Option Investor

Daily Newsletter, Thursday, 09/21/2006

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Table of Contents

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

Market Wrap

Priced To Perfection

The Market got what it wanted yesterday (a pass by the Fed) but sold off today anyway. Just another sell-the-news event. The trouble this time is that a sell-the-news event could lead to something a lot more drastic. That's because the market has everything priced to perfection at this point and any disappointing news will not be taken well. But so far there have been no major hiccups. Well, except for that minor little problem with Amaranth losing $5B. But what's a few billion amongst friends. There's plenty more where that came from.

The jubilation at the news the Fed was going to hold at the current interest rate turned to fear today that perhaps that means the economy is slowing. The release of the Philly Fed survey and leading economic indicators today only added to fears that a hard landing may not be avoidable after all. And once again I'll mention the facts about the stock market vs. the Fed's rate changes. With very few exceptions the stock market was down 6 and 12 months After the Fed stopped raising rates. Why so many talk about the market being a good time to buy once the Fed stops raising rates is beyond me. I'm thinking it's smart money who keeps that rumor alive so that they have plenty of sheep to sell to while smart money unloads their inventory.

From a technical perspective several of the market's major indices are perched at the top of bearish ascending wedges in which they have cornered themselves. They must break to the upside with gusto otherwise even a normal pullback will be a break down from the wedges. Once a break down occurs it will be difficult to stem the blood-letting since these wedges typically retrace quickly all the way back to their origin; in this case that's the July low.

But that's the downside risk. For now the equity market is holding up remarkably well. The low VIX says no one is worried about a Sept/Oct correction (strong hint--put options are real cheap right now). I hate to sound like a bear since I know many of our readers do not like hearing anything other than bullish things and prefer to only buy and not sell. Buying calls is good; buying puts means youre a pessimist. But those who have followed me for a couple of years now know that I call it as I see it. As Fleckenstein often says, I'm often wrong but I'm always confident in what I say. So while I may sound confident in the setups I see tonight, understand that I'm just one analyst of many that you should be following (even here at OIN or on the Market Monitor) so as to form your own opinion. After all, it is your money.

If you don't like bearish reports you can stop reading here. But I see a bearish setup in this market the likes of which I haven't seen since 2000. Playing the short side is more difficult than playing the long side and it has a lot to do with bear market rallies that stops many shorts out of their positions only to reverse hard to the downside again. You don't see that kind of price action in a bull market. But the setup I see in front of us could make shorts more money in a year than bulls have made in the past 4 years. If you don't like playing the short side of this market then at least go into profit protection mode and move to cash soon, as in very soon. As I mentioned above, buying some put options for insurance against your portfolio's losses has never been cheaper. Some December puts should work very nicely.


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There are many who are speculating that the market will be held up into the elections. I have to say I've been surprised at the inability for this market to sell off. Bearish divergences have been on the charts since, well, since 2004 but it's getting noticeably weaker lately. The advancing-declining volume and issues shows less and less participation at each new high. The semis are simply not in the game. And when the semis are heading south while the big caps are chugging higher that says smart money is not buying into the new highs, literally.

But the effort to hold the market up could continue for several more weeks. Just getting close to the election would be good enough since not enough damage could occur by election (maybe). As a follower of Elliott Wave patterns there's a way for me to consider the possibility of a strong rally tomorrow. And if that happens I firmly believe we'll see a rally last at least into the end of this month, perhaps as a choppy rally, with SPX 1345 as an upside target. But if we get a bounce followed by new lows below today's then let the bell toll for those bulls who refuse to get out of their long positions.

Before getting to the charts to show what I'm looking at, let's review today's economic reports. The weekly unemployment numbers showed a rise of 7K to 318K. The 4-week average of new claims stayed steady at 315K. The number of continuing claims fell by 29K to 2.4M and the 4-week average dropped to 2.47M which puts it back down to the level seen at the beginning of the month.

The Leading Economic Indicators (LEI) fell -0.2% in August, making it the 4th time in the past 5 months to have fallen. It also fell in July. This suggests sluggish growth at best into the end of the year. Of the 10 indicators that make up the LEI, 3 were up--stock prices, money supply (gee, I wonder who could be doing that) and orders for consumer goods. Thank goodness for the mighty consumer still. But consumer expectations, building permits and the factory workweek dropped the biggest. The rest were down slightly--interest rate spread, jobless claims, vendor performance and orders for capital goods.

