Option Investor

Daily Newsletter, Wednesday, 11/08/2006

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Table of Contents

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

Market Wrap

Finding Common Ground

Ahead of Cisco's (CSCO) earnings report this afternoon, markets brushed off early weakness today and posted gains. Those gains didn't appear to be on the books early this morning, but gains in another big-cap stock, Microsoft (MSFT), helped propel indices higher in the afternoon. The Dow was among those, posting another record close. The Nasdaq posted its best close since February, 2001.

The morning looked bleaker. Our markets reportedly hate uncertainty, and uncertainty was what market participants faced early this morning. The Democrats had won the House, but two key Senate positions--positions that would determine whether Democrats would take control of the Senate, too--were close and undecided. While I don't want to focus too heavily on political matters, options traders understand that such political developments do impact the economy or specific sectors of the economy and so must be recognized.

For example, a key Democrat spoke this morning on CNBC, detailing what the Democrats would like to do to balance the budget, efforts that might be hampered by the President's perceived intention to veto any legislation that would undo his administration's tax cuts. Also, a changing of the guard on key committees can impact businesses directly. For example, a CNBC correspondent pointed out this morning that such a changing of the guard could mean that auto companies could be faced with a push for higher-mileage vehicles, something auto manufacturers do not want to see happen. Tax incentives granted to the energy industry could be undone. The drug manufacturers could be impacted. While one key Democratic Senator stated yesterday that while we have troops on the ground, defense cuts wouldn't be considered, some believe that defense-related companies would eventually see cuts. Some small business owners believe that a push for a higher minimum wage could hurt their bottom lines.


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While some say that it was the prospect of a Democratic-controlled House and Senate that hit futures and then stalled the cash markets for a time this morning, others will point out that it's been widely believed for weeks that this could happen and yet markets have risen. It may be more likely that the uncertainty about election results as well as an unwinding of pre-election positions that led to the pre-market decline and the stall until the afternoon when markets suddenly climbed. Uncertainty about who has control leads to uncertainty as to how a portfolio should be positioned. The country dreads another ugly recount scenario, if one or two should occur in those hotly contested Senate seats.

Apparently, the election resulted in more than a Democratic takeover of the House and a possible one of the Senate. Shortly after noon, the announcement was made that Defense Secretary Donald Rumsfeld had resigned. President Bush tapped ex-CIA chief Robert Gates to replace Rumsfeld. Markets reacted with a brief bounce, but it was just part of the choppy market movement within a confined consolidation pattern that played out until a stronger afternoon push. When President Bush talked about the changeover during an early-afternoon press conference, he was also of course questioned about his ability to work with key Democrats. He talked at length about his intention to find a common ground as well as his belief that such a common ground could be found.

Markets had spent the morning attempting to find a common ground between bulls and bears, too, one where bullish and bearish pressures were equalized. They remained equalized for a time until bulls broke that equilibrium in the afternoon.

With all the attempts to claim that the victory of the Democrats in the House and possibly in the Senate had stalled the markets, it was a company-related announcement that was given the credit for breaking that stalemate, that seeking of common ground in the markets. Microsoft (MSFT) announced that Windows Vista was ready to be shipped. The Fed's Moskow should also perhaps be given some of that credit. He spoke during the afternoon, affirming that the pause in rate hikes was appropriate and had "served us well."

Perhaps we should just look to the charts to see if today's action was in keeping with what shows up there.

Annotated Daily Chart of the SPX:

Despite the day's gain, I consider this action consolidation. The candle speaks of consolidation and so does the action as prices gyrated between support and resistance. This is a hand-drawn channel and not one calculated by regression analysis, so the midline might be slightly off.

On a short-term Keltner basis, the day's trading looked weaker than yesterday's, despite the higher close. Resistance at 1387.55-1389 was trying to firm, although a retest of that zone can't be precluded. Obviously a strong, CSCO-propelled rally such as the type that we've seen in the past could blow past any resistance seen on a 15-minute chart, but the SPX's typical pattern after a strong several-day push is a several-day consolidation period that is sideways or sideways-up and lasts up to a week. The SPX is merely following that pattern. Unless CSCO-inspired enthusiasm blows past that resistance, however, I would expect to see short-term resistance there tomorrow morning if the first push is higher.

You'll read about the Dow's record close, as you have already in the opening paragraph, but the chart displays consolidation rather than new strength.

