Option Investor

Daily Newsletter, Wednesday, 10/04/2006

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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

Post-Party Blues Dispelled

The post-holiday blues hit the markets early this morning, only a day after the Dow hit an all-time high. A blue chip precipitated that mood swing, with giant retailer Wal-Mart (WMT) cutting its forecast for September's same-store sales. Blue chip GM was a party-pooper, too, starting out to the upside, but turning lower by the end of the day.

Few party-goers were ready to give up the celebration, however, urging the Dow forward into a retest of yesterday's high. That move higher was predicted by yesterday's charts, too, with many daily candles showing a spring off support and a potential reversal signal in the making. Such springs off support usually precede further gains the next days. The Dow's daily candle was one of those showing such a spring. By mid-morning, the Dow had already exceeded yesterday's high and advancers had moved well above decliners on both the NYSE and Nasdaq.

Not even the grim future story presented by Fed Chairman Bernanke or sobering economic reports could restrain the party-goers. Crude's bounce off its lows failed to restrain them. Joe Battipaglia, once called as a perma-bull, joined the party, with a MarketWatch.com interview early this morning in which he urged that bulls had the momentum for now.

Listening to that interview, however, it sounded as if Battipaglia was willing to party, but was standing by the door just in case he needed to exit quickly. Battipaglia cautioned that some indicators were showing that breadth had been thinning on the rally, at least going into today's trading. He believes that the Fed "got lucky" as Bernanke got "a pass" with a bet that the softening economy would bring down inflation pressures. Battipaglia noted, as many of us have on this site, that the Russell 2000 was "going backwards" rather than leading, one setup often seen in the end period of a bull run. The Russell 2000 gained along with other indices today, in fact showing a higher percentage gain than many indices, but charts will show that it had been trailing far below other indices in some measures of performance. It's following rather than leading on those measures, if not on percentage gains today. So, it's time to look at those charts.

Annotated Daily Chart of the SPX:

First support is near 1340, with the 10-sma offering support below that. The 1367-1368 resistance should be strong, if touched. Prices do sometimes breakout to the upside out of channels such as these when momentum pushes prices into a parabolic rise, but the top of the channel is joined by a long-term Fib resistance level and such rises often mark the beginning of the end.

The SPX broke out above Keltner channels, up through the 120-minute charts. That's poses a dilemma for both bulls and bears. It means that bullish momentum is (or was today) strong, but from this moment on, the SPX is vulnerable to a pullback without any promises as to when it will occur. On a 15-minute chart, that breakout level was at about 1347.60 on 15-minute closes, at least as of today's close. With momentum this strong, the first thing you have to see to believe that there's even the smallest change in tenor is a close back below that upper Keltner band (Length 120, ema and multiplier, 7.2) and then a rise back to retest it, with that Keltner channel then serving as resistance. Bearish price/RSI divergence would be nice, too, but that's not the end of this warning. Unless you see prices plunge, in reaction to something that Fed speaker Kohn says this evening or due to some other cause, don't presume a big pullback. Intraday Keltner support is closely layered down to 1344, so, that first bounce potential comes in from within that level unless there's a strong whoosh down. Next intraday support is at 1341, but the line will move lower if there is a strong move lower that breaks through the higher band of resistance.

Until and unless such conditions are met, assume that first short-term, intraday support lies along the top of that channel on 15-minute closes.

Those hoping for a pullback have evidence that it's time for one to begin without having any sign yet that it will begin, whether or not "it's time." Strangely enough, that evidence of time for a pullback comes from the Dow, which rose to hit potentially strong resistance today.

Annotated Daily Chart of the Dow:

The resistance that the Dow faces now is another multi-year resistance level, and this may be strong resistance. However, like the SPX, the Dow created a breakout condition on its intraday Keltner charts. As of the close, Keltner support was building for the Dow from 11,810-11,832.50 on 15-minute closes, and it may take a strong whoosh lower to break that support. Until it's broken (and remember, these lines are dynamic, moving with price), the Dow remains in breakout mode, and it's dangerous to assume a rollover will happen, no matter how extended the rally appears or how strong the resistance appears.

Those hoping for even a short-term pullback want to see the Dow push below those lines now at 11,810-11,832.50, rise back to test them and then fall again. If that happens, the 11,760 level is currently first support, with the daily first support noted on the daily chart.

The Nasdaq charged toward the top of its rising regression channel today, pushing above the small gap down in May.

Annotated Daily Chart of the Nasdaq:

Like many other indices, the Nasdaq created a breakout signal on its 15-minute Keltner chart, up through longer-term intraday charts. On a 15-minute basis, Keltner support could now be found at the breakout level, at about 2284 as of the close, with this level being important on 15-minute closes. The Nasdaq remains in breakout mode as long as it's finding support on this channel line, but, it, too, is charging up toward next and potentially strong resistance, so it's possible gains could be capped at that next resistance zone. If you're hoping for a turnaround, even over the short-term, you have to see the Nasdaq begin closing 15-minute periods below that Keltner breakout zone near 2284 and then rise to retest it, with resistance holding.

