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Daily Newsletter, Monday, 09/18/2006

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Table of Contents

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

Market Wrap

Majors finished unchanged; Commodities get a bounce

The major indexes finished mixed to modestly higher after last week's quarterly option expiration, as decliners edged out advancers at both the NYSE and NASDAQ.

Commodity prices stabilized with the CRB Index (cr00y) 308.15 +0.36% closing up more than 1 point after breaking to new 52-week lows last week.

October Crude Oil (cl06v) settled up 47 cents, or +0.75%, while shiny metals found a stronger bounce ahead of tomorrow's August PPI data with the StreetTracks Gold (NYSE:GLD) $58.23 +1.44% and iShares Silver Trust (NYSE:SLV) $111.70 +3.43% recouping recent losses.

In Friday evening's Market Monitor at OptionInvestor.com, I began to outline some of this week's potential "key stocks."

The Semiconductor HOLDRs (AMEX:SMH) $34.65 +0.87% was a percentage gainer with one of my "key stocks," Applied Materials (NASDAQ:AMAT) $17.78 +3.37%, continuing its recent rise and finishing atop today's list of most actives.

The chip equipment giant announced it had recently repurchased 145 million shares of its common stock for approximately $2.5 billion under an accelerated stock repurchase program. The company said the recent buyback, combined with near 9 million shares already repurchased in the current fiscal quarter, resulted in a 10% reduction in outstanding common shares at the end of its third fiscal quarter.

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Applied Materials said its board of directors also approved a new repurchase program authorizing up to $5.0 billion in stock repurchases over the next three years.

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 664.52 +0.38% finished fractionally higher.

The National Association of Home Builders' index for U.S. sales of new, single-family homes dropped for an eighth month in a row and hit the lowest level since February 1991. The group said it doesn't expect sales to flatten out until mid-2007.

The NAHB's thoughts about a mid-2007 "flattening out" might be confirmed as I track the CME's Real Estate Housing futures, where the May2007 where at Friday's settlement, the Composite (comprised of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco, Washington DC) was last traded at 212.60, down from its August 9, 2006 01:35 PM EDT trade of 214.60.

On Friday, the CME Real Estate August07 futures last traded $211.40.

As noted in several market wraps, and Market Monitor postings, it is/was housing prices that the Fed saw as reason to continue their steady pace of interest rate hikes earlier this year, as the then torrid rise in single family homes was deemed inflationary.

U.S. Market Watch - 09/18/06 Close

In Monday's Market Wrap, I thought the Securities Broker/Dealer Index (XBD.X) 224.05 -0.38% would be a sector/index that traders and investors monitor for "bullish confirmation."

A quick look at the 5-dayNet% change in the above U.S. Market Watch does have the XBD.X up 7.11% since our last visit, with Airlines, Networking and Software lending to broader market strength.

Retailers as depicted by the S&P Retail Index (RLX.X) 470.22 -0.50% traded soft, but they too have advanced nicely since Monday's close, with electronics retailer BestBuy (NYSE:BBY) $54.10 +0.50% having risen an impressive 13.25% since last Monday's close. Evidently "the MARKET" was impressed by some of last week's "key earnings."

There have also been some MAJOR status changes in the institutionally followed major market bullish % at Dorsey/Wright & Associates, as well as StockCharts.com.

While I have provided greater detail in the Market Monitor at OptionInvestor.com on several of these, let's cover the S&P 500 Bullish % ($BPSPX) from StockCharts.com, as it gives traders and investors around the world a recognizable and rather broad observation of how demand is back in control of this market and "confirms" recent technical strength.

S&P 500 Bullish % ($BPSPX) - 2% box chart

Today's action (Monday) did see a net gain of 5 stocks generating REVERSING HIGHER point and figure buy signals, where internals from this institutionally monitored measure of internal strength continues to improve. In July, I was "on the alert" for any weakness and a reading of 46%, where internals could have deteriorated and really had another powerful wave of selling (supply/O) taking hold.

However, just last week, this internal measure turned "bull confirmed" and there is no doubt here, that demand and buying is back in control of this market.

Now let's take a look at the S&P 500 Index ($SPX) 1,321.18 +0.09% and its point and figure chart.

