Option Investor

Daily Newsletter, Monday, 11/20/2006

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Table of Contents

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

Market Wrap

M&A Activity a Horn of Plenty

In what tends to be a quiet, yet bullish week of trade, the major indices digested last week's option expiration gains with fractional gains and losses scattered across the board.

Advancing issues were evenly matched against decliners at both the NYSE and NASDAQ.

Merger and acquisition news grabbed the bulk of today's headlines,

Today's blockbuster M&A deal had shares of Phelps Dodge (NYSE:PD) $120.47 +26.78% surging more than $25/share after the copper producer said its chief rival, Freeport McMoRan (NYSE:FCX) $55.63 -3.08%, made a $25.9 billion cash-and-stock offer for the company. If consummated, the partnership would create North America's largest copper producer, while the combination would create the world's No. 2 global producer of the shiny metal, second only to Chilean state copper giant Codelco.

Freeport's move was a "jaw dropper" and a big bet that a strong global economy will be an underpinning force for copper demand.

Addition M&A news had the real-estate arm of private-equity firm Blackstone Group offering $20 billion to acquire Equity Office Properties Trust (NYSE:EOP) $48.14 +7.64%, the U.S.'s largest office-building owner and manager, in what could be the largest real-estate deal ever. Excluding the assumption of debt, the deal would be the third-highest leveraged buyout on record, if it goes through, behind the $25.1 billion paid for RJR Nabisco in 1988 and the recent $21.2 billion deal to take HCA Inc. private.

While the Phelps/Freeport and Blackstone/Equity Office mergers were the "deals of the day," there were other deals that had stocks on the move.

On Friday, shares of United States Steel (NYSE:X) $72.75 +3.08% had jumped notably from Thursday's close of $64.57 on speculation the company might be in play as an acquisition target. However, it was Oregon Steel Mills' (NYSE:OS) $63.77 +8.15% investors that broke out in gleeful tears today after Russia's biggest steel maker, Evraz Group SA asked for OS's hand in marriage. The "wedding ring" was valued at $2.3 billion, and would be paid for in cash!

Brokers were strong with Charles Schwab (NYSE:SCHW) $18.94 +2.04% gaining after Bank of America (NYSE:BAC) $54.90 +0.09% said it was willing to pay $3.3 billion for the private-banking arms of Schwab. The deal would reportedly vault Bank of America into the top tier of private banks serving the ultra rich and modestly add to the bank's EPS by 2008.

But not every bride can be "bought" on a first proposal, and sometimes the size of the ring, or the offer, is not big enough.

The London Stock Exchange said "No!" again after the NASDAQ Stock Market (NASDAQ:NDAQ) $37.70 +3.08% made a $5.1 billion offer for the bourse. NASDAQ's move comes after it said it has increased its stake to 25%. The LSE said the offer is still undervalued.

While the LSE confesses it sees positive synergies in a long-term marriage with the NASDAQ, or list of other suitors, the LSE appears willing to stay single awhile a longer.

The Nasdaq's Chief Executive Robert Greifeld told analysts that "This is a long game that we're playing, and I'm optimistic we'll engage with the London Stock Exchange board in a relatively short period of time."

U.S. Market Watch - 11/20/06 Close

Amongst all the wedding invitations being sent out, there were also some earnings reports being released as earnings season winds down into the Thanksgiving holiday.

Building products retailer Lowes (NYSE:LOW) $30.58 +0.32% gained 10-cents by their close after a choppy intra-day trade. The stock fell to $30.00 in early action, to then trade as high as $31.07 after the company said net income rose 11% to $716 million, or $0.46/share, as tight expense controls helped overcome a weakening sales environment. Lowes' executives said sales rose 5.75% year-over-year from $10.6 billion to $11.21, but same-store-sales, or sales in stores open at least one year, a key measure of benchmarking performance, fell 4%. A cloudy outlook had the company expecting a 4% decline in sales from last year's $10.8 billion, which implies sales of $10.37 billion. Analysts were expecting revenues of $10.8 billion in the company's fourth quarter.

The National Association of Realtors confirmed some of Lowes' third-quarter same-store-sales trends when the Association said that sales of existing homes fell in 38 states during the third quarter. Sales retreated to a seasonally adjusted annual rate of 6.27 million units nationwide, down by 12.7% from the same period a year ago. Regional data had Nevada, Arizona, Florida and California leading the sales declines.

