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Daily Newsletter, Saturday, 09/23/2006

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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

Stealth Rally Fades

A stronger than expected drop in the Philly Fed survey was blamed for the two-day drop in the markets. While that was an unexpected drop in the Philly numbers there were numerous other factors also contributing to the market weakness. High on the list was the strong overbought conditions as the markets rebounded to retest the multiyear highs. This was stretched even further as traders anticipated the Fed would remain on the sidelines and pushed the markets higher. Once the Fed announcement was made there was nothing else to motivate buyers ahead of the historical Sep/Oct weakness. The Philly Fed report was simply the catalyst that triggered the much needed profit taking to return the indexes to primary support levels. Now that the overbought conditions have eased next week will be a critical test of bullish convictions.

Dow Chart - Daily

Nasdaq Chart - Daily

The dramatic drop in the Philly Fed from +18.5 to a negative -0.4 significantly shocked analysts and investors. Sometimes you have to be careful what you wish for or you might just get it. Everybody wanted the Fed to be done cutting rates and that required a significant deterioration in economic fundamentals. The Philly Fed was the first of what could be many evidences of that economic slowing. Basically investors got their wish but now they want to retract it. This was the first time the survey has been in negative territory since April 2003. It was also the largest drop since the -19 point drop in January 2001 only two months before the last recession. The headline number at -0.4 hid more serious negatives in several components. Shipments fell from 22.3 to -6.8. New orders fell to -1.3 from 15.7 and unfilled orders dropped to -5.3 from 0.6. The Philly Fed survey is normally seen as a leading indicator of national manufacturing activity. Negative numbers are seen as slowing activity while positive numbers represent an expansion of activity.

The sharp drop in the Philly Fed numbers will put more emphasis on the Chicago PMI next Friday and the National ISM the following Monday. Unlike the Philly Fed any number over 50 on these reports is considered expansion while a number under 50 indicates a contraction. The Chicago PMI came in at 57.1 last month and the ISM was barely expansionary at 53.5. The economic bears came out of the woodwork this week with predictions of gloom and doom in every sound bite.

Chart of Ten-Year Note Yields - Daily

Bonds suddenly found favor again and the yield on the ten-year note fell to 4.59% and a level not seen since March 2nd. With the Fed funds rate at 5.25% there is a serious disconnect between the economic outlook of bond buyers and the outlook of equity traders. The chances of another rate hike are less than zero. With meetings in Oct, Dec and January the February futures are now pricing in a 40% chance of a quarter point cut at one of those meetings. The November futures are showing a miniscule 4% chance of a cut in October. However, the most likely scenario is a continued pass for the rest of 2006 to avoid any political connotations surrounding the elections and then a cut at the January meeting. The sharp drop in yields, -25 basis points since the Monday high at 4.85% and the largest drop in 17 months, is very bullish for the housing sector. Part of Friday's drop in yields was attributed to comments from Greenspan that were interpreted as dovish for future rates. He also said that the current low rates would provide support for housing and help slow the current housing decline.

Bonds are finding favor as a safe trade ahead of potentially rocky economics. Next week the calendar starts off with Existing Home Sales on Monday and New Home Sales on Wednesday. With homebuilders very oversold and real interest rates crashing it may be time to speculate in some long-term calls. Any bad news will probably be ignored. The key economic reports are the three manufacturing surveys, the Chicago PMI on Friday and the ISM on the following Monday.

Economic Calendar

Next week is earnings warning week. The quarter is basically over for accounting purposes and companies now know if they are going to hit their forecasts. We have seen a flurry of warnings over the last week with warning ratios rising. These companies warned on earnings or cautioned on guidance, DCX, MAS, FBN, STLY, LEA, BWA, FDX, BSX, NYT, YHOO, MCHP, XLNX, MXIM, AATI, MSCC and of course the homebuilders continued to predict the earth would open and swallow their various projects. The ratio of negative to positive warnings rose to 2.4 compared to 2.09 in Q3-2005 and the historical average of 2.2. This means the number of negative guidance announcements is rising above historical norms. Analysts still don't think this is a major problem and Thomson Financial is still predicting S&P earnings growth of +14.2%. There have been some sector downgrades such as consumer discretionary companies from +20% growth to only +9%. Holding up the averages Thomson is expecting earnings from the materials sector to rise +46%, finance +28% and energy +17%. Remember Q3-2005 was a strong quarter for energy stocks after the sharp price gains surrounding Katrina. This will make earnings comparisons difficult. Thomson says this will be the 13th straight quarter of double-digit earnings growth and only the second time this has happened with the other being the streak from 1992-1995.

According to the analysts earnings will not be a problem but in reality the overall average will be held up by a few strong sectors. Nothing new but there will be individual problems that could sour investor sentiment. Remember Dell is expected to warn and their frantic attempts to regain share and unload inventory could cause profit shrinkage in the rest of the PC sector. As you can see by that list of warnings above many of those are chip stocks. I am not going to spend a lot of time speculating on which stocks or sectors could cause problems next week because we have another problem facing next week us that will be more evident.

