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Daily Newsletter, Wednesday, 11/01/2006

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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

ISM Disappointment Collapses ADP Balloon

During the pre-market session today, a strong ADP number suggested that Friday's nonfarm payrolls number might be better than had been feared. Buoyed by that hope as well as by merger-and-acquisition activity and easing crude costs, futures jumped.

So did equities during the first few minutes of trading. October's ISM arrived a mere thirty minutes later, however, collapsing all that enthusiasm. Instead of climbing by the anticipated amount, the ISM manufacturing number slipped closer to the expansion versus contraction benchmark level. After that, any attempt to bounce was met with selling, and the day turned sour for equity bulls.

The selling was evident on the SPX's chart.

Annotated Daily Chart of the SPX:

That potential support on which the SPX ended the day was mentioned last week, too. Although it might be difficult to spot on this chart, the SPX did show a small end-of-day bounce after piercing or testing the long-term rising trendline shown here. The bounce was minimal, but did at least show that some were attempting to buy the support: some brave souls, that is, after a long day of selling. Although not shown on this chart, the 1367-1368 level is also an important Fibonacci level taken off the SPX's bear market decline off the 2000 high.

On a short-term and intraday basis, the SPX ended the day bouncing off potential intraday support near 1366-1367. The potential for a bounce exists, but until and unless the SPX closes a 15-minute period above a Keltner line currently at 1368, it's in a downtrend on the intraday chart and it also hasn't broken free of the potential long-term support/resistance at 1367-1368. If it can't break free and climb off this level, a decline to the bottom of the rising price channel off the July low and the 30-sma appear more likely.

Annotated Daily Chart of the Dow:

The Dow close below the 10-sma suggests that a trip to the bottom of its rising channel is next, but Dow 12,000 may likely be staunchly defended, at least ahead of Friday's nonfarm payrolls.

On an intraday Keltner basis, the Dow did not weaken as much as did the SPX, but that's easy to explain given the narrower breadth of the Dow and the psychological power of the 12,000 level. If the Dow should continue its small end-of-day bounce, watch for potential resistance at the 10-sma.

During the pre-market session, Bear Stearns and Kaufman Brothers both lowered ratings on Plantronics Inc. (PLT), citing valuations and concern about market potential for the next year. Although not a Nasdaq component, of course, this downgrade helped depress the tech sector. PLT was to end lower by 9.14 percent. Fortunately for bulls, the Nasdaq's drop wasn't that steep, but the Nasdaq did drop 1.37 percent.

Annotated Daily Chart of the Nasdaq:

The Nasdaq looks as if it might dip a little further, but do expect at least an attempt at a bounce if the bottom of the channel is approached, and be prepared for the possibility that it could occur a little ahead of the bottom of the channel, perhaps at about 2324-2325. Don't be too convinced that the bounce attempt will get too far this time, however. This drop through the channel has been harder and faster than a leisurely corrective pullback should be, and some bulls might be weakened.

The Nasdaq has broken down below short-term Keltner intraday support. This suggests that the short-term move has been overdone, but that the downside momentum is strong. Eventually, the Nasdaq will rise to retest that breakdown level, now at about 2338.50-2339.60 (but dynamic), but the timing of that rise or the result of the retest isn't predicted. The resistance could keep repelling prices, pushing them lower again. The rise could occur early in the day or not until trading is well underway.

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If in short-term bearish positions, be aware of the possibility of a bounce attempt if the bottom-of-the-channel support should be more closely approached. Because it's possible that a bounce attempt wouldn't get very far ahead of Friday's nonfarm payrolls, be cautious about buying that dip, however. It's possible that shorts could cover in any bounce, propelling it higher than I anticipate, of course, but I think I'd take the chance of missing a move and stand aside from buying a bounce attempt tomorrow.

The SOX dropped, too, closing again below the 72- and 200-ema's and the 200-sma, but it didn't break down out of the weeks-long consolidation pattern. It needs to close beneath about 443.81 to do that.

Annotated Daily Chart of the SOX:

The SOX ended at intraday Keltner support at about 448. It was rising into potential resistance at 450.25-450.91. Until and unless the SOX closes a 15-minute period above that resistance, it remains in a short-term downtrend. If you don't have Keltner channels, substitute the 15-minute 10-ema.

The Russell 2000 did break through consolidation-pattern support.