Home prices also dropped. The NAR survey showed that the midpoint price for an existing home sold during the summer dipped 1.2% year over year to $224,900.

Economic data released today had the Conference Board saying its forward looking Index of Leading Economic Indicators rising 0.2% in October. The Conference Board said an increase in real money supply and improved consumer expectations helped offset sharp declines in housing permits and weaker vendor performance. The index stood at 138.3 versus 139.1 in January, its peak so far this year. The index has declined four of the last seven months.

The Conference Board's labor economist, Ken Goldstein, said the October index suggests "the economy is unlikely either to reheat or to get significantly cooler."


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An old trend is like an old friend. Sometimes....

In last Monday's Market Wrap, we looked at a weekly interval chart of the NASDAQ-100 Tracker (NASDAQ:QQQQ) $44.39 +0.20% as it was following the other major indices pattern and getting a new multi-year high.

As such, I turned to my fibonacci technique of "fitting" a 38.2% retracement in order to build some resulting higher levels of resistance, but more importantly, pointed out how the QQQQ had not CLOSED back below a prior level of retracement, when on a Friday (or end of week trade) it had closed above a level of retracement.

Ah, but with a week gone by and the NASDAQ-100 Bullish % ($BPNDX) from StockCharts.com now nearing a strengthening yet longer-term "overbought" 70% at 69% bullish (that's 69 of the 100 components now showing a PnF buy signal intact with its chart) traders and investors can still use the "once above, not below" slogan to test their own convictions, if not that of other market participants.

Now, some traders have been so focused on intra-day chart that they haven't been able to see the forest through the trees. Or is it the trees through the forest?

As the faster moving, or more volatile NASDAQ-100 Bullish % ($BPNDX), or BPNDX from Dorsey/Wright and Associates gets near 70%, I'm always looking for "trouble."

It has been my observation for years now, that the NASDAQ-100 has been "the index" that weakens first, and has a pulling lower effect on the other major indices. It has been my observation that technically, the NASDAQ-100 has been FOLLOWING the other major indices higher..

If I'm looking, or monitoring for "trouble," then this is the index I think we as traders/investors should be keeping up to speed on.

NASDAQ-100 Tracking Stock (QQQQ) - Weekly Intervals

As I review a plethora of charts at week's end, always starting with a point and figure chart, then working with other time intervals with bar charts, I'm a little more focused on an "old trend" in the QQQQ.

OK ... last week, the QQQQ closes above my resulting "bull fit 38.2%" resulting 61.8% retracement of $42.84. Did it close below that level on Friday? The answer is "no."

I could play the same game with the PINK retracement, which would be a "conventional" use of retracement this week too. As long as the QQQQ closes ABOVE $42.66 (the next level below $44.30) then technically, the pattern of strength would hold.

For some perspective, the BRIGHT GREEN horizontal lines simply mark the past three option expirations for September, October and Friday's November expiration.

See my "trend?" I'd deem this a longer-term "bullish resistance" trend. Bullish as it is trending HIGHER.

There is an old saying in the technical world that a broken trend, can become resistance in the future. It is my belief that a LONGER-TERM trend is more powerful, or significant than a shorter-term trend.

When the QQQQ broke above the $40.11 level in mid-September (09/12/06), a new "bull confirmed market" for this market (the NDX/QQQQ) had just been signaled by the $BPNDX. Now Stockchart.com's $BPNDX is nearing 69%.

There is NO sign of internal weakness. Let's make that clear, just as there was no sign of internals weakness in mid-September, or mid-October.

And while we've been seeing short-term "bullish resistance" trends get broken to the upside just about every week, this longer-term UPWARD trend, that was notably broken to the downside in early May (week of 05/08 to 05/12) will get some attention from technicians, and a great number of market participants.

NASDAQ-100 Bullish % ($BPNDX) - 2% box

Yes, I may be "looking for trouble," or monitoring for trouble, but as I felt bulls should be picking up the OFFENSE in mid-September and bears should be playing DEFENSE at that very time, I always grow a little more cautious when a bullish % nears the 70% level. You can probably see that a traders doesn't need to RUN for the exits, but taking some profits from the long side doesn't hurt here.

