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Daily Newsletter, Wednesday, 11/29/2006

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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 Sigh of Relief Swells into a Yell

Markets across the globe sighed with relief during the overnight session as selling pressure on the dollar eased. Many multinational companies with significant presences in the U.S. saw their stocks rebound from recent drubbings. That sigh was to swell into an exultant yell after the GDP revision reassured some that perhaps the U.S. economy wasn't softening as much as had been feared.

Bond traders didn't appear so convinced, however. The sometimes defensive bonds rose and yields dropped. The dollar/bonds/yields/equities interrelationships can be complicated to puzzle out, but bond traders apparently put more credence on fears of a softening in equities than they did on worries about whether a strong economy and/or depressed dollar would hike inflation.

The market day included many important economic releases, lengthening this report more than is optimal. The Wrap is divided by the usual subtitles, however, so subscribers who want only charts and an outlook on tomorrow's events can scroll to the appropriate sections.

Introduction

Reports from bourses across the globe have detailed the impact of the falling dollar on foreign companies that have a significant presence in the U.S. Companies such as Hanson Building Materials, a U.K.-based company, had been hit by the impact of the falling dollar. The converse to that thinking is that the falling dollar might be good for the coffers of U.S.-based multinational companies that collect a significant monies in currencies against which the dollar has fallen.

That thinking can be stretched only so far, however, and it wasn't working out that way on U.S. bourses this week. Equities were moving with the dollar. Less worth for each dollar could prompt a rise in inflation or cause slower growth as consumers tightened their hands on stretched-thin dollars. Bond traders didn't appear to be worried about that impact, however.

The release of the Commerce Department's revision of the third-quarter GDP reassured some who had been frightened recently by the spectacle of a U.S. economy slamming into a hard landing rather than merely softening. The headline number surprised to the upside, and the soft pre-market sighs of relief began swelling into that more exultant noise. However, as will be detailed later in the article, that exultant noise may have drowned out some other voices pointing out some troubling aspects of the number.

The exultation also drowned out worries about rising crude prices, declining inventories, and historically low refinery utilization numbers. Perhaps that was because investors in energy-related stocks were yelling the loudest, benefiting from the sector's surge higher as crude prices rose.

Markets paused to take a breath as the time for the Beige Book release approached, but then slowly that exultant noise built up again and markets climbed through the late afternoon.

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Charts

That late-afternoon climb was to produce a new high of the day on the SPX.

Annotated Daily Chart of the SPX:

The SPX's late-day climb was to finally drive it back above its 10-sma, but only that late-day drive succeeded in doing that. Earlier in the day, it had stopped right on that average and pulled back.

The SPX ended the day with 30-minute candles that were pulling back below Keltner resistance. The next Keltner upside target would be at about 1406, but the SPX's struggle with that nearby Keltner resistance made it unclear as to whether that's a viable target or not. Tentative bearish divergences on the 15-minute chart questioned that upside target, too. The TRAN needs to participate better in any rally than it did today before the SPX can break too much higher, I would think, and a TRAN rollover might drag the SPX, OEX and Dow lower, too.

If the SPX pulls back, however, multiple layers of potential Keltner support lie below, so that any pullback would need to be swift and hard to break SPX prices through it. Otherwise, any pullback might result in choppy behavior.

The Dow wasn't able to make it back above its 10-sma's resistance.

Annotated Daily Chart of the Dow:

The Dow's chart looks more bearish than the SPX's, with several comparisons leading to this impression. The Dow clearly fell out of its channel, while the SPX did not do so convincingly before it bounced again. Today's rally couldn't bring the Dow high enough to breach either the bottom of the channel's former support or the 10-sma.

Like the SPX, the Dow ended the day struggling with Keltner resistance on a 30-minute chart. If the Dow is able to pull free of that resistance, the next upside Keltner target is at about 12,314, but it's unclear whether it will be able to pull free. It, too, doesn't tend to run too far in a direction opposite the TRAN's.

If the Dow pulls back instead, the Keltner picture looks much like the SPX's. Layers of potential Keltner support just below suggest that the Dow might be most likely to chop around after any pullback unless that pullback was swift and hard.

The Nasdaq also didn't make it back above its 10-sma, but prices did remain within their rising channel.

