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Daily Newsletter, Saturday, 09/02/2006

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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

Goldilocks Lives!

The economic reports last week were right in the groove with the economy moving down the yellow brick road but not fast enough to get a speeding ticket from the Fed. The Goldilocks economy grew jobs right on track, saw manufacturing expand for the 40th consecutive month and consumer sentiment is beginning to rebound in time for the coming holiday. The heat wave is over, Ernesto brought only needed rain and not hurricane winds, kids are back in school to the relief of parents and for traders we are finally out of the dog days of August. Life is good, or is it?

Dow Chart - 30 min

Nasdaq Chart - Daily

The major report out Friday was the employment report for August with the headline number coming in at +128,000 and almost exactly where analysts had predicted at +125,000. The lower than expected numbers in June and July were revised up slightly by +18,000 jobs. Not too hot and not too cold with jobs growth just right. The unemployment rate fell back to 4.7% on a strong jump of +250,000 jobs in the household survey. Average hourly earnings rose only +0.1% and well below the torrid rate of +0.5% in July and +0.4% in June. Wage inflation appears to be slowing as predicted by the Fed. Manufacturing lost -11,000 jobs, trade/transport -15,000, retail -14,000 but construction gained +17,000, finance +10,000. The tame jobs report almost guarantees the Fed will remain on the sidelines on Sept 20th.

The ISM Manufacturing Index came in at 54.5 with only a -0.2 drop from the July reading and almost exactly where analysts had expected. This shows the manufacturing sector is still expanding for the 40th consecutive month but not fast enough to attract additional heat from the Fed. The prices paid component fell -5.5 points to 73.0 while employment rose +3.3 points to 54.0. New orders eased only slightly to 54.2. The index is right in the slow growth sweet spot needed to keep the Fed on the sidelines.

ISM Index Table

Construction Spending fell -1.2% as the drop in homebuilding led the index lower. The prior two months were also revised lower. The homebuilding component fell -2.0% and the biggest drop in five years. Rising interest rates were seen as having a moderate impact but it was condos and homes that really knocked the support from the sector. The chart below shows the sudden drop over the last month. It would have been a lot worse had it not been for a boom in office construction.

Chart of Construction Spending Changes

The final reading of Consumer Sentiment for August came in at 82.0 and up strongly from the 78.7 in the initial reading. During the survey period for the first reading the foiled bomb plot was the big news. During the survey period for the last half of the month there was a truce declared in the Middle East and gasoline prices were plunging. One contrary indicator was the National Association of Realtors pending home sales number released on Friday. The index fell -7.0% for July following a sharp downward revision in June. The July drop was the largest drop on record since the index was created. This pushed the index to -11% for the year and -16% over the same period in 2005. This change in sentiment should reverse soon with falling interest rates a major driver to home sales. The expectations of a permanent pause by the Fed and the potential for cuts in 2007 has sent bond buyers into a frenzy. The yield on the ten-year note fell to 4.72% on Friday with the 30-year at 4.87%. These are multi-month lows and suggest home mortgage rates will be following very quickly. This will bring those looking to refinance back into the market. A quick check of mortgage rates showed several lenders in the 5.85% range for a $250k 30-year mortgage. This is not a bad rate and an easy out for those with option ARM loans about to reset. This looks to me like the housing sector may be close to a bottom but we need to see a couple more months of data before that assumption can be proved.

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After the bell on Friday the Semiconductor Industry Association released the semiconductor billings, which rose by +1.8% in July to $20.1 billion. This is calculated on a three-month moving average basis. This should give techs a boost at the open on Monday. Sales have risen over $2.1 billion over the same period in 2005. Sales growth in the Americas has risen +17.7% and +13.4% in the Asia Pacific region. Capital spending has risen in 2006 to 22% of chip sales. The summer months are typically a weak period for semiconductors and this strength is especially gratifying given the state of the economy. As we head into Q4 sales should continue to rise as cell phones and consumer electronics benefit from the back to school ramp and the coming holiday sales period. Computer sales amount to 40% of chip sales and the growth in laptop acceptance due to lowered prices is producing another chip boom. The average price of PCs has fallen -7% so far this year. Sales of chips by price is expected to be under pressure as the year progresses and Intel continues to dump excess inventory. Unit sales will grow but price pressures will make sales comparisons difficult. Intel is expected to announce job cuts of as many as 20,000 workers next week as it continues its reorganization plans. The first 10,000 are scheduled to be announced after the close on Tuesday according to industry sources. Intel is trying to cut $1 billion in expenses by the end of 2006.

The economic calendar for next week is lackluster compared to the flurry of major reports we saw over the last three days. The major events for next week would be Productivity and Beige Book on Wednesday. The calendar is not expected to be a detriment to the markets but there are no material reports expected to help it either.