In late April, just before early May (red 5 is early May) the $BPNDX had fallen to 54%, below February's 56% reading and turned "bear confirmed." Now that the $BPNDX is reaching similar levels of bullishness, but also RISK as found in January (red 1), a trader/investor that incorporates the point and figure bullish % indicators into their investment/trading strategy, should be booking some gains.

On the ACCOUNT MANAGEMENT side of things. GET OFF OF MARGIN at these higher levels of BULLISH RISK. It is tempting to LEVERAGE your account, or utilize MARGIN to keep buying and buying and buying as the account grows. Don't do it here at 69% bullish.

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: 154.76 chg: +0.13 stop: 147.95

The broker-dealer stocks were inching higher on Monday. The group probably got a boost out of the rash of new merger and acquisitions announced today. Shares of BSC lagged behind its peers. The stock dipped near $154 twice but both time traders bought the dip. Our target is the $159.00-160.00 range. We do not want to hold over the mid December earnings report. FYI: More conservative traders may want to adjust their stop loss closer to the $150 level.

Picked on November 14 at $151.89
Change since picked: + 2.87
Earnings Date 12/14/06 (unconfirmed)
Average Daily Volume = 1.5 million


FedEx - FDX - close: 117.58 chg: +0.14 stop: 113.90

We don't see any big changes from our weekend update on FDX. The stock bounced in the $116.50-117.00 region for the second time in the last three days. We see this as a new entry point to buy calls. However, it is worth noting that the market acts tired and we may be in for more of a consolidation during this holiday week. 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. FYI: We do not want to hold over the December earnings report.

Picked on November 15 at $117.15
Change since picked: + 0.33
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 1.9 million


Fomento Econo. - FMX - close: 105.93 chg: +2.04 stop: 99.49

FMX ignored weakness in the Mexican markets and a lackluster session in the U.S. markets by producing a strong gain. Shares rose almost 2% to a new all-time high. FMX is now within striking distance of our target in the $107-110 range.

Picked on November 08 at $102.09
Change since picked: + 3.84
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand


Gilead Sciences - GILD - close: 68.90 chg: -0.53 stop: 66.75

GILD tried to breakout over resistance at the $70.00 level again but it failed. The U.S. markets were drifting lower on Monday and the biotech index witnessed some profit taking. Our strategy remains the same. We will wait for a breakout with our suggested trigger to buy calls at $70.25. If triggered our target is the $74.74-75.00 range. Right now we have a stop loss just under technical support at its 50-dma but it's a little too wide for our comfort zone and we'll be planning to adjust it higher the first chance we get.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/17/07 (unconfirmed)
Average Daily Volume = 3.7 million


Goldman Sachs - GS - cls: 197.45 chg: +2.41 stop: 189.95 *new*

Shares of GS continue to show relative strength. The stock added another 1.2% and is nearing our target in the $199.00-200.00 range. More conservative traders may want to think about an early exit now to lock in a gain. We're raising our stop loss to $189.95.

Picked on November 14 at $190.36
Change since picked: + 7.09
Earnings Date 12/12/06 (unconfirmed)
Average Daily Volume = 4.8 million


KLA-Tencor - KLAC - close: 52.19 chg: +0.50 stop: 47.65

Semiconductor stocks turned out to be one of the best performing sectors on Monday. The SOX index rose 1.75%. Shares of KLAC tried to keep pace but closed with a 0.9% gain. We remain optimistic but even the semis may have trouble gaining ground if the wide market choose to consolidate. 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: + 1.38
Earnings Date 01/00/07 (unconfirmed)
Average Daily Volume = 3.9 million


Sepracor - SEPR - close: 54.79 chg: +0.10 stop: 50.75

SEPR may have closed in the green today but the session looks more bearish. The stock spiked open after being upgraded this morning before the opening bell. Unfortunately, the open was the high for the day and SEPR drifted lower barely holding any gains. We would not be surprised to see a dip back into the $53.75-54.00 region so traders may want to wait before opening new plays. SEPR has significant resistance near $60 so we're aiming for the $59.50-60.00 range as our target.

