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Daily Newsletter, Monday, 10/16/2006

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Table of Contents

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

Market Wrap

Regional Manufacturing Readings Ignite Small Caps

A stronger than expected reading from the regional New York Fed manufacturing index had the small caps of Russell 2000 Index (RUT.X) 769.48 +0.89% jumping higher on Monday, while energy stocks also found gains with November Crude Oil futures (cl06x) touching $60 a barrel ahead of this week's special meeting among OPEC members in Qatar.

Natural Gas was today's hot commodity with the November futures contract (ng06x) settling up $0.785, or 13.87% at $6.444/mmBtu.

Traders cited several reasons for today's natural gas price action. Among the reasons were the stronger than expected New York Fed's data (see below), cooler temperatures as well as comments from the head of the North American Electric Reliability Council, or NERC, for today's rise in natural gas prices.

NERC President and CEO Rick Sergel said that Texas and New England are the two U.S. regions most likely to face severe power grid problems and possible blackouts in the next few years.

The NERC's concerns about those two areas painted a dismal picture of the ability of electricity resources to keep pace with demand throughout many regions of the U.S. where I (Jeff Bailey) think traders turned to the natural gas complex as the "alternative fuel" to electricity.

Stocks opened mixed-to-higher with the New York Fed saying its October Manufacturing Index jumped to 22.9 from 13.8 in September. The 22.9 reading was well above economists' forecast, which was looking for a decline to 11.2. Readings above zero signal most manufacturers reported business is getting better.

The New York Fed's manufacturing gauge of new orders declined to 11.8 from 14 in September, while the shipments index rose to 22.5 from 20.6. Inventories rose to 2.5 from September's -4 reading.

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Additional measures showed manufacturing costs declined as the index of prices paid for raw materials decreased to 30.8 from 41 in September, while the measure of prices received by factories rose to 19.4 from 12.5.

Employment data at the manufacturing level in the region also showed a rebound with the index of manufacturing employment rising to 19.4 from September's 12.5.

Volumes were light at both the NYSE and NASDAQ with a plethora of economic reports being released tomorrow.

Prior to tomorrow's opening bell (08:30 AM EDT), traders and investors will get a look at the producer price index for September. Economists are forecasting prices to fall 0.7% month-over-month after a 0.1% rise in August, while the core rate (excluding food and energy) is expected to rise 0.2% after a 0.4 decline.

At 09:00 AM EDT the Treasury International Capital (TIC) Report, which measures foreign demand for U.S. debt and assets will be released. The U.S. Dollar Index (dx00y) 86.97 has been on the rise since late August, depicting some renewed demand for the greenback, if not U.S. assets. Economists are looking for inflows to have risen by $56 billion after $32.9 billion in July.

Then at 09:15 AM EDT September industrial production is forecasted at unchanged versus a 0.1% decline in August, while capacity utilization (a key measure the Fed keeps an eye on for inflation) is forecasted to have eased to 82.2% vs. 82.4% in August.

Later in the afternoon, at 01:00 PM EDT, the National Association of Homebuilders (NAHB) will release its Housing Market Index figures for October. Economist are forecasting the index to remain unchanged from September's reading of 30.00.

U.S. Market Watch - 10/16/06 Close

While there was a lot of green on the screen again today, there was some pockets of weakness among financials.

Wachovia Corp. (NYSE:WB) $55.25 -2.16% closed off its session lows of $54.63, but traded weak after the bank reported net income of $1.88 billion, or $1.17 a share, which included a $0.02/share charge in merger-related costs. The bank said revenues increased 5% to $7.04 billion. The results were shy of analysts' estimates for earnings of $1.19/share on revenue of $7.28 billion. Wachovia officials cited the current interest rate environment pressuring results.

I think traders and investors understand that Fed funds are currently 5.25%, while the benchmark 10-year Treasury note is yielding 4.788% after having recently fallen to just below 4.6% in late September. While I believe the recent RISE in Treasury YIELDs have been a relief for margins between what a bank borrows at and can lend at, margins are narrow.

Wachovia is the first of the nations major banks to report earnings. Wells Fargo (NYSE:WFC) $36.20 -0.25% is scheduled to release earnings tomorrow (consensus $0.63/share), while JPMorgan Chase (NYSE:JPM) $47.73 -0.89%, Bank of America (NYSE:BAC) $53.71 -1.25% and Citigroup (NYSE:C) $50.15 -0.45% are scheduled to report quarterly earnings on Thursday.

