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Daily Newsletter, Wednesday, 10/25/2006

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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

Third Time's a Charm?

Early today, I misinterpreted a headline. "Stocks Expected to Move Wednesday," it read, and I thought the article would address the expect movement of the stock market post-FOMC decision. As part of my research, I turned to the article, but it instead addressed specific stocks that were expected to move, of course. That turned out to be an appropriate title for the first half of trading today, because index action at first appeared to be dictated by earnings releases from reporting component companies, with reactions dampened by the typical Fed-watch caution and then by rising crude prices.

In earliest trading today, volume breadth indicators displayed much higher advancing volume than declining volume. This was true on the NYSE as well as on the Nasdaq, but the price action did not always match in enthusiasm. Influenced by investor enthusiasm or disdain for reporting companies, the Dow pulled back, the SPX inched forward, the Nasdaq climbed and the TRAN soared.

The crude inventories report was to knock the TRAN back from its high of the day by mid-morning, but other indices were already settling into their Fed-watch status. By noon, indices were printing small-bodied candles all in a row, an indication of hesitancy, and then they slipped a little further as crude passed $61.00 again. The SPX, lately being touted as the next index destined to run to new highs, had pierced 1380, but had pulled back. Immediately before the decision was announced, the SPX was higher by a few cents; the Dow, lower by 32 points; the Nasdaq, higher by about a point. Nasdaq breadth indicators had turned sour, with decliners higher than advancers. Collective breaths were held across the trading world. Would this be the third time in a row that the Fed paused and would that be the charm the markets needed to push even higher?

Interest rates were held steady. That was a given. Richmond Fed President Jeffrey Lacker voted against those steady rates, preferring a quarter-point rate hike. That was nearly a given, too. Equity bulls were relieved that he didn't convert anyone else, however. He was once again the lone dissenter. One potential equity disaster was diverted, although equity traders probably would have preferred that even Lacker not dissent this time.

The Dow, SPX and OEX shot to new highs of the day. The TRAN, RUT, SOX and Nasdaq lagged a bit. The only task remaining was to discover any changes in the accompanying statement and decide what they meant. That took a few minutes, during which the markets performed their usual post-FOMC-statement gyrations.

Early commentary focused on a slight change in wording related to expectations for economic growth. "Going forward, the economy seems likely to expand at a moderate pace," the statement added after noting that the "[e]conomic growth has slowed over the course of the year." Does a "moderate pace" suggest an above-trend, on-trend or below-trend pace, a CNBC commentator questioned? The initial interpretation, as of the close of trading today, appears to be that this statement was key, suggesting that the Goldilocks scenario of just-right growth will unfold, but I warn that the overnight reaction can be different.

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As expected, the statement was tough on inflation. Some months ago, I mentioned that in other periods when the Fed had paused, the statement was necessarily hawkish as the investing public needs to be convinced that the FOMC will remain vigilant against inflation. This hawkish tenor is typical for such periods, and, knowing that, bulls will ignore it to some degree, whether or not the tenor is for show or due to a real concern. CNBC commentators laughingly noted this afternoon that Fed Chairman Bernanke was probably happy to see Lacker's dissent continue because it provides that reassurance that the Fed remains vigilant. As reported in the Wall Street Journal this morning, Fed Chairman Ben Bernanke has made it clear that it's not enough that inflation measures not increase: they have to drop to satisfy this Fed Chairman, and therein lies the danger of discounting the hawkish tenor as the typical kind of statement seen in a period of pausing.

