Option Investor

Daily Newsletter, Tuesday, 08/29/2006

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Table of Contents

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

Market Wrap

FOMC Minutes Spike Volatility

An otherwise lackluster day was awakened from its midday slumber when the FOMC minutes were released at 2:PM. The indexes had faded after Monday's rally with the Dow off -35 points before the announcement. Volume was extremely low with light profit taking and a general cautiousness ahead of the report. The indexes dipped sharply lower on the release with the Dow hitting 11299 and S&P 1295. As the data was digested the news appeared positive for the markets although not what traders were hoping would appear. However, the news was enough to bring buyers back into the market with a strong buy program at 2:10 lifting the indexes back into the green.

Dow Chart - 30 min

Nasdaq Chart - 30 min

The FOMC minutes were sprinkled with terms both negative and positive as Fed heads debated their mixed views at the Aug-8th meeting. The pause was a close call according to the minutes with most members agreeing more hikes would be needed. Balancing this view was the opinion that there would be little risk in deferring future hikes until more data could be analyzed. Most felt inflation would ease over time as energy prices and shelter costs weakened. There was still a strong debate over whether the recent rise in inflation was temporary or permanent. All felt the pause would not mark the end of the tightening cycle. The lone dissenter to the pause vote was Lacker and he felt the economy would not slow fast enough to lower core inflation as quickly as needed. The committee spent a lot of time debating inflation signs and the need for additional hikes resulting in a narrow win for a temporary pause. The Fed funds futures were showing only a 12% chance of a hike on Sept-20th before the minutes but those chances are now expected to rise to 30% to 40% according to one analyst.

Dallas Fed President Fisher also made headlines with comments in an afternoon speech. He said the Fed can't afford to let inflation build up a "head of steam" at which point it would be tougher to battle without a strong dose of monetary medicine. Fisher said he has lost confidence in the CPI as an inflation gauge and was moving to the trimmed PCE deflator as a guide. That "trimmed" indicator throws out any spikes in individual components producing more of an average. He also said the Fed must be wary of temporary inflation distortion. He felt the Fed was not behind the curve and doubted there was a recession brewing. He felt other areas of the economy were picking up the slack for the housing sector.

The morning report taking the market lower was a drop in the Consumer Confidence from 107.0 to 99.6. This was far below the consensus estimate for 103.0. This -7.4 drop was the sharpest drop since Katrina and took the index to its lowest level since December 2005. The present conditions component fell -10.8 points to 123.4 while the expectations component fell -5.1 points to 83.8. The impact of +$3 gasoline was seen as the primary factor for the drop with the London terror plot a contributing factor. Those were the factors in the news when the survey was taken two weeks ago. There was also a substantial drop in those seeing jobs as plentiful from 28.6% to 24.4%. This may be a leading indicator for the Jobs report on Friday. The sharp drop in jobs sentiment could be due to a sharp drop in new jobs, which will be reported on Friday. Rising interest rates and falling house prices were also seen as pressuring confidence.

Tomorrow we will get the revision to the Q2 GDP, which is expected to come in at +3.1% compared to the +2.5% in the prior release. A sharper than expected rise could be negative for rate hike expectations. A weaker than expected report could energize the market on hopes the Fed was right in taking a pass. The economic calendar accelerates sharply on Thursday and Friday with Personal Income, NAPM, PMI and the Help Wanted Index on Thursday and Jobs Report and ISM on Friday. Those reports will be critical to market sentiment and to Fed direction when they meet again in three weeks.

After the FOMC minutes bonds became the investment vehicle of choice for many with heavy buying pushing the yields to a new five month closing low at 4.783%. It appears many investors are concerned that the outlook for a slowing economy could be understated.

Ten Year Note index - 5 min

Ten Year Note Index - Daily

First Horizon (FHN) warned that Q3 earnings would be lower due to a tough mortgage market. The bank said earnings would be -$56 million lower than Q2. FHN said loan originations would be $1 billion lower in Q3 compared to the $7.5B seen in Q2. FHN said the secondary market where it sells most of its loans was seeing a sharp drop in demand causing a drop in spreads from 1.22% to 0.85%. More banks are attempting to sell loans to reduce risk as the economy slows.

