Option Investor

Daily Newsletter, Monday, 08/21/2006

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Table of Contents

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

Market Wrap

Make it a "light"

The major indexes gave back some of last week's impressive gains on Monday in what could best be described as a "light" session of trade.

There were no major economic reports released for the U.S. today, and a light economic calendar this week begins Wednesday morning at 10:00 AM EDT with July existing home sales (consensus 6.6 million annual rate vs. previous 6.6 million annual rate).

Volumes at both major exchanges were anemic with many traders opting for the lounge chair at the vacation home after last week's active trade, where many of the major equity indexes broke above, or free of their August "Max Pain" Theory tabulations earlier in the week, then trended higher into Friday's close.

While the Semiconductor HOLDRs (AMEX:SMH) $32.54 -1.65% traded weak today, the battering this sector has taken since the beginning of the year had the most optimistic bull looking to guard some profits after last week's 8.2% gain.

Semiconductor HOLDRs (AMEX:SMH) - Daily Intervals

In recent Market Wraps that I've written, I've been showing the conventional use of fibonacci retracement from a relative high close to relative low close for various indexes.

In Tuesday's wrap, it looked like shorts, and ESPECIALLY call sellers got caught on the "wrong side" of the near-term trade and with arms and legs wrapped tight, gave themselves a big bear hug.

I think bulls will, or should, use that to their advantage near-term. Look for the SMH to pull in, show some stability from $31.28-$31.51, then look for 1/2 positions there, and add further on a move ABOVE the recent highs.

According to Dorsey/Wright and Associates, their Semiconductor Sector Bullish % (BPSEMI) has reversed up to "bull alert" status at 33% bullish after a recent low 24% measure. It would currently take a reversing lower measure of 26% to revert back to "bear confirmed" status, and a 68% reading to achieve "bull confirmed" status.

A complete list of various HOLDRs and their components/weightings can be found at http://www.holdrs.com

Patterson-UTI Energy (NASDAQ:PTEN) $27.64 +2.18%, Microsoft (NASDAQ:MSFT) $26.12 +1.27% and Expedia (NASDAQ:EXPE) $15.34 +1.05% were percentage gainers for the QQQQ, but couldn't offset negative breadth of 17:83 and losses of 3% or more for Akamai Technologies (NASDAQ:AKAM) $38.73 -3.12%, Urban Outfitters (NASDAQ:URBN) $16.54 -3.33%, Amazon.com (NASDAQ:AMZN) $28.13 -3.39%, Monster Worldwide (NASDAQ:MNST) $41.48 -3.51%, PETsMART (NASDAQ:PETM) $23.92 -3.47%, NVIDIA (NASDAQ:NVDA) $23.92 -3.47% and Broadcom (NASDAQ:BRCM) $28.89 -3.70%.

Earnings reports were also light on Monday.


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Shares of building products retailer Lowe's (NYSE:LOW) $28.35 -3.96% gapped back below both their 50-day SMA ($29.26) and curling higher 21-day SMA ($28.58) after the company missed Q2 estimates and cut its year forecast.

The number 2 home improvement retailer after Dow component Home Depot (NYSE:HD) $34.30 -1.35% reported earnings per share of $0.60 for the quarter, up from $0.52 a year earlier.

Analysts had forecast a profit of $0.61 a share.

Lowe's said sales rose 12.2% to $13.4 billion from $11.9 billion a year earlier. Analysts were expecting it to post revenue of $13.3 billion for the period.

Lowe's pared its full-year profit forecast to a range of $2 to $2.07 a share from May's projection of $2.07 to $2.11 a share and said they now see same-store sales for the year rising 2% to 3%, compared with May's forecast for a gain of 4% to 5%.

Company executives cited higher gasoline prices, as well as the slowing housing market as reasons for their more cautious outlook.

Despite strong gains in longer-dated Treasuries, which had the benchmark 10-year YIELD ($TNX.X) falling 1.6 basis points to 4.819% and the 30-year YIELD ($TYX.X) edging down 0.9 basis points to 4.964%, home builders as depicted by the DJUSHB closed down 18 points, or -2.90% on their curling higher 21-day SMA .

Today's economic calendar was void of any

The September Crude Oil futures (cl06u) will expire at Tuesday's close, where Middle East tensions helped provided a bounce from last week's decline. September Crude settled up $1.31, or +1.84% at $72.45, while October Crude Oil futures (cl06v) settled higher by $1.20, or +1.66% at $73.30.

Iran's supreme leader said Tehran will continue to pursue nuclear technology while refusing access to U.N inspectors wanting to examine its underground nuclear facility, accusing the U.S. of pressure despite assertions it isn't seeking nuclear weapons.