One change in the portion of the statement addressing inflation includes the subtraction of "energy and other commodities" prices having "the potential to sustain inflation pressures." If you'd like to read the full statement, you can find it by copying and pasting the following URL: http://www.federalreserve.gov/boarddocs/press/monetary/2006/20061025/

Although a bit delayed, the treasury reaction was pronounced, with bonds jumping and yields falling. Yields on the ten-year had jumped above the 200-ema this week and were challenging the 200-sma and the neckline of a potential inverse H&S. They fell back after the FOMC statement, but, at 4.77 percent, remain within the consolidation pattern that's forming the right shoulder. I had suggested last week that these yields were likely to consolidate within that right-shoulder range at least until after the FOMC meeting, basing that impression on the symmetry with the left shoulder as well as expected behavior before an FOMC meeting. Support for these yields appears to be in the 4.72-percent range, if the current light support is broken. These yields should be watched tomorrow morning for a clue as to how the FOMC news was digested overnight. It's my personal opinion that bond traders and global bond investors haven't yet decided whether to send U.S. bonds up or down, as evidenced by the consolidation of the yields within that right-shoulder range. Equities have gone ahead and set up their party, but bond traders don't appear to be so sure what's going to happen next.

Equity investors made their decision, at least for the afternoon and at least for the SPX. The index was helped by gains in the energy sector, particularly by Exxon Mobil (XOM) ahead of its earnings report tomorrow morning. Equity traders drove the index to a new recent high, wedging it further into a 1375-1400 consolidation zone from 2000. Once again eschewing a confirmation of the potential reversal signal that it had created by following one tall green candle with yesterday's doji, the index also did away with its usual pattern of following such strong days with about a week's worth of consolidation near the highs. It didn't fall and confirm the potential reversal signal. It didn't consolidate. It climbed. And, after doing so, it's about to hit the top of the channel in which it climbed off the summer's low.

Annotated Daily Chart of the SPX:

The intraday picture was a slightly different one, at least based on Keltner evidence. That showed the SPX's attempts to break out on an intraday basis being rebuffed, so that on a Keltner basis, the SPX either has to break out tomorrow or risk falling back further inside its Keltner channels. Short-term resistance is just under 1383 on 15-minute closes, and short-term support at just over 1381.62 and then at 1381. Short-term bulls would like to see 15-minute closes hold above that line currently at 1381, but particularly above stronger support now at 1377.55.

Longer-term bulls know what to do: keep following the upward movement by inching your stops higher, too. This is particularly true if the SPX should approach the top of that channel tomorrow or later in the week.

Although each rally has to end at some time, want-to-be bears still need confirmation before they attempt anything other than a scalping move. The chart remains bullish until we see more confirmation. Watch for a setup if the top of that channel is approached, but only if you're adept at judging such signals and can trust yourself to get out if the SPX breaks to the upside instead. If the SPX approaches 1390, 1400 is then going to be a strong lure.

The potential for a pullback within the Keltner channels exists. If the top of the chart isn't reached, and tomorrow we see the kind of reversal that's sometimes seen the day after an FOMC meeting concludes, you would want to have breadth indicators strongly on your side and would need to be aware of potentially strong support at the 10-sma if you even thought about a bearish play. I'm trading spreads these days and not directionally, but I wouldn't jump into a countertrend play after a trend this strong until there was confirmation, including a strong drop, a rise to retest the former support and a failure.

The Dow also pushed higher, but the early dip created a daily candle that isn't quite so bullish looking. Small-bodied candles with lower shadows after a sharp climb aren't particularly bullish, but don't jump to conclusions about the potential for a pullback with bullish fervor still in full force. Wait for real confirmation before you become one of those bears contributing to a short squeeze.

Annotated Daily Chart of the Dow:

Despite the Dow's new intraday and closing high, the Dow didn't look as strong as the SPX on the intraday charts. A lower Keltner line held it back all day, with that line at about 12,153 on 15-minute closes, and with next resistance at 12,160-12,170. First Keltner intraday support is at about 12,125 on 15-minute closes.

For those who saw last week's Keltner channel chart on the Dow, the Dow took the route of pushing Keltner resistance higher rather than falling back immediately as it did the last time it hit a Keltner channel hit last week. Keltner support on daily closes is now at about 12,089 and resistance, at about 12,146. The line now at 12,089 needs to be broken on a daily close before the breakout status is reversed. What's seen on a short-term intraday chart is likely to be overturned by what occurs overnight and tomorrow morning, however, particularly as it's so easy to maneuver the Dow.