Economic Calendar

Oil prices continued their fall on Friday after comments from UN members made it evident that any material sanctions against Iran would be months away. Russia, China and now France are talking down immediate sanctions in favor of further talks over the next month. Gasoline demand for last week was 200,000 bbls over the same week in 2005 and stretching the consecutive weeks of higher demand to eight. This should be the last week of strong demand with 35 million people taking to the highways for the holiday.

Ernesto has withered into a rainstorm and there are no other storms in sight in the Atlantic. With gasoline demand about to drop off a cliff and supplies of crude surging two months before winter heating oil demand begins it is a bearish setup for energy prices. The price of crude closed at $69.25 and below support at $70 and below the 200-day average at $69.75. The next material support point is $65 and baring a sudden Iran event or a new hurricane in the Gulf we should test that level soon. The breakdown in oil is relieving the pressure on the transportation index and support at 4200 appears to be holding.

Gasoline Demand Chart

October Crude Chart

Falling gasoline prices won't help falling consumer interest in gas-guzzler autos. The major manufacturers released sales numbers for August on Friday and it was not pretty. GM managed to post flat sales for the month but Ford sales dropped -14.8% and Chrysler fell -6.8%. Toyota posted a gain of +12.6% led by their hybrid models. GM also announced they would be cutting production -12% in Q4 in an effort to reduce inventory levels. Ford said truck sales fell -23.6% in August.

TrimTabs reported total equity outflows in July of -$4.3 billion from mutual funds. Outflows from May-July totaled -$19.5 billion and the highest three-month period since 2002. Ironically the markets ended the quarter only slightly below their 4-year highs in the case of the Dow and S&P. This was due to the strong corporate buyback activity of nearly $3 billion per day and on institutional and insider buying. New offerings over the last month averaged only $605 million per day with many cancelled due to market volatility. You have to go back to 1998 to find a lower period where new offerings averaged $433 million per day.

The Dow turned in its best month since 2003 and the Nasdaq had its best August since 2000 with a +4.5% gain. The S&P closed Friday at 1310 only 16 points away from new four-year highs. The Dow closed at 11464 only -206 points from its four high. Despite the strong August performance for the Nasdaq its 2192 close is still well below the 2375 high made last April.

Considering August and September are historically the two worst months of the year is this rally too good to be true? Are we going to continue higher from here? I would never be the one to say never but the odds of us getting into the October earnings cycle without a serious correction are not very good. BUT, it is just those low odds that may give us a decent chance of moving higher.

After the markets failed to breakout all week I was beginning to have my doubts but I knew traders were waiting for the Jobs report as confirmation the Fed would stay on hold. It was a holiday week, the last week of summer and volume was very low. I said last Sunday everyone just wanted to get into September without any material event. Vacations are over and the economics are excellent. The soft landing appears to be on track and investors should be losing their fear of the Fed and of a recession. There is actually little investors have to fear now but fear itself. I know that is corny but it is true. Even without any material minefield ahead the memories of prior fall corrections looms large in our collective consciousness. I listened and read numerous commentaries last week where fund managers and professional traders were talking about increasing short positions on any post Jobs rally. The Sept/Oct dips are too cyclical to be shrugged off simply because traders feel good about the economic future.

It may come to pass as many fear but just maybe this fear is what could keep us moving higher. I saw evidence of several sell programs on Friday afternoon and I chalked it up as hedge funds trying to get short ahead of September, historically the worst month of the year. If we have enough bears shorting the tops it could provide us with new rounds of short covering if the herd wakes up and wants to stampede into Q4. The hedge funds have tried to push the indexes back for two straight weeks without any conviction or success. If the cash on the sidelines, I heard it was as much as 20% in some funds, 5-7% in others, suddenly decides there is not going to be a September dip we could be off to the races. Should the S&P actually break that four year high at 1325 it would trigger a flood of buying and short covering.

