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Daily Newsletter, Wednesday, 08/23/2006

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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

Superseding Inflation Concerns

Often on a Wednesday, crude inventories data supersedes anything said about the housing market, either in the regular Wednesday-morning report by the Mortgage Banker's Association or by a realtor's group. That's particularly true in times when market participants are especially worried about the impact of high energy costs on inflation.

A subtle shift has occurred lately, however. Despite a Fed governor saying yesterday that inflation worries outweigh those about the economy's health, today's housing-related releases impacted markets. An early rally attempt was soon squashed when markets turned lower after the release of the existing home sales data.

Other pressures included Iran's response to yesterday's original deadline and the failure of the energy-related sectors to provide support. This morning, Iran's state-run news agency claimed that the nation would soon take steps to confirm its status as a "nuclear country." This afternoon, the State Department termed Iran's response to the U.N.'s incentives package "far short" of the required one.

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However, some of you familiar with my own take on the markets know that I believe that markets may not be allowed to break too far out of this summer's choppy consolidation zones ahead of the return of the gurus to the big investment firms after Labor Day. That's especially true so far ahead of a definitive take on whether the FOMC will extend its pause or will resume hiking rates. I'm more prone to look for technical signs that the market was ready to pull back within this summer's choppy zone, believing that the data just gave markets a reason for doing what technical analysis said it was likely to do anyway.

Many indices, with the RUT a particular example, had early in the morning approached the top of regression channels they had been forming since the middle of last week. Unless they were going to break to the upside, it time for them to pull back to the bottom of those regression channels. Markets tend to make that test faster and harder than they do the climb through such channels. In fact, the SPX made its drop so fast and hard that it broke through its channel's support. The RUT was to do the same, although it followed rather than led the SPX in that regard.

As happens so often during summertime trading, one formation soon resolved into another, with traders often having reason to regret putting too much trust into any one formation or support or resistance level. By late afternoon, the fall from the day's high had begun to look like falling wedges on many indices. These are bullish rather than bearish formations. If that's what they are, and if those formations have any validity, several indices were breaking out of them to the upside by the close. The SPX was one.

Annotated Daily Chart of the SPX:

When the SPX broke to the upside out of that falling wedge produced today, it rose toward next Keltner resistance on the 15-minute chart, at 1293.10 as of the close. Resistance above that is firmer, at 1294.51 as of the close. Support isn't yet as firm as I would like to see it before I believed that the SPX could get away without retesting that support. It may need to be retested. It was at 1289.62-1290.49 as of the close, with lighter support at 1291.36. All these levels are on 15-minute closes. Keltner lines are also dynamic, so they will shift a bit as the SPX moves. I do like to give you a short-term look at what might happen near the open, however.

As of the close, a rise toward 1294.50 or a dip toward 1289.62-1290.49 looked about equally likely, so there's not a strong prediction. Without a strong decline, however, it looks now as if any dip to that area might serve to firm up support for another attempt to move higher. The 240-minute chart, a usually fairly reliable one for the SPX, suggests that a dip toward 1286 might be possible before a bounce attempt, and we all know about the support near 1280.

Beyond that, it's difficult to make predictions. That's not because I'm loathe to do so, but because summertime chop has chopped up charts, too. Look below the blue 10-sma on that SPX daily chart posted above, and then scan to the left, and you'll see multiple periods of consolidation. You could draw a horizontal line almost anywhere and say that's support and you'd have a point. The firmest support should be found near 1280 and the bottom of the newest rising regression channel, but I'm just not sure it will be tested the next couple of days. If it is, until and unless that support is broken, I would assume for now that it's going to hold.

The Dow also broke through the upper trendline of a falling wedge as it popped higher near the close. This was on an intraday chart. The daily chart shows that it was popping higher after testing one version of trendline support as well as approaching the 10-sma.

Annotated Daily Chart of the Dow:

Which of the mishmash of trendlines and moving averages do you trust here?

The Diamonds (DIA) showed a fairly significant increase in volume when they popped off their low of the day after testing the gap they'd left behind on August 16, but then the push higher was stopped at their former support at about 113.13. That suggested that former support is now resistance, at least for today. Both the Dow and the Diamonds showed bullish price/RSI divergence at today's low, but the pattern of lower lows and lower highs has not been broken. When I see that, I conclude that bulls want to push prices higher, but they haven't yet proven that they can.

