Energy prices fell Monday with September Crude Oil futures (cl06u) settling down 82-cents, or -1.10% at $73.53 as the U.N.-imposed cease-fire between Israel and Hezbollah helped ease some of the geopolitical unrest responsible for oil's recent historic highs.
An improved production outlook from BP (NYSE:BP) $69.30 -0.02% regarding the Prudhoe Bay field also weighed on energy prices, with September Unleaded futures (hu06u) settling below the $2.00 level ($1.9905/-3.37%). While not certain, BP said it may be able bypass some of the corroded western oil transit line using a 24-inch high pressure gas pipeline, which is what the operator did in March, when BP was able to restart 70,000 bpd of the 90,000 bpd that was being produced at Gathering Center-2 a little over a month after the initial shutdown this spring.
A Reuters news source, close to BP, said output from Prudhoe Bay currently stands at 150,000 bpd and is expected to rise to 200,000 bpd by the end of the month once maintenance on Gathering Center-1 is completed.
Just after today's close, the EIA said U.S. June crude oil imports reached their highest monthly total ever at 10.779M bpd.
The major indices gapped higher at their open, but gains faded toward the close as traders await key economic data early Tuesday morning in form of producer prices for July.
Economists currently see July producer prices rising 0.4% m/m, with the core rate (excluding the volatile food and energy component) to have risen a more tepid 0.2%.
As that data is being released (a gauge on prices at the production level), we'll also get a regional economic report and the August Empire Manufacturing Index, which covers manufacturing activity in New York State. Consensus among economists is for a reading of 14.0 vs. 15.6 previously.
The New York Fed conducts this monthly survey that asks roughly 175 manufacturing executives to rate their business on an assortment of indicators, concerning both the present and future expectations.
U.S. Market Watch - 08/14/06 Close
Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 575.21 -1.37% have been quick to relinquish their pre-FOMC gains as the benchmark 10-year YIELD ($TNX.X) is quickly back within 25 basis points of the current Fed Funds target of 5.25%.
For both Treasuries and homebuilders, tomorrow's PPI data will be closely watched. At last week's meeting, it was Jeffrey Lacker, Richmond Fed President that argued for a quarter-point increase in the fed funds rate.
A modest rise in the U.S. Dollar Index (dx00y) and decline in the StreetTracks Gold (NYSE:GLD) $62.25 -0.73% gives hint that tomorrow's economic data is a focal point.
The rise in the dollar hints some market participants still see further near-term tightening from the FOMC in the works, while that potential tightening, combined with a moderately slowing economic backdrop has gold treading water between its recent July 14 and July 24 relative highs and low of $66.42/$59.83.
The S&P Retail Index (RLX.X) held a fractional gain at the close, but was bolstered earlier this morning when Dillard's (NYSE:DDS) $33.08 +5.61% surged to a multi-year high. The department-store operator reported net income of $15.7 million, or $0.20 a share, which included $0.14 of one-time gains. Still, the figures easily surpassed analysts' estimates for a loss of $0.05 per share. Dillard's said revenues rose 1% year-over-year to $1.75 billion, with fewer markdowns helping results.
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In last week's Market Monitor at OptionInvestor.com, I once again began updating traders on this month's "Max Pain Theory" values for some of the major indices as we near August option expiration for the major indexes and stocks this Friday.
Last week, and even today I still see what I believe to be some gyrations and "fine tuning" of indices and stocks toward the mathematically derived "Max Pain Theory" values.
For those that may not be overly familiar with "Max Pain Theory," the simple explanation for "Max Pain" is the theory that a major index may tend to gravitate toward this mathematically derived value, where the value is simply the sum of open interest at various OPTION strikes, which leaves the BULK of call option and put option buyers with as little profit as possible, and the market makers of those options holding the bulk of the profits as time premium erodes into the expiration.
Last week I was jumping around and trying keep traders abreast of "what to look for," and here are some observation relative to "Max Pain Theory" that I feel are important.
There is NO GUARANTEE that an index, or stock will close AT, or NEAR its "Max Pain Theory" value, but I'm going to show you some things I've been seeing, and still see, where I think it would take a BIG SHOCK from some type of economic data, to pull the major indices too far from their "Max Pain Theory" values into the end of the week.