Early gains in AMZN and other internet-related stocks, as well as in KLAC, Netflix (NFLX) and Adobe Systems (ADBE) helped the Nasdaq in early trading, with all the named stocks being Nasdaq components. The AMZN post-earnings gains were to be deemed overdone, and by the end of the day, AMZN had dropped well off its high of the day and back below its previous October high. It also dropped back to the top of that huge gap down from July.

Annotated Daily Chart of the Nasdaq:

The Nasdaq has not yet convincingly broken out of the consolidation pattern that it's forming. On an intraday basis, the Nasdaq behaved more like the Dow than the SPX, finding resistance all day at a lower Keltner line, one currently at about 2360 on 15-minute closes. Next intraday Keltner resistance at 2370, with support layered in about 2-3-point increments below the close, down to 2338.

Semiconductors provided some help to the Nasdaq today.

Annotated Daily Chart of the SOX:

First support and resistance are evident here, even without a look at the intraday charts. First resistance is just overhead, provided by historical resistance and that river of moving averages, all near 460. In its most bearish iteration, the SOX would turn down immediately or perhaps after pushing slightly higher, and would fall back below the 50-sma, or perhaps even the previous October low. If the SOX instead pushes above 460 and stays above it, it may be headed back up to the 200-sma or the September and October highs at 473.45 and 476.95. If the SOX does move higher, I would expect some consolidation in the 469-470 range, however.

The SOX needs to fall below the recent support at 444 to break down out of its most recent consolidation. Next historical support is near 433 and then at about 424.

The RUT attempted a breakout today, but couldn't quite confirm it. A break above last Wednesday's high would be needed to confirm it.

Annotated Daily Chart of the RUT:

The RUT's intraday Keltner chart suggest a possible upside target of 771.33 for the RUT, which would presume a retest of its October intraday high. The target was a tentative one, however, and a morning breakout attempt as measured by Keltner charts failed. This one could, too, with a fall back inside the channels, depending on overnight action. The RUT, unlike some other indices, did not achieve a new high of the day after the FOMC meeting. While it's consolidating in a potential bull flag formation, it's difficult to presume too much bearishness by the action with respect to intraday Keltner channels. However, I wondered if those investing in the interest-rate sensitive small caps weren't a little worried by the hawkish tenor in the FOMC statement and not so anxious to send these small caps higher. The RUT appeared to follow other indices higher rather than lead this afternoon.

That was true of the TRAN, too. It's impossible to put all the charts I'd like in this Wrap as it would be just too long, but the TRAN reached to a new recent high early in the day, climbing up out of its recent consolidation pattern. It couldn't hold onto all its gains, however, and fell back, leaving a relatively long upper shadow. It may be time for the TRAN to consolidate near the high (if the bullish tenor remains) or pull back.

Developments other than the FOMC statement included a press conference by President Bush and various economic reports. In his second press conference in the last two weeks, President Bush addressed matters related to the Iraqi war. His prepared words and all questions and answers with the exception of a few brief comments addressed the war and not economic-specific matters, however, and so the conference will not be covered on these pages. As the November elections near, all traders are of course aware that the outcome of the elections can ultimately impact the economy, but that was not the thrust of the press conference.

A bit later than usual, the Mortgage Bankers Association released its weekly mortgage application volume survey, with that number revealing that mortgage applications and mortgage rates both inched higher. The climb in mortgage application volume was by 0.5 percent, but only when seasonally adjusted and compared week-to-week. They have declined 13 percent year over year. Other components included refinancing applications, and those rose 1.8 percent. Purchase applications fell by 0.6 percent. Refinancing inched higher as a percentage of total applications, too. The average rate for a thirty-year, fixed-rate mortgage rose to 6.36 percent, up from the previous week's 6.33 percent.

Existing-home sales for September were also reported today. Industry analysts suggested that those sales would drop from 6.3 million to 6.23 million. Jim noted last night in his Wrap that a couple of homebuilders had reported yesterday. MDC gained and CTX, reporting after the close, lost ground in after-hours trading. MDC has noted a 48.5-percent cancellation rate. CTX reported a drop of 29 percent in new orders. Several companies in the business of profiting mortgages also have reported that they'll be trimming back their workforces.

