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Daily Newsletter, Saturday, 08/12/2006

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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

Disappointment Continues

The post Fed decline continued on Friday with all the indexes ending lower for the week. This was a week where most traders expected the market to rally once the Fed rested from its 17 meeting rate hike streak. If you have been reading this commentary for long you know this was not what I expected. I warned everyone that any post hike rally would likely fail and so far the markets have followed our expectations.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

The economic report causing waves on Friday was the Retail Sales for July, which came in at +1.4% growth. This was well over last months drop of -0.4% and nearly double the expectations at +0.8%. The challenge here is news of strong consumer buying when everyone expected consumers to be retreating into their shell under the pressure of high energy prices and falling home values. The market reacted in shock to the headline number as fears rose the Fed would have to jump back into the game with another hike at the September meeting. Fed funds futures jumped more than 10 points to a 46% chance of a rate hike over the next two meetings.

If you listened to the talking heads on Friday and the various discussions about the Fed then you will be surprised when you read the next paragraph. I don't believe the +1.4% growth in the Retail Sales headline number is relative for the Fed. There were two components that produced 50% of the jump in sales. Those components were autos, +0.4% of the total and gasoline sales at +0.3%. Without those components the headline number would have been right in line with estimates at +0.7%. Automakers pulled out all the stops in July to dump inventory ahead of the new model year. The return of monster incentives drew some extra buyers off the sidelines and into the showrooms. It was simply a one time event and not relative to the overall consumer profile. With the rise in gasoline prices over $3 it was not surprising that gasoline sales spiked so severely as vacations hit high gear. Gas stations reported a +2.5% jump in sales due mostly to the rising price of gas. This is also not discretionary spending with more than 95% of gasoline purchases simply normal daily travels. It should not be seen as a sign of increased consumer spending due to an abundance of free cash. I doubt anyone rushed to the gas station last week just to buy the latest version of reformulated gasoline. Have you heard anybody brag last week that they bought premium instead of regular so the guys at work would be jealous? I doubt it.

The components that did produce cause for concern were a +1.8% jump in sales at building material dealers and +1.9% jump in electronics sales. This is the season for home building projects and with fewer people trading homes this summer it is not surprising to me that they are improving their current homes. The electronic sales are rising on the sharp drop in flat screen TV prices. I get email spam almost daily from places like Circuit City, Microcenter, NewEgg.com, Buy.com, etc advertising new lower prices on flat screens. With dozens of models at 42" or smaller under $1000 it is not surprising purchase activity is increasing. I am sure many families opted for a new TV rather than an expensive driving vacation in the heat.

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There were some challenges in the retail sales report. Year over year sales growth slowed to +4.8% but that was mostly due to slowing auto sales in prior months. If you take out autos that number jumps to +9.2% growth over the last twelve months. That number was available to the Fed before it's meeting so despite being strong the Fed was not worried. The Fed is convinced the economy is going to slow as a direct result of the high energy prices and the slowing housing market. The current economic cycle has run its normal course according to the Fed. They feel the lagging impact of their recent rate hikes will provide a soft landing to the unsustainable gains we made over the last two years. The Retail Sales report does not bother me and I doubt it bothered the Fed. The talking heads on stock TV were just looking for an excuse for the selling.

Personally I think the foiled terror plot this week will add to retail sales in the future. Americans have already slowed their overseas travel and this should make even more rethink that desire to travel into places where terrorists are active. Officials tell us air travel is safe but I am skeptical. For at least the next decade I believe airplanes will continue to be the target of choice for terrorists. This foiled plot will cause many people to vacation at home in the US rather than expend the money and risk to travel abroad. We saw it after 9/11 and I expect to see it again. Much of the money, which would have been spent overseas, will be spent at home. Just replacing the millions of trashed bottles of shampoo, toothpaste, hair spray, makeup, sunscreen, moisturizer, etc, should produce a bump for consumable sales. The US warned on Friday that US citizens in India were at risk next week due to information about a plot to attack the country's financial and entertainment hub around independence day on August 15th. Americans traveling to India were advised to avoid New Delhi and Bombay. With the five-year anniversary of 9/11 only a month away it is likely we will see an escalation of attacks. A top leader in Al Qaeda has said they were planning a major attack by the anniversary. Officials are hoping the foiled airline plot was that attack and there are no others in the works.

Next week we will get some reports that will impact the Fed in September. Those reports are the PPI, CPI, Industrial Production and the two housing reports. They will be looking for the current reading on inflation (PPI/CPI) and the strength of the manufacturing sector in the Industrial Production report. The housing reports will update us on the state of the housing sector decline.

Weekly Economic Calendar

Although the earnings cycle is about over there are still some major companies left to report. Next week we will see Computer Associates (CA), Agilent (A), Applied Materials (AMAT), Home Depot (HD), Wal-Mart (WMT), Hewlett Packard (HPQ) and Dell (DELL). Dell has already warned and the focus will be on how much market share HPQ has stolen from Dell. On Friday Analog Devices (ADI) missed estimates by a penny and guided lower for next quarter. The stock was knocked for a -$5 loss or -16%. Kohls rode the retail wave with better than expected earnings and raised their guidance. KSS gained +2.57 on the news. Kohls departed from the pack with some recent retail reporters down between -2% to -4%. Those losing ground since July included Target, Federated and JC Pennys.

