Option Investor

Daily Newsletter, Wednesday, 09/06/2006

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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

The Boyz--and Girlz--Are Back

The juniors at Wall Street's firms performed admirably this summer, roiling the markets but not letting them get too far out of hand. That almost happened the last two days, but the light volume yesterday questioned the importance of the supposed breakout. Suspiciously few of the boyz and girlz appeared to be partaking of that breakout, as Jim Brown noted in his Wrap last night.

Then rate-hike fears reasserted themselves this morning when the revision to the nonfarm business productivity data resulted in a five percent increase in unit labor costs, the fastest growth since 1990. Although a CNBC guest attempted to calm fears by asserting corporate profits were not showing any negative impact, as they surely would if unit labor costs were really rising so rapidly, bond traders didn't believe him. Bond yields had been climbing since yesterday morning, but then gapped higher again this morning after that report. Yields on the five-year, ten-year and thirty-year bonds all gapped higher but all retraced some of their gaps without closing them.

Mid-afternoon, some traders appeared to hope that the Beige Book would deliver more encouraging information. Equities bounced off intraday oversold levels. They resumed their decline when the Beige Book survey provided a weak echo of the earlier report, with moderating, and in some cases, sluggish growth; strong labor results; and sustained higher costs among some raw materials, even if those costs weren't yet being passed on to consumers.


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By the end of the day, the Russell 2000, a recent upside leader, had erased almost a week's worth of gains, dropping 2.12 percent. The SOX had fallen 3.04 percent. The OIX had dropped 2.99 percent and the XOI, 3.45 percent, with these two oil-related indices among the leaders to the downside. Crude might have dropped, but that meant that energy-related stocks provided no help to the SPX and instead pressured it lower. The TRAN wasn't helped by the decline in crude and was hurt by signs of a moderating of economic growth, dropping 1.76 percent.

Not all was bad, however. GM gained 2.39 percent and Ford, 1.90. MO lost only 0.02 percent, with this stock sometimes being a defensive play. The BIX, the S&P Banks Index, posted a 0.02 percent gain. There wasn't much else that was green on my screen, however, including the important SPX.

Annotated Daily Chart of the SPX:

As the day ended, the SPX was showing tentative price/RSI bullish divergence on its 15-minute Keltner chart, but had set a downside target of 1296.78. Although 1300 is of course psychological support, the real support lies lower, I believe, as indicated on the SPX chart's annotations.

Some Keltner evidence existed that the SPX could bounce ahead of a further attempt at that 1296.78 short-term Keltner target, with 1301.80-1301.94 next resistance on 15-minute closes, at least as of the close today. Remember that those lines are dynamic and will change tomorrow morning, moving in the direction of the first SPX move. Next resistance above the 1302-ish zone is near 1306, a possible neckline area for a potential inverse H&S. While I don't give great credence to these formations meeting their targets, watching whether they're confirmed or fall apart tells us something about short-term bearish or bullish strength, so I do watch them.

Today the Dow completed a classic and nearly perfect three-candle reversal formation on its daily chart. A retest of the 10-sma seems likely, if not a deeper drop to the rising 30-sma.

Annotated Daily Chart of the Dow:

Like the SPX, the Dow was showing tentative bullish price/RSI divergence on its 15-minute chart as of the close, so it's possible that the Dow will attempt to rise to retest resistance tomorrow morning. Support still turns lower, at 11,395 as of the close, and then at 11,331.42, with nearby resistance at 11,412.61 and then stronger, at 11,418.51. The 15-minute chart looks like prices could keep sliding down that descending support level, but remain aware of that potential bullish divergence and be prepared for a bounce attempt. As the chart is aligned as of the close, 11,418.51 and then 11,431.47 look like strong resistance, but the Dow can be pushed around more easily than other indices.

The SOX let the techs down early in the week, but the RUT held up for a long while, helping support sentiment for tech stocks and the Nasdaq. Today, the RUT gave way, and so did the Nasdaq.

Annotated Daily Chart of the Nasdaq:

The inverse H&S referenced on the chart is the large one spanning all the summer months, not yet finished forming much less confirmed.