Fifteen-minute Keltners show the Dow approaching next resistance at 11,299.74 with stronger resistance above at 11,309.14-11,312.99 as of the close. Support is at 11,282.85. Next support is at 11,265.95-11,269.81 as of the close. These are on 15-minute closes.

Support is not yet firm enough that I can predict that it's been tested enough. Like that on the SPX, it may need to be retested. If so, short-term bulls want that first support to hold. The resistance at 11,309.14-11,312.99 looks firmer, so it's going to require either a strong push or else some continued chopping around to break that up enough for the Dow to maintain pushes above it.

The Nasdaq's 15-minute Keltner chart also showed that overhead resistance, at 2140.10-2140.46 on its Keltner chart, to look slightly stronger than the strongest support, at 2127.72-2130.17, too. Like the Dow and the SPX, the Nasdaq may need to chop around a bit and tighten that support before it can sustain a climb.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's 15-minute Keltner chart is set up like all the others. Support isn't as firm as it might be, so that it's not possible to conclude yet that it's been tested enough. The Nasdaq may, like other indices, need to chop around a bit to tamp those lines down and firm up support. The support may even need to be retested. First resistance approaches at 2135.91 as of the close, with stronger and firmer resistance at 2140.10-2140.46 as of the close. First support is at 2131.81, next at 2130.17, as of the close.

The SOX fell today, retesting its 200-week sma. One negative influence on sentiment came from National Semiconductor. The company slashed its profit target for the first quarter of its fiscal year. Lower shipments contributed to the company's decision to cut that target by 87 percent, with the company pegging shipments for the chips used in mobile phones as being particularly troublesome. CNBC commented that the company kept its estimates of margins the same, helping to support the stock and helping the SOX to tread water once it tested its 200-week moving average. NSM closed higher by 3.50 percent, although it dipped off its closing level in light after-hours trading.

I'm still refining the color setups on the charts I'm using from QuoteTracker, such as this SOX chart, but note that the SOX turned back after a test of the 38.2 percent retracement of its decline off the year's high as well as after it tested that long-term trendline visible here.

Annotated Weekly Chart of the SOX:

The setup on the SOX's 15-minute Keltner chart looks similar to the others I've noted. First resistance is at 433.01 with next resistance at 434.42-435.32. First support is near 432 with next support from 430.28-430.92. The SOX's resistance may be a little less firm than that seen on other charts, and there was certainly pronounced price/RSI bullish divergence as the SOX fell today. However, support is not strong enough to say it's been tested all it's going to be tested, either. The picture just isn't clear.

The RUT looked weaker on the 15-minute Keltner charts than other indices, as it couldn't move past a resistance level at 698.63 on a 15-minute closing basis. The other indices had bounced past that particular channel line, turning it into potential support. Like the other indices, though, the RUT had shown bullish price/RSI divergence, at least on the last two intraday swing lows if not all day long. Resistance looks far weaker on the RUT than on the other indices, with the various resistance lines scattered widely, but the RUT has to get past that first resistance before it can take advantage of those scattered resistance lines, and it hasn't managed to do so.

On the daily chart seen below, the RUT's long drop to horizontal support is visible. That horizontal support is the 19.1 percent retracement of the RUT's climb from its 2002 low into this year's high. That horizontal line also nearly bisects the triangle seen here.

Annotated Daily Chart of the RUT:

The RUT fell hard, but almost all sectors declined after the morning's data. The housing-related data that was the catalyst for the declines from the day's high was the MBAA's weekly mortgage application volume survey. Mortgage application rates declined again, the Mortgage Bankers Association reported at 7:00 this morning. Weekly mortgage application volume survey for the week ending August 18 showed mortgage loan application volume inching up 0.1 percent on a seasonally adjusted basis, but falling 1.2 percent on an unadjusted basis. That volume is 25.1 percent below the year-ago level for the same week. Components were mixed, with the refinance, conventional and government indices climbing but with the purchase index dropping one percent. Four-week moving averages were also mixed, with the market index climbing 1.3 percent and the refinance index increasing by 3.8 percent, but the purchase index dropping 0.4 percent. The average contract interest rate for a fixed-rate thirty-year mortgage dropped to 6.38 percent from its previous 6.54 percent, with points remaining the same.