Annotated Daily Chart of the Dow:

The Dow might have eked out a new record close, but the day's intraday high was below yesterday's, and the day's candle speaks of consolidation rather than strength. The bulls and bears are still caught in a short-term stalemate.

The 15-minute Keltner charts also show resistance firming on the Dow, at about 12,195-12,204 as of today's close. If there's an early pop tomorrow, watch for potential resistance there on 15-minute closes unless a CSCO-induced rally pushes the Dow right through that resistance.

The Nasdaq also eked out a new recent closing high, although not a new record closing high. Its daily candle was a stronger one than the Dow's, but the Nasdaq also could not top yesterday's intraday high and also stopped at the midline of its rising regression channel.

Annotated Daily Chart of the Nasdaq:

Unlike the SPX and Dow, the last push on the Nasdaq created a breakout scenario on the Nasdaq's 15-minute Keltner channel chart. Next light Keltner resistance crossed at 2391.19 as of the close, with that resistance important on a 15-minute close and not on a move within the first 15-minute period. Historical resistance exists just above, too, at yesterday's 2391.34 intraday high. Further Keltner resistance, on 30 minute closes, crosses at 2394.20. I would watch for potential short-term resistance at those levels if there's an early push higher tomorrow morning, but the approaching 2400 round-number level might prove a strong price magnet to bulls.

The Nasdaq might have produced a stronger candle than some other indices, but that wasn't due to the influence of the SOX. The SOX's daily candle was within a recent consolidation zone and below the 200-sma, and its shape was clearly indicative of indecision or consolidation.

Annotated Daily Chart of the SOX:

The SOX's chart has proved puzzling for a while. After falling out of the same rising channel that many indices produced when climbing off the summer lows, this index fell slightly, rose up in a classic manner to retest the former support, which did hold as resistance, but then failed to act as expected and dive further. It has consolidated since. While I see nothing particularly bullish about this chart, other than the fact that bears were not able to drive prices lower when they might have been expected to do so, I don't yet see confirmation of the bearishness, either. This indicator index has failed to participate in the rally seen on other indices, and that's certainly more on the bearish than the bullish side of the ledger. It may or may not be forming a potential head-and-shoulders formation, as the possible formation is rather roughly formed, but these formations have not been reliably bearish for quite some time. Bears probably need to see a sustained break below the October low to get anything going to the downside and bulls need to see a sustained break of the 200-sma as a first step, although further resistance awaits the SOX above that level.

On a 15-minute nestled Keltner chart, the SOX had attempted an afternoon breakout, but had fallen back below the breakout level by the close. Resistance and support were thickly layered above and below the SOX as of the close, but strongest resistance appeared to be just above, at 466.34, and then at 469.58, with this resistance important on 15-minute closes, and strongest support was from 460.15-461.44, also important on 15-minute closes.

Annotated Daily Chart of the RUT:

The RUT, like so many other indices, could not breach yesterday's intraday high, despite a close today that was higher than yesterday's close. The body of today's candle was within yesterday's range. Despite the relatively strong candle, this speaks to me of consolidation more than new strength. Yesterday's stalemate on the RUT has not yet been resolved, in my opinion.

At the close, the RUT was rising to retest Keltner resistance just under 770, with further resistance at 771.64-772.30, with all of those numbers important on 15-minute closes. Resistance appeared to be firming a bit, but not yet enough to guarantee that it would hold, especially if there were a strong rally tomorrow morning.

With CNBC and most other networks more concerned with election news than economic developments and with economic releases few and far between, little attention was paid to those releases. The first was at 7:00, when the Mortgage Bankers Association released its weekly mortgage application volume survey for the previous week, with that volume showing an 8.8-percent increase. The increase was driven higher by an 11 percent rise in refinance application volume. These are week-over-week comparisons, however. Year over year, the total volume fell 5 percent.

Four-week-moving averages moved higher, too, reacting to this week's big jump. The four-week averages of the market, purchase and refinance components jumped 0.9 percent, 1.2 percent and 0.6 percent, respectively. The average contract interest rate for a fixed-rate, 30-year mortgage was unchanged from the previous week's 6.24 percent, but points decreased.