BP made the news again today when the company confirmed US investigators are looking into reported manipulation of crude oil and gasoline markets. The CFTC has subpoenaed BP and several energy traders in its investigation. They are looking at the over the counter markets during 2003-2004. Investigators are examining whether BP used information about its own pipelines and storage tanks at a key oil delivery point in Cushing Oklahoma to influence oil price benchmarks that are set each day and influence billions of dollars in transactions. BP is also under attack by the US authorities for possible criminal implications in its pipeline leak problems. BP is also being sued by victims of the March 23rd 2005 explosion at a BP refinery in Texas. CEO John Browne has been subpoenaed to testify about the event that produced a record fine of $21.3 million for safety violations. 15 died and 180 were injured in the explosion. BP has also been under investigation for some time for manipulating the propane market.


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Oil prices fell nearly a buck in the second day of sharp declines after tropical storm Ernesto made an unscheduled turn away from the Gulf and towards the Florida keys. Oil closed at $69.75 for the first close under $70 since June-21st. This represents a sharp drop of -12% since the August high of $78.80 for the October contract. The drop is due to many factors with the biggest a reduction in hurricane fears. After last years Katrina event and the massive destruction in the Gulf the storm analysts were predicting another strong hurricane season in 2006. So far those storms have failed to show and the peak of the season normally occurs over the next two weeks. Once we pass Sept-10th the potential for storms will decrease. Oil inventories are already very high as is the inventory levels for natural gas. With the heat of summer fading along with the chance of disruption from hurricanes that leaves those traders with long positions way out on a limb.

Oil and natural gas prices are linked in various ways and the massive drop in gas prices this week helped kill speculation in oil. The September gas contract closes for trading tomorrow but speculation over Ernesto had resulted in a spike to $7.50 on Friday. Ernesto's change in direction prompted a direction change in gas prices as well. That $7.50 price plummeted to $6.05 for a -20% drop before a massive short covering spike at the close sent it back to $6.90. That spike held in the gas contract but the corresponding spike in oil was quickly erased. We could see the same type of gyrations as September heating oil and gasoline close for trading on Thursday.

With summer over and gasoline demand about to fall off a cliff all thoughts turn to winter heating oil supplies as refiners begin the conversion to winter products. Unfortunately the record warm winter last year left heating oil inventories fully stocked. Currently inventories are at their highest level since Nov-1999. This is going to be very bearish for oil prices assuming no hurricanes head for the Gulf. With today's close under $70 it is almost a sure bet we will see crude test $65 very soon.

The drop in oil prices has knocked about 20 cents off gasoline prices and further drops should lie ahead. This will help consumer sentiment ahead of the holiday season. However, the CEO of Daimler Chrysler said on Monday they are planning for $3-$4 gas for the rest of the decade. He said the US consumer will continue to demand 5-6 passenger vehicles with higher fuel economy and they were planning their future products on this trend. GM announced they would be offering a tried and true incentive of cash back on many of its 2006 and 2007 models.

After the bell today Cendant (CD) announced a 10:1 reverse split and a new name. Cendant will become Avis Budget Group with the new symbol of CAR. Cendant has recently been divesting many of its corporate assets with names like Coldwell Banker, Century 21, Cheap Tickets, Orbitz and numerous hotels being sold or split out of the parent. CD closed at $1.91 today and a far cry from its 1998 high of $41.68. Cendant will begin trading under the new symbol on Sept-5th.

Barnes and Noble (BKS) traded down after receiving a subpoena from the US Attorney's office regarding its stock option dating practices. Because this was from the attorney's office rather than the SEC it was seen as having higher potential for ending in criminal charges. According to analysts there are nearly 100 companies expected to be facing charges and hundreds more racing to clean up their act before the regulators find them first.

Intel announced a new Dual-Core Xeon 71-hundred series processor, which included lower power options to help cut energy costs. Codenamed Tulsa the chips offer nearly three times better performance per watt over previous Intel Xeon MP processors. This was another shot at AMD, which has been taking market share from Intel in the server area.

Brinker International (EAT) jumped +1.70 after announcing it would buy back up to 11.7 million shares or 14% of its stock in a Dutch auction for up to $38.50 per share. The auction will run from Aug-29th to Sept-26th. The buyback announcement overcame news that same store sales would decline from 2.5% to 3.5% for August.

SGX Pharmaceuticals (SGXP) fell -41% after announcing it would discontinue phase 2/3 trials of its acute myelogenous leukemia drug Troxatyl.

