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Daily Newsletter, Sunday, 10/22/2006

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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

Amazing Resilience!

Caterpillar (CAT) really stunk up the place on Friday morning with weaker than expected guidance and a massive -$10 drop. This equates to roughly -70 Dow points and that knocked more than -100 points off the Dow's opening highs at 12048. The Dow shook off the pounding and returned to positive territory just prior to the close. While it could not hold the gains it did manage to close over 12000 and guaranteed top billing in the weekend papers. It was an amazing show of resilience after three months of gains.

There were no material economic reports on Friday but earnings were creating enough of a mess without economics adding to it. Next week we will see two manufacturing reports from the Fed from Kansas and Richmond. We will also have the National Activity Index on Wednesday and the Q3-GDP on Friday. The GDP is expected to fall to +2.2% from the 2.6% growth we saw in Q2. The really critical economic event for next week is the FOMC meeting on Tue/Wed. With five Fed heads making hawkish comments over the last week or so it is obvious there is no overwhelming urge to cut rates. It appears there is growing sentiment for further tightening and that has pushed bond yields higher over the last two weeks. The Fed funds futures are only showing a 6% chance of a rate cut through February and that is down from a 50% chance about three weeks ago. The economic picture is very mixed with some indicators firming and others holding at their lows. If the Fed feels the soft landing has morphed into a quick touch and go they could shift back into hike mode to make sure the inflation rate does not rise with the economy. The growing feeling among Fed speakers is that although inflation has cooled slightly it is far from under control and it would be worth taking additional measures to accelerate its decline and guarantee it won't soon come back. If the Fed statement on Wednesday has any clues suggesting the Fed could reenter the hike cycle the equity markets will not be pleased.

Economic Calendar


The big winner for the day was Google with its blowout earnings report and +$33 gain to $460. Brokers were falling all over themselves to raise price targets with Citigroup raising theirs to $600. S&P raised its target to $500 from $370 and Stifel Nicholas & Co raised their target to $554. With the demise of Yahoo as a search/advertising competitor it appears Google is alone at the top and poised to gain market share with acquisitions of page views like their recent YouTube.com buy. They are currently sitting on more than $10 billion in cash and more pouring in every quarter. Buy the dips and hope for that $600 price target from Citigroup.

Losers were a lot more prevalent on Friday with massive over reaction sell offs in multiple sectors. Leading the headlines was Caterpillar with a warning that knocked -$10 off its price. CAT called an anticipated sales slowdown in 2007 a pause, not the end of a sales run that more than doubled revenues since 2002. CAT posted profits that rose +15% but fell short of analyst's estimates. CAT also lowered its full-year earnings forecast citing high operating costs and lower than expected sales volumes. CAT also cautioned that the weak housing market in the US and a drop in sales of truck engines would restrain earnings in 2007. The new diesel emissions laws take effect next year and many buyers stocked up on the old engines ahead of the new rules. They said business would rebound after the potential 2007 pause due to strong global sales, energy exploration, mining and infrastructure improvements. They said strong worldwide growth would continue to push demand higher. The key sentence came from an analyst with Morningstar. He said, "It is a lot better to under promise and under deliver" and with predictions for a slower economy this was simply insurance against that possibility. CAT could still surprise to the upside if the economic decline continues to flatten rather than fall lower. I bought the CAT dip and will be recommending it to LEAPS Subscribers this weekend.

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There was also a slaughter in the chip sector with SanDisk disappointing investors with its outlook. SNDK fell -$12.58 after saying pricing was down -25% due to tough competition and heavy promotions and would decline another -15% to -20% in Q4. That added to problems in the chip sector with the SOX plunging from its high of 477 on Monday to Friday's close at 447 for a -6% loss. M-systems Ltd (FLSH) also fell off a cliff with a -$9.61 drop. FLSH is being acquired by SNDK. I am sure FLSH investors are really happy about that acquisition today. The chip sector was already under pressure after AMD disappointed analysts on Wednesday with lower margins and lower selling prices. Intel appears to be winning the processor war and AMD is going back to gathering the scraps. Intel has been kicking out new models in rapid-fire mode with rapid increases in processing power. XLNX was the only major supporter of the SOX on Friday with a +1.45 gain after beating the street by a penny. XLNX looked like the only port in the storm for chip investors on Friday. Without gains in chips we will not see any material gains in the Nasdaq.

Financials also took a hit after weaker than expected results from UnionBanCal (UB). The bank warned for Q4 saying raising capital had become more expensive and margins were shrinking. UB lost -4.73 on Friday dragging the sector off its highs. We had seen most of the brokers and major banks hitting news highs early in the month but those are starting to trend lower ahead of the FOMC meeting on those fears that the Fed could come back into the picture. With the long-term outlook still positive for the economy I feel it is only a dip that should be bought if the Fed does not spoil the picture on Wednesday.

I put together a top ten losers/gainers list for Friday and you can see with the exception of Google the amounts lost were significantly more than those gained.

Top Ten Losers/Gainers


Not all outlooks were negative with UPS giving a big boost to the Dow transports after reporting profits, which rose +8.9% in Q3. UPS CEO said the quarter was stronger than they were expecting and they were expecting a strong Q4, which was shaping up to be a solid holiday season. UPS rebounded +$4 off its Wednesday lows. Ryland (RYL) shares rose slightly after their earnings fell less than expected and they affirmed their full year outlook. Imagine that, a homebuilder without a warning. Could this be a sign of things to come?