The Nasdaq ended the day on its 10-sma and, more importantly, its 100-sma. That, plus daily Keltner support at 2165.10, could combine to help steady the Nasdaq. That's not what the 15-minute Keltner chart suggests, however, with the Nasdaq having set a short-term downside target of 2159.91. The Nasdaq may have a retest of its 31.8 percent retracement of its summer swoon in store, with that Fib level now at 2151.98. I wouldn't be surprised to see a drop somewhere between those last two numbers, at least, say near 2155, and some charts suggest a more pronounced drop, down into the 2144-2145 zone. Watch the Russell 2000 and SOX for clues, as this one proves hard to gauge. Studying charts for various time intervals produces different short-term outlooks, but I'm thinking that a punch down toward 2155 appears likely and I wouldn't be utterly surprised to see 2145 tested, depending on what happens with the SOX.

Although the SOX might have begun a pullback ahead of the Russell 2000, the SOX's pullback perhaps looks a little more corrective and a little less dismal than the RUT's. The SOX ended the day on potential trendline support, with its potential inverse H&S formation intact.

Annotated Daily Chart of the SOX:

The potential inverse H&S formation can be seen with the head at the July low, the left shoulder along the top of the rising red trendline and the right shoulder forming now, in the same region as the left shoulder. The SOX also maintains a rising trendline that could be drawn off its July low, so this chart does not look particularly bearish as yet.

The SOX also ended the day testing 15-minute Keltner support at 437.85, closing just below that support. Since the SOX often overruns support or resistance, I don't consider that violated just yet, especially with bullish price/RSI divergence. The SOX might be one of the first indices to bounce, if there is indeed going to be any bounce attempt, sustained or otherwise. Over the last few days, the SOX has found resistance on 30-minute closes at a line now near 439.50, so that level should be watched first for resistance. Bulls should be particularly wary if the SOX does not bounce but instead gives way, changing that corrective-looking pullback to something entirely different.

While the Russell 2000 also did not violate a rising trendline off its July low, its action was decidedly bearish, and RUT bulls need to pull their act together. Today, the Russell 2000 plummeted from yesterday's close just a few points above the 50 percent retracement of the summer's decline, all the way to the 38.2 percent retracement of that same decline. It violated its 100- and 200-sma's. It did find support at its 10-sma, near tentative historical support in the same 712 zone, and it did not, of course, violate potential round-number support at 700, but that's about all that could be said in defense of RUT bulls, if they didn't all bail out today.

Annotated Daily Chart of the Russell 2000:

The RUT appears to have retraced the minimal amount it needs to retrace to retest the resistance level that had held several times during the summer, but it did it all in one day. That has to have scared RUT bulls, and now the index may need to retrace further to at least retest that descending red trendline seen above. Today's steep drop right into the close suggested that there's still some selling to be done, but watch for a potential bounce attempt from 704-707, if not before. The 15-minute Keltner chart suggested the possibility of a bounce attempt as early as 711, but it did not necessarily suggest that such an attempt would be successful, as resistance still looked stronger than support on that chart.

The day's economic reports started this decline, or so the television commentators will say. Long-term OIN readers know that we don't see the real direction of the markets until the big-money boyz and girlz return from their summer vacations. I'm not sure they've all quite returned. Today's 4.4 billion volume certainly trumped yesterday's 3.9 billion, but it wasn't what would be called monster volume, either.

The reports began at 7:00 when the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending September 1. The overall index measuring mortgage loan application volume increased 1.8 percent week over week on a seasonally adjusted basis, but that doesn't tell the whole or the real story. On an unadjusted basis and when compared to the same week a year ago, that volume fell 26.1 percent. Other components were mixed, with the refinance component lower week over week by 0.9 percent. Refinancings also decreased as a percentage of total mortgage activity. Four-week moving averages were up for all components measured as the interest rate for 30-year fixed-rate mortgages fell to 6.31 percent from the previous week's 6.39 percent. Points increased, however.

The Labor Department's revision to the second-quarter's nonfarm productivity data proved the catalyst to early market direction, however. Expectations for the unit labor costs had been for an increase of 1.5 percent, so that the actual 5 percent increase proved shocking. That increase results in an annualized increase of 4.9 percent, well above the previous 4.2 percent. Productivity increases can sometimes offset a rise in unit labor costs, and productivity did rise an annualized 1.6 percent, more than the previously estimated 1.1 percent. That's not enough to offset the rise in unit labor costs, some experts contend.