Annotated Daily Chart of the Nasdaq:

The Nasdaq had not broken free of Keltner resistance as of the close, but its Keltner support, just below the current level, appears stronger than the SPX's or Dow's. The Nasdaq has to break up through the 2439-ish zone on 30-minute closes before it can push for the next upside Keltner target at about 2457, however, and it's not clear that it will be able to do so as the Nasdaq's afternoon advance also stopped short of a new intraday high. The 15-minute and 30-minute pictures give different pictures of short-term strength and resistance, so don't make a clear projection of the next development. On the 30-minute chart, a pullback toward 2427 looks like the next development, but the 15-minute chart shows support firming so much at that level that prices would likely be repelled. In short, the intraday Keltner charts don't give a clear picture.

The SOX did not participate fully in the day's rally, which also questions the Nasdaq's strength.

Annotated Daily Chart of the SOX:

While the SOX's slide down that former resistance is not particularly bearish, its action must be placed in the context of a strong rally today. The SOX clearly did not participate and that's troublesome. RSI approaches a supporting trendline of its own. Watch its action if prices and the RSI should pull back further tomorrow, as RSI might give the first heads-up that the SOX has finished its consolidation and is ready to either bounce or fall farther and test that river of moving averages flowing beneath it.

The SOX was caught in a tangle of Keltner lines as the day closed, giving little hint of next direction.

Annotated Daily Chart of the RUT:

The RUT ended the day jammed just under 30-minute Keltner resistance, hovering just above 15-minute Keltner support. The 30-minute chart suggested that a pullback to 782 might be necessary and the 15-minute one showed an upside target of about 790.50.

When intraday charts are scrambled as they are, several conclusions can be made. Some might decide that Keltner channels or any similarly scrambled charting tool is a useless one or they might decide that a clear message is being delivered: bulls and bears are still sorting out what's going to happen next and the outcome isn't yet clear. That's my conclusion. Both intraday and daily charts are sending that message, in my opinion, not a surprise when markets sort through the likely impact of rising crude prices and the myriad of economic reports today.

Space doesn't allow me to provide as many charts as I'd like, but I do have one other I'd like to post: the TRAN's.

Annotated Daily Chart of the TRAN:

For those who may not remember the discussion of a couple of weeks ago, the TRAN's longer-term pattern shows the possibility for a large, continuation-pattern inverse H&S. These are not trustworthy formations, but they should be watched. I noted at the time that, even if this was a reliable pattern, that the TRAN needed a right shoulder for that pattern and that would likely mean a pullback to the 30-sma and perhaps lower, and a somewhat lengthy consolidation period there. I wouldn't be surprised to see the TRAN drop to the 4650-4660 zone, at least, although I'm not sure that will happen tomorrow.

Today's Developments

At 7:00, the Mortgage Bankers Association reported another decline in its weekly mortgage application volume survey. The volume declined 3.9 percent week over week on a seasonally adjusted basis and fell 1.6 percent year over year. Components were mixed, with the week-over-week numbers for refinancing falling a seasonally adjusted 9.6 percent week over week but applications to buy a home climbing 1.3 percent for the same period. The rate for a 30-year, fixed-rate mortgage stayed at 6.13 percent. The rate for ARMs inched lower, but the percentage of homebuyers applying for an ARM dropped to its smallest level in three years.

The next economic-release slot produced the Commerce Department's first revision of the GDP for the third quarter. That number rose to a 2.2 percent annual growth rate, an upward revision from its earlier 1.6 percent estimate and far above the expected revision to 1.8 percent. This number measures the value of all goods and services produced. In real terms, the economy has expanded three percent. Markets greeted the number enthusiastically.

My lack of an economics degree may be hindering my thinking here, but I was concerned about some elements of this report. Higher inventories contributed to the upward revision. Imports were lower than in the first estimate, too, also contributing to the upward revision since it meant that the deficit was lower. However, higher inventories and lower imports could both point to slowing demand. That inventory building may have come in a hefty percentage from the auto industry, too, with a third of the GDP growth attributed to the production of motor vehicles. Will those autos sell at an equally hefty pace? My first impression, economics-challenged as I might be, was confirmed by the discussion in a Bloomberg article, quoting a JPMorgan Chase Bank analyst who suggested that the combination could lead to a "significant inventory correction in the fourth quarter."