After the FOMC smoke cleared the Dow had rallied to a +17 point gain after a -50 point loss immediately after the release. This rebound brought the Dow right back to the strong 11375 resistance level we have seen for the last two weeks. The range has been very tight and even the +75 point romp on Monday failed to break this level. The Dow gains today were mostly on the back of IBM, MMM, UTX and HPQ. These are considered safe deposit boxes ahead of any potential fall weakness. It continues to suggest that some investors are remaining cautious ahead of the coming inflation results and the Sept-20th Fed meeting.

Contrary to the caution being displayed in the Dow the Nasdaq surged to a new two month high with a close at 2172. After two weeks of consolidating from the mid August gains we finally saw a return to the highs. There was a strong buy program at the close and that program overpowered sellers on what had been a low volume day until 2:30. When the buy program hit the volume picked up substantially as it triggered short covering at every increment along the way. Helping to power the Nasdaq was the SOX with a +7 point gain achieved entirely after the FOMC release. The SOX found support at 430 on the 24th and has risen slightly every day since. The SOX is typically seen as the leading indicator for techs.

The Russell also sprinted higher to a new three week high at 715 showing that while some investors were looking at the big caps of the Dow for safety there were still some willing to bet on the small caps. This is very bullish if the Russell can continue to post gains. It could mean more investors were avoiding safety in hopes of higher rewards in the eventual Q4 rally. The Russell closed right at its two-month high set on August 4th. The next resistance level would be 730 but we have to actually break 715 first.

SPX Chart - 30 min

The SPX has moved over 1300 and appears ready to mount a breakout that could attract some heavy buying. Each peek over 1300 since the first one on Aug-17th has resulted in a microscopically higher high with Tuesday's close a new three month closing high. The range continues to be very tight and today's gains did result from a closing buy program. Still it is definitely looking like a breakout is near. However, remember we have some serious economic reports later this week that could change the direction in a heartbeat. It appears some investors are positioning themselves for a series of reports that will be considered Fed friendly. If that occurs we could have a significant breakout and some traders are obviously expecting it. I have been advocating a move over 1300 as bullish and a break below 1290 as bearish. It appears that the upper level has been pushed to 1305 this week by the constant chipping away of investors jockeying for position. I would want to continue to be long over 1300 and hope for a break with seasonal trends and a true breakout above our current range. If that break does occur I believe the next resistance level at 1325 would be the next resting point. Once over that level it would be a rocket ride as those still in cash and waiting for an October dip race to go long.

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

The Andersons - ANDE - close: 39.62 chg: -0.12 stop: 37.49

Once again shares of ANDE traded over round-number resistance at the $40.00 level and again the stock failed to hold these gains. ANDE's failure to hold any bullish breakout over the $40.00 mark makes us cautious. The next move could be a dip back toward the 50-dma near $39.00 or the 10-dma near $37.70. We are not suggesting new bullish positions with ANDE under $40.00. A dip and bounce anywhere above $37.50 could be used as a more aggressive entry point to buy calls. Our target is the $44.50-45.00 range.

Picked on August 28 at $ 40.26
Change since picked: - 0.64
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 900 thousand


AstraZeneca - AZN - close: 64.31 change: +0.99 stop: 59.95

Tuesday saw more gains for the drug sector. The DRG index hit another two-year high. Shares of AZN also turned higher and posted a 1.5% gain on above average volume. The good news here is that AZN has broken out higher from its week-long trading range. More conservative traders might want to take some profits as AZN nears potential round-number resistance at $65. 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: + 1.32
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million


Cameco - CCJ - close: 39.42 change: +0.15 stop: 37.95

Tuesday was the second day in a row that shares of CCJ found support near the $38.80 region. We don't see any changes from our previous update. We would not suggest new call positions until CCJ traded back above $40.00 or $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 $38.80 level. Our target is the $44.50-45.00 range.

Picked on August 22 at $ 40.33
Change since picked: - 0.91
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.9 million


Cognizant Tech. - CTSH - close: 70.53 chg: -0.67 stop: 68.45

Given the volatility in CTSH on Tuesday our stop loss might be too close. The stock spiked higher on Tuesday morning and hit our trigger to buy calls at $71.55 so the play is now open. Unfortunately, shares immediately turned south and dipped back toward the $68.75 region, which has been support during the last few days. Bulls did step in to buy the dip and CTSH pared most of its losses but we're not suggesting new positions with CTSH under $71.50. We'd wait for another rise past $71.50 or even $72.00 before buying calls. Our target is the $76.50-77.50 range.

