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Daily Newsletter, Saturday, 08/26/2006

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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

Market Wrap


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ANDEAZONone
 CYT 
 RDN 

New Calls

The Andersons - ANDE - close: 39.48 chg: +0.54 stop: 37.49

Company Description:
The Andersons, Inc. is a diversified company with interests in the grain & ethanol and plant nutrient sectors of U.S. agriculture, as well as in railcar leasing, industrial products formulation, turf products production, and general merchandise retailing. Founded in Maumee, Ohio, in 1947, the company now has operations in seven U.S. states plus rail equipment leasing interests in Canada and Mexico. (source: company press release or website)

Why We Like It:
Shares of ANDE caught our eye on Wednesday with the bullish breakout over its simple 50-dma and the big spike in volume. The move also appears to be a breakout above its four-month trendline of resistance (see chart). The stock continued to drift higher this past week while most of the market was drifting flat to down. Bigger picture chart readers will notice that ANDE is bouncing from technical support at its 200-dma. Meanwhile the P&F chart, while bearish, is also bouncing from support and the recent sell signal may have been a bear trap. ANDE now looks poised to breakout over resistance at the $40.00 level. We are suggesting a trigger to buy calls at $40.25. If triggered our target is the $44.50-45.00 range.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 35.00 AQA-JG open interest= 11 current ask $6.30
BUY CALL OCT 40.00 AQA-JH open interest=203 current ask $3.10

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 900 thousand
 

New Puts

AutoZone - AZO - close: 87.21 change: +0.81 stop: 89.05

Company Description:
As of May 6, 2006, AutoZone sells auto and light truck parts, chemicals and accessories through 3,699 AutoZone stores in the United States and 92 AutoZone stores in Mexico and also sells the ALLDATA brand automotive diagnostic and repair software. (source: company press release or website)

Why We Like It:
It's back! We tried playing AZO as a put candidate a couple of weeks ago but there was no follow through to the downside. Now the stock has produced a bearish double-top pattern near resistance around the $90 level and shares are seeing new selling pressure. Friday the stock did bounce from its August low near $86.00 but we think it's temporary. Most of the technical indicators are bearish and the P&F chart points to a $72 target. We are suggesting a trigger to buy puts at $85.85. Our target is the $81.00-80.00 range. FYI: More aggressive traders might want to consider new put positions right here or anywhere under $89.

Suggested Options:
We are suggesting the October puts but we do not want to hold over AZO's late September earnings report.

BUY PUT OCT 90.00 AZO-VR open interest=139 current ask $4.80
BUY PUT OCT 85.00 AZO-VQ open interest= 74 current ask $2.35

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 663 thousand

---

Cytec Ind. - CYT - close: 50.24 change: -0.54 stop: 52.05

Company Description:
Cytec Industries Inc. is a global specialty chemicals and materials company focused on developing, manufacturing and selling value-added products with pro forma sales in 2005 of approximately $3.2 billion. (source: company press release or website)

Why We Like It:
The sideways consolidation in CYT over the last three months appears to be nearing an end. The stock has a short-term bearish trend of lower highs and earlier this month shares broke down under technical support at the 200-dma. Now the stock is clinging to round-number support at the $50.00 level. The Point & Figure chart is already bearish with a $42.00 target. Should CYT trade under $50 it should produce a new triple-bottom breakdown sell signal. We are suggesting a trigger to buy puts at $49.75. If triggered our target is the $45.50-45.00 range. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October puts.

BUY PUT OCT 55.00 CYT-VK open interest= 37 current ask $5.10
BUY PUT OCT 50.00 CYT-VJ open interest=130 current ask $1.75
BUY PUT OCT 45.00 CYT-VI open interest= 0 current ask $0.50

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 241 thousand

---

Radian Group - RDN - close: 59.63 chg: -1.65 stop: 61.51

Company Description:
Radian Group Inc. is a global credit risk management company headquartered in Philadelphia with significant operations in both New York and London. Radian develops innovative financial solutions by applying its core mortgage credit risk expertise and structured finance capabilities to the credit enhancement needs of the capital markets worldwide, primarily through credit insurance products. (source: company press release or website)

Why We Like It:
On your mark. Get set. Go! Shares of RDN have essentially traded sideways, albeit in a wide range, over the last several months. This consolidation and what appears to be a bearish double-top pattern follows a significant rally from its October 2005 lows. We didn't see any specific news to account for the move but Friday saw RDN lose 2.69% on above average volume. Friday's decline was also a breakdown below round-number support at $60.00 and technical support at its three-month trendline of higher lows. Friday's decline looks like the entry point to buy puts. However, RDN does have potential technical support at its rising 200-dma currently at 59.40. Therefore we're suggesting a trigger to buy puts at $58.99. If triggered our target is the $55.15-55.00 range. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October puts although Novembers would also work well.