The Philly Fed survey came out at 12:00 and the market started breaking down right after that. The Philly Fed diffusion index dropped significantly--down -0.4% vs. expectations for +14.4%. This was a drop from August's +18.5%. This was the first time this index went negative since April 2003 which of course was right after the bottom in the market (March 2003). Readings below zero indicate contraction and that's what started the "R" word to start spreading around again. Economic growth is slowing fast and inflation is hanging on. For those who were around in the 1970's and remember the painful times of stagflation, that's where we could be headed again. It's tough for the Fed to fight that one--they'd be stuck between a rock and a hard place.

The new orders index dropped to -1.3 from 15.7 and shipments dropped -6.8 from 22.3. Prices paid index dropped to 38.1 from 45.3 while the employment index rose slightly to 10.7 from 8.2.

DOW chart, Daily

The DOW continues to press against the top of its ascending wedge but not able to make more headway than that. And each new high is being met with less enthusiasm as measured by market breadth. The bearish divergences at new highs is usually a very good indicator that the bearish interpretation of this pattern is the correct one. The Elliott wave count that have for the internal structure shows it could be complete at today's high. There's also the possibility that today's pullback was just a deep correction to this week's rally off Tuesday's low. If that's the case then the market needs to rally hard tomorrow. If we've seen the high for this pattern then we should see a bounce (assuming we'll get one tomorrow) that then leads to new lows.

The DOW came down and touched its uptrend line from July today at 11500. That's the line the bulls need to defend. If the DOW breaks that and then breaks Tuesday's low (11480) then that will be confirmation of the break down from this pattern. Ascending wedges (and descending wedges) tend to retrace the wedge relatively quickly and that would mean a drop below July's low and it could happen in a matter of weeks vs. the 2 months it took to build this wedge. The bigger EW pattern tells me we're perched on the edge of a cliff. You'll recall the chart I showed a couple of weeks ago showing the relationship between the housing index vs. the S&P 500 (lagged 12 months). That chart and my EW count suggest we're in for a nasty decline very soon.

SPX chart, Daily

The SPX sports the exact same bearish ascending wedge as the DOW. A retest of the May high also occurred. Like the DOW, if today's pullback is followed by a strong thrust higher tomorrow (and it has to happen tomorrow) then we could see a push up to a Gann and Fib target of 1345. It might not happen in a quick move though but instead be a choppy ride higher. That would tell me it's the last leg up as smart money sells into it. By its wedge pattern, and previous highs and lows, SPX could find support around 1313 whereas the DOW will show a break down by that point. So there's enough of a difference to cause some question as to when we'd have a sell signal. A break below SPX 1308 would tell me to short every bounce in your favorite index.

Nasdaq chart, Daily

The COMP is struggling near the top of its steep parallel up-channel for price action since the August low. It's also at the broken uptrend line from August 2004 where it last failed a retest in late June. While this one could press higher as well, it's looking very vulnerable to a sell off here. The QQQQ chart looks exactly the same.

SMH index, Daily chart

The semis have been weaker during the whole summer rally and have now started to sell off before the rest of the market. That's usually very telling--they're the canary in the coal mine and I think the canary just fell off its perch. It's looking at me with sorrowful eyes while clutching its throat. I can't quite figure out if it was a bad seed or what. Bulls should heed the warning on this one if it breaks its uptrend line from July, currently just below where it closed today.

BIX banking index, Daily chart

The banks look almost bullish here, but only if it survives a retest of its broken downtrend line (closed on it today). If it drops back down below the line then it was just a bull trap head fake to the upside. A failed break out usually results in a whip to the downside as all the bulls scramble out the one narrow exit door. But if the banks turn around and head higher I would expect to see the same in the DOW and SPX and I would abandon attempts at the short side until at least the end of the month.