The stock option problem took a turn for the worse on Friday after Apple Computer warned that restatements of financials would now contain "significant changes" in last quarters results and they cannot provide a reasonable estimate at this time. The investigation into options grants is continuing and could be lengthy. Apple also reported it had received a delisting notice from Nasdaq due to its failure to file its 10-Q. Juniper also acknowledged it had received a delisting notice. Nvidia posted better than expected earnings but then lost ground after telling investors it found option grant problems dating all the way back to its IPO in 1999. According to one analyst over 120 companies have now delayed financials due to the options problem and over 80 companies are under review by the SEC. Based on the charges filed against the Brocade ex-CEO the bar appears very low and we could see hundreds more face charges. The University of Michigan did a survey and found more than 2000 companies that had suspicious options activity. 24% of those companies reported options grants well after they happened raising the flag even further. Other names in the news this week on options were VTSS, RMBS, OPWV, ZRAN, VRSN, MFE, KLAC, INTU and CMVT. The poster child for options problems is still United Health (UNH), which is reviewing 45,000 grants to 15,000 people over the last seven years. This could continue to depress the markets as more charges are filed.

BP announced on Friday that they were going to try and keep the west side of the field open and continue producing 185,000 bpd through an alternate pipeline. They received approval from regulators on Thursday but were still running tests on Friday. There were conflicting reports late Friday that they had made the decision but I could not find any hard documentation. BP said the repairs would cost $170 million and could take six months. After the bell Exxon declared force majeure on deliveries from the Prudhoe field. Conoco, 36.1% owner of the field, had already declared force majeure earlier in the week. By declaring they are relieved of the responsibility to deliver the oil to current contract holders. This means those expecting delivery will have to replace the oil on the open market. BP has already contracted for delivery of 4.5 million barrels from the Middle East for delivery to refineries on the west coast. It will take 30 days for the replacement oil to begin to arrive. BP is losing $3.5 million per day from the halt in production. Exxon and Conoco will also take a hit but it will be smaller. BP is the operator of the field for the partners and is fully responsible. Unfortunately Exxon and Conoco will have to pay a portion of the repair cost despite the corrosion being the fault of BP. I am sure there will be some heated discussion in boardrooms about this. The state of Alaska is losing over $6 million per day in tax revenue and they claim they will sue BP for any losses. I saw an interesting statistic in one of the BP interviews. They feel the majority of the corrosion came from excess water in the pipe allowing microbes to survive. It is supposed to be removed before entering the pipeline. During the interview the BP spokesman said the mixture pumped from the Prudhoe field was 75% water and only 25% oil. This is a sure sign that the field is nearing the end of its life. A water cut that large becomes a very tough problem and separating it requires a lot of extra effort. This excessive water cut is probably why extra water made it into the pipe.

Unless we see a sudden flurry of hurricanes I think the peak for oil is behind us for 2006. We could see another attempt to rally next week on the Exxon force majeure but inventories are at high levels and the peak demand from driving season is nearly over. Late Friday there was news of a resolution at the UN to end the war and the vote was unanimous. Israel and Lebanon are both expected to accept the cease-fire. If the war is going to be over it will remove worries of eventual involvement by Syria or Iran. That should weaken oil prices despite the Alaskan problem. Some of the Nigeria oil is also coming back online and that will offset some of the Alaskan loss.

September Crude Oil Chart - Daily

Oil prices dropped -$2 on Thursday and the drop was blamed on the terrorist plot. This is ridiculous. The theory was an expected decrease in the number of fliers and therefore less demand for jet fuel. Since most flights are full there is a very slim chance that enough people would cancel trips to cause entire flight cancellations. The planes may fly with a few empty seats for a while but scheduled flights will continue and fuel demand will remain the same. What really tanked oil prices was the reallocation of gasoline positions by Goldman Sachs in the GSCI index. They announced they were changing the weighting allocations for gasoline in the September and October GSCI futures contracts and the herd stampeded to the exits. Note the weighting changes for the HU contract highlighted in blue in the table below. The drop in oil prices had NOTHING to do with terrorists and was simply a figment of imagination by the talking heads on TV who had no clue about the change in futures.

GSCI Contract Weighting Changes

Unleaded Gasoline Chart - 60 min

The futures price for unleaded had been hovering in the $2.25 range for four weeks in anticipation of a hurricane that never appeared. With the summer driving season rapidly coming to a close it was the right time to exit and I believe the Friday's close at $2.07 could be just a pause point. We could see a further decline by as much as -25 cents if no hurricane appears. The price of gasoline exerts significant pressure on the price of oil when gas is declining. Oil prices pull gasoline prices higher when oil prices are climbing. The dump in gasoline contracts on the Goldman Sachs news simply kicked the props from under the price of oil. Despite all the news and paranoia the gasoline inventories are +300,000 bbls above the five-year average for this time of year. We saw a sharp decline last Wednesday of -3.2mb but we were already over supplied. Gasoline demand continued to rise with demand of 9.697 million barrels for the week ended on Aug-4th. That was +2.2% higher than the same week in 2005 and the strongest demand week for the year. $3 gasoline is definitely not slowing demand regardless of what the news sources are telling you. That demand should come to a screeching halt over the next four weeks as summer vacations come to a close.