S&P 500 Index ($SPX.X) - 10-point box chart

The S&P 500 Index ($SPX) now challenges multi-year highs found in May and the Bullish % for this major market average is gaining strength and adding to the number of reversing higher point and figure buy signals.

On August 4, the $SPX gave a reversing higher point and figure buy signal at 1,290.

Real trading! I review my Market Monitor trade blotters on a frequent basis. I've encouraged traders and investors to do the same for their own accounts!

On July 21, after having just closed a profitable trade in some S&P Depository Receipts (AMEX:SPY) I profiled another BEARISH trade with some SPY August $126 Puts. That trade was STOPPED out for a LOSS on 08/02/06! The first entry for the SPX on the above chart for the MONTH of August is the "8".

Where I'm going by mentioning a LOSING BEARISH trade is how a BEAR might have actually turned BULLISH at SPX 1,290!

In my mind, and on the above SPX point and figure chart, that has to be deemed FORMIDABLE near-term support.

Do you see/feel how the internals are building bullish? And they're (the internals) "just starting" to confirm what PRICE for the SPX itself is saying.

Remember! For the bullish % indications, imagine that you have TWO stacks of charts and each night you hand chart all 500 of the SPX components! In one stack you place all the "buy signal" charts, and the other stack you place all the "sell signal" charts. The stack of "buy signal" charts is getting thicker.

Bottom Line:

This market is turning BULLISH. As a trader/investor, you want to FOCUS the BULK of your trading as BULLISH. A trader/investor does NOT BUY ALL AT ONCE. Buy a little NOW (index, or stock) to get SOME BULLISH EXPOSURE.

It is thought by some that a trader/investor has to do everything at once. This is NOT the case.

This week's "key sector" ...

Dow Jones Home Construction Index ($DJUSHB) - 5-point box

The $DJUSHB gets my "sector of the week" as there is NO GOOD NEWS in the sector that I have been able to find (big guide higher on earnings, inventories, sales, etc.) yet the DJUSHB breaks above 665, triggers a "spread triple top" buy signal at 670 and challenges its BEARISH resistance trend, which in April was "kissed" at 920 and sellers sent the index lower yet again!

See that "9" at 625? That's the first chart entry for September (09/01/06 to be exact) at 625. See how PRICE fell to 575, then ramped back up to 645 (gave the double top buy signal at 630) and for some reason, when it tried to pull back, buyers stood their ground at 630, and demand (X) builds further.

Monitor STOCKS and Indexes you're interested in for these types of 3-box reversals to SUPPORT.

The reason Applied Materials (NASDAQ:AMAT) $17.78 +3.37% was one of my "key stocks" for this week was largely technical, but as explained in the OptionInvestor.com Market Monitor, tied in with this spring's warning from Dell Computer (NASDAQ:DELL) and resulting action in Intel (NASDAQ:INTC).

Today's technical action in AMAT is indeed "key" in my opinion and bodes bullish for this STOCK, and can be a catalyst for further gains in the SECTOR.

Applied Materials (AMAT) - Daily Interval Chart

Friday evenings Market Monitor comments and today's action out of Applied Materials (AMAT) $17.78 +3.37% on HEAVY volume should give some conviction to bulls.
 


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

Beazer Homes - BZH - close: 40.64 change: +1.04 stop: 37.90

Double check those seat belts because this might be a bumpy ride in BZH. The homebuilders edged higher today and BZH out performed many of its peers with a 2.6% rally and a bullish breakout over resistance at $40.00 and its 50-dma. That's the good news - relative strength in BZH. The bad news is that rival builder MTH announced another earnings warning after the closing bell tonight. At this time we did not see any heavy after hours selling in either MTH or BZH so maybe the sector can shrug off the bad news. It's not like we haven't heard the news before from a handful of builders in the past few weeks. Shares of BZH did hit our trigger to buy calls at $40.75 so the play is now open and our target is the $46-47 range. We do not want to hold over the November earnings report.