The National Association of Realtors was also due to report its July sales data this morning, at 10:00, with expectations all over the map. Some expected a gain in sales while others predicted a 0.9-percent drop. Some believed that July's year-over-year median sales price would drop, although others cautioned that this figure doesn't include the value of homes not for sale or on the market but not yet sold, so doesn't mean that house prices are necessarily falling. The DJUSHB, the Dow Jones U.S. Home Construction Index, gapped lower at the open and dropped below Friday's low in anticipation of that report. A 15-minute chart reveals that it gapped lower again when the report was released, then began a slow and painful choppy rise into that last intraday gap. That index was to close lower by 2.89 percent, only a couple of points off its day's low of 590.46.

That drop in existing home sales was deeper than expected, with existing home sales falling 4.1 percent to a seasonally adjusted figure of 6.33 million. That's the lowest number of sales since January 2004, and I don't have to tell you that comparing a summer's sales, when families try to move between school years, to January sales, makes July's drop even more damaging.

Inventories of unsold homes climbed 3.2 percent, with experts calculating that, at the July sales rate, it will take 7.3 months to sell those houses. That's the longest in thirteen years. The realtors' group's chief economist claimed that's the strongest increase in inventories on record. Prices rose 0.9 percent year over year, a weak price growth.

Several articles discussed the regional differences, with boom markets hardest hit. Prices fell year over year in the West and Northeast. Some commentators mention that even previously flat markets are declining.

Others note that low-priced housing markets such as those here in Texas are seeing a pickup. Anecdotally, I know that's true, as a family member who is a realtor in Houston reports getting calls from developers from New York and California every time she posts in Craig's List. One realtor in her office has sold six homes on the same upscale street to a single investor from California. One young relative leases a home bought by a California couple, sight unseen. That's not atypical. A local television station noted yesterday that here in Dallas, there's rising competition from out-of-town investors. Those investors are paying cash for Texas homes, which they can do since homes in Texas are so cheap compared to others across the nation, where housing prices rose quickly enough to give flippers plenty of cash on hand. So, all that real-estate money is rolling out of previous boom markets into the last frontiers left. That may not necessarily be a good thing for the housing market, and particularly not for Texas homebuyers. It reminds me of the period early in 2000 when everyone was playing in the stock market, looking for the next momentum play . . . until momentum switched to the downside.

Crude inventories were released thirty minutes later. Refineries operated at 92.8 percent capacity last week, data confirmed. As the child of a refinery worker growing up in a refinery town, I wonder when plants are going to have time to shut down a unit and do maintenance. Apparently, those refineries were producing gasoline and distillates as fast as possible. Gasoline inventories rose 400,000 barrels, the first time they've risen in five weeks, one article noted. Crude inventories had been expected to dip, and they did, but by a smaller-than-expected 600,000 barrels. Ahead of the winter heating season, distillate supplies climbed 2.3 million barrels.

API figures were different, as they always are, with the API saying that gasoline supplies climbed a heftier 1.3 million barrels and crude supplies dropped a heftier 1.9 million barrels. The API figure for distillates was in line with the Energy Department's figures, at a rise of 2.1 million barrels.

Crude had been dropping ahead of the inventories number (looking at October delivery) and fell more afterwards, dipping to test the August 18 low before initiating a tepid bounce. Crude futures (October contract) closed at $71.76. The XOI and OIX both dropped, too, exacerbating the drop supposedly caused by the housing numbers. The XOI lost 1.45 percent and the OIX, 1.21. Their components provided no support for the SPX, of course.

Most sectors dropped, but not all stocks did, of course. Gateway benefited from a hedge fund's decision to acquire more than ten percent of the company and an offer from its retail operations. It closed higher by 13.37 percent. Rambus Inc. (RMBS) also climbed after a U.S. District Court stayed the final portion of its trial with Hynix, but it gave back a few cents of its 17.7-percent gain after hours.

Today's after-hours reports included those from a number of retailers. Coldwater Creek (CWTR), Chico's (CHS) and Michaels Stores (MIK) were among those reporting. CWTR had gained ahead of its report, and it beat in both EPS and sales.

Also during the after-hours session, Apple Computer (AAPL) reported that it and Creative Technology (CREAF) had reached a broad settlement to their legal disputes. CREAF had recently been awarded a patent and AAPL will pay $100 million for a paid-up license to use that patent. CREAF will repay some of that payment if it can license the patent to other companies. AAPL CEO Steve Jobs said that the settlement would resolve all disputes between the two companies, including several lawsuits. As this report was prepared, AAPL was up four cents in after-hours trading.
Last Thursday, I warned that the volatility indices had reached levels that could portend a rise in those indices and a pullback in the equity indices. Although I warned that these volatility indices are not good market-timing tools, they do sometimes provide us with warnings that help us to make decisions about profit-protecting measures. If you heeded that advice and were in a short-term bullish play, you had profit-protecting plans in place in case there was a pullback, which did occur.

