Option Investor

Daily Newsletter, Wednesday, 11/15/2006

Printer friendly version

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Yada, Yada, Yada

Are you getting tired of hearing about the Dow's new record intraday and closing highs? Today saw a number of new records reached, with the Dow reaching yet-another intraday and closing high, the SPX reaching yet-another six-year high, the Russell 2000 reaching another all-time high, the Nasdaq at its highest level in more than five years, and some airline stocks breaking above their 9/11 levels for the first time since that tragic day.

If you're in bullish positions or depending on stock-market gains to push your mutual fund higher, you're not tired of those new records. If you're in bearish positions, you're weary beyond bearing. Those sentiments were expressed mathematically in the VIX's drop to an intraday low of 10.13, one hundredth below yesterday's 10.14 low. Complacency reined this morning, signaling concern to contrarians. That concern has been misplaced of late, but contrarians were to be rewarded over the short-term at least after the release of the FOMC's October minutes stalled the rally.

I, Linda Piazza, would like to shorten my Wraps, but, unfortunately, those setting the dates for economic releases, company developments and FOMC meetings, statements and minutes failed to consult me. I'm doing the next-best thing. I'm dividing my Wrap into sections as follows: Introduction, Charts, Today's Developments, Tomorrow's Economic and Earnings Releases, and What about Tomorrow? If you're interested only in charts and what I have to say about tomorrow's likely pattern, do a search for those headlines.


Equities had been charging higher all day, with the SPX having just broken to the upside out of a rising wedge, once upon a time known as a "bearish" rising wedge. When the minutes were released, equities were knocked back. The ensuing counter-bounce brought the SPX up to a new daily high before it fell back more precipitously and then proceeded to chop around the rest of the day. That bounce had been a bit hard to understand, given the stern tenor of those FOMC minutes.

Bond yields had bounced along with equities and were treading water near their highs of the day previous to the release of the minutes. They gave credence to the stern tenor found in the FOMC minutes. Keene Little has been mentioning in his Wraps lately that the bond traders seem to have as little insight as the rest of us lately, however.

The minutes emphasized that ALL members were concerned about inflation risks, mentioning many upside risks, including the tight labor market. Members agreed that the emphasis in the statement released in concurrence with the October meeting should convince its readers that additional tightening could occur. The Committee's dominant concern was the inflation risk. Current rates of core inflation remained too high for comfort, the minutes emphasized. Targets for inflation were discussed, but a decision was postponed. The Committee thought that "substantial uncertainty continued to attend [their] outlook" that "the economy would expand close to or a little below its potential growth rate and that inflation would ebb gradually from its elevated levels."

The minutes pointed to the upcoming release of significant amounts of data before the next meeting on December 12. That data will provide the Committee with the information that might be needed to assess "whether any additional firming was needed to address" inflation risks.

Although the FOMC believes that the "contraction in home construction remained a significant drag on economic activity," it does not yet see any spillover from the weak housing market. The rise in nonresidential building offset the losses in residential building. September's decline in industrial production was mentioned, with the notation that "economic growth had probably slowed more sharply in the third quarter than had been expected at the time of the September meeting," although the Committee believes that the third-quarter's slowdown was due to temporary factors.

Those who want to read the entire statement for themselves can follow this link: http://www.federalreserve.gov/FOMC/MINUTES/20061025.htm

Looking at charts will give some perspective on the day's events.


Annotated Daily Chart of the SPX:

The SPX's type of short-term bearish candle has often been followed by sideways consolidation rather than an actual downturn. That sideways consolidation sometimes creates a slightly higher high. In the event of an actual downturn, however, watch for potential support at the 10-sma unless the SPX blows through it. Support at the 30-sma and converging trendlines seen on the chart might be appropriate for a short-term buy-the-support bounce attempt for those who are so inclined. Be careful with any such play, preparing to jump right back out if this is the time that the SPX isn't going to bounce. Watch internals, too, because the further these bounces take the SPX and other indices, the more weak hands have been jumping on. They'll be quick to bail.

As of the close, the SPX's 15-minute Keltner chart revealed that the SPX was finding resistance at the same Keltner line that had previously provided support. That resistance was gathering from about 1397.15-1397.60 on 15-minute closes. It looked as if the SPX might be pressured toward next Keltner support. As of the close, light support lay at 1395.12, with next and stronger support at 1393.80. Strongest support lay at 1388-1388.50, with that support line still rising sharply.

Unless there's a hard push down due to an unfavorable CPI number or other development tomorrow, a bounce should be expected near 1393.80-1394.00, with the result of that bounce, if any, telling traders whether some or all of the bullish exuberance has been evaporated. A brief bounce followed by a rollover may predict that the stronger support near 1388 will be tested. Remember that Keltner lines are dynamic and will change somewhat when the SPX moves, and that any 15-minute indicators can easily be overcome by an event as important as tomorrow's CPI or Philly Fed.

The Dow's small-bodied candle with a small upper candle might also be considered short-term bearish, although "bearish" still translates to sideways or sideways-up consolidation in this market. Be watchful in case it translates into something more bearish than that, however.