I can't show too many charts or this article would be even longer than it's going to be with all the economic releases today, but if I could show you these 15-minute Keltner charts on all these indices, you would see the breakout first on the 2:45 candles, then a pullback to retest the channel line to see if it holds as support, and then a push back above the channel. It was too clean a test for the significance of the channels to be ignored. Bears, even short-term ones, want to see those channels containing prices again, and bulls may not be in too much trouble even if they do.

If the Nasdaq should pull back within these channels, first Keltner support shows up currently at 2278 and then at 2271, but that will change if price does dive below the breakout levels. The range between those two numbers contains Friday's 2273.30 high, though, so that range seems a good one to watch for first potential support.

If the Dow's rise to test strong resistance might present one possible reason for a downturn, the SOX might present another case. All the charts you've seen above have prices rising through ascending price channels. Until a few days ago, the SOX's chart looked the same, but it quietly broke through its channel's support this week. The SOX might have risen today along with other indices, but it was rising to retest what had formerly been support, and it stopped dead right on that former support.

Annotated Daily Chart of the SOX:

While other indices were creating breakout signals, the SOX traded safely within its Keltner channels, even on the 15-minute chart. As of the close, it had set a potential upside target of 463.53, but it made a lower high into the close rather than the higher high seen on many other 15-minute charts, so I'm not sure about that upside target. That's particularly true with the SOX facing the strong resistance depicted on the daily chart.

The 15-minute Keltner chart showed support first intraday support at about 455 on 15-minute closes, with further support down to 452. If the SOX turns down precipitously, Tuesday's 443.81 low may be important to watch, but many will be watching the 50-sma at 437.69 as the last nail in a bearish coffin for the SOX, should it roll down again.

Resistance will be at that Keltner level at 463.53, with daily resistance at the 50 percent retracement of its decline from May highs, at about 472, and then at its 200-sma at 478.61. The SOX will be important to watch tomorrow.

Many times over the last week, the SOX and RUT have seemed to diverge. Today, both gained, but the RUT remains within its rising price channel, and hasn't broken down like the SOX.

Annotated Daily Chart of the RUT:

Although the RUT looks more like the Dow and SPX than the SOX, as it still climbs through this rising channel, it doesn't look quite like them on the 15-minute Keltner chart. It couldn't break out, as they did, but instead stopped just short of Keltner resistance at about 734.20. It is also not making new recent highs, of course. The RUT could break out, easily, but if so, it's still playing a following role and not a leading one. That 734.20 level should be first resistance on 15-minute closes, with support at 731.54, and then layered down to about 725. It's going to take a strong whoosh lower to break through all that potential support at once, so want-to-be bears shouldn't expect a strong pullback without that whoosh.

The TRAN was not a follower today on the basis of its performance on 15-minute Keltner charts. Its breakout preceded that of other indices. On a Keltner basis, the TRAN needs to drop beneath support that's currently at about 4538.50 and then rise to retest that zone and have it hold as resistance before the breakout status is undone.

To see any real damage done to the TRAN, it has to drop further, back beneath the 200-sma it finally crossed today.

Annotated Daily Chart of the TRAN:

A number of economic releases or events occurred today, seemingly without much impact on the markets, since several should have dampened the party spirits, but didn't. One aberration in the party-dampening releases was the MBAA's weekly mortgage application survey information. At 7:00, the Mortgage Bankers Association released its survey for the week ending September 29, and that volume rose sharply when compared to the previous week. It was up 11.9 percent on a seasonally adjusted basis and 11.5 percent on an unadjusted basis. Remember the year-over-year comparison, however, with that comparison revealing that application volume was down 10.9 percent.

Other components reached double-digit gains when compared to their week-ago levels, too, with the refinance component gaining 17.5 percent and increasing to 46.7 percent of total applications. This was the highest percentage of total volume seen in more than 18 months. Thirty-year, fixed-rate mortgages increased to 6.24 percent, up from the previous week's 6.18 percent.

Later in the day, Fed Chairman Bernanke was asked about the housing market during the Q&A session after a scheduled speech on savings. He said that the housing sector was undergoing a substantial correction, that would-be investors and homebuyers were waiting for clarity, and that the housing slump was expected to subtract about a percentage point from economic growth. Bernanke believes that the housing slowdown is mitigated by other economic forces, but affirms that questions remain as to how much of that slowdown will spill over into other sectors. The DJUSHB, the Dow Jones Home Construction Index, gained today, but its open and close were roughly within the consolidation zone formed this week.

Other early morning releases gave a possible heads-up about Friday's jobs number. The ADP index showed an anemic gain of 78,000 private-sector jobs. If this number realistically predicts Friday's September jobs number, that number will show the weakest growth since Katrina pushed jobs growth lower.


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In a typical month, another 10,000 jobs would be added, accounting for government-sector jobs, positing a number of about 88,000 for Friday's September jobs number. That's far less than the 125,000 previously predicted. By midmorning, some forecasters were already revising lower their prediction for Friday, with Action Economics analysts now predicting a gain of 115,000. The ADP Index is comprised so that it hopefully predicts the jobs number, but many will remember the spectacular miss early this summer. However, another number, the Hudson Employment Index, was softer than expected, at 100.5 and its lowest level this year. Markets have presumably been rising on the "Goldilocks scenario," a belief that economic conditions would soften to the just-right combination that prevents inflation pressures from building but doesn't crater the economy. If jobs soften too much, that might make that porridge representing the economy a bit too cold for most Goldilocks investors.

