 67.49

Our bullish play in EOG is now open. The stock continued to rally on Wednesday and shares broke through resistance at its 200-dma with a 3.5% gain. The MACD indicator on the daily chart is nearing a new buy signal. Our trigger to buy calls was at $71.01. Our target is the $77.50 level but readers should bear in mind that we plan to exit on Monday afternoon (July 31st) to avoid holding over the company's earnings report on Tuesday.

Picked on July 26 at $ 71.01
Change since picked: + 0.82
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 3.6 million

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General Dynamics - GD - cls: 67.99 chg: -1.39 stop: 67.45

Shares of GD hit some profit taking on Wednesday and the stock erased a good chunk of Tuesday's gain. We remain on the sidelines. Our strategy involves a trigger to buy calls at $70.05 to catch a bullish breakout over resistance at the $70.00 level. If triggered our target is the $74.50-75.00 range. The P&F chart for GD already points to a $75 target.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (confirmed)
Average Daily Volume = 1.5 million

---

Goldman Sachs - GS - close: 147.38 chg: -1.11 stop: 141.79

The trend in GS today was mostly sideways and volume came in pretty low. We remain bullish but if the major averages pull back tomorrow then GS could dip towards the $145 region. More aggressive traders may want to try and buy a bounce from the $145 level. More conservative traders may want to heed our previous suggestion and wait for a breakout over $150. Our target is the $154.00-155.00 range. Conservative types may want to put their stop closer to $145.

Picked on July 25 at $148.05
Change since picked: - 0.67
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

The Houston Exp. - THX - cls: 63.32 chg: +0.72 stop: 59.99

Oil stocks continued to show relative strength on Wednesday and THX added another 1.15%. We would have liked to have seen stronger volume on the bullish breakout above resistance. Our target is the $67.50-70.00 range. We do not want to hold over the early August earnings report. FYI: The Point & Figure chart is bullish and points to a $76 target.

Picked on July 25 at $ 62.60
Change since picked: + 0.72
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 667 thousand
 

Put Updates

Apollo Group - APOL - close: 46.63 chg: -0.96 stop: 50.05

The bounce in APOL appears to have failed at its descending 10-dma. This looks like a new entry point to buy puts but we're not suggesting new positions at this time. One reason is that APOL already looks significantly oversold. Secondly, the stock is nearing our target in the $45.50-45.00 range. On the other hand the stock is sinking under its March lows and the Point & Figure chart is bearish with a $36 target. More conservative traders may want to consider tightening their stops into the $49.00-48.75 region. We're leaving ours at $50.05 for now.

Picked on July 09 at $ 49.92
Change since picked: - 3.29
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Chicago Merc. - CME - close: 450.00 change: - 5.25 stop: n/a

We don't see any changes from our Tuesday update on CME. The stock is still sinking and the pattern looks bearish, especially on the weekly chart. We're not suggesting new put plays but aggressive traders might want to consider positions on a drop below Tuesday's low ($446). Currently we're aiming for a decline into the $420-400 range.

Picked on July 23 at $452.00
Change since picked: - 2.00
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 680 thousand

---

IDEXX Labs - IDXX - close: 75.55 chg: +0.34 stop: 76.05

We are planning to exit tomorrow (Thursday) at the closing bell to avoid holding over IDXX's earnings report on Friday morning. Other than an official exit there are no changes from our previous updates on IDXX. The stock is inching closer to our stop loss and technical resistance at the 50-dma and the 200-dma. We've been suggesting for days now that traders exit early and lock in a profit. Our conservative target at $75.25 has already been hit and we're currently aiming for $72.50.

Picked on June 12 at $ 77.95
Change since picked: - 2.40
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 144 thousand

---

Manpower Inc. - MAN - close: 59.26 chg: -1.73 stop: 62.25

Good news! It looks like the oversold bounce in MAN has reversed. The stock produced a bearish engulfing candlestick pattern today. Plus, the close back under the $60 level is a positive move for the bears. This looks like a new entry point to buy puts. Our target is the $55.50-55.00 range. We suspect that the simple 200-dma near $55.00 will offer technical support.