GGas Demand Chart

The Cisco rally was short lived and the Nasdaq succeeded in hitting a new three-week low of 2048 once the Cisco bounce was over. This does not mean the market is heading south at a high rate of speed. The post Fed decline has returned to support levels that need to hold if the bulls have any hope of preventing the seasonal decline. Earnings next week from Dell are not expected to be pretty and it will be up to HPQ to save the day for techs. However, the focus will not be on earnings but the inflation data in the PPI/CPI and the housing surveys.

The PPI on Tuesday is expected to rise by +0.6%, which would be the largest gain since April. The CPI on Wednesday is expected to rise +0.4% and inline with prior levels for the last four months. The core rates will be the key. The Fed has pinned its hopes on a slowing economy putting the brakes on inflation. Three days after the Fed meeting very few, if any, analysts actually expect their hopes to come true. Martin Feldstein commented in the WSJ "although this optimistic outlook is possible, experience suggests it is unlikely." Feldstein is an economics professor at Harvard and the ex-chairman of the Council of Economic Advisers under Reagan. His thoughts count in the economic community. According to Feldstein, "A mild slowing of economic growth is generally not sufficient to reverse rising inflation." Mickey Levy, a member of the SOMC or Shadow Economic Market Committee, agreed with Feldstein saying, "Inflation is above the acceptable range and there is strong risk it will rise further. More importantly we would disagree that a moderation in growth will lower inflation." In the last 30 years there has been six lengthy Fed rate hike cycles. A recession appeared after four of those cycles with a soft landing in only two. The Fed does not have a good record of avoiding going too far regardless of who is at the helm. If the PPI and CPI continue to show rising inflation next week the analysts are sure to start preaching rate hike again and this time they will be using the R word as the eventual result. Most feel the economy at present is still growing rapidly and not declining as the Fed claims. That 9.2% retail sales rate I mentioned above is the fastest pace of growth in 15 years. The preliminary GDP for Q2 came in at 2.5% and based on the recent economic reports it appears we could see a revision to over 3.1% when it is revised on August 30th. That is far from a slow economy although well off the 5.6% rate in Q1. A 3% GDP will NOT slow inflation and that suggests the Fed erred when it took a pass last week. With the Fed funds futures currently at 46% chance of another hike in September any strong inflation data in the PPI/CPI or strong growth indications in the Philly Fed survey or Industrial Production and the market will be back on Fed watch once again.

I would say the odds of that happening are about 100% in some form or another. The recent reports have not shown a sharp downward move on the economy and some have been stronger than expected. If this trend continues it is almost a sure bet the Fed will have to come back harder and faster to put the inflation monster back in the cage. That could easily mean another full point or more. This is why analysts are divided on the market outcome. Strong growth, decent profits, +16% in Q2 and no sign of gasoline prices slowing consumer spending means the bulls are predicting a monster year end rally. I heard one major analyst on Friday predicting a +20% move in the indexes. The bears are pointing out the chances for a more aggressive Fed in September and the potential for a Fed induced recession in 2007. From the looks of the internals below traders are not buying the bullish case. New highs are well below new lows and Friday's decline was a downward acceleration from the Tuesday high.

Market Internals

The bullish case is strong and even Charles Biederman from TrimTabs.com was beaming with excitement on Friday. He said there was over $6.3 trillion in cash in money markets, cds, and brokerage accounts. Over $700 billion was added in the last 12 months alone. He feels with corporate buybacks and mergers and acquisitions at record levels along with huge hoards of corporate cash and rising dividends investors should be backing up the truck. Biederman said once the tide reversed on the cash flowing into money markets the equity markets would explode higher. That was a key word there, reversed. What we are seeing is more cash going into money markets now than into equities because 4% on cash is a decent return ahead of a potential recession. The bears claim investors are going into bunker mode despite the Fed pause. I heard the catch phrase more than once this week. Since the Fed paused despite rising inflation "what do they know that we don't know?" I told you it would happen and it only took three days for that question to begin making the rounds. Don't forget that 23 of the 28 central banks around the globe are still tightening. The global boom will eventually slow in the face of that concerted effort.

For next week I believe we are data dependent to steal a phrase from the Fed. Any material signs of inflation and we will be setting new lows. Any signs of slowing inflation and the bulls will be back. Dow 11050 appeared as support once 11100 broke. I told everyone on Tuesday to watch for Dow 11100 to break as a sign investors were concerned about slowing growth. We saw an immediate breakdown in CAT -$6.50 from Tuesday's high, UTX -$3, BA -$5 as examples. This could have been simply a sell the news event from the widely anticipated Fed decision but there are signs it is not over. I would say the market has an overwhelming downside bias today. This is good because a sudden burst of good economic news could produce a monster short squeeze. If that news does not appear then I believe the markets are setup for a swoon into September and the seasonal autumn dip. I do believe that a retest of the lows in September would be about all the bulls could stand before mortgaging their homes and families to buy the many bargains.