Just after today's close, the EIA said the average retail price for gasoline across the U.S. fell by 7.6 cents last week to $2.924 cents per gallon. September Unleaded futures (hu06u) settled down $0.0303, or -1.54% at $1.9366.

Miners got a nice bounce with the AMEX Gold Bugs Index ($HUI.X) 344.71 +5.37% jumping higher not only on the dollar's weakness, but the rebound in oil prices.

One item traders and investors will want to be alert to with the $HUI.X's strong bounce today is something I began alerting gold (commodity) traders to in Thursday's Market Monitor. I think longer-dated Treasury maturities are about to reverse course, and I'll discuss these thoughts, and possible dynamics below.

S&P Depository Receipts (AMEX:SPY) - Daily Intervals

Not unlike the SMH, or the QQQQ, or many equity-based indexes, we saw a notable rise into Friday's August expiration.

A "trap" a trader can fall into when they see a more "oversold" SMH/QQQQ rise quicker than what got the bull party started, is to try and turn more BEARISH the major index that sounded the trumpet for the bull's charge to begin.

"Financials" comprise the GREATEST weighting not only for the S&P 500, but also the SMALL CAPS and the Russell 2000 Index ($RUT.X).

Now, a low beta sector like the BIX.X and BKX.X, where many stocks there have a beta of about 0.30 to 0.50, a 5-dayNet% gain of 1.60% and 1.50% is nothing to sneeze at for a bull.

Beta is a measure of volatility, or systematic RISK, of a security or a portfolio in comparison to the market as a whole.

Let's say the SPX/SPY is representative of "the market" here in the U.S..

It would appear that the greater weighting of the banks starts to act like a damp cloth on the SPY and even the RUT.X, and with fed funds currently at 5.25% and the discount rate at 6.25%, it can be tough for banks (that make loans) to see much margin when the 5-year, 10-year and 30-year Treasury YIELDS are ALL below the above-mentioned fed funds and discount rate.

So why are the banks hanging in there with some nice gains considering there low beta relative to "the market?"

I think it is anticipation that we should start to see some "bond bulls" in the Treasury market start locking in gains, bring selling to the longer-dated maturities, and have their YIELDS start to rise and the benchmark bond 10-year YIELD ($TNX.X) has achieved, and now begins to exceed its bearish vertical count.

10-year YIELD ($TNX) Chart - 0.25 box size

I've always thought the "bond market" is much smarter, or educated about the "stock market" when it comes to the economy, and what the Fed is thinking, or may be doing in the future.

When the bond market "overdose" things, is usually when shorts get on the wrong side of things, and a momentum trade really unwinds.

The above chart is that of the 10-year YIELD, but I have, and would also alert traders/investors that the longest-dated 30-year YIELD ($TYX.X), which was down a more fractional 0.9 basis points at 4.965% today, would have its Point and Figure chart showing a bearish vertical count of 49.00, or 4.90%.

The bond market is SO MUCH MORE a RISK/REWARD trade than probably any other market we would encounter. Not just because of its size, which dwarfs equity markets, but because there is such a small window for error.

Think about it.

Trillions of dollars in a YIELD of, say 5%. Heck, the SPX/SPY has risen 6.25% in just the past month.

In Thursday's Market Monitor, it was my "gut feel" based on observations that gold was about to get a bounce, as TREASURY YIELDS were "overdone" to the downside, relative to where fed funds rates were at, combined with the 10-year YIELD ($TNX.X) achieving its bearish vertical count.

Yes! Perhaps I was a day early, but today's jump in the Amex Gold Bugs Index ($HUI.X) has the "equity" portion of the gold commodity getting a bounce, and I think this may lead to some SELLING in longer-dated Treasuries (that's where the risk in the bond market is at right now; LONGER-dated MATURITIES) where the RISK comes from the amount of TIME to MATURITY.

The Dollar's weakness gives us a signal too, that the Fed is closer to a "hold," or ease cycle than it is for raising rates.

But the "dynamic" I want to get across is the potential RISE in longer-dated Treasury YIELDS, that then adds some MARGIN, or spread back to banks that LEND MONEY.

How does an SPY/SPX pullback take place?

For the most part, stocks began their rebound not long after the recent FOMC meeting, and decision to hold the fed funds target at 5.25%.

YIELDS fall and Dollar weakens, and gold gives somewhat of a "mixed signal" and has been rather volatile on a session-to-session basis.

What I see taking place the next week is YIELDS start to rise, this builds some "fear" back onto the inflation side of things, and stocks ease back from their current rally.