That problem is the end of quarter portfolio games. The third quarter is a critical quarter for funds with the Q3 portfolio statements seen as a setup for the next year. Funds do not want to show losers in their Q3 statements. They want to show recent winners so investors think they are smarter than they really are. This means the next week should see more selling in those losers already down hard and more buying in the recent winners. The sector hardest hit is of course the energy sector. I would say homebuilders as well but the selling has already moderated in those as bottom fishers have already created support. That leaves energy as the scapegoat and the sector most likely to get dumped again next week. Sectors likely to find additional buyers would be financials, broker dealers, drugs and telecoms. Fund managers trying to mark up their portfolios will be buying more of stocks like Goldman Sachs (GS), Morgan Stanley (MS), MetLife (MET), Electronic Arts (ERTS), Apple Computer (AAPL), Nvidia (NVDA), Corning (GLW), China Life (LFC), AT&T (T) and takeover target BellSouth (BLS), Verizon (VZ) and the Telecom Holders (TTH). Their plan will be to push those stocks they already own higher in order to dress up their end of quarter statements. This buying should be spread out early in the week since the SEC has begun monitoring the last couple days of the month for fund abuses.

November Crude Oil Chart - Daily

Helping to push energy prices lower next week was the drop to $60 in the November contract for crude and a new two-year low for natural gas at $4.59. We saw a nice attempt at a rebound once the selling related to the expiring October contract had passed but $62 remained firm resistance with another flush into Friday's close. This could be a really rocky week for energy but that could change the first week in October. We are seeing that end of quarter flush stimulated even more by the lack of any outside events. No hurricanes, BP will restart production in Alaska next week, Iran is talking nice to anybody who will listen and inventories are at multiyear highs. It will not be a permanent drop but funds will probably dump some of their window dressing stocks once September ends and start buying energy again for the winter rebound.

Tanker tracker PetroLogistics said OPEC shipments have dropped -400,000 bbls per day in September, mostly from Saudi Arabia. This could be a leading indicator that OPEC is already reducing output to support the price above $60. Saudi can get nearly the same revenue by selling 8.1 mbpd at $65 as they can by selling 9.1 mbpd at $58. The difference is only $1.3 million. A drop in the bucket compared to the $527.8 million or so they currently receive each day. (Those numbers are based on the price of light crude and Saudi actually sells a mix of crude at a lower average price but you get the idea.) The Saudi Oil Minister Ali Al Nuaimi said in one interview that oil prices were still lucrative for producers and at a satisfactory level. In another quote he said current prices are "fair" which was a change in stance from "unreasonable" in prior comments. This is probably another clue that $60 is going to be supported and maybe slightly higher. Of course he also said Saudi was still producing its full OPEC quota of 9.1 mbpd and nearly everyone on the planet knows this is not true. Shipments in August had fallen to about 8.1 mbpd and if Petrologistics is correct they have slipped even more in September. Time will tell but you can bet they have grown very accustomed to receiving $65 and above. EIA senior analyst Doug Macintyre said on Friday the EIA expects prices to return to the mid to upper $60s later this year and possibly back over $70. Goldman Sachs also maintains their $70+ price target for Q4. I hope they are right and I plan on adding to positions on weakness next week.

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I saw an interesting statistic this week about the new "low" gasoline prices. According to the bean counters the average price for a gallon of unleaded fell to $2.44 last week. While I would bet many of our readers have not seen prices that low yet you can rest assured they are coming. The statistic in question showed that US consumers were paying $266 million less per week for gasoline than just a month ago when the average price was $3.10. $266 million is a huge number and that is about where the Powerball lottery will be by next weekend if nobody wins the estimated $203 million jackpot this week. If you find yourself pumping that cheap gas this weekend you might reconsider not buying that Powerball ticket. I know it is a tax on the mathematically impaired but what the heck you are saving $266 million a week. Splurge a little and remember me if you win.

Natural gas inventories grew by +91 BCF last week to 3,177 BCF. This is the highest level of gas in storage for this time of year as seen over the last 13 years. If we only see injections at the average rate for the next five weeks it would be an additional +264 BCF and raise gas in storage to theoretical levels of 3,541 BCF. There has never been this much gas in storage before and nobody knows if it will fit or will the increased pressure cause leaks in the underground caverns. The EIA recently did a study of the maximum gas ever stored at each of the individual locations. Each operator was asked what was the most gas they ever stored in their current configurations. Those results were tallied to produce a theoretical "Peak Volume" capacity of 3,608 BCF. It has never been that high and because of pipeline limits and current usage trends it may never reach that high. For instance if one pipeline serves a lot of power plants the drain on that pipeline may be such that storage on that line never reaches maximum levels. Other pipelines could theoretically max out while others continue to supply consumers at peak pipeline rates. The official capacity estimate for the entire system is 4,054 BCF but many of the storage areas have never seen pressures required to reach that level. It should be interesting as we near the assumed safe capacity of 3,500-3,600 BCF. We are already seeing gas price competition and prices are going to continue to fall as suppliers compete for the remaining available storage. On the positive side cold weather is barreling down on the plains and mountain states. It is snowing in Colorado today and we have a winter storm watch for the weekend. It may not be winter yet but it is coming. The cooler weather will consume more gas than the prior two weeks suggesting injections into storage will slow. That would be bullish for prices but don't expect any real rebound until late October, early November.