Consumer spending had also slipped from its previous estimate, although it was still termed the major contributor to GDP growth, rising 2.9 percent and contributing 2 percent to the GDP growth. Business investment climbed 10 percent, much higher than the second quarter's 4.4 percent, and contributed to that upward revision in the third-quarter GDP, too.

Home construction dropped to its lowest level in 15 years, a Bloomberg article noted. This was a drag on the GDP revision.

The core personal consumption expenditure price index, a key measure of inflation that is tied to consumer spending, was reported at 2.4 percent. That number is higher than the Fed's comfort zone at 1-2 percent. The third-quarter's preliminary chain deflator was released today, too, and it stayed at 1.8 percent, which was the expectation.

Yields did rise momentarily when the bond market opened, perhaps reacting to this portion of the GDP revision. However, they fell to a new low before rising in a choppy manner to retest that early day's high.

Those worried about a tight labor market's impact on inflation might have been reassured when the second-quarter's real disposable incomes fell 1.5 percent, lower than the previously reported 1.7-percent gain. That drop certainly doesn't promise much good news in the consumer-spending front, but real disposable incomes rose 3.7 percent in the third quarter. The personal savings rate was disappointing, dropping 1.4 percent in the second quarter and 1.3 percent in the third.

Whether I or the JPMorgan economist might have had some reservations, market bulls had few and they pinned the shorts in losing positions, forcing them to buy to cover and contribute to the market explosion. Name any sector and it was rising into the release of the Beige Book.

October's New Home Sales were reported in the middle of the morning. The Commerce Department reported that those dropped 3.2 percent, falling to a seasonally adjusted annual rate of 1.004 million. For the past year, those sales have fallen 25.4 percent. Although the number of new homes on the markets fell 0.7 percent, the number of months it will take to sell those homes at the current sales rate climbed to a 7-month time period, up from the previous 6.7 months. That's a number that industry and market analysts think important. Any concern about that number was perhaps tempered by the 1.9-percent year-over-year rise in the median price for a new home.

Before the release of crude inventories, crude for January delivery had already been moving higher, continuing a bounce that had begun on 11/20. Weather reports pointed to colder weather, and speculation increased that OPEC will further cut production at its December meeting. That speculation was increased midday when Algeria's oil minister said that OPEC might need to trim production.

Expectations for crude inventories were not met, as drawdowns in distillates and gasoline surprised analysts. Builds of up to 500,000 and 700,000 barrels were expected, respectively. Instead, the Department of Energy reported drawdowns of 1.0 million and 600,000 barrels, respectively. Analysts had been all over the map with expectations for crude inventories, with some saying they would drop 300,000 and some claiming they would climb 2.1 million. Crude inventories dropped by 300,000 barrels. Refinery utilization was at 88.1 percent, with a CNBC guest analyst noting that this level remains below historical levels, needed levels and expected levels.

Crude futures for January delivery were to climb into a $62.35 a barrel close, gaining $1.36. By the afternoon, many segments on CNBC dealt with the likely impact and some credited rising crude prices, rather than the impending release of the Fed Beige Book, for stalling markets midday.

The afternoon produced the last economic release of the day, the Beige Book. Many expected the various regions to report further drops in the housing market and further tightening in the labor markets, with neither of those conclusions good news for the markets. They were expected, however, and had little immediate impact on the markets.

Of the various regions, most reported moderate growth, the report said, but Dallas was decelerating from high levels while New York and Richmond were accelerating. The retail outlook for the holiday season was "cautiously optimistic," with consumer spending increasing in October and early November. That increase did not include Boston, where sales softened, and Dallas, where expectations were not met.

As was anticipated, auto and housing-related producers showed some weakness. Most districts reported a continuation of the weakening in single-family construction. Some districts also reported a slowing in mortgage lending and some, a slight rise in delinquencies. Several noted that demand for commercial and industrial loans remained steady or had even moved higher, however.

In general, manufacturing activity was deemed "positive." High-tech industry trends were strong in several districts, with Dallas noting that both high-tech industry and energy-related manufacturing activity proved strong.

Vehicle sales continued to be soft, with inventories rising in several districts. Chicago said vehicle sales were steady and St. Louis said they improved, but five districts reported that sales were slow or had actually declined.

Labor markets were tight, as expected, with particular mention made of high-skilled occupations. Wage pressures rose for some specialized professions, but were "generally moderate."

Demand for services and temporary staffing firms were termed strong, but again Dallas mentioned softening demand. Chicago also noted softening demand for temporary staffing firms, and Atlanta and Cleveland said that demand for freight services had declined.