Picked on July 20 at $ 59.42
Change since picked: - 0.16
Earnings Date 07/19/06 (confirmed)
Average Daily Volume = 1.0 million

---

Union Pacific - UNP - close: 83.10 chg: -1.14 stop: 87.01

Railroad stocks experienced more selling today. The Dow Jones railroad index lost over 4% as investors reacted to NSC's earnings report this morning. NSC actually missed Wall Street's estimates by 3 cents and came in light on revenues. Shares of UNP did not show as much weakness as we would have liked but the overall trend remains bearish. We have two targets. Our conservative target is $80.10. Our more aggressive target is the $77.65 level.

Picked on July 21 at $ 83.75
Change since picked: - 0.65
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 1.7 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.)

---

Bausch Lomb - BOL - close: 48.52 change: +0.61 stop: n/a

BOL may not see the volatility we were expecting tomorrow. The only earnings date we had for BOL was Thursday, July 27th before the market's opening bell. Unfortunately, we can't confirm that date and honestly at this point we do NOT expect BOL to report earnings tomorrow. If you go to the company's website the table of dates for their earnings releases is blank. Whenever they report we would not open new positions after the company announces. Actually, at the moment, the stock is currently trading outside our suggested entry range (47.00-48.00) to open positions. Our estimated cost was $2.15. Our goal will be to sell if either option rises to $3.25 or more. More aggressive traders may want to aim higher. The options in our suggested strangle are the August $50 call (BOL-HJ) and the August $45 put (BOL-TI).

Picked on July 23 at $ 47.40
Change since picked: + 1.12
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

L-3 Comm. - LLL - close: 76.23 chg: -0.55 stop: n/a

LLL erased yesterday's gains and dipped to $75.58 before traders bought the dip at LLL's simple 50-dma. We do expect LLL to report earnings tomorrow morning so we're not suggesting new strangle positions at this time. Wall Street is looking for LLL to report earnings of $1.21 a share. Our estimated cost for the strangle was $1.35. We will plan to sell if either option rises to $2.25 or more. The options in our LLL strangle are the August $80 call (LLL-HP) and the August $70 put (LLL-TN).

Picked on July 23 at $ 75.26
Change since picked: + 0.97
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.2 million

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3M Co. - MMM - close: 69.06 change: +0.95 stop: n/a

It's not a surprise but MMM did produce an oversold bounce today and that bounce failed under the $70.00 level. As broken support the $70 level should act as new resistance. Fueling the rebound this morning were some positive analyst comments on the stock. We are not suggesting new strangle plays at this time. Our estimated cost was $0.75. We are planning to exit if either options rises to $1.50 or more. The options in our strangle are the August 65 put (MMM-TM) and the August 75 call (MMM-HO).

Picked on July 23 at $ 70.72
Change since picked: - 1.66
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 3.7 million

---

Phelps Dodge - PD - close: 77.82 change: -1.61 stop: n/a

Uh-oh! PD did report earnings today and the market reaction was pretty under-whelming. The report was mixed. Not accounting for the various charges the company took earnings came in above estimates but revenues were a little bit less than expected. The stock spiked lower this morning but spent the rest of the day bouncing. While this lack of a reaction to earnings is a big blow to our strangle play we're not out of the game yet. PD is still trading inside a neutral pattern of higher lows and lower highs. This is a pattern that tends to produce a breakout one way or the other and the stock's trading is coiling more tightly so a breakout could be soon. While we are going to keep the play open more conservative traders may want to give some serious thought to exiting early right now since we didn't get any big move on the earnings news! Our estimated cost was at $2.15. We're planning to sell if either option rises to $3.15 or more. The options in our strangle are the August $85 call (DPB-HQ) and the August $70 put (PT-TN). We're not suggesting new positions.

Picked on July 23 at $ 77.20
Change since picked: + 0.62
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 7.8 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Fibonacci Retracements as Support/Resistance

I wrote in my last Trader's Corner article (Wed, 7/19) on 'Signs of a Bottom in the Indexes'. Online access to this article happens if you click here)

I get more sure on seeing a reversal point coming when certain key and select technical and psychological indicators line up suggesting its coming soon. 'Confirming' a reversal then has t9o be a bullish pattern on the charts. For example, a rally from the area of a prior significant bottom or 'line' of support; i.e., multiple lows in the same area.