Dow Diamonds (AMEX:DIA) - Daily Intervals
I've placed a fibonacci retracement bracket on the more recent relative high/closes for the Dow Diamonds (AMEX:DIA) $111.15 +0.09%, where August's "Max Pain Theory" is currently tabulated at $111.00. Option strikes are in increments of $1. For those not familiar with this, there are OPTION contracts at $109, $110, $111, $112, $113, etc.. All in $1 increments.
For fibonacci traders, 38.2% and 61.8% tends to define upper-lower near-term ranges of support/resistance, with 50% being an "equilibrium" level. When looking at the DIA, relative to its $111.00 "Max Pain Theory" level, I would say the DIA is range-bound within $110.50-$113.00.
Now, let's look at some of the Dow components. Remember! The DIA is a security by itself that trades with options. But within the INDU/DIA, there are 30 stocks. Some have GREATER weighting than others, and all of these stocks trade with OPTIONS!
Dow 30 Components - Market Cap Weighted Index
The Dow Industrials, or its "tracker" the DIA is a PRICE-weighted index. That means, the stock with the HIGHEST PRICE VALUE carry greater weight that those with SMALLER PRICE VALUES.
What I've done in the above table is simply run through the 11-most HEAVILY-weighted components, jot down their current August "Max Pain Theory" values, and the increments that their options are traded on.
For instance, Altria (NYSE:MO) $80.56 -0.34% is the "most heavily weighted" stock in the DIA right now. It's August "Max Pain Theory" value is $75.00 and that "Max Pain" value is derived from OPTION strikes in $5.00 increments. Will MO necessarily gravitate DOWN to $75.00 just because its "Max Pain" is $75.00?
My answer is NO!
A stock we've traded twice the past couple of days from the short side has been American Express (NYSE:AXP) $51.80 (unch), where some work I've done, and shown in the Market Monitor suggests that should the DIA itself remain "pinned" around $111.00, that AXP might tend to "gravitate" somewhere between $50.00 and $52.50. Split that difference $52.50 - $50.00 = $2.50, then $2.50 divided by 2 = $1.25, I could derive a more "accurate" Max Pain of $51.25.
In Friday's Market Monitor is reviewed AXP's option montage, and all-be-darned if on Friday, the stock didn't trade a session low of $51.19, then bounce right back up to $51.80 by the close.
I thought traders should short it again at $51.85, but with a tight stop at $52.08, should some type of bullish news have the DIA ripping away higher from its "Max Pain Theory" value and perhaps an extensive short-covering rally take hold. While that short in AXP was stopped out this morning on the gap higher open of $52.15, I still sense a "gravitational pull" on the stock.
My point, or observation here, is to illustrate what I feel is the IMPACT of an option expiration into Friday.
33-most Heavily Weighted S&P 100 Components - Cap-Weighted Index
Now let's take a look at some of the same stocks that reside in the Dow Industrials, which also comprise the S&P 100 Index ($OEX.X). However, here we now look at a MARKET CAP WEIGHTED index. It is no long PRICE, but the SIZED of the stock's MARKET CAP that begins to determine some stocks' "importance."
Again, I show some of the August "Max Pain Theory" values, and their increments. PINK-boxed stocks are also components of the NASDAQ-100 Index (NDX.X), or QQQQ.
I do point to the 5-DyNet% to give some observation of "who is driving who" and in which direction. Last week, Cisco Systems (NASDAQ:CSCO) $20.09 +2.81% surged from the $19.50 level on upbeat guidance, and some affirmation that stock option grants to executives had not been backdated.
S&P 100 Index (OEX.X) - Daily Interval Chart
Here is the OEX with similar retracement as shown for the DIA. A little different look, and the OEX actually looks STRONGER than the DIA.
"Key stocks" here would probably be XOM thru MO, or 1-10 weighted stocks in the near-term. If the OEX is going to get "pinned" back towards its August "Max Pain" of 580, and its RISING 200-day SMA, we might look for one of the "big guns" to see weakness.
NASDAQ-100 Trust (QQQQ) - Daily Interval Chart
For the QQQQ, I still follow my "bear fit 38.2%" retracement and the persistent selling at the 06/13/06 relative low close. See the "tie?" June 13 has been "LOW CLOSE" fibonacci retracement for the DIA and OEX, but that "bear fit 38.2%" retracement shows the weakness, and how that broken level of support, still finds some willing sellers at the $37.25 level.