Annotated Daily Chart of the RUT:

The Russell 2000 not only tested a former resistance line: it fell through it. The RUT sometimes overruns targets, so it may be that happened in this case, too, but it definitely fell out of its consolidation-pattern support and below the Fib level at 757.31, shown above. That suggests that, in the event of a bounce attempt, that Fib level may be now be resistance. Further resistance should be expected just above 760 and then at the 10-sma, where market participants should watch for a rollover if that level is tested.

The RUT also broke through Keltner support on the intraday chart, dropping through its channels. Until and unless the RUT closes a 15-minute period above a Keltner line now at 754.82, it's still in a short-term downtrend, and until it breaks above about 757.60-758.25, it's still in a breakdown status on a short-term basis.

If the RUT does continue dropping, expect a bounce attempt at 745-746, if not earlier. Stronger support will be found near the converging (pink) 50-sma and 72-ema's. If the 30-sma support does not hold on daily closes, that test of the 50-sma may be in the works.

A number of economic releases and stock-related developments contributed to the market's weakness. After reporting a rise in mortgage applications last week, the latest weekly survey by the Mortgage Bankers Association revealed another decline. The survey's reported 1.8-percent week-over-week decline brings mortgage applications down by 11.2 percent year-over-year and to the lowest level in almost three years. Components of the number also fell, including applications to refinance a current loan. Those applications dropped a hefty 4.5 percent despite a drop in the rate for 30-year, fixed rate loans to 6.24 percent from the previous week's 6.36 percent. Marketwatch.com reports that refinancing loan volumes have dropped 42 percent from their highs just last year. The spread between a fixed-rate loan and a one-year ARM narrowed, which gives home buyers little incentive to choose a riskier ARM.

September's pending home sales were also reported at 13.6 percent below their year-ago level, falling 1.1 percent in September. Residential construction spending dropped for the sixth month in a row, falling by 1.1 percent. These numbers proved far from cheering for the homebuilders in particular or the markets in general.

Another early morning release gave futures a boost in the pre-market session, however, although it wasn't destined to last long. The Automatic Data Processing Inc. (ADP) employment number provides market watchers with a preview of what the jobs data will show, since the ADP's survey is taken during the same period as that jobs data and reputedly employs methods that echo those used in calculating the jobs data, other than that the ADP data does not include government jobs. The ADP report showed a higher-than-expected 128,000 private-sector jobs added in October. With an estimate of the government jobs added to the ADP's number, that predicts a nonfarm payrolls number of about 140,000 on Friday, above the until-then expected 121,000-135,000 jobs and above the recent average of about 95,000 jobs. That calmed fears of a serious disappointment on Friday, although the ADP was spectacularly wrong about five months ago. In June, the ADP seriously overestimated the jobs number.

The October ISM and crude inventories were still to come, however, and the ISM was to change the character of the trading day. The ISM had been expected to rise to 53.0-54.0 from the previous 52.9, although OIN's Jim Brown didn't expect it to rise. He posed the possibility this weekend and last night that recent economic releases indicated that the ISM could weaken. It most certainly did. The ISM weakened to 51.2, sinking dangerously close to the expansion versus contraction benchmark at 50.0.

Not all the news was bad, depending on your outlook. Components showed that the prices index dropped to 47.0 from September's 61.0 and the employment index inched to 50.8 from September's 49.4. However, the new orders component dropped to 52.1 from September's 54.2, the production index dropped to 51.9 from September's 56.1 and inventories climbed to 49.4 from September's 46.4. As Jim mentioned last night in his Wrap, growing inventories in a weakening economy is not a good combination. While the decline in prices was good news for those most concerned about inflation, no one would consider slowing manufacturing growth of this magnitude to be good news. This was the worst decline in more than three years.

Stock-market investors agreed. They sent equities lower and bonds higher. This was the best of both worlds for bonds, with the drastically lower prices component removing immediate fears of inflation and raised rates, driving yields lower, and with bonds being considered a safer investment if the economy is going to contract more than the gentle softening that's wanted. Soon after the ISM release, the February fed funds futures had predicted a 20 percent chance of a rate cut in late January, up from last week's 12-percent chance.

The equities that reacted negatively to the ISM included those stocks that make up the Dow Jones Transportation Index, the TRAN, but they were soon to be momentarily rescued by another release, the crude inventories. According to the Department of Energy, crude inventories rose 2.0 million barrels, gasoline inventories dropped 2.8 million barrels, and distillates dropped 2.7 million barrels. Inventory was added to the SPR. The American Petroleum Institute (API) figures showed crude supplies rising 3.5 million barrels, gasoline inventories dropping 3.2 million barrels and distillate inventories falling 745,000 barrels.