Even worse, the first quarter's data was revised to show unit labor costs increasing a whopping annualized 9.0 percent. Year-ago comparisons for all these numbers also prove troubling, clearly showing unit labor costs rising faster than productivity. In the past year, unit labor costs have risen 5 percent; real hourly compensation, 3.6 percent; and productivity, only 2.5 percent.

As troubling as these numbers were on the surface, market participants still had some sorting through to do before they came to a final conclusion. Outside the financial corporate sector, first-quarter productivity rose 11.1 percent, the most it's risen in 35 years. For the last year, productivity outside the financial sector rose 4.8 percent; real hourly compensation, 3.4 percent; and unit labor costs, 3.4 percent, so productivity was rising faster than wages.

Even when the headline number is reconsidered, some believe the evidence difficult to weigh. A rise in productivity is clearly good for industry, and a rise in real compensation helps the consumer deal with inflationary pressures. The market just didn't buy that more benign explanation today, however.

The Institute for Supply Management reported later on the August ISM services index. That number proved surprising, too, with economists predicting an increase to only 55.4 percent, while the actual increase was to 57.0 percent. July's number had been 54.8 percent. The boom-or-bust number is 50 percent for this index. Some components of this number may have eased the jitters engendered by the productivity number, at least for a few minutes, because the price index, the component measuring price increases, fell to 72.4 percent from July's 74.8 percent. The employment index decreased to 51.4 percent, down from its pervious 54.5 percent. However, new orders also fell, to 52.1 percent, down from the previous 55.6 percent.

Monday's holiday resulted in a postponement of the crude inventories number until tomorrow. Crude closed lower by 1.5 percent, at $67.55 (QCharts, intraday) or $67.57 (QCharts, daily) a barrel. The OIX and XOI were hard hit, with their component stocks not able to help the SPX today.

Another release, advertising spending, came in about midmorning. TNS Media Intelligence reported that advertising spending rose 4.1 percent for the first half of this year, but that was less than the expected 4.5 percent. The expected number had been trimmed twice. Ads in local newspapers dropped 3.9 percent. Ads in consumer magazines were up by 4.4 percent, but had softened from previous numbers. Advertising during the World Cup and Olympic blitzes increased spending on the Spanish Language Media and network TV. Internet display advertising did rise 18.9 percent.

Indices rebounded a bit into the afternoon release of the Beige Book, the Federal Reserve's survey of current economic conditions across its twelve districts, conducted before the end of August, but then indices resumed their downward course. Although economic growth continued, the report concluded, the pace of that growth softened, with five out of the twelve districts seeing what the Federal Reserve termed a "deceleration" of growth. One of those five, the Dallas district, was seeing a deceleration from a particularly strong growth to a strong growth so that its deceleration could be partially discounted, while Boston, New York, Philadelphia and Kansas City saw more of a deceleration.

The report concluded that manufacturers did not appear to be able to pass cost increases in metals, energy and other raw materials onto finished consumer goods. Presumably that would have dampened rate-hike fears, but the fear of a slowing economy may have increased after the report.

Consumer spending was affected by slower auto and home-improvement-related sales. It's no surprise to anyone watching the housing market that home improvement sales might be slowing, and the Beige Book confirmed that real estate markets are weak across the country. The survey didn't find many changes in the labor markets, with those appearing strong but with only spotty reports of upward wage pressures and labor shortages.

Although this report was mostly in keeping with the earlier reports, it did echo worries about a slowing economy along with higher materials costs and rising wage pressures, even if only on scattered fronts.

Companies in the news included Ford (F), General Motors (GM), Cisco (CSCO) and a number of energy-related companies. Ford announced a new CEO, Alan Mulally, formerly of Boeing. Analysts appeared surprised by the move that included Henry Ford's great-grandson giving up his post to Mulally. Some credit Mulally with the revival of the commercial plane business at Boeing after 9/11. Some analysts applauded Ford's move, speculating that Ford's turnaround would move faster; others noted that Mulally had been passed over a couple of times for promotion while at Boeing and questioned how easy it would be to transition from jets to cars. In an interview on CNBC, Mulally claimed that while at Boeing, he had needed to meet consumer demand, and he can do that with Ford, too. Citigroup upgraded F's stock from a sell rating to a hold rating.