That is a big "IF" and next week will be crucial for market direction. If we continue to see the inch worm creep higher above the 1310 close it will attract more and more attention and begin making those funds still sitting on cash very nervous. They can't afford to miss any Q4 rally or risk losing investors and bonuses. Normal September corrections are caused by earnings warnings coming out of the summer slump. We really have not see any indications that will occur this year from any sector other than autos and homebuilders. We already know those sectors are bad and that is already discounted into the market. Falling energy prices will ease pressures on profits at manufacturers and retailers are already seeing a surge in new buying. Wal-Mart said they saw a +2.7% jump in sales in August, Target saw a +2.8% gain and Federated got a +3.8% boost. Falling gasoline prices will continue to boost consumer spirits. We saw from the jump in semi billings that tech stocks should continue to see profit gains. Cisco has already risen +29% off the August lows while HPQ gained +14%. Those are some strong numbers and should produce a strong case for profit taking soon. That is exactly what the September bears are counting on. However, it is not just tech stocks moving higher. We are seeing industrials, cyclicals, commodities and finance stocks moving higher. Proctor & Gamble (PG) gained +10% to a new high along with Dow components MO and PFE. Rate hikes appear to be over and the smell of a soft landing is floating down Wall Street. Going long after the Fed ends a rate hike cycle is never a bad idea and could easily trump the historical September weakness. However, the highest risk timeframe for traders is the next three weeks as we approach the Sept-20th FOMC meeting. Since almost everyone expects the Fed to pass at that meeting and a growing number of analysts think the Fed will confirm that pass with a stronger pause statement that would be the starters gun for a Q4 rally. This means any funds, which have not already jettisoned unwanted positions will need to do so quickly and position themselves for that possibility. It also makes any economic reports between now and the 20th very crucial to confirming that soft landing scenario. If any of them suddenly begin to show a strong growth spurt or a renewed spike in inflation all bets would be off and we could head south at a high rate of speed.

S&P-500 Chart - Daily

Russell/SPX Comparison Chart - Daily

Since we don't know what the future holds we need to base our decisions on what the market tells us. The S&P closed at 1310 after two weeks of chipping away at resistance at 1300 and then 1305. It has been very slow progress but market internals have been improving almost daily. New 52-week highs for the last three days have been at levels not seen since the May 9th highs. That alone should make any bear drool with anticipation. While I would have liked to see more conviction as we chipped away at the S&P resistance it did occur over the dog days of August on very low volume. We should be grateful for our many blessings instead of looking our gift horse in the mouth. For next week I would remain long and buy any dip above 1290 but never doubt the damage, which could occur if that level is broken. Another indicator to watch would be 700 on the Russell-2000. The Russell has not participated in the rally and continued to trend sideways with a slight uptick only visible over the last few days. This means funds are not committing enough new money to small caps and until they do any future rally will either be excruciatingly slow or doomed to failure. A move over 740 could confirm a strong rally in progress and a dip back to 690-700 would be a buying opportunity. I would still use the S&P as the primary indicator but keep the Russell in view as confirmation. Despite all the warm and fuzzy feelings about the economy and where the markets "should" go do not forget that the market exists solely to prove the most people wrong at any given time. Follow what the market gives us not what we expect to happen. Remain long, buy any dip to 1290 and go short or flat below that level.

S&P-500 Chart - September 2000 Retest of Market Highs

I started this commentary with a Goldilocks analogy. You might remember in the end of that fairy tale the three bears scared Goldilocks off and she ran into the forest and ran and ran until she could run no more always fearing the three bears were still chasing her. While everyone points to the center of the tale for various analogies the ending is not so pleasant. If you look back at the S&P in September 2000 you will find an almost exact duplicate of today's conditions. The yield curve was inverted by 0.59% and bond yields were falling while analysts were praising the return of the S&P to its highs at 1525 as evidence the market was shaking off the slowing economy and was going to rally to new highs. Fed funds rates had just topped at 6.5% and the Fed had just shifted into pause mode. We all know what happened. A recession did follow within two quarters and the three bears chased the Goldilocks market all the way back to 950 on the S&P by Sept-2002. The Fed started cutting rates by 50 points per meeting beginning on Jan-3rd 2001 and continued cutting until June-2003 where rates hit 1.0%. The only thing really different this time is the imploding housing market. That did not exist to this extreme in 2000. In 2000 it was the Internet bubble bursting and today it is the housing bubble. Which do you think impacts the American consumer more? This should be another reason to wonder, "Is this time really different?" This is why we always need to trade what the market gives us, not what we expect to happen. Remain long, cautiously buy any dip to 1290 but go short or flat below that level.
 


New Plays

New Option Plays

NEW OPTION PLAYS TABLE-->
Call Options Plays
Put Options Plays
Strangle Options Plays
CRS None None
EMR    

New Calls

Carpenter Tech. - CRS - cls: 99.78 chg: +3.94 stop: 94.99

Company Description:
Carpenter Technology, based in Wyomissing, Pa, is a leading manufacturer and distributor of specialty alloys, including stainless steels, titanium alloys, superalloys, and various engineered products. (source: company press release or website)