JPMorgan (JPM) and Citigroup (C) are Dow Industrials components as we near Dow 12,000 and once again, I think "bulls will be betting on the banks," if not monitoring them closely in coming sessions. "Financials" also carry the heaviest industry weighting for the broader S&P 500 Index (SPX.X).

KBW Bank Sector Index (BKX.X) - Daily Intervals

There is NOTHING at this point that I see as BEARISH for the BKX.X, but those that have followed my commentary over the years know how I tend to keep a very close eye on the banks and various financial sectors/indexes.

Wachovia's earnings were not terrible, but the company's executives state the obvious as it relates to lending margins.

Both the Dow Industrials and S&P 500 Index (SPX.X) achieved prior multi-year highs on, or very close to May 8th, and with several large banks reporting earnings this week, both the BKX.X and BIX.X may be "key sectors" that determine near-term market direction.

Today's S&P Banks Index (BIX.X) 397.44 -0.56% doesn't look overly concerning on the surface, but I will note that this group of super regional banks and regional banks did trade their WEEKLY S1 (396.36) briefly, and show some DIVERGENCE to the S&P 500 Index (SPX.X) as it nears its MONTHLY R2 (1,371.70) and did not trade its WEEKLY Pivot, which this week moves HIGHER to 1,363.50 from last week's 1,343.49 (see last Monday's Market Wrap).

Here is the SAME chart shown in Monday's Market Wrap of the SPX.X, but with WEEKLY Pivot Retracement (blue) updated.

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

There are SIMILARITIES between the BKX.X/BIX.X charts and the S&P 500 Index (SPX.X). Just as the BKX.X fell quickly from a May 8th relative high to June 14th low, the SPX did the same. But the last few sessions, both the BKX.X and BIX.X have not really "confirmed" the SPX.X strength.

I wouldn't say, or believe that they HAVE to, but this is where the Pivot levels can come in useful.

Various sectors, or industries have different beta, and a 1% gain/loss in the banks is a much bigger move than a 1% gain/loss in the SPX, which would be a MARKET that the banks would be measured against.

A sign of CAUTION is that the S&P Banks Index (BIX.X) does see lower trade at its WEEKLY S1 (buyers held firm at that level of 396.36), while the SPX continued to move higher, not even touching its WEEKLY Pivot of 1,363.50.

Bottom line is that we have some earnings coming from some BIG banks this week, where a DECLINE in Treasury YIELDS vs. current Fed Funds has lending margins being squeezed. Add to that some data tomorrow that addresses INFLATION, or perhaps lack thereof on the producer level, which could influence FOMC policy.

If there is a group of stocks that may be "priced to perfection" at this point in time, I think it may well be the banks, and their price action based on upcoming PAST earnings and FORWARD outlooks from the likes of WFC, JPM and C will be KEY.
 


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: 85.19 chg: +0.14 stop: 83.45

If you were looking for an entry point then ABK provided one. Over the weekend we suggested new entries on a dip into the $84.00-84.50 range and this morning ABK slipped to $84.46 before bouncing back. The move today looks like another test of technical support near the 10-dma and 50-dma. We only have about a week and a half before ABK reports earnings on Oct. 25th. We do not want to hold over the announcement. Our target is the $88.00-90.00 range.

Picked on October 04 at $ 84.40
Change since picked: + 0.79
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand

---

BP Prudhoe Bay - BPT - close: 72.00 chg: -0.07 stop: 72.45

The weakness in BPT on Monday was unexpected. Crude oil futures turned higher and the oil sectors rose strongly on Monday yet BPT failed to participate. The stock actually gapped lower but managed to pare its losses on the session. We're not willing to give up yet but today's weakness is a bearish breakdown below the three-week pattern of higher lows. We're still suggesting a trigger to open positions at $75.05, above resistance at the $75.00 level. If triggered our target is the $79.00-80.00 range. FYI: A move over $75 would produce a new Point & Figure chart buy signal.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 421 thousand

---

Peabody Energy - BTU - close: 42.39 chg: +1.19 stop: 39.85

BTU continues to rally and actually managed to scrape out a new five-week high. Our only concern today was the lack of volume, which does not put a lot of strength behind the move. The lack of volume might be due to traders waiting to hear the company's earnings report, which is coming up on Oct. 19th. We're planning to exit on Wednesday afternoon at the closing bell. Our target is the $43.25-45.00 range.