BUY PUT OCT 65.00 RDN-VM open interest= 0 current ask $5.90
BUY PUT OCT 60.00 RDN-VL open interest= 0 current ask $2.55
BUY PUT OCT 55.00 RDN-VK open interest= 0 current ask $1.05

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 722 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

AstraZeneca - AZN - close: 63.22 change: +0.20 stop: 59.95

The U.S. markets spent last week digesting the previous week's gains with a flat to down consolidation. That left shares of AZN, a stock that's been showing a good amount of relative strength, to churn sideways in a $1.00 range for all of last week. We remain bullish on AZN and would still consider buying calls right here near $63.00. However, another attractive entry point would be to buy a dip near $62.00, which as broken resistance should now act as short-term support. Our target is the $68.00-69.00 range but our time frame is mid-October.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 60.00 AZN-JL open interest=1344 current ask $4.70
BUY CALL OCT 65.00 AZN-JM open interest=1901 current ask $1.70

Picked on August 20 at $ 62.99
Change since picked: + 0.23
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Cameco - CCJ - close: 39.19 change: -0.05 stop: 37.95

We remain on the defensive with CCJ. Long-term oil prices will continue to rise and this will push more and more countries to invest in nuclear-powered forms of energy. That puts CCJ, a major supplier of uranium, into a strong position. Unfortunately, the (short-term) bullish breakout on August 21st, where CCJ pushed through resistance at its 100-dma, the $40.00 mark and its three-month trendline of resistance, has reversed on us. Thus we're not suggesting new bullish positions at this time. We would wait for a move back above the $40.00 level and preferably above $40.50. The Point & Figure chart is still bullish with a $55 target. More conservative traders may want to consider tightening their stops toward the $39 level. Our target is the $44.50-45.00 range.

Suggested Options:
We're not suggesting new positions in CCJ with the stock under $40.00 but if shares move higher we'd choose the October calls.

Picked on August 22 at $ 40.33
Change since picked: - 1.14
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.9 million

---

Cymer Inc. - CYMI - close: 39.28 chg: +0.16 stop: 39.95

We saw the August 14-17th rally in semiconductors as not just a bullish breakout above multiple levels of resistance but also as a potential trend change in the sector. Unfortunately, the group spent all of last week digesting those gains. In a similar fashion shares of CYMI have consolidated lower. It was our plan to catch a bullish breakout in CYMI above the 50-dma and the mid August high in an effort to ride the next leg higher. So far that breakout has failed to materialize. Instead the trading in CYMI has looked like a failed rally at resistance and more of an entry point for bearish (put) plays. The short-term technical picture on CYMI has definitely deteriorated. Currently we have a suggested trigger to buy calls at $42.55, which is above the 50-dma, above the exponential 200-dma and the August 17th high. However, now we are proposing that traders remain nimble and consider buying puts if CYMI breaks down under support at the $38.00 level. More specifically we're setting a trigger to buy puts at $37.74. If triggered at $37.74 we'll target a decline into the $33.00-32.50 range. If CYMI breaks down we'll use a stop at $40.51 for our put play.

Suggested Options:
We have a bullish trigger to buy calls at $42.55 and a bearish trigger to buy puts at $37.74. In either case we would play the October or November strikes.

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

---

Freeport McMoran - FCX - close: 57.40 chg: +0.76 stop: 53.95*new*

The market's consolidation last week also left shares of FCX to churn sideways in a narrow $2.00 range. Fortunately, the pattern remains bullish with FCX bouncing near the $56 level and its simple 200-dma. The stock's P&F chart also looks bullish with a breakout over resistance and a $76 price target. We are suggesting calls with FCX above the $56.00 level although more conservative types may want to wait for a breakout over short-term resistance at $58.00 before initiating plays. Please note that we're also raising our stop loss to $53.95. More conservative traders might want to use an even tighter stop. 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. FYI: As the August 31st U.N. deadline for Iran approaches we would expect gold futures to rise and that could benefit shares of FCX.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 55.00 FCX-JK open interest= 311 current ask $4.70
BUY CALL OCT 60.00 FCX-JL open interest=1441 current ask $2.30