Why We Like It:
We are seeing widespread strength in the steel sector this past week. Leading the charge higher on Friday was CRS. The stock added 4% after announcing it would raise its prices on some of its products. Most stocks in the sector have been consolidating flat to down over the past couple of months but it looks like the group has built a short-term base to rally from. There wasn't much of a reaction on Thursday when one analyst firm downgraded the steel sector. We like CRS because shares have been building on a technical support at its rising 200-dma (see chart). The Point & Figure chart has also turned bullish with a breakout over its trendline of resistance and a new buy signal that currently points to a $114 target. More conservative traders may want to wait for a rally past the 50-dma near $102.50 before committing capital to this play. We're going to suggest a slightly more aggressive trigger to buy calls at $100.75, which is above Friday's intraday high. If triggered our target is the $107.50-108.00 range, which is under the simple 100-dma. FYI: Another stock we are watching as a potential candidate for calls is IPS. IPS is another steel stock that produced a bullish breakout over $95 and its 100-dma on Friday. The Friday gain helped IPS' weekly chart produced a bullish engulfing candlestick pattern. Unfortunately, it looks like IPS may have additional resistance near $97.50 and the $100 level. Traders may want to keep an eye on it as a potential play.

Suggested Options:
We are suggesting the October calls. You, the individual trader, should decide which month and strike price best suits your trading style and risk.

BUY CALL OCT 95.00 CRS-JS open interest= 203 current ask $9.30
BUY CALL OCT 100.0 CRS-JT open interest= 69 current ask $6.40
BUY CALL OCT 105.0 CRS-JA open interest= 91 current ask $4.20

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/06 (unconfirmed)
Average Daily Volume = 847 thousand

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Emerson Elec. - EMR - close: 82.69 chg: +0.54 stop: 79.99

Company Description:
Emerson, based in St. Louis, is a global leader in bringing technology and engineering together to provide innovative solutions to customers through its network power, process management, industrial automation, climate technologies, and appliance and tools businesses. Sales in fiscal 2005 were $17.3 billion. (source: company press release or website)

Why We Like It:
This past week was good for EMR. The stock rallied off a test of the $80.00 level and managed to breakout over multiple levels of resistance. The P&F chart also looks good with a rebound from its rising trendline of support and a buy signal that points to a $92 target. If you check out the daily chart is looks like the stock has produced a big bull flag pattern. Aggressive traders might want to buy calls now or on a dip back towards $82.00. We want to see a little more confirmation of the current trend higher. Thus we're suggesting a trigger to buy calls at $83.55, which is above Friday's intraday high. If triggered our target is the $89.00-90.00 range.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 80.00 EMR-JP open interest= 273 current ask $4.30
BUY CALL OCT 85.00 EMR-JQ open interest=8011 current ask $1.40
BUY CALL OCT 90.00 EMR-JR open interest= 148 current ask $0.30

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.5 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

The Andersons - ANDE - close: 41.59 chg: +0.58 stop: 37.49

The rebound in ANDE continues. The stock looks bullish given its bounce from technical support near its 200-dma a couple of weeks ago. This also coincided with a big bounce from rising support on its P&F chart. In the last two weeks shares of ANDE have broken out above is three-month trendline of resistance (lower highs) and its 50-dma. Last week's breakout over the $40 level has produced a new P&F chart buy signal that now points to a $56 target. We would still consider new bullish positions right here although buying a dip closer to $40.00 would be a more attractive entry point. More conservative traders might want to tighten their stops. Our target is the $44.50-45.00 range.

Suggested Options:
We are suggesting the October calls. You, the individual trader, should decide what month and strike price best suits your trading style and risk.

BUY CALL OCT 40.00 AQA-JH open interest=226 current ask $4.00
BUY CALL OCT 45.00 AQA-JI open interest= 11 current ask $1.55



Picked on August 28 at $ 40.26
Change since picked: + 1.33
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 900 thousand

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AstraZeneca - AZN - close: 65.43 change: +0.29 stop: 59.95

The DRG drug index is hitting new two-year highs and at the front of the pack is AZN, which hit a string of new all-time highs this past week. The stock has displayed significant relative strength and volume improved significantly Tuesday through Thursday last week. We're not suggesting new positions at this time. AZN actually looks a little short-term overbought and due for a dip. More conservative traders might want to both lock in some profits and raise their stop loss. We're thinking about raising our stop towards $62, which should be short-term support. Our target is the $68.00-69.00 range.

Suggested Options:
We are not suggesting new positions at this time.



Picked on August 20 at $ 62.99
Change since picked: + 2.44
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Cameco - CCJ - close: 41.73 change: +0.78 stop: 38.75 *new*

It turned out to be a decent week for shares of CCJ. The stock climbed more than six percent and volume began to improve on the Thursday-Friday breakout. As we mentioned earlier the rally past the $40.00 and 40.50 levels was a new bullish entry point in our book. Friday's 1.9% gain also marks a breakout past the August highs. We are only aiming for a run into the $44.50-45.00 range so we're not suggesting new plays at this time but a dip or bounce near $40 could be used as a new entry point. Please note that we're raising our stop loss to $38.75, which is under last week's support. FYI: The P&F chart shows a triple-top breakout buy signal with a $55 target.

