Option Investor

Daily Newsletter, Monday, 10/23/2006

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Table of Contents

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

Market Wrap

Another Wave of Bullish Insurgence!

Stocks continued their torrid climb Monday, where a brief spat of selling at the open was quickly reversed.

Shares of Wal-Mart (NYSE:WMT) $51.28 +3.86% closed at a 20-month high on heavy volume of 53 million shares after the world's largest retailer and Dow component's CFO Tom Schoewe said the company was looking to "significantly lower" the company's year-over-year global growth rate of capital expenditures to a range of 2% to 4% in fiscal 2008 from the current year's range of 15% to 20%.

Investors and industry analysts applauded the move, which is aimed at improving both returns on invested capital and cash flows.

On a conference call with reporters, Mr. Schoewe said the decision to lower capital expenditures on new stores being built was in part due to higher land and construction costs.

"If there's a significant deceleration in land costs and construction costs, we would be in a position to reaccelerate new-store growth," added Schoewe.


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Wal-Mart said that roughly 600 new stores would be built under the revised plan, with half in the United States. Most of the new stores will be 196,000 square-foot super centers.

Wal-Mart's gains helped boost the S&P Retail Index (RLX.X) 500.47 +.72% back towards its recent all-time high close of 501.91.

Also adding to today's upbeat tone among the Dow blue chips was General Motors (NYSE:GM) $35.19 +5.54% and 3M (NYSE:MMM) $80.09 +2.06%.

Shares of Caterpillar (NYSE:CAT) $60.42 +2.40% edged higher after Friday's negative reaction to earnings.

Meanwhile, the AMEX Disk Drive Index (DDX.X) 150.62 -0.62% closed below its 21-day SMA (155.11), 200-day SMA (153.33) and 50-day SMA (151) with component SanDisk (NASDAQ:SNDK) $47.45 -3.45% unable to find a bid after Friday's -20% decline.

Today's percentage loser among the Dow components had shares of American Express (NYSE:AXP) $56.65 -2.39% trading off their recent all-time highs of $58.43. The financial services conglomerate reported Q3 net income of $967 million, or $0.79 per share, which topped Wall Street's expectations of $0.76 per share.

Closing U.S. Market Watch - 10/23/06

While the major indexes pressed either all-time highs, or new 52-week highs, energy prices were under pressure again today.

After Friday's expiration for the November Crude Oil futures contract (cl06x), December Crude Oil futures (cl06z) settled down $0.52, or -0.88% at $58.81 in its first day of front-month trading as traders remained skeptical that OPEC will be able to successfully implement a decision to cut production in an effort to support prices.

S&P 500 "overbought" ... QUANTIFIABLY speaking

If you're thinking the major indexes are starting to look a little overbought (some have thought so since mid-September) then I'm going to begin siding with those of you that feel this way!

Just as the S&P 500 Bullish % (BPSPX) from Dorsey/Wright & Associates alerted you and I to a "bull confirmed" status on September 13, we should now observe this institutionally followed indicator of market internals, while VERY STRONG, recently achieved the 70% level, where other internal indicators, like my proprietary NYSE and NASDAQ NH/NL ratios reach some very bullish, yet very overbought readings (see above internals).

I want to quickly review Dorsey/Wright's S&P 500 Bullish % with you.

Dorsey/Wright's S&P 500 Bullish % (BPSPX) - 10/23/06 Close

StockCharts.com users will follow the $BPSPX chart, but the main point I want to alert traders and investors to is the STRENGTH, but the overbought levels and greater bullish RISK we're at now.

Tom Dorsey like to use American Football as an analogy, and it is a fitting analogy in my opinion. Think of a football field where 30% and 70% are the actual goal lines.

On September 13, when the BPSPX signaled "bull confirmed" this MARKET was signaling that bulls took possession of the football. At 70%, the bulls have scored a touchdown. While bulls still have the ball, at some point, they will kick the ball back to the bears, and we should see some type of weakness, or supply come back to this market.