Today, Centex Corporation's (CTX) Chief Executive addressed an investor conference that was sponsored by UBS. The Chief Executive said that historical patterns suggested that the housing industry downturn might have a bit further today in its decline from the July, 2005 boom. He believes that difficulty in selling existing homes is still leading to cancellations in new homes, driving inventory higher and prices lower. Whether as a result of his words or a reaction to other developments, the DJUSHB, the Dow Jones U.S. Home Construction Index, dropped beneath recent consolidation, ending at a best-fit trendline off the summer's low. A trendline that encompasses all candle shadows, too, is lower and has not yet been violated or tested, but there was no participation by this index in the afternoon rally, despite a drop in bond yields today and this afternoon, in particular.

Crude inventories were reported mid-morning. If only minimal on-air commentary was allotted to a discussion of crude's price actions, the TRAN was still showing some short-term reactions, dropping when crude rose immediately after the announcement, rising when crude prices retreated, then dropping again when the crude price climbed. The TRAN has looked weaker by some measures than some other indices lately.

Annotated Daily Chart of the TRAN:

Although I did not draw the trendline because I wanted the blue 10-sma to be clearly visible, the TRAN's prices have dropped below a best-fit rising trendline off the September low and now have risen to retest that trendline. The TRAN's prices are showing some hesitancy at that former supporting trendline, but that hesitancy is so far in the form of a sideways consolidation. Neither bulls nor bears have prevailed yet.

While the TRAN struggles with resistance, the current crude futures contract does, too, struggling with the 30-sma.

Annotated Daily Chart of Crude Futures:

A sustained push above that 30-sma might negatively impact the TRAN as well as other indices. Crude costs should be watched tomorrow and the TRAN's reaction or non-reaction to its movements should be watched, too. Today, the OIX and XOI gained, helping to propel the SPX higher.

The Department of Energy's survey showed that crude inventories climbed 400,000 barrels last week. Both distillates--important as the winter season approaches--and gasoline inventories fell. Distillates fell by 2.7 million barrels, the DOE reported, while gasoline supplies dropped 600,000. The draw downs were larger than expected, with the decline in distillate supplies about three times what was expected, according to CNBC. Refinery capacity also dropped, by 0.8 percent.

As you may already know, yesterday the Energy Department released its forecasts for crude and natural-gas costs and demand. Those forecasts included an increase in demand for crude across the globe of 1 million barrels a day for the full year. It expects WTI crude to average $66 a barrel in 2006 and $65 a barrel in 2007.

Some company-related developments also impacted markets, with several companies of note reporting or announcing news today or late yesterday. Those included Federated Department Stores (FD), reportedly missing expectations, but climbing sharply in early trading. Sirius Satellite Radio (SIRI) reported higher subscriber additions and a narrower third-quarter loss and climbed in early trading, too. Late yesterday, National Semiconductor (NSM) had blamed slow shipments to cell-phone manufacturers for the company's decision to cut its targets, but even NSM rose in early trading.

In addition, late yesterday Merck (MRK) reported four tax disputes in Canada and the U.S. MRK wasn't as lucky as some of the other companies missing expectations, lowering forecasts or reporting bad news, however. It dropped from the get-go this morning, with the drop perhaps exacerbated by uncertainty over how drug manufacturers would be impacted by a Democratic-led House and gridlock in the Senate or even a Democratic-led Senate.

CNBC characterized CSCO's after-hours report as "very good news," with the company beating expectations. Earnings were $0.31, above the $0.29 expected. The revenue was reported as being $300,000 above expectations. Gross margins were 64.8 percent, a little below the 65 percent that the company had guided and a little below the expectations of at least one analyst, but the stock soared in the after-hours period immediately after the release. I caution that this activity was shortly after the report and before the conference call. The conference call can change the reaction, especially as the analyst mentioned above was anxious to get a look at the company's book-to-bill report.

Tomorrow's economic reports are more numerous than those for the rest of the week. They include the usual jobless claims at 8:30 tomorrow morning, but that time slot will also see the release of September's International Trade and Import/Export Prices. The market expects a deficit of $66.1 billion in international trade, with that being a narrower deficit than the previous $69.9 billion deficit. Import/Export Prices are expected to drop 1.1 percent, with the previous drop at 2.1 percent. That release will be followed by November's Consumer Sentiment at 10:00. Consumer Sentiment is expected to remain relatively flat, at 93.7, after November's 93.6. Wholesale Trade figures appear at the same time, with an increase of 0.6 percent expected, down from the previous month's 1.1-percent increase. Natural gas inventories will bring up the rear, at 10:30.