Although the draw downs in gasoline and distillate inventories were larger than anticipated, utilization of refinery operable capacity climbed, and the report was ultimately considered bearish for crude costs. They dropped, allowing the TRAN, sensitive both to both any economic softening and any rise in crude costs, to attempt a post-ISM bounce. That bounce wasn't to last long, however, as perhaps might be expected when we saw the TRAN climbing as crude costs did but while economic prospects were also increasing. The TRAN might react intraday to crude costs but this index is probably more sensitive to economic health. In addition, the drop in crude prices wasn't to last. The TRAN ultimately dropped below 4700, finding end-of-day support at near the 61.8 percent retracement of the decline off the May high into the August low, with that Fib level at about 4675, and with the TRAN ending the day at 4674.75.

Our FOMC Chairman Bernanke also spoke today, but his talk was not considered market moving. He did warn that consumers should be vigilant when weighing various options related to mortgage and investment products. He cited research that shows that "awareness could be improved," especially among those with low incomes or educational levels.

Some earnings reports did impact specific stocks and sometimes sectors. For example, better-than-expected earnings reports from Newmont Mining (NEM) and Marsh & McLennan (MMC) were credited by some with supporting their respective sectors. NEM was to end the day well off its high of the day, but did close positive.

Others did not provide support. McKesson (MCK) reported earnings this morning, beating expectations. The company also raised its EPS guidance for the full-year 2007. While this report was initially greeted by investors buying the MCK's stock, prices soon reversed into negative territory and the stock closed below $50.00, at $48.99.

In the same sector, merger talk interested some market participants this morning and helped boost enthusiasm for equities in the pre-market and early cash market periods, but may have taken some of the wind out of MCK's sails. Drugstore chain CVS confirmed that it was in talks to merge with Caremark Rx. Caremark manages pharmacy benefits, selling drugs through networks of pharmacies to direct mail to benefit-plan participants. This may be a move to counteract the negative impact of Wal-Mart Stores (WMT) to sell generic drugs for $4.00. After the close, CVS reported earnings of $0.33 a share, up from the previous year's $0.30, on sales of $11.21 billion. Analysts had anticipated $0.32 a share and sales of $11.24 billion. Same-store sales rose 9.1 percent for the three months ending September 30, with total pharmacy sales comprising 70.3 percent of the revenue.

Cigna (CI) also beat expectations and raised its EPS forecast for the full year.

Time Warner Inc.'s (TWX) earnings resulted in some investors losing interest in the company's stock during the pre-market session as its adjusted earnings missed expectations. The stock was to close well above its low of the day, but still in negative territory, below its 10-sma.

The company reported net income of $0.57 a share, up from the year-ago Q3 earnings of $0.18. Continuing operations produced earnings of $0.34 a share. On an adjusted basis, however, earnings from continuing operations were $0.19 a share, with revenue of $10.91 billion. Analysts reportedly expected $0.20 a share on revenue of $11.07 billion. The company projected that it would see a growth rate in the low double-digits for operating income before depreciation and amortization on an adjusted basis for 2006 and would convert 35-45 percent of that income for 2006 into free cash flow. Time Warner Cable created revenue growth of 44 percent while AOL's revenue fell three percent.

In other stock- and industry-related developments, Apple Computers announced that it was launching iTunes Latino. This will consist of a zone within the US iTunes Store that focuses on Latin television shows and podcasts, audiobooks, music and music videos.

In the afternoon, auto companies began releasing October sales figures. GM beat expectations, reporting a 17-percent increase in sales for October when compared to year-ago levels, as reported in an AP article. Toyota announced a 9.2-percent increase, and Ford, an 8-percent increase. Ford still sold more cars than Toyota, though, with the comparison at 214,806 vehicles versus Toyota's 189,011. Nissan's October sales increased 3.9 percent. DaimlerChrysler reported sales that dropped 1.6 percent. Although the Mercedes-Benz unit produced sales that rose 12.3 percent, Chrysler's dropped 3.2 percent.