The other big news for the week was the OPEC production cut. After weeks of wrangling they finally agreed to cut 1.2 mbpd starting Nov-1st. Yawn. The futures spiked +$1 on the news to $60.50 in overnight trading. Before the smoke cleared for the week the contract was trading at the low for the year at $56.82 and better than a -$4.25 loss from the highs. You are probably asking "what happened?" There were several reasons for the drop. First, it was a typical sell the news event that had been hyped for three weeks. No surprise there other than the slightly higher total cut. The breakdown of the cut by country is shown in the table below.

OPEC Member Production Cut


The Dept of Energy said it would actually amount to a real cut of only -660,000 bpd. They correctly realized that some of those countries had already slowed production and some have not been able to make their quota for sometime making their cuts less likely to be honored. It is still a move in the right direction and OPEC also warned that they could cut another -500,000 bpd when they meet in December. The real challenge with the production cut is the timing. If it starts on November first it will be 30-45 days before it is felt at the refineries. That is the normal transit time for OPEC crude. That means every bbl they can pump for the rest of the month will be floating to its destination until well after Thanksgiving. Secondly Saudi has not modified any of its contracts for future delivery suggesting they have not yet notified anyone their deliveries will be cut. Until that happens there is no teeth in the cut and traders will continue to be rightly suspicious of OPEC. Another reason oil prices crashed into the close on Friday was the expiration of the November futures contract for trading. All those traders who have been hoping for a huge post OPEC spike found their dreams shattered and rushed to the exits trying to salvage their remaining investments. The December contract begins trading as the current month contract on Monday and it went out at $59.37 on Friday, +2.55 over the expiring November contract. That is right at strong support at $59. Cold weather has produced a strong rally in natural gas with Friday's close at $7.30 compared to the low of $5.27 just three weeks ago.

December Crude Chart - Daily

On Thursday the Dow closed above 12K with lots of fanfare and the expectations by many that an immediate bout of profit taking would appear. When CAT warned and knocked -100 off the Dow at the open the bears were positively drooling with excitement. Before the day's end they were licking their wounds and calling for reinforcements. The market resilience is positively amazing and the talking heads are giddy with the current earnings parade. Year to date the Dow is up +12%, S&P +9.5% and Nasdaq +6% with no profit takers in sight. Earnings have been very strong with the majority of announcements stronger than expected. So far 151 S&P companies have reported with only 15 missing estimates. This means a whopping 90% either reported inline or beat estimates. That breaks down even further showing that 74% beat estimates and only 16% reported inline. Earnings for the quarter to date have come in at +17.3% growth and well over the +16% expected at the beginning of the announcements. Margins are running at 8.8% compared to the average at 7.5% with revenue growing at a +9.5% rate. This is about as good a quarter as could be expected in light of the slowing economics. In fact it might be too good and convince the Fed the economy was not as weak as they thought. However, before we get too enthusiastic we need to remember that the early reporters are normally the best reporters and earnings quality declines as the cycle continues. That should bring us back inline with estimates over the next several weeks. The only qualification there is energy earnings. Those begin in earnest next week and so far the early reporters have been very positive. That is not what analysts expected. They felt the comparisons to the 3Q of 2005 would be tough and we could see some earnings weakness. So far that has not happened and the three biggest companies, Exxon, Chevron and Conoco report next week. Those three companies make up a whopping 9% of the entire S&P. I believe we may see some continued strength and that could push the S&P earnings growth for Q3 even higher. The table below lists only a few of the more than 500 earnings announcements next week.

Earnings Calendar


For next week I have continued mixed feeling about market direction. As I stated above the market resiliency has been very strong. This strength was even more amazing when you consider some pretty weak readings on the internals. Despite the Dow hitting highs the internals were barely able to stay neutral with declining volume winning the battle 3 of the last 4 days. Volume was higher, over 5 billion shares on Tue/Wed/Thr but that is disconcerting considering most of it was declining volume. The Dow shows literally no signs of failure but the internals are showing signs of distribution typical of a market top.

I don't want to get everybody excited and create a storm of hateful emails because I am calling for a bear market. I am not doing that at all. I simply believe the market needs a rest before we can move much higher. The earnings news has been great but it is already priced in at this point. The Fed meeting on Tue/Wed only has the potential for bad news. The only good news would be a rate cut and that is not going to happen. Those hawkish comments from five Fed members suggest there will be some heated discussions about letting the situation ride much longer without a material drop in inflation. Since they can't cut/hike in the October meeting due to political concerns they may choose to issue a hawkish statement and try to warn the markets there is a change in status ahead. This would be very bad for equities and with the earnings news almost past tense for Q3 there is nothing left to provide motive power. I believe the markets could begin to price in a hawkish statement early next week now that option expiration is over. I would tighten stops on any long positions.

The Dow set a new closing high over 12000 on October 19th. This is an important historic date that few remember. This was the 19th anniversary of the 1987 crash where the Dow lost -22% on one day. That would be the equivalent of -2600 points if it happened today but that chance is nearly impossible due to circuit breakers instituted after that event. The indexes can still bankrupt a lot of unprepared traders even under its current movement restrictions. Remember the Boy Scout motto and always be prepared!