Next on the day's full roster of economic releases and Fed speakers was the Commerce Department's report on orders for factory-made goods for August. That number was flat, with components for both durable and nondurable goods also flat. July's headline number had dropped 1 percent month over month, one article notes, and the expectation had been that factor orders would decline 0.1-0.2 percent. Market watchers should note, however, that July's number was previously reported at a 0.6-percent drop, then revised lower to a 1.0 percent drop.

September's services or non-manufacturing ISM dropped to 52.9, a big downside surprise from the anticipated 56.2. August's number had been 57, with 50 the expansion-or-contraction benchmark. Jim had predicted a weak number, and this one was the weakest in more than three years. The price index that is part of this report plummeted to 56.7 percent, down from its previous 72.4 percent, and it was this component of this report that reassured investors that the Fed is done with rate hikes and, some think, allowed the party to proceed today. However, keep that Goldilocks scenario in mind, but this porridge threatens to cool too much for the just-right state investors want. Worry should perhaps have been stronger today than it appeared to be.

Speculation abounds about when OPEC members might decide to step in and cut production, but little attention appeared to be paid to the crude inventories number. As Jim mentioned last night in his Wrap, crude had dropped to an after-hours low of $58.43 a barrel yesterday, the lowest price since July, 2005. That drop was at least partly attributed to an expectation that crude supplies might increase today. According to an online Bloomberg article yesterday, experts expected distillate supplies to rise about 1.5 million barrels, and gasoline supplies, 1.5 million barrels. Crude inventories were expected to drop, but by less than a million barrels.

Instead, crude supplies rose 3.3 million barrels last week, according to the Energy Department. Distillates were up only 200,000 barrels, however, far less than the expected number. Gasoline supplies rose 1.2 million barrels, in line with some predictions.

Traders at first considered the inventories numbers bearish for crude prices, and they dipped immediately afterwards, prompting mid-morning headlines that read "Oil Falls Under $58." Those headlines weren't to tell the last story, however, as crude rebounded, and closed at $59.45 according to my feed source.

One news source attributed the bounce to news of an explosion at a refinery in Texas, but the only news I located was that there had been a chemical release at a Valero refinery in East Houston. While I'm not minimizing the release of sulfur that apparently sent at least seven people to the hospital, I grew up in a refinery town and have personally had hose melted off my legs from a sulfur release while I was attending college. I don't think that sulfur release was a big enough event to bounce crude futures. Some also attributed the bounce to an announcement by a Nigerian militant group claiming that it would hit oil installations today, but it may have just been time for crude to bounce. I don't have access to volume comparisons on the daily chart, but there appeared to be a surge in volume at the day's low. If daily volume was particularly high in comparison to recent trading, then you may have seen a key reversal day. "Key reversal day" is a technical term that requires that high volume, a punch to a new recent low, and a strong rebound, and I've learned not to trust such apparent reversals that do not include the strong volume component.

At noon, the Fed speakers began lining up, with Geithner appearing first, at noon. Several minutes later, snippets of his talk began trickling into news reports. Geithner said that he believed a 1997-1998-style financial crisis was unlikely, but that emerging markets had much work still to do. Geithner's talk was titled "Progress toward Financial Stability in Emerging Market Economies." He pinned his belief about that unlikelihood on accumulations of current account surpluses and currency reserves among emerging economies.

Fed Chairman Bernanke was slated to speak on savings. He spoke next, but did not address current economics or monetary policy. He did warn about that there was no "silver bullet" that would increase personal savings and that if the problems caused by the aging of the baby boomers were not addressed, we could expect a lowering of living standards. The first wave of baby boomers will begin collecting Social Security payments in 2008, headlines noted, and Bernanke believes it's critical that U.S. consumers begin saving more right now. He spoke of the rapid changes leading into 2030, when the number of working younger persons per person over 65 will fall from 5 to about 3, and the percentage of the population 65 and older will rise from 12 percent to 19 percent. (CNBC quoted 30 percent, but I thought I heard him say 19.) Without changes to ameliorate the effects, spending on Federal programs for the aged will increase from about 7 percent of the GDP to 13 percent by 2030, he believes. That would presume a slashing of budgets for other programs that benefit society. Questions of inter-generational fairness will arise, he warns, as debt is shifted into the future. To insulate future generations from this grim effect, Bernanke says economic models require an immediate four-percent reduction in consumer consumption or a three-point rise in savings. The speech was grim.

Thomas Kohn was the last FOMC member scheduled to speak. One source said he would be speaking at 6:30 EST, and he is slated to speak on the economy. Given today's weak numbers, that talk may be important to the markets.

Company developments, particularly negative ones, appeared to be ignored today. WMT's trimmed September same-store sales forecast turned futures negative, at least if CNBC commentators were to be believed, but that was about the only effect this retailer had on markets. The time stamps of the information and the downturn do seem to coincide. WMT had previously predicted a gain of 1.8 percent in those same-store sales, but now says that the official sales release, slated to be released before the bell tomorrow, should measure a gain of about 1.3 percent. The retailer said that the monthly reconciliation process prompted the change in outlook for those sales.