Most auto-related companies saw gains, but GM couldn't hold onto those gains and closed a bit lower. Articles caution that last October saw auto sales plummeting, so that the comparisons proved easy for many companies. Ford announced its efforts to align inventory with expected sales, saying that Ford, Lincoln and Mercury inventories were lower than year-ago and September levels.

Tomorrow ushers in a full schedule of economic releases, although those releases are probably not as important as today's ISM or Friday's nonfarm payrolls. They begin at 6:00 with October's Monster Employment Index and then continue at 7:30 with October's Challenger Report, another employment-related number. Jobless claims for the week of October 28 follow at 8:30, with the third-quarter's Productivity and Costs release at the same time. September's Factory Orders follow at 10:00, with those orders expected to rise 3.7 percent, up from the previous flat number. Natural gas inventories will follow at about 10:30. Chain store sales for October will also be released, as will September's Semiconductor Billings.

Markets will also be anticipating Friday's non-farm payrolls, as well as dealing with a number of earnings releases. Companies releasing earnings include APCC, AMSC, ABC, ATML, AWRE, ABX, BDX, BBI, BWNG, CMX, CEGE, CEPH, CMS, CSTR, CS, EE, ENR, ENZN, FFH, GTW, GMST, IMGN, IFF, IP, ISIS, LF, MDR, OLGC, PPX, PHTN, PDC, PWAV, QCOM, PWR, QSC, GOLD, SONE, SINA, SFY, TLG, TSO, RIG, UN, VPHM, WEBM, WFMI, WMB and others.

What's likely to happen tomorrow? Several indices show that they're approaching short-term oversold conditions, including the tech-related indices. Those indices look as if they might see a little further weakness, but that some oversold pressure might be building, too, so that a bounce attempt might be expected at some point. At this perspective and especially ahead of Friday's nonfarm payrolls, I'm not expecting great strength out of any bounce attempt, however. I could be wrong, as I was last week about some indices with a stronger Thursday last week than I'd anticipated, so let the 15-minute 10-ema's be your guide to short-term strength or weakness. Fifteen-minute closes above those averages suggest that bulls have temporarily gained strength.

I think I'd hold off entering new bullish positions, however, especially ahead of the nonfarm payrolls number on Friday. If you're in bullish positions already, you've long ago determined your get-out levels, and those may have been hit today. If you've entered a bearish position, now is the time to start moving your stops down with the action. Remember that many indices are still just dropping down within months-long rising price channels. The SOX is the only one that has violated such a channel, and it has moved sideways and not down since breaking down out of that channel. There's something wrong with the bearish picture there, so keep on your toes. Until and unless the SOX breaks down again and other indices follow by breaking out of their respective rising price channels, this has just been a long-anticipated and not-yet-too-bearish pullback.

Arguing against that innocuous conclusion is the fact that the RUT attempted an upside breakout and couldn't hold it, a fake-out movement that visibly illustrates that bulls could not make it happen. The RUT's drop today was pronounced.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None CDWC None
  DIA  
  QQQQ  
  SMH  

New Calls

None today.
 

New Puts

CDW Corp. - CDWC - cls: 64.41 chg: -1.26 stop: 66.25

Company Description:
CDW's direct model offers customers one-on-one relationships with knowledgeable account managers and access to more than 600 on-staff engineers and advanced technology specialists who customize solutions for customers' complex technology needs. CDW also provides same-day product shipping and post-sales technical support. CDW was founded in 1984 and employs approximately 5,250 coworkers. In 2005, the company generated sales of $6.3 billion. (source: company press release or website)

Why We Like It:
CDWC's latest earnings report had the company beating estimates by 5 cents but the stock sold off anyway. Shares have been consolidating sideways since the report in mid October. Now shares look poised to breakdown. We're suggesting a trigger to catch a breakdown under support at the $64.00 level. Our suggested entry point will be $63.90. If triggered our target is the $60.50-60.00 range. Be advised that CDWC is hosting an analyst day on November 8th.

Suggested Options:
We are suggesting the December puts. Our trigger to open plays is at $63.90.

BUY PUT DEC 65.00 DWQ-XM open interest=118 current ask $2.45
BUY PUT DEC 60.00 DWQ-XL open interest= 28 current ask $0.75

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 762 thousand

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DIAMONDS ETF - DIA - close: 120.26 chg: -0.47 stop: 121.16

Company Description:
The DIAMONDS Trust, Series 1, is an exchanged traded fund representing the Dow Jones Industrial Average.