Those desiring to see the complete report can find it at the following link: http://www.federalreserve.gov/Fomc/BeigeBook/2006/20061129/default.htm

Because today presented so many economic developments, this report will only glance at company-related news. Pfizer (PFE) announced late Tuesday that it would lay off 20 percent of its sales force in the U.S. It gapped higher, but soon dropped to test its gap and closed inside it. In the same sector, Dynavax Technologies (DVAX) has been conducting a Phase III trial that compares its version of a hepatitis B vaccine to that of Glaxo and found statistically significant differences. DVAX shares soared in the pre-market session. It, too, gapped higher, ran a bit, but then dropped back from the day's high. It did say above its gap, however. GlaxoSmithKline's (GSK) shares were climbing, too, early in the morning, with this European company being one of those companies benefiting from the easing of the selling pressure on the dollar. It did drop down into its gap.

3COM (COMS) announced its participation in an unusual action related to a joint venture in which COMS and Huawei would each bid for the other's stake in the joint venture. Investors didn't like the news and drove the stock lower. Nestle might sell its medical-nutrition business and acquire Gerber Products, various news sources revealed.

Bear Stearns raised its price target on Apple Computer (AAPL) to $100. AAPL had received an even higher new price target yesterday, and the stock was a topic of conversation in many articles and on televised discussions. AAPL closed at $91.99, a few cents higher than yesterday's $91.81 close. Verizon Communications (VZ) received an upgrade. It closed at $34.89, up from yesterday's $34.00 close. Prudential raised the price target on Boeing (BA) to $99.00, and the stock gained. Both Ford (F) and General Motors (GM) benefited when Ford confirmed that 38,000 of its work force has accepted buyout offers.

After-hours saw several stocks climbing. Tivo and Hot Topics were among those stocks.

Tomorrow's Economic and Earnings Release

Tomorrow's economic releases will bring other important economic releases: the Chicago PMI, and another one that might assume some importance in the current climate, October's Personal Income and Consumption. The Personal Income number will be released at 8:30, at the same time slot as Initial Claims. Personal income is expected to be up 0.5 percent. Personal Spending is expected to rise 0.1 percent. November's Chicago PMI will be released at 10:00. Expectations are for a rise to 54.5-56.0, up from the previous 53.5. October's Help-Wanted Index will also be released at 10:00.

Companies reporting earnings tomorrow include CATS, HRB, HNZ, SFD and CAKE.

What about Tomorrow?

The short of it? My gut tells me it could be a choppy consolidation day with prices chopping somewhere roughly between today's high and yesterday's low.

If you want to read more, here's what I think: In my opinion, yesterday's doji-type day and today's rise were givens. They don't prove anything yet. All along as the indices have climbed through their rising channels off the summer's lows, I've been annotating graphs with the comment that "there's nothing bearish here yet" or "markets are just following their usual climb-then-consolidate-sideways patterns." Beginning about two weeks ago, however, I began sounding a more cautious note. The climbs felt more frantic, a sign of a frenzy of buying. The VIX hit troubling levels, although I don't use the VIX as a market-timing tool and I don't suggest anyone else does, either. The downturns were sometimes sudden and bigger than they had been. On some indices, RSI can trend sideways at "overbought" levels for weeks, but on some others, the RSI levels were more ominous because RSI didn't tend to stay at high levels long. When they turned down, the index in question usually did, too.

I began escalating my cautions about ratcheting up stops as prices climbed. I began suggesting that if there were pullbacks to the bottom-of-the-channel levels, that bulls be particularly cautious about buying the pullback in this instance. I wasn't suggesting that bears jump into the game with both feet. Not yet. And I'm still not, but something feels different here and has for a couple of weeks.

I still feel that caution is warranted, particularly as we head into December's FOMC meeting. Although I'm cautious and now in a wait-and-see mode, I'm not surprised by the steadying of the indices on their 30-sma's and the strength of this morning's rally. For months, bulls have been rewarded each time they bought at the bottom of those channels, so why wouldn't they buy and buy in force? The bullish fervor has not been extinguished because of a few days of consolidation last week and then one strong decline this one, but if bulls keep getting knocked back at former-support-turned-resistance, some of that fervor will evaporate.