Picked on September 18 at $ 40.75
Change since picked: - 0.11
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Cymer Inc. - CYMI - close: 44.00 chg: +0.00 stop: 39.95

The SOX semiconductor index managed to out perform the rest of the market thanks to news that Freescale Semiconductor was accepting a buyout offer from private investors. The SOX added just over 1%. Meanwhile shares of CYMI continued to trade sideways (unchanged today) with another failed rally at resistance near $45.00 and another bounce from the bottom of its recent trading range. We are not suggesting new positions at this time. Something to keep in mind is that while the first two weeks of September bucked the historical trend of weakness the next four weeks have a very strong history of weakness for stocks. More conservative traders may want to exit early or tighten their stop loss on CYMI.

Picked on September 06 at $ 42.55
Change since picked: + 1.43
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Hartford Finc. - HIG - close: 86.09 chg: -0.95 stop: 82.99

Hmm... this back and forth up and down trading in HIG is not a sign of strength. The stock has struggled to hold any of its gains following the bullish breakout over resistance a week ago. It's true that volume came in pretty light today, which would suggest a lack of conviction behind today's slide (-1%) but it was a slide nonetheless. Readers can use a bounce from here ($86.00) as a new bullish entry point but remember that our market outlook for the next four weeks is not very optimistic. Our target is the $91.50-92.00 range, near its May highs. However, we do expect some resistance in the $89-90 region. We do not want to hold over the early November earnings report.

Picked on September 12 at $ 86.29
Change since picked: - 0.20
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Manpower - MAN - close: 60.76 chg: -0.14 stop: 57.99

MAN spent the session churning sideways. We don't see any changes from our weekend update and still expect a dip back toward the $60.00 level and/or its simple 10-dma currently near 59.61. The $60.00 mark is broken resistance so it should offer some support. However, we're cautious on the market's strength so more conservative traders may want to tighten their stops (suggestions are 59.45 or $58.99). We're leaving our stop at $57.99 for now. Currently our target is the $65.00-66.00 range.

Picked on September 12 at $ 60.28
Change since picked: + 0.48
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand

---

Mettler Toledo - MTD - close: 65.14 chg: -0.29 stop: 59.99

MTD posted a decline on Monday but it was minor and the lack of real profit taking could be interpreted as more relative strength. The lack of volume on Monday would also suggest a lack of sellers (and buyers for that matter). We don't see any changes from our weekend update. The stock still looks short-term overbought and due for a dip so we're not suggesting new positions at this time. Our target is the $68-69 range. Please note that we normally try to avoid playing stocks with average volume this low so traders may want to consider this a higher-risk play. We do not want to hold over the late October earnings report.

Picked on September 13 at $ 63.66
Change since picked: + 1.48
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

---

Omnicom - OMC - close: 91.92 chg: -0.40 stop: 88.84

There is no change from our weekend update. We're still looking for more of a dip probably back toward the rising 10-dma (currently near 91.11) and potentially back to the $90 region. Our target is the $96.00-96.50 range. We would definitely wait for the pull back and signs of a bounce before considering new call positions. We do not want to hold over the late October earnings report.

Picked on September 10 at $ 90.97
Change since picked: + 0.95
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

United Ind. - UIC - close: 55.15 change: +0.25 stop: 51.45

The trading in UIC was favorable. The stock shrugged off weakness in the defense sector and managed to hit a new four-month high on an intraday basis and still close in the green. Shares have already hit our initial target in the $54.75-55.00 range and we're now targeting the $57.50 mark.

Picked on August 27 at $ 51.77
Change since picked: + 3.38
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand
 

Put Updates

Caterpillar - CAT - close: 66.99 chg: +1.56 stop: 67.36

There are no changes from our weekend play description on CAT. The stock did see a strong bounce on Monday but the bearish pattern of lower highs is still in affect. The DJIA might try and tag its all-time high before rolling over. Meanwhile we are still waiting for a breakdown. Our suggested trigger to buy puts is at $64.59. The P&F chart points to a $48 target. If triggered our short-term target is the $60.25-60.00 range.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

EOG Resources - EOG - close: 62.69 chg: +2.85 stop: 64.15

The energy sector was looking oversold so chatter about potential supply disruptions sparked a big bounce in the group. The OIX oil index added 2% and the somewhat volatile OSX oil services index produced a 3.2% rebound. Shares of EOG out performed most of its peers with a 4.7% bounce on strong volume. The rally failed at broken support/new resistance near $64.00. Normally we'd watch for a failed rally under $64 as a new entry point but we're worried that crude might continue to rebound so we are suggesting caution here. Our target is the $57.50-55.00 range. The P&F chart points to a $48 target.