Why We Like It:
The DJIA has been hitting new record highs but it looks like the bull run may be coming to an end or at least a rest. The DJIA index looks pretty overbought and way overdue for some consolidation. Normally November begins the best six months of the year for stocks but we suspect the markets could turn lower over the next couple of weeks. We're suggesting puts on the DJIA via the Diamonds (DIA). There is short-term support near $120 so we're suggesting a trigger to buy puts at $119.80. If triggered our target is the $118.00-117.00 range (near the rising 50-dma).

Suggested Options:
We are suggesting the December puts. Our entry point to open plays is at $119.80.

BUY PUT DEC 121.00 DAQ-XQ open interest= 4025 current ask $2.10
BUY PUT DEC 120.00 DAQ-XP open interest=21261 current ask $1.65
BUY PUT DEC 119.00 DAQ-XO open interest= 4942 current ask $1.30
BUY PUT DEC 118.00 DAQ-XN open interest= 5754 current ask $1.00

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 6.6 million

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NASDAQ-100 ETF - QQQQ - cls: 42.00 chg: -0.58 stop: 42.81

Company Description:
The NASDAQ 100 Trust shares, series 1, is an exchanged traded fund representing the NASDAQ 100 index.

Why We Like It:
The NASDAQ 100 has turned in a very impressive run from its July lows but now it looks like the index is ready for its way overdue consolidation. The stock has produced a failed rally near $42.80 twice in the last couple of days and today's session produced a bearish engulfing candlestick pattern. Technical indicators are already bearish. We're suggesting a trigger to buy puts at $41.75, under Wednesday's low. If triggered our target is the $40.25-40.00 range, which might be a little optimistic given potential support at its rising 50-dma. FYI: More aggressive traders may want to put their stop above the $43.00 mark!

Suggested Options:
We are suggesting the December puts. Our trigger to open plays is at $41.75.

BUY PUT DEC 43.00 QQQ-XQ open interest= 27161 current ask $1.45
BUY PUT DEC 42.00 QQQ-XP open interest=126814 current ask $0.95
BUY PUT DEC 41.00 QQQ-XO open interest=147248 current ask $0.60

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 106 million

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Semiconductor HOLDRs - SMH - cls: 33.28 chg: -0.72 stop: 34.15

Company Description:
The Semiconductor HOLDRs is an exchange traded fund representing 20 companies in the semiconductor sector.

Why We Like It:
If the NASDAQ is headed lower it will probably be lead by the semiconductors. The SOX semiconductor index has been struggling recently and the recent bounce on the KLAC upgrade a few days ago has failed. Now the group looks vulnerable to more selling pressure. We're suggesting plays on the SMH as a proxy for the SOX. More aggressive traders may want to jump into bearish plays with a drop under SMH's low today (33.24). We're going to suggest a trigger at $32.95 to open positions. More conservative traders may want to wait for a decline under $32.80, which is under the simple 100-dma. If you're watching the SOX the key levels are 440 and its 100-dma near 438.50. If we are triggered on the SMH at $32.95 our target is the $31.50-31.40 range.

Suggested Options:
We are suggesting the December puts. Our trigger to open positions is at $32.95.

BUY PUT DEC 35.00 SMH-XG open interest=5072 current ask $2.10
BUY PUT DEC 32.50 SMH-XZ open interest=1587 current ask $0.80

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 17.7 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cerner Corp. - CERN - close: 48.00 chg: -0.31 stop: 46.45

The markets suffered a widespread round of profit taking on November 1st. Shares of CERN dipped to $47.32 before bouncing back to the $48 level. This almost looks like a bounce from its rising 10-dma, which is the first level of technical support. Were it not for the overbought condition in the major indices traders might want to consider new call positions on this bounce. However, since we're concerned that the markets have more profit taking ahead readers might want to wait for a new relative high before opening new plays in CERN. 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: - 0.05
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand

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Frontier Oil - FTO - close: 29.46 change: +0.06 stop: 27.99

FTO performed better than expected with an intraday bounce from the $28.80 level, which is also near the 50-dma. The stock's bounce may have been influenced by news that FTO had won a court battle in Beverly Hills today. We remain cautious and we're not suggesting new positions given our time table. We plan to exit ahead of the company's Nov. 7th earnings report. More conservative traders may want to exit early to avoid or limit losses. Our short-term target is the $32.50-33.00 range.