Picked on August 23 at $ 57.51
Change since picked: - 0.11
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume = 5.1 million

---

Goldman Sachs - GS - close: 150.07 chg: -1.33 stop: 149.40

Our bullish call play in GS is in trouble. The XBD broker-dealer index managed to breakout past its 100-dma in mid August but the sector index failed to breakout over resistance at the 220 level. That failed rally has grown into a six-day downturn and now the XBD is under several significant moving averages and its MACD has produced a new sell signal. GS has followed suit with a pull back toward support at $150 and its 50-dma near $149. The MACD on GS' daily chart has also produced a new sell signal. Right now, given the short-term trend in GS, odds are that we will be stopped out but since the stock is currently clinging to the $150 level for now we're not going to abandon the play just yet. We are not suggesting new bullish positions.

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

Picked on August 16 at $154.99
Change since picked: - 4.92
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.3 million

---

MicroStrategy - MSTR - close: 90.05 chg: -0.93 stop: 87.40*new*

Traders need to turn defensive with our bullish play on MSTR. The stock's upward momentum has stalled. Just as the major market indices consolidated flat to down last week so did MSTR and shares of the volatile stock are clinging to the $90.00 level and its four-week trend of higher lows. The technical picture is suggesting that MSTR is nearing a breakdown and shares could fall back into its bearish pattern. Thus we are not suggesting new plays and to reduce our risk we're raising our stop loss to $87.40, which is under potential support at the exponential 200-dma and the 50-dma. More conservative traders might want to use a tighter stop loss. Currently our target is the $98.75-99.00 range.

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

Picked on August 16 at $ 92.05
Change since picked: - 2.00
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand

---

Piper Jaffray - PJC - close: 53.60 change: +0.54 stop: 51.65*new*

PJC is suffering from weakness in the broker-dealer sector. The stock was actually holding on to its gains until Thursday. On Thursday the XBD index broke down under its 200-dma and PJC followed with a drop below its 50-dma and a breakdown under its multi-day trading range. Overall we still suspect that the stock has produced a significant bottom with the double-bottom pattern over the July-August time frame. However, current weakness in the sector during what is traditionally a week time period for stocks puts us on the defensive. Aggressive traders may want to keep their stop loss under round-number support at $50.00. We're going to adjust our stop to $51.65, which is under the 200-dma and under the top of the gap from mid August. Traders might want to watch for a bounce from the $52 region as a new entry point but at the moment we're hesitant to suggest new plays.

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

Picked on August 20 at $ 55.70
Change since picked: - 2.10
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 300 thousand

---

FreightCar Amer. - RAIL - close: 55.90 chg: -0.40 stop: 53.99

Our bullish play in RAIL could be in trouble. The Transportation index traded lower last week in part due to a rise in crude oil futures and worries over a slowing economy. Shares of RAIL spent the week consolidating lower and eventually broke down under its 10-dma and 200-dma. The technical indicators have also grown more bearish. Traders might want to consider buying a bounce near the $55.00 level but right now we'd wait for a new move over its simple 100-dma near $58.00. We did notice that RAIL under performed the railroad index on Friday. The DJUSRR index has been trading in a bearish pattern of lower highs but it managed to bounce from support near the 340 level. We'll be turning bearish on the sector if the DJUSRR trades under 340. Meanwhile the P&F chart for RAIL is still bullish and points to a $79 target. Our target for RAIL is the $64.50-65.00 range but we do anticipate some resistance near $60.

Suggested Options:
We're not suggesting new plays in RAIL at this time. Wait for a move over the 100-dma.

Picked on August 20 at $ 59.13
Change since picked: - 3.23
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand

---

Ryland Group - RYL - close: 43.84 change: +1.42 stop: 39.95

Housing stocks generally trended lower this past week as investors reacted to some dismal sales and inventory numbers. Yet on Friday shares of TOL and RYL were out performing the group. RYL was the real leader with a 3.3% rally on above average volume. We could not find any news or catalyst to explain this bullish move in RYL. Currently we're still on the sidelines with a plan to open plays on a breakout over resistance at $45.00. Our trigger to buy calls is at $45.15. Our short-term target is the $49.50-50.00 range, which is a slight adjustment from our original target. Watch out for potential resistance at the descending 100-dma near $50.

Suggested Options:
If triggered at $45.15 we're suggesting the October calls.