Securities broker index, Daily chart

The brokers also pushed higher than I thought they'd go, and there's not much in the way of bearish divergences to tell me I should be looking to short this index. It did however get near testing its broken uptrend line from May 2005. This index loves to test previously broken support and has been consistently doing that since the April high. This could be just another test before turning back lower. That's my expectation but we'll need price to turn back down now to give some clues in that regard.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing index has been consolidating since its July low and it looks like a bear flag. My EW count says it is in fact a bear flag and that we should see this continue lower once it's done (and the last high in September should have been it). This should get down to, or below, 500 before another consolidation.

OOil chart, November contract, Daily

I've been saying for a while now that I expected oil prices to decline based on my belief that we'll see an economic slowdown on a global basis. This was based on EW analysis that calls for a deep retracement in the stock market which happens to be the best reflection of social mood that we have. With a downturn in social mood (which we're seeing) we'll see a downturn in the economy. Lack of demand for oil will result in a drop in oil prices. This has nothing to do with the fundamentals about oil which I know next to nothing about (although thanks to Jim and his superb research and analysis I'm far more educated this year). It has everything to do with EW analysis and it tells me oil has further to go to the downside before finding firmer support. I could be all washed up on this but this is how I'm calling it. And if we get the 5-wave move down as I've depicted it will mean we've seen the high in oil for a long time (a few years anyway).

Oil Index chart, Daily

The oil index is mirroring the oil price. The break of the 200-dma followed by a failed retest of it looks bearish. We might have completed the 3rd wave down which would call for a sideways/up consolidation and the short term charts are starting to show bullish divergences so we might not be far from a bounce. It's not one I'd want to buy but I wouldn't want to short this index from here, not yet anyway.

Transportation Index chart, TRAN, Daily

A retest of the May high for DOW and SPX is not being accompanied by a test of the high for the TRAN. That's bearish non-confirmation. The Trannies struggled with the confluence of its 50, 100 and 200 moving averages and now looks ready to pullback after a failed test of that resistance. It looks like another bear flag about to break down.

U.S. Dollar chart, Daily

The US dollar chart is starting to give me bigger bearish feelings here. For a while I though a brief consolidation would be followed by a move to minor new low--targeting around $83--to be followed by a bigger bounce. Now I'm getting the impression that the sideways coil is the continuation pattern for the move down from November 2005. Two equal legs down from last year's high would take the dollar down to around $77. That should theoretically be very good for gold. But so far I'm not seeing that much I like bullish about gold.

Gold chart, December contract, Daily

I view the current small consolidation as bearish and am looking for lower prices for gold. Using Fib projections I see a downside target of $506. I've drawn in a trend line across the lows in March and June of this year and if I squint I can see a H&S pattern there (albeit with a rather large right shoulder, so it's a humpback H&S). The downside price target from that is closer to $400 and that matches a Fib projection for the 2nd leg down to be 162% of the 1st leg down (common, especially in commodities). I don't know if that will happen from here but without considering the US dollar or any of the economic fundamentals that should drive gold higher, my opinion on gold is bearish for now.

Results of today's economic reports include the following:

This chart (from Yahoo's economic calendar) doesn't show any significant economic reports tomorrow. Jane reported on the Market Monitor at the end of the day that we'll have the August Chicago Fed National Activity Index (Previous: -0.12).

After the close JDSU (2.15 -0.03) announced its approval for a 1-for-8 reverse stock split. That would get their stock price back up to $17.20 based on today's closing price. Of course stock holders would have one-eighth of the number of shares they currently have. Expect many many more tech companies to do this in the next year, especially those that were hammered down during 2000-2002 and haven't really recovered much since then.

Taking a look at my weekly SPX chart to see how it's doing, again there's not much change.

SPX chart, Weekly, More Immediately Bearish

The market is stubbornly holding onto its highs but not making much headway on a weekly basis. The weekly oscillators into overbought and/or curling offers more evidence that the bearish ascending wedges will likely result in a significant price correction. For those who like to play the short side we should have a good opportunity right around the corner. But the real money maker for short players will be next year after a bounce into the new year.

For now I'd play it carefully tomorrow and into next week. The bearish setup is there but we'll have to see a bounce followed by a move to new lows below today's. That would be a strong sell signal for me and I'd be looking to short the bounces after that. But if tomorrow reverses today's losses then I'd be inclined to scalp the long side and watching carefully for the end of the run.