Temperature Map of the US - Friday Night

Stocks headlining the news on Friday were HPQ, FDRY, COGN, FDX and BSX. I will spare you the Hewlett Packard soap opera and focus on real news. Foundry (FDRY) joined the stock options crowd with an announcement they were going to review results to correct prior back dating events. Cognos (COGN) beat estimates on Friday and several analysts raised guidance on the company. COGN rose +3.17 on the news. FedEx broke even after posting a stronger than expected +43 cent increase in earnings to $1.53 per share. The problem was a cautious outlook saying the economy was moderating although still growing at a healthy and sustainable pace. This is a prime example of FedEx managing earnings expectations. They typically under promise and over deliver then give cautious guidance. UPS stunk up the sector back in July after they forecasted slower growth despite strong Q2 profits. Merrill cut UPS to a sell at the time after UPS cut estimates to nearly a dime under those of analysts. Boston Scientific fell about -10% on Friday after warning that sales could drop as much as -10% below analyst's estimates. Earnings were still expected to be in the range of 15-19 cents with analyst expecting 16 cents. Downgrades fell like rain as the stock was hammered to a new 4-year low at $14.85.

Seems like just yesterday I wrote about the indexes being at multiyear highs, the lack of bullish conviction and the potential for a historical October dip. But, two trading days have passed since I penned that Wednesday commentary with the talking heads projecting 1450 on the S&P and 12500 on the Dow. I did not hear much talk about those new highs as the markets rolled over for two consecutive days. Now the talk has reverted to recession worries and the rally in the bond market. It seems traders are not happy regardless of the circumstances. When the markets were testing the highs it was tough to find any bullish conviction or bearish conviction either. It was as though both sides were content to wait passively while the stealth rally added points in stutter steps to reach those highs. For next week we are faced with the end of quarter window dressing scenario. That should see buying early in the week followed by slowing support as the week/quarter draws to a close.

The indexes could not have performed the script more perfectly than they did. The Dow eased off its highs at 11625 to coast to a stop on support at 11500. Every dip below that level was bought with just enough intensity to hold the line but still without conviction. The S&P relinquished its hold on 1325-1328 and plunged back to support at 1315 and exactly where we had decided to draw the line on Wednesday night. Friday's trading saw it vacillate just under 1315 all day but never out of reach. Buying at the close put the index at 1314.68. Close enough for me. The Nasdaq did exactly the same thing with 2220 after a -45 point drop from just over 2260. In each case critical resistance held despite being under attack for most of the day on Friday. Support on the Russell at 715 and the Wilshire 5000 at 13100 mirrored the other indexes. You would almost think traders were actually watching their charts. In reality it was the fund managers holding the line and preparing for next week's costume party. As long as they could close them at support they have a good chance of a rebound when the window dressing begins in earnest next week. If they had let that support fail it would have been a race to the exits and out of their control. For the retail bulls it simply appears that profits were taken and it is time to buy the dip again.

Russell-2000 Chart - Daily

Wilshire-5000 Chart - Daily

SPX Chart - Daily

Based on the end of quarter scenario I am neutral for next week. I am going to follow my own advice with only a slight modification. On Wednesday I suggested buying a dip to 1315 and go short/flat below that level. Since we traded -2 points under 1315 nearly all day Friday that line in the sand was erased by millions of hoof and paw marks making it unreliable as a dual trigger. I am changing the recommendation to 1310 as our short indicator. The new plan will be to remain long over 1315 and short under 1310. That makes it easier to differentiate the signals since both triggers can't be touched at the same time. It also makes stop losses easier since each becomes the stop for the other. Since nobody can accurately predict how next week will play out in the absence of a normal September dip scenario we will put our biases on the shelf and simply follow the plan. The early week economics should not be a factor but additional earnings warnings could disrupt the window dressing plan. Economic reports later in the week could produce additional weakness so be aware in advance that the ice gets thinner as the week progresses. I would love to see a rally appear on Monday that takes us to new highs but that is my bias talking and we know how unreliable biases can be. Follow the plan and it will not matter which direction we trade because we will be following the trend.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
GD MXIM None
  TXT  

New Calls

General Dynamics - GD - close: 70.61 change: -0.89 stop: 69.74

Company Description:
General Dynamics has leading market positions in mission-critical information systems and technologies; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and business aviation. It is headquartered in Falls Church, Virginia, and employs approximately 81,900 people worldwide. (source: company press release or website)

Why We Like It:
We do not have a very bullish market outlook for the next few weeks but this next week could be somewhat volatile moving either direction. We're moving into the last week of the third quarter and the markets could be affected by window dressing. What is window dressing? That's when fund managers sell their losers and buy more of their winners or whatever has been winning this last quarter to make your quarterly fund statements look better. If we do see some window dressing this week then GD could benefit from those funds looking to pad their portfolio. The stock is up about 8% over the last quarter and GD has shown a lot of relative strength with new all-time highs in the past two weeks. Friday did see some profit taking in GD but traders bought the dip near $70.00. The $70.00 level was resistance for a long time and now that it is broken it should and appears to be acting as support. This looks like a relatively low risk entry point to buy calls. If we're wrong we should be stopped out pretty quickly with our stop loss at $69.74. The P&F chart has a triple-top breakout buy signal and a $75 target. We agree with the target and will aim for the $74.50-75.00 range. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October or November calls. Remember that it is the individual trader who should decide which month and strike price best suits their trading style and risk. Don't forget that October options expire in four weeks.