The term "overbought" has been used for weeks now, but QUANTIFIABLY speaking, the S&P 500 Bullish % (BPSPX) tells us that 70.77% (roughly 354 of the 500 stocks comprising the S&P 500 Index) now show a "buy signal" associated with their point and figure chart.

Just as I've done over the years, and then my 09/18/06 Market Wrap, let's take a look at the S&P 500 Index ($SPX) 1,377.02 +0.61% point and figure chart. Remember, X is demand, O is supply. Currently we would need to see a 3-box reversal for any sign of MEANINGFUL weakness.

S&P 500 Index - 10-point box

One of the powerful traits of point and figure charts is the methodology for a greater focus on supply/demand (O/X) than on time. I've said before, and I'll say it again. Bull and bear moves can last MUCH LONGER than we might imagine when the move takes hold.

As the bullish % nears SIMILAR LEVELS OF RISK found in January, traders and investors should be prepared, or have plans in place for at least a 3-box reversal (see pinkish box). That 3-box reversal from 1,290 this past January (1= First chart entry the month of January) would have represented a 2.3% decline.

From the 1,370 level, a 3-box reversal, would "only" bring the SPX back down to 1,340, or a 2.19% decline.

I should note that on the above chart from Dorsey/Wright.com, the "top" and "bot" labels are the 10-week trading bands. They can continue to move higher, just as a bollinger band, or keltner band will do as PRICE rises, but here too, we get the observation that things may be a little extended to the upside.

RISK to a simple pullback is 3-boxes. RISK to a "sell signal" is all the way back down to 1,220 at this point.

Now let's take a look at the S&P Depository Receipts (AMEX:SPY) $137.47 +0.46% with an updated WEEKLY (blue) pivot retracement.

In the OptionInvestor.com Market Monitor, I have profiled the November $136 Put (SFB-WF) on two different occasions. One on 10/11/06 when the SPY was trading $135.08, and ANOTHER put at 10/17/06.

S&P Depository Receipts (SPY) - 10/23/06 Daily Intervals

As bullish as I've been in the Market Monitor and Market Wraps since early September upon my return from vacation, I must confess that I thought we would have seen some type of pullback in recent weeks.

Yes, we took some profits on bullish positions WAY TOO SOON, just in time on other, and some, well, there were no profits at all as the MARKET just didn't agree with my bullish analysis on that particular stock. A rising tide tends to lift a lot of boats, but not ALL boats.

But that hasn't kept me on the sidelines either!

One additional "reason" for bullish caution at tonight's close is that the SPY, which mirrors the SPX, is getting very, very close to my bullish resistance. The "dashed red" upward trend is also a bullish resistance trend that has been mentioned in prior weeks, where we can perhaps see just how strong, and perhaps "bull confirming" strength has been in regards to that trend.

Today's continued strength in the SPY above its MONTHLY R2 (resistance 2) had me RAISING the bearish target from my previously profiled target of $132.50 to $135.30. (MONTHLY Pivot Retracement is PINK)

That would be a level where I think other BEARS for the SPY are also going to be looking for some cover near-term, should a decline be found. It is a level where bulls may also be looking for entries.

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: 85.32 chg: +0.50 stop: 84.49*new*

Time is almost up. We plan to exit tomorrow (Tuesday) at the closing bell to avoid holding over ABK's earnings report due out on Wednesday. Wall Street is looking for ABK to turn in earnings of $1.78 a share. We are raising the stop loss toward today's low at $84.49. Our target was the $88-90 range but it doesn't look like ABK will make it.

Picked on October 04 at $ 84.40
Change since picked: + 0.92
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand


BP Prudhoe Bay - BPT - close: 72.75 chg: -0.60 stop: 72.45

There is no change from our previous updates on BPT. The stock is still trading sideways and under multiple levels of resistance with the 50-dma, 200-dma and the $75 level still overhead. 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.

