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Daily Newsletter, Saturday, 11/11/2006

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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

A Quiet Veteran's Day

I (Keene Little) will be filling in for Jim for this weekend's report. Today seemed more like an opex Friday rather than the day before opex week starts. Lately we've seen the Thursday and Friday before opex get a little volatile as traders square up a lot of their positions (exiting or rolling out) before options expiration. Other than a bit of selling Thursday afternoon we haven't seen much volatility. Friday was a downright snoozer. Of course Veteran's Day had many traders taking the day off in order to give themselves a nice 3-day weekend. Thursday's selling might have been a result of the holiday weekend--take some profits off the table before leaving for a long weekend rather than leave it at risk. After all, the bulls have some pretty good profits sitting on the table right now and I would imagine some are getting a little nervous and moving more into profit protection mode now.

There was no major economic news on Friday and the day started out with a slight dip but then consolidated for most of the day. A further dip in the afternoon was followed by a lift into the close which gave the major indices a marginally positive close. The techs and small caps were the strongest of the bunch which could be considered bullish. The VIX dropped sharply into the end of the day which is also potentially bullish. Finishing at 10.79 the VIX is showing no worries about the lofty levels in the market.

VIX chart, Daily

The VIX has been chopping its way lower since its spike up in June, which of course was a low for stocks. There are a couple of ways to draw the top trend line of its wedge but it appears to have broken out of it as of last week and has since been spending its time consolidating and pulling back to retest the broken downtrend line. If the stock market rallies further in the coming week we'll probably see VIX slide down this trend line and could find support at its previous 2005 lows near 10.

One of the explanations for the lack of fear this week is the expectation that the market will rally next week out of relief that the elections are over and the uncertainty has been removed. If that were a good reason I wonder why it didn't rally at the end of this week. At the end of this report I show which economic reports we'll get next week and again it seems there's an expectation that we'll see good numbers for the economy. As earnings wind down there's also less fear that we'll get a nasty surprise in that department.

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Dell and Hewlett-Packard will report next week and there's hope they'll continue the string of strong earnings reports from technology companies. The tech earnings helped drive the Nasdaq up this week, giving it its best week in two months. Certainly if there was a lot of concern about the market we would not see the techs and small caps leading the way. These stocks are a measure of the market's appetite for risk and clearly the market's appetite has not been satiated yet. But why are the semis so notably MIA? That sector continues to be a warning flag but as has been the case for two months now that warning flag has been trampled by the bulls.

There is also an expectation that the stock market will rally into the end of the year since that's what it typically does after mid-term elections. The challenge for this scenario is that 2006 has been the year of moves counter to normal expectations. It has rallied during times when we should have expected declines and vice versa. In keeping with the counter moves we should see a decline into year end. That remains to be seen obviously.

And of course we're heading into opex week and anything can happen by that influence alone. Other than this past May we have usually seen a bullish opex week. Many times it starts down, usually the Thursday before, and then gets a strong reversal the following week. This Thursday was down so that could be setting up our bullish week. I've reported on the trading activity of the mega-banks' trading teams and the way I think they make a lot of their money (with the help of hedge funds jumping on the band wagon). It's relatively easy for them to manipulate the market during opex. If they can drive the market down, buy some cheap front-month call options and sell deep ITM put options, and then drive the market higher into opex they can make a boatload of money. They've consistently shown each quarter the results of their "risk-free" trading.

The only fly in the ointment for this scenario is what I see in the charts which indicate to me that we might have topped. That's a tough call right now since the up trends are still well intact. The opexantics can also result in moves that are counter to what the charts are telling us. But there are enough signals that indicate to me that we could be very close to a trend change, which I'll review with the charts below.

Next Tuesday we'll get retail sales data. It was down -0.4% in September and expectations are for a slight improvement to -0.2% in October. If that number comes in much worse, signaling a stronger slowdown in consumer spending then the market is not going to be happy. Spending is expected to be strong during the upcoming holiday season and if that doesn't happen then the market's anticipation for a strong end-of-year run will evaporate instantly. Wal-Mart has already been warning of lower expectations and I think that's the warning shot across the bow. If the other retailers follow suit then batten down the hatches.

Naturally there's lots of speculation going on now that we know we have a Congress and Senate dominated by the Democratic party. We could get the gridlock that the market favors but with both the Congress and Senate under the Democrats there may be more influence by the Democrats than the market had been expecting. That has started up the worries about higher inflation due to higher taxes and wages (raising the minimum wage would be inflationary). That puts us back on Fed watch since they've made it very clear that higher wage growth (which we've seen lately) will put them back on the rate-increase path.

Bonds have been all over the map recently which says they don't have a clue either (they're supposed to be the brighter bunch). Yields have been spiking strongly up and down since September and my first impression is that it might be in a consolidation pattern before continuing lower.

30-year Yield chart, Daily

The other interpretation is that bond yields are hammering out a bottom and will start to rally after possibly chopping a little lower. It's too early to tell. As can be seen by the RSI we're beginning to get some bullish divergences at the test of September's low. If we see the yield continue to consolidate in a descending triangle pattern then it will look like a continuation pattern (for lower yields). Lower yields would likely mean we're heading into (or already in) a recession.