Picked on October 11 at $ 40.05
Change since picked: + 2.34
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 5.8 million

---

Beazer Homes - BZH - close: 42.30 change: +0.96 stop: 39.85

BZH repaired some of Friday's damage with a 2.3% gain today. Volume improved over most of last week's sessions. The rally in BZH today was fueled by an analyst upgrade to a "buy" for the stock. There were also analyst comments suggesting the homebuilders have hit a bottom. Unfortunately for BZH shareholders the stock could not make it past last week's highs and shares had already begun to sink back into the closing bell. Traders can choose to try and enter new positions on a bounce near $40.00 or wait for a new move over $43.20, which would be a new relative high. Our target is the $49.00-50.00 range. We do not want to hold over the early November earnings report.

Picked on October 11 at $ 42.75
Change since picked: - 0.45
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.3 million

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CIGNA - CI - close: 117.23 change: -0.63 stop: 116.95

We do not see any changes from our previous updates on CI. We're still waiting for a breakout over resistance near $120.00. Currently we're suggesting a strategy to buy calls with a trigger at $120.26. If triggered our target is the $126.00-128.00 range. The P&F chart points to a $133 target. We do not want to hold over the November 1st earnings report. FYI: We noticed that some of the short-term indicators are suggesting that CI is reaching a pivotal point where the stock either bounces higher or breaks the bullish trend.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 1.3 million

---

Carpenter Tech. - CRS - cls: 113.80 chg: +2.35 stop: 104.95

Steel-related stocks were strong again on Monday. Shares of CRS rose over 2% to close at a new two-month high. We don't see any big changes from our weekend update. Our target is the $118.00-120.00 range. Don't forget we plan to exit ahead of the October 26th earnings report. The company did issue a press release today regarding a 22.5-cent dividend payable on December 7th to shareholders of record on October 31st.

Picked on October 11 at $110.51
Change since picked: + 3.29
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 754 thousand

---

Devon Energy - DVN - close: 67.01 chg: +2.29 stop: 60.95

Oil stocks surged on Monday thanks to strong gains in crude oil futures and natural gas futures. It didn't hurt that OPEC announced an emergency meeting to discuss how to stop the decline in oil prices. We don't see any changes from our weekend update. Our target is the $69.50-70.00 range. We do not want to hold over the November 1st earnings report. FYI: The P&F chart is bullish with a $78 target.

Picked on October 15 at $ 64.72
Change since picked: + 2.29
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 5.6 million

---

Emerson Electric - EMR - close: 85.99 chg: +1.14 stop: 82.99

EMR surged higher this morning. The stock rose to an intraday high of $86.58 before spending the rest of the session consolidating those early gains. We didn't see any specific news to account for the strength today but it could have been investor reaction to the better than expected earnings report from ETN. We see the move over $85.25 in EMR as a new entry point. 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: + 0.84
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

EOG Resources - EOG - close: 67.27 chg: +2.29 stop: 63.95

EOG is another oil play that is off to a strong start. The rise in oil and gas in addition to the OPEC meeting news really fueled a sector-wide rally for energy stocks. EOG rose 3.5% and broke out over resistance at $66.00 and its exponential 200-dma. We had a trigger to buy calls at $66.05 so the play is now open. Our short-term target is the $69.50-70.00 range. More aggressive traders may want to aim higher but watch out for the 200-dma. We do not want to hold over the October 31st earnings report. FYI: Today's move over $66 produced a new P&F chart buy signal with an $82 target.

Picked on October 16 at $ 66.05
Change since picked: + 1.18
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 3.6 million

---

Entergy - ETR - close: 82.38 change: +1.18 stop: 79.99 *new*

ETR turned in a strong session. The stock rose 1.45% to set a new intraday and closing high. We're not suggesting new positions at this time and we're adjusting the stop loss to $79.99. Our target is the $84.00 mark. Remember, we don't want to hold over the earnings report.

Picked on October 03 at $ 80.33
Change since picked: + 2.05
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 1.1 million

---

Fortune Brands - FO - close: 76.61 chg: +0.76 stop: 73.99

Traders were quick to buy the dip near $75.60 this morning and FO trended higher all day. We would continue to suggest new positions at current levels. Our target is the $79.90-80.00 range. We do not want to hold over the late October earnings report.