GM announced a new consumer initiative. Some expected the announcement to include longer warranties, and the announcement did include a five-year, 100,000-mile powertrain limited warranty. Articles mention that this is a tactic borrowed from Hyundai. Hyundai's 100,000 warranty, enacted in 1999, was credited with helping increase sales of the Korean car. GM will begin its version with 2007's cars and trucks and will include all eight GM brands. It will also be retroactive to the 2007 cars or trucks already sold.

Cisco gained attention when CFO Dennis Powell reaffirmed the company's forecast first made in early August for the quarter and the full year. The company's first fiscal quarter ends in October, and Powell believes that 19-21 percent growth is possible if Scientific-Atlanta sales are included, or 11-13 percent without them. He believes that sales will increase 15-20 percent for the full year if Scientific-Atlanta sales are included. Excluding those results, the company's revenue will rise 10-15 percent. Powell detailed continued plans for the active stock buy-back program and also volunteered to his audience of reporters and financial analysts that the company would eventually pay a dividend. Investors weren't impressed, and CSCO dropped 1.85 percent.

In other company-specific news, Citigroup downgraded refiners Sunoco Inc. (SUN) and Valero Energy Corporation (VLO). After the close, Market Biosciences Corp. (MATK) fell after it shaves its earnings estimates for the fourth quarter to a level below analysts' estimates. KB Homes (KBH) announced that the third quarter's preliminary net orders had declined 43 percent.

Tomorrow's releases include initial claims for the week ending September 2 at 8:30, followed by a couple of releases at 10:00. The fourth-quarter 2005 business employment will be released, as will July's wholesale trade. Consensus for the wholesale trade number is a gain of 0.8 percent, matching the previous number. If the inventories portion of this number changes enough to impact the GDP, this could be a market-moving number, but otherwise, it typically has little impact on the markets. Crude and natural gas inventories follow at 10:30.

Earnings have slowed down considerably, and it's now earnings warnings such as MATK's after-hours announcement or raised guidances that have the potential to impact the markets.

As Jane Fox noted on the Market Monitor today, the Bank of Japan begins a much-watched two-day policy meeting Thursday, which would be during our overnight session tonight. The Bank of Japan and its governor, Toshihiko Fukui, is expected to leave the rates at 0.25 percent, but the statement coming out of that meeting will be much watched. The government and the Bank of Japan often disagree about the pace at which Japan's monetary policy will be tightened, with the government fearing that a too-quick move would threaten Japan's long-time-coming recovery. Some argue that Fukui will take amore hawkish tone and warn of future rate hikes while others theorize that he'll keep to the established statement. Our markets' movements have not had as much correspondence to Japan's lately as they once did, since the two countries are presumably at far different points in their rate-hike cycle, but I mention it for those who might watch the Nikkei to see how it reacts to our developments. Tonight, its reactions might be governed more by their own rate-hike fears than ours.

Tomorrow is the Thursday before option expiration week, and that's a Thursday that often produces crazy market action as big-money people are rolling out of September positions and into October ones. The VIX sometimes isn't a great help in measuring the markets and there sometimes is not much relevance in that day's action when compared to what happened the Wednesday that preceded it.

With that information to keep in context, I see charts that appear to need at least a little more retracement before strongest support is reached. The RUT's day was horrible and many other indices produced legitimate reversal signals, so my expectation, at the least, would be to see prices punch a bit lower sometime during the day, with the most bullish possibility then being a bounce attempt, leaving a long tail springing up from support. That bullish possibility doesn't have to occur, however, so if you're tempted to step in and buy a dip, be ready to step right back out if needed.

That's the best-of-the-bad short-term outlooks that charts are giving, but the markets can do anything they want. Charts don't present a good case for a strong bounce tomorrow, but if prices can drop heavily one day, they can rise as quickly the next, although that's less likely than a heavy drop. Many indices sport potential inverse H&S's on their daily charts, with those formations spanning the summer months, so we could be in another chop zone as those right shoulders attempt to form. We had some short-term bearish action today, but it should be looked at in the context of rising support from July holding on most indices and potential bullish inverse H&S's forming on many daily charts. Some may have been waiting for the "magic" numbers such as SPX 1300 to buy, although I believe stronger support to be below that, so some attempts to buy dips may begin tomorrow. If you're in short-term bearish positions, keep following the price movement down with your stops so you don't lose too much of your profits if a stronger reversal begins.