BUY CALL OCT 65.00 GD-JM open interest= 42 current ask $6.00
BUY CALL OCT 70.00 GD-JN open interest=1805 current ask $2.00
BUY CALL OCT 75.00 GD-JO open interest=2017 current ask $0.25

BUY CALL NOV 65.00 GD-KM open interest=1463 current ask $6.50
BUY CALL NOV 67.50 GD-KU open interest=2379 current ask $4.50
BUY CALL NOV 70.00 GD-KN open interest=3557 current ask $2.75
BUY CALL NOV 72.50 GD-KT open interest=2473 current ask $1.50
BUY CALL NOV 75.00 GD-KO open interest=2857 current ask $0.75

Picked on September 24 at $ 70.61
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

New Puts

Maxim Integrated - MXIM - close: 28.29 chg: -0.08 stop: 30.05

Company Description:
Established in 1983, Maxim Integrated Products is a worldwide leader in design, development, and manufacture of linear and mixed-signal integrated circuits (ICs). (source: company press release or website)

Why We Like It:
The semiconductor sector and the SOX index that represents the sector appears poised for a move lower as the SOX teeters on the two-month trendline of support. If the SOX does breakdown then MXIM is most likely going with it. A month ago shares of MXIM looked pretty bullish with a breakout over the top of a multi-month bearish channel. A couple of weeks later MXIM finally broke out over resistance at the $30 level. Yet even this show of strength failed and now the stock has given it all back and fallen toward support at the $28.00 level. Technical indicators are mostly negative and the P&F chart points to a $9.00 target. We are suggesting a trigger to buy puts at $27.90. If triggered then our target is the $24.00 level although we would expect a bounce near $26 and traders may want to do some profit taking at $26 to take some money off the table. We do not want to hold over the early November earnings report.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 30.00 XIQ-WF open interest=3535 current ask $2.80
BUY PUT NOV 25.00 XIQ-WE open interest=1216 current ask $0.60

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

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Textron - TXT - close: 81.61 change: -1.98 stop: 84.01

Company Description:
Textron Inc. is one of the world's largest and most successful multi-industry companies. Founded in 1923, we have grown into a network of businesses with total revenues of $10 billion, and more than 37,000 employees in nearly 33 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, Textron is ranked 190th on the FORTUNE 500 list of largest U.S. companies. (source: company press release or website)

Why We Like It:
If the markets see any window dressing this week then TXT could be in for some trouble. The stock is down about 11.4% this quarter. Shares have been grinding lower under a pattern of lower highs. The stock broke down under significant support in late August ($85 level and 200-dma) and now shares face another test of significant support near $80.00. The Point & Figure chart is already bearish but the P&F pattern only points to an $80 target. We think TXT will exceed this level and trade significantly lower. Currently the stock has bounced twice from the $80 region. Not only is $80 round-number, psychological support but it is also where TXT has a four-year trendline of rising support. A breakdown under $80 would be very negative. We are suggesting that traders wait for that breakdown to occur before opening positions. We'll use a trigger to buy puts at $79.85. More conservative traders may want to use a trigger around $79.50 to reduce the risk of being triggered on an intraday under $80.00. If triggered we're suggesting two targets. Our first target is the $75.50-75.00 range. Our second target is the $71.00-70.00 region. Plan on selling half or more at the first target to lock in a gain. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October or November puts. TXT is expected to report earnings around the same time October options expire so we plan to exit before expiration anyway. You should choose which month and strike price best suits your trading style and risk.

BUY PUT OCT 85.00 TXT-VQ open interest= 361 current ask $4.20
BUY PUT OCT 80.00 TXT-VP open interest= 208 current ask $1.50
BUY PUT OCT 75.00 TXT-VO open interest= 45 current ask $0.45

BUY PUT NOV 85.00 TXT-WQ open interest= 5 current ask $4.90
BUY PUT NOV 80.00 TXT-WP open interest= 79 current ask $2.35
BUY PUT NOV 75.00 TXT-WO open interest= 0 current ask $1.00

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 829 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 42.42 chg: -0.88 stop: 41.95

Our concerns are being realized. Tech stocks and especially semiconductor stocks are seeing more profit taking. What is really concerning is that the semiconductor SOX index has closed under what should have been support at the 450 level. Currently the SOX is testing (or in the process of breaking) its two-month trendline of support. The SOX's MACD new (two-day old) sell signal looks stronger. Shares of CYMI under performed its peers with a 2% loss and a dip back toward the $42.00 level. We expected the $42 region to offer some support and that's why our stop loss is at $41.95. However, we are not optimistic here and traders may want to heed our earlier suggestion to just bail out early and cut losses now. We're not suggesting new positions. The only reason we're not closing the play now is because CYMI still has a chance to bounce from the $42 level. We do note that the weekly chart and the Point & Figure chart still look bullish.