China was back in the news this week. Our trade deficit with them continues to worsen, hitting a record high of -$23.0B in October. We, and many other countries, have handed off much of our manufacturing to them and now buy our products from them vs. producing it ourselves. It of course means lots of US dollars leaving the country which has been coming back to us in the form of treasury purchases. They continue to indicate their desire to diversify into other securities rather than the US dollar and that helped depress the value of the dollar to nearly a 3-month low. China reiterated its desire to invest more in gold and that helped boost the price of gold to near September's high.

But China's news is nothing new and the price patterns of the dollar and gold look ready to reverse again as they continue to consolidate.

Gold chart, December contract, Daily

Gold has rallied up to its broken uptrend line from August 2005. With the daily chart in overbought it seems unlikely that the rally will continue. From a short term perspective I see the possibility for gold to rally to the 643 area but that's just an upside potential that I see for gold. Short term bearish divergence at the last high (you can see it on the RSI on this chart) raises the possibility that we'll see a pullback start from here.

U.S. Dollar chart, Daily

The US dollar is dropping to its uptrend line from January 2005 and with the daily chart looking oversold we should see the dollar start to bounce back up. The longer term pattern suggests we should see the dollar bounce back up to the top of its consolidation pattern, near 85.30, and at the same time would hit its downtrend line from November 2005. That should set up a decline to new lows as we head into 2007.

A declining dollar fits the scenario when two things are considered: One, like China, many other countries have also stated they wish to diversify and invest in other securities as they feel they are too heavily invested in the US dollar. Lack of demand for, if not outright selling of, the greenback will of course depress its value. Two, the Fed has been producing money at hyper-inflated rates which will of course devalue the dollar itself. Think of those countries that were experiencing strong devaluations in their currency. They were at the same time experiencing rampant inflation. I'm not saying that's where we're headed but that's the risk.

That brings up the subject of money supply.

Calculated M3 Money Supply, Daily chart, courtesy nowandfutures.com

The first thing you should notice when looking at this chart is the parabolic rate at which the money supply is growing. Bernanke stated this week that they're not concerned about money growth anymore since they don't see the correlation between it and economic growth. He said this was due to the innovative financial products that have been introduced in the past few years. I guess that remains to be seen. I have trouble with that opinion when I see the value of the US dollar dropping over the past few years while the rate of growth in the dollar continues to grow at an expanding rate.

If the Fed is intent on monetizing the debt (to be able to buy it back with cheaper dollars) then that would be a reason they wanted to stop reporting M3 money supplies and try to convince us that they are not concerned about money growth. And if the stock market is the beneficiary of all that money, well then, all the better. As I had commented previously, the spike in money growth, as indicated in the big jump in the rate of growth (light blue line) since August seems suspiciously connected to the huge run up in the stock market. When (if) the rate of growth in the money supply slows down, as has started in the past two weeks, then the stock market may lose its prop.

Thanks to Monday and Tuesday the stock market had a good week. As can be seen in the table at the beginning of this report, most indices and sectors were up nicely for the week. As can be seen, this week reversed the losses we saw last week. Let's review the charts.

DOW chart, Daily

The DOW continues to hold inside its bullish up-channel for price action since July. I added small horizontal lines that indicate the stair-stepping higher that this market has seen. It all looks very programmed. Each step is roughly 130 points and the step above the current high is near 12250 so that's our upside potential if we get an early rally next week.

But I see some bearish things developing here. One, RSI has broken its string of higher lows since June. Two, RSI came up for a bearish kiss goodbye against its uptrend line this week. Three, price stalled at the mid line of its up-channel, often an indication the rally is losing steam. Four, we have a large bearish divergence against the high on October 26th. These are all warning flags so the question for the upcoming week is whether the bulls, especially with opexantics, simply trample those flags again.

Bullishly I see the following on the above chart: one, it's still within its up-channel; two, the DOW held its 10-dma on Friday (12095) after bouncing off its 20-dma (12071); three, RSI has held above the 50 line (thin red horizontal line) on its pullback; four, see #1. By the way, if the DOW breaks below RSI 50 it will probably be breaking its uptrend line at the same time and will be confirmation it's likely real selling (not a head fake) taking hold.

DOW chart, Weekly

The DOW's weekly chart shows that it is overbought on this time frame and threatening to turn back down. It's also overbought when you look at its bullish percent--it's now reaching the level it was at in early 2004, which marked the high for the DOW at the time. I also show the measured move from October 2005--we have two equal legs up from that low to the projection at 12197. The high this past week was 12196. These measured moves are very common reversal levels so this is another warning flag. If I've got the long term wave count correct, this leg up is the one that will finish the 2002-2006 rally.

SPX chart, Daily

SPX also looks bullish here when I look at that strong jump off its uptrend line from July. As long as this stays inside its steep up-channel then long is the place to be. Just be ready for a quick exit when that uptrend line breaks because everyone and their brother is watching it. Also be careful about a head fake break down. It's been very easy for the market manipulators to move the market in one direction, let's say a break down in this case, suck in the bears and stop out the longs, and then hit it hard with some buy programs to get both sides scrambling to buy it again. It's been almost too easy for them to do this so expect it again. But a real break will likely open up the flood gates of selling.