None of that boded well for existing-home sales, and those sales did drop for the sixth straight month to a lower-than-expected level of 6.18 million units. This was the slowest sales rate in more than eighteen months, and all sections of the country except the South were hit. On an annual basis, the drop is the largest ever recorded. The median price of a single-family home also dropped. It fell 2.5 percent year-over-year, to $219,800.

Some analysts are proclaiming that the housing market might be in the process of bottoming. They can point to the second straight decrease in the inventory of unsold homes. That inventory still represents a 7.3-month supply if September's sales pace were maintained. As Jim reported last night, homebuilders have been rising on bad news, and that's what they did today, too, including MDC and CTX.

Expectations for crude inventories were that crude inventories would rise 2.5 million barrels, gasoline supplies would fall 1.5 million barrels, and distillates would decline by 1.2 million barrels. Refinery utilization was expected to rise. Instead, all components of the inventories numbers dropped. Crude inventories dropped by 3.3 million barrels; gasoline, 2.8 million barrels; and distillates, 1.4 million barrels. At this time of year, distillate supplies are most important. Refinery utilization also dropped, rather than rising as had been expected. American Petroleum Institute numbers proved different, with the API saying that crude supplies dropped 3.7 million barrels; gasoline, 2.3 million barrels and distillates, 588,000 barrels.

Early this morning, the prediction had been that supplies of distillates were smaller than expected and the refinery utilization rate lower than expected, crude would climb. It did and was last at $61.40.

The climb in crude costs knocked the wheels out from under the TRAN. The TRAN had been zooming in early trading, sent higher by the market reaction to Norfolk South (NSC), a TRAN component that reported better-than-expected earnings. By the end of the day, NSC had pulled back slightly off its high of the day, but had still posted an almost $5.00 gain from yesterday's close. Volume was unusually strong on this rise, indicating that some--those with enough money to move volume that way, unlike what the lowly retail trader can do--were selling into the rise. Until the overhead supply evaporates or else overwhelms buyers, NSC may need to consolidate.

Several other key companies reported this morning, some components of the Dow. While television commentators were still touting GM's better-than-expected earnings, the stock had already turned lower in pre-market bid/ask quotes. Futures had turned lower, too. GM reported a profit of $529 million and sales growth of 3.5 percent, driven higher by new SUV sales. GM has also cut its exposure to financially troubled Delphi Corp. It closed lower.

DaimlerChrysler (DCX) and Boeing (BA) also reported. In the case of DCX, the 37-percent drop in profit wasn't as big a drop as was expected, with the Mercedes unit being responsible for that better-than-expected unit. DCX ended up near yesterday's close, climbing off its day's low. BA raised expectations for 2006 and bettered EPS expectations, but missed revenue expectations. BA dropped heavily.

Altria (MO) reported a 0.03-percent profit and net income of $1.36 a share, or $1.39 excluding certain charges, and announced that it may divest itself of its majority stake in Kraft Foods Inc. The board will announce a decision on that matter in late January. The company noted that slowing international sales and higher restructuring costs had hit the profit, but it also announced an upgrade of earnings guidance for the full-year.
Both EPS figures appeared to be under expectations of a $1.41 a share, but the company guided analysts to expect 2006 full-year earnings to be $5.48-5.53, up from the previous guidance of $5.40-5.50. MO closed sharply higher, but at the top of a gap from last month.

During after hours, Symantec (SYMC) fell after the software company's sales disappointed. Applebee's (APPB) stock also fell after it reported earnings. However, Business Objects (BOBJ) rose after better-than-expected earnings. As this report was prepared, homebuilder Pulte Homes (PHM) had just reported that new home orders dropped 39 percent and closings had fallen 11 percent. The company reported Q3 earnings of $0.74 from continuing operations, with analysts reportedly expecting $0.75-0.85.