I'm not as convinced as some that the NDX/QQQQ has traded its "summer bottom." Volumes have been light, and with the Labor Day holiday quickly approaching, many expect traders to "head for the beach" after Friday's expiration to get in their last bit of vacation before returning thru Thanksgiving.
Is my "bear fit 38.2%" retracement technique in play? I think so as depicted by the 07/18/06 relative low, which somehow, the resultant 50% of $35.56 found buyers. Most likely, BEARS that had shorted the break and CLOSE below $37.25.
One stock I'd be monitoring CLOSELY again this week, which in all actuality is followed by most NDX/QQQQ traders, is Microsoft (MSFT). The company announced a Dutch auction July 21, where the company is willing to buy up to 808,080,808 shares at a price between $22.50 and $24.75 per share.
Since that Dutch offer, the stock REFUSES to close below $24.20 and at the time of this writing, the Dutch auction deadline is Thursday's close.
For the past couple of weeks, MSFT's shares have been bound between $24.20 and $24.64. A break much above $24.75 could really bring in some short-covering, while a CLOSE much below $24.20, could have the mid-point of the Dutch auction range ($23.63) quickly coming into play.
Apple Computer - AAPL - close: 63.91 chg: +0.26 stop: 70.01
AAPL managed a minor bounce from the rising 21-dma and 100-dma today but the rally stalled just over the $65.00 level. The move today looks like a failed rally much like the one seen in the major indices. We remain bearish but AAPL might still try and bounce toward its 10-dma or 200-dma overhead. If you're looking for a new entry point to buy puts this could be it. Our short-term target is the $60.50-60.00 range. The top of the July gap near $59.70 could act as support.
Picked on August 08 at $ 64.78
Autozone Inc. - AZO - close: 86.70 chg: -1.97 stop: 90.05
AZO suffered a bearish day with a 2.2% slide fueled in part by some negative analyst comments on AZO's potential earnings. Shares spiked lower only to quickly rebound and see the bounce fail again under its 50-dma. We remain bearish and its MACD indicator on its daily chart is nearing a new sell signal. This looks like a new entry point to buy puts. Our target is the $82.50-80.00 range.
Picked on August 08 at $ 87.73
Boeing - BA - close: 75.39 change: -0.57 stop: 80.85
BA gapped higher this morning only to see the rebound fail near the $77.00 level. The move today actually produced a bearish engulfing candlestick pattern. We remain bearish but traders may still want to wait for a breakdown under round-number support at the $75.00 mark before initiating positions. Our target is the $70.50-70.00 range.
Picked on August 10 at $ 75.75
Burlington Nor.SantaFe - BNI - cls: 64.12 chg: -0.72 stop: 70.25
For the most part the transportation sector managed a bounce on a pull back in oil prices. Yet shares of BNI did not participate and the stock broke down further under the $65.00 mark and closed under last month's low on above average volume, which is bearish. Our target is the bottom edge of the current channel in the $62.50-60.00 range.
Picked on August 08 at $ 68.06
Chaparral Steel Co. - CHAP - cls: 67.01 chg: +0.01 stop: 70.01
CHAP produced another failed rally, this time under the $70.00 level. More aggressive traders may want to strongly consider entering new put positions here. We're still waiting for a breakdown under its 50-dma and 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, especially now that CRS has closed under its simple 200-dma.
Picked on August xx at $ xx.xx <-- see TRIGGER
Chipotle Mex Grill - CMG - close: 49.88 chg: +0.59 stop: 54.01
CMG is still trying to produce an oversold bounce and shares did post a 1.1% gain but like most of the market the stock pared its winnings to close near its lows for the session. We remain bearish but patient traders may want to wait and see if the oversold bounce reaches the $52-53 region before considering new put positions. The P&F chart is bearish with a $39.00 target. Our target is the $45.50-45.00 range.
Picked on August 09 at $ 50.28
Cummins Inc. - CMI - close: 115.50 chg: -0.22 stop: 121.27
CMI has produced another failed rally under the $118 level and its simple 10-dma. The MACD sell signal on the daily chart is looking stronger and we don't see any changes from our weekend update. 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.
Picked on August 08 at $119.77
Fastenal - FAST - close: 35.45 chg: +0.43 stop: 37.51
Same story, different stock. The market bounce powered FAST to an intraday high over $36.00 but as the market's strength faded so did FAST's. This looks like a new bearish entry point but traders may still want to wait for a decline under $35.00 before initiating new positions. Our target is the $30.75-30.00 range.