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



Picked on September 06 at $ 42.55
Change since picked: - 0.13
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

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Mettler Toledo - MTD - close: 64.15 chg: -0.05 stop: 61.99

We do not have anything new to report on for MTD. Our updates have been warning readers for the last several days to expect some profit taking. In reality MTD has shown some relative strength by limiting the profit taking to less than 2% last week. Shares managed to rebound from its intraday low on Friday. Our market bias is not bullish for the next few weeks and we still expect that any market weakness will likely pull MTD back toward support near $62.50-62.00. If you're feeling optimistic the bounce on Friday might be a new entry point. The stock rebounded from an almost perfect 38.2% Fibonacci retracement of its September rally. However, if you're considering new bullish positions you may also want to use a tighter stop loss. Currently our target is the $68-69 range. We do not want to hold over the late October earnings report.

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



Picked on September 13 at $ 63.66
Change since picked: + 0.49
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

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Omnicom - OMC - close: 90.19 chg: -1.21 stop: 89.89 *new*

OMC has now given back all of its gains since the bullish breakout over resistance near $90 in early September. We've been cautioning readers about a pull back toward broken resistance and what should be support at the $90 level. Shares dipped to $89.93 near its 100-dma on Friday afternoon. The ten-day sell-off in OMC has down some technical damage to the stock's upward trend. Friday's decline actually produced a new MACD sell signal on the daily chart. Normally we would expect a bounce from here, near support, but since our market bias is not very bullish we'd hesitate to open new plays right here. We are going to inch up our stop loss to $89.89. Currently our target is the $96-97 range.

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



Picked on September 10 at $ 90.97
Change since picked: - 0.78
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Burlington Nor.SantaFe - BNI - cls: 68.72 chg: +0.12 stop: 71.01

Our new put play on BNI has been opened but it looks like a false start. We had suggested a trigger to buy puts at $67.75 in an attempt to catch a bearish breakdown under $68 and its 50-dma. BNI did dip to $67.57 but rebounded back from its lows. Odds are good that the bounce will carry it back toward the $70 region. Readers can wait and watch for a failed rally under $70 as a new entry point or look for another decline under $68.00. We're reposting our original play description here:

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= 238 current ask $3.80
BUY PUT NOV 65.00 BNI-WM open interest=1289 current ask $1.65



Picked on September 22 at $ 67.75
Change since picked: + 0.97
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Caterpillar - CAT - close: 62.77 chg: -1.77 stop: 67.36

Our put play in CAT is off to a good start. Shares broke down under support on Thursday and hit our trigger to buy puts at $64.59 on rising volume. Friday's session saw another 2.7% decline on even stronger volume to confirm the breakdown. We probably wouldn't open new positions right here. Wait for a bounce/failed rally under $65 as an entry point. Our target is the $60.25-60.00 range but more aggressive traders may want to aim lower. The P&F chart does point to a $48 target.

Suggested Options:
We are not suggesting new positions at this time. See play details for new entry point ideas.



Picked on September 21 at $ 64.59
Change since picked: - 1.82
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

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EOG Resources - EOG - close: 62.19 chg: -0.31 stop: 64.15

EOG is at and has been at a pivotal point the last couple of days. The stock has been somewhat oversold, not as much as crude oil futures, but both could see a bounce higher. Yet at the same time EOG is struggling to breakout over resistance at $64.00 and its two-month trendline of lower highs, which is actually the top of its descending channel (see chart). If you read the market wrap this weekend then you know that odds are good oil stocks will continue to sell-off this week as funds manage their window dressing for the end of the quarter. This selling pressure should keep EOG inside its bearish channel and under resistance at $64.00. Yet we hesitate to suggest new put plays with the stock looking poised to move higher. Currently our target is the $57.50-55.00 range. Traders may want to consider new put positions on a breakdown under $61 and its 10-dma.

Suggested Options:
We are not suggesting new plays in EOG but the update does have suggestions on an entry point.



Picked on September 06 at $ 63.85
Change since picked: - 1.66
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

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Express Scripts - ESRX - close: 79.62 chg: -1.41 stop: 82.51

Good news! The afternoon bounce from Thursday's sell-off has failed. Shares of ESRX produced a failed rally near $81.50 and its 200-dma on Friday morning and traded lower to close under support near $80 and its 50-dma. This looks like a new entry point to buy puts. The stock is breaking down from a six-week trading range. The P&F chart has produced a triple-bottom breakdown sell signal with a $73 target. We're only aiming for a decline into the $75.50-75.00 range. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 85.00 XTQ-WQ open interest=727 current ask $7.10
BUY PUT NOV 80.00 XTQ-WP open interest=713 current ask $4.10
BUY PUT NOV 75.00 XTQ-WO open interest=745 current ask $2.20



Picked on September 21 at $ 79.85
Change since picked: - 0.23
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Joy Global - JOYG - close: 33.17 change: +0.17 stop: 36.55*new*

Shares of JOYG produced a bit of an oversold bounce after three days of losses. Shares continue to look bearish following the breakdown under support near $35.00. The Point & Figure chart has produced a triple-bottom breakdown sell signal with a $19 target. Readers could open new put positions here but we'd prefer to see a failed rally under $35 or its 10-dma before opening new plays. Speaking of the 10-dma, we're going to inch our stop loss down to $36.55. Our target is the $30.50-30.00 range. Keep an eye on CAT, which is also breaking down. Weakness in CAT should also drag on JOYG.