Other companies in the news included automakers General Motors (GM) and Ford Motor Co. (F). Bear Stearns upgraded GM to a peer-perform rating, up from its previous under-perform rating, and downgraded F to a peer-perform rating, down from its previous out-perform one. Both stocks reacted in the pre-market session, with GM jumping and F rolling lower. GM wasn't to retain its gains, however. Later in the morning, news surfaced that GM and Nissan-Renault had terminated alliance talks, and the stock's price turned lower.

Bear Stearns also downgraded TiVo Inc. (TIVO) to an under-perform rating. This occurred after an appeals court ruled that EchoStar Communications Corp. (DISH) could continue to sell its brand of digital-video recorders as the companies' patent dispute was appealed.

Geopolitical tensions remain. South Korean, China and Japan have all now urged North Korea not to continue with its plans to test a nuclear bomb and to instead continue six-nation talks. The U.S. and Russia of course are the other two countries previously involved in six-nation talks with North Korea. Former U.N. chief weapons inspector Hans Blix today said that the world should assume that North Korea intends to go through with this test, and that this isn't just another case of saber rattling. North Korea is believed to have produced up to six nuclear weapons, with material on hand to produce as many as thirteen more. A South Korean official believes it may be a threat, however, with a goal to exert further pressure on the U.S.

Other tensions that may impact the markets are internal political pressures. Articles now mention the "anti-incumbent" trend, and some financial websites now include charts comparing support for various Republican incumbents and their opponents in upcoming elections.

Late-day developments included an apology from Apple (AAPL) Chief Executive Steve Jobs. He said that while he did not receive any backdated stock options and didn't understand the accounting implications, he did know that some had been backdated. The company also announced the resignation of its CFO from its board of directors. No misconduct was found among current or former management, the internal study concluded, but the company might need to restate several of its financial reports. As this report was edited, AAPL was at $74.85, down from its $75.38 close.

Tomorrow's economic reports start with September's Monster Employment number at 6:00, followed by the weekly Jobless Claims number at 8:30. Shortly before the open, we should also hear about the European Central Bank's rate decision. Natural gas inventories come at 10:30. Chain store sales figures will be reported during the day. Many traders will spend the day positioning their portfolios for the Friday morning September jobs report.

Earnings tomorrow remain light, but include STZ, MAR, and SLR.

Tonight's speech by Kohn and tomorrow's chain store sales may be the only factors impacting the markets, barring a company or two warning about earnings. So, what should we expect tomorrow on the markets?

First, we should expect to pay attention to both the Dow and the SOX. I know the Dow has been at one key level or another the last week, with each termed important resistance. Now it's at another, and it's hit that key resistance level after a strong one-day gain and a breakout signal on intraday Keltner channels. While such gains can be followed by another day of gains, it's often instead followed by a small-bodied candle with long or short shadows and sometimes even by an actual downturn. I would look at the possibility that the Dow could produce a doji-type day, if not a downturn, with any push higher likely part of an upper shadow that pierces but doesn't close above or much above next resistance. The TRAN, too, stopped short on next resistance after hitting it nearly exactly, and, it, too, could produce a doji-type day after perhaps first trying to punch through that resistance.

And the SOX, of course, rose to retest former support, a possible "kiss goodbye" for the SOX or a possible prelude to a move back into its channel and proof that the downturn had been a trap for bears.

I see potential for a pause at least tomorrow, at least on the Dow, TRAN and SOX. Delving deeper into the RUT's chart showed that it stopped at a descending trendline off the lower highs since September 20.

My suggestion? If you're long, just keep following the moves higher with your stops, remaining aware that some indices stopped today at next resistance, and so may need to recharge. Those breakouts on intraday Keltner charts are times of danger for both bulls and bears, because they show that momentum has become excessive. As long as that momentum continues, bulls are doing fine, but it will eventually collapse.

If you're interested in bearish positions, go back and study all those other presumed resistance levels and see how easily they were eventually snapped before you decide ahead of time that they're going to hold. Watch those Keltner levels if you have them available on your charts, and, unless there's a strong whoosh lower, you want to see a retest that holds as resistance before you even begin to believe the short-term tenor has changed. If you don't have those Keltner channels, you can substitute other intraday charts. For example, today, the SPX was mostly skipping along the three-minute 21-ema. Put that on your chart. If the SPX continues skipping along that ema, then the momentum remains, no matter what you personally believe that it should be doing. If the SPX violates it, then you want to see it rise to retest it, and then begin falling back again before you believe that there's even the slightest change in tenor. Keep your stops tight if you're tempted into a bearish play. One of these days, they're going to work, but make sure you have some funds left to take part in any downturn.

If doji are produced tomorrow, bulls will have a decision to make. Such doji at the top of a climb can hint that a downturn is next. Other potential reversal signals would occur if indices tomorrow were to close more than midway below today's ranges.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ABK None None

Play Editor's note: The market's strength during the last few weeks has been unusual. We're not going to discuss why the market has been strong right here. That's what the market commentary is for. We will say that historically stocks tend to be weak the second half of September and the first half of October. Today may have been a turning point. The broad-based rally today was pretty strong. Internals looked good although we could have done with a little more volume. We are cautiously bullish here. You will note a large number of new call plays today but do not interpret that as our bias as being very bullish. At this point the contrarian in us expects every rally to fail but we can't trade on our market bias alone - only what the market gives us. Right now the trend is up so we're going to play it. Watch those stop losses!

