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Daily Newsletter, Monday, 10/09/2006

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Table of Contents

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

Market Wrap

Lets Give Them Something To Talk About ...

The major indices ended Monday's session relatively unchanged, while the bond market's closure in observance of Columbus day gave equity traders little to key off of in a notably light volume trade at both the big board and NASDAQ.

After a couple of weeks of strong gains that had traders feeling like they were experiencing a rendition of heavy metal rocker Ozzy Osbourne's "Crazy Train," Monday's session was more analogous to Bonnie Raitt singing "Lets Give Them Something To Talk About" and a more tranquil trade was found.

After seeing a surge in bullish leadership last week with 293 stocks hitting new 52-week highs at the NYSE on Thursday, 188 stocks were pressed to new highs today. NASDAQ's 141 new highs came close to matching Thursday's 143, the highest number I've seen since a May 5th count of 265.

Today's session started out mixed to lower with decliners having the upper hand over advancers on reports out of North Korea that its government had performed a successful underground test of a nuclear missile this weekend.

The United Nations Security Council swiftly condemned North Korea's claim, and prepared to weigh proposals for new sanctions against the Pyongyang regime in a closed-door session.

John Bolton, the U.S. ambassador to the United Nations said, "The entire discussion, in which all 15 council members participated, took only 30 minutes," with all members condemning North Korea's claim.

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Intelligence experts were uncertain about the strength of the weapon. A U.S. intelligence official told the New York Times that the blast was a sub-kiloton explosion and that experts hadn't yet determined whether it was a nuclear explosion. Some experts say a one-kiloton explosion would be extremely small for a nuclear explosion.

Russia's defense minister, Sergei Ivanov, told the Itar-Tass news agency that Moscow believes the blast was in the 5-to 15 kiloton range.

The PHLX Defense Sector ($DFX.X) 308.47 +0.48% rose 1.48 points, with Lockheed Martin (NYSE:LMT) $88.58 +1.37% closing at an all-time high.

Despite the underground rumblings in North Korea and assumptions that OPEC is plotting its first output cut in nearly 2 years, November Crude Oil (cl06x) settled up 20 cents, or +0.33% at $59.96 after trading as high as $61.30 late in the afternoon.

Cooler temperatures in much of the north east underpinned a bid in heating oil with the November contract (ho06x) settling up more than 3.5 cents, or +2.11% at $1.7297.

The S&P Retail Index (RLX.X) 492.00 +1.06% closed at a new all-time high as market participants remained constructive on the sector with November Unleaded Gasoline futures (hu06x) falling just more than a penny, or -0.62% to settle $1.4949.

Restaurateur Cheesecake Factory (NASDAQ:CAKE) $27.58 -0.39% opened sharply lower, but rallied by the close after trading as low as $25.69 intra-day. The company said total Q3 same-store sales fell 1.6% from year-earlier levels, with sales at Cheesecake Factory restaurants falling 2.1% and sales at its Grand Lux Cafes rising 6.7%.

U.S. Market Watch - 10/09/06 Close

Homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 664.94 +2.41% were atop today's list of sector winners in my U.S. Market Watch. The index continues to trade sideways for a second-straight week, but holds support at a trying to curl higher 21-day SMA (650.50).

Shares of NVIDIA (NASDAQ:NVDA) $32.92 +6.43% surged nearly $2.00/share on renewed rumors that chip giant Intel (NASDAQ:INTC) $20.62 -0.04% may be set to acquire the maker of graphic processors. In late July, Intel rival Advanced Micro Devices (NYSE:AMD) $23.00 -4.20% announced its intentions to buy ATI Technologies (NASDAQ:ATYT) for $5.4 billion, which also makes chipsets for graphic and multimedia processing products.

The AMEX Biotechnology Index (BTK.X) 712.45 +0.76% extended recent gains after last Monday's break above its 200-day SMA (677.27). The Biotechnology HOLDRs (AMEX:BBH) $189.57 +1.58% were nearly twice as strong as the BTK.X with component Shire (NASDAQ:SHPGY) $57.20 +15.78% (not a component of the BTK.X) gaining on news that New River Pharmaceuticals (NASDAQ:NRPH) $42.32 +61.46% said it had received conditional approval from U.S. regulators to market its new hyperactivity drug NRP104, which was licensed to Shire in 2005.

While there were some percentage gainers to talk about in today's session, there were also some percentage losers.

Powerwave Technologies (NASDAQ:PWAV) $6.42 -17.69% plunged more than $1.00/share after the wireless solutions provider warned that its Q3 revenues would fall shy of prior guidance. The company cited difficulties in implementing a new enterprise resource planning system in Europe. Powerwave adjusted its Q3 revenue guidance to a range of $155-$160 million from $200-210 million.