Suggested Options:
We would suggest the November puts but see play details on entry point ideas.



Picked on September 20 at $ 34.95
Change since picked: - 1.78
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Las Vegas Sands - LVS - close: 65.27 change: -1.14 stop: 70.05

LVS continues to look bearish. The stock erased Thursday's gain and produced a bearish engulfing candlestick pattern on Friday. The recent trading in LVS suggests the next move is lower. The P&F chart is bearish and currently points to a $57 target. We are suggesting new positions right here but more conservative traders may want to wait for a decline under $64, which might act as support. We suspect that the 200-dma will offer some technical support so we're targeting the $60.50-60.00 range. We do not want to hold over the early November earnings report.

Suggested Options:
We are suggesting the November puts but we do not want to hold over LVS's early November earnings report.

BUY PUT NOV 70.00 LVS-WN open interest= 96 current ask $7.20
BUY PUT NOV 65.00 LVS-WM open interest=205 current ask $4.30
BUY PUT NOV 60.00 LVS-WL open interest=518 current ask $2.30



Picked on September 19 at $ 65.99
Change since picked: - 0.72
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

Nucor - NUE - close: 46.97 change: -0.70 stop: 50.01

We are seeing a number of the metal and steel-related stocks breaking down under support and we expect shares of NUE to join them soon. NUE broke down under a huge pennant pattern of lower highs and higher lows about two weeks ago. Since then NUE has consolidated sideways but the attempt at a bounce stalled out near $49.50. We suspect that the next move will be a new leg lower. Our plan is to catch a breakdown under $46.00 and we're suggesting a trigger to buy puts 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. FYI: The P&F chart has a triple-bottom breakdown sell signal with a $41 target.

Suggested Options:
We are suggesting the October and November puts. However, traders should remember that October strikes expire in four weeks but we plan to exit ahead of NUE's earnings report in mid October. You, the individual trader, should choose which month and strike price best suits your trading style and risk.

BUY PUT OCT 50.00 NUE-VJ open interest=7531 current ask $4.80
BUY PUT OCT 47.50 NUE-VW open interest=5788 current ask $3.10
BUY PUT OCT 45.00 NUE-VI open interest=5322 current ask $1.85
BUY PUT OCT 42.50 NUE-VV open interest=2728 current ask $1.00

BUY PUT NOV 50.00 NUE-WJ open interest= 402 current ask $5.40
BUY PUT NOV 45.00 NUE-WI open interest= 394 current ask $2.55
BUY PUT NOV 40.00 NUE-WH open interest= 137 current ask $0.95



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

---

Southern (Peru) Copper - PCU - cls: 86.92 chg: -0.59 stop: 92.51

Our new put play in PCU is now open. We had suggested a trigger to buy puts at $86.50, which was under support at the $87.00 level. Shares of PCU dipped to $85.66 on Friday afternoon before bouncing back. Don't be surprised to see the stock bounce back toward $90. A failed rally under $90 could be used as a new entry point. We don't see any other changes from our Thursday night new play description so we're reposting it here:

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 Wednesday'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. Don't forget that October strikes expire in four weeks.

BUY PUT OCT 90.00 PCU-VR open interest=1156 current ask $5.50
BUY PUT OCT 85.00 PCU-VQ open interest=3275 current ask $2.95
BUY PUT OCT 80.00 PCU-VP open interest=3483 current ask $1.35

BUY PUT NOV 90.00 PCU-WR open interest= 53 current ask $8.60
BUY PUT NOV 85.00 PCU-WQ open interest= 213 current ask $5.70
BUY PUT NOV 80.00 PCU-WP open interest= 196 current ask $3.50



Picked on September 22 at $ 86.50
Change since picked: + 0.42
Earnings Date 10/16/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

FreightCar Amer. - RAIL - close: 53.84 chg: -0.66 stop: 56.32

We do not see any changes from our Thursday night new play description on RAIL so we're reposting it here:

RAIL is another play in the railroad sector that we think is headed lower. The stock did show some relative strength Thursday but the rally failed near (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 Thursday'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 $4.60
BUY PUT NOV 50.00 RQN-WJ open interest=133 current ask $2.30



Picked on September 21 at $ 54.50
Change since picked: - 0.66
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 353 thousand

---

SanDisk - SNDK - close: 55.38 chg: -2.31 stop: 60.05

Our new play in SNDK is now open. The stock continued to show weakness on Friday with a 4% loss on above average volume. Friday's decline was also a bearish breakdown under technical support at its 200-dma. This confirms the breakdown under its trendline of support on Thursday. The weekly chart's latest candlestick is a both a failed rally and a bearish engulfing candlestick pattern. Our suggested entry point to buy puts was at $56.69. If you missed the entry point on Friday morning we would still consider new put plays right here. 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= 7702 current ask $6.30
BUY PUT OCT 57.50 SWF-VY open interest=11444 current ask $4.60
BUY PUT OCT 55.00 SWF-VK open interest=12907 current ask $3.20
BUY PUT OCT 52.50 SWF-VX open interest= 9476 current ask $2.15
BUY PUT OCT 50.00 SWF-VJ open interest=10076 current ask $1.35



Picked on September 22 at $ 56.69
Change since picked: - 1.31
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 9.9 million

---

Steel Dynamics - STLD - close: 47.84 chg: -2.13 stop: 52.05

Our put play in STLD is now open. As expected the stock continued to show weakness and shares broke down under support on Friday. The move confirms the bearish technical pattern and rising volume also adds some conviction behind the drop. We had a suggested trigger to buy puts at $49.40. If you missed the entry point you can choose to chase it here or wait for a possible bounce back toward $49-50. Our short-term target is the $45.15-45.00 range. More aggressive traders may want to aim lower. The P&F chart shows a triple-bottom breakdown sell signal with a $42 target. We do not want to hold over the mid October earnings report.