New Calls

Ambac Fincl. - ABK - close: 84.40 chg: +0.84 stop: 81.99

Company Description:
Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. (source: company press release or website)

Why We Like It:
ABK found support near $82 a couple of weeks ago. Shares formed a short-term bottom there bolstered by technical support at its rising 100-dma. Now the short-term technicals are looking bullish and its MACD on the daily chart has produced a new buy signal. Today's gain is a bullish breakout over resistance near $84.00 and its 50-dma. Volume came in light, which is a warning sign, but we're going to play it anyway. We're suggesting calls with ABK above $84.00. Our target is the $88.00-90.00 range. We do not want to hold over the October 25th earnings report. FYI: The P&F chart points to a $102 target.

Suggested Options:
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 80.00 ABK-KP open interest=158 current ask $5.60
BUY CALL NOV 85.00 ABK-KQ open interest=698 current ask $2.00

Picked on October 04 at $ 84.40
Change since picked: + 0.00
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand


Amgen Inc. - AMGN - close: 72.97 change: +1.64 stop: 69.99

Company Description:
Amgen discovers, develops and delivers innovative human therapeutics. A biotechnology pioneer since 1980, Amgen was one of the first companies to realize the new science's promise by bringing safe and effective medicines from lab, to manufacturing plant, to patient. Amgen therapeutics have changed the practice of medicine, helping millions of people around the world in the fight against cancer, kidney disease, rheumatoid arthritis, and other serious illnesses. (source: company press release or website)

Why We Like It:
The biotech sector is breaking out and AMGN is helping lead the charge. We like AMGN as a bullish candidate given today's breakout from its two-week trading range. Volume on today's breakout was pretty strong and that's definitely a bullish sign. The stock should continue to see strength as investors have been favoring the big caps. We'll stick a stop loss under the recent support and target a rally into the $79-80.00 range. However, we will exit ahead of the October 23rd earnings report. FYI: The P&F chart is also showing a bullish breakout and an $86 target.

Suggested Options:
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 70.00 YAA-KN open interest= 794 current ask $4.40
BUY CALL NOV 72.50 YAA-KV open interest=1802 current ask $2.70
BUY CALL NOV 75.00 YAA-KO open interest=3950 current ask $1.40

Picked on October 04 at $ 72.97
Change since picked: + 0.00
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 7.8 million


Deere & Co. - DE - close: 85.39 change: +1.80 stop: 82.99

Company Description:
Deere & Company, founded in 1837, grew from a one-man blacksmith shop into a worldwide corporation that today does business in more than 160 countries and employs over 46,000 people worldwide. Deere & Company consists of three equipment operations, credit operations, and four support operations. (source: company press release or website)

Why We Like It:
Shares of DE look poised to move higher. The stock's breakout in the last week of September produced a new triple-top breakout buy signal on its P&F chart, which now points to a $102 target. The last few days has seen DE churn sideways under the $85 level as it digested those September gains but now the stock is breaking out again. Readers might want to consider this a hedge against our bearish play on CAT right now. We are suggesting calls with DE above $85.00. We'd suggest a stop loss under the recent trading range. Our target is the $89.50-90.00 range. We do not want to hold over the November earnings report.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 80.00 DE-KP open interest=289 current ask $7.30
BUY CALL NOV 85.00 DE-KQ open interest=395 current ask $3.90
BUY CALL NOV 90.00 DE-KR open interest=379 current ask $1.70

Picked on October 04 at $ 85.39
Change since picked: + 0.00
Earnings Date 11/14/06 (unconfirmed)
Average Daily Volume = 2.7 million


Emerson Electric - EMR - close: 84.77 chg: +0.74 stop: 82.99

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

Why We Like It:
The rally in EMR has brought the stock right to resistance near $85.00. Volume has dried up the last few days as EMR digested its recent gains. Now shares look poised to breakout over the $85 mark and make a run toward its highs. We're suggesting a trigger to buy calls at $85.15. If triggered our target is the $89.00-90.00 range. The P&F chart is bullish and points to a $92 target. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 80.00 EMR-KP open interest=588 current ask $5.80
BUY CALL NOV 85.00 EMR-KQ open interest=848 current ask $2.20
BUY CALL NOV 90.00 EMR-KR open interest=118 current ask $0.50

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


Greenbrier - GBX - close: 29.70 change: +1.19 stop: 27.99

Company Description:
The Greenbrier Companies, headquartered in Lake Oswego, OR, is a leading supplier of transportation equipment and services to the railroad industry. The Company builds new railroad freight cars in its manufacturing facilities in the U.S., Canada, and Mexico and marine barges at its U.S. facility. It also repairs and refurbishes freight cars and provides wheels and railcar parts at 23 locations across North America. Greenbrier builds new railroad freight cars and refurbishes freight cars for the European market through both its operations in Poland and various subcontractor facilities throughout Europe. Greenbrier owns approximately 9,000 railcars, and performs management services for approximately 135,000 railcars. (source: company press release or website)