Several economic reports will be released tomorrow, but the biggest late-week release will be Friday's third-quarter GDP. Tomorrow brings in Jobless Claims and September's Durable Goods. After the prior 0.5-percent drop, expectations are for a 2.0-percent gain in the durable goods number. September's Help Wanted Index and New Home Sales will arrive at 10:00. Natural gas inventories follow at 10:30, and the Kansas Fed Survey for October comes last, at 11:00.

The important earnings report tomorrow will be Microsoft's (MSFT) and Exxon Mobil's (XOM). Others include AET, ACV, APA, AZN, BDK, BMY, COG, CELG, COHU, DVW, DNN, EMN, ELX, EXTR, FRNT, GNW, GSK, GR, JNS, LLL, LSCC, LEA, LIZ, MEDI, NTGR, NWL, NYX, OPWV, RTN, ROP, SEPR, SIVB, SNE, S, HOT, SU, SUNW, DOW, TUES, LCC, WRE, and WEN, among others.

What happens tomorrow? Tomorrow should be about positioning ahead of Microsoft's earnings after the bell and the GDP on Friday morning. That positioning will occur while markets roll along a river of earnings reports and while all keep an eye on those crude costs. Because the afternoon gains were pegged on the slight changes in the FOMC statement that addressed economic growth, that GDP number will assume even more importance. If Friday's number is hotter than expected, the emphasis will shift to the hawkish tenor and the equity rally might stumble, if a stumble is possible. If the GDP is way too cool, that's also an opportunity for a stumble because it undermines the Goldilocks scenario. It needs to be just right.

Based on that likely positioning, but also on the Dow's more tentative rise, the TRAN's strong pullback from its day's high, it's possible that the Dow at least might continue to consolidate, but if MSFT breaks out of its recent consolidation pattern, the Dow, the SPX and the OEX might run with it. If you're trading the SPX and OEX, too, I'd also keep a watch on the TRAN, since it often leads those indices as well as the Dow. Don't expect any of those indices to get too far if the TRAN is moving in an opposite direction.

I wouldn't be surprised to see the OEX or SPX also consolidate, but watch the TRAN and MSFT for clues. Keep a watch on the SOX, the Nasdaq, the RUT and bond yields, too. All are consolidating at important levels. None have broken out of recent consolidation patterns, and it's dangerous to presume the direction of those breakouts before they occur.

There's also sometimes a tendency for the post-FOMC reaction to be reversed the next day. The Dow, in particular, looks as if it needs further consolidation or that that it might be vulnerable to an actual pullback, but then that's what I said last week, too. The Dow did consolidate into the end of the week, but it then pushed forward, pushing Keltner resistance higher, too. Because I write Wraps on Wednesday and because a Wednesday movement is so often followed by a Thursday that's a consolidation day or a reversal day, I feel as if I'm always offering the same advice--consolidation or an actual pullback--but if I were writing on a different day each week, my advice might be different because the markets might present me with different evidence.
 


New Plays

New Option Plays

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

New Calls

NTL Inc. - NTLI - close: 26.95 chg: +1.05 stop: 25.99

Company Description:
ntl Incorporated is the UK's largest cable operator and a leading provider of broadband, digital television, telephony, content and communications services to homes, businesses and public sector organizations. From the consolidation of the cable industry to
the roll-out of broadband, ntl and Telewest have led the communications industry for over a decade, providing services to 5 million residential customers and reaching 85% of UK businesses. (source: company press release or website)

Why We Like It:
We hesitate to add another call candidate to the newsletter when the major averages are looking so overbought and due for a rest. However, the pattern in NTLI looks pretty bullish and today's very strong volume behind the rally suggests that the stock might be poised for a big breakout. We are suggesting a trigger to buy calls at $27.41, which is above the September 11th, 2006 high. This should be a breakout over resistance and clear the way for a run towards the $30.00 region. If triggered at $27.41 our target is the $29.90-30.00 range. We do not want to hold over the early November (8th?) earnings report.

Suggested Options:
We are suggesting the November or December calls. Our trigger to open positions is at $27.41.