I say scalping long plays because I believe the risks are now on the bulls' side. Surprises are likely to be to the downside now. With the market priced to perfection it won't take much to see a fast exit and the exit door gets mighty narrow when that happens. For those of you who have traded fast markets you know about the terrible fills you can get. If you want out quickly don't even hesitate to use a market order. If you want in, use a limit order. It's a time to be very careful and if you can't watch the market intraday, and you're long the market, be sure you're using some protection. Nobody likes nasty surprises when you don't use protection.

Good luck and I'll see you next Thursday and on the Market Monitor tomorrow.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None BNI None

New Calls

None today.

New Puts

Burlington Nor.SantaFe - BNI - cls: 68.60 chg: -1.82 stop: 71.01

Company Description:
A subsidiary of Burlington Northern Santa Fe Corporation, BNSF Railway operates one of the largest railroad networks in North America, with about 32,000 route miles in 28 states and two Canadian provinces. The railway is among the world's top transporters of intermodal traffic, moves more grain than any other American railroad, transports the components of many of the products we depend on daily, and hauls enough low-sulphur coal to generate about ten percent of the electricity produced in the United States. (source: company press release or website)

Why We Like It:
In spite of plunging oil prices the transportation sector has not been able to breakout past resistance in the 4475-4500 region and its simple 200-dma. Now the sector is falling with today's 1.5% decline and breakdown under technical support at its 50-dma. The railroad stocks are performing worse with the Dow Jones railroad index falling 2.2% and also trading under its 50-dma. While momentum indicators are turning bearish we admit this may be a tough sell. Both the Transportation average and the railroad index have support that was built over the last couple of months. However, the railroads, including shares of BNI, have produced a third failed rally at its five-month trendline of resistance (see chart). This could be the beginning of a new leg lower. We are going to suggest a trigger to buy puts on BNI at $67.75, which is under the stock's 50-dma. We do expect some support near $64.00. Therefore we're going to list two targets. Our conservative target is $64.25 and our aggressive target is at $61.00. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November puts. We do not want to hold over the October earnings. Our trigger to open plays is at $67.75. Remember that it is you, the individual trader, who should decide which month and strike price best suits your trading style and risk.

BUY PUT NOV 70.00 BNI-WN open interest= 236 current ask $3.80
BUY PUT NOV 65.00 BNI-WM open interest=1284 current ask $1.70

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.8 million


Southern (Peru) Copper - PCU - cls: 87.51 chg: +0.20 stop: 92.51

Company Description:
Our mining operations are located in Peru and Mexico. We own and operate four open pit mines and three metallurgical complexes that make SCC a fully integrated copper producer with significant byproducts of molybdenum, zinc and precious metals. (source: company press release or website)

Why We Like It:
The trading in PCU has turned bearish. The stock has produced a bearish double-top pattern over the last couple of months and now shares are flirting with a breakdown under support in the $87.50-87.00 region. The P&F chart has already produced a breakdown sell signal with a $77 target. We do have a couple of concerns. PCU has potential support near $85 with its rising 200-dma. Plus, the price of copper has been rebounding since yesterday's gap down. Shares of PCU and its rival PD can be somewhat volatile. Therefore we have to label this a more aggressive, higher-risk play. At this time we're suggesting a trigger to buy puts at $86.50. If triggered our target is the $81.00-80.00 range. Traders should also note that PCU is due to split 2-for-1 on October 3rd. This shouldn't have any big impact on our play but our post-split target would be the $40.50-40.00 range. More aggressive traders may want to aim lower.

Suggested Options:
We are suggesting the October and November puts. Please note that we do not want to hold over the mid October earnings report.

BUY PUT OCT 90.00 PCU-VR open interest=1039 current ask $5.20
BUY PUT OCT 85.00 PCU-VQ open interest=3129 current ask $2.85
BUY PUT OCT 80.00 PCU-VP open interest=3287 current ask $1.35

BUY PUT NOV 90.00 PCU-WR open interest= 43 current ask $8.50
BUY PUT NOV 85.00 PCU-WQ open interest= 213 current ask $5.60
BUY PUT NOV 80.00 PCU-WP open interest= 195 current ask $3.50

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/16/06 (unconfirmed)
Average Daily Volume = 1.3 million