Dow Chart - 1987

Dow Chart - 180 min

The Dow has been on a mission since its low on July-18th. Over the last month the dips have been getting shallower and uptrend resistance tested on almost a daily basis. Eventually the Dow must rest and retest uptrend support. With the FOMC meeting next week it would be a very good opportunity for traders to pocket some profits. Nothing prevents the Dow from moving higher in the short term but there is simply no reason for it to move higher now other than funds chasing performance as the threat of an October decline quickly evaporates.

The Nasdaq presents nearly the same picture only not as steep. The spike above uptrend resistance last week lost traction as it approached the stronger resistance at 2375. The multiple train wrecks in the chip sector greased the skids and the Nasdaq is struggling to remain within reach of that 2375 resistance. With Microsoft the only major non-chip tech to report next week the Nasdaq is going to suffer from the dozen or so chips still to report led by Texas Instruments on Monday. I know, TXN is not a Nasdaq stock but it will color the outlook for the remaining chips still to report. The network sector will also report next week with FFIV, LU, FDRY, TLAB, AKAM, etc reporting. They could pick up some of the chip sector slack or apply more grease to the skids if they stumble. Fortunately the Nasdaq has decent support at 2300 so it would take more than just an intraday dip to cause any real damage.

Nasdaq Chart - 180 min

SOX Chart - 180 min


The S&P-500 is a mirror image of the Dow gains but only if looked at on a long-term chart. The S&P rise has been on a rocky road with several sharp dips followed by sprints higher. Like the Dow and its 12000 battle the S&P has been waging one of its own at 1368. This appears to be the line in the sand and IF I was only going by the chart I would say a breakout was imminent. The consolidation just under 1368 is showing the typical higher lows and wedge of pressure building with every intraday dip bought. If there was no Fed meeting next week I would be more optimistic given the very short-term signals. Long term I believe, like the Dow and Nasdaq we need to retest support around 1345 very soon.

SPX Chart - 180 min


While these chart patterns appear to be bullish they are all very overbought and over extended. They can continue higher only as long as somebody is willing to buy the tops but in periods of rampant bullish sentiment like we have now that can continue to even greater extremes of overextension. As traders we need to try not to anticipate what we think the market SHOULD do and simply react to what it does. Despite all the gyrations the SPX only gained +2.40 for the week and my recommendations from last week still stand. We want to remain long until the market tells us otherwise. We want to buy dips to 1350 and go short/flat under 1345. In order to buy dips to 1350 we need to tighten current stops to something in the 1360 range on any longs. Take your profits if the market decides to rest and then get back in on a dip.

I would continue to buy energy stocks on the dips despite what the crude futures are doing. The strong winter demand season is just ahead and the OPEC cuts will take effect just as that demand kicks into high gear. Oil prices are not going to fall much further before the herd begins to shift back into energy for the next wave higher. With dozens of energy companies reporting this week it should be simple to spot the good ones and there is plenty of value to go around.

Russell Chart - 60 min

Be wary of the Fed on Wednesday and Microsoft earnings on Thursday. Watch the Russell on Monday for signs of a retreat by the funds. Equity funds took in $1.4 billion in the prior week and $2.7 billion on the week ended on Wednesday. From the bounces in the Russell that began on the 4th and 12th it appears they put that money to work. Nothing attracts new money better than a market making new highs and nothing causes sudden outflows faster than a market losing its grip on those highs. Currently initial support is 760 on the Russell with real support well below at 735. Small cap internals have been weakening the last two days and it is just possible the Russell could be the canary in the cold mine this week.

 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CERN None BSC
CI    

New Calls

Cerner Corp. - CERN - close: 46.95 chg: +1.45 stop: 46.45

Company Description:
Cerner Corp. is taking the paper chart out of healthcare, eliminating error, variance and waste in the care process. With more than 1,500 clients worldwide, Cerner is the leading supplier of healthcare information technology. (source: company press release or website)

Why We Like It:
CERN reported earnings last Thursday after the closing bell. The results were better than expected and Friday's session saw the stock produce a big rally from its lows of the day. The move produced a new bullish engulfing candlestick pattern. If CERN sees any follow through higher next week the stock might breakout through the top of its ten-week $44-48 trading range. We're suggesting that readers use a trigger to buy calls at $48.05. If triggered then our target is the $52.00-52.50 range. The $50.00 mark might offer some round-number resistance so expect a pull back on the initial test of $50. FYI: The Point & Figure chart projects a $76 target.

Suggested Options:
We are suggesting the November and December calls. You, the individual trader, should decide which month and strike price best suits your trading style and risk. Our entry point is $48.05.

BUY CALL NOV 45.00 CQN-KI open interest=169 current ask $3.00
BUY CALL NOV 47.50 CQN-KW open interest=561 current ask $1.35
BUY CALL NOV 50.00 CQN-KJ open interest=551 current ask $0.50

BUY CALL DEC 45.00 CQN-LI open interest=485 current ask $3.70
BUY CALL DEC 47.50 CQN-LW open interest=378 current ask $2.15
BUY CALL DEC 50.00 CQN-LJ open interest=286 current ask $1.10

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand

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CIGNA - CI - close: 119.90 change: +0.57 stop: 117.75

Company Description:
CIGNA Corporation and its subsidiaries constitute one of the largest publicly owned health and related benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and services and group life, accident and disability insurance products. (source: company press release or website)

Why We Like It:
We are going to try again with CI. We recently had the stock on the newsletters as a bullish candidate but shares never broke out over resistance at $120 and never hit our trigger to open positions. Now the stock has rebounded from the $116 level and actually managed to trade over resistance at $120 on an intraday basis this past Friday. We only have a few days. The company is due to report earnings on November 1st and we do not want to hold over the report. However, if CI does breakout it could spark a significant move. We are suggesting a trigger to buy calls at $120.25. If triggered our short-term target is the $125.00-127.00 range. We're setting our stop at $117.75. More aggressive traders may want to put their stop under $116.

