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Daily Newsletter, Tuesday, 08/15/2006

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Table of Contents

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

Market Wrap

Market Wrap

Benign inflation readings at the wholesale level for July ignited a very broad rally today, while Treasuries also found a strong bid not only in stocks, but Treasuries as well, and the recent pattern of strength fading towards the close was nonexistent.

The Labor Department said producer prices edged up a modest 0.1% in July, while the core rate, which excludes the volatile food and energy components fell 0.3% and gave market participants renewed optimism that the Federal Reserve's measured pace of hiking rates was indeed managing inflationary pressures.

The market also found some solace on the inflation front after the New York Federal Reserve said its manufacturing index came in at 10.3 vs. economists' forecast of 14.0.

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While the New York figures certainly depict some continued cooling at that regions manufacturing level, many saw the data as being one reason the Fed may well take no action at its late September meeting.

In last night's wrap I discussed some August "Max Pain Theory" levels. For the S&P Depository Receipts (SPY) $128.63 1.19%, it ripped away from its $127 Max Pain level where August PUTS were atop today's list of most active option, and PAIN delivered to a bear (holder of the put), but PLEASURE (seller/NAKED put trader).

S&P Depository Receipts Option Chain - Most Actives

A lower move in a volatility measure like the VIX.X is sometimes assumed to be created buy CALL option buyers only. Not true! The SPY August $127 Puts (SPY-TW) were #2 most active and we can see that DownTicks (sell induced trade) greatly outnumbered UpTicks (buy induced trade).

Closing U.S. Market Watch - 08/15/06 Close

There was a lot of "green on the screen" today and only the RXH.X finished in the red.

Home builders as depicted by the DJUSHB recouped all of yesterday's losses, and then some. At 01:00 PM EDT the National Association of Home Builders' (NAHB) said their index for U.S. sales of new, single-family homes fell in August to 32, its lowest point since February 1991 when the economy was in recession.

Still, longer-dated Treasury maturities like the 10-year yield ($TNX.X) and 30-year year YIELD ($TYX.X) created some needed optimism for the group that mortgage rates may stabilize at some historically attractive levels.

Economic Calendar -

"Orange" and "red" folders are usually deemed important than yellow, but these days, when Fed activity is being closely monitored, just about every economic report from around the globe can find some type of analysis.

The "TIC Report" had the Treasury revealing net foreign buys of U.S. securities rose to $75.1 billion in June, which was slightly above the 12-month average, but well above the consensus estimate of $62.9 billion.

The Treasury Department said net foreign purchases of U.S. Treasury notes and bonds more than tripled in June to $27 billion!

Testing 1 ...

I now want to pick up where I left off in last night's wrap with the QQQQ.

Oh, there were some buyers on the break above $37.25, and I have to deem tonight's close as BULLISH, where any type of pullback near $36.33 (IF the QQQQ were to pull back there) would get gobbled up, especially by bears that now find themselves with a paw in the proverbial "honey jar."

What I want to show (with volume turned on) is the same chart of the QQQQ we looked at last night, where a "test for strength" from the QQQQ was to get a close ABOVE $37.25. Sellers (not just bears/shorts, but long liquidators too) had been able to overcome buyers for weeks now.

I'm "turning on" my QCharts' WEEKLY Pivot Levels too, so you and I can get a feel for how INSTITUTIONAL computers have handled things.

NASDAQ-100 Trust (QQQQ) - 5-minute interval chart

There were a couple of technicals in play yesterday that suggested to me that traders should be "bearish" the QQQQ at $37.25, and by yesterday's close, that sure looked to be the case.

Even this morning, on the gap higher open, you can see that sellers were still hanging around the $37.25 level.

Yep ... "OK, inflation data is friendly, but what about the SLOWING economic data out of New York?"

Boom! There's our answer.

It would HAVE to be my analysis that the MARKET is more focused on "inflation" and Fed activity, and thinking "the economy will take care of itself, or provide more data in the future, but the move above $37.25 and ability to CLOSE above that level, if not my "old upward trend" would now have the more BULLISH BIAS lifting from $35.56 to $36.32, somewhat "eh.... neutral" at $37.24 (unless your short the QQQQ, then a trader/investor needs to make sure they're not overly short), and a near-term BEAR BIAS would be at the $37.95 level.

I say "bias" based on the levels of fibonacci retracement, NOT the WEEKLY Pivot Levels. For a pivot level trader, WEEKLY Pivot after a trade at a WEEKLY R2 is the more "neutral" to near-term BULL bias level.

Testing ... 1, 2

How about those one, two and three-lettered stock symbols on the NYSE?

NYSE Composite (NYA.X) - Daily Intervals

It never hurts to be consistent. Take the high close to the low close and see what you get.

I get a BULLISH CLOSE (yes, just 3 points). On a "close to close" basis, if SELLERS were stronger than buyers, then the NYA.X should have closed BELOW 8292.78. Right?

Testing 1, 2, 3 ...