Watch the RUT and watch the SOX for clues. If you're a Dow or SPX trader, check the RLX and TRAN, too, as those often serve as indicator indices in the same way the RUT and SOX do. And all should study bond yields from time to time, as they're often reacting ahead of the equities, as they did when they began rising Tuesday, ahead of the equity downturn.

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: 39.63 chg: -3.06 stop: 38.90

Ouch! It was a very ugly day for shares of ANDE. The markets suffered a broad-based day of profit taking and investors chopped off several days of gains in ANDE with one fell swoop (-7.1%) on rising volume. The breakdown and close under what should have been round-number support at $40.00 and technical support at its 10-dma is bad news. Traders may want to seriously consider exiting immediately as odds are very good that if the market sees any follow through lower tomorrow morning we'll be stopped out at $38.90.

Picked on August 28 at $ 40.26
Change since picked: + 2.43
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 900 thousand


Allegheny Tech. - ATI - cls: 60.59 chg: -1.73 stop: 56.95

Steel stocks were not excused from the market-wide profit taking on Wednesday. Shares of ATI lost 2.7% and closed back under its 50-dma. We would wait for signs of a bounce from the $60 level before considering new bullish positions. More conservative traders might want to tighten their stops. Our target is the $67.50-70.00 range but we do expect some resistance near $65 and its 100-dma (64.85).

Picked on September 05 at $ 62.32
Change since picked: - 1.73
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 3.3 million


AstraZeneca - AZN - close: 63.27 change: -1.12 stop: 61.95 *new*

It was just two days ago that the DRG drug index was hitting new one-year highs and AZN was hitting new all-time highs. Now the group and AZN is seeing more profit taking and the momentum indicators are turning south. We are not suggesting new bullish positions in AZN at this time. Instead we're raising our stop loss to $61.95, since broken resistance near $62.00 should offer some support. More aggressive traders might want to leave their stop under the rising 50-dma, currently at 60.93.

Picked on August 20 at $ 62.99
Change since picked: + 0.28
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 1.1 million


Cameco - CCJ - close: 41.17 change: -1.18 stop: 38.75

This afternoon CCJ marked down its 2007 gold production forecasts. The stock lost 2.7% on the session but we suspect that was due to the market-wide profit taking. We would wait and watch for a bounce near $40 before considering new bullish positions. Our target is the $44.50-45.00 range.

Picked on August 22 at $ 40.33
Change since picked: + 0.84
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 1.9 million


Carpenter Tech. - CRS - cls: 99.85 chg: -3.67 stop: 97.45

CRS produced a bearish reversal on Wednesday. The stock lost 3.5% and closed back under its 50-dma and what should have been support at the $100.00 mark. The sharp sell-off is bad news for the bulls and CRS could dip all the way back toward technical support at its 200-dma near $95. Of course a move that deep would stop us out at $97.45. We are not suggesting new positions at the moment and given the momentum behind today's reversal more conservative traders might want to tighten their stops even further or exit early.

Picked on September 05 at $101.10 *gap higher*
Change since picked: - 1.25
Earnings Date 10/23/06 (unconfirmed)
Average Daily Volume = 847 thousand


Cognizant Tech. - CTSH - close: 69.83 chg: -1.67 stop: 68.45

The sharp sell-off in tech stocks was definitely felt in shares of CTSH. The stock reversed yesterday's rally and closed back under the $70.00 mark. We're not suggesting new bullish plays at this time and more conservative traders might want to tighten their stops even further (maybe around $69.25).