Suggested Options:
We are suggesting the November calls. Our trigger is at $120.25.

BUY CALL NOV 115 CI-KC open interest= 579 current ask $8.40
BUY CALL NOV 120 CI-KD open interest= 794 current ask $5.20
BUY CALL NOV 125 CI-KE open interest=1034 current ask $2.85

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

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New Puts

None Today.

New Strangles

Bear Stearns - BSC - cls: 150.19 chg: -0.24 stop: n/a

Company Description:
Founded in 1923, The Bear Stearns Companies Inc. is the parent company of Bear, Stearns & Co. Inc., a leading investment banking, securities trading, clearing and brokerage firm. With approximately $61.9 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. Headquartered in New York City, the company has approximately 13,000 employees worldwide. (source: company press release or website)

Why We Like It:
The broker-dealers have been a huge pocket of strength for the markets over the last several weeks. BSC has run from its September lows near $127 to its recent all-time highs around $153. Needless to say the stock looks overbought and due for a correction. The MACD on the daily chart for BSC is nearing a new sell signal. It looks like the correction has already begun in the XBD broker-dealer index. It would be tempting to try and speculate with puts on BSC but the bullish trend is still intact for the stock and the major market indices. Thus we're suggesting a strangle to try and capture any further move in the stock. At today's prices our estimated cost for this play is about $4.00. We want to exit if either option rises to $6.00 or more. Try and open positions in the $149.00-151.00 entry range. The closer to $150.00 the better.

Suggested Options:
A strangle involves buying both an out-of-the money (OTM) call and an OTM put.

BUY CALL NOV 155 BSC-KK open interest= 969 current ask $2.05
-and-
BUY PUT NOV 145 BSC-WI open interest= 754 current ask $1.95

Picked on October 22 at $150.19
Change since picked: + 0.00
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Play Updates

In Play Updates and Reviews

Call Updates

Ambac Fincl. - ABK - close: 84.82 chg: +0.43 stop: 83.79

We only have two days left on our ABK play. The company is due to report earnings on Wednesday, October 25th and we plan to exit on Tuesday at the closing bell to avoid holding over the report. On Thursday we raised our stop loss to just under Thursday's low. More conservative traders may want to inch their stop toward the $84 level due to our decreasing time frame. Our target was the $88-90 range but it doesn't look like ABK is going to make it.

Suggested Options:
We're not suggesting new positions in ABK at this time.

Picked on October 04 at $ 84.40
Change since picked: + 0.42
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand

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BP Prudhoe Bay - BPT - close: 73.35 chg: -0.09 stop: 72.45

We are still stuck at the starting line with BPT. Shares are trying to rebound but we are waiting for a breakout over resistance at the $75.00 level. BPT has to push past technical resistance at its 50-dma and 200-dma first. If we are triggered at $75.05 than our target is the $79.00-80.00 range. FYI: A move over $75 would produce a new Point & Figure chart buy signal.

Suggested Options:
We would suggest the November or December calls if triggered at $75.05.

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

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Beazer Homes - BZH - close: 42.29 change: -0.27 stop: 40.95

Homebuilders have been trending lower this past week in spite of some positive analyst comments that the sector may have finally bottomed. Shares of BZH have displayed some relative strength with a sideways consolidation in stead of a downward consolidation. We're still concerned about the lack of upward movement and would wait for a new rise past the $43.00 level or the October 12th high at $43.19 before initiating new call positions. We do find it interesting that the sideways consolidation in BZH appears to be narrowing. Similar patterns where the stock price coils into a point almost always end with a big breakout (or breakdown). Given the bullish P&F chart we suspect that BZH will breakout higher but the trend in the homebuilder index might suggest otherwise. We have about two and a half weeks left before BZH reports earnings. Keep that in mind if you're considering new positions. Our target is the $49.00-50.00 range. We do not want to hold over the early November earnings report.

Suggested Options:
If BZH trades over $43.00 again we'd consider buying the November calls.

Picked on October 11 at $ 42.75
Change since picked: - 0.46
Earnings Date 11/07/06 (confirmed)
Average Daily Volume = 1.3 million

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Carpenter Tech. - CRS - cls: 110.29 chg: -0.98 stop: 107.45 *new*

We are running out of time with CRS. The company is due to report earnings on the morning of Thursday, Oct. 26th. We don't want to hold over the report so we're planning to exit on Wednesday at the closing bell. The lack of follow through higher after Thursday's bounce is a concern. Technicals are mixed. The weekly chart's MACD indicator has produced a new buy signal while the MACD on the daily chart is nearing a new sell signal. So far CRS' six-week trend is bullish. We're going to raise our stop loss to $107.45. More conservative traders may want to exit now or adjust their stop toward Thursday's low near $108.00. Our target is the $118.00-120.00 range.

Suggested Options:
Time is almost up. We're not suggesting new positions in CRS although traders seeking an alternative might want to consider launching a strangle play with the stock near $110.