Picked on October 13 at $ 76.26
Change since picked: + 0.35
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 745 thousand

---

Frontier Oil - FTO - close: 29.71 change: +0.81 stop: 25.99

FTO, another oil play, turned in a 2.8% rally, which was enough to out perform the OIX oil index (+2.2%). Boosting the move in FTO was an analyst upgrade for the stock this morning. FTO is quickly nearing potential resistance near $30.00 and its 50-dma and 100-dma. Traders looking for new positions might want to wait and see if the stock pulls back from its initial test of the $30 level. Broken resistance near $28 should offer some support. Our target is the $32.50-33.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart is still bearish for FTO.

Picked on October 15 at $ 28.90
Change since picked: + 0.81
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 3.2 million

---

KB Home - KBH - close: 44.12 change: -0.51 stop: 44.99

Hmm... we find the relative weakness in KBH really interesting. The homebuilders received a couple of upgrades this morning and generally positive comments that the sector had formed a bottom. Yet the sector indices didn't see that much strength. Shares of KBH actually lost over 1.1% and on above average volume. That looks pretty negative. We're going to stick to our plan for now but we're leaning toward just removing KBH as a bullish candidate. Currently we're suggesting a trigger to buy calls at $48.05. If triggered our target is the $52.50 level. We do expect the $50 mark to offer resistance at the initial test and KBH could bounce around the $48-50 region until it builds up enough steam to breakout higher. The P&F chart points to a $64 target and a move over $48 would be a new triple-top breakout buy signal.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/20/06 (unconfirmed)
Average Daily Volume = 2.7 million

---

NCI Building Sys. - NCS - cls: 61.25 chg: +0.89 stop: 57.99

Our play in NCS is now open. The stock continued to rally on Monday and shares broke out over the September highs to hit our trigger to buy calls at $61.26. Now that the play is open our target is the $67.00-70.00 range. Currently the P&F chart points to a $90 target.

Picked on October 16 at $ 61.26
Change since picked: - 0.01
Earnings Date 11/29/06 (unconfirmed)
Average Daily Volume = 386 thousand

---

Omnicom - OMC - close: 94.54 chg: -0.14 stop: 92.95

There are no changes from our weekend update on OMC. We're still leaning toward an early exit right now to lock in a gain. The stock's momentum appears to be failing and shares failed to participate in Monday's rally. We only have a few trading days left before OMC reports earnings and we plan to exit ahead of the announcement (although the date is still unconfirmed). Our target is the $96.00-97.00 range near the June 2006 highs.

Picked on September 10 at $ 90.97
Change since picked: + 3.57
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Rockwell Automation - ROK - cls: 62.26 chg: +0.57 stop: 59.45

Shares of ROK are still marching higher. The stock added another 0.9% but after the early rise this morning the stock consolidated sideways in a narrow range. The stock is nearing potential resistance near its exponential 200-dma and the 100-dma around the $63 region. Traders looking for a new position might want to wait for a probably pull back. A dip near $61 looks like a good entry point to buy calls. Our target is the $64.90-66.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart points to a $76 target.

Picked on October 12 at $ 60.86
Change since picked: + 1.40
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Sepracor - SEPR - close: 52.26 chg: -0.26 stop: 49.90

It was a quiet Monday for SEPR. The stock consolidated sideways. We're not suggesting new positions and odds of a dip back toward the 10-dma and 200-dma near $50.75-51.00 are probably pretty good. Our target is the $55.50-56.00 range. Don't forget that we plan to exit ahead of the earnings report.

Picked on October 09 at $ 51.25
Change since picked: + 1.01
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 2.3 million

---

Unibanco - UBB - close: 81.90 change: -0.21 stop: 76.45

UBB consolidated sideways on Monday. The lack of profit taking is probably a good sign but the lack of upward movement is affecting the technical indicators. We're not suggesting new positions at this time but traders could watch for another bounce from the $80 region as a potential entry point. 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: + 2.78
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume = 796 thousand

---

Vimpel Comm. - VIP - close: 63.70 chg: +0.54 stop: 59.95

VIP managed to tag another new all-time high with today's intraday strength but for the most part VIP traded sideways on Monday. Overall we don't see any changes from our previous updates. Traders can choose to open new positions now or hope for a pull back toward the $62 region. Our target is the $67.50-70.00 range. We do not want to hold over the mid-November earnings.

