Option Investor

Daily Newsletter, Monday, 08/07/2006

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Table of Contents

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

Market Wrap

Oil spikes; Fed decision looms

U.S. stocks finished broadly lower ahead of tomorrow's closely watched FOMC decision on interest rates, while September Crude Oil futures (cl06u) surged 2.97%, or $2.22/barrel to settle at $76.98 after BP (NYSE:BP) $70.45 -2.88% said it began shutting down 22 miles of transit pipelines late Sunday after a leak was discovered near the massive Prudhoe Bay field in Northern Alaska.

The West Coast was expected to be squeezed particularly hard and the government was considering releasing oil from emergency stockpiles to ease an expected crunch.

California gets about 20% of its oil from Alaska, with the remainder coming from in state and foreign sources.

According to the U.S. Energy Information Administration (EIA), the shutdown will reportedly deprive markets of 400,000 barrels of oil per day, about 2.6% of U.S. supply including imports.

The aging pipeline system on the North Slope, which was designed to last 25 years, but has now lasted 29 years, has been fraught with corrosion problems.


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BP, which is the operator of the Prudhoe Bay field traded weak as company officials were uncertain as to how long transit lines would be shut down. The company did say it was spending $72 million this year to inhibit corrosion, up from $60 million last year.

Dow component Exxon Mobil (NYSE:XOM) $69.23 +0.78% and Conoco Phillips (NYSE:COP) $67.61 -1.32%, both major producers at Prudhoe Bay, traded mixed.

Shares of Prudhoe Bay Trust (NYSE:BPT) $76.85 -12.56%, which derives royalties from the Prudhoe Bay field fell $11.04/share, but finished well off their morning lows of $69.00.

Volumes at both the NYSE and NASDAQ were what I would consider to be "light" today. The NASDAQ's 1.46 billion shares was the lowest full-day volume since June 26.

For the month of July, NYSE volume (excluding the 1/2 day on 07/03/06) averaged a brisk 2.39 billion shares per day, while NASDAQ average daily volume came in at a more modest 1.93 billion shares per day.

U.S. Market Watch - 08/07/06 Close

Treasuries gave back some of last week's gains with yields backing up a bit. I'm thinking bond bulls took some handsome profits ahead of tomorrow's FOMC decision on rates.

August Fed Funds futures (ff06q) 94.71 were unchanged and currently have traders forecasting just more than a 15% probability that the Federal Open Market Committee will raise its target for Fed Funds by 25 basis points at tomorrow's meeting.

We did get once piece of economic data today in the form of June consumer credit. The government said consumer credit rose by $10.3 billion to $2.186 trillion, led by gains in revolving credit. The $10.3 billion increase was much larger that the $4.0 billion forecast, and May's upwardly revised $5.9 billion increase (from $4.4 billion).

The June consumer credit figures were released at 03:00 PM EDT, just as the bond markets closed. A quick check of the U.S. Dollar Index (dx00y) 84.81 as I type (05:45 PM EDT) is little changed from its 03:00 PM EDT session close.

It would have to be my analysis that the rather flat trade in the dollar has market participants little moved as to Fed action from the consumer credit data.

In my opinion, the June consumer credit figures have an "inflationary" look to them.

I would expect FOMC members and traders to be monitoring tomorrow morning's 08:30 AM EDT release of Q2 Nonfarm Productivity, where current consensus is for a 0.9% increase.

Increases in productivity are a KEY measure that FOMC members will monitor, and INCREASES in productivity are believed by many to be dovish for inflation and allow a pause to further Fed rate hikes.

Also slated for release at 08:30 AM EDT will be Q2 labor costs, which are forecasted to rise by 3.6%.

Should labor costs rise 3.6%, it becomes imperative that productivity also increase for those that have been "banking" on the Fed to pause.

September Crude Oil futures (cl06u) - $0.50 box size

At Friday's settlement, it looked as if Crude Oil prices for September delivery might be headed lower, but this weekend's news out of Alaska certainly gives traders something to reconsider. Perhaps some information they didn't have at Friday's settlement.

Today's trade at $77.00 now has the Point and Figure chart (supply/demand) back on a "buy signal" (column of X exceeding prior column of X) and hinting at an initial bullish price objective of $82.50.

I've given a quick tutorial on how a BULLISH vertical count is tabulated (in blue text).

Exacerbating today's rise in oil was news out of Denver, CO that at some Colorado truck stops, diesel fuel was being rationed to 50 to 75 gallons per truck as the conversion of diesel to meet the new EPA requirements has regional refiners still "scrubbing" storage tanks that will eventually store the ultra-low-sulfur diesel (15 parts per million from 500 parts per million).

Sunoco's (NYSE:SUN) $77.79 +4.92%, shares surged $3.65/share on heavy volume of 5.03 million shares in Monday's trade. Sunoco operates Denver's only regional refinery.

The company said it has been trying to maximize diesel production and had recently completed a $445 million project to produce ultra-low-sulfur diesel.

According to AAA, the average price of diesel in Colorado was $3.20/gallon, compared with a national average of $3.06.

September Heating Oil futures (ho06u), which trader will tie to distillates, moved sharply higher to settle up $0.0539, or +2.58% at $2.1435 and just off its all-time contract high of $2.18 set in early July.

I had profiled a 1/2 position short in shares of Sunoco (SUN) headed into Friday's close at $74.87 in the OptionInvestor.com Market Monitor, without the knowledge that there was a diesel shortage here in Denver, CO, and a pending crude oil supply disruption at Prudhoe Bay. That trade was stopped out not long after this morning's open at $75.50.

Oil and water

It has been on rare occasion that daily internals would have NASDAQ showing any strength relative to the NYSE (NH/NL, or A/D), and today was no exception.

But just because the NASDAQ trades weak, that doesn't necessarily mean "the market" is weak, or is overly bearish.

CNBC's James Cramer likes to say "there's always a bull market going on somewhere." For the NASDAQ Composite, or NASDAQ-100, that's not been the case.

If anything, other major indexes have been PULLED LOWER by the very broad NASDAQ Composite (COMPX) 2,072.50 -0.60%, and even the narrower NASDAQ large caps and NASDAQ-100 Index (NDX.X) 1,494.13 -0.64%.

Key earnings after tomorrow's closing bell will come from technology/networking giant Cisco Systems (NASDAQ:CSCO) $17.41 +0.98%, which range-traded within Friday's session today.

Current consensus (21 analysts) is for Cisco to earn $0.28 per share on revenue of $7.92 billion.

NASDAQ-100 Index (NDX.X) - Daily Intervals

Friday's "pop" above 1,515 early in the morning was pushed back below this key level of resistance by 12:00 PM EDT. According to StockCharts.com's NASDAQ-100 Bullish % ($BPNDX), just 29 of the 100 stocks' comprising this index currently show a Point and Figure "buy signal" associated with the chart. Since closing below 1,515, the NDX has NOT been able to close above that level. That's a good test from strength (a close above 1,515).

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

Since Monday's wrap, the SPX is little changed. However, we did see some sign that demand was starting to outstrip supply as the SPX did trade 1,290 and generate a double top buy signal.

Tonight's S&P 500 Bullish % ($BPSPX) reading from StockCharts.com has 53% of the stocks in this index (265 of 500) showing point and figure buy signals. A BULL that might be looking to buy the break higher at 1,290 would want to see MORE than 54% to show some BULLISH CONFIRMATION.

A LOW RISK and potentially HIGH RETURN trade is to look for the SPX to pull back, say 3 or 4 boxes to 1,260/1,250, to then buy a 1,300 strike call.

A "safer" trade for a bull is to see if the NDX can hold a close above 1,515, as any STRENGTH at the bottom (the NDX is WEAKEST) most likely brings a tidal wave of bullish enthusiasm to the STRONGER SPX.

If the S&P 500 Bullish % ($BPSPX) were giving BULLISH CONFIRMATION, I'd say "go long young bulls," but the slight bearish divergence still depicts that of bullish caution.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

Editor's note: We're not adding any new plays to the newsletter until the FOMC meeting is over on Tuesday, August 8th. Our market bias remains bearish.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

The Andersons Inc. - ANDE - cls: 39.11 chg: +0.67 stop: 38.75

We don't see any changes from our weekend update on ANDE. Our market bias is still leaning toward the bearish side so readers may want to hesitate before opening new call plays. It's our plan with ANDE to buy calls on a breakout over its 50-dma or the $40 level. Right now the 50-dma has slipped to $41.60 so we're adjusting our trigger to buy calls to $41.65. If triggered our target is the $46.00-47.00 range.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.2 million


Avalonbay Comm. - AVB - close: 115.37 chg: -3.09 stop: 114.90

Investors did some shuffling ahead of the FOMC meeting tomorrow and it looks like a number of investors wanted to lock in profits in the REITs. A lot of REIT stocks have been showing relative strength and trading at new highs but today they were a source of weakness. Shares of AVB lost 2.6%, plunging past broken resistance near $117.50 and back towards the bottom of its recent trading range near $115.00. The short-term RSI and MACD indicators are looking bearish. We're not suggesting new plays with AVB under $117.50 and if the markets are weak tomorrow we expect to be stopped out at $114.90.

Picked on August 04 at $117.70 *gap higher*
Change since picked: - 2.33
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 319 thousand


Cytec - CYT - close: 53.26 change: -0.47 stop: 52.45

There is still no change from our previous updates on CYT. The stock is trading sideways between its short-term pattern of higher lows and resistance at $55.00. The MACD indicator on the daily chart looks like it wants to head lower. This weekend we posted an editor's note that said our market bias is turning more bearish and readers may not want to open new bullish positions even if stocks like CYT break out and hit our trigger to buy calls. Our trigger is at $55.11. If triggered our target is the $59.00-60.00 range.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 313 thousand


Femsa Fomento - FMX - close: 89.31 chg: -1.29 stop: 85.85

This could be bad news. The profit taking in FMX on Monday left the stock trading under what should have been support at the $90.00 level. Broken resistance at $90.00 should have been support but FMX gapped open lower and traded sideways in a narrow range all day. We do note that the low today was a test of its rising 10-dma. We're not suggesting new positions with FMX under $90.00. Wait for a move over $90.25 again before considering calls. More conservative traders might want to tighten their stop losses.

Picked on August 04 at $ 90.50 *gap higher*
Change since picked: - 1.19
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 524 thousand


Goldman Sachs - GS - close: 152.65 chg: -0.34 stop: 146.95

GS didn't make any big moves today. There was an initial spike toward the $155 level but it faded. Investors are just waiting for the FOMC meeting and the committee's comments on the state of inflation and monetary policy. If you missed our last updated GS has already achieved our target at $154.00 (twice now) and we're aiming for our aggressive target at $157.50.

Picked on July 25 at $148.05
Change since picked: + 4.60
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.2 million


Petroleo.Brasiliero - PBR - cls: 94.40 chg: +0.74 stop: 89.49

We are a little surprised that PBR did not post a bigger gain today. BP's news that they're closing their oil field in Alaska pushed crude futures to a new high near $77 a barrel. Overall the energy sector traded higher. We don't see any big changes from our weekend update on PBR. Our target is the $99.50-100.00 range. We do not want to hold over the mid-August earnings report. FYI: The Point & Figure chart is forecasting a $116 target.

Picked on July 30 at $ 92.72
Change since picked: + 1.68
Earnings Date 08/11/06 (unconfirmed)
Average Daily Volume = 3.4 million

Put Updates

US Airways - LCC - close: 43.07 chg: -1.88 stop: 47.51

Fuel is one of the biggest expenses for airlines and today's 3% jump in crude oil to a new high near $77 a barrel is not good news for the industry. Shares of LCC lost 4.1% and closed near its lows for the session. We suspect that the $40 level might offer some support for LCC so we're setting our short-term conservative target at $40.25. We're also setting a more aggressive target at $36.00. FYI: The P&F chart points to a $35 target.

Picked on August 01 at $ 43.54
Change since picked: - 0.47
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.6 million


Manpower Inc. - MAN - close: 57.39 chg: -1.36 stop: 60.76

MAN lost 2.3% with a follow-through move on Friday's failed rally at the $60 level. It was a good day for bears but volume was low as most investors are still waiting for tomorrow's FOMC meeting. Our target is the $55.75-55.50 range near the simple 200-dma. The P&F chart currently points to a $48 target.

Picked on July 20 at $ 59.42
Change since picked: - 2.03
Earnings Date 07/19/06 (confirmed)
Average Daily Volume = 1.0 million


NII Holdings - NIHD - close: 50.05 chg: -0.78 stop: 52.51

Our put play in NIHD is now open. The initial spike higher toward $51.50 failed and the stock plunged to $48.71 before fighting back to close over round-number support at the $50.00 level but under technical support at its simple 200-dma. Our trigger to buy puts was at $49.90 so the play is open. Aggressive traders might want to look for a rise or failed rally near $51 as a new entry point. Most traders might be better off looking for a new decline under $49.75 as a new entry point if you missed today's jog lower. We do expect some sort of bounce near $47.50 but our target is the $45.50-45.00 range since $45.00 looks like stronger support.

Picked on August 07 at $ 49.90
Change since picked: + 0.15
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million


Transocean Inc. - RIG - cls: 69.05 chg: -1.03 stop: 75.25

Our put play in RIG is now open. The stock continued to sell-off and shares broke down under the $70.00 level on strong volume and traded at our trigger to buy puts at $69.49. We are a little surprised. RIG already looked oversold and due for a bounce and we were expecting a bounce toward $74-75 before it rolled over and broke down under support at $70.00. We're even more surprised that RIG was this weak today with crude oil soaring 3% to a new high near $77 a barrel. The volume on the sell-off has been pretty strong for three days in a row. The P&F chart's target has grown from $59 to $57. The move today is very bearish but be ready for an oversold bounce sooner rather than later. We are suggesting two targets: a conservative target at $65.25 and a more aggressive target at $61.00. The P&F chart points to a $59 target.

Picked on August 07 at $ 69.49
Change since picked: - 0.44
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 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.)


Bausch Lomb - BOL - close: 46.34 change: -0.44 stop: n/a

BOL continues to sink following Friday's breakdown under support at $47.00. We're not suggesting new positions. We have two weeks left before August options expire and need to see a bigger move in BOL soon. Our estimated cost on the strangle was $2.15. Our goal will be to sell if either option rises to $3.25 or more. 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: - 1.06
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.2 million


L-3 Comm. - LLL - close: 70.82 chg: -0.68 stop: n/a

The sell-off in LLL spiked to $69.60 before traders finally bought the dip. The move today looks like a short-term bullish reversal so don't be surprised by a bounce towards $72 or the 10-dma nearing $73. We're not suggesting new positions. 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: - 4.44
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.2 million


3M Co. - MMM - close: 69.00 change: -0.45 stop: n/a

MMM is still sinking but it's not making much progress because investors are waiting to hear the Fed tomorrow. We're not suggesting new positions. Our estimated cost for our August strangle 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: - 1.72
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 3.7 million

Dropped Calls


Dropped Puts


Dropped Strangles



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