Picked on October 11 at $110.51
Change since picked: - 0.32
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 754 thousand

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Devon Energy - DVN - close: 67.39 chg: -0.95 stop: 64.72

Any strength in crude oil due to the OPEC news quickly faded. Crude oil slipped to new relative lows on Friday and some were calling it a "sell the news" reaction to the OPEC cuts. Weakness in crude sparked another round of profit taking after Thursday's gains. The OIX index fell 0.5% and the more volatile OSX oil services index slipped 1.9%. Shares of DVN closed down 1.39% but appeared to bounce from its three-week pattern of higher lows. We hesitate to suggest new positions at this time but it does look like crude oil futures are still trading above support (for now). Our target is the $69.50-70.00 range. We do not want to hold over the November 1st earnings report.

Suggested Options:
We are not suggesting new positions in DVN at this time.

Picked on October 15 at $ 64.72
Change since picked: + 2.67
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 5.6 million

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EOG Resources - EOG - close: 66.25 chg: -1.01 stop: 64.95

A bearish reversal in crude oil futures sent the commodity to new relative lows. This weighed heavily on the energy sector and shares of EOG lost 1.5%. The stock managed to bounce near $65.30, which is near the bottom edge of its four-day trading range (65.25-67.50). Coincidentally it's also near technical support at the 100-dma. Traders could use the bounce from Friday's low as a new entry point to buy calls but we're not suggesting new positions at this time. Our short-term target is the $69.50-70.00 range. More aggressive traders may want to aim higher. We do not want to hold over the October 31st earnings report.

Suggested Options:
We're not suggesting new positions in EOG at this time.

Picked on October 16 at $ 66.05
Change since picked: + 0.20
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 3.6 million

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Fortune Brands - FO - close: 75.50 chg: -0.11 stop: 74.84*new*

We are running low on time with our FO play. The company is due to report earnings on the morning of Friday, October 27th. We do not want to hold over the report so we're planning to exit on Thursday afternoon at the close. FO's upward momentum has stalled. The stock has been stuck in a narrow $75.00-76.00 trading range for the last few days. We are not suggesting new positions due to our diminishing time frame but more nimble traders might want to consider new plays on a move over $76.00 or $76.25. Our target is the $79.90-80.00 range. Please note that we're raising our stop loss to $74.84, which is under last Tuesday's low.

Suggested Options:
We are not suggesting new positions in FO.

Picked on October 13 at $ 76.26
Change since picked: - 0.76
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 745 thousand

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Frontier Oil - FTO - close: 29.65 change: -0.04 stop: 26.99

FTO displayed some relative strength on Friday. Most of the energy stocks were trading lower thanks to a decline in crude oil futures. Yet shares of FTO closed with a minor 4-cent decline after trying to breakout past the $30.00 level again. We remain optimistic with FTO but traders have a choice. They can wait for a move over $30.00 before initiating new call positions or they can look for another dip in the $29.00-28.00 region as a new entry point. Our target is the $32.50-33.00 range. We do not want to hold over the early November earnings report, which gives us less than two full weeks. FYI: The P&F chart is still bearish for FTO.

Suggested Options:
Due to our time frame (less than two weeks) we'd learn toward not opening new positions but our play description (above) lists two different entry points. We'd prefer the November call options.

Picked on October 15 at $ 28.90
Change since picked: + 0.75
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 3.2 million

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NCI Building Sys. - NCS - cls: 60.00 chg: -1.25 stop: 59.45*new*

Short-term technicals are starting to look bearish on NCS. The stock's performance last week looks like a failed rally pattern on the weekly chart. Friday's dip under the $60.00 level didn't inspire any confidence either. The stock's lack of follow through higher after two bounce attempts at $60 would be a good excuse to exit now. We're choosing to hold on for another day or two and see what happens. However, we're raising the stop loss toward Friday's low. Our new stop is $59.45. We're not suggesting new positions with NCS under $61.00. Our target is the $67.00-70.00 range.

Suggested Options:
We're not suggesting new positions in NCS at this time.

Picked on October 16 at $ 61.26
Change since picked: - 1.26
Earnings Date 11/29/06 (unconfirmed)
Average Daily Volume = 386 thousand

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Rockwell Automation - ROK - cls: 60.69 chg: -0.87 stop: 59.95

ROK spiked lower in knee-jerk reaction as traders reacted to the various headlines on Friday morning. Bulls did step in to buy the dip near $60.00 but Friday's loss damaged the current up trend. More conservative traders may just want to exit immediately on Monday morning. We are suggesting that everyone exit on Monday afternoon at the closing bell to avoid holding over ROK's earnings report due out after the close. Wall Street is looking for earnings of 82 cents a share.

Suggested Options:
We are not suggesting new positions in ROK at this time.

Picked on October 12 at $ 60.86
Change since picked: - 0.17
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 1.5 million

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Vimpel Comm. - VIP - close: 63.16 chg: +0.12 stop: 59.95

Once again VIP gapped open lower only to see traders buy the dip and push shares higher. The action on Friday looks like a new entry point to buy calls but we have to caution readers that volume came in pretty low and that doesn't say much about Friday's strength. More conservative traders may want to tighten their stops toward the $61.00 or $61.50 level. Our target is the $67.50-70.00 range. We do not want to hold over the mid-November earnings.

Suggested Options:
We are suggesting the November calls although January calls would also work.