Annotated Daily Chart of the Dow:

If the Dow should reach for another new high tomorrow, watch for resistance at the midline of this channel. Bottom-of-the-channel support now lines up with the 10-sma, so bulls don't want to see that support broken. Confirm any such break with a close below the 30-sma, however, and remain aware that support is closely layered beneath the channel. Unless the Dow is shoved down hard, it's going to be difficult for the bears to gain much traction and a bounce might prove likely at the bottom-of-the-channel support, if it's tested.

At the end of the day, the Dow's 15-minute Keltner chart also revealed that former support through much of the day was beginning to serve as resistance. That support was at 12,255-12,257 on 15-minute closes. First light support was at 12,237, with further support at 12,220. A brief bounce at support, followed by a rollover, may suggest that stronger support may need to be tested. As of the close, that lay at 12,165-12,172, but was it still rising sharply.

The Nasdaq's small-bodied candle that pulled back from the day's high, when coupled with its RSI level, urge that short-term bulls exercise caution, although long-term bulls can be satisfied that the Nasdaq's chart remains bullish for now. Follow the Nasdaq or any tech-related stock higher with your stops, however, if you're sitting on big gains from a long-term position.

Annotated Daily Chart of the Nasdaq:

That small-bodied candle with the upper shadow would be more significant if it had occurred at the top of the channel, but the RSI level does urge caution for short-term bulls. Note that the Nasdaq's RSI doesn't tend to stay at its current level long. The top-of-the-channel level may prove irresistible, however, a price magnet of sorts. Whether a short-term or long-term bull, I'd be ratcheting up my stops, however.

As of the close, the Nasdaq's 15-minute Keltner chart did not show the same setup as did the Dow's and the SPX's. It's true that a Keltner line now at 2445 was formerly providing support and, at the end of the day, served as resistance. However, the Nasdaq remained on breakout status on the 15-minute chart. It would first have to break through support at about 2440 and then at 2430.63, as of the close, before it erased that breakout status, with either of those support levels likely to prompt at least a short-term bounce attempt, if not more. A hard shove down tomorrow morning could do push the Nasdaq through that support, but without that hard shove lower, look for support at one of those two levels. Remember that the lines are dynamic and that they're important on 15-minute closes, not on intra-period moves.

I've been pointing out that there was something wrong with the SOX's bearish picture for weeks now. The SOX had been traveling higher through a rising price channel, just as had the other indices. After breaking down, it rose to retest the former support, falling back from that former support in a classic "kiss goodbye" setup. However, the SOX should have then fallen precipitously. Instead, it trended sideways, showing that bears didn't have the strength to push it lower. Sooner or later, bulls were going to gain courage to buy the SOX components if the bears couldn't break the consolidation. This week, bulls gained that courage. The SOX was driven above its 200-sma again and above long-term resistance.

However, the candle it created today while driving above that resistance was anything but bullish.

Annotated Daily Chart of the SOX:

Since that descending trendline that the SOX leaped above this morning is a long-term one, the possibility exists that I've merely gotten the angle the slightest bit off kilter. If that's true, the candle pierced the resistance but closed at or above it, rather than remained sitting on it. In any case, the daily candle was a bearish one when it comes at the top of a rise, and the RSI confirms that possibility. Remember that overbought conditions can be relieved by a sideways/sideways-up movement in time in addition to a pullback.

The SOX's Keltner picture was not particularly clear since the SOX began consolidating in a potentially bullish right triangle after its initial burst higher today, and since it remained in breakout status on the 15-minute Keltner chart. It is, like other indices, finding resistance on a line that earlier served as support, but it needs to drop below 479.90 or so on a 15-minute close to erase its breakout status. There's every possibility that it might rise first, since the Keltner chart was so scrambled by that consolidation. If it does rise first, watch for first potential resistance at 485 to just under 486, with that important on 15-minute closes.

The Russell 2000 also jumped above resistance and also fell back off the day's high, but only slightly. Its daily candle is not particularly bearish, although the chart does show some similarities to the SOX's, particularly when considering the RUT's RSI level. The RUT tends to consolidate sideways or pull back soon after reaching its current level, as is apparent on the chart. I must note, however, that 800 is a nice round number that may present an irresistible price magnet.

Annotated Daily Chart of the RUT:

First daily support for the RUT would obviously be offered at the rising red trendline, with October's high and then the converging 10- and 30-sma's also offering potential support. If in bullish positions, keep ratcheting those stops higher. Although the daily chart was not as bearish as the SOX's, the RSI suggests a short-term overbought condition.

Like the SOX, however, the RUT had not violated its breakout signal on the 15-minute Keltner chart as of today's close. It was finding resistance on a Keltner line that had previously provided support, with that line at the RUT's closing level and with further light Keltner resistance near 793.24. The RUT would need to fall below Keltner lines currently at 788.47 and then at 782.09 before it erases that breakout signal. As of the close the support near 782 looked strong, backed up by further Keltner support.