Suggested Options:
Traders can choose the October or November puts but don't forget we want to exit ahead of STLD's earnings report that is expected ahead of October expiration in four weeks.



Picked on September 22 at $ 49.40
Change since picked: - 1.56
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

U.S.Steel - X - close: 55.76 chg: -1.39 stop: 60.05

Our new put play in X is now open. The stock broke down under support in the $57-56 range and hit our trigger to buy puts at $55.95. Volume on the sell-off was strong, which is a bearish sign. We do not see any changes from our Thursday night new play description so we're reposting it here:

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 Thursday'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=485 current ask $6.50
BUY PUT NOV 55.00 X-WK open interest=533 current ask $3.60
BUY PUT NOV 50.00 X-WJ open interest=379 current ask $1.75



Picked on September 22 at $ 55.95
Change since picked: - 0.19
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 4.4 million
 

Strangle Updates

None
 

Dropped Calls

Hartford Finc. - HIG - close: 84.94 chg: -0.66 stop: 84.95

We have been stopped out of HIG at $84.95. It shouldn't be a surprise. We warned readers on Thursday that HIG had produced a bearish reversal and we raised our stop loss to just under support near $85 and its 100-dma. The stock's bullish breakout over resistance and from a (bullish) inverse head-and-shoulders pattern just didn't see enough follow through. Friday's decline also produced a new MACD sell signal on the daily chart. We would keep an eye on HIG for a potential play. A breakdown under the 50-dma might be a bearish entry point while a new high over $87 might be a bullish entry point.



Picked on September 12 at $ 86.29
Change since picked: - 1.35
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Manpower - MAN - close: 59.55 chg: -0.92 stop: 59.45

We have been stopped out of MAN at $59.45. The intraday low on Friday was $59.41. We warned readers to beware any breakdown under the $60 level. There is a chance that MAN might bounce from technical support at its 50-dma near $59.00. The lack of volume on the recent pull back does not lend a lot of emphasis behind the move. However, it does look like the bullish breakout and buy signal from mid September has been reversal, especially now with the close under old resistance and what should have been support at the $60.00 level.



Picked on September 12 at $ 60.28
Change since picked: - 0.73
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand
 

Dropped Puts

Johnson Controls - JCI - close: 68.40 chg: -0.79 stop: 74.16

Target achieved. Actually our target has been surpassed. JCI gapped open lower on Friday morning to open at $67.49, which was under the low end of our $68.50-67.50 target range. The stock dipped to $66.75 before bouncing. Our play is closed but more aggressive traders may want to aim lower.



Picked on August 22 at $ 72.96
Change since picked: - 4.56
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Jacobs Engineering - JEC - cls: 72.12 chg: -1.14 stop: 80.15

Target achieved. The sell-off in JEC has now reached seven days in a row. Volume on the decline has consistently come in strong, which is bearish. The stock is definitely looking oversold now and due for a bounce. Traders should note that JEC is nearing potential support at its trendline of higher lows (see chart). Our target was the $72.50-70.00 range. The play is closed.



Picked on September 18 at $ 79.45
Change since picked: - 7.33
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 416 thousand
 

Dropped Strangles

None
 


Trader's Corner

Is It Time Yet?

Imagine that you've been watching a rally and you think it's extended too long. Some market watchers began feeling that way just before September's option expiration. The SPX looked as if it had outrun its short-term support. It had been testing possibly significant long-term resistance, too, and doing it with pronounced price/RSI bearish divergence. The VIX had punched to new recent lows and then rebounded off those lows. Many mentioned negative news that the market just hasn't digested yet, but soon must digest. The SOX did not participate in the Nasdaq's rally.

Contrarians had begun shorting the markets, and that included many retail traders who chose the cheapest options, September's. Some of those got caught when September's options expired without a significant downturn in the markets. A simple chart might have saved them. Take a look at a couple of charts snapped at the close of trading on September 13, when the conditions described above existed.

Annotated 10-Minute Chart of the SPX:

Annotated 10-Minute Chart of the Nasdaq:

Annotated 10-Minute Chart of the Dow:

If charts of the TRAN, Russell 2000 and Wilshire 5000 were posted, their behavior at the close on September 13 would have mimicked this action. The RLX's behavior was similar.