Picked on November 19 at $ 54.69
Change since picked: + 0.10
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 2.3 million


Thomas & Betts - TNB - close: 53.21 chg: -0.47 stop: 49.90

Over the weekend we cautioned readers that TNB might be poised for some consolidation and that's what the stock produced on Monday. The dip may not be over yet so we'd wait for a pull back near $52 or its 10-dma before considering new positions. Our target is 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: + 1.85
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 thousand

Put Updates

Cardinal Health - CAH - cls: 62.37 chg: -0.30 stop: 64.05

Shares of CAH spiked lower right at the open this morning but the weakness didn't last long and Monday's volume came in relatively low. We're somewhat concerned by the lack of momentum in this play and hesitate to suggest new positions. Our target is the $58.00-57.50 range. Please note that we're adjusting our stop loss to $64.05.

Picked on November 10 at $ 61.99
Change since picked: + 0.38
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 1.3 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.)


Caterpillar - CAT - close: 60.91 chg: -0.03 stop: n/a

There are no changes from our weekend update on CAT. We remain concerned over the stock's lack of directional movement. We're not suggesting new positions. 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: + 0.81
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million


Blue Nile - NILE - cls: 36.42 chg: +0.44 stop: n/a

We don't see any changes from our weekend update. We're not suggesting new strangle 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: - 2.50
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

Dropped Calls

Cerner Corp. - CERN - close: 48.75 chg: -0.32 stop: 47.90

We are calling it quits on CERN. The stock continued to under perform the NASDAQ and the NWX networking index. Shares lost 0.6% and look poised to continue lower. There is a chance that CERN will bounce from broken resistance and what should be support near $48.00 but we don't want to risk it. We're suggesting an early exit before the stock turns negative on us.

Picked on October 30 at $ 48.05
Change since picked: + 0.70
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 662 thousand


Deere & Co. - DE - close: 89.41 change: -0.95 stop: 88.95

The DJIA snapped a six-day winning streak and this may have prompted some traders to do some profit taking in DE ahead of its earnings report. The stock lost just over 1% and reversed Friday's gains. It was our plan to exit today at the closing bell to avoid holding over DE's earnings report due out tomorrow.

Picked on November 08 at $ 87.45
Change since picked: + 1.96
Earnings Date 11/21/06 (confirmed)
Average Daily Volume = 2.7 million


Morgan Stanley - MS - close: 79.31 chg: +0.19 stop: 74.49

Target achieved. The XBD broker-dealer index posted another new all-time high on Monday. Shares of MS followed with an intraday high at $80.00. Our short-term target was the $79.90-80.00 range. 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: + 2.63
Earnings Date 12/20/06 (unconfirmed)
Average Daily Volume = 4.1 million


Oregon Steel Mills - OS - cls: 63.77 chg: +4.81 stop: 56.99

If we had been a couple of days earlier in adding OS to the play list then today's news would have worked for us. Unfortunately, news that Evraz plans to acquire OS for $2.3 billion only produced a gap-open entry point. It was our plan to buy calls on a breakout over $60.00 with a trigger to enter plays at $60.25. Today's acquisition news pushed OS to open at $64.05, which technically would have been our entry (above $60.25). It's up to you, the individual trader, if you want to keep the play open. We didn't know about any M&A news on OS over the weekend but now that the news is out we don't see a reason to hold any positions.

Picked on November 20 at $ 64.05*gap open
Change since picked: - 0.28
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 970 thousand

Dropped Puts

Freeport McMoran - FCX - cls: 55.63 chg: -1.77 stop: 60.26

After today's merger news we're suggesting an early exit in FCX. If you missed it this morning FCX announced a $25.9 billion deal to buy rival Phelps Dodge (PD). As is normally the case shares of FCX, the acquirer, went down but it seemed like the market approved of the deal. Shares of FCX actually spiked to $59.70 this morning. Technically the pattern in FCX continues to look bearish but we're gun shy given today's intraday moves. The stock hit our conservative target on Friday so we would rather exit now before FCX tries to bounce again. FYI: Our conservative target was the $55.25-55.00 range and our aggressive target was the $51.00-50.00 range.

Picked on November 08 at $ 59.05
Change since picked: - 3.42
Earnings Date 10/17/06 (confirmed)
Average Daily Volume = 3.7 million

Dropped Strangles



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