Today's Developments

Several economic releases appeared before this afternoon's FOMC minutes. As is usual for a Wednesday morning, the first release of the day was the Mortgage Bankers Association's (MBAA) weekly mortgage application volume survey, this for the week ending November 10. With the rate for thirty-year, fixed-rate mortgages dropping to 6.15 from its previous 6.24 percent and with points decreasing, too, the application volumes increased 4.3 percent. The unadjusted year-over-year comparison fell 0.1 percent. All components rose, too, with the Refinance Index reaching its highest level in more than a year.

At 8:30 EST, the influential Empire State index measuring manufacturing activity in the New York area was released. That index climbed to 26.7 from last month's 22.9, a surprise since economists had been expecting a decline. Other surveys of manufacturing activity, including the ISM, had shown some weakness. Today's result reached a five-month high. Components measuring new orders, shipments, unfilled orders and employees all improved. The index measuring future business conditions leaped to 37.8 from the previous 30.2.

Perhaps a bit more troubling to those on inflation watch was the strong jump in the employee and prices-paid components, however. The employee index jumped to 24.5 from the previous 19.4, bringing it to the highest level in more than a year. The prices paid index jumped to 34.9 from the previous 30.8. While prices paid were increasing, prices received were easing, to 17.0 from 17.5. That, of course, is not a good combination. Bonds did drop and yields did rise after the release, but whether that was related to the index or was just part of the choppiness we've seen lately in the bonds remains unclear.

Several developments this week could and did impact crude prices. As many may have heard, yesterday think tank Cambridge Energy Research Associates dismissed the "peak oil" theory, saying that the world has about 3.74 trillion barrels of oil remaining, with that estimate triple the previous one. The peak in oil production would not occur before 2030, the think tank's director of oil industry activity proposed.

It's too bad that Jim is out of town this week because his research could have given us a better perspective on how much of this supposed supply would be available for production and how difficult it would be to bring it into production. I suspect he might dispute the think tank's estimate that we have 122 years of supply at current consumption rates. As many of you know, Jim has spent the last year attending energy conferences around the country, speaking with industry officials, so he has gained a strong perspective and knowledge base of what's occurring in the energy sector. Whether Jim would agree with this release or not, the release and perhaps other factors pushed crude lower yesterday, but the modest loss surely wasn't a strong endorsement of the think tank's prophecy.

This morning, speculation that OPEC might be considering another production cut was discussed again, although some are skeptical that such a cut would occur. OPEC's president spoke out, however, removing some of the skepticism when he stated that $58-60.00/barrel oil wasn't good for investments, that more production should have been cut at the last OPEC meeting, and that another cut was probable at December's meeting. Nigeria's production has decreased and reports of another strike at the Nigerian production facilities were circulating this morning ahead of the crude inventories number.

Expectations for crude inventories from Wachovia were for an increase of 1.2 million barrels for crude, while Fimat USA expected a lower increase of 800,000 barrels. The corresponding expectations for distillates were for a decline of 550,000 barrels and 1.1 million barrels. For gasoline, Wachovia forecast a climb of 225,000 barrels, and Fimat predicted a decline of 200,000 barrels.

Gasoline and distillate figures proved much different than expected, with big draw downs in both. The EIA reported a build of 1.3 million barrels in crude, but draw downs of 3.6 million barrels in distillates and 3.7 million barrels in gasoline. The EIA also reported that refineries operated at 87.3 percent last week. Crude climbed above $59.00 today, but was stopped by the 10-sma , with the close today at $59.15 according to my source.

The TRAN had soared ahead of the crude inventories, breaking above October's high, but flattened afterwards. It closed the day at 4830.43, playing catch-up with other indices that had been posting gains. It's still below a long-term descending trendline that crosses at about 4860, however.

Big news surfaced in the transportation sector this morning, with U.S. Airways making an $8 billion cash-and-stock offer for Delta. According to a CNBC reporter, the CEO of U.S. Airways has always believed that if he wanted to grow the company, it would be through mergers and acquisitions. This merger would give U.S. Airways the biggest share of domestic seats. He pointed out the advantages for U.S. Airways to move now. The offer is a 20 percent premium to what Delta's creditors would be able to receive otherwise, and so the deal was likely to receive approval from the courts and creditors. In addition, some have speculated that the Democratic stance on antitrust issue would make them less likely to agree to mergers and acquisitions in the airline industry. It behooves the company to move quickly and have the deal structured before Democrats come into office, even if it's unlikely that the deal can be completed before then. If the deal is in the works, it's unlikely that Democrats will have this first on their list, the expert speculated, although other legacy airlines are likely to object.

Another analyst proposed that this development could create big excitement in the transports, and it certainly did in early trading. We have six big carriers, the expert said, speculating that we needed only two. A third expert noted that the transports had not participated in yesterday's rally, and, in fact, were still far below May's high.

The excitement didn't appear to be strong at Delta, however, with a pre-market banner on Marketwatch claiming that Delta had said that early talks with U.S. Airways had not been productive.