I would watch Dow 11050, Nasdaq 2050 and SPX 1265 as current support and continue to remain short on any further drops. Remember to watch the inflation data on Tue/Wed as the next clue to market direction. I would not jump into a lot of long positions until we either retest the lows or move back over SPX 1280. This is period of historical seasonal weakness and there is no reason to fight the trend.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None CHAP None
  LRCX  
  MDC  
  RYL  
  WHR  
  X  

New Calls

None today.
 

New Puts

Chaparral Steel Co. - CHAP - cls: 67.00 chg: -3.05 stop: 70.01

Company Description:
Chaparral Steel Company, headquartered in Midlothian, Texas, is the second largest producer of structural steel beams in North America. Chaparral is also a significant supplier of steel bar products. In addition, Chaparral is a leading North American recycling company. (source: company press release or website)

Why We Like It:
Steel and iron-related stocks, as a group, have been showing relative weakness lately. If investors are worried about an economic slow down in the U.S. and aboard then it makes sense to worry about such a basic industry group. Shares of CHAP have fared better than some of its peers but that strength may be coming to an end. The stock has struggled to breakout over resistance in the $74-76 region for the past few months. Now technicals are deteriorating and its Point & Figure chart has produced a new sell signal with a $60 price target. Aggressive traders may want to buy puts here. We're going to wait for a breakdown under its simple 100-dma. Our trigger to enter plays will be $65.40. More conservative traders may want to wait for a decline under $65.00 before initiating positions. Our short-term target will be the $60.50-60.00 range. Traders should note that CHAP is due to split 2-for-1 on September 5th. The stock split will not affect the fundamentals of our play. FYI: Another steel-related stock we're keeping an eye on as a potential put candidate is CRS.

Suggested Options:
We're suggesting the September puts. We do not want to hold over the late September earnings report. Our trigger is at $65.40.

BUY PUT SEP 70.00 ZHQ-UN open interest= 64 current ask $6.30
BUY PUT SEP 65.00 ZHQ-UM open interest=100 current ask $3.70
BUY PUT SEP 60.00 ZHQ-UL open interest= 53 current ask $1.90

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/20/06 (unconfirmed)
Average Daily Volume = 510 thousand

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Lam Research - LRCX - close: 39.04 change: -1.24 stop: 42.01

Company Description:
Lam Research Corporation is a major supplier of wafer fabrication equipment and services to the world's semiconductor industry. (source: company press release or website)

Why We Like It:
Several of the semiconductor stocks are looking vulnerable again. A few days ago shares of LRCX produced a failed rally/bearish reversal at the $42 level and its simple 200-dma. Now the stock looks poised to move lower from its sideways consolidation we've seen over the last few sessions. The P&F chart already points to a $34 target. We're suggesting that readers buy puts with LRCX under $40.00. More conservative traders may want to wait for a new decline under Friday's low near $38.60. Our target is the $35.25-35.00 range. FYI: Some traders might prefer to wait for the SOX semiconductor index to breakdown under the 400 level before considering put plays on LRCX. Currently the SOX is at 405.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 40.00 LMQ-UH open interest=6149 current ask $2.55
BUY PUT SEP 35.00 LMQ-UG open interest=3086 current ask $0.75

Picked on August 13 at $ 39.04
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 3.0 million

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MDC Holdings - MDC - close: 42.46 change: -0.50 stop: 45.15

Company Description:
MDC, whose subsidiaries build homes under the name "Richmond American Homes," is one of the top ten homebuilders in the United States, based on 2005 revenues. The Company also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary HomeAmerican Mortgage Corporation. (source: company press release or website)

Why We Like It:
The homebuilders are looking weak again. The group has been crushed over the last several months. The housing market is cooling and there has been a large number of earnings warnings in the sector. We hesitate to even add a homebuilder as a put play because the group is so beat up. Yet it looks like MDC's recent oversold bounce has faded and now shares are poised to produce a new leg lower. We are going to suggest a trigger to buy puts at $42.25, which is under the July low. If triggered our target is the $38.00-37.50 range. We do expect a bounce at round-number, psychological support at the $40.00 level so be prepared for it. The P&F chart points to a $32 target.

Suggested Options:
We are suggesting the September puts. Our trigger is at $42.25.

BUY PUT SEP 45.00 MDC-UI open interest=1628 current ask $3.50
BUY PUT SEP 40.00 MDC-UH open interest= 578 current ask $1.05

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 991 thousand

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Ryland Group - RYL - close: 40.00 chg: -0.78 stop: 42.05

Company Description:
With headquarters in Southern California, Ryland is one of the nation's largest homebuilders and a leading mortgage-finance company. The company currently operates in 28 markets across the country and has built more than 255,000 homes and financed more than 215,000 mortgages since its founding in 1967. (source: company press release or website)

Why We Like It:
RYL is another homebuilder that we think looks poised to turn lower. The oversold bounce stalled near $45.00 and now shares are clinging to the $40.00 level. Technical indicators are weak and suggesting a potential trip back toward the July lows. We're going to use a trigger at $39.40, which is under Thursday's low. If triggered our target is the $35.25-35.00 range.