That pullback was accompanied by a jump in the volatility indices, with volatility expanding as it often does on pullbacks. Today ended with the VIX testing the neckline of an inverse head-and-shoulders formation that is visible on the 60-minute chart. The VIX hadn't been able to conclusively break above that neckline and will face Keltner resistance at 13.26-13.53 when it does. This is resistance that's been turning the VIX back since the middle of July, so watch carefully if such a test should occur. Remember that the VIX is not a good market-timing tool, but a stall or rollover in the VIX from that level could signal that it's now time to put plans into place to protect your short-term bearish plays.

That suggests that traders need to be watching for a short-term bounce from resistance or an all-out rollover. Unfortunately, not even the intraday 15-minute charts provided much guidance as to which is likely to occur, although a hint of a bullish setup could just barely be discerned. Whether that tentative bullishness can prevail is yet to be seen, however.

Many of the 15-minute Keltner charts have set up in a similar way. They suggest two possibilities, neither of which may come true, but here they are: a setting up of inverse H&S's that will require a further rise to the incipient neckline, toward 1294-1295 on the SPX, for example, and then a pulling back to test support either at the right shoulder level or all the way to an equal-low test. The rise doesn't have to come first thing but may occur after a slight dip. So, if you feel like hanging your trading hat on a possible bullish formation, not even fully set up much less confirmed, they're there to be found.

Markets are choppy. Unless you're skilled at intraday scalping, it's not a fun environment for those of you options traders whose repertoire mainly consists of call or put buying. It's been a great environment for those types of plays that capitalize on range-bound trading, such as credit spreads. While markets chop around, they're hacking away at the premium on those calls or puts, so the credit-spread people are benefiting while those doing straight call- or put-buying are sometimes seeing their trading accounts being chopped up. When markets become directional again, those of us trading credit spreads are going to be the ones with perspiration on our upper lips, but for now, we've got the better lot out of the various types of options players.

Thursday's economic reports include initial claims for the week ending August 19 and July's advance durable goods, both due at 8:30. Jim reported this weekend that the consensus for the durable goods number is an increase of 0.3 percent, down considerably from the previous 3.1 percent. Midmorning, at 10:00, July's new home sales will be reported, with this week's housing numbers proving important after TOL's earnings report earlier in the week and today's data in the form of existing home sales. Industry analysts predict that new home sales will number 1,110,000, down from the prior 1,131,000. Natural gas inventories will be released at 10:30.

Earnings tomorrow will include those from HRL, JCG, MCDTA, PDCO, SHLO, TTIL and WSM, among others.
 


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: 63.12 change: +0.12 stop: 59.95

AZN continues to resist any serious profit taking attempts. The stock traded sideways on Wednesday in a 50-cent range. Volume came in pretty low. We don't see any changes from our previous updates and we're still suggesting that traders consider waiting for a dip toward $62 or $60 as a new bullish entry point. 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: + 0.13
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Bucyrus - BUCY - close: 48.66 chg: -2.24 stop: 47.69

Bulls may be in serious trouble with BUCY. We told readers to expect a dip towards $51 or $50 and BUCY delivered but we weren't expecting today's 4.4% decline and breakdown under the $50.00 mark. The stock's recent bullish breakout over resistance is now in trouble and the buy signal created by the breakout from its inverse (bullish) H&S pattern is also looking vulnerable. More conservative traders may want to exit now to cut their losses. We're going to stick it out for now since BUCY might still bounce from its six-week trendline of higher lows.

Picked on August 16 at $ 51.87
Change since picked: - 3.21
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 697 thousand

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Cameco - CCJ - close: 40.30 change: -0.03 stop: 37.95

CCJ was strong off the start this morning but the rally faded and shares fell back toward the $40 level. We do not see any changes from our new play description from Tuesday. The chart has various bullish signals. Monday's rally past the $40 level was a bullish breakout over its trendline of resistance. The recent bounce was a bounce from longer-term support on the weekly chart. The P&F chart is bullish and points to a $55 target. We are suggesting call options with CCJ above the $40 mark. Our time frame is four to six weeks and our target is the $44.50-45.00 range.