In related news, British Airways announced that it was buying American's 1-percent position in Iberia. Also, Fortress Investment Group will buy Rail America Inc. (RRA), a holding company for two railroad companies, for $16.35 a share cash, with Tuesday's close at $12.38. Also perhaps contributing to some excitement in the transportation sector was Bear Stearns' upgrade of JetBlue (JBLU) and AirTran Holdings (AAI). The Wall Street Journal reported good prospects for Boeing (BA).

Another development in the energy sector was discussed this morning. Some speculation exists that Russia wants to set up an OPEC for natural gas. Russia has over 20 percent of the world's natural gas. Although an expert speaking on CNBC this morning thought an OPEC for natural gas was unlikely because the producers were so disparate and had such different goals, that expert did point out that Russia still had immense control over the world's supply. Nearly 25 percent of all Europe's gas is coming from Russia, he pointed out, speculating that in the next 20-25 years, that percentage could rise to 40 percent.

Warren Buffet's Berkshire Hathaway created some excitement early in the day with a pre-market announcement that it was increasing its stakes in Lowe's Companies (LOW) and Nike (NKE). This helped boost the retail sector ahead of tomorrow's earnings releases that include a number of retailers. In other company-related news, Goldman Sachs upgraded Altria Group (MO) to a buy rating ahead of Thursday's investor meeting.

Earlier in this article, antitrust issues were mentioned in concern with the U.S. Airlines' proposed merger, and that issue has surfaced again with respect to Microsoft (MSFT). The head of the European Commission has given MSFT a Thanksgiving Day deadline to submit requested technical documents or be levied a fine of up to 3 million euros each day. In other company-related news, Clorox (CLX) raised its quarterly dividend by two cents.

After-hours developments included disappointing results from Applied Materials (AMAT) and BEA Systems (BEAS). AMAT was last trading at $18.25, down from its $18.65 close, and BEAS was last trading at $14.34, down from its $15.69 close.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic reports of course begin with the weekly initial claims, but few will notice that release. They'll be focusing instead on October's CPI, to be released at the same time. Expectations are for the headline number to drop 0.2-0.3 percent, following last month's 0.5-percent drop. Any sign of inflation might be considered particularly bad news, given the recent gains in the market. September's Net Foreign Purchases will be released at 9:00, followed by October's Industrial Production and Capacity Utilization at 9:15. Both can and do move the markets. Some market participants might be skittish about this number, given some weaker-than-expected manufacturing numbers in the last several weeks, although today's Empire State index might have reassured them. Expectations are for a gain of 0.2-0.3 percent in industrial production after last month's 0.6-percent drop, and a flat figure for capacity utilization. Expectations are for 81.9-82.0 percent after the previous 81.9 percent. The important November Philly Fed follows at noon, with expectations at a 4.0-5.0 percent jump, up from the previous 0.7-percent drop.

As is apparent, tomorrow will usher in a number of potentially market-moving economic releases. These could fight against that normal pin-them-to-the-numbers effect that typically begins about mid-morning on an opex Thursday.

Also perhaps fighting against that tendency might be the fact that Dell reports tomorrow after the close, and HPQ also reports tomorrow, although the time was not supplied, according to Yahoo. Other companies reporting earnings tomorrow include BKS, BIG, CLE, CPWM, DEBS, GPS, IFX, KLIC, MSCC, SHLD, SBUX, SMRT, BBA, WSM and ZLC. Those reporting companies include many retailers.

What about Tomorrow?

What about tomorrow? By the end of the day today, a little fear-of-the-Fed had asserted itself, particularly ahead of tomorrow's CPI. We know that the FOMC has to proclaim itself a staunch defender against inflation. If you've read my previous Wraps, you even know that the FOMC tends to take that stern stance when it's pausing, even in those times when the next move has been an easing rather than a tightening. However, recent data makes it difficult to dismiss that fear of the Fed entirely, and bond traders certainly weren't dismissing it.

Tomorrow's pre-market release of the CPI assumes strong importance in this climate, and I still haven't received my crystal ball. The shape of today's daily candles and the RSI levels of some indices that do tend to respond quickly to elevated RSI levels suggest that the indices are vulnerable to a downturn, perhaps as soon as tomorrow. If in long-term bullish positions, continue the tack I've advised in other Wraps: ratcheting your stops higher with any gains and getting out if your pre-set get-out points are hit. So far, indices remain long-term bullish, but candles today were short-term bearish on many indices. I've pinpointed levels to watch when discussing each chart.

What about bearish positions? As indices have been climbing inside their rising price channels, I've been pointing out the difficulty of entering bearish trades in a bullish environment. I've been cautioning would-be bears to enter only at their own risk and only if they're adept scalpers. However, if tomorrow weren't opex Thursday, I would be suggesting that this might be a good time to attempt a short-term bearish play, perhaps after a first bounce tomorrow morning. However, tomorrow is opex Thursday. Moreover, it's attended by numerous important economic releases that will be occurring throughout the day, as well as Dell's after-the-close report. Based on that, I think I'd advise again that--other than long-term bulls who are ratcheting up those stops as the markets climb higher--only adept scalpers who don't need my advice anyway should be in the market tomorrow. Today's moves have scrambled technical indicators, and they've been of less use than usual in this climate, anyway.