Earnings releases are winding down, but tomorrow's reporting companies include AEG, AMCC, BVF, CPKI, CPST, CWEI, DAR, DSCO, EPEX, FMR, GT, HLS, IVAN, JCP, KSS, LR, PSUN, QBAK, BID, SCON, TXU, USHS, URBN, VIA and DIS.

What happens tomorrow? Nothing on the charts predicts that unless one considers the recent tendency of a week-long consolidation period to follow a few days of gains to be predictive enough to suggest that tomorrow will be another consolidation day. Another pattern argues against that consolidation, however: recently, the Thursday before opex week has often proven volatile.

With all honesty, as I began writing this Wrap and annotating the charts, I expected to project a more bullish tone than I found myself projecting after viewing the charts. Prices had bounced from the bottoms of rising price channels, bouncing more strongly than I had expected last week since I'd thought there might be consolidation nearer the bottom of the channels than the midlines of those channels ahead of the elections. However, other than the TRAN's struggle with its 10-sma, the potentially bearish formation seen on its chart and the SOX's puzzling behavior, I see nothing that warrants my less-bullish-than-expected tone, but the TRAN's chart does bother me, perhaps more than it should.

The SPX, Dow and OEX are just doing what they've done so many times before, posting a strong gain and then consolidating sideways for a few days before they continue their journey up through those rising channels. So, my advice remains the same as it has so many times before when the markets consolidate as they're doing now. If you're in long-term bullish positions, you've hopefully been ratcheting up your stops as the markets climb, and will continue to do so, watching those price channels in which the indices have been climbing. If you're in short-term bullish positions, you'll want to be a little more careful tomorrow morning if there's an early push toward yesterday's highs and Keltner resistance, as there might be a pullback from those zones, particularly if there's any sell-the-fact effect in CSCO. Beware such a reaction, which has occurred in the past and could occur again.

If you're a want-to-be bear, you might be gazing at the midlines of those rising price channels and the resistance they've been offering the last couple of days, wondering if now is the time to try a bearish position. Who knows? It could be: the Thursday before an opex week is an ideal day to expect some strange price antics, and something about the charts tonight makes me less bullish than I would expect to be when the typical punch-higher-consolidate-sideways pattern has appeared once again. However, there's just no confirmation tonight that such action will occur tomorrow. I've studied all kinds of MA's on all kinds of intraday charts to see if there's "the" moving average or "the" trendline or "the" price level that I can give you to show that markets were in the process of rolling over, if there should be any decline tomorrow, but the last two days have produced chop that's chopped up the charts, too. Half of today, the SPX was finding resistance under its 30-minute 9-ema on 30-minute closes: the other half it was finding support on that average.

All I can suggest is that, if you're inclined to look for a bearish entry, make sure that the bearish ducks all line up, and that the VIX and TRIN are climbing, the advance/decline line is dropping and that they stay that way. Changes in breadth indicators have been fairly good predictors the last couple of days that bulls were gaining ground again.

Bulls and bears should both be aware of the sentiment number expected at 10:00, as, in this jittery time, that number could reverse any early-morning movement, particularly if it's much lower than expected. If there's an early-morning bounce, short-term bulls need to evaluate whether they'll hold on through that release. You've been told tonight, so you have time to consider your choices and make up a game plan tonight.

New Plays

New Option Plays

Call Options Plays
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Strangle Options Plays

New Calls

Deere & Co. - DE - close: 87.45 change: +2.61 stop: 83.99

Company Description:
John Deere (Deere & Company) is the worlds leading manufacturer of agricultural and forestry equipment; a leading supplier of equipment used in lawn, grounds, and turf care; a major manufacturer of construction equipment; and a major supplier of engines and drivetrain components for use in John Deere and other leading brands of equipment. (source: company press release or website)

Why We Like It:
DE produced a new bullish buy signal today. The stock bounced near its rising 50-dma and produced a bullish engulfing candlestick pattern. The rally today (+3%) also broke out over resistance at its 10-dma, 21-dma and its three-week trendline of resistance. Technical indicators are improving. We suspect that DE will rally into its November 21st earnings report. We're suggesting call positions here above $87.00. There is probably some resistance at its October high (90.47) but shares have more significant resistance near $92.00-92.50 from last May. We'll use a $91.50-92.00 target. We do not want to hold over the November earnings report.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 85.00 DE-LQ open interest=7318 current ask $5.10
BUY CALL DEC 90.00 DE-LR open interest=5613 current ask $2.45