Picked on August 29 at $ 71.55
Change since picked: - 1.72
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 1.4 million


Cymer Inc. - CYMI - close: 41.30 chg: -0.91 stop: 39.95

Call it bad luck or call it stock price manipulation but we have been triggered in CYMI. The stock rallied to $42.70 early this morning before quickly reversing lower. Our trigger to buy calls was at $42.55, which was above resistance at $42.50 and its exponential 200-dma. If you look you'll notice that the SOX semiconductor index saw no such morning rally higher. At any rate the move today is a failed rally/bearish reversal and we're not suggesting new plays at this time. More conservative traders, if you did open positions, might just want to exit early and cut losses now. The next move looks like a dip toward what should be support near $40.00. Our stop loss is at $39.95.

Picked on September 06 at $ 42.55
Change since picked: - 1.25
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million


Emerson Elec. - EMR - close: 82.00 chg: -1.40 stop: 79.99

Profit taking pushed EMR to a 1.6% loss. A bounce from here, near its 10-dma and 100-dma, would be a positive sign. Yet we expect the dip to continue. Watch for a bounce near $81.00 as a potential bullish entry point. Our target is the $89.00-90.00 range.

Picked on September 05 at $ 83.55
Change since picked: - 1.55
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.5 million


Freeport McMoran - FCX - close: 60.35 chg: -1.24 stop: 55.95

We warned readers to expect a potential "fill the gap" move. That would suggest that FCX will continue to dip toward $59.50 and maybe toward the rising 10-dma, near 58.00. We are not suggesting new positions at this time. Our target is the $62.50-63.00 range.

Picked on August 23 at $ 57.51
Change since picked: + 2.84
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume = 5.1 million


Phelps Dodge - PD - close: 92.56 change: -0.92 stop: 87.75

PD failed to breakout over the $95 level again today and shares began to slip lower as the sell-off in the markets grew into the afternoon. The session was also host to some analyst comments. One analyst upgraded PD to an "out perform" while another analyst started coverage with a "sector perform" and a $110 price target. We are expecting a dip back towards $90 as the stock "fills the gap" from yesterday morning. Wait and watch for the bounce before considering new positions. Our target is still the $97.50-100.00 range.

Picked on September 01 at $ 90.55
Change since picked: + 2.01
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 6.7 million


United Ind. - UIC - close: 54.32 change: -0.94 stop: 49.99

Watch out! We have been warning readers that UIC was looking short-term overbought and due for some profit taking. Today's 1.7% decline and bearish engulfing candlestick looks like the beginning of a multi-day consolidation. The stock has already hit our primary target in the $54.75-55.00 range and more conservative traders may just want to exit completely right now. We're expecting a dip toward the $52 region. Our secondary target is the $57.50 level.

Picked on August 27 at $ 51.77
Change since picked: + 2.55
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand


VF Corp. - VFC - close: 69.59 change: -0.23 stop: 68.45

The lack of follow through on yesterday's afternoon bounce is discouraging. We seriously considered exiting early after today's close back under the $70.00 level. More conservative traders might want to give that idea more thought. The overall trend remains bullish but unless you want to put your stop loss under the 50-dma near $68 then odds are good that any pull back tomorrow we will be stopped out at $68.45. We're not suggesting new positions at this time.

Picked on August 30 at $ 70.25
Change since picked: - 0.66
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 567 thousand

Put Updates

Boeing - BA - close: 74.44 change: -0.92 stop: 78.05

The big news today in BA was the announcement that Ford (F) had picked Alan Mulally as their new president and chief executive officer. Alan had been the leader of BA's commercial plane division. The news hardly helped BA during the market's sell-off today. The stock lost 1.22% and closed back under the $75 level. This looks like another entry point to buy puts. Our target is the $70.50-70.00 range.

Picked on August 10 at $ 75.75
Change since picked: - 1.31
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 4.2 million


Chipotle Mex Grill - CMG - close: 50.09 chg: -0.42 stop: 52.55

The pull back in CMG appeared mild. We would wait for another decline under Wednesday's low (49.74) before considering new positions. Our target is the $45.50-45.00 range. The P&F chart is still bearish and points to a $39 target.

Picked on August 09 at $ 50.28
Change since picked: - 0.19
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 414 thousand


EOG Resources - EOG - close: 63.15 chg: -3.46 stop: 66.55

Another slide in crude oil futures helped fuel the big sell-off in oil stocks today. Shares of EOG were hit with a 5.19% drop on rising volume. Shares broke down under support at $64.00, which was also the neckline to its bearish head-and-shoulders pattern. The move also produced a new triple-bottom breakdown sell signal on the P&F chart. Our trigger to buy puts was at $63.85 so the play is now open. Our target is the $57.50-55.00 range. Remember, the biggest risk we see to this play is any escalation with the U.S. and Iran.