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


Cerner Corp. - CERN - close: 46.59 chg: -0.36 stop: 46.45

CERN failed to experience any upside follow through on Friday's bullish engulfing candlestick pattern. This is negative especially considering the new relative highs in the DJIA and the S&P 500 on Monday. We remain on the sidelines and await a breakout over resistance at the $48.00 level. We're suggesting a trigger to buy calls at $48.05. If we don't see CERN move higher in the next couple of days we'll probably drop it as a bullish candidate. 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.

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


CIGNA - CI - close: 119.87 change: -0.03 stop: 117.75

We have to wave the yellow caution flag with CI as we may have been subject to a false start. Shares sprouted higher this morning and traded over resistance near the $120 level. The high today was $121.18 and our trigger to buy calls was at $120.25 so the play is now open. Unfortunately, the strength in CI was short lived and shares closed back under resistance at the 120 level thus we have a failed rally pattern. If the markets see any consolidation lower in the next two days as traders turn cautious due to the Fed meeting we could easily see CI hit our stop loss at $117.75. We would wait for another rise past $120.50 or $121.00 before considering new bullish positions again. Currently our target is the $125.00-127.00 range. More aggressive traders may want to put their stop under $116.

Picked on October 23 at $120.25
Change since picked: - 0.38
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 1.3 million


Carpenter Tech. - CRS - cls: 110.62 chg: +0.33 stop: 107.95*new*

CRS tried to bounce on Monday but the stock didn't get very far before the rally failed. We're planning to exit on Wednesday at the closing bell to avoid earnings the next day. Given our dwindling time frame we are raising the stop loss to $107.95. More conservative traders may want to exit now. Our target is the $118.00-120.00 range.

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


Devon Energy - DVN - close: 66.52 chg: -0.87 stop: 64.72

DVN posted another loss on Monday with a 1.6% decline. Oil stocks were weak on Monday thanks to another decline in crude oil futures. The stock did bounce from its rising 10-dma, which might normally be seen as a new bullish entry point, but given the relative weakness in oil stocks we'd hesitate about opening new positions right now. Our target is the $69.50-70.00 range. We do not want to hold over the November 1st earnings report.

Picked on October 15 at $ 64.72
Change since picked: + 1.80
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 5.6 million


EOG Resources - EOG - close: 66.11 chg: -0.14 stop: 64.95

EOG is another energy stock that suffered some profit taking today but the selling effect was mild as traders bought the dip near $65.00. This looks like a new bullish entry point buy calls but we're suggesting caution right now given the relative weakness in oil stocks. 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.

Picked on October 16 at $ 66.05
Change since picked: + 0.06
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 3.6 million


Fortune Brands - FO - close: 75.25 chg: -0.25 stop: 74.84

There is no change from our weekend update on FO. The stock spent another session consolidating sideways in a narrow range. FO might be stuck trading sideways as investors wait for the company's upcoming earnings report. We're planning to exit on Thursday at the closing bell to avoid holding over Friday's earnings announcement. More conservative traders may want to exit early right now given today's relative weakness. We are not suggesting new positions. Our target is the $79.90-80.00 range.

Picked on October 13 at $ 76.26
Change since picked: - 1.01
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 745 thousand


Frontier Oil - FTO - close: 28.92 change: -0.73 stop: 26.99

FTO is another energy stock that slid lower on Monday thanks to weakness in crude oil futures. The stock has been trading sideways in a $28.70-30.00 trading range for over a week now. Traders have a choice when it comes to new entry points. 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.

Picked on October 15 at $ 28.90
Change since picked: + 0.02
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 3.2 million


Vimpel Comm. - VIP - close: 63.60 chg: +0.44 stop: 59.95

VIP gapped lower again but traders quickly bought the dip and pushed shares into the green. Volume has been light the last few days and that might be a concern for the bulls. Most of the technical indicators are still bullish. 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.

Picked on October 12 at $ 62.17
Change since picked: + 1.43
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million

Put Updates


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.)