Matria Healthcare (NASDAQ:MATR) $25.58 -11.18% traded weak on speculation that health insurer UnitedHealth (NYSE:UNH) $50.72 -1.51% ended its contract with the company. Matria and UnitedHealth officials said they were unable to comment on the status of the contract.

I would also note that broker UBS cut its rating on three pharmacy benefit managers to "neutral" from "buy." UBS downgraded Express Scripts (NASDAQ:ESRX) $68.96 -6.70%, Caremark Rx Inc. (NYSE:CMX) $51.19 -4.13% and Medco Health Solutions (NYSE:MHS) $55.75 -2.38%, citing a tentative agreement by a drug price list publisher to trim average wholesale prices by 5%.

UBS's Ricky Goldwasser said in a research note that the change could push pharmacy-benefit managers' per-share earnings lower by 9% to 13%. But if it is assumed that three-quarters of their contracts contain provisions protecting wholesale pricing, the negative impact might only be in the 2-4% range.

Mergers .... What about love, love, love?

Again.... there wasn't much to talk about with regard to the major indices today, but a merger Monday did find some action.

Shares of CNS Inc. (NASDAQ:CNXS) $36.72 +28.57% jumped more than $8.00/share after GlaxoSmithKline (NYSE:GSK) said it wanted to boost its consumer operations with a $566 million acquisition of CNS.

PNC Financial Services (NYSE:PNC) $70.40 -4.34% fell from a 52-week high set last week after the company said it agreed to purchase Mid-Atlantic banking concern Mercantile Bankshares (NASDAQ:MRBK) $44.90 +22.07% for nearly $6 billion in a stock-and-cash deal designed to extend PNC's reach across the Eastern seaboard.

Meanwhile, the Dolan family, who developed Cablevision (NYSE:CVC) $26.50 +10.73% into one of the nation's largest cable-television cable systems operators, confirmed reports of an offer to take the company private. The family said that they would offer $27 in cash for each CVC share. The family currently owns 22.5% of the company's stock, but has 74% voting power through a special class of shares.

In tonight's extended session, shares of Google (NASDAQ:GOOG) $429.00 +2.02% edged higher to $431.75 after the Internet search giant said it was buying privately held YouTube for $1.65 billion in an all-stock deal. YouTube's site features volumes of copyrighted material, such as DVDs, which some feel may have had the company sued into bankruptcy. However, YouTube's founders have spent months cozying up with major media executives in an effort to convince them that YouTube could help them make more money by helping them connect with the growing number of people who spend most of their free time on the Internet. This morning, YouTube announced new partnerships with Universal Music Group, CBS Corp. and Sony BMG Music Entertainment, similar to the arrangement announced last month with Warner Music Group.

The truce with Universal Music Group is thought to be a major breakthrough because the world's largest record company had threatened to sue YouTube for copyright infringement less than a month ago.

Several other suitors, including Microsoft (NASDAQ:MSFT) $27.72 -0.53%, Yahoo! Inc. (NASDAQ:YHOO) $25.03 -1.72% and News Corp. (NYSE:NWS) $20.95 +1.01% had reportedly discussed interest in YouTube and may still be looking at other YouTube-like startups.

"Good buy," was a "goodbye" instead

In Monday's Market Wrap, I thought a pullback to SPX 1,322.50 would be a "good buy," a pullback to 1,318 a "great buy" and 1,311 a "best buy!"

Market participants evidently thought the prior 52-week high of 1,326.70 was support-enough to their liking and sent the SPX on its way to another multi-year high.

Here's the SPX daily interval bar I showed in Monday's wrap, where the "pink" retracement is still the MONTHLY Pivot retracement shown in that wrap, but with the start of a new week we get new WEEKLY Pivot Levels.

Near-term institutional computer resistance (which pivot levels are derived) would now be MONTHLY R1 (1,353.78) and a level that until broken remains horizontal resistance. However, with overhead supply scarce, a break much above 1,354, which the SPX lends its way to 1,360 (WEEKLY R1), and somewhat correlative WEEKLY R2/MONTHLY R2 of 1,370-1,371 and ascending bullish resistance trend.

S&P 500 Index (SPX.X) - Daily Intervals

The first sign of any weakness from a pivot level would be the WEEKLY Pivot (blue retracement) at 1,343.49. Last WEEK's trade did find the SPX's WEEKLY R1 (Resistance 1) being tested, so a pivot level trader should think of that as "what inventory there was, has been depleted" from a sell-bias perspective. Yes, there will be longs that are selling as they took profits at last week's WEEKLY R1 (1,346.69), but market makers and specialists that have had to "short to the market" in order to provide liquidity, should be looking to replenish some inventory back near WEEKLY Pivot.

Once again this week, we can see how the prior 52-week high of 1,326.70 finds "overlap" with the newly defined WEEKLY (blue) pivot retracement level of 1,327.