Picked on August 29 at $ 71.55
Change since picked: - 1.02
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 1.4 million


Cymer Inc. - CYMI - close: 39.97 chg: +0.69 stop: 39.95

The SOX semiconductor index turned in a strong session rising 1.6%. This helped shares of CYMI bounce higher (+1.7%) but the stock is still under resistance at $40.00 and its 50-dma. We don't see any changes from our previous updates. We currently have two triggers on the stock to catch a breakout either way. If shares move higher we have a trigger to buy calls at $42.55. If shares move lower we have a trigger to buy puts at $37.74.

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: 57.02 chg: +0.43 stop: 53.95

The intraday weakness in FCX was a bit disconcerting. Shares traded under support at the bottom of its recent trading range near $56.00 and its simple 200-dma. Fortunately, FCX did not fall far and the stock rebounded higher with the afternoon market rally. The rebound from $56 could be used as a new entry point to buy calls but more conservative readers may want to wait for a breakout 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: - 0.49
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume = 5.1 million


MicroStrategy - MSTR - close: 91.54 chg: +0.17 stop: 87.40

MSTR displayed a little bit of volatility today. The stock dipped to $89.38 but traders bought the dip and shares eventually closed in the green. We see the rebound today as another entry point to buy calls but more conservative traders might want to wait for a move past the simple 200-dma, the $92.00 level or even the simple 100-dma. This remains a somewhat aggressive play given MSTR's volatility. More conservative traders might want to use a tighter stop loss. Currently our target is the $98.75-99.00 range.

Picked on August 16 at $ 92.05
Change since picked: - 0.51
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand


Piper Jaffray - PJC - close: 55.84 change: +0.65 stop: 51.65

PJC continues to show relative strength. Traders bought the dip around $54.60 and the stock rallied back toward the top of its trading range and resistance near $56.00. At this point in the game, if you have not opened positions yet, we'd wait for a breakout over $56.00. Our target is the $59.90-60.00 range.

Picked on August 20 at $ 55.70
Change since picked: + 0.14
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 300 thousand


FreightCar Amer. - RAIL - cls: 56.86 chg: +0.84 stop: 54.95

It was a bullish day for RAIL. The stock out performed the broader markets and its peers in the transportation and railroad sectors. The stock rose 1.49% but we could not find any specific news or catalyst to explain the rally. We did note that volume came in pretty low but that's to be expected during this late-summer week. We are a little concerned about the bearish technicals that the recent pull back in RAIL has produced. Aggressive traders might want to buy this bounce. We would wait for a move past the 200-dma and 100-dma near $58.00 before buying calls.

Picked on August 20 at $ 59.13
Change since picked: - 2.27
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand


Ryland Group - RYL - close: 42.64 change: -1.48 stop: 39.95

We recently received a reader email about our RYL play. Some of the comments we received only encouraged us to discuss trading with triggers. Right now we are on the sidelines with RYL. There is no position (real or hypothetical) yet in RYL. It does not matter how high or low the call option values move until we're triggered. Our strategy specifically states that we're waiting for a breakout over resistance at $45.00 and our official entry point will be $45.15 or higher. We suggest triggers for a reason usually because we want to see something happen first in the stock to confirm our suspicions about the next short-term move. We also want to remind readers that technical analysis is not perfect. Conditions can change and outside events can impact stock prices no matter what the technical picture is saying. Case in point... as of yesterday RYL had rallied back toward resistance near $45.00 and look poised to breakout higher. However, today the stock gapped open lower and closed with a 3.3% loss. Why? The stock turned lower because an analyst firm cut their rating on RYL to a "sell" before the opening bell. Reaction to the news prompted the gap down. Whether it is an analyst rating change, a company's earnings results, or some economic report there is no way for you or I to know the results beforehand. We can look at estimates but take for example an earnings report. We almost always plan to exit before an earnings report to limit our risk. We do this because we don't know what the news is or more importantly how the markets will react to the news and it's usually not worth the risk. Back to our play on RYL... we don't see any changes and continue to wait for the move over $45.00. If the housing sector reverses lower and/or RYL breaks down from its bullish pattern of higher lows then we might consider switching directions and buying puts on a break down below $40.00. We have to trade what we see not what we believe.