BUY CALL NOV 60.00 VIQ-KL open interest=683 current ask $4.90
BUY CALL NOV 65.00 VIQ-KM open interest=691 current ask $2.05

Picked on October 12 at $ 62.17
Change since picked: + 0.99
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million

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Put Updates

None Today.

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.)

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ConocoPhillips - COP - close: 60.86 chg: -0.27 stop: n/a

COP is still consolidating sideways between $60 and $62. We would expect more sideways trading into the company's earnings report on October 26th unless crude oil really begins to move next week. Traders can still open new strangle positions near $60.00 up until the company's earnings announcement. We would not suggest new plays after they report. Try and keep new entries in the $59.50-60.50 range. Our estimated cost was 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).

Suggested Options:
We're cautiously suggesting new strangles ahead of the earnings report. See our play description for more details.

Picked on October 15 at $ 60.03
Change since picked: + 0.83
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 9.8 million

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Google - GOOG - close: 459.67 chg: +33.61 stop: $452.99

As expected shares of GOOG gapped open higher on Friday morning. Shares opened near $459 and dipped to $453.59 before bouncing back. It was a very strong day thanks to the company's better than expected earnings report. Analyst firms were raising their price targets on Friday. Citigroup raised their price target for GOOG to $600 and S&P raised their price target to $500. Originally our plan was to exit if either option rose to $24.00 or more. Yet on Thursday we got a little greedy and raised our exit price to $29.00 with the expectation that GOOG would open near $460 and continue higher. Well, the November $440 call (GOP-KH) did not reach $29.00. As of Friday it was trading at $27.70bid/$27.90ask. Traders may want to consider exiting right now to lock in a gain! We're going to alter our strategy again and put a stop loss on this play. If GOOG trades under $453.00 we want to sell the strangle (the call side) to protect any potential gains. Our estimated cost was about $13.00 for the strangle.

Suggested Options:
We're not suggesting new positions in GOOG at this time.

Picked on October 01 at $401.90
Change since picked: +57.77
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 5.6 million

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Dropped Calls

Emerson Electric - EMR - close: 84.39 chg: -1.41 stop: 83.99

We have been stopped out of EMR at $83.99. Shares spiked lower fairly quickly on Friday morning and dipped to $83.93 before bouncing. We could not find any specific news to account for the Friday morning weakness and it may have been investor over reaction to another company's earnings report/sell-off. Friday's decline also added strength to the bearish curve in some of the technical indicators.

Picked on October 05 at $ 85.15
Change since picked: - 0.76
Earnings Date 11/07/06 (confirmed)
Average Daily Volume = 1.5 million

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Unibanco - UBB - close: 80.10 change: -0.64 stop: 76.45

We have decided it's time to exit early in UBB. The banking indices have all produced some short-term sell signals and UBB is nearing a new sell signal of its own. There is still a good chance that UBB would find support near $76.50-77.00 but we don't want to risk it at this time.

Picked on October 08 at $ 79.12
Change since picked: + 0.98
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume = 796 thousand

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Vulcan Materials - VMC - cls: 79.43 chg: -4.77 stop: 80.26

Ouch! VMC dropped over 5.6% on Friday with volume soaring about three times the daily average. The stock gapped open at $80.67 and then plunged to $78.30 before bouncing. This sudden onset of weakness was due to Goldman Sachs downgrading the stock to a "neutral". This seems like an overreaction but we can't argue with the market. Our stop loss was $80.26 so the play is now closed. FYI: Earlier this week we were suggesting traders consider an early exit over $84.00. Our target had been the $84.50 level. Thursday's high was $84.48.

Picked on October 09 at $ 80.26
Change since picked: - 0.83
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 843 thousand

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Dropped Puts

None Today.

Dropped Strangles

Boston Properties - BXP - close: 104.52 chg: +0.30 stop: n/a

Our aggressive strangle play in BXP was a flop. Shares had begun to march higher after a test of support near the bottom of its rising channel a few days ago but then the rally just ran out of steam. Lack of any real movement killed the options and BXP just limped sideways into option expiration on Friday. Our estimated cost was $1.90.

Picked on October 01 at $103.34
Change since picked: + 1.18
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 694 thousand

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Trader's Corner

Back to Basis, Part Two

Last week, I discussed the basics of getting started with QuoteTracker, a charting service that some subscribers might consider as either a backup charting service or their primary source. To review, QT has a free version. Even the registered version, free of advertisements and offering more days of data, costs only $7.00 a month. The data feed comes from either one of the available brokerages with which QT works or a subscriber vendor. Among the available brokerages are Interactive Brokers, OptionsXpress and BrokersXpress, brokerages used by many of our subscribers. That makes this service an ideal backup service for our readers.

Because a trusted reader expressed some concerns about last week's article, an article that appeared to him to be more commercial than helpful trading advice, I thought some explanation of the reasoning behind last week's article and this one might be in order. His points were valid, and I thought some readers might share his concerns. First, I assure you that I have no connection with QuoteTracker, and they have neither requested nor approved anything I write here, and I have received no remuneration from them. It's my sole viewpoint.

While I certainly understand the reader's concerns, I also had reasons I consider valid for writing these articles. We cannot trade effectively without effective trading tools. Our choices of a brokerage, advisory service and charting service all involve choosing effective tools. It's more important that you have charts and that the feed is reliable than that you have a certain indicator, but you also want a charting service that allows you to measure what's happening in the way you like to do so, with those chosen indicators. It's appropriate to decide whether a certain charting service has made available the technical indicators our readers most often want. Moreover, I've long been a proponent of having a backup method of contacting your brokerage in case of an Internet or power failure and a backup quote and chart service in case your preferred one goes down.