Picked on August 22 at $ 40.33
Change since picked: - 0.03
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.9 million

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Carpenter Tech - CRS - close: 94.15 chg: -2.19 stop: 94.99

The bullish bottoming pattern in CRS is fading. Today's existing home sales numbers revived worries about a slowing economy. That led shares of CRS to drop back toward its 200-dma. Readers might want to switch directions and buy puts if CRS breaks down under the $90.00 level. If CRS closes under $94 or its 200-dma soon we'll drop it as a bullish candidate. Currently we're suggesting a trigger to buy calls at $100.26.

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

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Cymer Inc. - CYMI - close: 38.97 chg: -0.76 stop: 39.95

Semis are still seeing a pull back after last week's big rally. Shares of CYMI dropped under the $40 level and the pull back is turning the technical picture bearish. Traders might want to switch directions and buy puts if CYMI trades under the $38.00 level, which was support in early August. Right now we're suggesting a trigger at $42.55 to buy calls.

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

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Freeport McMoran - FCX - close: 56.67 chg: -0.23 stop: 52.95

Our new call play in FCX is now open. The stock spiked over short-term resistance at the $57.50 level and hit our trigger to open plays at $57.51. Unfortunately, FCX failed to hold any of its gains and shares were drifting back toward the $56 level by the closing bell. We remain bullish but we're cautious with the failed rally today. More aggressive traders might want to try and catch a bounce from the $55.00-54.00 region. More conservative traders may want to wait for a new relative high over $58.00. Our target is the $62.50-63.00 range. Traders should also note that we do expect some short-term resistance near $60.00 and a retest of the 100-dma, once broken as resistance, should act as support.

Picked on August 23 at $ 57.51
Change since picked: - 0.84
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume = 5.1 million

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Goldman Sachs - GS - close: 152.70 chg: -1.45 stop: 149.40

GS is still consolidating sideways. Unfortunately after the late July gains this consolidation has the technical indicators fading toward bearish signals. Keep an eye on the XBD index, which might bounce from its simple 200-dma. Readers might want to wait for a new move over $155 before considering new call plays in GS. 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: - 2.29
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.3 million

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MicroStrategy - MSTR - close: 90.85 chg: -1.01 stop: 85.99

Shares of MSTR dipped to short-term support near $90.00 and its 10-dma before traders finally bought the dip. Today's move shouldn't be a surprise. We told readers to look for a pull back toward $90. A bounce from here could be used as a new entry point to buy calls but more conservative types may want to wait for a breakout over its 100-dma first (currently near $94). More conservative traders may also want to tighten their stops. Our target is the $98.75-99.00 range.

Picked on August 16 at $ 92.05
Change since picked: - 1.20
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand

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Piper Jaffray - PJC - close: 55.15 change: +0.49 stop: 49.99

There is still no change in PJC. The stock is bouncing around the $54-56 trading range. Traders can try and time an entry point on a dip toward $54.00 or just wait for a breakout over $56.00. Our short-term target is the $59.90-60.00 range.

Picked on August 20 at $ 55.70
Change since picked: - 0.55
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 300 thousand

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Children's Place - PLCE - cls: 56.09 chg: -1.45 stop: 56.95

This is the third down day in a row for PLCE. Shares lost 2.5% and closed under potential technical support at its 10 and 50-dma(s). If PLCE doesn't produce a bounce soon we're going to drop it as a bullish candidate. Currently our plan suggests that readers use a trigger at $60.35 to buy calls. 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

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FreightCar Amer. - RAIL - close: 56.95 chg: -0.49 stop: 53.99

The oversold bounce in the transports and the railroads has failed and now shares of RAIL are starting to succumb to profit taking. Shares closed near the low end of their trading range and the stock closed under its simple 200-dma, which is a negative technical signal. Short-term oscillators are also turning more bearish. More conservative types may want to raise their stops. We're not suggesting new plays at this time unless RAIL suddenly breaks out over the $60 level soon.

Picked on August 20 at $ 59.13
Change since picked: - 2.18
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand

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Ryland Group - RYL - close: 41.29 change: -1.12 stop: 39.95

There is still no change from our previous updates on RYL. The bounce in the homebuilders is fading. Today's data about a big slow down in existing home sales spurred more profit taking in the group. Traders might want to switch directions and buy puts if RYL breaks down under $40.00 or $39.00. At the moment 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.