What can we tell about these charts? The break back above the 10-minute 100/130-ema's on September 11, the Monday of opex week, was a sign that upward momentum had increased. That signaled danger in assuming that bearish positions would work. Of course, would-be bears might point to the straight-up rise that had far outstripped the potential support of the 10-minute 100/130-ema's by September 13. Those averages have clearly been important in providing either support or resistance, so bears might reason that the SPX, Nasdaq, Dow, TRAN, Russell 2000 and Wilshire 5000 were all due for either sideways consolidation while those averages rose underneath them or an actual pullback occurred to test their support.

A more cautious trader might have pointed out that however logical that conclusion might be or how likely such action was based on recent historical evidence, these indices were still clearly bouncing from the 10-minute 21-ema's as of the close on September 13. Indices were maintaining their strongest rally mode, not even pulling back to the stronger and more important support of the 100/130-ema's. As long as that kind of momentum continued, any eventual testing of the 100/130-ema's support was likely to be accomplished by a sideways/sideways down movement rather than a stronger pullback. As long as that kind of momentum continued, it was dangerous to assume bearish positions would profit.

Another conclusion might be reached, drawn from the strange congruence of the actions on these indices. This was clearly program, institutional or--if you're the suspicious type--even PPT (plunge-protection team) buying. Someone or several someones with deep pockets were buying baskets of stocks each time indices hit certain key support levels.

Would you really want to bet against those someones, especially with options that were about to expire? Would you really want to enter a trade based on a VIX move, when it's well known that such VIX moves can presage a market movement by days or sometimes even weeks, and when a low VIX can go lower? Should you factor in any possible option-expiration influences on the VIX's behavior anyway?

On the night of September 13, I mentioned all these points in the Wrap. I told traders to watch those averages the next day, but cautioned that a likely action would be some disorganization, a trading back and forth across the 10-minute 21-ema's that wasn't as much a violation of that average as it was a knitting of prices across it, indicating some disorganization. Since both the daily candle's shape and the opex Thursday pin-them-to-the-action behavior that typically begins about mid-morning on opex Thursday hinted at possible consolidation, and since such a period of disorganization was sometimes seen in consolidation, bears shouldn't be too quick to believe that a minor violation of the 10-minute 21-ema's meant a plunge was next. It wasn't.

Annotated 10-Minute Chart of the SPX:

Those who held September puts through that Thursday, when they stopped trading, were not to be rewarded with a drop that would re-inflate the value of those options that were out of the money.

Watching such a chart would have saved traders from entering short-term positions with September puts any time opex week. Traders would have had a clear benchmark that told them that upward momentum remained strong. Many other signs might have been pointing to the need for a pullback, but watching prices bounce from these averages showed it wasn't happening.

That violation of the 10-minute 100/130-ema's wasn't to occur until Tuesday of this week.

Annotated 10-Minute Chart of the SPX:

This is how the 10-minute chart looked at the close of trading on September 19. When I wrote the Wrap that night, Tuesday, I pointed out this action and told readers to watch how the SPX reacted with relationship to those 10-minute 100/130-ema's the next morning. If the markets were to pull back and the SPX to actually gap down and open beneath them, then it had likely just overrun that resistance. If it continued climbing, then the retest of likely resistance was unsuccessful in establishing that resistance.

Conservative traders would have been rewarded for their patience in waiting for the results of the retest. The resistance didn't hold.

Annotated 10-Minute Chart of the SPX:

It wasn't until Thursday that the SPX was to fall finally complete all steps that indicated at least a short-term trend change: falling through those 10-minute 100/130-ema's, rising to retest them, and then falling back again, with those averages serving as resistance.

Annotated 10-Minute Chart of the SPX:

The retest of the 10-minute 100/130-ema's was more pronounced on the OEX, which I was watching at the time of the retest Thursday afternoon, because it had been the big-caps that had been leading the rally, to some extent. The OEX rose exactly to the 100-ema and fell back.

I won't have watched the action on Friday because a trip will have taken me away from my computer, but if I'd been watching, I would have paid particular attention to the action of the SPX with relationship first to the 10-minute 21-ema and then the 100/130-ema's. I'd have expected those 100/130-ema's to eventually be retested, either Friday or Monday. Bears should hope that any such retest occurs with a sideways/sideways-up movement that allows the falling 100/130-ema's to play catch-up, rather than a swift rise such as that seen on the September 19. Such a swift rise would have hinted that the bullish fervor hadn't yet been worked out of the markets.

These charts were each snapped as the action occurred. The charts that referred to the end of the day September 13 were snapped at the end of the day, for example. The chart that referred to the post-FOMC action was snapped at the end of the day of that decision. Each of the other charts was snapped at the end of the day to which they referred. I wanted you to see that I wasn't scrolling through charts, picking out something that worked, but rather starting with the action as it unfolded and following it through.

There's nothing too technical on these charts, just a simple examination of price action with regard to key moving averages, with those averages discovered through a testing of various time periods. Sometimes you don't have to be too technical. A study of these charts would have saved some from jumping into bearish trades too soon, especially with options about to expire.

If you did that, I'm certainly not chastising you for doing so. Been there and done that in the past, so who am I to chastise anyone? Many indicators suggested that it was time for a trend change. I'm merely suggesting a tool that might help you better time such trend-change plays.

Nothing is foolproof, either. Friday, when I'm gone, the SPX may shoot right back up, with bullish fervor reestablished. Stops are always needed, no matter what the charts say.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

DISCLAIMER

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

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