I remember a long-ago series on setting up charts with QCharts, unfortunately no longer available since the archives were deleted when the new website was initiated. That series helped me set up my own charts when I was a new QCharts user, so I was amenable to the suggestion to do a similar series on QuoteTracker. However, since I do consider the subscriber's concerns valid, I'm going to keep the number of my articles on this topic few, stopping the review of QuoteTracker with this article. I'm giving you just a flavor of what might be found on QuoteTracker rather than going through each jit and jot of setting it up. I want you to see enough to determine if it's a valuable trading tool for you to consider, either as a backup or main charting service, but not to tell you how to arrange your charts or accomplish any other housekeeping-type tasks. You can discover those on your own after you've determined whether you're interested in this charting service. So, when you read about what I did setting up QuoteTracker, I don't mean to be focusing on my needs as a technical trader, but just providing you with a flavor of the service so that you can determine if offers enough varied indicators, is legible enough for you to read, and user-friendly enough for you to tackle.

Read last week's article for more information about initial considerations, particularly if you use OptionsXpress or BrokersXpress. Neither of those offers backfill, and that may change how you want to receive data feed if you're going to use QuoteTracker or even whether you want to use it at all. I also forgot to mention in last week's article that although BrokersXpress is not listed as among the available brokerages, BrokersXpress clients can identify OptionsXpress as the source of data feed and then use their BrokersXpress login information. It works. I tried it out, although I opted to pay for a feed for my own use.

Last week's article discussed setting up a portfolio. Once you've got one or more portfolios set up, it's easy to call up your first chart. All you have to do is right-click on any of the symbols in your portfolio, and you'll be presented with a menu that allows you to look at intraday or historical charts as well as any number of other options. One of those options is backfilling the chart, which I've done for an intraday chart on the Diamonds, a three-minute chart showing the last day of trading, which was October 13 when this article was begun.

Three-Minute Chart of the DIA:


A difficulty presented itself immediately upon calling up my first chart, a difficulty that might not exist for other new QuoteTracker users: the default color system used. Because I write for OptionInvestor, including charts with my articles (with the permission of QuoteTracker), I needed a new color scheme. Our subscribers sometimes print out articles to study later, and a dark background causes difficulties. Perhaps you print out your own charts, too, or just don't like the dark background.

Fortunately, the color scheme proves easy to change. Right-clicking directly on the chart produces a pull-down menu with an option for "Color Schemes." You can change the color of the gradient background, the grid, trendlines, and indicators, among other choices. You can change the scheme temporarily or can set up and save several different versions of color schemes, using names that you choose. I have one labeled OIN, for example, for use with charts that will be published with my articles.

Three-Minute Chart of the DIA, OIN Color Scheme


Switching from one color scheme to the other becomes a simple matter of right-clicking on a chart, choosing "Color Schemes" and then selecting the preferred scheme for that chart out of those that you've set up.

That same right click on the chart offers an option for "Select Indicators." That's where you'll find upper indicators such as Bollinger Bands, moving averages, pivot points, and lower indicators such as RSI, CCI and MACD. You'll also find a number of indicators that will likely prove unfamiliar, too, unless you've tried nearly every indicator there is. The choice appears to be good.

When presented with the list of indicators, you can double click on the indicator you want to use, and it will move to the open window the right in the indicator screen that's pulled up. An edit button will appear beside the chosen indicator, and you can click that button to change the allowable parameters of the indicator.

The following table displays how the "Select Indicator" screen looks after I have set it up to show the nested Keltner channels that I like to watch and RSI. I'm using this as an example both because I do use these nested Keltner charts and also because nesting Keltner channels is not a particularly common charting task, and I wanted to show you that QuoteTracker proved flexible enough to do it. When I tried another and more expensive charting service, I actually had to go find code and adapt it to nest Keltner channels together.

The "<H>" beside the "Volume" indicator means that volume will be hidden. I could also choose to hide all upper or lower indicators at once by checking "Hide" on "Selected Upper Indicators" or "Selected Lower Indicators."

Select Indicators Screen:


"Apply" can be clicked, and the new indicators will be applied to the chart without closing the indicator screen, if you want to further edit your indicator list. Click "OK," and they're applied and the screen is closed. With indicators set up as they were on the illustration above, the chart would appear as it does below.

Three-Minute Chart of the DIA with indicators applied.


The use of Keltner channels or any channel that might have values far outside those of current price movement brings up another possibility with QuoteTracker, adjusting the scale of the charts so that all the channels or other indicators show. This is accomplished by editing the indicator after you've chosen it. Normally, QuoteTracker bases the price scale on charts on the actual prices during the period displayed. Often, especially on intraday charts, this would mean that my widest Keltner channel, the purple one seen at the top but not at the bottom, would not fully display. Note that the value for the lower channel is displayed, but not the channel itself. This might also occur with some other indicators such as Bollinger bands or moving averages in a short-term chart when a move has been extreme. If you want the indicator to show, you can accomplish this goal by clicking "Edit" on the chosen indicator and then checking "Adjust Scale," as shown in the example below, for that widest Keltner chart.