Picked on November 08 at $ 87.45
Change since picked: + 0.00
Earnings Date 11/21/06 (confirmed)
Average Daily Volume = 2.7 million


Fomento Econo. - FMX - close: 102.09 chg: +1.81 stop: 97.99

Company Description:
FEMSA is the leading beverage company in Latin America. It controls an integrated beverage platform that comprises Coca-Cola FEMSA, the largest Coca- Cola bottler in the region; FEMSA Cerveza, one of the leading brewers in Mexico and important beer exporter to the United States; and Oxxo, the largest and fastest growing convenience store chain in Mexico with over 4,000 stores. (source: company press release or website)

Why We Like It:
The Mexican stock market touched a new high today and shares of FMX are not that far behind it. FMX rallied off its lows of the session to produce a bullish engulfing candlestick pattern and a 1.8% gain. Considering the pattern on FMX's daily chart there appears to be resistance in the $102.50-102.80 region but given the momentum in the Mexican market and in the U.S. market we suspect that FMX will breakout higher. The MACD on the daily chart just produced a new buy signal. We're suggesting bullish positions now with the stock above $100. More conservative traders may want to wait for a new relative high. We're going to start the play with a stop loss at $97.99 but more conservative traders may want to stick their stop under today's low (99.12). Our target is the $107.00-110.00 range.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 100.00 FMX-LT open interest=65 current ask $5.00
BUY CALL DEC 105.00 FMX-LA open interest=30 current ask $2.45

Picked on November 08 at $102.09
Change since picked: + 0.00
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand


Grainger - GWW - close: 72.62 change: +0.77 stop: 69.99

Company Description:
W.W. Grainger, Inc., with 2005 sales of $5.5 billion, is a leading broad line supplier of facilities maintenance products serving businesses and institutions in Canada, China, Mexico and the United States. (source: company press release or website)

Why We Like It:
Shares of GWW are bouncing from the bottom of its rising, bullish channel in addition to bouncing near $70 and its 200-dma. Short-term technicals are improving and the P&F chart is bullish with an $80 target. We are suggesting call positions with the stock above $72.00. Our target is the $77.50-78.00 range. More conservative traders may want to exit early near $76, which might be resistance due to the July highs.

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

BUY CALL JAN 70.00 GWW-AN open interest=676 current ask $4.70
BUY CALL JAN 75.00 GWW-AO open interest=443 current ask $1.90

Picked on November 08 at $ 72.62
Change since picked: + 0.00
Earnings Date 10/16/06 (confirmed)
Average Daily Volume = 687 thousand


FreightCar Amer. - RAIL - close: 56.08 change: +1.89 stop: 53.49

Company Description:
FreightCar America, Inc. manufactures railroad freight cars, with particular expertise in coal-carrying railcars. In addition to coal cars, FreightCar America designs and builds flat cars, mill gondola cars, intermodal cars, coil steel cars and motor vehicle carriers. (source: company press release or website)

Why We Like It:
Transports and railroad stocks are on the rebound. Shares of RAIL displayed plenty of relative strength today with a 3.4% gain and a new six-week closing high. The breakout over its 50-dma and the $55 level in the last few days looks like a new bullish entry point as RAIL makes a run for resistance near $60.00. The P&F chart is optimistic with a $68 target. We're suggesting calls with RAIL above $55. Our target is the $59.75-60.00 range.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 55.00 RQN-LK open interest=1454 current ask $3.50
BUY CALL DEC 60.00 RQN-LL open interest=1178 current ask $1.20

Picked on November 08 at $ 56.08
Change since picked: + 0.00
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 334 thousand

New Puts

Freeport McMoran - FCX - cls: 59.05 chg: -1.68 stop: 62.01

Company Description:
FCX explores for, develops, mines and processes ore containing copper, gold and silver in Indonesia, and smelts and refines copper concentrates in Spain and Indonesia. (source: company press release or website)

Why We Like It:
Yesterday copper producer Phelps Dodge (PD) hit a new all-time record high. Meanwhile shares of FCX were trying to breakout over resistance at the $62.00 level. Today both stocks were hit with profit taking and shares of FCX broke down under support at its 10-dma and bullish trend of higher lows. Technicals are turning bearish from overbought conditions. We're suggesting puts on FCX with the stock under $60.00. Given the stock's history we're going to suggest two targets. Our conservative target is the $55.25-55.00 range. Our aggressive target is the $51.00-50.00 range.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 60.00 FCX-XL open interest=970 current ask $4.10
BUY PUT DEC 55.00 FCX-XK open interest=863 current ask $1.60

Picked on November 08 at $ 59.05
Change since picked: + 0.00
Earnings Date 10/17/06 (confirmed)
Average Daily Volume = 3.7 million


Washington Group. - WGII - cls: 55.40 chg: -1.76 stop: 58.75

Company Description:
Washington Group International Inc. provides the talent, innovation, and proven performance to deliver integrated engineering, construction, and management solutions for businesses and governments worldwide. (source: company press release or website)

Why We Like It:
WGII recently reported earnings and the results were under analysts estimates and the company's guidance was mixed. Yet shares of WGII were already having trouble before the earnings report with a breakdown under its four-month bullish trend in late October. Today's 3% decline is a breakdown under support near $56.00 and its exponential 200-dma. The stock has already broken through its 50-dma, 100-dma and 200-dma. We're suggesting put positions now with the stock under $56.00. More conservative traders may want to wait for a decline under $55.00. A move under $55 would produce a new triple-bottom breakdown sell signal on the P&F chart. Our target is the $51.00-50.00 range.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 60.00 QUG-XL open interest= 28 current ask $5.00
BUY PUT DEC 55.00 QUG-XK open interest=100 current ask $1.70
BUY PUT DEC 50.00 QUG-XJ open interest= 41 current ask $0.40

Picked on November 08 at $ 55.40
Change since picked: + 0.00
Earnings Date 11/06/06 (confirmed)
Average Daily Volume = 195 thousand

New Strangles

Caterpillar - CAT - close: 60.10 chg: +0.18 stop: n/a

Company Description:
For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2005 sales and revenues of $36.339 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. (source: company press release or website)

Why We Like It:
The post-earnings sell-off and oversold bounce in CAT has dwindled into a sideways consolidation as the stock hugs the $60 level. Do you think CAT will move more than $5.00 before December options expire? We do. That's why we're suggesting a strangle on the stock here. Our preferred entry point is as close to $60.00 as possible but we'll suggest a $60.50-59.50 entry range to open plays.

Suggested Options:
A strangle involves buying both an out-of-the money call and an OTM put. Try and keep your investment on both sides as equal as possible to keep the strategy neutral. At current prices our estimated cost is about $0.75. We want to exit if either option rises to $1.50.

BUY CALL DEC 65.00 CAT-LM open interest=5128 current ask $0.45
BUY PUT DEC 55.00 CAT-XK open interest=2062 current ask $0.30

Picked on November 08 at $ 60.10
Change since picked: + 0.00
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million

Play Updates

In Play Updates and Reviews

Call Updates

CNOOC Ltd - CEO - close: 84.11 change: +0.21 stop: 82.89

Oil stocks were posting gains on Wednesday thanks to a bounce in crude oil futures. The OIX oil index rose 1.2% and the OSX oil services index jumped 2.1%. Shares of CEO are still under performing its peers but the move was higher today. We're still waiting for a breakout over resistance at the $85.00 level. Our suggested entry point to buy calls is at $85.25. If triggered our target is the $89.50-90.00 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 264 thousand


Cerner Corp. - CERN - close: 49.85 chg: -0.42 stop: 46.90

Tomorrow could be a good day for networking stocks. Networking titan CSCO reported earnings after the bell today and the results were pretty good. CSCO closed at two-year highs near $25 and after hours the stock was trading north of $27 on the news. That could help fuel another gain in shares of CERN. We're not suggesting new positions at this time. Our target is the $52.00-52.50 range.

Picked on October 30 at $ 48.05
Change since picked: + 1.80
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand


GlobalSantaFe - GSF - close: 55.39 chg: +1.79 stop: 49.39

It looks like GSF had some good news today but we cannot find it. The stock soared with a 3.3% gain to breakout over resistance at its 200-dma and the $55 level. Furthermore the move looks pretty bullish with the strong volume behind it. This may just be a reaction to strength in crude oil and oil service stocks. Our target is the $57.50-58.00 range.

Picked on November 05 at $ 52.39
Change since picked: + 3.00
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 3.4 million


Holly Corp. - HOC - close: 49.88 change: +0.89 stop: 47.95

It's about time HOC showed some strength again. The stock bounced for a 1.8% gain but shares remain under round-number resistance at the $50.00 mark. More aggressive traders may want to buy today's bounce. We would wait for a move over $50 and maybe over $50.75. Our target is the $54.90-55.00 range.

Picked on November 05 at $ 50.75
Change since picked: - 0.87
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 1.1 million


Petroleo Brasileiro - PBR - cls: 91.96 chg: +1.85 stop: 85.65

PBR enjoyed a strong session on Wednesday. The rebound in crude oil futures helped push PBR to a 2% gain and a new two-month high. This could be used as another entry point. Our target is the $95.00-96.00 range. FYI: PBR is a Brasilian stock traded as an ADR here in the U.S. One risk traders are facing is the company's earnings report. We cannot find a specific date or even a history of recent earnings reports. The risk is that they announce a negative report while we're trading them.

Picked on November 06 at $ 90.05
Change since picked: + 1.91
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.5 million


Transocean - RIG - close: 77.19 change: +1.54 stop: 71.99*new*

Oil service stocks produced a healthy gain and shares of RIG added just over 2% to close over its 200-dma again. We have two targets. Our conservative target is the $79.50 level. Our aggressive target is the $84.00 level. FYI: We are raising the stop loss to $71.99.

Picked on November 05 at $ 75.07
Change since picked: + 2.12
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 7.6 million


Schlumberger - SLB - cls: 65.28 chg: +1.27 stop: 60.95

It was a bullish day for SLB. Oil service stocks were strong and the stock rose 1.98% to breakout over the $65.00 level. Traders may want to consider new positions here but if you're opening new plays now you may want to raise your target toward $69-70. Currently our target is the $67.50-68.00 range.

Picked on November 05 at $ 63.50
Change since picked: + 1.78
Earnings Date 10/20/06 (confirmed)
Average Daily Volume = 9.8 million


Vimpel Comm. - VIP - close: 65.53 chg: +0.74 stop: 62.49

Wednesday turned out to be something of a volatile day for VIP. The stock spiked to $63.30 just after the opening bell but quickly turned things around to close in the green. The stock now looks poised to breakout over the $66 level soon. Don't forget that we're dealing with a rising environment of risk due to the earnings report. The company is expected to report this month but we can't find a specific date. Estimates for when VIP will announce range from November 7th to November 23rd. Our target is the $67.50-70.00 range.

Picked on October 12 at $ 62.17
Change since picked: + 3.36
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million

Put Updates

Alcon Inc. - ACL - close: 104.78 chg: -1.40 stop: 110.01

Drug stocks trended lower on Wednesday as investors worried that a democrat-controlled house might be bad news for drug makers and healthcare stocks. Shares of ACL lost 1.3% and set a new three-month closing low. More conservative traders may want to tighten their stops toward the $108 level. Our target is the $100.10-100.00 range.

Picked on October 31 at $105.75
Change since picked: - 0.97
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 520 thousand


Advanced Micro Dev. - AMD - cls: 21.25 chg: -0.31 stop: 22.05

Hmm... there was no third day of gains for the semiconductors. The SOX closed fractionally in the red and AMD lost 1.4%. We're not suggesting new positions at this time. Yesterday we suggested that more conservative traders may want to exit early and cut their losses now and we're repeating that suggestion today. Our target is the $17.50-17.00 range.

Picked on October 29 at $ 20.86
Change since picked: + 0.39
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 23.0 million


Amazon.com - AMZN - close: 39.47 chg: +0.70 stop: 40.25

It looks like we need to go to yellow alert! AMZN posted its fourth gain in a row with the last two days garnering above average volume. That's bad news for the bears and today's rise above resistance at the $39.00 level is definitely a warning short for the bears. More conservative traders may want to exit early right here to limit losses. We're holding on to see if AMZN reverses at round-number, psychological resistance at the $40.00 level. Our target is the $35.00-34.00 range.