FreightCar Amer. - RAIL - close: 54.50 chg: +1.16 stop: 56.32

Company Description:
FreightCar America, Inc. manufactures railroad freight cars, with particular expertise in coal-carrying railcars. In addition to coal cars, FreightCar America designs and builds flat cars, mill gondola cars, intermodal cars, coil steel cars and motor vehicle carriers. It is headquartered in Chicago, Illinois and has manufacturing facilities in Danville, Illinois, Roanoke, Virginia and Johnstown, Pennsylvania. (source: company press release or website)

Why We Like It:
RAIL is another play in the railroad sector that we think is headed lower. The stock did show some relative strength today but the rally failed near old (recent) support near $56 and its descending 100-dma. This sort of failed rally looks like a low-risk entry point to buy puts. We'll put our stop loss just above today's high and the 100-dma. We're going to list two targets. We suggest selling half or more of your position at our first target in the $50.25-50.00 range. Sell the rest at our second target in the $46.00-45.00 range.

Suggested Options:
We are suggesting the November puts although Octobers and Decembers could also work. We do not want to hold over the late October earnings report.

BUY PUT NOV 55.00 RQN-WK open interest= 0 current ask $4.20
BUY PUT NOV 50.00 RQN-WJ open interest=131 current ask $2.05

Picked on September 21 at $ 54.50
Change since picked: + 0.00
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 353 thousand


SanDisk - SNDK - close: 57.69 chg: -1.21 stop: 60.05

Company Description:
SanDisk is the original inventor of flash storage cards and is the world's largest supplier of flash data storage card products, using its patented, high-density flash memory and controller technology. SanDisk is headquartered in Milpitas, CA and has operations worldwide, with more than half its sales outside the U.S. (source: company press release or website)

Why We Like It:
SNDK succumbed to profit taking like most of the tech sector on Thursday in spite of some new positive analyst comments this morning. The stock has been screaming higher from its July lows but the upward momentum has stalled near $60.00 resistance. Technical indicators are turning south and it looks like it's time for more significant profit taking. Nothing moves in a straight line and even a normal 38.2% (Fibonacci) retracement would pull SNDK toward the $51 region. More aggressive traders may want to open positions right now. The stock has already broken down under its two-month trendline of higher lows. However, we want to see a breakdown under its 200-dma. Thus we're suggesting a trigger to buy puts at $56.69. If triggered our target is the $51.50-50.00 range. We do not want to hold over the mid October earnings report so that only gives us about four weeks.

Suggested Options:
We are suggesting the October puts although Novembers would work well. We plan to exit before October strikes expire to avoid SNDK's earnings report.

BUY PUT OCT 60.00 SWF-VL open interest= 7552 current ask $4.80
BUY PUT OCT 57.50 SWF-VY open interest=10007 current ask $3.50
BUY PUT OCT 55.00 SWF-VK open interest=12604 current ask $2.30
BUY PUT OCT 52.50 SWF-VX open interest= 9120 current ask $1.45
BUY PUT OCT 50.00 SWF-VJ open interest= 9719 current ask $0.90

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 9.9 million


U.S.Steel - X - close: 57.15 chg: -1.60 stop: 60.05

Company Description:
United States Steel Corporation headquartered in Pittsburgh, Pa., manufactures a wide variety of steel sheet, tubular and tin products; coke, and taconite pellets; and has a worldwide annual raw steel capability of 26.8 million net tons. (source: company press release or website)

Why We Like It:
X is another stock in the iron and steel sector that looks poised to breakdown. Shares have been consolidating in bearish fashion with a pattern of lower highs while it bounces from support near $56.00. More recently the trendline of lower highs has been bolstered by a descending 50-dma and now the $60.00 level with its 200-dma. Volume came in strong on today's failed rally under $60 and the technical indicators are bearish. More aggressive traders may want to open put plays right here. We want to wait for a breakdown under support at $56.00. Therefore we're suggesting a trigger to buy puts at $55.95. If triggered our target is the $50.25-50.00 range. We do not want to hold over the late October earnings report. FYI: We already have a couple of put candidates on the newsletter (NUE, STLD) in the steel and metals sector. We would suggest only trading one or two to prevent overexposure to one specific sector.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 60.00 X-WL open interest=434 current ask $5.50
BUY PUT NOV 55.00 X-WK open interest=409 current ask $2.95
BUY PUT NOV 50.00 X-WJ open interest= 58 current ask $1.35