Why We Like It:
The Dow Jones railroad index broke out over resistance at the 380 level and its 200-dma with Wednesday's 2.3% gain. The group has broken out past its five-month trendline of resistance. We suspect that GBX is poised to breakout from its trading range and join its peers in the railroad sector. Today's rally in GBX was a technical breakout over the 100-dma but the stock has resistance at the $30.00 mark. We're suggesting a trigger to buy calls at $30.05. If triggered our target is the $33.00-34.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart is still bearish but it's seeing a strong bounce near support.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 25.00 GBX-KE open interest= 0 current ask $5.70
BUY CALL NOV 30.00 GBX-KF open interest=96 current ask $2.15

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 310 thousand


Vulcan Materials - VMC - close: 79.22 chg: +1.67 stop: 76.95

Company Description:
Vulcan Materials Company, a member of the S&P 500 Index, is the nation's foremost producer of construction aggregates: primarily crushed stone, sand and gravel, and a major producer of other construction materials required by the U.S. economy. (source: company press release or website)

Why We Like It:
VMC has been consolidating sideways under resistance at the $80.00 level for just over a month. Today's rally has put the stock back in position to breakout over resistance and the short-term technicals are beginning to turn bullish again. The P&F chart is already bullish with a $93 target. We are suggesting a trigger to buy calls at $80.26, which is above the late September high. If triggered our target is the $84.50-85.00 range. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 75.00 VMC-KO open interest= 257 current ask $6.40
BUY CALL NOV 80.00 VMC-KP open interest= 543 current ask $3.40
BUY CALL NOV 85.00 VMC-KQ open interest=1158 current ask $1.55

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 843 thousand

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Entergy - ETR - close: 80.45 change: +0.12 stop: 77.99

ETR continues to creep higher but it looks like the stock was forgotten as investors put their money into flashier sectors. We do not see any changes from yesterday's new play description. We are suggesting calls with ETR above $80.00 although another dip and bounce near $79.00 would also work. Our short-term target is the $84.00 level. We do not want to hold over the late October earnings report.

Picked on October 03 at $ 80.33
Change since picked: + 0.12
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.1 million


Mettler Toledo - MTD - close: 66.30 chg: +0.30 stop: 63.66

MTD also looks like it was forgotten by traders during today's widespread market rally. Overall the pattern remains bullish. Our target is the $68-69 range. We do not want to hold over the late October earnings report.

Picked on September 13 at $ 63.66
Change since picked: + 2.64
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand


Omnicom - OMC - close: 93.76 chg: +0.19 stop: 89.89

OMC is another stock on our list that was relatively forgotten by investors during today's widespread market rally. We do not see any changes from our previous updates. We are not suggesting new positions at this time. Our target is the $96.00-97.00 range. We do not want to hold over the late October earnings.

Picked on September 10 at $ 90.97
Change since picked: + 2.79
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

Put Updates

Caterpillar - CAT - close: 65.54 chg: +0.43 stop: 67.36

The strength in the DJIA and the markets today appears to have inspired some bargain shopping in CAT. Traders bought the dip near $63.50 this morning. The move looks like a short-term bullish reversal. We're not suggesting new positions at this time and would expect the bounce to carry CAT toward the $67 level. More conservative traders may want to cut their losses early. Our target is the $60.25-60.00 range but more aggressive traders may want to aim lower. We do not want to hold over the late October earnings report.

Picked on September 21 at $ 64.59
Change since picked: + 0.95
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million


Chipotle - CMG - close: 50.99 change: +1.49 stop: 52.61

A widespread rally combined with some high-profile better than expected same-store sales numbers in the restaurant sector helped lift shares of CMG. Investors may have decided that the pull back in oil prices will see more discretionary income move toward restaurants. Today's 3% rally in CMG is trouble for the bears since the stock has broken back above the $50 mark and its 50-dma. We are not suggesting new positions and considering the strong volume behind today's rally (which is bullish) more conservative traders may want to cut their losses early right here. We're not suggesting new positions at this time. We do not want to hold over the late October earnings report.

Picked on September 28 at $ 49.45
Change since picked: + 1.54
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 459 thousand


Maxim Integrated - MXIM - cls: 28.83 chg: +0.79 stop: 29.21 *new*

Semiconductors rallied with the rest of the market and the SOX added 1.9%. Shares of MXIM out performed its peers with a 2.8% rebound. The trading in MXIM over the last several days has turned into a sideways trading range and if MXIM breaks out over $29.00 it will look like a short-term base. We are lowering our stop loss to $29.21 to reduce our risk. We're not suggesting new positions at this time.

Picked on September 25 at $ 27.90
Change since picked: + 0.93
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million


Phelps Dodge - PD - cls: 78.65 chg: -1.40 stop: 82.15

Copper mining stocks under performed the markets today as copper futures sank again. Shares of PD plunged to an intraday low of $76.31 before bouncing back this afternoon. Our suggested trigger to buy puts was at $78.45 so the play is now open. A failed rally under $80.00 would be another potential entry point to open positions. However, we suggest caution when opening any sort of bearish position given the market's bullishness on Wednesday. Our target for PD is the $72.50-70.00 range. We do not want to hold over the company's October earnings report. PD can be volatile so we consider this a higher-risk play.