Monday's decline was strong and that has to have caused a few bulls to step back off the field. On the SPX, it appears to have been the most precipitous decline since July, when the SPX began forming the channel in which it has climbed off the July low.

Until proven otherwise, we can't qualify today's rally as anything more than a relief rally. On many indices, the rallies stopped at or below their 10-sma's. Most other times when the indices had fallen beneath that average to test the bottom-of-the-channel support, they powered right through that 10-sma and kept going, closing above it on the same day they pushed through it. While the SPX did close above its 10-sma today, it didn't exactly power through it as it had on those other instances. Something has changed, and whether that "something" is significant or not has yet to be proven.

Any bulls not stopped by Monday's decline need to have their trading plans in hand and their get-out points determined in case it's time for a prolonged sideways move out of those channels, consolidating all these gains of the past month, or an actual downturn. That plan should allow for the possibility that markets could power right up through their rising channels again because nothing has yet proven that prices will not do that.

Nothing has proven that they will, either. Want-to-be risk-taking bears should watch the internals as the 10-sma's and/or the midlines of those rising channels are tested to gauge whether there's a possibility of an imminent rollover. Before even considering entering a bearish play, no matter how good the setup appears to be, bears should have already taken time to decide how they'll deal with the possibility that the setup may not play out as expected. Will tight stops be set in case there's another swoosh higher? Will wider stops be set so that a bear isn't stopped out just before markets capitulate and rollover, increasing the potential loss if they don't do so? There are points to be made for each tactic, and the one chosen should depend on a trader's stamina and account size, among other factors.

Some might choose to wait it out until there's more proof, and that probably would have been my chosen tactic before I switched to credit spreads rather than pure call or put buying, especially when bullish plays have a history of working for months on each and every pullback. My gut tells me that tomorrow could be a choppy day, and that bulls and bears have some battling to do. I think I'd have stepped back and waited for the battle to be over and for me to have a better idea of which team was winning before I joined in. If you're not in already, you might consider that, too.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
EOG None None
LMT    

New Calls

EOG Resources - EOG - close: 72.06 change: 1.09 stop: 67.99

Company Description:
EOG Resources, Inc. is one of the largest independent (non-integrated) oil and natural gas companies in the United States with proved reserves in the U.S., Canada, offshore Trinidad and the United Kingdom North Sea. (source: company press release or website)

Why We Like It:
Oil stocks were the hot spot on Wednesday and we're adding more exposure to the group. There were plenty of bullish candidates available after today's big rally but we wanted to find something that didn't look too extended. EOG has a bullish trend of higher lows and today's breakout to a new three-month high was fueled by strong volume, which is a positive sign. The company is in the midst of a two-day analyst meeting that concludes tomorrow. This morning EOG said its 2007 production target was for 10% growth. We are suggesting call positions with the stock above $70.00. Our target is the $78.00-80.00 range. The P&F chart has a very bullish pattern called a bullish triangle breakout that points to a $94 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 70.00 EOG-AN open interest=3587 current ask $5.00
BUY CALL JAN 75.00 EOG-AO open interest=4739 current ask $2.45
BUY CALL JAN 80.00 EOG-AP open interest=3555 current ask $1.05

Picked on November 29 at $ 72.06
Change since picked: 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Lockheed Martin - LMT - cls: 90.62 change: 1.32 stop: 87.65

Company Description:
Headquartered in Bethesda, Md., Lockheed Martin employs about 140,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The corporation reported 2005 sales of $37.2 billion. (source: company press release or website)

Why We Like It:
Defense stocks turned in a strong performance today. The DFI defense index rose 1.9% and broke out to a new six-month high. Helping lead the way were shares of LMT, which broke out to their own all-time high above resistance at the $90 level. The relative strength in LMT is encouraging and the technical indicators are turning higher again. The P&F chart looks very promising with a bullish triangle breakout buy signal that points to a $110 target. We do have a couple of concerns. Volume on today's and yesterday's rebound/rally was below average. Furthermore LMT clearly has a bearish divergence between its rising price and its MACD indicator. Given the market strength and sector strength we're still willing to suggest calls above $90.00. Our short-term target is the $94.85-95.00 range. More aggressive traders may want to aim for the $99-100 region.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 85.00 LMT-AQ open interest=1464 current ask $6.90
BUY CALL JAN 90.00 LMT-AR open interest=1550 current ask $3.20
BUY CALL JAN 95.00 LMT-AS open interest=2150 current ask $1.00