I have to end by saying that this climate scares me a bit, although the VIX level indicates that it's not scaring many people.

New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Bear Stearns - BSC - close: 153.81 chg: +1.92 stop: 144.99

The XBD broker-dealer index continued to rally on Wednesday and is in the process of breaking out over resistance in the 240-242 zone, which would complete a bullish cup-and-handle pattern for the sector. Shares of BSC also continued to rally and shares added 1.2% following yesterday's breakout from its bull-flag pattern. We do expect some resistance near $155 but our target is the $159.00-160.00 range. We do not want to hold over the mid December earnings report.

Picked on November 14 at $151.89
Change since picked: + 1.92
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.5 million


CNOOC Ltd - CEO - close: 86.76 change: -0.44 stop: 82.89

We don't see any changes from our previous updates. CEO is still consolidating flat to down and looks like it will dip toward the 10-dma or the $85 level soon. We would hesitate about opening new bullish positions in CEO at this time. Broken resistance near $85 should now act as support so more conservative traders may want to raise their stops. Our target is the $89.50-90.00 range.

Picked on November 09 at $ 85.52 *gap higher*
Change since picked: + 1.24
Earnings Date 10/31/06 (confirmed)
Average Daily Volume = 264 thousand


Cerner Corp. - CERN - close: 49.60 chg: +0.16 stop: 46.90

CERN managed to out perform its peers in the networking sector on Wednesday. Shares rose just 0.3% but it appeared to be enough to breakout from a short-term bull flag pattern. Our biggest concern would be the lack of volume on today's session. More conservative traders may want to adjust their stops closer to the $48 level. Our target is the $52.00-52.50 range.

Picked on October 30 at $ 48.05
Change since picked: + 1.55
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand


Deere & Co. - DE - close: 89.20 change: -0.65 stop: 84.95

DE spent the session consolidating (lower) after testing the $90 level on Tuesday. A dip or bounce near the $88 level could be used as a new entry point to buy calls. 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 21st earnings report.

Picked on November 08 at $ 87.45
Change since picked: + 1.75
Earnings Date 11/21/06 (confirmed)
Average Daily Volume = 2.7 million


FedEx - FDX - close: 117.31 chg: +1.81 stop: 113.90

Transport stocks were a bright spot in the market on Wednesday. The group was lead by airlines thanks to some M&A news but the Dow Jones Transportation index rose 1.3%. Shares of FDX out performed its peers and rose 1.5% to breakout over resistance at the $117.00 level. Our suggested trigger to buy calls was at $117.15 so the play is now open. We would expect a pull back at the stock's initial test of $120 and shares might bounce around the $117.50-120.00 range for a couple of days. However, our target is the $124.00-125.00 range. The P&F chart is more optimistic with a $153 target.

Picked on November 15 at $117.15
Change since picked: + 0.16
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 1.9 million


Fomento Econo. - FMX - close: 102.49 chg: -0.49 stop: 97.99

We don't see any changes from our previous updates on FMX. The path of least resistance still appears to be up. Readers can choose to open positions here or try and buy a dip near the 10-dma or the $100 level. 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.

Picked on November 08 at $102.09
Change since picked: + 0.40
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand


Goldman Sachs - GS - cls: 193.11 chg: +2.75 stop: 184.99

GS continued to show relative strength and managed to hit a new all-time high on an intraday basis. We don't see any changes from yesterday's play description. Traders can choose to open positions here or hope for a dip back towards $190. Our target is the $199.00-200.00 range. We do not want to hold over the December earnings report.

Picked on November 14 at $190.36
Change since picked: + 2.75
Earnings Date 12/12/06 (unconfirmed)
Average Daily Volume = 4.8 million


Holly Corp. - HOC - close: 52.29 change: +0.93 stop: 47.95

HOC turned in a decent session adding 1.8%. A draw down in the weekly oil inventory numbers helped lift the energy stocks. Shares of HOC have shown some strength this week and look poised to post new three-month highs. Our target is the $54.90-55.00 range.

Picked on November 05 at $ 50.75
Change since picked: + 1.54
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 1.1 million


KLA-Tencor - KLAC - close: 50.43 chg: -0.38 stop: 47.65

Looks like the rally in the semiconductor stocks stalled a bit on Wednesday. Yesterday the SOX soared and broke out over resistance but today the SOX only managed a 0.4% gain. Shares of KLAC, which hit new five-month highs yesterday, pulled back toward the $50 level. The company did have some news with the NASDAQ sending them a delisting notice over its delayed 10-Q filing. The 10-Q is delayed due to KLAC investigating its equity options plans and potential backdating. We would use the dip toward $50 as a new entry point to buy calls. Our target is the $54.50-55.00 range. The stock appears to have solid resistance at $55.00.

Picked on November 14 at $ 50.81
Change since picked: - 0.38
Earnings Date 01/00/07 (unconfirmed)
Average Daily Volume = 3.9 million


Morgan Stanley - MS - close: 78.66 chg: +0.43 stop: 74.49

MS is still inching higher and hit another new high today. Our short-term target is the $79.90-80.00 range but more aggressive traders may want to aim higher since the P&F chart points to an $83 target.