Like the DOW I see a couple of bearish developments here: one, the same mid line of the up-channel is acting as resistance now; two, the uptrend line for MACD (and RSI) has been broken; three, a retest of the October 26th high is leaving a bearish divergence; four, price has stalled at the 78.6% retracement of the 2000-2002 decline (the line in the sand for bears) and the Fib projection based on the move up from August 2004, both in the 1386-1389 area and the high for SPX is 1389.

Bullishly, also like the DOW, I see: one, it's still within its up-channel; two, price bounced off it's 10-dma (1377) and 20-dma (1375); three, RSI bounced off its 50 line and holds above it; four, see #1.

Nasdaq chart, Daily

Same exact comments for the DOW and SPX hold for the COMP. The only extra bearish thing I see here is that the bearish divergences since early October are more pronounced. Even though the techs have exhibited more relative strength this week, from a price standpoint, they could be considered weaker when looking at the lack of breadth exhibited by this chart. The bullish thing I see is the fact that price held the retest of the April high at 2375. As long as that continues to hold then stay on the long side (not to mention its uptrend line now near 2367.

The good thing here is that the market is in synch--all indices are in agreement and that's refreshing. When one is breaking they will probably all be breaking (or rallying).

Where In the World Is the SOX semiconductor index, Daily chart

Someone stopped me in the street wondering if I'd sign petition and wear a bracelet with the name "SOX" on it. For those who grew up in the Vietnam era you'll get the joke. The SOX continues to be MIA in the broader market rally. The bearish divergence on MACD can be interpreted two different ways here. The bullish interpretation is that MACD is "resetting" itself back to the zero line as price consolidates. This could be a very bullish interpretation. The bearish interpretation is that the new highs, or retests of highs, is being accompanied by lower highs in MACD. At this point I would say a failure to get back above its 200-dma, which continues to act as resistance, is bearish. It takes a break below the October low, so below 444, to confirm we're probably in a break down.

BIX banking index, Daily chart

While the banks didn't quite rally up to the top of its parallel up-channel it did come within a half point of its Fib projection at 403.68 (Wednesday's high was 403.20). The rally continues to leave bearish divergences, including at its most recent high. The EW (Elliott Wave) counts looks complete for its rally from June. If it manages to rally a little higher in the coming week then the top of the channel is near 405. A break below 392 would indicate a top is very likely in, and it should be a long term top.

U.S. Home Construction Index chart, DJUSHB, Daily

The home builders got a bounce on Friday and it was just in time. That's a bounce off support at the bottom of its bear flag pattern and its broken downtrend line. I have very mixed feelings about this chart. On the one hand it looks potentially bullish for another run higher to the top of its flag pattern where it would also meet resistance at its 200-dma. But in order for that to happen I would think the broader market will have to be rallying strongly as well and I'm having trouble seeing that possibility at the moment. So for the time being let's see if the 50-dma holds price back. A small bounce here followed by a break below 600 would indicate that the high for the bear flag was the October high.

Oil chart, December contract, Daily

Oil looks bullish in that it broke above its downtrend line from August. But it's floundering. I was expecting a firmer break to the upside. So far it's looking a bit corrective with overlapping highs and lows. This signals to me that my interpretation of the wave pattern could be correct--it says we've seen the long term highs for oil and price will continue lower after this bounce is finished. I still believe we'll see a multi-month rally in oil but it could end up being very choppy and difficult to trade.

Oil Index chart, Daily

The rally in the oil stocks was a predictor that oil itself was finding a bottom. I can't help but feel that has now been priced in and we're going to see price stall for this index. As depicted on the chart I 'm expecting to see a pullback. Whether that leads to another bounce higher or to new lows is too hard to tell right now. If long the oil stocks continue to follow Jim's analysis in his LEAPs updates. From a strictly technical analysis I would say you want to protect positions here and perhaps selling some covered calls is the right play.

Transportation Index chart, TRAN, Daily

If the Transports manage to rally to a new high I suspect it will be associated with more bearish divergences. But it's close to breaking its uptrend line and that's the way I'm currently leaning. A break below 4600 would be bearish.

Next week's economic reports include the following:

As you can see, it will be a busy week next week for economic reports. There are some big reports in there that the Fed watches carefully and depending on how the market interprets how the Fed will interpret the data (confused?) will determine the knee-jerk response. On top of that we've got the potential amplification of opex. Need I say be careful this coming week?

The plethora of warning signals I see in the charts now, on the daily and weekly charts, tells me we could finally be putting in a high. Whether or not we get the opex push to new highs I can't tell but if we start breaking the uptrend lines from July/August then there will be little question in my mind that we've put in a major high, at least one that should last for quite a while. More bearishly, the highs, once put in, will not be seen for many years to come as we start bear market leg #2.