Picked on November 29 at $ 90.62
Change since picked: 0.00
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.1 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

B.P.Prudhoe Bay - BPT - close: 75.76 chg: 1.10 stop: 72.45

Breakout alert! Another rise in crude oil futures, following a surprise decline in the weekly inventory numbers, helped fuel another rally in oil stocks. BPT broke out over significant resistance at the $75.00 level and hit our trigger to buy calls at $75.25 opening the play. Our target is the $79.75-80.00 range. Keep an eye on the 100-dma near $77, which might offer some resistance. The P&F chart is bullish with an $85 target.

Picked on November 29 at $ 75.25
Change since picked: 0.51
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 219 thousand

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Enerplus - ERF - close: 46.01 change: 0.60 stop: 43.85

The rally in oil stocks also lifted shares of ERF but the stock's 1.3% gain seemed a bit anemic versus the OIX's 2.5% rise and the OSX's 3.9% surge. We were suggesting a trigger to buy calls in ERF at $46.01, which was hit today so the play is now open. Our target is the $50.00-51.00 range.

Picked on November 29 at $ 46.01
Change since picked: 0.00
Earnings Date 11/10/06 (confirmed)
Average Daily Volume = 973 thousand

---

FedEx - FDX - close: 116.00 chg: 0.10 stop: 113.90

Rising crude oil prices is putting the squeeze on the transport stocks and shares of FDX struggled to make headway today. We remain cautiously optimistic but more conservative traders may want to tighten their stops or just exit early since we expect oil to remain relatively strong. We do expect some resistance at the $120 level but our target is the $124-125 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: - 1.15
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 1.9 million

---

Fomento Econo. - FMX - close: 104.45 chg: 2.59 stop: 99.49

Shares of FMX produced a strong session. The stock gapped open higher and rose back above its simple 10-dma and the $104 level, which could have been short-term resistance. Our target is the $107-110 range.

Picked on November 08 at $102.09
Change since picked: 2.36
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand

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General Dynamics - GD - cls: 74.99 chg: 1.45 stop: 71.90

Our new play in GD is now open. The market's rebound today helped fuel a bull flag breakout (buy signal) in GD. We were suggesting a trigger to buy calls at $74.35. Our target is the $78.00-80.00 range.

Picked on November 29 at $ 74.35
Change since picked: 0.64
Earnings Date 01/24/07 (unconfirmed)
Average Daily Volume = 1.4 million

---

KLA-Tencor - KLAC - close: 51.05 chg: -0.05 stop: 49.49

Hmm... the chip stocks were oddly down today while the rest of the tech sector posted gains (the networking sector just barely in the green). The relative weakness was somewhat surprising since the group got some positive analyst comments on TXN and INTC. Shares of KLAC still look bullish with a trend of higher lows. 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: 0.24
Earnings Date 01/00/07 (unconfirmed)
Average Daily Volume = 3.9 million

---

Petroleo Brasileiro - PBR - cls: 93.94 chg: 3.33 stop: 87.99

The rally in oil helped fuel a big move in Brazilian oil company PBR. The stock gapped open ($91.30) and rallied to a 3.6% gain. We were suggesting a trigger to buy calls at $91.51 so the play is now open. The strong volume behind today's move is a bullish sign. Our target is the $98.00-100.00 range.

Picked on November 29 at $ 91.51
Change since picked: 2.43
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Research In Motion - RIMM - cls: 134.15 chg: -0.14 stop: 129.99

Wednesday proved to be an interesting and somewhat volatile session for RIMM. The stock gapped open higher at $135.37, rallied to $137.16, only to fall all the way back to $130.61 before traders stepped in and bought the dip (again). The lack of a real bounce is bearish but seeing traders defend RIMM at $130 again is bullish. We labeled this as aggressive high-risk play for a reason so keep that in mind. Today's afternoon bounce can be used as another entry point to buy calls. Our target is $142.00.

Picked on November 28 at $134.29
Change since picked: - 0.14
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 7.2 million

---

Sepracor - SEPR - close: 56.44 chg: 1.51 stop: 52.35

Bullish breakout alert! SEPR managed to push through resistance in the $55.50-56.00 region today with a 2.7% gain. This looks like the beginning of its next leg higher. We're aiming for the $59.50-60.00 range because the daily/weekly charts have resistance near $60.00.