However, the recent lackadaisical gains for banks, and perhaps "financials" in general, then ignite on the loan spread increasing from the rise in longer-dated maturities.

And that is where I think a BEAR that thinks "oh, short/put the SPY/SPX" as its rise from the June lows has played out, and now it has further to fall than the NDX/QQQQ" might be the BIG mistake.

New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

AstraZeneca - AZN - close: 63.23 change: +0.24 stop: 59.95

Shares of AZN hit another new high on Monday. We remain bullish and don't see any changes from our weekend play description. Traders might want to wait for a dip towards $62 or even $60 before considering new positions. Our target is the $68.00-69.00 range but our time frame is mid-October.

Picked on August 20 at $ 62.99
Change since picked: + 0.24
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million


Bucyrus - BUCY - close: 51.14 chg: -2.04 stop: 47.69

We warned readers to expect a pull back toward $52 and potentially the $51 level. Shares of BUCY delivered that pull back today. Volume came in pretty light but it was also the lightest volume day of the year for the markets in general. Readers can use a bounce from $51.00 or if the decline continues then a bounce from $50.00 as a new entry point to buy calls. More conservative traders might want to tighten their stops. Our target is the $57.50-60.00 range.

Picked on August 16 at $ 51.87
Change since picked: - 0.73
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 697 thousand


Carpenter Tech - CRS - close: 97.22 chg: -1.63 stop: 94.99

CRS saw an early morning rally attempt but it failed under round-number resistance at the $100.00 mark. We do not see any changes from our new play description this past weekend. We are suggesting a trigger to buy calls at $100.26. There is potential resistance at its August high near $103.50, which also happens to be near the 50-dma. Traders need to be defensive until CRS clears this level. Our target is the $109.00-110.00 range. It's worth noting that a move over $100 should reverse the P&F chart into a new buy signal.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 921 thousand


Cymer Inc. - CYMI - close: 40.02 chg: -1.13 stop: 39.95

After leading the rally last week the semiconductor stocks were the leaders lower this week as investors locked in some profits. We do not see any changes from our weekend play description on CYMI. We are suggesting a trigger to buy calls at $42.55, which is above the simple 50-dma. If triggered our target is the $47.00-48.00 range. The P&F chart is bullish and points to a $59 target.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million


Goldman Sachs - GS - close: 153.83 chg: -0.85 stop: 149.40

The broker stocks experienced some profit taking this morning but traders bought the dip in GS near the stock's short-term trendline of higher lows. This looks like a new entry point to buy calls but more conservative types might want to wait for a new move over $155 before initiating positions. Our conservative target is $160.00. Our secondary target is the $164.50 level. Consider selling half your position at $160 and the rest at $164.50. We do not want to hold over the late September earnings report. FYI: The P&F chart points to a $190 target.

Picked on August 16 at $154.99
Change since picked: - 1.16
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.3 million


MicroStrategy - MSTR - close: 91.10 chg: -2.08 stop: 85.99

MSTR hit some turbulence today. The stock produced a failed rally under its simple 100-dma and closed back under its 200-dma. We would expect a dip toward the $90.00 level and its 10-dma and quite possibly a low as the $87.50 region. Wait for the dip and then a bounce to appear before considering new bullish positions. Our target is the $98.75-99.00 range.

Picked on August 16 at $ 92.05
Change since picked: - 0.95
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand


Piper Jaffray - PJC - close: 55.04 change: -0.66 stop: 49.99

We do not see any changes from our weekend new play description for PJC. We told readers that our preferred entry point would be on a dip and PJC provided one this morning. The pull back may not be over yet but the slight bounce from today's low near the 50-dma does look like an entry point to buy calls. Our short-term target is the $59.90-60.00 range.

Picked on August 20 at $ 55.70
Change since picked: - 0.66
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 300 thousand


Children's Place - PLCE - cls: 58.37 chg: -1.22 stop: 56.95

Retail stocks were also caught up in the profit taking today. The RLX retail index lost 1.6% and shares of PLCE pulled back with a 2% decline. Aggressive traders might want to consider buying a bounce from $58 or its 50-dma, near 57.00. We're going to wait for a new relative high. Thus we're suggesting a trigger to buy calls at $60.35. If triggered our target is the $64.85-67.00 range. The P&F chart is bullish and points to a $73 target.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/17/06 (confirmed)
Average Daily Volume = 588 thousand


FreightCar Amer. - RAIL - close: 57.90 chg: -1.23 stop: 53.99

Shares of RAIL dipped toward technical support at its rising 200-dma for the third day in a row and once again traders bought the dip. This looks like a new bullish entry point to buy calls. We don't see any changes from our weekend play description for RAIL. More conservative traders may want to strongly consider waiting for a breakout past the $60.00 level first. Our short-term target is the $64.50-65.00 range.