Often, especially if in near the absolute lows what looks to be a trade-significant bottom, I trade out of Index calls at the first failure at expected resistance. I'm not a very good 'trend' trader or the best at staying put (no pun) in a trend.

Staying with a trend implies trading for bigger objectives. For example, staying in a call position as long as a first reaction off a first significant high doesn't retrace too much of the prior advance. "To much" is a relative term and I use it as meaning not more than having a 62-66 percent retracement; or, in select other circumstances to NO MORE THAN a 100 per cent retracement of the prior move.

FIB RETRACEMENTS OF THE FIRST RECENT RALLY: S&P
Given that the S&P 500 (SPX) hourly chart and the strong index, it could be anticipated that it would retrace not more than a half to two/thirds of the first rally, which it did at 62%. Strongest would be if SPX only retraced 38%, then only 50% and finally not more than 62 to 66% (2/3rds) of prior advance. Retracements of not more than 66%, keeps the pattern bullish.

FIB RETRACEMENTS OF THE FIRST RALLY: NASDAQ

There is a circumstance with a weak index, market or market sector, whereby retracing ALL (100%) of its prior move, but not more and followed by a sharp surge higher, remains a still-bullish pattern called a double bottom.

The Nasdaq Composite (COMP) shows below in its hourly chart, how the retracement involved in COMP was 100% but not more. A place to add to call positions perhaps, as you know where to stop out or exit the trade; i.e., a price just below the 100% retracement.

I got the question from someone as to showing what I think is relevant ahead in terms of the FIBONACCI retracements on the DAILY charts, looking at how this present rally is climbing back in percent terms relative to the biggest last decline. What levels represent the fibonacci 38, 50, 62 (to 66%); even a 100% round-trip 'retracement'.

Am happy to oblige on that one and show the charts:

S&P 500 (SPX)
Where we got to today in the S&P 500 Index, at intraday highs for the past two sessions in fact, is to the 50 percent retracement point or to the 1273 area. This level of retracement will frequently be a 'stopper' in a rally for an index or stock that is in a STILL declining trend.

A move ABOVE the 50% retracement level at 1273 however suggests that SPX has above 'average' strength/staying power and could well take out the prior high around 1280, but encounter tough resistance around 1290 and a put play.

S&P 100 (OEX)

With the S&P 100 (OEX) as shown below, an extension of this recent advance to the 589-590 area implies resistance not only by the 66% retracement but by the fact that this was also a prior (countertrend) rally peak back in early-June.

A resistance area suggested not only by a key percent retracement of a prior move, by also accompanied by that same area being a prior high makes the area additionally important. For example, a strong move through 590 in the case of the OEX would set up the potential for a 100% retracement back to the prior early-May major top at 604.

NASDAQ

The Nasdaq Composite (COMP), as an Index of all (capitalization weighted) stocks trading on Nasdaq exchange, has been under a lot of pressure in past weeks.

The fact that COMP retraced completely its first rebound but then rallied again, suggested possible establishment of either the low end of a trading range or the start of a significant retracement of its prior decline.

Here's the rub with a weak index or stock: they often only manage a 'minimal' retracement of about 38% of the prior move, which would be reached if COMP get back up the 2150 area. A stock or index STILL in an intermediate downtrend will not usually retrace more than 50% or one-half of its prior decline (before falling again). IF the trend remains down still, COMP gets back to the 2200 area or the 50% mark and not further, perhaps then falling sharply from there.

As seen in the COMP daily chart above, the down trendline off the early tops since the April peak, may end up intersecting with the area representing the 38 to 50 percent retracements. For example, it within the next few days, COMP rebounded back to the 2200 area, this is also then resistance implied by the down trendline above.

NASDAQ 100

Per the Nasdaq 100 (NDX) chart shown below, the Index has to rebound back to the 1565 area to reach a 'minimal' 38% fibonacci retracement if seen in terms of the April to mid-July decline.

1600 is resistance doubly implied by the intersection of the NDX down trendline and the 50% retracement level; both suggest 'strong' resistance when the index or stock in question remains within an intermediate downtrend.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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

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