Picked on October 04 at $ 78.45
Change since picked: + 0.20
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 5.1 million


FreightCar Amer. - RAIL - close: 52.69 chg: -0.36 stop: 56.32

Shares of RAIL continue to show relative weakness. The transport stocks broke out higher today in a big way and railroad stocks followed. Yet RAIL failed to participate in the rally. This weakness is a good sign but we'd suggest against new plays at this time. Right now we're suggesting two targets because RAIL appears to have some support near $50.00. 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. The P&F chart points to a $42 target.

Picked on September 21 at $ 54.50
Change since picked: - 1.84
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 353 thousand


U.S.Steel - X - close: 55.95 chg: +0.89 stop: 60.05

It's been about two weeks and we're right back where we started at $55.95. That may be a wash if you're trading stocks but that's a bad thing if you're trading options. Shares of X look like they want to trade lower but today's market rally was so broad based that X rebounded for a 1.6% gain. We're not suggesting new positions at this time and more conservative traders may want to tighten their stops.

Picked on September 22 at $ 55.95
Change since picked: - 0.00
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 4.4 million

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)


Boston Properties - BXP - close: 104.35 chg: +0.51 stop: n/a

BXP is still inching higher. We do not see any changes from our previous update. We're not suggesting new strangle positions at this time. Our suggested options are the October $105 call (BXP-JA) and the October $100 put (BXP-VT). Our estimated cost is about $1.90. We're suggesting an exit if either option rises to $3.80 or higher. Remember, this is an aggressive play due to our three-week time frame. October options expire in less than three weeks.

Picked on October 01 at $103.34
Change since picked: + 1.01
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 694 thousand


Google - GOOG - close: 415.70 chg: +11.66 stop: n/a

Widespread strength on Wednesday, especially in tech stocks, helped GOOG breakout from its recent consolidation pattern. The stock is now outside of our suggested entry range to open strangle positions so we're not suggesting new plays. The options in our strangle strategy are the November $440 call (GOP-KH) and the November $360 put (GGD-WL). Our estimated cost for this position is about $13.00. Our suggested exit is at $24.00 or higher.

Picked on October 01 at $401.90
Change since picked: +13.80
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 5.6 million


Legg Mason - LM - close: 102.00 change: +2.28 stop: n/a

LM bounced from the $99.00 level this morning and by the day's end had rallied toward short-term resistance near $102. The stock is now outside of our suggested entry range to open strangle plays so we're not suggesting new positions. The options in our strangle strategy are the November $105 calls (LM-KA) and the November $95.00 put (LM-WS). Our estimated cost is $5.15. We're suggesting an exit if either options rises to $7.25.

Picked on October 03 at $ 99.72
Change since picked: + 2.28
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.4 million

Dropped Calls


Dropped Puts

Monster - MNST - close: 39.12 change: +1.14 stop: 37.55

MNST continues to show relative strength and a breakdown under support near $35.00 looks like a may not happen. It was our plan to catch a breakdown under $35.00 but MNST never hit our trigger to open plays at $34.65. Thus we're dropping the stock as a bearish candidate.

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


Sears Holding - SHLD - close: 163.66 chg: +4.00 stop: 162.05

We have been stopped out of SHLD at $162.05. The widespread market rally combined with some better than expected same-store sales announcements in the retail sector helped push the RLX retail index to a 2.1% gain. Shares of SHLD out performed the group with a 2.5% rally. We had warned readers yesterday about a potential follow through higher.

Picked on October 01 at $158.09
Change since picked: + 5.53
Earnings Date 11/16/06 (unconfirmed)
Average Daily Volume = 1.8 million

Dropped Strangles


Trader's Corner

Pivot Points, Current Sentiment and a Weekly Index Chart view

A few weeks back I received a note from one of our Option Investor Subscribers that included the following quiry... "(I'm) curious as to your thoughts on the use of pivot points in trading."

I answered back on in this space on 9/13 (06) that:

'Pivot points as a topic is just not a defined or well-defined topic in technical analysis. If you go searching through the books on the subject, there is no definition of the term. This is not to say that it's a meaningless term. I've heard of a 'pivot point' trading method or system but don't have the details. Anyone who has any references on the subject, send them to me. I'm interested. (The term 'pivot' point can be pretty subjective. I use the term 'pivotal' support or resistance to mean a price point that if pierced, would be significant for the trend; e.g., suggesting a possible reversal of the trend or acceleration of the existing trend.)'

My request for more information led to an answer (at the end of last week, 9/29) from another OI Subscriber as follows (although I did make a few edits):

"Pivot points are daily, weekly and monthly price points that act as price targets for any underlying instrument (indices, stock etc.). Pivot points are employed by day traders and floor traders too to help them calculate entry and exit points. They have use as predictive support and resistance levels and can help confirm other technical methods. Some of the numbers have confluence with Fibonacci levels.

The numbers are based on the 4 numbers that all of us have at our disposal: the open, close, high and low. Daily numbers are updated on the close of each day, weekly numbers on the close of the week and monthly on the close of the month. For each day, there's a middle pivot point (the fulcrum of daily action), a resistance 1 and resistance 2 numbers (the expected highs for the day) and support 1 and support 2 numbers (the expected lows for the day). You only have to watch these numbers to see how often they act as daily targets or turning points.

With regard to swing trading, monthly and weekly pivot points are excellent swing areas. Price momentum has to be very high to break through these levels significantly. When you get confluence of both, the probability of a swing is even higher. The recent swing in the oil stocks happened at last month's weekly and monthly confluence.