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 4.4 million

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 43.84 chg: +0.53 stop: 41.95

Tech stocks erased a lot of their gains from Wednesday. The SOX index fell 1.7% and shares of CYMI slipped 1.2%. What worries us is that the technical indicators on the SOX are turning bearish. The SOX's MACD indicator has produced a new sell signal and the MACD for CYMI is nearing its own sell signal. More conservative traders may want to exit early right here to avoid or minimize any losses. However, we're choosing to keep the play open for now because the SOX has potential support at the 450 level just as CYMI has potential support at the $42.00 level. A breakdown in the SOX under 450 will likely pull CYMI under $42. We are not suggesting new plays at this time.

Picked on September 06 at $ 42.55
Change since picked: + 1.29
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million


Hartford Finc. - HIG - close: 85.60 chg: -1.25 stop: 84.95 *new*

Uh-oh! Reversal alert! Tuesday's intraday bounce and Wednesday's rally in HIG looked relatively bullish but today's reversal is a big warning flag. Considering our less than optimistic outlook on the markets for the next few weeks we are seriously suggesting that more conservative traders cut their losses right here and exit early! We are going to up our stop loss to $84.95 that means if HIG trades under Tuesday's low then odds are good we'll be stopped out. We're not suggesting new positions.

Picked on September 12 at $ 86.29
Change since picked: - 0.69
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million


Manpower - MAN - close: 60.47 chg: -0.32 stop: 59.45 *new*

Volume shrank to about one-third MAN's average volume as the stock consolidated in a narrowing sideways action on Thursday. We remain cautious. MAN has resistance at the 100-dma overhead and support at its 10-dma just below it. A breakout is coming and MAN will move through one of these levels soon. We're going to raise our stop loss again to $59.45, which is under Tuesday's low and the 10-dma.

Picked on September 12 at $ 60.28
Change since picked: + 0.19
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand


Mettler Toledo - MTD - close: 64.20 chg: -0.30 stop: 61.99

There is no change from our previous update on MTD. Yesterday we suggested that conservative traders exit early since it's our expectation that MTD will slip back toward what should be support in the $62.00-62.50 region. It is interesting to see how the stock bounced from its initial test of the rising 10-dma today. We're not suggesting new positions. 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: + 0.54
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand


Omnicom - OMC - close: 91.40 chg: +0.12 stop: 89.75

OMC produced some relative strength today but the stock is still struggling to breakout (again) past the 10-dma. We are not suggesting new positions at this time. A dip back toward what should be support near $90 is still a big possibility.

Picked on September 10 at $ 90.97
Change since picked: + 0.43
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

Put Updates

Caterpillar - CAT - close: 64.54 chg: -1.34 stop: 67.36

Ding! Our play in CAT is now open. The stock displayed relative weakness on yesterday and today saw more selling pressure with a breakdown under support near $65.00. We had a suggested trigger to buy puts at $64.59 so the play is now open. Volume on today's 2% decline was above average and a good sign for the bears. Our initial target is the $60.25-60.00 range.

Picked on September 21 at $ 64.59
Change since picked: - 0.05
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million


EOG Resources - EOG - close: 62.50 chg: +1.51 stop: 64.15

Crude oil futures have been pretty oversold recently and today oil produced an oversold bounce. This ignited some buying/short covering in the oil stocks. Shares of EOG added 2.4% on strong volume. That's not good news for the bears. Chart readers will note that the rally stalled at resistance near $64.00 but the technical picture is starting to turn more bullish for EOG. We are not suggesting new positions at this time! If oil bounces again tomorrow we may be stopped out.