I could easily justify a move either way for the upcoming week. My feeling is which ever direction it starts on Monday could easily be a strong move for the week. I continue to believe the mega-banks' trading teams and hedge funds get the momentum started during opex week and won't let up until Friday's close. At least that's been the pattern. Therefore I'm almost inclined to suggest joining an initial move and stick with it rather than try to day trade it.

But countering the argument to stick with a swing trade for the week I've got concerns that if we're in a topping pattern then we could see lots of volatility with big spikes up and down. The number of important economic reports this week could help amplify those spikes. The easy recommendation is to stay long above the uptrend lines shown on the charts and get short below. Those uptrend lines are close so it won't take much of a move to show us whether or not they're going to hold.

Good luck this coming week since it could be a tough one. Trade light and don't let a move go much against you since the potential is that we will not see much in the way of corrections to the move (as has been typical pattern). I'll see some of you on the Market Monitor for the intraday calls on Monday and everyone else back here for a review of market action in Tuesday's Wrap.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
MS None None
TNB    
WHR    

New Calls

Morgan Stanley - MS - close: 76.68 chg: +1.83 stop: 74.49

Company Description:
Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management, wealth management and credit services. The firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 30 countries. (source: company press release or website)

Why We Like It:
Currently LEH is on the play list as a put candidate. We're going to hedge our bets and add MS as a bullish call candidate. The run up in the broker-dealers from their late summer lows was very impressive but late October and early November saw several stocks in the group breakdown. MS was trending lower after its peak in late October until traders bought the dip at its 38.2% Fibonacci retracement level (see chart). Friday's rally (+2.4%) is a bullish breakout over the three-week trendline of lower highs. It also follows a higher low for the stock. We're suggesting calls with MS above $76.00. Our short-term target is the $79.90-80.00 range. More aggressive traders may want to aim higher since the P&F chart points to an $83 target.

Suggested Options:
We are suggesting the December calls since we plan to exit ahead of the December earnings report.

BUY CALL DEC 75.00 MS-LO open interest=1436 current ask $3.30
BUY CALL DEC 80.00 MS-LP open interest=2675 current ask $0.80

Picked on November 12 at $ 76.68
Change since picked: + 0.00
Earnings Date 12/20/06 (unconfirmed)
Average Daily Volume = 4.1 million

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Thomas & Betts - TNB - close: 51.36 chg: +0.58 stop: 49.90

Company Description:
Thomas & Betts Corporation (www.tnb.com) is a leading designer and manufacturer of electrical components used in industrial, construction, and utility markets. (source: company press release or website)

Why We Like It:
The consolidation in TNB appears to be ending. Technical indicators are turning positive as TNB prepares to breakout from a bull flag-shaped pattern. Friday's intraday bounce from the $50 level and its 200-dma looks like a new entry point to buy calls. We do see some resistance at the $54.00 level but we are aiming for the $56.00-57.00 range. Currently the P&F chart points to a $77 target. More conservative traders may want to wait for a move over $51.50 or $52.00 before initiating positions.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 50.00 TNB-LJ open interest=250 current ask $2.85
BUY CALL DEC 55.00 TNB-LK open interest=199 current ask $0.70

Picked on November 12 at $ 51.36
Change since picked: + 0.00
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 thousand

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Whirlpool - WHR - close: 89.55 change: +1.05 stop: 86.99

Company Description:
Whirlpool Corporation is the world's leading manufacturer and marketer of major home appliances, with annual sales of more than $19 billion, more than 80,000 employees, and more than 60 manufacturing and technology research centers around the world. (source: company press release or website)

Why We Like It:
The sideways consolidation in WHR may be coming to an end. The stock has rallied from its early November lows and is now challenging resistance at the $90.00 level. Daily technical indicators have turned positive and the P&F chart points to a $94 target. We want to catch a breakout over resistance at $90.00 so we're suggesting a trigger to buy calls at $90.15. If triggered our target is the $94.75-95.00 range.

Suggested Options:
We are suggesting the December or January calls.

BUY CALL DEC 85.00 WHR-LQ open interest= 728 current ask $5.80
BUY CALL DEC 90.00 WHR-LR open interest=2272 current ask $2.50
BUY CALL DEC 95.00 WHR-LS open interest= 868 current ask $0.75

BUY CALL JAN 90.00 WHR-AR open interest=3508 current ask $3.90

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 1.0 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

CNOOC Ltd - CEO - close: 87.42 change: +0.80 stop: 82.89

This has been a volatile week for crude oil. On Thursday crude oil futures surged more than 2% to breakout over $61 a barrel. Today crude oil decline back under $60 after the IEA cut their demand forecasts. Shares of CEO ignored the weakness in crude oil on Friday. The stock gapped open higher and closed with a 0.9% gain. The move was probably fueled by news that the company reached success with a new natural gas well in Bohai Bay, China. We are still bullish on the stock but we're not suggesting new positions at this time. Our target is the $89.50-90.00 range.

Suggested Options:
We are not suggesting new positions in CEO at this time.