Picked on November 19 at $ 54.69
Change since picked: 1.75
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 2.3 million

---

Thomas & Betts - TNB - close: 51.98 chg: 0.44 stop: 49.90

TNB is trying to bounce. The stock added 0.8% and its short-term technicals are improving. Yet it's going to take a move past the $52.50 region to show that TNB has broken its short-term trendline of lower highs. We'd be cautious about considering new bullish 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: 0.62
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 thousand
 

Put Updates

Essex Property Trust - ESS - cls: 130.17 chg: 2.67 stop: 130.01

It does not look like ESS is going to cooperate. The REITs were strong again on Wednesday and ESS powered ahead to a 2% gain. It was our plan to buy puts on a breakdown under $125 so we're safe and sitting on the sidelines for now. Our suggested trigger to buy puts is at $124.90. If triggered we will have two targets. Our first target is the $120.50-120.00 range. Our second, more aggressive target will be the $116.50-115.00 range. FYI: The P&F chart remains bullish (for now).

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 147 thousand
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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Caterpillar - CAT - close: 62.06 chg: 0.46 stop: n/a

CAT managed to add about 0.7% but we need to see a breakout above its simple 50-dma before we start to get hopeful. We have less than three weeks before December options expire. More conservative traders may want to try and salvage some of their trading capital with an early exit. For this play to have any hope of being successful we need to see CAT trade above $66 or under $54 before expiration. 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: 1.96
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million

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Blue Nile - NILE - cls: 33.95 chg: -0.13 stop: n/a

A stronger than expected earnings report for Tiffany (TIF) failed to have any affect on NILE. Shares of NILE displayed relative weakness with another loss today. 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: - 4.97
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand
 

Dropped Calls

CNOOC - CEO - close: 89.50 change: 2.26 stop: 84.45

Target achieved. The rally in oil stocks helped lift CEO to a 2.59% gain on above average volume. Our target was the $89.50-90.00 range so the play is closed. More aggressive traders may want to aim higher given the relative strength in the sector and the commodity.

Picked on November 21 at $ 85.94
Change since picked: 3.56
Earnings Date 03/23/07 (unconfirmed)
Average Daily Volume = 261 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

My 'Sentiment' Indicator & 'Two-Day' Rule

Last week in this space, I discussed my 'sentiment' indicator I use to assess the predominant bullish or bearish outlook by traders.
This indicator, similar but not the same as the put/call ratio you may be used to seeing, is inferred by the amount of call volume activity for CBOE equities (excludes index options volume) relative to daily put volume. If you want to refer back to my column of last week it can be seen in your saved Option Investor Daily (OID) e-mail from Wednesday 11/22 or by going to its location on the OID web site by clicking here.

This ratio when plotted below a major trading index like the S&P 100 (OEX), the index which I have taken to using it with, oscillates up and down on a daily basis and, over time, will tend to hit one extreme or the other per my first chart below. Using equities-only option volume activity and excluding index call and put volume figures, which have a lot of activity going on related to portfolio hedging, tends to give a more 'pure' reading of the outlook by individual traders in terms of their overall bullishness or bearishness. The more bullish we are as a group, the more call activity will be seen relative to puts on a daily basis.

Dividing daily call volume BY daily put volume also results in a ratio line that oscillates up and down in the same manner as the class of indicators called 'oscillators', which also purport to show on a PRICE basis, whether an index or stock is 'overbought' or 'oversold'. Oscillators like the Relative Strength Index (RSI) or Stochastics also get to a LOW reading when the market is at an oversold extreme and get up to a HIGH reading when the market is assumed to be overbought. The problem so to speak with oscillators is that they don't work well as a trading aid when the market has a big run or up or down 'leg', as these indicators get up to the high or low end of their 0-100 scales and STAY there more or less. This can of course also be seen the S&P 100 chart below:

I will be referring back to just the price graph of this and other charts when I talk about the 'Two-bar' rule of thumb. Right now, my focus is on the two INDICATORS. The first indicator is the RSI, which is set to 'length' 13 (accounts for the last 13 days of price activity on a daily chart) and the second is my 'sentiment' indicator "CPRATIO", which is a CUSTOM indicator. I have to manually insert the ratio each and every day in order to plot it. No charting service is using this call to put model in the way I've described.