Picked on August 10 at $ 34.90
Hartford Fincl - HIG - close: 81.48 chg: +0.87 stop: 82.01
Insurance stocks are still bouncing and HIG managed to touch its descending 10-dma and the $82 region before paring its gains. We're still on the sidelines so it doesn't hurt to wait and watch HIG for a while. A failed rally from here might be an aggressive entry point but we're still waiting for a breakdown. 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.
Picked on August xx at $ xx.xx <-- see TRIGGER
Intuitive Surgical - ISRG - cls: 92.02 chg: -2.38 stop: 101.55
Our aggressive, high-risk put play in ISRG is moving our direction. The stock displayed relative weakness today with a 2.5% decline and a close near its lows for the session. The stock is approaching the early August low near $91.25 and potential round-number support near $90.00 so we're expecting a bounce. However, we remain bearish. Our target is the March lows in the $87.75-87.50 range. ISRG's P&F chart points to a $60 target.
Picked on August 10 at $ 94.90
US Airways - LCC - close: 38.14 chg: +0.95 stop: 42.85
After last week's sell-off the airline stocks were looking a bit oversold and ready for a bounce. Today's drop in oil prices was the perfect reason the market needed for airlines to rebound today. LCC added 2.55% but failed to breakout over its 200-dma or the $40.00 level. We're not suggesting new plays and traders may want to seriously consider exiting positions now to lock in profits. The stock has already hit our conservative target at $40.25 and now we're targeting the $36.00 level.
Picked on August 01 at $ 43.54
Lam Research - LRCX - close: 39.64 change: +0.60 stop: 42.01
LRCX produced a 1.5% bounce on Monday but the stock failed to hold its gains over the $40 level and shares reversed under its descending 21-dma. 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 409.
Picked on August 13 at $ 39.04
MDC Holdings - MDC - close: 42.24 change: -0.22 stop: 45.15
Our put play in MDC is now open. The stock traded to an intraday low of $42.01 and our suggested trigger to buy puts was at $42.25. MDC did not show as much weakness as the DJUSHB home construction index (-1.37%) but we are encouraged by the DJUSHB's MACD indicator on its daily chart that has produced a new sell signal. Our target for MDC 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.
Picked on August 14 at $ 42.25
NII Holdings - NIHD - close: 48.47 chg: -0.26 stop: 52.51
We do not see any change from our previous updates on NIHD. The stock is creeping lower and still looks weak. 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 (like today, the intraday high was $49.50). 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
Transocean Inc. - RIG - cls: 65.05 chg: -1.75 stop: 70.25 *new*
Target achieved! The sell-off in crude oil today weighed on the oil and oil services stocks. Shares of RIG hit an intraday low of $64.82 and closed with a 2.6% loss. Our conservative target was at $65.25. We are suggesting that traders sell all or part of their position and lock in profits. RIG is very oversold and due for a bounce. We are not suggesting new positions. We are going to adjust our stop loss to $70.25. Currently our secondary, aggressive target is the $61 level.
Picked on August 07 at $ 69.49
Ryland Group - RYL - close: 39.39 chg: -0.61 stop: 42.05
Our new put play in RYL is now open. The DJUSHB home construction index lost 1.37% and its MACD indicator produced a new sell signal. Meanwhile shares of RYL lost 1.5% and its MACD is very close to a new sell signal. The intraday low for RYL was $39.24 and our suggested entry point to buy puts was at $39.40. Our target is the $35.25-35.00 range.
Picked on August 14 at $ 39.40
Whirlpool - WHR - close: 76.50 chg: +0.44 stop: 76.26
There are no changes from our weekend play description on WHR. The intraday rally failed on Monday but we're still on the sidelines. 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.
Picked on August xx at $ xx.xx <-- see TRIGGER
United States Steel - X - cls: 57.12 chg: +0.83 stop: 60.05
There are no changes from our weekend play description on X. Shares remain above support near $56.00. 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.
Picked on August xx at $ xx.xx <-- see TRIGGER
(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: 45.04 change: +0.03 stop: n/a
We only have four days left for this strangle and BOL's lack of movement today is a not a good sign. 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.
Picked on July 23 at $ 47.40
3M Co. - MMM - close: 68.62 change: +0.09 stop: n/a
Our strangle on MMM is also running out of time with only four days left. 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.
Picked on July 23 at $ 70.72
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