Picked on September 06 at $ 63.85
Change since picked: - 1.35
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million


Express Scripts - ESRX - close: 81.03 chg: -2.91 stop: 82.51

Wal-Mart (WMT) created some excitement (or fear) in the retail drug market today. WMT, the retail titan that it is, announced it was starting something of a pilot program to provide 300 generic drugs for only $4 a prescription on a normal 30-day supply. The company plans to widen this program to several states next year. The retail drug store stocks were hit hard today (LDG, RAD, CVS, WAG) with CVS and WAG getting crushed. Shares of pharmacy benefit managers like ESRX also traded down in sympathy this morning. Shares of ESRX plunged at the open from $83.42 to $78.50 before bouncing back. We had a suggested trigger to buy puts at $79.85 so the play is now open. However, we have to urge caution. The breakdown was only intraday and the bounce back above support near $80 and its 50-dma is bad news for the bears (and put holders). The overall pattern looks bearish after a multi-week trading range but we would not suggest new positions until ESRX traded back below the $80 level again. Our target is the $75.50-75.00 range.

Picked on September 21 at $ 79.85
Change since picked: + 1.18
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million


Johnson Controls - JCI - close: 69.19 chg: -2.12 stop: 74.16

The market weakness helped JCI continue lower. Shares lost 2.9% and broke down (again) under round-number support at the $70.00 level. Shares are nearing our target in the $68.50-67.50 range but more aggressive traders may want to aim lower (maybe $66-65).

Picked on August 22 at $ 72.96
Change since picked: - 3.77
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million


Jacobs Engineering - JEC - cls: 73.26 chg: -2.28 stop: 80.15

JEC continues to plummet. The stock is now down six days in a row and volume came in very strong on today's 3% loss. JEC has lost almost 8% since we picked it as a put play and traders may want to seriously consider locking in a gain right here. Our target is the $72.50-70.00 range.

Picked on September 18 at $ 79.45
Change since picked: - 6.19
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 416 thousand


Joy Global - JOYG - close: 33.00 change: -1.81 stop: 37.01*new*

JOYG has been showing relative weakness the last couple of days. Yesterday the stock broke support and hit our trigger to open plays at $34.95. Today saw another 5.19% decline on strong volume. We are inching our stop loss down toward the 10-dma at $37.01. Our target is the $30.50-30.00 range.

Picked on September 20 at $ 34.95
Change since picked: - 1.95
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million


Las Vegas Sands - LVS - close: 66.41 change: +1.15 stop: 70.05

LVS got a bit of a bounce this morning but the rally ran out of steam near $68 region and its 10-dma. This could be a new entry point to buy puts although more conservative traders may want to wait for a new move under $65.50 before opening positions. Our target is the $60.50-60.00 range. We do not want to hold over the early November earnings report.

Picked on September 19 at $ 65.99
Change since picked: + 0.42
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million


Nucor - NUE - close: 47.67 change: -1.07 stop: 50.01

The oversold bounce in NUE also seems to be running out of gas. More aggressive traders may want to consider positions now or on a move under today's low (46.81). We're still suggesting that readers wait for a drop under support near $46.00. Our trigger to open put plays is at $45.95. If triggered our target is the $40.50-40.00 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 = 4.2 million


Steel Dynamics - STLD - close: 49.97 chg: -1.50 stop: 52.05

On your mark! Get set! Shares of STLD look like they are in the runner's crouch set to spring into a new leg lower. The stock dipped toward support near $49.50 this morning but failed to hit our trigger to open plays 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

Strangle Updates


Dropped Calls

Beazer Homes - BZH - close: 38.74 change: -0.91 stop: 38.49

The market pull back on Thursday encouraged more profit taking in the homebuilders. The DJUSHB home construction index lost 2% and shares of BZH under performed its peers with a 2.29% loss. The stock actually closed under its simple 10-dma and shares look poised to drop toward recent support near $36.00. We are going to exit early right here to cut our losses. We would keep an eye on the $36.00 level and the $41.00 level. A breakout move past either might be considered an entry point (puts on a breakdown, calls on a breakout higher).

Picked on September 18 at $ 40.75
Change since picked: - 2.01
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.2 million


United Ind. - UIC - close: 53.04 change: -1.57 stop: 51.77

We are throwing in the towel on UIC. Today's trading action was pretty bearish with a failed rally and a bearish engulfing candlestick pattern (normally viewed as a bearish reversal). Today's decline also broke a few levels of technical support. Odds are very good that UIC will consolidate back down toward what should be support near $50.00 and its 200-dma. Please note that UIC had already hit our initial target in the $54.75-55.00 range more than once.

Picked on August 27 at $ 51.77
Change since picked: + 1.27
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand

Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.


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