NASDAQ Composite (COMPX) - Daily Intervals

One item that was "troubling" me from a bull's perspective last week was that breadth (advance/decline) as well as new highs seemed rather narrow and something bulls wanted, if not needed to see broaden out. NARROW bullish leadership in a rapidly advancing market is a warning sign. Last week the very broad NASDAQ Composite (COMPX) saw bullish leadership ramp up with as many as 143 stocks hitting new 52-week highs, which was improved from 114 found on 09/15 and 117 found on 09/20.

With the COMPX not yet breaking to multi-year highs, conventional use of retracement still helpful with price action looking strong as the COMPX now retraces more than 80.9% of its April to July decline.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ambac Fincl. - ABK - close: 84.81 chg: +0.20 stop: 81.99

Monday proved to be a mild session if you were outside the tech sectors. Shares of ABK dipped this morning but traders bought the bounce above short-term support at the $84 level. We would use today's bounce as another entry point to buy calls. Our target is the $88.00-90.00 range. We do not want to hold over the October 25th earnings report.

Picked on October 04 at $ 84.40
Change since picked: + 0.41
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand

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Amgen Inc. - AMGN - close: 73.92 change: -0.09 stop: 69.99

The BTK biotech index continued to inch higher on Monday but shares of AMGN, one of the BTK's biggest components, traded sideways and closed with a minor loss. Traders can choose to buy the bounce from the $73.50 level (third bounce in two days) - or traders can wait for a potential dip back towards the rising 10-dma as a new entry point to buy calls. Our target is the $79.00-80.00 range. We do not want to hold over the October 23rd earnings. FYI: More conservative traders might want to adjust their stop loss closer to the $72 level.

Picked on October 04 at $ 72.97
Change since picked: + 0.95
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 7.8 million

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Deere & Co. - DE - close: 88.00 change: +2.71 stop: 82.99

Shares of DE turned in a strong session on Monday. The stock almost hit our target with today's intraday high of $89.09. A similar rally was also seen in shares of rival CAT. While today's +3.1% gain is certainly bullish the intraday chart had DE moving lower into the close. More conservative traders may want to take some profits here. We're not suggesting new positions. Our target is the $89.50-90.00 range. We do not want to hold over the November earnings report. FYI: The P&F chart points to a $108 target.

Picked on October 04 at $ 85.39
Change since picked: + 2.61
Earnings Date 11/14/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Emerson Electric - EMR - close: 85.06 chg: +0.29 stop: 82.99

Traders bought the dip near EMR's 10-dma (around the $84 level) around lunchtime and the stock's rebound took it over resistance near $85.00. We recently suggested that readers use a move over $85.25 as a new entry point to buy calls and this level was hit today. The weekly chart and the P&F chart both look pretty bullish. Our target is the $89.00-90.00 range. We do not want to hold over the late October earnings report.

Picked on October 05 at $ 85.15
Change since picked: - 0.09
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Entergy - ETR - close: 80.68 change: +0.05 stop: 77.99

Traders continue to buy ETR's dips near the $80.00 level. We don't see any changes from our weekend update. Everything appears to be pointing higher for ETR. We would continue to open new plays at current levels. 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: + 0.35
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Greenbrier - GBX - close: 29.95 change: -0.05 stop: 27.99

GBX's close under the $30.00 level is a little bit discouraging since the $30 level should have acted as round-number support. However, we remain optimistic. The stock did bounce from today's lows near the 10-dma and 100-dma. We would still consider new call positions at this time or readers can wait for a move over today's high at $30.18. 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. More conservative traders could always tighten their stops - we'd consider moving ours toward the $29 level.

Picked on October 05 at $ 30.05
Change since picked: - 0.10
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 310 thousand

---

Mettler Toledo - MTD - close: 66.37 chg: +0.18 stop: 64.95

There is no change from our previous update on MTD. We're still not suggesting new positions and more conservative traders may want to lock in a gain now. Many of the technical indicators are suggesting that the next move will be lower. 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: + 2.71
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

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Omnicom - OMC - close: 94.02 chg: -0.63 stop: 92.95

Monday's session failed to see any upward follow through on OMC's Friday rally. This no-show for the rally is discouraging and some of the technical indicators are still suggesting that the upward momentum has died and the next move will be lower. We are not suggesting new positions at this time. More conservative traders may want to think about locking in a profit right here or at least taking some money off the table. Our target is the $96.00-97.00 range. We do not want to hold over the late October earnings. FYI: The P&F chart points to a $131 target.