Suggested Options:
We are not suggesting new positions at this time.



Picked on August 22 at $ 40.33
Change since picked: + 1.40
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.9 million

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Cognizant Tech. - CTSH - close: 69.74 chg: -0.17 stop: 68.45

Unfortunately, we are still urging caution on CTSH. The stock's position really hasn't changed much from Thursday but CTSH's failure to rally with the market's generally widespread strength on Friday is a big clue that the next move in CTSH might be down. Bigger picture CTSH has a bullish pattern and the P&F chart is bullish with a $92 target. Yet short-term the technicals have deteriorated on us and the MACD (on its daily chart) has actually produced a new sell signal. More conservative traders might want to tighten their stops or exit altogether. You could always re-enter if CTSH reverses higher. Speaking of entry points we would now wait for a move past $72.00 before considering new call positions. The only reason we are keeping the stock on the play list is because CTSH might bounce from its six-week trendline of support, especially if the markets move higher this week. Our target is the$76.50-77.00 range. We are leaving the stop loss at $68.45, which is under support at the late August low near $68.50.

Suggested Options:
We are not suggesting new positions at this time.



Picked on August 29 at $ 71.55
Change since picked: - 1.81
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 1.4 million

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Cymer Inc. - CYMI - close: 40.91 chg: -0.24 stop: 39.95

We are still sitting on the sidelines with our play in CYMI. The semiconductor sector pulled back for the second day in a row on Friday. The industry was leading the market higher during the first three days of last week. It was the sector strength that helped CYMI breakout again over resistance near $40.00 and its 50-dma. However, CYMI was unable to push past its exponential 200-dma near $42.00. We are suggesting a trigger to buy calls at $42.55. Overall CYMI and the SOX still look poised to move higher and the Thursday-Friday dip was probably just normal consolidation. If triggered in CYMI at $42.55 our target is the $47.00-48.00 range.

Suggested Options:
We are suggesting the October calls. Our trigger is at $42.55.

BUY CALL OCT 40.00 CQG-JH open interest=850 current ask $3.40
BUY CALL OCT 45.00 CQG-JI open interest=218 current ask $1.25



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: 59.36 chg: +1.15 stop: 54.95 *new*

The rally in metal and mining stocks continued on Friday. Traders should note that the XAU gold & silver index has a bullish pattern of higher lows and the sector index looks poised to breakout over resistance near the 150 level. FCX also has a bullish pattern of higher lows. More recently the stock retested support at its 200-dma and late this past week FCX broke out from its short-term trading range. Friday's 1.9% gain was a nice follow through, especially after traders bought the dip Friday morning at its rising 10-dma. Readers can choose to buy calls now following the breakout over $58.00 or wait for a breakout over $60.00. We've been warnings readers that we expected $60 to act as resistance the first time FCX tests it. Another dip may be in the cards. Our target is the $62.50-63.00 range but more aggressive traders may want to aim higher. The P&F chart shows a significant breakout over resistance and a $76 target. Please note that we're raising our stop loss to $54.95.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 55.00 FCX-JK open interest= 335 current ask $5.80
BUY CALL OCT 60.00 FCX-JL open interest=2424 current ask $2.95



Picked on August 23 at $ 57.51
Change since picked: + 1.85
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume = 5.1 million

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MicroStrategy - MSTR - close: 91.61 chg: +0.41 stop: 88.99

There isn't any change from our Thursday update on MSTR. We're still in a wait and see mode and we remain cautious given the deterioration in the technical patterns. The six-week trend is still up but MSTR remains stuck under technical resistance at its 200-dma (and 100-dma). At this point in time we would wait for a breakout over $93.00 before considering new call plays. Currently our target is the $98.75-99.00 range.

Suggested Options:
We are not suggesting new plays at this time but if MSTR trades over $93.00 we'd suggest the October calls.



Picked on August 16 at $ 92.05
Change since picked: - 0.44
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand

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Southern Peru Copper - PCU - close: 93.10 chg: +0.78 stop: 88.99

PCU is a new bullish play from our Thursday night newsletter. We do not see any changes so we're reposting the play description here:

Copper miners are on the move Thursday. The price of copper itself was moving higher on news that a labor strike in Chile might be ending soon. Meanwhile news of a merger between gold miners GG and GLG also contributed to strength in the mining sector. Shares of PCU are in the process of breaking out from a three-week sideways consolidation pattern. The new relative high Thursday actually produced a new triple-top ascending buy signal on the P&F chart. We are suggesting new call positions in PCU with the stock above $91.00 although more conservative traders may want to wait for a new move over $93.10 (Thursday's high). Our target is the $98.00-100.00 range. Please note that we're also adding PD, another copper mining stock, to the play list. We would suggest you choose to play just one not both stocks in the same sector.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 90.00 PCU-JR open interest=355 current ask $7.10
BUY CALL OCT 95.00 PCU-JS open interest=319 current ask $4.50