Suggested Options:
We are suggesting the September puts. Our trigger is $39.40. You pick which strike price suits your trading style.

BUY PUT SEP 45.00 RYL-UI open interest= 394 current ask $5.60
BUY PUT SEP 42.50 RYL-UV open interest=1404 current ask $3.70
BUY PUT SEP 40.00 RYL-UH open interest=1795 current ask $2.15
BUY PUT SEP 37.50 RYL-UU open interest= 652 current ask $1.20
BUY PUT SEP 35.00 RYL-UG open interest= 240 current ask $0.60

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Whirlpool - WHR - close: 76.06 chg: +0.61 stop: 76.26

Company Description:
Whirlpool Corporation is the world's leading manufacturer and marketer of major home appliances, with annual sales of more than $19 billion, more than 80,000 employees, and more than 60 manufacturing and technology research centers around the world. The company markets Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Brastemp, Bauknecht and other major brand names to consumers in nearly every country around the world. (source: company press release or website)

Why We Like It:
WHR produced a sharp rally higher in early August on news that it would be raising prices but the strength was short lived. After the Fed meeting investors began to worry about a slow down in the economy and new rate hikes in the future, which might cause a recession and would be bad news for WHR. Technicals are bearish but WHR is trying to bounce from the $74-75 region. If WHR trades under $74.00 it would produce a new quadruple bottom breakdown sell signal on its P&F chart. We're suggesting that readers use a trigger to buy puts at $73.99. If triggered our short-term target is the $70.10-70.00 range.

Suggested Options:
We are suggesting the September and October puts. Our trigger is at $73.99.

BUY PUT SEP 75.00 WHR-UO open interest=3507 current ask $2.45
BUY PUT SEP 70.00 WHR-UN open interest= 882 current ask $0.95

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.2 million

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United States Steel - X - cls: 56.44 chg: -2.78 stop: 60.05

Company Description:
United States Steel Corporation headquartered in Pittsburgh, Pa., manufactures a wide variety of steel sheet, tubular and tin products; coke, and taconite pellets; and has a worldwide annual raw steel capability of 26.8 million net tons. (source: company press release or website)

Why We Like It:
X is another iron and steel-related stock that looks poised for more weakness. Shares are already trading in a bearish trend of lower highs and Friday's decline saw X breakdown under technical support at its simple 200-dma. The P&F chart is already bearish and points to a $49 target. We want to see shares of X break down under support at the $56.00 level before initiating positions. Our trigger to buy puts is at $55.85. If triggered our target is the $50.25-50.00 range.

Suggested Options:
We are suggesting the September puts. Our trigger is at $55.85.

BUY PUT SEP 60.00 X-UL open interest=1497 current ask $5.40
BUY PUT SEP 55.00 X-UK open interest=1561 current ask $2.65
BUY PUT SEP 50.00 X-UJ open interest=1558 current ask $1.05

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 5.7 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

None
 

Put Updates

Apple Computer - AAPL - close: 63.65 chg: -0.42 stop: 70.01

The options backdating scandal is still looming over shares of AAPL. The company has delayed filing its 10-Q since it's reviewing the options issue and the delay has forced the NASDAQ to send AAPL a delisting notice. Investors didn't react much to the news. Shares lost 0.6% and spent most of the day trading sideways against technical support at its 100-dma. We remain bearish but we're not suggesting new positions at this time. There remains a chance that AAPL will produce a bounce and re-challenge the 10-dma and 200-dma as overhead resistance. Our short-term target is the $60.50-60.00 range. The top of the July gap near $59.70 could act as support.

Suggested Options:
We're not suggesting new positions in AAPL at this time.

Picked on August 08 at $ 64.78
Change since picked: - 1.13
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 28 million

---

Autozone Inc. - AZO - close: 88.67 chg: +0.40 stop: 90.05

The good news with AZO on Friday is that the rebound appeared to fail at its simple 50-dma. Unfortunately, we're still on the defensive and we still don't see any news to account for Thursday's big reversal and bullish engulfing candlestick pattern. The only news we did find on Thursday was a negative earnings report from a rival. The overall trend remains bearish and the Point & Figure chart points to a $72 target. However, we would wait for another decline under Friday's low (87.75) before considering new put positions. Our target is the $82.50-80.00 range.

Suggested Options:
Remember, we would wait for a move under $87.75 before considering new positions. We like the September puts since we plan to exit ahead of the September earnings report.