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

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United Ind. - UIC - close: 51.44 change: +0.17 stop: 47.49

Hmm... traders have a choice to make. UIC pulled back but it did not hit our suggested trigger to buy calls at $50.25. Bulls stepped in around $50.58. Yet at the same time buyers were unable to push the stock past its 100-dma and hold it there. More aggressive traders might want to buy calls now. We're going to stick to our plan with a trigger at $50.25 and a suggested entry range in the $50.25-50.00 region. A dip back toward the 200-dma, just under $50 could also be used as an entry point. If triggered our target is the $54.75-55.00 range. More aggressive traders might want to aim higher. The bullish P&F chart points to a $64 target.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand

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VF Corp. - VFC - close: 68.39 change: -1.64 stop: 68.45

The slow down in home sales brought back fears of a slow down in the economy. This sent shares of VFC lower with a 2.3% decline yet bulls bought the dip near its 40-dma just under $68 and the afternoon bounce pared its losses. We are waiting for a breakout over resistance at $70.00. We are suggesting a trigger to buy calls at $70.25. If triggered we're targeting a short-term rally into the $74.00-75.00 range. More aggressive traders may want to aim higher.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 567 thousand

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Valero - VLO - close: 61.78 change: -1.67 stop: 59.99

An unexpected rise in fuel inventories sent shares of VLO lower. The stock produced a failed rally under its 10-dma and shares closed with a 2.6% loss. More conservative traders might just want to exit right now to cut any losses in the bud. We still suspect that the nuclear-Iran issue will keep oil prices strong, which should filter into the oil stocks. A bounce back over $62.00 or $62.50 could be used a new entry point. Our target is the $66.00-67.00 range.

Picked on August 20 at $ 61.84
Change since picked: - 0.06
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 9.1 million
 

Put Updates

Boeing - BA - close: 76.36 change: -0.59 stop: 80.45

BA isn't making in big moves but the stock is still trending lower and today's decline is a technical breakdown under its 200-dma. More conservative traders may still want to wait for a breakdown under the $75.00 mark before buying new put positions. Our target is the $70.50-70.00 range. The P&F chart currently points to a $70 target.

Picked on August 10 at $ 75.75
Change since picked: + 0.61
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

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Burlington Nor.SantaFe - BNI - cls: 65.89 chg: -0.80 stop: 70.25

BNI is still trading inside its bearish channel and today's failed rally at $67.50 looks like 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: - 2.17
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Chipotle Mex Grill - CMG - close: 50.16 chg: -0.42 stop: 54.01

CMG is still flirting with a breakdown under the $50.00 level but after five days of declines the stock might be ready for a bounce. Look for a move under today's low (49.70) before considering new plays. 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: - 0.12
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand

---

Intuitive Surgical - ISRG - cls: 91.90 chg: -2.74 stop: 101.55

ISRG is showing relative weakness with a 2.89% decline following yesterday's breakdown under the $95 level. The stock is trading in a pivotal area near support in the $92-91 region. A breakdown from here and we should be clear for a drop into the mid-80s. However, we wouldn't be surprised by a bounce back toward the $95 region. Remember that this is an aggressive, higher-risk play due to ISRG's volatility. Our target is the $87.75-87.50 range.

Picked on August 10 at $ 94.90
Change since picked: - 3.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Johnson Controls - JCI - close: 71.99 chg: -0.97 stop: 76.51

JCI continued to breakdown and shares hit a new five-week low on Wednesday. We do not see any changes from our new play description published on Tuesday night. Technicals have turned bearish and the P&F chart has produced a triple-bottom breakdown sell signal. Currently the P&F target is at $67 but that number could fall further. We are suggesting puts with JCI under $74.00. Our target is the $68.50-67.50 range.

Picked on August 22 at $ 72.96
Change since picked: - 0.97
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

NII Holdings - NIHD - close: 51.12 chg: -0.06 stop: 52.51

There is no change from our previous updates on NIHD. The stock is still consolidating sideways in the $50-52 range. We'd probably wait for a new decline under $49.90 before considering new put plays. The P&F chart is 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: + 1.21
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million

---

Transocean Inc. - RIG - cls: 67.04 chg: -1.50 stop: 70.25

Oil stocks were unable to avoid today's market-wide sell-off. Shares of RIG posted a 2.1% decline and the stock almost produced a new bearish engulfing candlestick pattern. This might be a new entry point to buy puts. 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: - 2.59
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Market 'Sentiment'

I got the following note from one of our Option Investor Subscriber:

"Sorry that your email box was empty. Sooo, I'll give you some topics:
1.) Market Sentiment. What should we be watching to determine short and mid-term trends?
2.) Point and figure charting essentials. Since the Market Wrap uses these and some people (like me) were not trained in their use, maybe you could discuss this.
3.) The Trading Day. How and when to trade.
4.) E-Minis vs ETF/Index Trading. Advantages and disadvantages. Ex QQQQ vs MNX."