Picked on August 31 at $ 92.32
Change since picked: + 0.78
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 1.5 million

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Phelps Dodge - PD - close: 90.75 change: +1.25 stop: 86.75

Our new call play on PD has been opened. The stock pushed past round-number resistance at $90.00 and hit our trigger to buy calls at $90.55. We don't see any changes from our Thursday night new play description so we're reposting it here:

We are adding PD for the same reasons we're adding PCU (see play above). The stock is moving higher on a rise in the commodity, which is rallying on news that a labor strike in Chile may be ending soon. The M&A activity between two gold miners on Thursday also contributed to bullish sentiment. Technicals are improving with the bounce this past week but we want to see a breakout over $90.00 first before we open plays. We're suggesting that traders use a trigger to buy calls at $90.55. If triggered our target is the $97.50-100.00 range. Please note that we're also adding PCU, another copper mining stock, to the play list. We would suggest you choose to play just one not both stocks in the same sector.

Suggested Options:
We are suggesting the October calls. Just a reminder - you, the individual trader, should decide which month and strike price best suits your trading style and risk.

BUY CALL OCT 85.00 DPB-JQ open interest=17882 current ask $9.20
BUY CALL OCT 87.50 DBP-JY open interest= 6912 current ask $7.60
BUY CALL OCT 90.00 DBP-JR open interest=13873 current ask $6.00
BUY CALL OCT 95.00 DBP-JS open interest=12201 current ask $3.70



Picked on September 01 at $ 90.55
Change since picked: + 0.20
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 6.7 million

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Piper Jaffray - PJC - close: 59.02 change: +0.44 stop: 53.99

PJC is still marching higher although the momentum definitely seems to be slowing. The stock has now posted its sixth gain in a row so shares are looking a little short-term overbought. Traders are probably thinking about locking in profits as the stock nears resistance at $60.00 and its 100-dma. We agree. Our readers should also be ready to exit. The stock is approaching our target in the $59.90-60.00 range but more conservative traders may want to lock in profits earlier near $59.50. We are not suggesting new plays at this time.

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



Picked on August 20 at $ 55.70
Change since picked: + 3.32
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 300 thousand

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FreightCar Amer. - RAIL - cls: 60.05 chg: +1.85 stop: 54.95

The transports and the railroad stocks, as a group, did not see much of a bounce on Friday in spite of a pull back in crude oil again. Yet shares of RAIL enjoyed a strong session. The stock added over 3% on Friday following Thursday's bullish breakout over the 200-dma. Friday's session was also a bullish breakout over round-number resistance at $60.00 and volume improved on the rally. We said that Thursday's move was a new entry point and we're still suggesting new positions today. Our target is the $64.50-65.00 range. FYI: Friday's move helped RAIL produce a new ascending triple-top breakout buy signal on the P&F chart that currently points to a $79 target.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 55.00 RQN-JK open interest= 12 current ask $7.40
BUY CALL OCT 60.00 RQN-JL open interest= 31 current ask $4.30
BUY CALL OCT 65.00 RQN-JM open interest= 65 current ask $2.00



Picked on August 20 at $ 59.13
Change since picked: + 0.92
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand

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Ryland Group - RYL - close: 42.38 change: -0.29 stop: 39.95

Homebuilding stocks, including RYL, are still trading sideways even through the most recent economic data suggests that we will have a soft landing. Furthermore this would suggest that the FOMC may indeed choose to pass on further rates hikes and now there is talk of potentially cutting rates next year. A halt in rate hikes would be good news for the builders and mortgage lenders. Yet there has been no bullish follow through higher on what appears to be a bottom in the homebuilders in July and August. We are going to keep RYL as a bullish candidate for now. We're trying to catch a breakout over resistance at $45.00 and we're suggesting a trigger to buy calls at $45.15. If triggered then our target is the $49.90-50.00 range.

Suggested Options:
We're not suggesting new plays at this time. Wait for RYL to hit our trigger at $45.15. We would suggest the October calls.



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: 54.28 change: +0.41 stop: 49.45

Target achieved! UIC hit our primary target in the $54.75-55.00 range on Friday afternoon. Volume came in very low on the move. It was our suggestion that readers sold half or more of their position at the first target and then the rest at our secondary target at $57.50. Both UIC and the defense-sector index have been showing relative strength lately but now UIC is starting to look short-term overbought (up three weeks in a row) and due for a dip. We are not suggesting new positions at this time. If you are looking for an entry point wait for a potential dip to the 10-dma or the $52 level. The P&F chart points to a $64 target.

Suggested Options:
We are not suggesting new call positions at this time.