Picked on October 12 at $ 62.17
Change since picked: + 1.53
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Vulcan Materials - VMC - cls: 83.02 chg: +0.34 stop: 79.85 *new*

Warning! VMC may have posted another gain on Monday but the trading actually has a bearish tone to it. The stock spiked to $84.27 before giving back most of its gains. This sort of move looks like a short-term top. More conservative traders may want to lock in a gain if they can. We'd expect a dip back toward $82.00 and potentially the 10-dma near $81.00-80.90. We're raising the stop loss to $79.85. 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: + 2.76
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 843 thousand
 

Put Updates

Medco Health Sol. - MHS - cls: 56.86 chg: +0.76 stop: 58.05

MHS produced some relative strength on Monday, which was a little unexpected. Readers may want to wait and watch for a new failed rally under the $58.00 level before considering new put positions. The trend is still down. The P&F chart points to a $49 target. We think shares can slip toward the $52.00-51.00 range. We do not want to hold over the early November earnings report.

Picked on October 15 at $ 56.10
Change since picked: + 0.76
Earnings Date 11/03/06 (confirmed)
Average Daily Volume = 1.9 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: 105.53 chg: -0.62 stop: n/a

Time is almost up. We only have four days left and it's not looking very good for our BXP strangle play. A move over $108 might be enough to push our strangle to our target price - we'll have to wait and see. 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: + 2.19
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 694 thousand

---

ConocoPhillips - COP - close: 61.09 chg: +1.06 stop: n/a

COP vacillated back and forth across the $60.00 mark for a couple of hours this morning so we had plenty of time to open new strangle plays before the stock shot higher. Our suggested entry point was the $59.50-60.50 range (the closer to $60.00 the better). We do plan to hold over the October 26th earnings report. At current prices our estimated cost is about $1.15. We are suggesting an exit if either option rise to $2.00 or more. Our suggested options were the November $65 call (COP-KM) and the November $55 put (COP-WK).

Picked on October 15 at $ 60.03
Change since picked: + 1.06
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 9.8 million

---

Google - GOOG - close: 421.75 chg: - 5.55 stop: n/a

The rally in GOOG is definitely starting to cool. It could be traders closing positions ahead of the company's earnings report this week. There was definitely more talk over copyright issues regarding GOOG's new acquisition in YouTube.com. We're not suggesting new strangle positions. 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: +19.85
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 5.6 million
 

Dropped Calls

Amgen Inc. - AMGN - close: 72.43 change: -0.79 stop: 71.85

We have been stopped out of AMGN at $71.85. The morning weakness looks like a reaction to the FDA news on Aranesp that came out late Friday night. We warned readers to turn defensive and raise our stop loss to $71.85 expecting the $72 level to act as support. Unfortunately, the intraday low this morning was $71.80 so we've been stopped out. Technicals are struggling so we'd probably avoid trying to buy a bounce at this point.

Picked on October 04 at $ 72.97
Change since picked: - 0.54
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 7.8 million

---

Greenbrier - GBX - close: 34.13 change: +2.88 stop: 28.75

Target achieved. Actually GBX has surpassed our target in the $33.00-34.00 range. The rally in GBX today was fueled by merger news. The company announced it was buying Meridian Rail for about $227.5 million and the deal would be accretive to earnings. The intraday high for today's session was $34.70.

Picked on October 05 at $ 30.05
Change since picked: + 4.08
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 310 thousand

---

Mettler Toledo - MTD - close: 68.41 chg: +1.41 stop: 65.89

Target achieved. MTD continued to rally and the stock added 2.1% on Monday. Our target was the $68.00-69.00 range. We'd be super cautious about holding positions as MTD looks pretty overbought and nearing potential resistance at the May highs.

Picked on September 13 at $ 63.66
Change since picked: + 4.75
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 169 thousand
 

Dropped Puts

FreightCar Amer. - RAIL - cls: 54.16 chg: +1.56 stop: 54.05

We have been stopped out of RAIL at $54.05. The railroad sector produced a strong 2.2% gain thanks in part to a big move in GBX today. This inspired some buying (or short covering) in RAIL on above average volume. Nimble traders may actually want to consider switching directions on RAIL but bear in mind the stock has been under performing the market and its peers over the last few weeks.

Picked on September 21 at $ 54.50
Change since picked: - 0.34
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 353 thousand
 

Dropped Strangles

None
 

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