BUY CALL NOV 25.00 NUD-KE open interest=1948 current ask $2.40
BUY CALL NOV 27.50 NUD-KY open interest=5264 current ask $0.90
BUY CALL NOV 30.00 NUD-KF open interest=1212 current ask $0.25

BUY CALL DEC 25.00 NUD-LE open interest=11490 current ask $2.70
BUY CALL DEC 27.50 NUD-LY open interest=10893 current ask $1.30
BUY CALL DEC 30.00 NUD-LF open interest= 6218 current ask $0.55

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/08/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

BP Prudhoe Bay - BPT - close: 74.00 chg: +0.90 stop: 72.45

Oil stocks continued to rally thanks to a strong 3% surge in crude oil futures. Crude oil was rising as investors reacted to an unexpected decline in the weekly inventory numbers and reports of new violence in Nigeria, one of the world's largest exporters of oil. Shares of BPT rallied 1.2% and is currently trading very close to technical resistance at its 50-dma and 200-dma. More aggressive traders may want to consider an early entry. We're waiting for a breakout over resistance at the $75.00 mark. 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

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Cerner Corp. - CERN - close: 46.86 chg: +0.10 stop: 46.45

It has been three trading days and CERN has failed to see any upward momentum on the October 20th bullish reversal/bullish engulfing candlestick pattern. We're going to wait one more day for CERN to show some strength or we're dropping it as a candidate. Right now we're waiting for a breakout through the top of its trading range and for a breakout over the $48.00 level. We're suggesting 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.

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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Frontier Oil - FTO - close: 30.12 change: +0.24 stop: 27.75

The strength in energy stocks helped lift shares of FTO through resistance at the $30.00 level. The rally did see some trouble with the simple 100-dma but overall the move today looks bullish as a breakout from its trading range. A breakout over $30.00 could be used 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: + 1.22
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Vimpel Comm. - VIP - close: 66.00 chg: +0.75 stop: 61.90*new*

VIP continues to rally and the stock set another new all-time high on Wednesday. Unfortunately, volume came in below average, which is normally a cautionary sign. We're not suggesting new positions at this time. Please note that we're adjusting the stop loss to $61.90. 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: + 3.83
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million
 

Put Updates

Alcon Inc. - ACL - close: 108.36 chg: -0.64 stop: 110.41

More aggressive traders may want to use today's failed rally under the $110 level in ACL as a new entry point to buy puts. The technicals definitely look bearish and the daily chart saw the MACD produce a new sell signal today. We are waiting for a new relative low. Our suggested trigger to buy puts is at $105.75. If triggered our target is the $100.10-100.00 level. We would consider this slightly more aggressive due to the wide stop loss we're suggesting.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 520 thousand

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Univ.Forest Prod. - UFPI - cls: 45.50 chg: -0.63 stop: 50.01

UFPI continues to trade lower on strong volume. The big volume on the declines is definitely a bearish signal. We are still suggesting new positions at current levels although more conservative traders may want to wait and see if shares bounce from the $45.00 level before considering new positions. We're aiming for a decline into the $41.00-40.00 range. We are using a wide stop loss until we see how shares react to the $45 level.

Picked on October 24 at $ 46.13
Change since picked: - 0.63
Earnings Date 10/16/06 (confirmed)
Average Daily Volume = 192 thousand
 

Strangle Updates

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

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Bear Stearns - BSC - cls: 153.39 chg: -0.41 stop: n/a

Shares of BSC tagged another new all-time high above the $155 level this morning. Yet the rally took a bit of a breather with a minor pull back in the stock by the closing bell. We wouldn't be surprised to see a dip back toward the $150 level soon. The technicals are showing a very overbought condition in the stock. We're not suggesting new strangle plays at this time (although another dip to the $150.00 level could be used as a new entry point). 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: + 3.20
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million

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ConocoPhillips - COP - close: 62.75 chg: +1.35 stop: n/a

COP reported earnings today and beat analysts estimates of $2.37 by 31 cents a share. The positive earnings news and the rise in crude oil thanks to the inventory report helped lift COP more than 2.1% on above average volume today. We're not suggesting new strangle positions at this time. 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: + 2.72
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million
 

Dropped Calls

Carpenter Tech. - CRS - cls: 119.09 chg: +3.90 stop: 109.99

Target achieved. CRS continued to rally on rising volume and shares closed near their highs for the session. This is pretty bullish for tomorrow but then CRS might see some "sell the news" reaction as traders react to the company's earnings report tomorrow morning. We were planning to exit today at the closing bell but CRS hit our target in the $118.00-120.00 range first.

Picked on October 11 at $110.51
Change since picked: + 8.58
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 754 thousand

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Devon Energy - DVN - close: 69.35 chg: +0.35 stop: 64.72

Target achieved/surpassed. The lower than expected oil inventory numbers produced a 3% surge in crude oil and that was felt in the energy stocks. Shares of DVN closed up 0.5% but managed to trade to $70.09 on an intraday basis. Our target was the $69.50-70.00 range.

Picked on October 15 at $ 64.72
Change since picked: + 4.63
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 5.6 million

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EOG Resources - EOG - close: 70.34 chg: +1.41 stop: 66.05

Target achieved/surpassed. EOG is another oil stock that benefited from the rise in crude oil futures. The stock broke out higher past resistance at the 200-dma and the $70.00 mark. Our target was the $69.50-70.00 range.

Picked on October 16 at $ 66.05
Change since picked: + 4.29
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 3.6 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Projecting Potential Price Targets in a Runaway Move

I've gotten some mails on how I might project some kind of 'ultimate' or next price objectives or 'resistances' for this runaway bull market we're in, at least in the Dow and S&P stocks. You can tell that the public is not into this market yet in a major way by the fact that the institutional big-cap favorites are the ones seemingly going to the moon. Well, we can't say that there's no 'public' money in this market, it's just that most of it is in the hands of professional fund managers, who are steering a lot of mutual funds invested via 401k.

There are basically just two circumstances in a market move:
1. The Stock Index being looked at is in new all-time high ground like the Dow 30 Industrials (INDU), finally matching the Dow Transports (TRAN).
2. The Stock Index is still RETRACING some part of a prior move; in our current situation, a percentage of the prior decline.

For coming up with some next price targets or objectives for situation #1, a market in new high ground, potential ways to calculate further objectives or (potential) 'resistance' include:

1. Drawing or projecting the top end of a bullish uptrend (price) channel.
2. Projecting a "pivot point" and subsequent potential resistance based on a 'mechanical' formula involving a previous price range such the prior week or month. In my last Trader's Corner, which was TWO weeks ago, I described John Person's pivot point (PP) method of projecting 2 levels of resistance and 2 levels of support above and below the PP.

More on this method shortly; my prior (10/11/06) article can be found by going back to your Wednesday 10/11 Option Investor daily market letter or view it online by clicking here.

3. The number three price target method for a move in new high ground: fibonacci targets. This is the least precise in my experience but is worth describing. Very often the second move in a 'typical' 3-part advance will equal a fibonacci 1.618 times the numerical value of the first move or leg. The first advance in INDU was from the Oct. '02 low at 7197.5 up to a high of 10,753 in Feb. '04; this equaled 3,555.5 points. The next up leg started from 9,708.4 in late-Oct.'04. 1.618 X 3,555.5 = 5,752.8; this figure added to the low of the second up leg gives us a next projected target (for the second up 'leg') in INDU of 15,461.2.

Going back to methods # 1 and #2 for the Dow, which is the major stock index in new high ground, what can we project?

#1: UPPER END OF THE DOW'S WEEKLY PROJECTED UPTREND CHANNEL(S):
Opps! On a weekly chart basis seen below, the action over last week and this week has created an upside penetration of the lowest projected upper line of INDU's uptrend channel. That (projected) upper line is a line parallel to the lower trendline and touching the highest high(s) showing. The lower line is drawn though at least 2-3 lows.

Potential resistance implied by the next higher trend channel line intersects around 12,235. An upside penetration of 12,235 especially on a weekly closing basis would suggest a next potential for INDU up to the 12,720 area in the coming period IF I construct the final highest channel line by using a trendline touching the highs of a still-earlier period near the start of 2004.

#2: PROJECTING A "PIVOT POINT" AND SUBSEQUENT POTENTIAL RESISTANCE POINTS:

A Commodity (Futures) Trading Advisor (CTA) named John Person has a particular method of determining pivot points in stocks and indexes. His method/formula for determining 2 support and 2 resistance levels for the coming day, week or month is as follows:

To find the pivot point number used to determine current support/resistance levels based on the Daily, Weekly or Monthly HLC (High, Low and Close), the following formula is used:

Pivot Point (PP) = [High (H) + Low (L) + Close (C) divided by (/) 3]
The first resistance level (R1) = (PP X 2) - L
The second resistance level (R2) = PP + H L

The first support level (S1) = (PP X 2) - H
The second support level (S2) = PP - H + L

The results of using LAST week's High, Low and Close figures for THIS week's Pivot Point (PP) and this week's R1 & R2 resistance points for the Dow are shown on the next chart, although only the second resistance (R2) is shown as Resistance point 1, at 12,072, has already been surpassed:

With the S&P 100 and the Nasdaq 100 Indexes, we can execute the Fibonacci RETRACEMENTS of their prior declines, both as potential next targets and as potential major resistance points, as neither index is in new high ground. I employ a favored method, that of retracements of a prior move (a decline in this case), which is Index situation number 2 that I begin discussing above. Unlike the Dow, OEX and NDX are NOT in new high ground:

The most common retracements used are the fibonacci levels of .38, .5 and .612 or 38, 50 and 62 percent. Sometimes I measure a 25% retracement and very commonly a 66% retracement, which is more of an influence of WD Gann's work of many years back.

If a return move pierces the 25% retracement level in a stock or Index, assume it will carry to at least a 38% retracement. In turn, moving higher than a 38% retracement, assume that the stock or Index can retrace at least a half/50% retracement. Above 50%, I start to look for a 62 to 66 percent retracement. Above a 2/3rds retracement (66%), I start looking for a 100% retracement or a move back to the prior high in the case of an upside retracement of a prior decline, which is the situation in the current market.

Looking at the S&P 100 Index (OEX) Monthly chart next, the upside targets and potential intermediate to major resistance points are at 670, then 690. A weekly and monthly close above 690 would suggest an eventual potential for a move to 850 or a re-test of the prior all-time high, which is not my current expectation but should be considered in the retracement method and this way of looking at further rally potential (assuming there was an eventual decisive upside penetration of 690 in OEX).

By the way, the method I described earlier of projecting an upper trend channel line, gives the look of potential near resistance in the S&P 500 (SPX) as follows in the next chart; at the red down arrow:

But I digress! I was going to look next, and lastly, at the Fibonacci retracement situation for the Nasdaq 100 (NDX) and talk about a 'tale of two cities'!: the big cap NDX, heavily tech stock oriented index is really lagging its opposite number in the S&P. Perhaps those PE's in 1999/2000 were a TAD bit high!

NDX is only just now approaching a 25% retracement of its prior decline, at least one based on the arithmetic scale (not the semi-logarithmic scale, measuring equal percentage moves). We can assume that the 1800 level in NDX may offer resistance. I anticipate that this level if reached will bring in increased selling.

At 1800, the consideration of NDX having retraced a quarter of the prior decline, PLUS the resistance implied by the previously broken up trendline, or the 'kiss of death' trendline (a name that I has a certain ring to it), suggests where we may see a next top or the start of at least a tradable pullback/downswing. Since NDX is just starting to hit this resistance trendline and we see a divergence shaping up this week as Nasdaq struggles to eke out further gains, perhaps 1800 won't be quite reached. Stay tuned on that!

Chances of getting above 1800 and then taking as a next eventual NDX target a move equaling a 38 percent retracement; i.e., to 2333? It could happen if tech sprouts wings. Could happen but right now not enough Nasdaq stocks seem completely on fire for that. This idle speculation aside, watch the 1800 area, if reached, as a significant milestone level.


GOOD TRADING SUCCESS!

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

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