Picked on November 09 at $ 85.52 *gap higher*
Change since picked: + 1.90
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 264 thousand

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Cerner Corp. - CERN - close: 49.03 chg: -0.24 stop: 46.90

Tech stocks, for the most part, were still inching higher on Friday. Unfortunately, shares of CERN continue to under perform the last few days. The overall pattern for CERN is still bullish given the breakout over resistance at $48.00 but the most recent candlestick on the weekly chart looks like a short-term bearish reversal (at the very least a failed rally). Friday's session doesn't tell us much. CERN traded sideways in a narrow 40-cent range for most of the day. A bounce from $49 near its 10-dma would be encouraging but we'd probably look for a dip and bounce near $48.00 before considering new positions. More conservative traders may want to adjust their stops closer to the $48 level. Our target is the $52.00-52.50 range.

Suggested Options:
We are not suggesting new positions at this time. Keep an eye on the $48 level.

Picked on October 30 at $ 48.05
Change since picked: + 0.98
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand

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Deere & Co. - DE - close: 87.11 change: +0.51 stop: 83.99

Friday's trading in DE didn't help much. The stock produced a minor bounce on below average volume. Overall Wednesday's breakout still looks like a bullish entry point to buy calls. However, traders may want to be patient and try and buy a dip in the $86.50-86.00 region. We suspect that DE will rally into its November 21st earnings report. 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=7305 current ask $4.80
BUY CALL DEC 90.00 DE-LR open interest=5830 current ask $2.20

Picked on November 08 at $ 87.45
Change since picked: - 0.34
Earnings Date 11/21/06 (confirmed)
Average Daily Volume = 2.7 million

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Fomento Econo. - FMX - close: 102.47 chg: +1.64 stop: 97.99

This looks like a new bullish entry point on FMX. Traders bought the dip (twice) near $100.00 on Friday morning. The rebound put FMX back near its recent highs and shares look poised to hit new highs next week. The P&F chart looks very positive with a bullish triangle breakout pattern with a $121 target. Our stop loss is at $97.99 but more conservative traders might want to tighten theirs. 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=66 current ask $5.10
BUY CALL DEC 105.00 FMX-LA open interest=43 current ask $2.40

Picked on November 08 at $102.09
Change since picked: + 0.38
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand

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GlobalSantaFe - GSF - close: 54.05 chg: -0.50 stop: 49.39

Oil service stocks tend to be more volatile than their oil producing peers. That was definitely the case on Friday. The IEA lowered their forecast on oil consumption and crude oil futures dropped back under $60 a barrel in what has been a volatile week for the commodity. Oil stocks fell lower but oil services under performed with a 1.8% decline in the OSX index. Shares of GSF closed with a 0.9% loss. We were looking for a bounce near the $54.00 level. GSF actually found short-term support near $53.50. The late afternoon bounce in GSF looks like a potential entry point to buy calls again. However, we are concerned that the three-day pattern in GSF and the OSX oil services index looks like a bearish reversal. Therefore we're not suggesting new bullish positions in GSF at this time. More conservative traders may want to tighten their stops. Our target is the $57.50-58.00 range.

Suggested Options:
We're not suggesting new plays in GSF at this time.

Picked on November 05 at $ 52.39
Change since picked: + 1.66
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 3.4 million

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Holly Corp. - HOC - close: 49.88 change: -1.07 stop: 47.95

The decline in oil futures also impacted shares of HOC. The stock lost just over 2% on Friday to reverse Thursday's gain. The technicals are starting to look mixed with the MACD on the daily chart poised to move lower versus the MACD on the weekly chart poised to produce a new buy signal. We would not suggest new bullish positions with HOC under $50.00 but aggressive traders might want to try and buy a bounce from $48 or $49 should one appear. Our target is the $54.90-55.00 range.

Suggested Options:
We're not suggesting new plays in HOC at this time.

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

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Petroleo Brasileiro - PBR - cls: 92.88 chg: +0.61 stop: 87.99*new*

PBR managed to post a minor gain in spite of the decline in the oil sector indices and crude oil futures. We remain optimistic but if you're looking for a new entry point then consider waiting for a dip back towards the $90 level. The technicals on the weekly chart are bullish while technicals on the daily chart are starting to near overbought zones. The P&F chart is bullish with a $104 target. Please note that we're raising the stop loss to $87.99. Our target is the $95.00-96.00 range. FYI: PBR is a Brazilian 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.

Suggested Options:
If PBR offers a new entry point near $90 we'd consider the December or January calls.

Picked on November 06 at $ 90.05
Change since picked: + 2.83
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.5 million

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FreightCar Amer. - RAIL - close: 55.16 change: +0.32 stop: 53.49

Traders bought the dip in RAIL near $54.00 and its 10-dma and 50-dma. This looks like a new entry point to buy calls, especially given Friday's rebound in the transportation index. RAIL's P&F chart is bullish and points to a $68 target. 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=1463 current ask $2.95
BUY CALL DEC 60.00 RQN-LL open interest=1276 current ask $1.00

Picked on November 08 at $ 56.08
Change since picked: - 0.92
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 334 thousand

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Transocean - RIG - close: 75.67 change: -0.90 stop: 71.99

News that the IEA had reduced their forecast for oil consumption sent crude oil futures lower and that weighed on the oil service stocks. The OSX index lost 1.8% and shares of RIG fell 1.17% - back under its 200-dma. Overall the larger pattern for RIG looks bullish but we noticed that the newest candlestick on the weekly chart looks like a bearish reversal or failed rally. We would look for a new rebound over $76.00 or a new dip/bounce near $74.00 as a new entry point to buy calls. Before considering new plays readers should note that the daily chart for the OSX oil services index looks dangerous with the last three days producing what could be a bearish reversal pattern. Currently we have two targets for RIG. Our conservative target is the $79.50 level. Our aggressive target is the $84.00 level.