Picked on November 12 at $ 76.68
Change since picked: + 1.98
Earnings Date 12/20/06 (unconfirmed)
Average Daily Volume = 4.1 million


Petroleo Brasileiro - PBR - cls: 91.49 chg: +0.61 stop: 87.99

We don't see much change from our previous updates on PBR. The overall trend is still bullish but it's worth noting that some of the technical indicators are looking overbought and hinting at a new bearish signals soon (like the MACD). We also noticed that today's high appeared to "fill the gap" from Monday morning. Be on the alert for further weakness. More conservative traders may want to raise their stops! 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.

Picked on November 06 at $ 90.05
Change since picked: + 1.44
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume = 2.5 million


FreightCar Amer. - RAIL - close: 55.92 change: -1.15 stop: 53.49

Warning! RAIL may have produced a bearish reversal today. The stock did produce a failed rally at the $58 level this morning and the sell-off left shares with a 2% decline. This was a bit surprising given the gain in the railroad sector and the gains in the transports overall. The move today also produced what looks like a "dark cloud cover" candlestick pattern. We are not suggesting new bullish positions at this time and more conservative traders may want to tighten their stops (we'd consider adjusting the stop toward the 10-dma). Our target is the $59.75-60.00 range.

Picked on November 08 at $ 56.08
Change since picked: - 0.16
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 334 thousand


Transocean - RIG - close: 75.59 change: +1.02 stop: 71.99

Oil service stocks turned in a decent session with the OSX index rising 1.6%. The move was potentially fueled by lower than expected numbers in the weekly oil inventories. Shares of RIG added 1.3% but failed to hold its gains above the 200-dma. We remain cautious especially with the MACD poised to produce a new sell signal. More conservative traders may want to consider tighter stops to reduce their risk. We're not suggesting new positions at this time. Currently we have two targets for RIG. Our conservative target is the $79.50 level. Our aggressive target is the $84.00 level.

Picked on November 05 at $ 75.07
Change since picked: + 0.52
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 7.6 million


Schlumberger - SLB - cls: 65.45 chg: +1.17 stop: 60.95

SLB, another oil service stock, turned in a strong session rising 1.8%. Shares are now challenging resistance at the $66 level. More conservative traders may want to tighten their stop loss. Our target is the $67.50-68.00 range.

Picked on November 05 at $ 63.50
Change since picked: + 1.95
Earnings Date 10/20/06 (confirmed)
Average Daily Volume = 9.8 million


Thomas & Betts - TNB - close: 52.76 chg: +0.48 stop: 49.90

TNB continues to rally with shares pushing past potential resistance at the $52.50 level. Today's gain (+0.9%) helped produce a new MACD buy signal. 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.

Picked on November 12 at $ 51.36
Change since picked: + 1.40
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 thousand


Whirlpool - WHR - close: 88.65 change: -0.41 stop: 86.99

We are starting to grow concerned with WHR. The stock under performed all the major averages today and this is the second time in three days that WHR has failed to hold its gains over the $90 level. The failed rally has put a bearish tilt in some of the short-term technical indicators. More conservative traders may want to tighten their stops. We would wait for a new relative high before considering new positions. Our target is the $94.75-95.00 range.

Picked on November 13 at $ 90.15
Change since picked: - 1.50
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 1.0 million

Put Updates

Cardinal Health - CAH - cls: 63.52 chg: +0.90 stop: 64.85

It's not surprising to see CAH trying to rebound with the major averages hitting new relative highs. Considering this environment traders may want to abandon most of their bearish strategies. CAH managed to rally toward the $64 level this afternoon before parting its gains. Conservative traders may want to cut their losses now or tighten their stops. We're adjusting our stop loss to $64.26. We're not suggesting new positions with CAT above $62.00.

Picked on November 10 at $ 61.99
Change since picked: + 1.53
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 1.3 million


Capital One Finc. - COF - cls: 77.09 chg: +0.04 stop: 79.33*new*

COF continues to consolidate sideways. Given the short-term trend of higher lows and lower highs the stock could really go either direction from here. We're not suggesting new plays and more conservative traders may want to exit early given the market's strength. We are adjusting our stop loss to $79.33. Nimble traders may want to try and exit early again next time COF trades under $76.50. Currently our target is the $75.10-75.00 range.

Picked on October 31 at $ 79.33
Change since picked: - 2.24
Earnings Date 10/18/06 (confirmed)
Average Daily Volume = 2.4 million


Freeport McMoran - FCX - cls: 57.55 chg: +0.56 stop: 62.01

Traders bought the dip in FCX near $56 and its 200-dma and 50-dma again. We would expect a bounce back toward $59 and potentially the $60 level or its 10-dma (near 59.45). We wouldn't consider new plays unless the stock produces a clear failed rally under $60 again. 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.

Picked on November 08 at $ 59.05
Change since picked: - 1.50
Earnings Date 10/17/06 (confirmed)
Average Daily Volume = 3.7 million

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: 153.81 chg: +1.92 stop: n/a

We have two days left for this strangle play to work out. Unfortunately, we're going to need a strong move past the $155 level to give us a chance at salvaging some capital. Given our time frame we're adjusting our exit target to $2.00. Our estimated cost was $4.00. The options in our play were the the November 155 call (BSC-KK) and the November 145 put (BSC-WI).