Picked on October 15 at $ 28.90
Change since picked: + 0.56
Earnings Date 11/07/06 (confirmed)
Average Daily Volume = 3.2 million

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NTL Inc. - NTLI - close: 27.05 chg: +0.02 stop: 25.99

NTLI tried to rally higher this morning with a minor gap up at the open but market weakness weighed on shares and the stock consolidated back toward breakeven for the day. We're not suggesting new positions at this time due to our time frame. NTLI is due to report earnings early on November 8th so we're planning to exit at the closing bell on November 7th to avoid holding over the announcement. Our target is the $29.90-30.00 range.

Picked on October 26 at $ 27.41
Change since picked: - 0.36
Earnings Date 11/08/06 (confirmed)
Average Daily Volume = 2.4 million

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Vimpel Comm. - VIP - close: 64.75 chg: -1.24 stop: 61.90

The market-wide profit taking on Wednesday set shares of VIP back for a 1.8% loss. We're actually seeing some bearish moves in the stock's technical indicators. More conservative traders may want to lock in a small gain before VIP sees any more profit taking. Or more conservative traders may want to raise their stops toward the $64 region. We're not suggesting new positions at this time. Our target is the $67.50-70.00 range. We plan to exit ahead of the mid-November earnings report.

Picked on October 12 at $ 62.17
Change since picked: + 2.58
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million
 

Put Updates

Alcon Inc. - ACL - close: 106.19 chg: +0.08 stop: 110.41

Today's move in ACL looks like a new entry point to buy puts. The stock tried to rally this morning but failed, multiple times, to get past the $108 level. This failed rally could be a good spot to buy puts. However, we want to note that both ACL and the DRG drug index still look short-term oversold. More conservative traders may want to tighten their stops or wait for a new relative low before opening new positions. Our target is the $100.10-100.00 range.

Picked on October 31 at $105.75
Change since picked: + 0.41
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 520 thousand

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Advanced Micro Dev. - AMD - cls: 20.73 chg: -0.54 stop: 22.05

Technology stocks were some of the worst performers today. The NASDAQ lost 1.3% and the SOX semiconductor index fell 1.9%. Shares of AMD under performed them both with a 2.5% decline. Traders can choose to open new put positions here or wait for a decline under round-number support at the $20.00 mark. Our target is the $17.50-17.00 range.

Picked on October 29 at $ 20.86
Change since picked: - 0.13
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 23.0 million

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Amazon.com - AMZN - close: 37.56 chg: -0.53 stop: 40.25

Shares of AMZN lost almost 1.4% and closed near the bottom of its four-day trading range. We expect shares to try and fill the gap from last month. 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: - 0.68
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 7.9 million

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Capital One Finc. - COF - cls: 76.86 chg: -2.47 stop: 81.05*new*

Renewed concerns about the economy took a toll on the financials. Shares of COF really under performed the market today with a 3.1% decline on strong volume. The stock started this morning with a failed rally at the $80 level and then dropped under potential technical support at its 50-dma by the closing bell. We're lowering our stop loss to $81.05. Our target is the $75.10-75.00 range.

Picked on October 31 at $ 79.33
Change since picked: - 2.47
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 2.4 million

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Focus Media - FMCN - close: 54.66 change: +1.77 stop: 56.55

An oversold bounce after yesterday's decline is not a big surprised. The stock appeared to produce a failed rally under the $55.50 level, which readers can use as a new entry point to buy puts or wait for a new decline under $54.00 before initiating plays. We do expect an initial bounce at $50.00 but our target is the $48.00-47.00 range. We do not want to hold over the November 20th earnings report.

Picked on October 31 at $ 52.89
Change since picked: + 1.77
Earnings Date 11/20/06 (confirmed)
Average Daily Volume = 660 thousand

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NewMarket - NEU - close: 62.67 change: -1.63 stop: 67.05

Our new put play in NEU is off to a decent start. The stock lost 2.5% and the MACD on the daily chart produced a new sell signal. We don't see any changes from yesterday's new play description. We are suggesting two targets. Our conservative target is the $60.20-60.00 range. Our aggressive target is the $56.00 level.

Picked on October 31 at $ 64.30
Change since picked: - 1.63
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 354 thousand

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PACCAR Inc. - PCAR - cls: 58.71 chg: -0.50 stop: 62.51

Today marked the third time in three days that shares of PCAR have produced a (bearish) failed rally at the $60.00 level. We see it as another entry point to buy puts (just like the first two). More conservative traders may want to consider a tighter stop with such clear resistance at $60.00. 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).