BUY CALL OCT 42.50 RYL-JV open interest=1366 current ask $4.00
BUY CALL OCT 45.00 RYL-JI open interest=1446 current ask $2.70
BUY CALL OCT 47.50 RYL-JW open interest= 254 current ask $1.70
BUY CALL OCT 50.00 RYL-JJ open interest=1985 current ask $1.10

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

---

United Ind. - UIC - close: 51.77 change: +1.02 stop: 47.49

We are changing our entry strategy on UIC. The last three days we've been waiting with a trigger to buy calls at $50.25. It was our plan to buy a dip near the $50.00 level. However, for the last three days traders have been buying the dip near $50.50 and now the stock, with Friday's rally, has cleared technical resistance at the simple 100-dma. We are going to suggest that traders buy calls now. More patient investors may still want to wait for a pull back toward $50 and/or its simple 200-dma near 49.40. We will continue to target the $54.75-55.00 range but we're also adding a secondary target at $57.50. We would suggest selling half or more of your position at the first target and the rest at $57.50. The P&F chart points to a $64 target.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 50.00 UIC-JJ open interest= 30 current ask $4.80
BUY CALL OCT 55.00 UIC-JK open interest= 48 current ask $2.30

Picked on August 27 at $ 51.77
Change since picked: + 0.00
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand

---

VF Corp. - VFC - close: 67.76 change: -0.63 stop: 68.45

The pull back in VFC this past week has weakened the stock's technical picture. Some of the weekly indicators have taken a turn for the worse. Short-term technicals are also bearish but the selling stalled at VFC's rising 50-dma. We're still sitting on the sidelines since it was our plan to buy calls on a breakout over resistance near $70.00. We're going to stock to that plan for now with a trigger at $70.25 to open play. However, if VFC closes under the 50-dma we'll probably drop the stock as a bullish candidate. If triggered we're targeting a short-term rally into the $74.00-75.00 range. More aggressive traders may want to aim higher since the P&F chart points toward a $99 target.

Suggested Options:
We're not suggesting new plays with VFC under $70.00. See play for details.

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

---

Valero - VLO - close: 62.40 change: -0.17 stop: 59.99

Like most of the market the oil sectors spent most of last week consolidating sideways. Shares of VLO just did it in slightly more volatile fashion. The stock is struggling to see any real follow through higher on the bounce from support near $60.00. Friday's action looks like another failed rally so we're not suggesting new put plays at this time. The upcoming August 31st U.N. deadline for Iran could push oil higher so we're not yet willing to abandon this play. Our target is the $66.00-67.00 range.

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

Picked on August 20 at $ 61.84
Change since picked: + 0.56
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 9.1 million
 

Put Updates

Boeing - BA - close: 73.93 change: -1.31 stop: 78.05*new*

We are finally seeing the breakdown in BA. The stock's drop under support at the $75.00 level was another entry point to buy puts. Further validating the move was just over average volume for BA, which is a feat on the lowest volume day of the year. We are adjusting the stop loss to $78.05 although more conservative traders might want to use a tighter stop loss. The P&F chart still points to a $70 target and that lines up with our target in the $70.50-70.00 range. FYI: A bounce back toward $75.00, which as broken support should be new resistance, could be used as another entry point.

Suggested Options:
We are suggesting the October puts.

BUY PUT OCT 75.00 BA-VO open interest=393 current ask $3.20
BUY PUT OCT 72.50 BA-VV open interest=692 current ask $2.00
BUY PUT OCT 70.00 BA-VN open interest=310 current ask $1.25

Picked on August 10 at $ 75.75
Change since picked: - 1.82
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Burlington Nor.SantaFe - BNI - cls: 66.06 chg: +0.86 stop: 70.25

On Friday shares of BNI produced a 1.3% oversold bounce, which matches the 1.3% rebound in the Dow Jones railroad index. The index and BNI are trading in similar bearish patterns with lower highs and both are bouncing from support. We remain bearish on BNI but we're not suggesting new positions at this time. More conservative traders might want to tighten their stops. Our target remains the $62.50-60.00 range. The P&F chart currently points to a $49 target.

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

Picked on August 08 at $ 68.06
Change since picked: - 2.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million

---

Chipotle Mex Grill - CMG - close: 48.90 chg: -0.27 stop: 52.55*new*

We are encouraged by CMG's relative weakness (down seven days in a row) we're starting to worry that shares are oversold and due for a bounce. It is for this reason we're not suggesting new plays at the moment. The good news is that CMG's weakness has produced a new sell signal on the daily MACD and some of the weekly indicators. The Point & Figure chart points to a $39 target. We are targeting a decline into the $45.50-45.00 range. Please note that we are adjusting our stop loss to $52.55.