Picked on September 06 at $ 63.85
Change since picked: - 1.16
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

---

Express Scripts - ESRX - close: 83.10 chg: +0.42 stop: 82.51

There is no change from our weekend update on ESRX. We are still sitting on the sidelines waiting for a breakout in ESRX. The stock has been trading sideways in the $80-85 range for six weeks. Taking into account that the next four weeks are usually a very bearish time period for stocks odds are definitely growing in favor of a breakdown. We're suggesting a trigger to buy puts at $79.85. If triggered our target is the $75.50-75.00 range.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Johnson Controls - JCI - close: 70.74 chg: -1.12 stop: 74.16

JCI lost 1.55% on Monday, which is a nice follow through on Friday's bearish engulfing candlestick pattern. Conservative traders could tighten their stop loss toward Friday's high. Our target remains the $68.50-67.50 range. The P&F chart is more bearish with a $56 target.

Picked on August 22 at $ 72.96
Change since picked: - 2.22
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Jacobs Engineering - JEC - cls: 78.97 chg: -1.01 stop: 82.26

Our new play in JEC is now open. The stock continued to sink after shares broke down under the $80.00 level and potential technical support at its simple 200-dma. Volume came in strong again with today's 1.2% decline. We suggested a trigger to buy puts at $79.45 so the play is now open and our target is the $72.50-70.00 range.

Picked on September 18 at $ 79.45
Change since picked: - 0.48
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 416 thousand

---

Joy Global - JOYG - close: 37.52 change: +1.24 stop: 37.51

There is no change from our weekend new play description on JOYG. We're waiting for a breakdown under $35.00. Our suggested trigger to buy puts is at $34.95. If triggered our target is the $30.50-30.00 range.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Las Vegas Sands - LVS - close: 66.85 change: -0.86 stop: 70.05

Believe it or not we were not triggered today. Shares of LVS continued to sink on Monday and dipped to $66.00 before bouncing sharply back to an intraday high of $68.49. The overall trading pattern continues to look bearish. More aggressive traders may want to enter put positions now. We're waiting with our suggested trigger to buy puts at $65.99 (under today's low). If triggered our target is the $60.50-60.00 range. We do not want to hold over the early November earnings report.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

Nucor - NUE - close: 48.77 change: +2.01 stop: 50.01

Steel-related stocks actually produced a rally on Monday. Shares of NUE added over 4% and broke out higher from its four-day trading range. Yet the stock remains in a bearish pattern overall. Aggressive traders might want to consider new put positions on a failed rally near $50 and its 50-dma. However, if NUE can trade over the 100-dma or the $52.50 level it would be a significant bullish breakout and traders would need to consider buying calls instead. We're still waiting for a breakdown under $46.00. Our suggested trigger to buy puts is at $45.95. If triggered our target is the $40.50-40.00 range. The P&F chart has a relatively new triple-bottom breakdown sell signal with a $41 target. We do not want to hold over the mid October earnings report.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Steel Dynamics - STLD - close: 52.83 chg: +1.90 stop: 52.05

STLD is another steel-related stock that was caught up in a sector-wide bounce. We're still on the sidelines waiting for a bearish breakdown under support. Our suggested entry point to buy puts is at $49.40. If triggered our target is the $45.15-45.00 range. We do not want to hold over the mid October earnings report.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Wynn Resorts - WYNN - close: 70.93 chg: -2.17 stop: 76.61

The sell-off in WYNN continued on Monday and shares lost another 2.9% on strong volume. The stock broke down under its 50-dma and 100-dma following Friday's bearish engulfing candlestick pattern. We have adjusted our entry point to this morning's open at $72.51 instead of Friday's close (73.10). The stock is testing potential, round-number support near $70 so don't be surprised to see a bounce back toward $73-74. A failed rally under $74.00 could be used as a new entry point to buy puts. Our target is the $68.50-68.00 range, which takes into account potential support at the rising 200-dma. Aggressive traders may want to aim lower.

Picked on September 18 at $ 72.51 *adjusted
Change since picked: - 1.58
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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