Picked on September 06 at $ 63.85
Change since picked: - 0.70
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million


Johnson Controls - JCI - close: 69.79 chg: -1.55 stop: 75.51

JCI has broken down to a new relative low under support at the $70.00 level. The stock is in striking distance of our target in the $68.50-67.50 range. We're not suggesting new positions at this time and more conservative traders may want to tighten their stops.

Picked on August 22 at $ 72.96
Change since picked: - 3.17
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million


Radian Group - RDN - close: 59.08 chg: -1.71 stop: 61.51

Our put play in RDN is now open. The market sell-off sparked new selling pressure in RDN. The stock spiked lower at the open and eventually traded to a new six-week low and under technical support at its simple and exponential 200-dma(s). Our suggested trigger to buy puts was at $58.99 and the low today was $58.96. Now that the play is open our target is the $55.15-55.00 range.

Picked on September 06 at $ 58.99
Change since picked: + 0.09
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 722 thousand

Strangle Updates


Dropped Calls

MicroStrategy - MSTR - close: 90.98 chg: -1.80 stop: 89.45

We're going to throw in the towel on MSTR. We voiced our opinion yesterday that the failure to hold its intraday gains above the 100 and 200-dma was a concern. The move is now looking like a failed rally at technical resistance. More aggressive traders might want to keep the play open but the technical picture has deteriorated and traders might want to be thinking put options if MSTR trades under $89.50.

Picked on August 16 at $ 92.05
Change since picked: - 1.07
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume = 431 thousand


Southern Peru Copper - PCU - cls: 96.90 chg: +0.23 stop: 89.99

Target achieved. PCU bucked the market's downtrend this morning and rallied to an intraday high of $98.95. Our target was the $98.00-100.00 range. We would keep an eye on a pull back toward the $50-dma near $90.00 as a potential entry point to consider buying calls again.

Picked on August 31 at $ 92.32
Change since picked: + 4.58
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 1.5 million


FreightCar Amer. - RAIL - cls: 57.29 chg: -2.30 stop: 54.95

It's time to disembark shares of RAIL. The recent breakout over technical resistance at its 100-dma and 200-dma has failed at the $60.00 level. Today's 3.8% drop in RAIL is a technical breakdown back below those same moving averages. What really concerns us is that Dow Jones Transportation average (TRAN). The TRAN has been consolidating sideways for the last four weeks and today's move is a bearish breakdown and sell signal. Readers might want to consider buying puts on RAIL if the stock trades under 56.50 or the $55.00 mark.

Picked on August 20 at $ 59.13
Change since picked: - 1.84
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 475 thousand


Ryland Group - RYL - close: 40.05 change: -1.76 stop: 39.95

The homebuilding sector really hit some selling today. The DJUSHB home construction index lost 3.7%. Shares of RYL fell 4.2% and the move produced a new MACD sell signal and a breakdown below its 50-dma. Traders might want to consider buying puts if RYL closes under $40.00. It was our plan to catch a breakout over resistance at $45.00 but that never happened. Our trigger to buy calls was at $45.15. RYL is dropped as a bullish candidate.

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

Dropped Puts


Dropped Strangles


Trader's Corner

Point and Figure Charting (2)

This article is a continuation of my Wednesday Trader's Corner article of last week (8/30/06) and discusses some of the key benefits and a key advantage of projecting price targets offered by Point & Figure (P&F) charts. The first article on this topic was in answer to a subscriber's question and described the basics of constructing Point & Figure (P&F) charts. That article is the preface to this one and may be seen by going back to your saved Option Investor Daily market letter or by clicking here when also connected to the Internet.

OIN's Jeff Bailey uses P&F charts extensively in his Market Wrap columns and the aforementioned article can provide the basics in how these charts display price-only data as changes occur of a certain magnitude, as opposed to price by date plotting seen in bar, candlestick and line (close-only) charts.