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

Picked on August 09 at $ 50.28
Change since picked: - 1.38
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand

---

Intuitive Surgical - ISRG - cls: 92.10 chg: -1.90 stop: 97.75*new*

ISRG is living up to its label as a volatile stock. Friday saw shares reverse Thursday's gain. The failed rally under $95 looks like another entry point to buy puts. Yet if you missed it we would not suggest new plays at the moment. The overall pattern of lower highs is bearish but ISRG is still finding support in the $90-92 region. The Point & Figure chart is bearish and points to a $60 target. We are only aiming for a decline into the $87.75-87.50 range. Please note that we're adjusting the stop loss to $97.75.

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

Picked on August 10 at $ 94.90
Change since picked: - 2.97
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Johnson Controls - JCI - close: 70.92 chg: -0.17 stop: 75.51*new*

We warned readers to watch for a bounce from the $70.00 level and JCI delivered one on Friday. Shares hit a new monthly low before traders bought the dip. We remain bearish but JCI is looking oversold and due for a bounce after six declines in a row. Watch for a failed rally in the $73-74 region as a new entry point to buy puts. We're not suggesting new plays at this time. Our target is the $68.50-67.50 range. The P&F chart, with its triple-bottom breakdown sell signal, points to a $61 target. Please note that we're adjusting the stop loss to $75.51.

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

Picked on August 22 at $ 72.96
Change since picked: - 2.04
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Transocean Inc. - RIG - cls: 68.96 chg: +1.16 stop: 70.25

RIG is nearing the moment of truth. We've been warning readers for several days now that the stock would probably produce an oversold bounce back toward the $70.00 region. The $70.00 level (actually 70.75) is broken support and should now act as overhead resistance. More aggressive traders might want to put their stop above the $70.75 mark. We're going to keep ours at $70.25 wit the expectation that the $70.00 mark will act as round-number, psychological resistance. We are not suggesting new plays at this time although a failed rally under $70 could be used as an entry point. 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.

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

Picked on August 07 at $ 69.49
Change since picked: - 0.53
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million
 

Strangle Updates

None
 

Dropped Calls

Children's Place - PLCE - cls: 55.13 chg: +0.20 stop: 56.95

PLCE tried to produce an oversold bounce on Friday morning but it failed near Thursday's high. This lack of strength contributed to the daily chart's MACD producing a new sell signal. We had a trigger to buy calls at $60.35 but PLCE never hit it so we're dropping this play unopened.

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
 

Dropped Puts

NII Holdings - NIHD - close: 51.72 chg: +0.54 stop: 52.51

We are going to throw in the towel and exit early with our NIHD put play. The stock has been trading sideways in the $50.50-52.50 range for over a week. Some of the short-term technical indicators are suggesting that the next move might be higher. While we are exiting the play we'd still keep an eye on NIHD for a breakdown under $50 or a move over $53 as potential entry points.

Picked on August 07 at $ 49.90
Change since picked: + 1.82
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 2.2 million
 

Dropped Strangles

None
 


Trader's Corner

Determining Support and Resistance: As Much Art as Science

Buy low and sell high, the television ad proclaims, but where are "low" and "high" located? That would be at support and resistance.

Some of us aren't buying low or selling high: we're trading condors or other combination plays, and we want indices or stocks to stay in a certain range. We want to establish the bull put and bear call credit spread components far enough away from the action that prices will stay away from them. That would be just the other side of important support or resistance.

Whatever we're doing as traders, we need to know where support and resistance lie.

Although other articles have dealt with locating support and resistance, including some of the weekend Trader's Corner articles, it's a subject that should be reviewed periodically. Even experienced traders sometimes like to look over the shoulder of another trader, as traders watch slightly different indicators. The list of indicators or tools that I watch most often include moving averages, trendlines, Fibonacci retracements, regression channels, nested Keltner channels and Average True Range (ATR).

Although I originally thought I could delve into all these in a single article, including charts will lengthen it so that the sub-topics need to be divided into separate articles. This one will discuss moving averages. Here's a chart that illustrates how key a moving average can be in pinpointing support. Since this article was prepared a week or two before publication, the charts do not reflect current prices.

Annotated Weekly Chart of the SPX:

Moving averages can serve as resistance just as effectively as they do as support, particularly in a declining market environment.