Picked on October 22 at $150.19
Change since picked: + 3.62
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.6 million


Caterpillar - CAT - close: 61.45 chg: +1.09 stop: n/a

CAT added 1.8% and its technical picture it turning bullish. We're not suggesting new positions at this time. 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.

Picked on November 08 at $ 60.10
Change since picked: + 1.35
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million


Cephalon - CEPH - close: 74.97 change: -0.42 stop: n/a

CEPH is consolidating sideways near the $75 level. Keep an eye on the call side of our strangle play. 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.

Picked on October 29 at $ 69.35
Change since picked: + 5.62
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 2.0 million


ConocoPhillips - COP - close: 63.98 chg: +0.52 stop: n/a

We have two days left before this strangle play expires. Given our time frame we're adjusting our exit target to $0.50. Our estimated cost was $1.15 and we're going to need a strong move past $65 to see a chance at an exit. 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: + 3.95
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 9.8 million


Blue Nile - NILE - cls: 36.84 chg: +0.65 stop: n/a

NILE is still trying to bounce and did a decent job of it today with a 1.8% gain and a move past the 50-dma. We are 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: - 2.08
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

Dropped Calls

GlobalSantaFe - GSF - close: 56.80 chg: +1.18 stop: 49.39

Target achieved. GSF continued to rally higher in spite of a downgrade this morning before the opening bell. Oil service stocks managed to our perform the broader market with a 1.6% gain in the OSX index. Our target in GSF was the $57.50-58.00 range. The high today was $57.63.

Picked on November 05 at $ 52.39
Change since picked: + 4.41
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 3.4 million

Dropped Puts


Dropped Strangles


Trader's Corner

Potential Resistance or 'Turning Points'  in Powerful Moves

I was asked in an e-mail today from an OI Subscriber, after being absent from this space last week a question that got me thinking about a technique I used to use to project potential support and resistance areas, as well as possible 'trend change' points ahead (future time projections), in ANY market, including those that have broken out to a new historical high or low. This topic is a reference to 'squaring price moves' (per WD GANN concepts) and included time duration projections, which I'll get into a bit today, with more to follow next week I think.

QUESTION: "How are you figuring how far this rally may take us? I am holding some distant calls currently. I've made good profits in expired options but am scratching my head on what's next. Like you said it keeps going and going."

Yeah, I compared this market to the Eveready bunny that just keeps traveling on, and on. This per my last Index Trader column, seen online only, with my Saturday article perused by clicking here.

Well, it's tough to project targets or projected resistance in a runaway move like this one, but I can take you through some ideas, concepts and techniques I use. Of course, options traders especially are needing in mind some possible projections for any move they are in. If in stocks and if you believe in the viability of the trend, hey just stay in them!

The following concepts, measurements and techniques are ones that I use in various ways to judge the staying power of a trend like the one we're in which I would call an accelerated if not runaway move. Certainly the angle of ascent or upside momentum has powered ahead in the last now, I count about 18 weeks.


This is major. In the nothing new under the sun department, Charles Dow so long ago talked about how MAJOR trends don't die/reverse until there are a LOT of 'believers'. The way I measure this is by a 'sentiment' indicator using a simple equities call to put daily trading volume ratio plotted on a graph, as seen in this first chart. Some of the strongest moves come with less than obvious consensus on the outlook for stocks; i.e., the outlook for the trend in EARNINGS.

When there is disbelief or just caution in the staying power of a powerful move, the tendency is for that move to be longer, to go further and with fewer CORRECTIONS than traders especially anticipate. As traders we are used to trading less powerfully trending markets. Non-trending or 'trading range' markets (70% of the time) are more common than strongly trending markets (30% of the time).

If my sentiment indicator doesn't jump to an extreme, it's a good sign for the market trend continuing. This doesnt address the question of how high it can go on the next price swing or ultimately, but it's a good indicator or good indication to stay in the market.

My sentiment indicator is at the bottom, but I will refer back to the upper price portion of the chart in pointing out how there are some price projections implied by the upper and lower end of an uptrend channel such as I've drawn on the S&P 100 (OEX) chart below. This channel currently suggests that possible 'resistance' may be found up around 660 currently. Again, this projected resistance doesn't give me any ultimate long-term targets as we don't know at what point in this rising channel will an ultimate top be found.

And, even if the recent declines to the LOWER end of the channel had been pierced, so what! There's a pullback of some greater amount than we've been seeing in recent weeks, then the (up) trend takes off again. For judging where to buy pullbacks in a strong uptrend however, the use of this OEX trend channel was very useful.

As seen above, there has not been an 'overbought' extreme, defined as a HIGH level of bullishness as reflected in CALL activity relative to puts, for the entire duration of the very powerful move that took OEX over 60 points higher. In a situation like this, as my mentor used to jingle, 'be a bull and your pockets will be full'.