Key aspects in Point & Figure chart construction:

1. All trading is seen as a single stream of prices and ignores the time duration an index or stock takes to get from one price to another. Moving average or other studies that use 'time', don't apply to P&F charts.

2. The P&F chart is constructed by a serried of Xs and Os. Each X or O represents a price move of a given amount, determined by the user; e.g., '1', as in a 1 Index point in the OEX, called the BOX size. An 'X' is equal to an advance of the box size, an 'O' is used to mark a decline of the amount of the box size.

3. New Xs or Os keep getting filled in as long any NEW high or low is equal to or more than the box size.

4. A second key element, besides the box size, is the REVERSAL amount, which is usually quoted as a multiple of the box size amount; e.g., 3 in the case of the commonly used 1X3 P&F chart above.

5. Assume the market has been advancing and we're using a 1X3 P&F chart. Comes a price pullback equal to 3 index points in OEX below the value represented by the highest high and the topmost X; a new column of at least 3 Os is made in the next column to the right in a descending manner. The reverse is true of descending boxes with Os: a rally from the lowest box with an O of 3 points or more (or, whatever is the reversal amount), will result in a new column to the right with 3 or more Xs plotted.

6. X and O columns always begin one box up or down from the end of the prior column; its a convention of P&F charting to start the new column this way. The reference to dates on the bottom of a P&F chart is not a time 'scale' in the sense in which it is normally used (one that marks regular increments of time like days). Rather, the dates noted to the right of the little slash marks represent the beginning of a new column.


#1, Finding support and resistance areas:

Point and Figure charts are quite useful in highlighting and defining areas of price resistance. For example, a price area where there is more stock for sale than buyers can absorb and where sellers will 'distribute' a substantial amount of stock to all willing buyers. In areas of price support, buyers will purchase or 'accumulate' as much stock as sellers will offer. Both distribution and accumulation price zones are where P&F reversals occur as shown by a new column of X's or O's.

The chart below of Microsoft (MSFT) provides an example of clear-cut definitions of the price areas where the stock has been under accumulation and distribution in the last several years. The same areas of support and resistance of course can be seen on bar charts, but with the P&F chart, there is no time duration to obscure what is happening and the information on price support and resistance 'pops out' visually with the use of this type chart.

#2, Measuring upside/downside potential for a next price swing:

Point and figure charts allow horizontal measurement across the chart to determine upside or downside price targets. This is mostly unique to P&F charts.

The premise here is that there is a direct relationship between the WIDTH of a sideways or horizontal trend (how long it goes on) and the subsequent price swing up or down when prices begin their next advance or decline. An equal measurement to width is made on the vertical price scale. So as not to mystify this and go back to market psychology and dynamics, the longer the tug of war goes on between buyers and sellers, the more pronounced will tend to be the buying or selling interest when it ends; we all know what happens when you let go of the rope in a tug of war game.

In the next chart, the count of the number of boxes in different columns is across the middle of an area where prices are trending sideways, which is also referred to as a (price)'congestion' area. Determine which horizontal line has the most number of Xs and Os filled in, then count the total number of 'boxes' across, whether filled or empty.

When there is a rally or decline that then moves above or below this line with a new X or new 0, count the same number of boxes on the vertical price scale (up or down), to arrive at a minimum price objective. The projected price objective is equaled or exceeded more often than not in my experience. Occasionally the 'minimum' price objective is not quite reached. What I describe is not all there is too measuring techniques in P&F charts, but it is the most useful to trading in my estimation.

# 3, Generation of 'trading signals':

Such 'signals' are generated when a column of Xs rises one box higher than the highest X of the prior 'X' column. Trading sell signals are generated when a column of Os declines one box below the lowest O of the prior 'O' column.

Since the reversal size is defined, the point where a new X would be added is known, an order to buy can be in place just above that price. Such a move could be used as a signal to initiate a new long position in a stock or as an indication to buy calls. This is a good way to set stops. If support in the OEX is seen at 600 in a 1X3 P&F chart, a decline 3 points below that level, or to below 597, would suggest the beginnings of a downside reversal.

#4, Confirming or refining interpretations of chart patterns:

For example, trendlines and channel lines can provide added clarity with Point & Figure charts and upside or downside breakouts are clearly seen.

Good Trading Success!

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

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


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