Picked on September 10 at $ 90.97
Change since picked: + 3.05
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Sepracor - SEPR - close: 50.79 chg: +0.59 stop: 47.95

Shares of SEPR were strong this morning. The stock gapped open higher and traded to an intraday high of $51.75 before paring its gains. SEPR's morning strength was fueled by news that the FDA had approved the company's Brovana drug for chronic obstructive pulmonary disease, which is said to affect approximately 12 million adults in the U.S. We had listed a trigger to buy calls on SEPR at $51.25 in an effort to catch a breakout over resistance at the $51.00 level. The play is now open. However, we would not suggest new positions until SEPR traded back above $51.00 or even our trigger again at $51.25. The stock's failure to hold its early gains actually looks a little bearish! Our target is the $55.50-56.00 range. We do not want to hold over the late October earnings report. We'll leave the stop loss at $47.95 for now. FYI: The latest (September) data put short interest at more than 13% of SEPR's 108 million-share float. That's a relatively high amount of short interest.

Picked on October 09 at $ 51.25
Change since picked: - 0.46
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.3 million

---

Unibanco - UBB - close: 79.71 change: +0.59 stop: 74.95

The financial sector indices continued to show strength on Monday and shares of UBB inch up another 0.7% to challenge potential resistance at the $80.00 level. We don't see any changes from our weekend comments on UBB. Readers can choose to go long call options here, wait for a dip towards $77.00-77.50 or wait for a breakout over $80.00. Our target is the $85.00-86.00 range. We do not want to hold over the early November earnings report.

Picked on October 08 at $ 79.12
Change since picked: + 0.59
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume = 796 thousand

---

Vulcan Materials - VMC - close: 80.05 chg: -0.13 stop: 76.95

Warning! We may be the victim of a false start here. Shares of VMC bounced strongly from its rising 10-dma this morning but the rally failed this afternoon. VMC was sinking back towards the $80 level at the closing bell and it looks like shares will continue to trade lower tomorrow. We had suggested a trigger to buy calls at $80.26 so the play is now open given the rise to $80.76 today. However, we would wait for a new move back above $80.25 or even $80.50 before considering new positions. More aggressive traders might consider opening plays on another bounce from the 10-dma. Our target is the $84.50-85.00 range. We do not want to hold over the late October earnings report.

Picked on October 09 at $ 80.26
Change since picked: - 0.21
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 843 thousand
 

Put Updates

Maxim Integrated - MXIM - cls: 28.53 chg: +0.25 stop: 29.05

The SOX semiconductor index was strong on Monday thanks to an upgrade for AMD and a big rise in NVDA on persistent rumors that INTC might try and acquire NVDA. Shares of MXIM did post a gain today but the stock remains under resistance at the $29 level. We don't see any real changes from our weekend comments on MXIM. We would wait for a new decline under $27.50 before considering new put positions. Please note we're adjusting our stop loss to $29.05. Our target is the $24.00 level.

Picked on September 25 at $ 27.90
Change since picked: + 0.63
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

---

FreightCar Amer. - RAIL - cls: 52.09 chg: +0.51 stop: 54.55

RAIL was looking short-term oversold and due for a bounce so today's 0.9% gain was not too surprising. The stock actually produced a minor failed rally at its descending 10-dma this afternoon, which is normally a bearish move. We're not suggesting new positions at this time. Currently we have two targets on RAIL since the stock 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: - 2.92
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 353 thousand
 

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: 105.23 chg: +1.00 stop: n/a

BXP bounced from its trendline of support (higher lows) again. The stock added almost 1% and looks poised to challenge potential resistance near the $106 level. We're not suggesting new strangle positions at this time. The play was labeled as aggressive and higher risk due to our short three-week time frame. We need to exit before October options expire on October 21st. Our suggested options were 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.

Picked on October 01 at $103.34
Change since picked: + 1.89
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 694 thousand

---

Google - GOOG - close: 429.00 chg: + 8.50 stop: n/a

Monday proved to be a big day for GOOG. The stock soared another 2% following last week's strong showing. Driving the price of GOOG higher were positive analysts comments on the company's earnings potential and any potential acquisition of YouTube.com. The company also announced a deal with Warner Music Group to let Google Video users access to WMG's music video content. Of course rumors last week were rampant that GOOG would buy YouTube.com for $1.65 billion. That rumor was confirmed today. Shortly after the closing bell on Monday GOOG announced that it had agreed to buy YouTube for $1.65 billion in an all-stock deal. Shares of GOOG were trading up over $430 in after hours. We're not suggesting new strangle plays at this time. 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. FYI: The November $440 call is already trading at $17.40ask/$17.00bid.

Picked on October 01 at $401.90
Change since picked: +27.10
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 5.6 million

---

Legg Mason - LM - close: 102.08 change: +0.83 stop: n/a

After Friday's decline shares of LM looked poised to move lower but the stock bounced on Monday for a 0.8% gain. We're not suggesting new strangle positions at this time but a dip back near the $100 mark could be used as an entry point. 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: + 2.36
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.4 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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