Picked on October 29 at $ 59.42
Change since picked: - 0.71
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 1.4 million

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Pantry Inc. - PTRY - close: 54.66 change: +0.08 stop: 57.05

Unfortunately, there is no change from our previous updates on PTRY. The stock is still trading sideways with short-term support at its rising 50-dma (near 53.75). Traders can choose to use a failed rally under the 10-dma (near 55.50) or a decline under $53.50 as a new entry point. More conservative traders may want to wait for a decline under $52.50 before opening new plays. 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: + 0.61
Earnings Date 11/16/06 (confirmed)
Average Daily Volume = 383 thousand

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Univ.Forest Prod. - UFPI - cls: 44.34 chg: -1.04 stop: 48.05*new*

The market-wide weakness weighed on shares of UFPI and the stock lost another 2.2%. More importantly shares broke down and closed under support at the $45.00 level on above average volume (which is bearish). We're aiming for a decline into the $41.00-40.00 range. We're adjusting the stop loss to $48.05.

Picked on October 24 at $ 46.13
Change since picked: - 1.81
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: 148.02 chg: -3.33 stop: n/a

Broker-dealer stocks really under performed the rest of the financials on Wednesday. The XBD index lost 2.3%. Shares of BSC dropped 2.2% and closed under the $150 level. This may have been the deciding move in finally reversing the stock's two-month bullish trend. We're not suggesting new positions at this time. 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. FYI: Don't forget that November strikes expire in less than three weeks.

Picked on October 22 at $150.19
Change since picked: - 2.17
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Cephalon - CEPH - close: 69.94 change: -0.24 stop: n/a

CEPH is hugging the $70.00 mark as investors wait for the company's earnings report due out Thursday after the closing bell. We would not suggest plays after Thursday's closing bell. 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: + 0.59
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.0 million

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ConocoPhillips - COP - close: 59.70 chg: -0.54 stop: n/a

Technical indicators continue to turn more bearish for COP but the stock isn't moving enough and our strangle play is in real jeopardy. We're not suggesting new positions. 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: - 0.33
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million

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Blue Nile - NILE - cls: 37.07 chg: -1.14 stop: n/a

NILE lost close to 3% on Wednesday but volume came in below average on the move. Technicals are turning bearish but the stock may have support in the $35-36 region. We're not suggesting new strangle plays. 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: - 1.85
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

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Whole Foods - WFMI - close: 63.16 change: -0.68 stop: n/a

The trading in WFMI continues to grow more negative but everything could change after the company's earnings report after the closing bell on Thursday. Currently the stock is outside of our suggested zone for opening new strangle plays (which was 64.00-66.00). We would not suggest new positions after Thursday. 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: - 1.59
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.1 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

A Most Useful Chart Pattern

I got asked in a SUBSCRIBER MAIL the following question, which seemed like a good one to take off on today: "Hi. Is there a chart pattern you find the most useful in terms of trading direction"?

If I had to pick the single most useful chart pattern, there is one that we see relatively often and one that's very useful in terms of confirming that a trend is continuing: the 'flag' (consolidation) pattern. That is, 'bull' or 'bear' flags, which are also sometimes called pennants when they have a certain shape. Call em all flags I say!

I would also mention the single most useful chart 'marking': the trendline; which helps spot both a trend 'continuation' and, when pierced, a trend REVERSAL. For example, in my last Index Trader article, written this past weekend, I was speculating on a possible top in the S&P and Dow, based on this past week's high hitting a type of trendline that's parallel to an up trendline. In this instance that is the upper boundary of a bullish (uptrend) CHANNEL.

You can go to the aforementioned Index Trader column, which is seen online only, by clicking here.

A trendline is a straight line connecting at least, but preferably 3 or more lows (up trendline) or 3 or more highs (a down trendline). An internal trendline is a trendline that connects the MOST number of highs or lows, so may cut through one of more 'bar'; a bar on a bar or candlestick chart being the intraday, daily or weekly price range or distance between the high and low for that trading period. A channel line is a line parallel to a trendline that touches the highest high(s) (uptrend channel) or lowest low(s) (downtrend channel) for some preceding period of time.

The weekly uptrend channel for the S&P 500 (SPX) is seen below, but today's high is not seen yet. If it was it would not be the close of the WEEK until Friday 11/3. The down red arrow marks the touch of last week's high to the upper channel line. This may be a temporary top or prices may come back to it again later; or, of course, break out above the upper channel line later, which I think is the least likely possibility even though some would say that 'trendlines are made to be broken'. Channel lines, in this instance here, at least give us some idea of a possible stopping point or pause in the very strong rally we've been seeing. The BEST use of trendlines for providing a trading 'trigger' is however when you see them pierced or 'broken'.

The Dow 30 (INDU) has the same touch in last week's low to an upper channel line on the weekly chart, as seen below. The trendline we would focus on for a potential trend REVERSAL is the UP trendline. We would be watching this relatively steep trendline as to whether it gets pierced (or not); this trendline intersects currently at 11,875 at the green up arrow.

So, for this week, a downside penetration of 11875, especially on a closing basis would be a potential bearish reversal of the current intermediate uptrend. After such a lengthily run up as we've seen, I would be watching a much shorter INTRADAY timeframe and chart, with more bars, probably hourly, as to 1. highlighting a well-defined up trendline and 2. watching for the point where any such up trendline has gotten pierced:

HOURLY S&P 500 (SPX):

A trendline can be drawn here on both a closing basis (a 'line' chart) or a standard 'bar' (or candlestick) chart. As it happens, the close-only hourly line chart sheen for SPX shown is very well-defined and has no closing hourly lows OUTSIDE the trendline so is not an 'internal' trendline. The break or decisive downside penetration of the up trendline came Friday, so the guts and glory went to those who went home short over the weekend.

The trendline seen on the hourly SPX chart shown below is an internal up trendline that cuts through a few of the hourly bars. The interesting thing about this draw of the trendline is that way that the return action of prices rebounding back up TO the trendline now acted as RESISTANCE. What had been support of the up trendline, once pierced, 'became' so to speak, a 'line' of resistance as seen at the red down arrow.

FLAG PATTERNS:

I started out to write about the most useful chart PATTERN, which I presenting one idea as being the 'flag' formation. Flag patterns are fairly common continuation patterns and are considered bullish in an uptrend and bearish in a declining trend. I say 'common', but they are most common in individual stocks, somewhat less so in the Indexes. You will find these patterns more commonly in Indexes on INTRADAY charts; e.g., hourly/60 min.

In technical analysis, continuation patterns are 'consolidations' of the current trend. After an initial price spurt up or down, there is typically a countertrend or more or less sideways price movement before the trend renews itself and continues in the same direction as before this/these consolidation(s). The narrow ranges that comprise the price swings of the 'flag', have tops and bottoms that typically or often allow drawing trendlines across the highs and lows; the two resulting PARALLEL trendlines will usually if not always slope in the OPPOSITE direction from the trend.

In options trading the reason that such patterns have such value is that this pattern provides an idea that the trend will be continuing and becomes a guidepost suggesting to STAY with your position. And with a time limited instrument like options there is always the question we need answer as traders as to whether the existing trend will continue. The example of multiple flag patterns shown below the chart is that of a prime S&P 'bellwether' stock, that of General Electric (GE). GE will sometimes forecast a correction that is yet to show up in the Dow or S&P Index chart. This makes it a bellwether or harbinger for future market movement.

One clue, maybe not quite offering enough to put out a general index put buy recommendation, that the market wasn't likely to continue to rise here just recently (besides what I showed above in the move up to resistance implied by the upper trend channel boundary in SPX), was the formation of the above RECENT BEAR flag (example all the way right) in bellwether GE.

Prices rise or fall, there's a pause and a consolidation; if the pattern traced out is a flag pattern, it's also a suggestion that the next move will continue in the direction of the trend PRECEDING the formation of the flag. In the above example, GE peaked then fell some, rallied a bit and traded in the narrow range seen above (the upward sloping flag pattern), tipping us to a further decline that was coming.

A flag patterns outline is formed by a series of relatively narrow price range sessions after a relatively short, sometimes steep, price spurt; sometimes the 'straight up' or 'straight down' nature of this spurt resembles a 'flagpole' as is outlined in the GE chart above, with a vertical line. The next move, once prices break down below the up-sloping bear flag pattern above, could then equal the length of the flagpole measured below the downside 'breakout' point, which is how I noted the 'objective' in the chart above.

OTHER EXAMPLES OF FLAG PATTERNS:



GOOD TRADING SUCCESS!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.
 

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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