Most traders watch moving averages, but it's surprising how different the preferred averages might be from trader to trader. The moving average displayed above is the 72-week exponential moving average. That's not a commonly watched average, but anyone who reads my articles or studies my charts will soon learn that it's a moving average that I prefer to watch. Scanning that chart seen above reveals my obvious reasons for watching this average. It's surprising how often it provides support or resistance on weekly closes. In fact, I watch the 72-ema on the daily chart, too.

Annotated Daily Chart of the SPX:

If different traders look at different moving averages, and certain moving averages lose their relevance from time to time, how does a trader confirm that a moving average is an appropriate support or resistance line? The action pointed out in the charts above serves as fair confirmation, all by itself. When you see prices repeatedly bouncing from a moving average in an uptrend or bouncing back from one in a downtrend, that average has been serving as support or resistance. However, adding a bottom indicator, such as MACD, CCI, stochastics or my own favorite, RSI, can help confirm that that support or resistance. Let's look at the first chart again to see how RSI worked to confirm the weekly 72-ema's importance.

Annotated Weekly Chart of the SPX:

The SPX's rally stumbled this summer, repeatedly piercing the weekly 72-ema, with RSI confirming a possible loss of support. The rally got to its feet again, but bulls were alerted to be careful and to have their profit-protecting plans in place. A trend change has not yet occurred: the SPX did, after all, bounce again from that average. However, bulls have been warned to be watchful as the long-term moving-average support doesn't look as inviolable as it did earlier. Leading into this summer, however, for several years, RSI confirmed the importance of the weekly 72-ema in providing support throughout 2004 and 2005.

The averages on these charts are 72-ema's or 72-period exponential moving averages. Most traders probably understand that moving averages come in two varieties, but for those who might be new to technical analysis the two types are simple moving averages and exponential moving averages. Simple moving averages give equal weight to all the periods used in computing the averages. They're the kind of averages you used to calculate in fourth grade. For example, if a 50-day moving average is employed, each day's results in that 50-day period is added to the sum once before that sum is divided by 50. Each day's activity carries an equal weight in calculating the average. When an exponential moving average is employed, more weight is given to the more recent action. So, if there's been a big move, the exponential moving average moves faster. It will often cross above the simple moving average in rallies and below in declines.

Many old-school market pundits suggest using exponential moving averages for longer-term averages, such as those viewed on a weekly chart, because of their tendency to give more weight to the recent action. Perhaps you don't want to give too much weight to an event that occurred 200 weeks ago, for example, but would rather give more weight to the most recent weeks.

Many even suggest the exponential moving average for the 200-day moving average. I keep it on all my daily charts. Tech stocks and tech-related stocks tend to find support or resistance at that average as much as at the simple moving average version.

Recently, however, an experienced trader noted that he relies exclusively on ema's on the intraday charts, but uses sma's on the daily and weekly ones. Upon reflection, I realized that I watch the 100/130-ema's on intraday charts, so I'm watching some intraday action using exponential averages, too. I also watch the 10- and 30-week simple moving averages, so I'm using some simple moving averages on the weekly chart.

Traders also vary the periods used to compute those averages. Some use a 9-day moving average, while others swear by a 10-day one. Some use a 20-period moving average; others, a 21-day one. In addition to the typical 50- and 200-period moving averages, I also often employ that pairing of the 100- and 130-ema's across various time frames. When I'm studying nested Keltner channels, I used a 120-ema rather than a 100-ema.

Confused? You don't have to be. Most charting services allow you to easily employ several moving averages, some set to custom periods. Try several. If you find that prices tend to find either support or resistance at a certain moving average, continue to watch that average for that period of time for that entity. Consider it a treasure hunt. Add your favorite indicator such as MACD, CCI, stochastics or RSI.

When prices start regularly trading across that average rather than finding either support or resistance at that average, especially when your indicator is also violating support or resistance, it's time to rely less heavily on that moving average to provide support or resistance. A period of disorganization is occurring. The trader is signaled protect profits and perhaps, if not yet in any plays, to stand aside until new resistance or support levels are established.

Until that disorganization occurs, however, it's best to assume that an average that has been providing either support or resistance for a long time will continue to do so. It's defining support or resistance for the time being. So, the key to using moving averages to help define support or resistance is to be flexible and look for corroboration from a favorite indicator.

Moving averages provide only one tool for studying support and resistance. The next few articles will discuss others.
 

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

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