How about an intra-day 5-minute interval of the OEX? Same fibonacci retracement we looked at last night. Throw on the 590.20 highest recent close, and QCharts' WEEKLY Pivot Levels.

S&P 100 Index (OEX.X) - 5-minute intervals

Intra-day observations may give traders and investors a better feel of how aggressive buyers and sellers are, and how the MARKET is they're trading is being traded.

The OEX is not an "electronic" index like the NDX/QQQQ, so its opening bar will usually be the prior day's close.

The OEX 5-minute bar actually gapped higher, where e-mini S&P futures (es06u) would be a better indication of today's open, but note how the OEX really seemed to find "caution" among sellers above the 07/28/06 recent relative high close of 590.20, which I made note of last night.

If anything, that's further sign of some "re-think" among bears regarding this morning's economic data.

Yes... the OEX did pull back from the 592 level on the NAHB data, into WEEKLY R1, but remember Mr. Greenspan's remarks several months ago regarding housing prices being on the Fed's watch list of inflationary pressures.

Sometimes... "bad news" is "good news" on the inflation front.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
NoneNoneNone

Editor's note: Tuesday's market rally was fueled by a better than expected PPI report. Investors interpreted the data to mean that the Fed might be done for the year since the Fed's last statement said they were data dependent. The market's internals and the breadth and dept of the rally today suggested this could be a pivotal change in the market's trend. We strongly considered adding new plays to the newsletter tonight but tomorrow's CPI report could undo any gains today if the CPI data is too strong. We're choosing to wait and see if the CPI affirms today's data in the PPI and if stocks see any follow through on today's move. The CPI will be released tomorrow at 8:30 in the morning Eastern time.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

None
 

Put Updates

Apple Computer - AAPL - close: 66.45 chg: 2.51 stop: 70.01

Uh-oh! Now we are starting to get worried with AAPL. The stock continued to rally on Tuesday, which isn't too surprising considering the fact that technology stocks were the market leaders in Tuesday's market surge. Shares of AAPL added 3.9% and closed over potential resistance at $65.00, its 10-dma and its 200-dma. More conservative traders may want to consider an early exit but bear in mind the CPI report will be out tomorrow morning before the open and if it's positive shares of AAPL could gap higher like they did today. We're not suggesting new bearish plays at this time.

Picked on August 08 at $ 64.78
Change since picked: 1.67
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 28 million

---

Autozone Inc. - AZO - close: 87.61 chg: 0.91 stop: 90.05

Shares of AZO did manage a bounce today but the performance looked a bit anemic. Another failed rally under the simple 50-dma could be used as a new bearish entry point. We remain bearish and its MACD indicator on its daily chart is nearing a new sell signal. Our target is the $82.50-80.00 range.

Picked on August 08 at $ 87.73
Change since picked: - 0.12
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 700 thousand

---

Boeing - BA - close: 76.58 change: 1.19 stop: 80.85

The market's widespread rally sparked another bounce in BA but shares remain under resistance in the $76-78 region. 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
Change since picked: 0.83
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Burlington Nor.SantaFe - BNI - cls: 65.70 chg: 1.58 stop: 70.25

Railroad stocks were a big part of the rally in transports. The Dow Jones railroad index added 3.2%, which helped the transportation index rally 2.9%. Shares of BNI produced an oversold bounce to the tune of 2.4% but what really alarms us was the big rise in volume. BNI's volume was about double the daily average. The stock is short-term oversold and the next move could be a rally toward the $70.00 level. We're not suggesting new plays. If the CPI data comes in positive then BNI might gap higher. More conservative traders may want to exit early!

Picked on August 08 at $ 68.06
Change since picked: - 2.36
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million

---

Chaparral Steel Co. - CHAP - cls: 69.47 chg: 2.46 stop: 70.01

Steel and iron-related stocks turned in a strong session. Shares of CHAP added 3.6% but the rally failed to breakout over the $70 level. We're still on the sidelines so we're going to keep CHAP on the play list for now. Our trigger to buy puts is at $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.

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

---

Chipotle Mex Grill - CMG - close: 50.64 chg: 0.76 stop: 54.01

We have been expecting a bigger oversold bounce in shares of CMG but it has yet to materialize. The current bounce is now three days old and it's turning the short-term technicals positive. More conservative traders may want to tighten their stops, especially if the CPI data comes in better than expected tomorrow. We're still looking for the $52-53 level to act as overhead resistance for now. Please note we're not suggesting new plays at this time.

Picked on August 09 at $ 50.28
Change since picked: 0.36
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand

---

Cummins Inc. - CMI - close: 119.15 chg: 3.65 stop: 121.27

Ouch! Today's surge in shares of CMI erased most of our unrealized gains. Volume was relatively low but the move past the 10-dma and the $118 level is short-term bullish. We're not suggesting new plays and more conservative traders may want to tighten their stops. If the CPI data is positive tomorrow we wouldn't be surprised to see CMI challenge the recent highs.