Adjusting Scale:


One interesting option for these charts is to hide the indicators, such as all those nested Keltner channels, but leave the display of their values seen on the right of the chart. So, if I wanted a cleaner chart with only the price bars in the window, I could still glance to the side and see the values for the various Keltner channels. That possibility is also available for moving averages and many others of the indicators. That seems a useful tool if you want a cleaner chart but still want to know where those moving averages might be.

It's possible with QuoteTracker to link two lower indicators so that they'll both display on the same space. Refer back to the third chart to see the indicator screen. If you wanted to link the two lower indicators shown there, volume and RSI, for example, you would click the black button to the left of the top indicator, and it links to the black button to the left of the next one. Click again, and the link is undone. If the indicators you want to link on a chart are not next to each other in the list, drag one of them so that they are positioned one following the other before attempting to link them.

What do you do if you want to look at a 15-minute chart that covers a 10-day period instead of a three-minute chart with data collected over the last day? Right clicking on the chart and producing that same menu that's been needed for all the previous changes allows you to do that, too. "Frequency" and "Chart Period" are the two selections you'll want. Both allow for custom numbers. If you like to study seven-minute charts, for example, as I sometimes do, you can make that choice. Right clicking on an intraday chart also offers the opportunity to display a historical chart, with daily, three-day, weekly, monthly and yearly time-intervals available.

What would a chart be without trendlines, however, one of the most useful tools to advanced and beginning traders alike? That's easy enough. The drawing tool default is set to draw trendlines, so all you need to do is left-click on the place you want begin the trendline and then hold the left-click button down until you've reached the spot you want to stop the trendline. Then you have several options for changing the trendline. By right-clicking on the trendline itself, you can extend it right, left, or both directions, copy it, delete it, and change its color or thickness. You can even set an alert based on a trendline, a great tool, but only on time-based charts.

I have to say that, unless I'm missing the settings, I haven't been able to find any sound-based alert like the spoken one that QCharts offers. Instead, I get various versions of pings or other such sounds, not loud enough to let me know an alert has been triggered if I've gone to the kitchen to make a sandwich. If I've just missed the setting, I'm sure one of our readers will let me know, and I'll pass on that information to the rest of you. I'm still learning about QuoteTracker's possibilities.

Also, QuoteTracker has one oddity associated with right-clicking on a trendline. That's where you're going to locate the all-important Fibonacci brackets. They're not found in the indicator choices or in the drawing tool default, but rather only after drawing a trendline and right-clicking on it.

If you want to draw something other than a trendline, that's a quick matter. If you study the top left of the chart window on any of the Diamonds charts in this article, you can just spot the lower edge of Chart Toolbar. This toolbar is set at auto-hide, but it will pop down when you move your cursor to the top left of the upper chart window.

Chart Toolbar:


Annotating a chart with text or with shapes other than a trendline can be done by clicking on the window with the square, circle and trendline, then choosing the appropriate shape or text. Other choices on this Chart Toolbar include adding extra space on the X-axis, less extra space on the X-axis, extra space on the Y-axis, less extra space on the Y-axis, viewing timeframes, working with chart templates, and an option to move the Chart Toolbar to another corner of the chart. QuoteTracker offers several options such as those extra-space ones and several options in vertical scaling, but it just does not offer the same flexibility that QCharts does, where you can click on the vertical or horizontal axis and either separate bars more widely or squeeze them together with one move of your mouse and with seemingly infinite variety.

QuoteTracker's template option is a helpful one. Most often, I study intraday charts two ways: with nested Keltner channels and with the 100- and 130-ema's. Probably, you have a number of different ways you want to study charts, too. Perhaps you like one with Bollinger bands and RSI and another with moving averages. After I'd set up a chart with the Keltner channels the way I wanted them, all I had to do was to click on that "T" symbol on the Chart Toolbar to save a template titled "Intraday with Keltner."

For those used to QCharts, you'll find another difference in the way QuoteTracker handles charting. To change the symbol you're charting on QuoteTracker, you just click on the chart and then start typing the new symbol rather than go to a window at the top of the workspace. A window will pop up on the chart with "OK" and "Cancel" options.

A last difference lies in the information on the cross-hair position. QuoteTracker allows two choices. Under "Options," "Edit Preferences," "Charts" and then "Miscellaneous," you'll find a choice for "Cross-Hair." You can choose whether to show it or not, but you can also choose whether or not to show the "Freestyle default." Freestyle allows you to see the current position of the cross-hair. Turn that off, and you'll instead see the data box that includes the time and the OHLC (open, high, low and close) information for the price bar that also occupies that vertical space. With QCharts you can see all at the same time: the current position of the cross-hair and the information related to the price bar. With QuoteTracker, you have to choose which you'll look at, at any one time. It's easy to click between the two, but having all that information available at the same time would be more convenient.

That's about it for a basic overview of setting up a portfolio and charts. This gives you enough information to know that you can obtain reliable feeds--perhaps for free, depending on your broker, can chart anything that your chosen feed source provides quotes for and can locate and configure almost any technical indicator you would like. However, QuoteTracker isn't quite as user-friendly as QCharts is, for those of you used to QCharts, and the limitation of ten days of data on intraday charts does sometimes prove . . . well, limiting. Overall, though, I found that I was willing to deal with some of the limitations and have more reliable feed than I'd had with my other charting service. In addition, you just can't beat QuoteTracker's service.

If you're looking for a backup or new charting service, I hope I've given you enough of an overview and a fair look at the (mostly) pros and (few) cons of QuoteTracker, enabling you to make your own decision.
 

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