Picked on October 29 at $ 38.24
Change since picked: + 1.23
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 7.9 million


Cardinal Health - CAH - cls: 63.48 chg: -0.56 stop: 64.85

Shares of CAH gapped down this morning as investors reacted to election news that democrats would control the house and possibly the senate. CAH managed to rebound off its worst levels of the session but the trend still looks bearish. Right now we're waiting for a breakdown under support at $63 and again near $62.35. Our suggested entry point to buy puts is $61.99. If triggered our target is the $58.00-57.50 range. Be prepared for a bounce on CAH's initial test of the $60 level.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 1.3 million


Capital One Finc. - COF - cls: 77.50 chg: -0.04 stop: 80.05

We have to warn readers that the intraday trading in COF on Wednesday looks bullish. The stock looks poised to rebound higher and we'd look for the next level of resistance at the 10-dma near 78.90. Wait for a failed rally under the 10-dma before considering new positions. Our target is the $75.10-75.00 range.

Picked on October 31 at $ 79.33
Change since picked: - 1.83
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 2.4 million


Centex - CTX - close: 49.65 change: -0.04 stop: 52.55

Homebuilders continued to show relative weakness on Wednesday. The DJUSHB index lost 1.5% but it bounced off its worst levels of the session. Shares of CTX did better than most of its peers with a sharp bounce from its intraday low - almost back to unchanged. The bounce may not be over yet. Watch for a failed rally under $50 or its 10-dma near 51.50 before considering new positions. Our target is the $45.50-45.00 range.

Picked on November 07 at $ 49.75
Change since picked: - 0.10
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 2.1 million


Lehman Brothers - LEH - cls: 74.30 chg: -1.20 stop: 77.01

The bounce in LEH appears to have failed. The stock lost 1.5% and closed back under the $75 level today with volume coming in above average on the move (which is bearish). The XBD broker-dealer index also under performed the markets today. We are aiming for the $70.25-70.00 range but traders should be aware that the rising 50-dma near $73 could be short-term support to be prepared for another bounce.

Picked on November 05 at $ 74.43
Change since picked: - 0.13
Earnings Date 12/13/06 (unconfirmed)
Average Daily Volume = 3.6 million


Pantry Inc. - PTRY - close: 51.63 change: -0.89 stop: 56.01

PTRY sank to a new relative low midday. We really don't see any changes from our previous updates. Our target is the $48.00-47.00 range but we do expect a bounce on PTRY's initial test of the $50 level. We do not want to hold over the November 16th earnings report.

Picked on October 29 at $ 54.05
Change since picked: - 2.42
Earnings Date 11/16/06 (confirmed)
Average Daily Volume = 383 thousand


Univ.Forest Prod. - UFPI - cls: 44.52 chg: -0.03 stop: 48.05

There is no change from our previous updates on UPFI. The stock traded sideways on Wednesday and the overall trend remains bearish. More conservative traders may want to think about tightening their stops toward the $46 level. We're aiming for a decline into the $41.00-40.00 range.

Picked on October 24 at $ 46.13
Change since picked: - 1.05
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: 148.74 chg: +0.51 stop: n/a

BSC managed to out perform the XBD broker-dealer index today but shares still look vulnerable to more selling. 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 two weeks.

Picked on October 22 at $150.19
Change since picked: - 1.45
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million


Cephalon - CEPH - close: 74.59 change: +1.89 stop: n/a

CEPH was upgraded to a "strong buy" this morning and the stock reacted with a 2.59% gain with a rally to the $75 level. We're not suggesting new positions at this time. 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: + 5.24
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.0 million


ConocoPhillips - COP - close: 62.37 chg: +1.38 stop: n/a

There is no change from our previous updates on COP. Currently this play is in big trouble with the lack of a directional move. Our target is breakeven at $1.15 but more conservative traders may want to try and exit at a fraction of our estimated cost (50%, 75%, etc). We're not suggesting new positions. 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: + 2.34
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million


Blue Nile - NILE - cls: 36.13 chg: +0.08 stop: n/a

There is no change from our previous updates on NILE. The stock spent most of Wednesday's session in a 15-cent range. We're not suggesting new positions at this time. 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: - 2.79
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

Dropped Calls


Dropped Puts

Intercont.Exchange - ICE - cls: 87.92 chg: +0.08 stop: 82.55

Shares of ICE are not cooperating. The stock has been bouncing higher this week and is challenging resistance in the $89-90 range. A breakout over $90 could be used as a bullish entry point. It was our plan to buy puts on a breakdown under $80 but that has failed to occur. We're dropping ICE as a bearish candidate.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 1.6 million

Dropped Strangles



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