Picked on August 27 at $ 51.77
Change since picked: + 2.51
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand

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VF Corp. - VFC - close: 70.42 change: +0.53 stop: 68.45

Good news! VFC's failed rally and bearish reversal pattern from Wednesday has been reversed. The stock broke out over resistance at $70.00 on news that the company will form a joint venture to sell its products in India. We're a little surprised that the rally was not stronger since India is such a large and growing marketplace. We are suggesting new positions with the move past $70.00. Our target is the $74.00-75.00 range. The P&F chart, with its triple-top breakout buy signal, points to a $90.00 target.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 65.00 VFC-JM open interest= 60 current ask $6.60
BUY CALL OCT 70.00 VFC-JN open interest= 10 current ask $3.20
BUY CALL OCT 75.00 VFC-JO open interest= 77 current ask $1.20



Picked on August 30 at $ 70.25
Change since picked: + 0.17
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 567 thousand
 

Put Updates

Boeing - BA - close: 75.43 change: +0.53 stop: 78.05

There were a lot of headlines for BA on Friday. The good news was that BA helped deliver the first successful test of the missile defense system. The bad news was that NASA chose rival LMT over BA to build the next space exploration vehicle. Although if you read some of the articles the analyst suggest that BA will still participate in NASA's new program with LMT just leading the way. Shares of BA managed to bounce +0.7% on Friday but the rally stalled under short-term resistance at the $76.00 level. The overall pattern in BA remains bearish but we're not going to suggest new put plays given the bullish attitude in the major indices. More conservative traders may want to tighten their stops or exit early since the DFI defense sector looks poised for a bullish breakout.

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



Picked on August 10 at $ 75.75
Change since picked: - 0.32
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million

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Chipotle Mex Grill - CMG - close: 50.69 chg: +1.35 stop: 52.55

Bulls came back strong on Friday in shares of CMG. The Wednesday-Thursday pattern looked like a failed rally/bearish reversal pattern and we said the drop under $50 looked like a new entry point to buy puts. Yet CMG failed to see any follow through lower. Friday's session produced a 2.7% gain for CMG and pushed shares back above round-number support/resistance at $50.00. The three-month pattern is still bearish with the trend of lower highs but we are not suggesting new plays with CMG above $50. Our target is the $45.50-45.00 range. The P&F chart is still bearish and points to a $39 target.

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



Picked on August 09 at $ 50.28
Change since picked: + 0.41
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand

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EOG Resources - EOG - close: 65.94 chg: +1.12 stop: 66.55

Oil stocks, especially oil service stocks, managed to bounce on Friday in spite of another decline in crude oil futures. We do not see any changes from our Thursday night new play description for EOG so we're reposting it here:

EOG is testing significant support. The end of the summer driving season, the technical breakdown in crude oil, is weighing on the oil sector. The recent weakness has pulled EOG down to a pivotal level. EOG has found support near $64.00 over the last two months, which coincidentally is now bolstered by a rising trendline of support on the stock's Point & Figure chart. Trading over the last several weeks has also produced a bearish head-and-shoulders pattern with the neckline at the $64.00 level. If EOG breaks under $64.00 it would also produce a triple-bottom breakdown sell signal on the P&F chart. We want to catch the breakdown so we're suggesting a trigger to buy puts at $63.85. Our target is the $57.50-55.00 range. The biggest risk we see with this play is the situation with Iran. The country has defied the U.N.'s demand to stop enriching uranium. The next move by the U.N. is supposed to be sanctions. We do not know how the world, the markets, Iran and more importantly crude oil prices will react to sanctions actually being applied. The rhetoric that is sure to come from Iran if sanctions are used could push oil higher, which would be risky for a put play on any oil stock. Furthermore, if there is any military action against Iran (and probably coming out of Iran) then oil should significantly spike higher, which again would put this play in danger!

Suggested Options:
We are suggesting the October puts.

BUY PUT OCT 65.00 EOG-VM open interest=5070 current ask $3.20
BUY PUT OCT 60.00 EOG-VL open interest=7084 current ask $1.50



Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.4 million

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Intuitive Surgical - ISRG - cls: 95.05 chg: +0.65 stop: 96.05

Traders are still undecided what direction they're going with ISRG. The six-week consolidation has been more sideways than down and the stock is coming close to breaking out past its short-term trendline of resistance. We're a little surprised that ISRG did not rally higher on Friday given the positive economic news and the market's reaction to the news. At this time we're not suggesting new put plays and given the market's recent strength it might be a good time to exit early. FYI: The P&F chart is still bearish and points to a $60 target.