One person with a pivot point 'system' is John Person. Myself and other traders here have been using pivot points with much success over the past months since we learned about them (on stocks, indices and currencies). While I respect your point and figure charts (I don't use P&F but do bare the targets in mind), I find pivot points more accurate and excellent for locking in profits along the way.

(MY NOTE: I'm not a big user of Point & Figure Charts myself, but gave a primer on their use in response to a Subscriber request to do so.)

I use multiple contracts to ensure that some of the options I trade are exited at maximum profits (last month's BA puts were another good example of ensuring exiting at the top, or in that case, the bottom). I have a spreadsheet that updates daily pivot points. I update the weekly and monthly numbers by hand. Charting software like eSignal will update them automatically.

(He offered to send me the formulas, which I did ask for, so I can put them into my TradeStation software.)

I have included a screen shot of JOYG with the weekly pivot point that was close enough to this week's low for me to exit the position. In addition, I have included some numbers below that I used this month to help exit profitably:

JOYG Weekly Support S1 level - 32.37
CAT was even more accurate, with a monthly Support 1 level - 62.71 (CAT closed last week with a low of 62.78)"

End of Subscriber comments and BACK TO ME FOLKS:
The chart I was sent by our Subscriber didn't come through, but to make a reference to the Weekly Chart of CAT, here it is with what I show to be a low of 62.76. Maybe the charts down under don't read the same lows due to the closeness to the South Pole:- KIDDING!

Test it out and look at before you commit money to it!

I will get the particular pivot point 'formula' in question here (John Person's) in order to start looking at it and testing it, in order to have a more definitive look at it next in my Wednesday's Trader's Corner column. By the way, the kind of formula that divides the High, Low and Close and divides by 3 as the first step in helping determine current support/resistance levels is well known by me and has been used for many years. I used to use this kind of method at UBS (formerly PaineWebber), to compute the daily-expected price range of the stock indexes.

A pivot point is a computed number based on the high, low and close of the previous price bar, whether the time period is a day, a week or a month. Using that pivot point number, traders calculate support and resistance levels, which are considered to be price brackets for the current time period.

In my most recent Index Trader post on the Option Investor.com web site, I was speculating somewhat on a possible near term top or pause in market advance (WRONG!), while at the same time showing that the weekly charts suggested plenty of 'room' on the upside, which I'll get to in a moment. First: Sentiment.

In the early and many times the most powerful phase of bull market moves, bullish sentiment DOES NOT get to the extremes that are seen later when the powerful move in question has made believers of the majority of traders. When it's a LEG (a move that is well beyond an 'average' up or down price swing), it's often accompanied by DISBELIEF.

Psychologically, traders and investors take some time to adapt to a new phase of the market. When the move is very strong and traders were not in on it early, they tend to hold back waiting for the usual REACTION; e.g., a pullback. When the market just keeps powering up, it leaves a lot of people sitting on the sidelines, NOT buying calls and or taking out puts for a hoped for profit on the reaction that doesn't come.


The way my particular 'sentiment' indicator is calculated is simplicity itself. So that it reads the way most 'overbought/oversold' indicators do, with oversold on the low end of the scale and overbought on the high end, I divide total daily call volume BY daily put volume. Calls into puts, for a CALL to PUT ratio, NOT the put-call ratio that is usually a fractional number.

The other important aspect is that I take OUT the INDEX options volumes to take OUT the effects of portfolio hedging and to try to get a clearer view of trader bullishness or bearishness by the ratio of EQUITIES (only) call to put options daily volume. I have to keep this number by hand, or rather by a calculator, once I get the daily CBOE daily market summary e-mail, which anyone can sign up for.

How many trades like the those suggested by a nearness to a high-potential bottom, as suggested by the dip of this indicator [ABOVE] into the 'oversold/extreme bearishness' column would have made your year in terms of options profits? And made it worthwhile for you to keep a running account of this ratio? I leave it to your imagination!


The S&P 500 (SPX) is the market leading Index right now, so it's of course the one to pay close attention to. Only lately has the Dow 30 (INDU) come on like gangbusters as the Institutions pile into the market. And, SPX has a quite well-defined uptrend channel and tend to do the same ol thing over and over as it trades back and forth WITHIN its weekly uptrend channel. Quite predictable, easy to forget, overlook or disbelieve! By this measure (trend channel trading parameters), there is not significance SPX resistance until around 1360.

The first parallel line to the lower up trendline is constructed by touching the more recent highs, or the bulk of those highs if they form a trendline. The next broader trend channel is constructed by going back to the highest high for the 2-year period shown and creating a parallel upper trend channel line that touches that/those highs. By this measure of the broader Dow 30 (INDU) weekly uptrend channel, the first significant technical resistance INDU will reach is up around 12,050 currently.

The Nasdaq Composite, my last (weekly) chart shown below, is trying to get back ABOVE its previously broken up trendline and therefore (if pierced) back INTO the uptrend channel it had going until mid-2006. This construction of suggests that the first critical (dare I say 'pivotal'!) resistance in COMP comes in at, and just over, 2300.

... and, keep those cards and letters (ah, e-mails) coming!

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

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


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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