Picked on August 20 at $ 59.13
Change since picked: - 1.23
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand


Ryland Group - RYL - close: 42.29 change: -1.69 stop: 39.95

The homebuilders definitely saw some profit taking today after last week's rally. The strength of the pull back was sharper than we would have expected especially in shares of RYL, which lost over 3.8% today on low volume. Fortunately, we are still on the sidelines waiting for a breakout over resistance near $45.00. We're suggesting a trigger to buy calls on RYL at $45.15. Our short-term target is the $49.90-50.00 range, which might also see resistance at its descending 100-dma. Right now our biggest concern is Toll Brothers (TOL), who is a rival homebuilder and due to report earnings on the morning of August 22nd. TOL's results and their comments could undermine any rally in the builders.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.7 million


Valero - VLO - close: 62.70 change: +0.86 stop: 59.99

Oil stocks bounced today. Crude oil futures rebounded on strong rhetoric coming from Iran, which is saying that it will not give in to U.N. demands to stop enriching uranium. Another potential cause for a spike in oil is tomorrow, August 22nd. There has been some commentary that August 22nd this year is an Islamic holy day and the world might see new acts of terrorism. At this time we do not see any changes from our weekend new play description on VLO. Our target is the $66.00-67.00 range.

Picked on August 20 at $ 61.84
Change since picked: + 0.86
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 9.1 million

Put Updates

Boeing - BA - close: 76.63 change: -0.99 stop: 80.45

Shares of BA continue to slip lower and the stock lost 1.27% today albeit on low volume. The stock is nearing potential technical support at its simple and exponential 200-dma(s). Aggressive traders may want to open positions here while conservative traders might still want to wait for a breakdown under support at $75.00 first. Our target is the $70.50-70.00 range. The P&F chart currently points to a $70 target. FYI: There were a couple of articles out today about former auditors who worked for BA claiming that the company made the 737-model of planes with defective parts between 1994 and 2002.

Picked on August 10 at $ 75.75
Change since picked: + 0.88
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million


Burlington Nor.SantaFe - BNI - cls: 66.07 chg: -2.38 stop: 70.25

One again it looks like the "trend is your friend" maxim works for us. BNI had rallied back toward resistance but the rally failed and the stock lost 3.47% today. Traders might want to use today's decline as a new entry point to buy puts. Our target remains the $62.50-60.00 range. The P&F chart currently points to a $49 target.

Picked on August 08 at $ 68.06
Change since picked: - 1.99
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million


Chipotle Mex Grill - CMG - close: 51.10 chg: -0.71 stop: 54.01

The bounce continues to fade in CMG. Traders can choose to buy puts here or wait for a new decline under the $50.00 mark. We don't see any changes from our weekend update. The Point & Figure chart points to a $39 target. We are targeting a decline into the $45.50-45.00 range.

Picked on August 09 at $ 50.28
Change since picked: + 0.82
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand


Intuitive Surgical - ISRG - cls: 96.43 chg: -0.33 stop: 101.55

We are growing more surprised at ISRG's lack of volatility. The stock has been trading in a narrow range the last few days and the range is getting tighter. That's a sure sign that we should see a breakout relatively soon. The only problem is that the breakout move could go either direction. At this time we're suggesting that traders wait for another decline under $95.00 before considering new put plays. This remains an aggressive, higher-risk play due to ISRG's volatility. Our target is the $87.75-87.50 range. The P&F chart currently points to a $60 target but a move over $101-102 would produce a new buy signal.

Picked on August 10 at $ 94.90
Change since picked: + 1.53
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million


NII Holdings - NIHD - close: 51.02 chg: -0.18 stop: 52.51

NIHD spent most of Friday's session churning sideways and the sideways pattern continued into today. We do not see any changes from our weekend update on NIHD. We would not consider new put positions in NIHD until shares traded back under $49.90 again. The P&F chart is still bearish and points to a $41 target. Our target is the $45.50-45.00 range.

Picked on August 07 at $ 49.90
Change since picked: + 1.12
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million


Transocean Inc. - RIG - cls: 68.33 chg: +0.30 stop: 70.25

New rhetoric out of Iran helped fuel was had already begun as an oversold bounce from support in crude oil. The rebound in oil lifted the oil stocks and RIG added 0.44% but volume came in relatively low. We're not suggesting new put plays at this time. The stock has already hit our conservative target at $65.25. Our secondary, aggressive target is the $61 level. Currently the P&F chart points to a $49 target.

Picked on August 07 at $ 69.49
Change since picked: - 1.30
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles



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