Suggested Options:
If RIG produces a new entry point we'd suggest the December or January calls.

Picked on November 05 at $ 75.07
Change since picked: + 0.60
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 7.6 million

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Schlumberger - SLB - cls: 63.30 chg: -1.67 stop: 60.95

Shares of SLB, another oil services stock, really under performed on Friday with a 2.5% decline. The overall pattern looks similar to RIG where the trend appears to be up but the trading over the last week looks like a bearish reversal (see weekly chart). If you're looking for a new entry point we would wait for a dip and bounce near $62 and its 200-dma or for a new rise past the $65.00 level. Bear in mind that our target is the $67.50-68.00 range. Currently the P&F chart is bullish with a $75 target but its upward momentum is in jeopardy. Readers should note that the recent trading in the OSX oil services index might be a short-term bearish reversal.

Suggested Options:
If SLB offers another entry point we'd consider the December or January calls.

Picked on November 05 at $ 63.50
Change since picked: - 0.20
Earnings Date 10/20/06 (confirmed)
Average Daily Volume = 9.8 million

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Vimpel Comm. - VIP - close: 65.91 chg: +0.05 stop: 62.49

We remain cautiously optimistic on VIP. The stock acts like it wants to move higher and given the chance we think it will. Unfortunately, VIP is also overbought and could be a big target for profit taking should the major averages turn lower. Shares of VIP are relatively close to our target in the $67.50-70.00 range so we're not suggesting new plays. We are going to repeat our earlier suggestion that more conservative traders may want to take some money off the table now. 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.

Suggested Options:
We are not suggesting new call positions in VIP at this time.

Picked on October 12 at $ 62.17
Change since picked: + 3.74
Earnings Date 11/17/06 (unconfirmed)
Average Daily Volume = 1.0 million
 

Put Updates

Advanced Micro Dev. - AMD - cls: 21.07 chg: +0.18 stop: 22.05

The SOX semiconductor index appears to have produced the right shoulder in a bearish head-and-shoulders pattern. The defining moment looks like Thursday's failed rally under the SOX's 200-dma. Unfortunately, there was no follow through lower on Friday. Instead the SOX bounced with a 1% gain lending strength to the NASDAQ. Shares of AMD followed with a 0.8% bounce albeit on relatively low volume. We suspect that AMD will turn lower given its trendline of resistance (see chart) but we are suggesting that readers wait for a new decline under support at $20.00 before initiating new positions. Our concern is that AMD is building on a trendline of higher lows (see chart). Our target is the $17.50-17.00 range.

Suggested Options:
We would wait for a decline under $20 before considering new plays. We prefer the December puts.

Picked on October 29 at $ 20.86
Change since picked: + 0.21
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 23.0 million

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Amazon.com - AMZN - close: 39.26 chg: +0.42 stop: 40.25

It would appear that the bulls are still in control of AMZN. Thursday saw the stock's rally fail under the $40 level but Friday did not produce any sort of follow through lower. Short-term technicals may be at overbought levels but they can always grow more overbought. Right now we are expecting another rally attempt at the $40 mark. The recent breakout and close over resistance at the $39.00 level is negative for the bears and more conservative traders may want to exit early to limit losses. If you're looking for a new entry point watch for another failed rally under $40 or $39.80 or as an alternative wait for a decline under short-term support at the rising 10-dma. Our target is the $35.00-34.00 range.

Suggested Options:
If AMZN produces a new entry point we'd suggest the December or January puts.

Picked on October 29 at $ 38.24
Change since picked: + 1.02
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 7.9 million

---

Cardinal Health - CAH - cls: 62.05 chg: -1.26 stop: 64.85

Our bearish put play in CAH is finally open. The stock has slowly withered lower and broken support at $63.00 and again near $62.35. Driving CAH under the $62 level on Friday appears to have been an analyst downgrade. Volume on the decline was strong, which is good news for the bears. Our suggested trigger to buy puts was at $61.99. Now that the play is open our target is the $58.00-57.50 range. Be prepared for a bounce on CAH's initial test of the $60 level.

Suggested Options:
We are suggesting the December or January puts.

BUY PUT DEC 65.00 CAH-XM open interest=1722 current ask $3.40
BUY PUT DEC 60.00 CAH-XL open interest=3409 current ask $0.85

BUY PUT JAN 65.00 CAH-MM open interest=5500 current ask $3.80
BUY PUT JAN 60.00 CAH-ML open interest=3563 current ask $1.40

Picked on November 10 at $ 61.99
Change since picked: + 0.06
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 1.3 million

---

Capital One Finc. - COF - cls: 77.52 chg: +1.10 stop: 80.05

Bulls are trying to make a comeback in COF. On Thursday the stock produced a bearish failed rally under its 50-dma (and the $78 level). Unfortunately, Friday failed to see any follow through lower. COF rebounded with a 1.4% gain. We're growing concerned that COF is finding too much support in the $76 region. We're not suggesting new positions and more conservative traders may want to exit early or tighten their stop toward the $79 or $78 levels. Our target is the $75.10-75.00 range.

Suggested Options:
We are not suggesting new positions in COF at this time.

Picked on October 31 at $ 79.33
Change since picked: - 1.81
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 2.4 million

---

Centex - CTX - close: 50.59 change: +1.79 stop: 52.55

CTX erased four days of losses with Friday's 3.6% bounce. We may be witnessing a short squeeze sparked by another decline in bond yields, which influence mortgage rates. The latest data put short interest at almost 10% of its 117 million-share float. The breakout back above $50 and its 100-dma is definitely bad news for the bears. Shares were somewhat oversold and due for a bounce but more conservative traders may want to exit early and limit losses anyway. We're keeping the play open since CTX appears to have additional resistance near $52 and its 50-dma. Aggressive traders could try and open positions on a failed rally under $52 but we would suggest waiting for a new decline under $50.00 or $49.75 before starting new plays. Our target is the $45.50-45.00 range.

Suggested Options:
We are not suggesting new plays in CTX at this time.

Picked on November 07 at $ 49.75
Change since picked: + 0.84
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 2.1 million

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Freeport McMoran - FCX - cls: 58.82 chg: -2.01 stop: 62.01

Gold and mining stocks gave back a lot of Thursday's big gains. Shares of FCX under performed its peers with a 3.3% loss and gave back all of its gains from Thursday. The decline on Friday helped produce a new sell signal on the daily chart's MACD indicator. The decline back under $60 and $59 looks like a new entry point to buy puts. However, the afternoon bounce on Friday suggests FCX may make another attempt at a rebound. We would wait and watch for a failed rally under $60.00 as a potential entry point to start new plays. We have two targets on FCX. Our conservative target is the $55.25-55.00 range. Our aggressive target is the $51.00-50.00 range.

Suggested Options:
Traders can choose to open positions now or wait for a failed rally under $60.00. We would use the December or January puts.

Picked on November 08 at $ 59.05
Change since picked: - 0.23
Earnings Date 10/17/06 (confirmed)
Average Daily Volume = 3.7 million

---

Lehman Brothers - LEH - cls: 72.18 chg: +0.79 stop: 75.55

The broker-dealer stocks bounced on Friday after Thursday's rough decline. Shares of LEH added 1.1% on above average volume. We remain bearish but the short-term oversold bounce may not be over yet. We're not suggesting new plays at this time but a failed rally near $74 could be used as a new entry point. Our target is the $70.25-70.00 range.

Suggested Options:
We're not suggesting new positions in LEH at this time.

Picked on November 05 at $ 74.43
Change since picked: - 2.25
Earnings Date 12/13/06 (unconfirmed)
Average Daily Volume = 3.6 million

---

Pantry Inc. - PTRY - close: 51.82 change: +0.83 stop: 54.05*new*

We are running out of time with PTRY. The company is due to report earnings on the morning of Thursday, November 16th. We do not want to hold over the report so we're planning to exit on Wednesday at the closing bell. Given our time frame we're adjusting the stop loss to $54.05 and we're not suggesting new positions. We're also adjusting our target to $50.25.

Suggested Options:
We are not suggesting new plays at this time.

Picked on October 29 at $ 54.05
Change since picked: - 2.23
Earnings Date 11/16/06 (confirmed)
Average Daily Volume = 383 thousand

---

Univ.Forest Prod. - UFPI - cls: 45.32 chg: +1.32 stop: 46.13*new*

Uh-oh! The oversold bounce in UFPI was just a little too strong for our comfort level on Friday. The stock bounced to a 3% gain and closed back above the $45 level. The move helped the daily chart's MACD indicator produce a new buy signal. More conservative traders might actually want to consider an early exit to avoid a loss given Friday's unexpected show of strength. We are adjusting our stop loss to $46.13 and we're not suggesting new positions. Our target has been the $41-40 range.

Suggested Options:
We are not suggesting new plays in UFPI.

Picked on October 24 at $ 46.13
Change since picked: - 0.81
Earnings Date 10/16/06 (confirmed)
Average Daily Volume = 192 thousand

---

Washington Group. - WGII - cls: 56.30 chg: +1.83 stop: 58.51*new*

WGII was bouncing early Friday but then the rally suddenly surged higher late afternoon accompanied by a big wave of volume. The momentum stalled just over the $57 level and the stock pulled back from its highs to close under the 10-dma and 200-dma. We could not find any specific news to account for the afternoon rise. The close back above the $56 level is a challenge for us since that puts WGII back in its $56-58 trading range. We would expect the 50-dma near $58.50 to act as resistance so we're lowering our stop loss to $58.51. However, given the unexpected strength and the big volume behind it more conservative traders may want to consider an early exit to avoid further losses. Our target has been the $51-50 range.