BUY PUT SEP 90.00 AZO-UR open interest=1042 current ask $3.30
BUY PUT SEP 85.00 AZO-UQ open interest=4607 current ask $1.35

Picked on August 08 at $ 87.73
Change since picked: + 0.94
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 700 thousand

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Boeing - BA - close: 75.96 change: -0.24 stop: 80.85

BA's Thursday bounce from round-number support at $75.00 did not make much progress on Friday. Shares of BA drifted lower after testing Thursday's high. The relative weakness was a bit surprising after some positive analyst comments about BA probably taking market share from rival Airbus. Plus, there was further (good) news that BA had cinched a joint venture deal with Russia's VSMPO-Avisma to produce titanium components for BA's planes. We are still suggesting put plays with BA under $76.00 and its 200-dma(s) but more conservative traders might feel a lot better by waiting for a breakdown under $75.00 before initiating positions. Looking at the weekly chart and its long-term trendline of support is another reason why readers may want to wait for a drop under $75 first. Our target is the $70.50-70.00 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 80.00 BA-UP open interest=2499 current ask $4.80
BUY PUT SEP 75.00 BA-UO open interest=6760 current ask $1.80
BUY PUT SEP 70.00 BA-UN open interest= 705 current ask $0.50

Picked on August 10 at $ 75.75
Change since picked: + 0.21
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

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Burlington Nor.SantaFe - BNI - cls: 64.84 chg: -0.71 stop: 70.25*new*

The railroad and transportation stocks continue to show a lot of relative weakness. The Dow Jones Transportation index lost 1.7% on Friday. Shares of BNI fell just over 1% to close under potential round-number support at the $65.00 level. We remain bearish with BNI stuck in its descending channel but we wouldn't be surprised to see a bounce from the late July low near $64.50, especially with shares looking short-term oversold. At this time we're adjusting our stop loss to $70.25 since the top of the channel should be resistance near $70.00. Traders looking for a new entry point can watch for a bounce/failed rally in the $67.50 region. Our target is the bottom edge of the current channel in the $62.50-60.00 range.

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

Picked on August 08 at $ 68.06
Change since picked: - 3.22
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Chipotle Mex Grill - CMG - close: 49.29 chg: +0.62 stop: 54.01

CMG managed a minor oversold bounce on Friday but the stock was unable to recapture the $50.00 level. While most of the technical indicators are bearish we're not sure the bounce is over yet. We would consider opening new positions here but a better entry point would be to wait and see if CMG rebounds toward the $52.00-53.00 level. A failed rally under its 10-dma could be an attractive entry point to buy puts. The P&F chart is bearish with a $39.00 target. Our target is the $45.50-45.00 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 55.00 CMG-UK open interest=308 current ask $6.50
BUY PUT SEP 50.00 CMG-UJ open interest=397 current ask $3.10
BUY PUT SEP 45.00 CMG-UI open interest=803 current ask $1.10

Picked on August 09 at $ 50.28
Change since picked: - 0.99
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand

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Cummins Inc. - CMI - close: 115.72 chg: -2.40 stop: 121.27*new*

Shares of CMI continue to see more profit taking. The RSI and stochastics were already bearish and now the MACD on the daily chart has produced a new sell signal. More conservative traders may want to lock in some profits now or plan on exiting early near the rising 50-dma near $113.35. Our plan is to exit at $112.75. We would not suggest new positions at this time but another failed rally under its 10-dma or the $118 level could be used as a new entry point. We are lowering the stop loss to just above last Wednesday's high at $121.27.

Suggested Options:
We are not suggesting new put plays on CMI at this time.

Picked on August 08 at $119.77
Change since picked: - 4.05
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

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Fastenal - FAST - close: 35.02 chg: -0.66 stop: 37.51*new*

The pattern on FAST is still bearish. The stock rallied higher in early August to "fill the gap" from its July gap down on earnings. The rally reversed at its descending 50-dma. Now shares look poised to begin a new leg lower. Short-term technicals like the RSI and stochastics are bearish and the MACD is hinting at a new sell signal soon. Traders can choose to open put positions here, wait for a failed rally under $36.00 or wait for a new decline under Friday's low at $34.78. We're adjusting our stop loss to $37.51, which is above the descending 50-dma. Our target is the $30.75-30.00 range.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 40.00 FQA-UH open interest=105 current ask $5.40
BUY PUT SEP 35.00 FQA-UG open interest=241 current ask $1.65
BUY PUT SEP 30.00 FQA-UF open interest=376 current ask $0.30

Picked on August 10 at $ 34.90
Change since picked: + 0.12
Earnings Date 10/11/06 (unconfirmed)
Average Daily Volume = 1.2 million

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Hartford Fincl - HIG - close: 80.61 chg: +0.03 stop: 82.01

Insurance stocks have managed to rally higher in the last two days on a stronger than expected earnings report from AIG. We noticed that HIG has been under performing its peers with an anemic bounce. We're going to keep the stock on the newsletter as a bearish candidate. Our plan is to buy puts on a breakdown below support in the $79.25-79.50 region. Our trigger is at $79.20. More conservative traders may want to wait for a drop under $79.00 before initiating positions. Our short-term target is going to be the $75.25-75.00 range. More aggressive traders may want to aim for the $72.50-70.00 range. The P&F chart points to a $73 target.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 85.00 HIG-UQ open interest=1319 current ask $5.00
BUY PUT SEP 80.00 HIG-UP open interest=2699 current ask $1.75
BUY PUT SEP 75.00 HIG-UO open interest=1742 current ask $0.45

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Intuitive Surgical - ISRG - cls: 94.40 chg: -1.02 stop: 101.55

ISRG is an aggressive, higher-risk put play. The stock can be very volatile at times and traders need to be careful and expect reversals. We thought that Thursday's trading had produced a short-term bullish reversal but thankfully there was no follow through on Friday. Shares lost just over 1% but volume was pretty low on Friday's session. We remain bearish and the move under $95 could be used as a new entry point to buy puts. Our target is the March lows in the $87.75-87.50 range. ISRG's P&F chart points to a $60 target.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 100.0 AXQ-UT open interest= 404 current ask $8.60
BUY PUT SEP 95.00 AXQ-US open interest= 519 current ask $5.70
BUY PUT SEP 90.00 AXQ-UR open interest= 517 current ask $3.50

Picked on August 10 at $ 94.90
Change since picked: - 0.50
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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US Airways - LCC - close: 37.19 chg: -3.33 stop: 42.85*new*

The XAL airline index hit new lows for the year with a 4.9% sell-off. Shares of LCC helped lead the way with an 8.2% drop on Friday. LCC broke down under the $40.00 level (again) and its simple and exponential 200-dma. Volume on the session was very high and shares hit an intraday low of $36.80. The stock has already hit our conservative target at $40.25 and now it's quickly approaching our aggressive target at $36.00. More conservative traders may just want to exit early right now! We're not suggesting new plays and we're adjusting the stop loss to 42.85. FYI: LCC is looking short-term oversold and due for a bounce soon.

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

Picked on August 01 at $ 43.54
Change since picked: - 6.35
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.6 million

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NII Holdings - NIHD - close: 48.73 chg: -0.85 stop: 52.51

We do not have anything new to report on for NIHD. The stock is still inching lower in a narrow channel. The overall pattern looks bearish with the lower highs and the breakdown under its 200-dma and the $50.00 level. The P&F chart is also bearish. We are suggesting puts with the stock under $50.00 but if you're patient we may get another chance to enter positions closer to the $50 level. 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.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 55.00 QHQ-UK open interest= 407 current ask $6.80
BUY PUT SEP 50.00 QHQ-UJ open interest=1192 current ask $3.20
BUY PUT SEP 45.00 QHQ-UI open interest= 773 current ask $1.00

Picked on August 07 at $ 49.90
Change since picked: - 1.17
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million

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Transocean Inc. - RIG - cls: 66.80 chg: +0.55 stop: 72.25

We have been warning readers for days that RIG was short-term oversold and due for a bounce. The bounce finally appeared on Friday with a 0.8% gain to end its seven-day losing streak. The stock has been sinking on very strong volume, which is bearish. However, the bounce may not be over and honestly we don't expect it to be over very quickly. RIG could rebound back toward broken support and what should be new resistance at the $70.00 level. We are not suggesting new put plays at this time. Chart readers will notice that the P&F chart's bearish target has grown from $59 to $51. We are suggesting two targets: a conservative target at $65.25 and a more aggressive target at $61.00.

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

Picked on August 07 at $ 69.49
Change since picked: - 2.69
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: 45.01 change: -0.02 stop: n/a

We are quickly running out of time with this strangle play on BOL. There are only five more trading days left until August options expire. We are not suggesting new positions. 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). FYI: Traders may want to plan an early exit on any spike that brings the put towards breakeven.

Suggested Options:
We are not suggesting new positions on BOL.

Picked on July 23 at $ 47.40
Change since picked: - 2.39
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

3M Co. - MMM - close: 68.53 change: +0.12 stop: n/a

Our strangle play in MMM is also running out of time. There are just five days left before August options expire. 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). FYI: Traders may want to plan an early exit on any spike that brings the put towards breakeven.

Suggested Options:
We are not suggesting new positions on MMM.

Picked on July 23 at $ 70.72
Change since picked: - 2.19
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 3.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Breaking Up Is Hard to Do

Shannon Dougherty's new show premiering this September focuses on couples breaking up with each other. I wonder if she'll help me break up with my current charting service. Turns out, it's hard to do.

I'm loyal. I like signing onto my charting service early each morning, knowing what to expect. I don't like to work hard just to get a few encouraging signs out of my charting service, and my current one is known for its user friendliness. That's why I originally engaged in a relationship with this service. Lately, though, I just don't think the charting service has the same commitment to the relationship that I have, and it's made me consider breaking up.

It all started months ago. I'd heard whispers that my charting service wasn't reliable, but I tend to discount rumors and base my relationships on what I see for myself. Eventually, the evidence couldn't be ignored. I would call up certain symbols and find no answer, only blank charts. Sometimes the charting service was late returning my request for information, with charts far behind the actual prices. I began looking around, but none of the better-known charting services was perfect, either. One had a reputation of being a hog of computer memory. Some required more of an investment than I was ready to make in a new service. Some didn't meet my charting needs in other ways. Several didn't offer Keltner channels, for example. My loyalty won out each time I considered changing.

Then the final straw occurred. The Philadelphia Board of Trade decided to charge a fee for the feed from the exchange's indices, including the important SOX. Not only did the PBOT decide to charge, but according to my charting service, the PBOT put the change into effect quickly, catching some brokerages and many charting services unprepared. My charting service was one of those. My charting service neither immediately informed me or other subscribers what had happened nor did it scramble to again provide SOX quotes and charts. In fact, it told me and other subscribers that it would be sometime this fall before it would do so.

Other charting services did more to preserve their relationships with their customers, I noticed. While I was still begging my charting service to give me some kind of date for a resolution to the problems, others were already providing those quotes and charts for their customers. My brokerage never stopped providing up-to-date quotes. No matter what my charting service claimed about the PBOT's lack of notice, other charting services and brokerages seemed to manage better than mine.

Perhaps you've found your and your charting service may be ready to part company, too. If so, remember that breaking up is hard to do. Keep some points in mind.

It's okay to flirt with a new charting service while still keeping your old one. I already had a new service in mind: the back-up service I use whenever my current charting service went on the blink. A former writer for OptionInvestor had used Medved QuoteTracker (www.quotetracker.com), a service that offers a price that can't be beat: it's free unless you want the version without ads and with more indicators and more intraday data.

QuoteTracker gets its feed from many brokerages or feed services, with the website listing those firms. My brokerage was one providing the feed, but there was a problem. My brokerage doesn't backfill, so my intraday charts filled with bars only when I actually had a chart up and running. If I took a few hours off from watching charts I had no bars for that period.

For those using Interactive Brokers, as many of OIN's subscribers do, this problem doesn't exist. IB provides ten days of backfill, I believe. It did exist for me, however, and since missing bars was one of the reasons I was changing from my previous service, I needed a fix for this problem if I was going to use QuoteTracker as my primary service.

I needed to subscribe to a feed service if I was going to fully test this charting service. No problem: I could flirt with several feed services, too. They had free trial periods, too.

If you want real-time quotes while you're flirting with another service, you'll usually have to pay the exchange fees, however, so the flirting may not be without cost. Since my primary concern with my old service was with the accuracy of the feeds, I paid those exchange fees so that I could see if the new service was any better than the old.

Many charting services offer free trials, so look around. Be careful, though. When your trial period is over, some automatically charge you for the service unless you notify them in advance that you do not want to continue. The feed I chose, DTN.IQ, does this.

Once I had charts up and running with real-time feeds, it was time to take the charts for a test run. Almost all charting services will provide a choice of exponential and simple moving averages and Bollinger bands as upper indicators, and MACD, RSI and CCI as lower indicators, but what about the more eccentric ones, the ones upon which a technical trader might rely? Perhaps you value an unusual setting or indicator. For example, a first question for me is whether the charting service provides the opportunity to set up the nested Keltner channels I use. Although many services now offer Keltner channels, some offer only one setting.

Annotated 15-Minute Chart of the SOX:

Since, with the exception of nested Keltner charts, the indicators that I use on other charts would be considered mainstream and ordinary, my concerns about available indicators have mostly been resolved, although I have yet to locate the indicator for Fibonacci brackets. This charting service's regression channels also do not seem to be as flexible and easy to use as my former service's, but I can draw lines myself and I'm sure a thorough search will turn up a way to handle the Fib brackets. QuoteTracker is known for their customer service, and I've tested that, too, on both QuoteTracker and IQ. Emails to both services returned replies within an hour. Helpful replies that actually answered my questions.

Concerns such as legibility issues should not be underestimated, however, so don't rush the switch. Those traders who consider themselves technical traders have accustomed themselves to glancing at a chart and gathering all needed information within a second or two. Lines should be easy to spot and interpret so that the almost instantaneous recognition of the setup occurs.

That and other reasons explain why I'll keep flirting with this charting service before I break up with my former charting service. This new one looks promising, but I'm not forming a permanent relationship with this new service and breaking up with the other until I've dated both for a while.

Although I've used the breaking-up premise to provide a slant for this article, the tenets expressed here are serious. Trading based on flawed quotes or charts will cost you money. Because I have been exclusively trading credit spreads since the first of the year, I've been able to endure slow feeds better than some might be able to do so, but even my tolerance was tested when the SOX was approaching a sold strike on option expiration week and I couldn't get SOX charts.

Trying to make quick trading decisions while maneuvering around an unfamiliar charting service can cost you money, too. Don't cut off your old trading service too soon. Plan to pay for both for a month or so if you're trying out something other than QuoteTracker or if you want the registered form of QuoteTracker ($7.00 a month) with no ads and with more perks or require a paid feed. DTN.IQ offers a special rate to QuoteTracker users, so my extra costs are minimal while I'm going through this testing period.

Make a list of indicators that you must have as well as other special needs. Are you color blind and does one charting service offer only colors that will prove indistinguishable to you? If moving averages are offered only in combinations of blue and green, a quick glance may not tell you which is which. Will you consider a new charting service only if you can trade straight from the screen? Do you require more than ten days of intraday data and does a new charting service limit you to ten days or less?

To reiterate, even if you believe you've answered all necessary concerns, don't switch providers right away. Run both for at least several weeks, gradually spending more time studying the new provider's charts so that you can see if they provide you with that necessary quick snapshot view of the setup.

When you're considering a breakup with a love interest, your emotional and perhaps financial wellbeing are at stake. When you're considering a breakup with your charting service, your financial wellbeing is also at stake.
 

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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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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