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



Picked on August 10 at $ 94.90
Change since picked: + 0.15
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Johnson Controls - JCI - close: 72.65 chg: +0.72 stop: 75.51

Thursday's bullish reversal in JCI has been confirmed. We warned readers that JCI produced a bullish engulfing candlestick pattern and a bounce from round-number support at $70.00 on Thursday. We also stated our opinion that the stock would likely bounce back toward the $75 region before encountering resistance. Friday's gain proved to be a breakout past the simple 10-dma and the short-term technical indicators are definitely improving (if you're a bull). We are not suggesting new plays at this time. Wait for a failed rally under $75 before considering new put positions. FYI: The P&F chart, with its triple-bottom breakdown sell signal, points to a $61 target.

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



Picked on August 22 at $ 72.96
Change since picked: - 0.31
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Radian Group - RDN - close: 60.53 chg: +0.65 stop: 61.51

We are still waiting on the sidelines with RDN. The stock has been a big winner from its 2005 lows. Yet over the last few months RDN has produced a big, bearish double-top pattern. Over the last few weeks the stock produced a bearish head-and-shoulders pattern. In late August the stock broke down under support at the neckline to the H&S pattern but failed to breakdown below technical support at its rising 200-dma. That's why we are suggesting readers wait for more confirmation of the breakdown below buying puts. Our preferred entry point is with a trigger at $58.99. If we are triggered our target is the $55.15-55.00 range.

Suggested Options:
We are suggesting the October puts if triggered.

BUY PUT OCT 65.00 RDN-UM open interest= 35 current ask $4.80
BUY PUT OCT 60.00 RDN-UL open interest=2534 current ask $0.95
BUY PUT OCT 55.00 RDN-UK open interest=1898 current ask $0.25



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
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Transocean Inc. - RIG - cls: 71.08 chg: +4.33 stop: 70.25

We have been stopped out of RIG at $70.25. Friday was a big day for RIG. The company announced two new contracts. Meanwhile news also hit the wires that RIG had won its patent infringement lawsuit. Bears panicked and the stock gapped open higher at $68.10 and then spiked over resistance near $70.00. This should only be a partial loss sine RIG has hit our initial target at $65.25 multiple times.



Picked on August 07 at $ 69.49
Change since picked: + 1.59
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 6.4 million
 

Dropped Strangles

None
 


Trader's Corner

Still as Much Art as Science

Today's traders are lucky. Charting programs allow them to reposition trendlines by trial and error until they find the best fit. They can decide whether that best fit runs along all candle shadows or just along the candle bodies.

In the past, such experimentation required penciling in trendlines, erasing them, and trying again, hoping that the eraser didn't wear a hole in the chart before the best fit was determined.

Whether penciling in lines or using a modern charting program, determining the right trendline is still often as much art as science.

Remember that my articles are usually prepared in advance, and so do not reflect current prices.

Annotated Weekly Chart of the SPX:

Similar questions could be asked about trendlines that defined resistance from 2004 to the end of August of 2006.

While the supporting trendlines were closely aligned at the end of August, they will diverge further as time passed. The question as to which is the most valid trendline might become more important if the current pattern is extended into mid-spring of next year, for example.

Making such decisions is a necessary task in any traders' repertoire. Whether traders' preferred options plays are limited to buying calls and puts that take advantage of a directional move or are more complicated combination strategies that seek to define a likely range, traders need to know where support and resistance might lie. Last week's Trader's Corner article discussed using moving averages to determine support and resistance levels, and this week's will continue the series, discussing trendlines.

Last week's article determined that using a corroborating indicator helps traders determine when a moving average serves as support or resistance during a particular market period, honing in on the best average to use. The same tactic works with trendlines.

Annotated Weekly Chart of the SPX:

Not all trendlines climb or descend, of course. Horizontal lines sometimes coincide with historical support or resistance. Determining where such a horizontal trendline should be placed sometimes requires even more art.

Annotated Daily Chart of Goldman Sachs

Using RSI or another indicator to clarify which horizontal trendline is most relevant doesn't appear to work as well with these horizontal trendlines.

Annotated Daily Chart of Goldman Sachs

A snapped Fibonacci bracket that encompasses the rally off last year's low also doesn't clarify matters.

Annotated Daily Chart of Goldman Sachs:

Here's a case where a trader's art and experience must guide the choices. My personal choice would be to use the red lines as horizontal trendlines. I tend to prefer a best-fit trendline hit most often by opens, closes, highs or lows. Each of those red horizontal lines has been pierced, but there has been only one minimal close outside them since May, and that close occurred with a strong spring that almost made it back above the red line. Therefore, it seems to me that a significant close outside those red lines or a close outside them for two to three days will mark a change in trend that may be significant. A quick reversal back inside the zone they define would alert me that either my original trendline assumptions had been wrong or that stops had just been run before the real move, but until then, that would be my choice.

Other traders might make different choices. That's the art behind determining trendline support or resistance.
 

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.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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