Suggested Options:
We're not suggesting new positions in WGII at this time.

Picked on November 08 at $ 55.40
Change since picked: + 0.90
Earnings Date 11/06/06 (confirmed)
Average Daily Volume = 195 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: 147.16 chg: +2.75 stop: n/a

We are down to our last five days with this BSC strangle play. The stock is trending lower but Friday's bounce helped shares recoup a lot of Thursday's big sell-off. November options expire after this Friday. Given our time frame we're adjusting our target to breakeven at $4.00 (estimated cost). The options in our play were the the November 155 call (BSC-KK) and the November 145 put (BSC-WI).

Suggested Options:
We're not suggesting new strangles in BSC.

Picked on October 22 at $150.19
Change since picked: - 3.03
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Caterpillar - CAT - close: 59.60 chg: +0.40 stop: n/a

Entry point alert! CAT bounced back into our $59.50-60.50 suggested entry point range to open new strangle plays. The intraday chart suggests that CAT will continue to bounce on Monday morning so we might get another (preferred) entry at the $60.00 mark. The options in our strangle are the December $65 call (CAT-LM) and the December $55 put (CAT-XK). Our estimated cost was about $0.75. We want to exit if either options rises to $1.50.

Suggested Options:
See play description.

Picked on November 08 at $ 60.10
Change since picked: - 0.50
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million

---

Cephalon - CEPH - close: 73.84 change: -0.44 stop: n/a

Traders bought the dip in CEPH on Friday. The stock rebounded sharply from its lows near $72.35. We are not suggesting new strangle plays in CEPH. 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.

Suggested Options:
We're not suggesting new strangles in CEPH.

Picked on October 29 at $ 69.35
Change since picked: + 4.49
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.0 million

---

ConocoPhillips - COP - close: 63.09 chg: -0.22 stop: n/a

We only have five days to see COP trade over $65 or under $55 to give this strangle play a chance to exit at breakeven or better. November options expire after Friday. We're not suggesting new positions. 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) to salvage their capital. Our suggested options were the November $65 call (COP-KM) and the November $55 put (COP-WK).

Suggested Options:
We are not suggesting new strangle plays.

Picked on October 15 at $ 60.03
Change since picked: + 3.06
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million

---

Blue Nile - NILE - cls: 35.87 chg: +0.34 stop: n/a

The last several days have seen NILE's oversold bounce fail but shares are struggling to fall through the $35.30 region. Overall the pattern looks negative. 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).

Suggested Options:
We are not suggesting new strangle plays.

Picked on October 29 at $ 38.92
Change since picked: - 3.05
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand
 

Dropped Calls

None
 

Dropped Puts

Alcon Inc. - ACL - close: 100.12 chg: -2.23 stop: 110.01

Target achieved. Drug stocks continued to sell-off for their third day in a row following the democrats win in congress on Tuesday. Shares of ACL plunged another 2.2% and managed to hit an intraday low of $99.00. Our target was the $100.10-100.00 range.

Picked on October 31 at $105.75
Change since picked: - 5.63
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 520 thousand
 

Dropped Strangles

None
 


Trader's Corner

More of "The Least You Should Know" about Options

"Options don't begin trading until 9:45," the broker intoned. This was during my newbie days as an options trader, back when we called in our orders to traditional brokers. The broker couldn't be convinced to try putting that order through any earlier and I wouldn't profit from those options, either.

Fifteen minutes can be an eternity in an options trade. By the time that fifteen minutes from 9:30-9:45 am EST had expired, the options that were profitable for a nanosecond after the open had dropped in price, just as I had feared they would. What could have been a nice profit for a nanosecond that morning resulted in a loss, my biggest loss up until that point.

The intention of this article is not to trash traditional brokers or any brokers, but rather to continue a discussion begun last week about the least you need to know if you're going to trade options. In addition to last week's settlement-related topics, you also need to know when options trade. Although the incident related above occurred years ago, questions still arrive from subscribers, questioning when options trade.

Equity options, such as the ones I was trading back when I was a newbie and had contacted that broker, trade during the same hours as the equities that underlie those options. Generally, that means that equity options trade from 9:30 am to 4:00 pm EST, but an option doesn't open until the equity that underlies it does. If a company releases important news before the open, news that creates an imbalance that takes three minutes after the open to resolve, its options won't begin trading until then, either.

If you're trading options on an index, the timing proves a little different. Index options trade from 9:30 am to 4:15 pm EST, but don't open until after twenty percent of the stocks composing that index have opened. If traders are waiting impatiently for an SPX option's new prices after the open, those prices may not be available because the required number of component stocks might not yet have opened. The percentage can change from index to index, but the CBOE notes that percentage as applying to most indices.

Armed with this knowledge, I might have been able to convince that broker to put my order through that long-ago morning, rather than holding it until 9:45 EST as he did. That might have prevented my first big loss. Understanding when options trade might help you prevent one, too.
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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