Some of these are bigger topics than others and I would need some clarification or more specifics on item 3 as to how and when to trade; this question or topic is perhaps too general. The others not so.

I have written a lot on what I use as my principle 'sentiment' indicator, but can not only look again at that information in this column, but survey what else is out there that is a measure of the bullish or bearish outlook for market participants. On Point and Figure (P&F) charting, I would note that Jeff Bailey is our resident expert on P&F charts and their use. However, I can cover the basics of this form of charting next time. One other note on my most recent Index Trader column, then on to a look at market sentiment surveys.

MY INDEX TRADER COLUMN:
I write this on the weekend and my 'Index Trader' section with these articles is seen only on the Option Investor web site. The weekend Option Investor Daily (e-mail) newsletter usually has a web LINK to this article (not the case this past Saturday due me not writing my article until Sunday). The online Index Trader section can be bookmarked after clicking here.

TYPO: I noted in my last (8/19) Index Trader that possible next upside S&P 500 (SPX) objectives seemed promising for a retest of the prior high at 1227 or a new high around 1235. The figures were right on the chart at 1327 and 1335, but wrong in the text of course; today's SPX close: 1280.

MARKET SENTIMENT: SURVEYS AND OTHER METHODS

Charles Dow was the first widely reported market observer of the phenomena that by the time the majority or vast majority of market participants were bullish or bearish on the market, or on a stock, it was often near the end of a move. From Dow's time on, much has been written on market psychology and the tendency for a widely known market outlook or bullish or bearish market 'sentiment, to be wrong.

It was a the people who were in early in price trends that profited the most from going against the prevailing sentiment. The 'theory of contrary opinion' flat out stated that opinion contrary to the majority was valuable and being in the majority was the least likely to line your pockets in the Street of Dreams. The theory of contrary opinion is what market sentiment surveys rely on. Once 7, 8 or 9 out of 10 investors and traders are convinced that the market will continue to go up or down, it may not be AT the end of a move, but it may well be NEAR at hand. The late-90's bull market was a case in point.

I had people chase me down from my perch at Cantor Fitzgerald to denounce my 'traitorous' attitude when I dared to say that the emperor had no clothes. This was when I said that when these market moves go straight up, in a kind of parabolic 'arc', it is near the end and these situations always end the same, with a collapse in prices.

The widely known ways of measuring market sentiment was through the use of market surveys and, in the options era, the ratio of put volume to call volume or the put-call ratio. If daily put or call volume numbers got to be a bigger and bigger percentage of the total option volume, it was suggesting a contrary trend reversal ahead. If investor and trader surveys started reflecting that 80% were bullish on the market outlook in the coming week or month, look out below.

MARKET SENTIMENT SURVEYS:
The Investor's Intelligence Survey polls publishers or writers of market letters and does this sampling weekly, with an outlook for the next 1-2 weeks. The results are sent to subscribers and are not weighted.

There is also the AAII (American Association of Individual Investors) survey. Opinion is solicited daily of the membership and has an outlook of 6 months; the results are sent to the AAII membership.

There is a survey called the Van Hedge Fund, which is a monthly survey of hedge fund managers, looking out the next month, with the results sent out to the press.

Another private survey of fund managers, investors and traders called the Stock Market Sentiment Survey of the Group of 100 (G100) has a weighting system and is done daily, with an outlook for the next trading session; results are sent to the respondents only. Some opinions weigh more than others and daily e-mails are sent in form the respondents as to their having a bullish, bearish or neutral outlook for the next trading day.

PROBLEMS with these market surveys include:
1. They're not readily available to all.
2. They are hard to quantify as to how much bullishness is bearish (contrary opinion) and vice versa
3. Less useful to option traders. As an investor I can be warned off from overweighting stocks in my portfolio if over weeks and months I see steadily rising bullishness, but when do I exit calls exactly? A growing bearishness doesn't define or refine the right time for me to get into index calls.