Bear Stearns - BSC - cls: 151.59 chg: +1.40 stop: n/a

Our new strangle play in BSC gave us a few chances to open new positions on Monday. This morning the stock dipped to $149.94 before surging to $152.10. Then this afternoon shares dipped toward $150.40 before bouncing again. We are suggesting that readers consider strangle plays in the $149.00-151.00 range and the closer to $150.00 the better. The options in our strangle are the November 155 call (BSC-KK) and the November 145 put (BSC-WI). Our estimated cost was $4.00. We're planning to exit if either option rises to $6.00 or more.

Picked on October 22 at $150.19
Change since picked: + 1.40
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million


ConocoPhillips - COP - close: 60.71 chg: -0.15 stop: n/a

COP offered us another entry point to open new strangle plays with the dip to $59.85. We've been suggesting potential entries in the $60.50-59.50 range with preferred entries at the $60.00 mark. COP's earnings are coming up on October 26th. We do plan on holding over the announcement. 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).

Picked on October 15 at $ 60.03
Change since picked: + 0.68
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 9.8 million

Dropped Calls

Beazer Homes - BZH - close: 41.43 change: -0.86 stop: 40.95

Danger! BZH is breaking down from its sideways consolidation. The stock lost just over 2% on Monday compared to a 1.1% decline in the homebuilder index. The stock did manage a meager bounce from short-term support near $41.00. The relative weakness in the homebuilders while the major averages are hitting new relative highs is definitely bearish. There is still a chance that the DJUSHB home construction index will bounce from support near 640 and there is a chance that BZH will bounce from support near $41.00. However, we're not going to bet on it. We're suggesting an early exit right now! We do not expect the FOMC to raise rates this week but they are likely to issue a hawkish commentary about potentially raising rates in the future to keep inflation under control and that would be negative for the homebuilders. Again, we're suggesting an exit now. We can always re-open positions on a bullish breakout over $43.00-43.25. More aggressive traders might want to consider keeping the play open with a stop loss under $41 or its 50-dma.

Picked on October 11 at $ 42.75
Change since picked: - 1.32
Earnings Date 11/07/06 (confirmed)
Average Daily Volume = 1.3 million


NCI Building Sys. - NCS - cls: 59.69 chg: -0.31 stop: 59.45

We have been stopped out of NCS. The stock was weak this morning and gapped open lower at $58.90 before bouncing back from its lows. We could not find any specific news to account for the gap down but it might be a reaction to a rival's earnings news. Unfortunately, our stop loss to exit was at $59.45 and the gap down at $58.90 should have produced an immediate exit.

Picked on October 16 at $ 61.26
Change since picked: - 1.57
Earnings Date 11/29/06 (unconfirmed)
Average Daily Volume = 386 thousand


Rockwell Automation - ROK - cls: 61.11 chg: +0.42 stop: 59.95

ROK gapped down this morning to open at $60.20 but traders were ready and bought the dip at $60.00 (today's low). The bounce was fueled by above average volume as investors made some last minute bets ahead of the company's earnings report. It was our plan to exit today at the closing bell to avoid holding over the earnings announcement after the bell today. Analysts were expecting earnings of 82 cents a share and ROK reported 97 cents. Revenues were under consensus estimates. There didn't appear to be a lot of after hours trading in ROK and what we did see was negligible.

Picked on October 12 at $ 60.86
Change since picked: + 0.25
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 1.5 million

Dropped Puts


Dropped Strangles

Google - GOOG - close: 480.75 chg: +21.08 stop: $452.99

Target achieved/surpassed. GOOG opened higher at $462.28 and barely looked back all day with a 4.5% surge on strong volume. The stock closed at a new all-time high. We were suggesting that traders exit if the call side of our strangle hit $29.00. The November $440 call (GOP-KH) actually opened at $29.80 and traded to an intraday high of $49.13 before closing near $47.00. Our estimated cost was about $13.00.

Picked on October 01 at $401.90
Change since picked: +78.85
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 5.6 million


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