The divergent trend in prices, with moves to ever higher highs, but without a concomitant trend in the RSI, means far less in a power move like we've been in. But, it's worth noting as signaling a degree of caution about piling on and continuing to buy every dip without closely watching how things unfold. Especially so with the recent jump in my sentiment indicator. Maybe we FINALLY got a huge bunch of bullish converts who are getting darn tired of watching this thing go up without them being on board; hey, why is 'everyone' else making money and not ME!

If an Index or Stock is not at a new high and most of them are not, with the notable exception of the narrow Dow average of 30 stocks that nevertheless everyone hears about on the nightly news, then the index or stock is RETRACING some portion of a prior move. The common retracements of 38, 50, and 62, as well as 66%, are often areas where trends reverse and can be projected as potential support or resistance; resistance, in the case of our current market. Using the OEX again, key retracements of the big 2000-2002 bear market decline are potentially significant:

I've chosen to use the close-only line chart on which to measure retracements. I found the closing level of interest, in that the 66% or 2/3rds retracement in the 687 area, will be seen again in my discussion of so-called 'Gann square' projections further on. Back to PRICE PROJECTIONS: a rule of thumb on retracements I use is that if an index or stock exceeds a 38% retracement of a prior move, it can achieve (and my next target is) a 50% retracement. If a move exceeds a 50% retracement, my next price objective becomes the level at which the index or stock would achieve a 62% retracement and perhaps a bit more; i.e., a 66% retracement. If the index goes beyond a 66% retracement, I look for a potential move equaling 100% of the prior price swing.

I failed to mention that there is a first retracement amount of 25% that I don't always account for, but in the case of very major decline such as we've had in the Nasdaq, 25 per cent is the FIRST retracement that we should look at as a potential target and possible reversal point, even if temporary.

The Nasdaq 100 Index (NDX) got up to near the top end of its uptrend channel; if drawn only slightly differently, it would have touched this line. I noted that when NDX got to the 1800 area, some significant selling came in, which is not unusual at the these even 100 levels. Note the support found at the low end of the outlined NDX uptrend channel in my next chart. I knew that 1800 was of some potential significance also, as this level is where NDX finally retraced (just) 25% of the 2000-2002 bear market in tech stocks that laid waste to this market segment.

When you get these cross-referencing pieces of data, such as where the upper end of the price channel is also hitting potential resistance or at least a possible pause point because this price area is also a first or later retracement of a prior move, well, it would be enough for me to take the money and run on call profits. The problem of trading out of a position is whether we will have the guts to buy back in; and, what if the move just powers ahead?

I noted that also that there was no doubt that QQQQ was at a possible resistance, although trend channel lines, like any trendline, can be pierced. Hey, nothing magical about these trend channels; but the upper and lower lines so tend to show where the trend is back to its prior 'rate of change', OR, AHEAD of its current average rate of forward/upward price momentum.

Legendary trader WD GANN had many unusual techniques for projecting price targets and was often accurate to exact tops or exact lows. Many of his techniques are not clear as to method. One that is, and that I've used on weekly charts in particular involves the 'square of the range'; that is, using a price range or the point value between a prior major low and a prior high to project ahead and find areas of support and resistance. Of all the so-called 'Gann angles', the most important, read USEFUL, is the 1 X 1 line, which is a 45 degree angle, where (if a
'unit' of price and a 'unit' of time represent equal distances), the line where some measure of price (e.g., a dollar) goes up or down one and per ONE day or week.

The following chart is a crude, for example only, 'squaring' of 202 points in the OEX, which is the distance separating the July 2002 low and the early 2005 high at 587. If I then overlay some large squares going forward where the length and height of the subsequent large squares of a distance of 202 points are projected up and forward (in time), then I can draw certain conclusions: 1. a quarter, half, 3-quarters and 100% of 202, added to the 587 high gives me projected resistance points at 637.5, 688 (remember 687 from above: representing a 66% retracement of the 2000-2002 decline), 738.5, etc. are both projected targets and potential resistance points.

Moreover, the 45-degree angle lines which simply bisect the squares, are potential further support and resistance areas. AND, the center of the squares, where the lines intersect are possible 'trend change' points; i.e., projected points further ahead when there might be a change in the trend, which is often either an acceleration in the existing trend or a reversal in the trend.

Study of the weekly OEX chart below will provide illustration of some of these past events or future projections. Note that 660 appears again as potential OEX resistance, per the top of the trend channel on my first chart above. I would also note that the market has made a significant top in March in the two years prior to 2006.

Stay tuned next week for more on 'squaring a price range', which is probably one of the most, if not the most, useful techniques that I got from my study of a unique and very successful historical trader and colorful market figure, who employed highly unique and unusual techniques of figuring what to trade, when and for what kind of objectives. It would almost make you believe that future price trends and trend targets are 'contained' in what has already happened and the trends just unfold according to certain cyclical laws of momentum. (Elliott) Wave theory is like this too. If true, such a theory would put countless 'talking heads' out of the predicting, prognostication business, which means that such things as I describe here will remain pretty well hidden from public view.


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

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


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.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives