Option Investor

Daily Newsletter, Monday, 10/30/2006

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Table of Contents

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

Market Wrap

Technology and Small Caps Rally as Energy Prices Plunge

The major averages finished mixed to higher, but plunging energy prices had technology and small caps notably higher by the close with advancing issues outnumbering decliners by a slim margin at both the big board and NASDAQ.

As has been the pattern in recent weeks, a dip at the open to start the week found support from buyers, while fears of building inventories among refined products had heating oil and unleaded gasoline futures pulling crude oil lower.

December Crude Oil (cl06z) settled down $2.39, or -3.93% at $58.36, while December Heating Oil (ho06z) was torched for a 4.52% decline, settling down $0.0785 at $1.66. December Unleaded futures (hu06z) settled at a new contract low, falling just more than 9 cents, or -6.17% to $1.4619.


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The Dow Industrials (INDU) 12,086.50 -0.03% finished well off its session lows of 12,050 where gains in International Business Machines (NYSE:IBM) $91.50 +0.81% and Boeing (NYSE:BA) $80.22 +0.60% helped offset weakness in Wal-Mart (NYSE:WMT) $49.53 -2.36% and Verizon (NYSE:VZ) $37.65 -3.06%.

Shares of the world's largest retailer Wal-Mart (WMT) traded weak after the company said October same store sales rose a modest 0.5%. Results showed the company's recent strategy to boost sales by catering to more upscale shoppers, paring its inventory and remodeling its stores, was not gaining as much traction as had been planned.

Verizon's (VZ) shares fell as low as $37.07 after the telecom services giant reported quarterly net income of $1.92 billion, or $0.66 per share, which included a $0.02/share charge in pension and merger costs. Revenues jumped 26% year-over-year to $23.25 billion. The company said its Verizon Wireless business added 1.9 million net customers, bringing total subscribership to 56.7 million. However, the company said it added just 448,000 net high-speed Internet connections, which include digital subscriber lines (DSL) and the more advanced fiber-optic lines, known as FiOS. The numbers for those higher margin services were lower than some analysts forecast for net additions of approximately 500,000.

Closing U.S. Market Watch - 10/30/06

Adding to some of this morning's mixed-to-lower trade for the major indices was a 0.2% increase in September's month-over-month core Personal Consumption Expenditures (PCE) price index (excludes food and energy), which is a key measure the FOMC policymakers keep close tabs on, but cooler heads prevailed when that volatile month-to-month measure of inflation was viewed in the context of a 0.3% decline in the all-encompassing PCE price index. Economists were expecting the core rate to rise 0.2%.

Personal spending rose just 0.1% and was slightly below economists' forecast for a 0.2% increase.

December Gold futures (gc06z) settled up $6.40, or +1.06% after jumping to $613.20 intra-day.

Treasury yields were little moved during today's session with the benchmark 10-year yield ($TNX.X) finishing unchanged.

Traders and investors were not inundated with merger/acquisition news, but shares of NASDAQ-100 component American Power Conversion (NASDAQ:APCC) $30.02 +26.34% surged and were today's most actively traded after the company said it would agree to be acquired for about $6.1 billion in cash by French electric-equipment maker Schneider Electric. The offer values APCC's shares at $31.00.

American Power Conversion's competitors include ABB (NYSE:ABB) $14.97 -0.26%, Emerson Electric (NYSE:EMR) $84.22 +0.07%, General Electric (NYSE:GE) $35.20 -0.02%, Hitachi (NYSE:HIT) $59.00 +0.13% and SL Industries (AMEX:SLI) $18.89 +1.50%.

NYSE Composite ($NYA) - 20-point box chart

Over the past week, the very broad NYSE Composite ($NYA.X) is up a fractional 0.34%, with near-term supply (O) outstripping demand (X). Bullish leadership as measured by new highs versus new lows (see table at top) remains very bullish, but resting from some very strong, yet overbought readings last week when on Thursday, 390 NYSE-listed stocks traded a new 52-week high versus just 8 components having traded a new 52-week low.

The first sign that SUPPLY (O) would be outstripping demand (X) on a more meaningful basis would currently come with a trade at 8,600.

NASDAQ Composite ($COMPQ) - 10-point box chart

On Thursday of last week, the also very broad NASDAQ Composite traded and closed at a 52-week/multi-year high of 2,379.29 as four and five-lettered stock symbols continue to show demand (X) outstripping supply (O). In mid-September as all of the point and figure bullish % indicators began signaling buyers were gaining control over sellers, this very broad market has given four additional buy signals. The first sign that supply (O) would be outstripping demand (X) would be a trade at 2,320.

Russell 2000 Index ($RUT) - 5-point box

Continued weakness in the energy complex has really brought buyers into the small caps in recent weeks as bulls and short-covering bears drive prices higher. While it would currently take a trade at 785 to have the $RUT making a meaningful-looking new all-time high, the $RUT is up 21.25% over the past 52-weeks, easily outperforming its next closest rival and the NYSE Composite's 18.95% 52-week advance.

The first sign of any near-term weakness for the $RUT would be a 3-box reversal to 760. It would currently take a trade at 710 to have this market giving a "sell signal" (column of O below a prior column of O).

For the broad S&P 500 Index ($SPX) and the conventional 10-point point and figure chart shown in last Monday's Market Wrap, we did see further demand (X) build to 1,380.

As of tonight's close, Dorsey/Wright & Associates' S&P 500 Bullish % (BPSPX) now shows 73.44%, or 367 of the 500 components, having a point and figure "buy signal" associated with their supply/demand chart. Compared to last Monday's closing measure of 70.77%, this represents an additional net gain of (73.44 - 70.77 = +2.67%) 13 stocks to reversing higher point and figure buy signals.

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

Cerner Corp. - CERN - close: 48.21 chg: +0.55 stop: 46.45

Tech stocks out performed the broader market on Monday. Shares of CERN managed to out do both the NASDAQ Composite and the NWX networking index. Today's breakout over resistance at $48.00 is also a bullish breakout through the top of its two-month trading range. The target on the P&F chart has risen from $76 to $79. We have been suggesting a trigger to buy calls at $48.05 so the play is now open. 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.

Picked on October 30 at $ 48.05
Change since picked: + 0.16
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand


Frontier Oil - FTO - close: 29.40 change: -0.45 stop: 27.99

The situation with FTO is not looking very good. Shares spent most of last week failing to breakout past the $30.50 level. Today the stock lost 1.5% thanks to a sharp decline in crude oil futures. The weakness today did stall at its 50-dma but it could be temporary. The technical indicators are starting to turn bearish. Over the weekend we suggested that more conservative traders may want to exit early. If you don't want to exit early then consider tightening your stop loss toward $28.50 or under today's low near $29.00. We're not suggesting new positions and if FTO closes under $29.00 we will probably exit early anyway! Our short-term target is the $32.50-33.00 range. It's short-term because we want to exit ahead of FTO's November 7th earnings report.

Picked on October 15 at $ 28.90
Change since picked: + 0.50
Earnings Date 11/07/06 (confirmed)
Average Daily Volume = 3.2 million


NTL Inc. - NTLI - close: 27.07 chg: -0.16 stop: 25.99

NTLI spiked to a new relative high at $28.48 this morning but the strength was fleeting and shares spent most of the session consolidating sideways near the $27 level. Today's session looks like a failed rally and traders should turn more cautious here. Our target is the $29.90-30.00 range. We do not want to hold over the early November (8th?) earnings report.

Picked on October 26 at $ 27.41
Change since picked: - 0.34
Earnings Date 11/08/06 (unconfirmed)
Average Daily Volume = 2.4 million


Vimpel Comm. - VIP - close: 64.97 chg: -0.10 stop: 61.90

We cautioned readers over the weekend to look for a dip toward the 10-dma or the $64.00 level. Share of VIP dipped to $63.80 this morning before traders bought the dip. The bounce today looks like a new entry point but if you're opening new positions here you may want to use a tighter stop loss. Our target is the $67.50-70.00 range. We plan to exit ahead of the mid-November earnings report. FYI: We are seeing a bearish divergence between the price action and the RSI on VIP's daily chart.

Picked on October 12 at $ 62.17
Change since picked: + 2.80
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million

Put Updates

Alcon Inc. - ACL - close: 106.87 chg: -0.47 stop: 110.41

ACL continues to sink lower although the pace of the decline is slowing. The stock is nearing potential support near the October low. We are suggesting a trigger to open plays at $105.75, which is under the October 24th low. If triggered our target is the $100.10-100.00 level. We would consider this play slightly more aggressive due to the wide stop loss we're suggesting. Keep an eye on the DRG drug index. The DRG spent about six days failing to breakout past the 363 level and now the sector index is falling sharply. Short-term technicals have turned negative for the group but the overall bullish up trend is still intact (for now).

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


Advanced Micro Dev. - AMD - cls: 21.32 chg: +0.46 stop: 22.05

An upgrade for KLAC sparked a rebound in the semiconductor sector. The SOX added 1.1% while shares of AMD out performed its peers with a 2.2% bounce. Yet in spite of today's strength in AMD the stock failed to breakout past its descending 10-dma. Traders could use a new decline under $21.00 as a new entry point to buy puts. More conservative traders may want to wait for a decline under round-number support at $20.00 before initiating positions. We're still expecting some market weakness in early November since tomorrow is year-end for many mutual funds. Our target is the $17.50-17.00 range.

Picked on October 29 at $ 20.86
Change since picked: + 0.46
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 23.0 million


Amazon.com - AMZN - close: 38.15 chg: -0.09 stop: 40.25

The rally in AMZN has paused. The stock has traded sideways in the $37.50-38.50 range for the last three sessions. We suspect that AMZN will fill the gap from last week and we're suggesting an aggressive put play to capture that move. The $39.00 level is resistance but we're giving AMZN room to maneuver with a stop loss above round-number resistance at $40.00. More patient traders may want to try and time an entry on another failed rally near $39 or if the rally continues then near $40. Our target is the $35.00-34.00 range.

Picked on October 29 at $ 38.24
Change since picked: - 0.09
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 7.9 million


PACCAR Inc. - PCAR - cls: 59.50 chg: +0.08 stop: 62.51

The trading in PCAR on Monday produced a failed rally at the $60.00 level. We see this as another entry point to buy puts. Our target is the rising 100-dma but we're going to use an official exit in the $56.00-55.50 range (for now). We are using a wide stop loss but more conservative traders may want to try and keep theirs near $61.00 to reduce their risk.

Picked on October 29 at $ 59.42
Change since picked: + 0.08
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 1.4 million


Pantry Inc. - PTRY - close: 54.02 change: -0.03 stop: 57.05

PTRY traded sideways in a relatively narrow range as the stock tested technical support at its 50-dma on Monday. We're suggesting put positions now with PTRY under $55.00 but more conservative traders may want to wait for a decline under $52.50 before opening new put plays. Conservative traders may also want to consider a tighter stop (maybe near $56.00). Our target is the $48.00-47.00 range. We do not want to hold over the November 16th earnings report. We would consider this an aggressive entry point above $52.50.

Picked on October 29 at $ 54.05
Change since picked: - 0.03
Earnings Date 11/16/06 (confirmed)
Average Daily Volume = 383 thousand


Univ.Forest Prod. - UFPI - cls: 45.70 chg: +0.44 stop: 50.01

UFPI is still trying to bounce from the $45.00 level. Shares hit a new relative low this morning at $44.94, which probably hit some stop losses but the stock quickly reversed higher albeit on below average volume. We would expect a rebound toward the 10-dma and potentially toward the $48.00 region. Wait for a failed rally or a new relative low before opening new plays. More conservative traders may want to tighten their stop loss and reduce their risk. We're aiming for a decline into the $41.00-40.00 range. Our wide stop loss makes this a more aggressive play.

Picked on October 24 at $ 46.13
Change since picked: - 0.43
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.)


Bear Stearns - BSC - cls: 152.48 chg: +3.27 stop: n/a

We are getting plenty of opportunities to open strangle plays at the $150.00 level. Shares of BSC reversed again and the 2.19% gain today eliminated a lot of Friday's losses. Overall the technical indicators still look bearish but it will be interesting to see if BSC can produce any sort of follow through on this move or is it just end of month window dressing. For a large number of mutual funds their year end is October 31st. Our suggested entry range to open strangles is the $149.00-151.00 range. 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: + 2.29
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million


Cephalon - CEPH - close: 70.44 change: +1.09 stop: n/a

Today's bounce in CEPH gave us a better entry point to open strangles at the $70.00 mark. If you missed the $70.00 mark CEPH still offered entry points with its sideways trading between $70.15 and $70.60 for the second half of the session. We are suggesting strangle entries in the $69.00-71.00 range with preferred entries near $70.00. We do not want to open plays after the November 2nd earnings report. The options in our strangle are the December $75 call (CQE-LO) and the December $65 put (CQE-XM). Our estimated cost was $3.45. We plan to see if either option rises to $4.90 or more.

Picked on October 29 at $ 69.35
Change since picked: + 1.09
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.0 million


ConocoPhillips - COP - close: 59.80 chg: -1.39 stop: n/a

Oil stocks were sliding lower after a sharp decline in crude oil futures today. Shares of COP lost 2.2% on above average volume. The close under its 50-dma and the $60.00 level is bearish. We're not suggesting new positions at this time and we only have three weeks left before November strikes expire. 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: - 0.23
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million


Blue Nile - NILE - cls: 39.10 chg: +0.18 stop: n/a

Shares of NILE spent the session trading sideways as investors waited for the company's earnings report that was due out after the closing bell tonight. NILE reported earnings that were a penny better than estimates and revenues came in above analysts' expectations. Guidance appeared to be bullish but shares of NILE were trading lower, near $36, after hours. Now that the earnings news is out we are no longer suggesting new positions. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).

Picked on October 29 at $ 38.92
Change since picked: + 0.18
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand


Whole Foods - WFMI - close: 64.90 change: +0.15 stop: n/a

WFMI experienced some volatility this morning. Shares gapped open lower and traded to $63.10 thanks to an analyst downgrade before the opening bell. Fortunately for us the stock rallied back toward the $65.00 level and continued to oscillate back and forth across the $65 mark offering us entry points to open new strangle positions. Our preferred entry point to open strangles is at $65.00 but we're suggesting a $64.00-66.00 entry range. The company's earnings report is coming up on November 2nd and we're planning to hold over the announcement. Our estimated cost is $3.15 and we're planning to sell if either side of our strangle hits $5.40 or more. The options in our suggested strangle are the December $70 call (FMQ-LN) and the December $60 put (FMQ-XL).

Picked on October 29 at $ 64.75
Change since picked: + 0.15
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.1 million

Dropped Calls

BP Prudhoe Bay - BPT - close: 71.59 chg: -2.50 stop: 72.45

Oil stocks were punished on Monday thanks a sharp decline in crude oil futures. This weighed heavily on BPT and shares lost 3.3% and fell back under its 50-dma. We had been waiting for a breakout over resistance at $75.00 but we're dropping BPT as a bullish candidate given today's weakness. It was our suggested strategy to buy calls at $75.05 but BPT never hit our trigger.

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

Dropped Puts

StanCorp. - SFG - close: 46.27 change: +0.72 stop: 46.01

The bullish reversal in SFG continued into Monday. The stock broke out over resistance at $46.00 on strong volume. There has not been any specific news to account for the turnaround and aggressive traders may want to keep an eye on the stock for a potential bullish entry point. Today's high was near its six-month trendline of resistance. We have been waiting for a breakdown under support near $44.00. SFG has not hit our trigger to open plays at $43.89 so we're dropping it as a candidate.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 267 thousand

Dropped Strangles



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