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: 53.65 change: +0.91 stop: 49.45*new*

UIC continues to out perform. The stock added another 1.7% on Tuesday. We're going to adjust our stop loss to $49.45. 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.

Picked on August 27 at $ 51.77
Change since picked: + 1.88
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand


VF Corp. - VFC - close: 70.10 change: +1.57 stop: 68.45

VFC displayed a lot of strength today. The stock did not see the midday swoon we witnessed in the major averages. Instead shares of VFC shot higher and is currently challenging resistance in the $70.00-70.20 region. The high today was $70.20. Our trigger to buy calls is at $70.25, which would be a new all-time high for the stock. 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.

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

Put Updates

AutoZone - AZO - close: 88.15 change: +0.94 stop: 89.05

AZO is still bouncing. The bounce does seem to be losing its steam but shares did clear the 50-dma today. Right now we are waiting for a breakdown under support near $86.00. Our trigger to buy puts is at $85.85. More aggressive traders might want to consider a failed rally under $89 as a new entry point. Our target is the $81.00-80.00 range.

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


Boeing - BA - close: 73.78 change: -0.94 stop: 78.05

BA turned in a bearish session. The stock spiked higher only to see the rally fail at the $76.00 level. The sell-off was fueled by strong volume and produced a bearish engulfing candlestick pattern. We continue to target the $70.50-70.00 range. More conservative traders might want to tighten their stops.

Picked on August 10 at $ 75.75
Change since picked: - 1.97
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million


Burlington Nor.SantaFe - BNI - cls: 65.33 chg: -0.34 stop: 70.25

The trading in BNI seems to be narrowing. The stock is consolidating between support in the $64 area and the top of its descending channel so in effect shares are being squeezed. We should see BNI produce a breakout one way or the other soon. 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.

Picked on August 08 at $ 68.06
Change since picked: - 2.73
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.7 million


Chipotle Mex Grill - CMG - close: 49.80 chg: +0.90 stop: 52.55

We hope no one was surprised by CMG's bounce today. We've been warning readers that CMG was short-term oversold and due for a rebound. If you follow the current trendline of overhead resistance then CMG should encounter said trendline in the $51.50-52.00 region. We are not suggesting new plays at this time. We are targeting a decline into the $45.50-45.00 range.

Picked on August 09 at $ 50.28
Change since picked: - 0.48
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand


Intuitive Surgical - ISRG - cls: 92.33 chg: -0.88 stop: 97.75

We do not see any changes from our previous updates on ISRG. The stock is essentially trading sideways but we do note a bearish, short-term trend of lower highs. We're not suggesting new positions at this time. 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.

Picked on August 10 at $ 94.90
Change since picked: - 2.74
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million


Johnson Controls - JCI - close: 70.71 chg: -0.73 stop: 75.51

JCI continues to under perform the market. 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.

Picked on August 22 at $ 72.96
Change since picked: - 2.25
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million


Radian Group - RDN - close: 60.20 chg: +0.10 stop: 61.51

There is no change from our weekend new play description on RDN. We are still 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.

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


Transocean Inc. - RIG - cls: 66.52 chg: -0.16 stop: 70.25

We see no changes from our previous updates on RIG. 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: - 2.97
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million

Strangle Updates


Dropped Calls

Valero - VLO - close: 59.89 change: -0.50 stop: 59.99

We have been stopped out of VLO at $59.98. Another decline in crude oil impacted the oil stocks. Shares of VLO actually gapped down and opened at $59.98 and dipped to its simple 200-dma near $59.25 before bouncing.

Picked on August 20 at $ 61.84
Change since picked: - 1.95
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 9.1 million

Dropped Puts

Cytec Ind. - CYT - close: 52.05 change: +1.12 stop: 52.05

We have been stopped out of CYT at $52.05. The stock posted a second day of gains following yesterday's fake-out. You may recall that CYT broke down under significant support at the $50.00 level on Monday morning only to rebound higher. We suspect the move is due to the sizeable declines in crude oil this week. Oil can be a major expense in chemical manufacturing.

Picked on August 28 at $ 49.75
Change since picked: + 2.30
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 241 thousand

Dropped Strangles



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