Picked on August 08 at $119.77
Change since picked: - 0.62
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Fastenal - FAST - close: 36.80 chg: 1.35 stop: 37.26 *new*

FAST turned in a strong rebound, adding 3.8%, but on lackluster volume. Shares are quickly approaching technical resistance at its 50-dma near $37.00. We're going to lower our stop loss to $37.26. If the CPI data fuels another market rally tomorrow then we expect to be stopped out.

Picked on August 10 at $ 34.90
Change since picked: 1.90
Earnings Date 10/11/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Hartford Fincl - HIG - close: 82.72 chg: 1.24 stop: 82.01

The bounce in HIG has marked its fourth gain in a row. Shares are quickly approaching technical resistance at its 50-dma. We're going to wait and see how the market reacts to the CPI report tomorrow before making a decision to keep or cut HIG as a bearish candidate. Our trigger to buy puts is at $79.20. More conservative traders may want to wait for a drop under $79.00 before initiating positions.

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

---

Intuitive Surgical - ISRG - cls: 95.56 chg: 3.54 stop: 101.55

We warned readers that shares of ISRG were volatile. The stock is living up to its label. Shares reversed yesterday's losses and put the stock back above the $95 level. We're not suggesting new plays.

Picked on August 10 at $ 94.90
Change since picked: 0.66
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

US Airways - LCC - close: 40.60 chg: 2.46 stop: 42.85

Airline stocks bounced for the second day in a row and shares of LCC out performed its peers with a big 6.44% gain today. Part of the sector's strength today was due to positive analyst comments on American Airlines and Southwest Airlines. Technical traders will note that the short-term technical indicators on LCC are looking bullish from oversold conditions and today's rally past the 200-dma and the $40 level are bad news for the bears. Traders may want to exit the rest of their positions now. We're not suggesting new plays. 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
Change since picked: - 2.94
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.6 million

---

Lam Research - LRCX - close: 41.17 change: 1.53 stop: 42.01

Semiconductor stocks led the rally higher today. The SOX added 3.7% and shares of LRCX out performed its peers with a 3.85% gain. The stock has broken out past its 10-dma and is now challenging resistance at its exponential 200-dma. We are not suggesting new positions. If the CPI data is favorable tomorrow we would expect to be stopped out.

Picked on August 13 at $ 39.04
Change since picked: 2.13
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 3.0 million

---

MDC Holdings - MDC - close: 43.31 change: 1.07 stop: 45.15

Homebuilding stocks rallied on the PPI data in spite of a very bearish homebuilder confidence report. The NAHB announced this morning that its housing index fell to 15-year lows with a 7-point drop in August to the 32 level. Readings under 50 suggest that builders have a negative view of the housing market. We are not suggesting new put positions in MDC at this time although a failed rally under $45 could be used as a new entry point.

Picked on August 14 at $ 42.25
Change since picked: 1.06
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 991 thousand

---

NII Holdings - NIHD - close: 50.09 chg: 1.62 stop: 52.51

Be careful here! NIHD added 3.3% and managed to breakout above its 10-dma, exponential 200-dma and the $50.00 level with today's gain. If the CPI report comes in better than expected we would expect NIHD to rally towards the 200-dma overhead.

Picked on August 07 at $ 49.90
Change since picked: 0.19
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million

---

Transocean Inc. - RIG - cls: 66.45 chg: 1.40 stop: 70.25

We have been expecting an oversold bounce in RIG for a while so today's rally isn't a surprise. We're not suggesting new positions at this time. At the moment we're looking for a rebound toward the 10-dma and possibly toward $70. The stock has already hit our conservative target at $65.25. Our secondary, aggressive target is the $61 level.

Picked on August 07 at $ 69.49
Change since picked: - 3.04
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million

---

Ryland Group - RYL - close: 40.86 chg: 1.47 stop: 42.05

RYL is another homebuilder that rallied strongly today but remains under technical resistance at its 50-dma. We are not suggesting new put positions at this time. More conservative traders may want to tighten their stops if the CPI data comes in positive.

Picked on August 14 at $ 39.40
Change since picked: 1.46
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Whirlpool - WHR - close: 76.73 chg: 0.23 stop: 76.26

There are no changes from our weekend play description on WHR. The intraday rally failed on Monday and Tuesday 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
Change since picked: 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

United States Steel - X - cls: 59.44 chg: 2.32 stop: 60.05

Iron and steel-related stocks rallied strongly today and shares of X are challenging their trend of lower highs. A breakout over $60 and traders might want to consider switching to call options. We're still on the sidelines with a trigger to buy puts at $55.85.

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
 

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: 45.43 change: 0.39 stop: n/a

We only have three days left for this strangle and BOL's lack of movement 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
Change since picked: - 1.97
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

3M Co. - MMM - close: 69.78 change: 1.16 stop: n/a

Our strangle on MMM is also running out of time with only three 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 either option towards breakeven.

Picked on July 23 at $ 70.72
Change since picked: - 0.94
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 3.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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