OPTION VOLUME RATIOS:
The 'standard' measure is the daily put-call reading or ratio, or the ratio of total put volume to call volume, usually for all options exchanges together. [A measure of market 'sentiment' I use is by examining the daily volume of call volume to daily put volume on the CBOE for equities options only.]

In the put/call ratio, the put volume total on any given day for both (individual) equities AND index options is compared to total call volume and is usually a fractional number; e.g., .75, indicating that put volume was 75% of call volume. If the put/call reading was 1.00, put volume equaled call volume that day which doesn't happen all that often. You can check this number easily, such as on CBOE web site (www.cboe.com) or in charting programs like Q-Charts; the symbol was "QC:PUTCALL" when I was using that application. This wide availability overcomes the problem of the limited availability of the market surveys.

WHY USE OPTION VOLUME RATIOS?
When put volume gets quite high, such as being equal to call volume, traders are getting very bearish. And, traders are 'closest' to the market so to speak, day in and day out. If in the case of a put volume being quite high relative to call volume, the market may be at or approaching an extreme. Too many traders on one side of the market often suggests that the downside, or upside, may be fully exploited and the trend about to reverse.

How bullish or bearish option traders are is best shown by where they are putting their money; more into calls or into puts and what is the trend of that. Of course, selling calls should not be considered an outright refection of bullishness, just as selling puts can be a bullish play. Nevertheless, the majority of option traders are betting on market direction, so call volume goes up on rally phases and put volume increases substantially in declining markets.

PUT/CALL RATIO - THE CONVENTIONAL WAY
When put/call ratios have gotten down to the .40 to .45 area, this is seen to mark a bullish extreme and caution is indicated as to the FURTHER prospects for much more of a rise. When put/call ratios have gone to or above about .90, this is considered to be a sign that there is excessive put buying and bearishness, which may signal an upcoming reversal.

The put-call indicator tends to be EARLY and well ahead in 'signaling' a possible trend change. Buy or sell points are often in fact 1 to as many as 5-6 trading days ahead of an actual top or bottom.

A factor that can make the standard put/call measure tricky is the effect of index calls and index puts in the total option volume figures. There is a lot of hedging by money managers and hedge funds that goes on and this can be related more o that (hedging) than simply how individual traders see the market.

As many of you know, I have found it useful to keep up my own way of measuring option volume numbers. For example, I only look at daily EQUITIES option volume numbers. I tend to get a more pure measure of bullish or bearish trader 'sentiment' this way, when I exclude the INDEX options volume figures.

I also like to divide total call volume by put volume, not the reverse. This way I have an indicator that is like the other overbought/oversold indicators such as Stochastics and RSI. A LOW number is suggesting a possible 'oversold' market and a high reading is suggesting an 'overbought' situation. I also simply my indicator by just using the CBOE daily volume numbers.

I keep my call/put ratio, plotted under the OEX chart below, by being able to put a 'custom' data item into my TradeStation software. There are other ways of doing it also, such as in Excel. I used to plot it my hand even and graph it that way. As with prices, we want to see the TREND with this indicator.

The chart is somewhat self explanatory, with daily extremes in the call/put ratio relative to the lines suggesting what the extremes are, similar to RSI 70/30 lines suggesting overbought or oversold.

In 5 of the 6 instances noted below with the red down arrows or the green up arrows, the call/put extremes in my indicator were 1-5 days ahead of tradable tops or bottoms in the market. One bearish extreme led the next market bottom by 8 trading sessions, well ahead of what occurred after the other extremes in this indicator.

With the 'normal' lag time after extremes, before tops and bottoms in the index follow, you obviously can't rely on something like this alone. Used with the chart pattern, such as when trendlines are pierced and other indicators suggesting overbought or oversold conditions (e.g., RSI), this indicator is quite useful as one trading input.

The key to the readings of this indicator is, and you'll notice, that readings at or above about 2.1-2.2 have tended to mark at least temporary tops and those have occurred within one to a few days. I also do look at a 5-day moving average of the call to put equities option ratio, which is the magenta line, but I rely on single one day numbers at the extremes and don't wait for a moving average confirmation.

We don't often see these extreme readings, but when they do, it's like saying "ready, get set, go" time to be watchful for a trend reversal in the coming day or up to about 5 trading sessions or a week.

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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