You can see on the RSI chart above the prolonged time this indicator has been in 'overbought' territory, generally defined as a reading at or above 70. If you had put index puts when the Relative Strength Index went to it's highest high, you would have been holding losing options for at least 3 weeks now. With the erosion of the time premium and even if OEX falls to 640-635, profits on the 650 strike bought back then would be hard to come by.

In a strongly trending market, often the FIRST or only of MY indicators that gives me a forewarning of a tradable top is an extreme high in my CPRATIO indicator, the second (lowermost) of the indicators seen above on the OEX daily chart. By experience over the years with this ratio, I've determined that, generally speaking, a reading of 2.1 (call volume is 2.1 times daily equities put volume) or above puts trader sentiment into at an overbought/extreme bullishness area. (A reading of 1.9 is the reverse situation, that of an 'oversold' overly-bearish situation.)

A reading like the one-day extreme seen above at the red down arrow, which occurred on Friday 11/17, starts a 'countdown' so to speak. I look for a tradable top within 1-5 trading days after the aforementioned extreme, which would have meant not later than Monday of this week, which was the biggest down day we have seen in some time. The actual top after the 1-day CPRATIO extreme was 3 trading days as noted on the OEX price chart above. If you had been following the hourly chart action AFTER the CPRATIO extreme occurred, which I recommend, you would have observed the following pattern in the hourly chart and its corresponding RSI, with 'length' set to 21, which I also suggest for the hourly chart:

Prices as measured by the hourly 'bars' were trending higher as prices advanced before Thanksgiving. Meanwhile the 21-hour RSI was in a downtrend. The diverging slope of the two lines was suggesting a possible downside reversal. The tip off for the minor or near-term change in trend was the hourly up trendline being pierced last week Friday. The recovery bounce of prices back up to an intraday high AT the previously broken up trendline, now acting as resistance, was another tip off that the index was encountering resistance finally. So, the first downside reaction has occurred, what now?

Typically, a correction or corrective 'wave' in Elliott wave terms, will have 3 parts in sum total called an a-b-c correction. 'A' is the length or the price distance covered in the first downswing, 'b' is the recovery bounce that will often carry an index (or stock) back up to the prior 'breakdown' point(s), with part 'c' being a second downswing that often will carry prices will past the low of the first downswing. The pattern might end up looking something like in the next (hourly) chart. Stay tuned on how this scenario works out!


MY 'TWO-DAY' RULE:
I often mention and I never know quite what to call this, my 'two-day' rule of thumb relating to one but NOT two-day penetrations of key moving averages OR trendlines. For example, going back to a different view now of the OEX daily chart first seen at top:

The recent pullback in prices led to a fall under OEX's up trendline and the pivotal trading average (for indexes) of 21-days durations. However, it could have been the case that prices would pop back up above that trendline or moving average the next day. Before making up my mind entirely on the validity of a trendline or moving average 'break' like this, I want to see if the SECOND day brings a rebound that carries back above the average or trendline. NO, in both instances here.

However, today brought a stronger follow through rebound that carried OEX to a Close back above its pivotal 21-day moving average, but not yet back above its up trendline. Potential resistance implied by this previously broken up trendline is noted at the red down arrow on the OEX daily chart below. Stay tuned on whether prices now get back above what sometimes turns out to be the 'kiss of death' trendline!

If I want to judge the overall market trend vis a vis the dominant up trendlines that we're seeing, I would also need very much to analyze the broader S&P 500 Index (SPX) and the broad Nasdaq Composite (COMP) index technical/chart patterns. Those charts follow and, at least according to the way I've drawn those trendlines, both SPX and COMP are back in their uptrend channels.

In the case of SPX, there WERE two consecutive day's closes under the dominant up trendline, but today saw a further strong rebound that carried the Index back up into its uptrend channel. And, SPX held support in the 1380 area where the last low formed.

So, is this pattern going to be consistent with all the other minor corrections we've seen over the past few months? That is, a quick and fast break such as the one in late-October, followed by another sharp rebound that is followed by prices climbing yet again? A relentless rise?

The only real difference I see this time is that bullish sentiment is finally increasing, following the market higher so to speak. And THIS pattern usually means that the trend AT LEAST won't be so one-sided ahead. There may actually be a more prolonged, read 'normal', correction ahead. So, I'm not entirely a believer that we're off to the races again. The next day or two should tell the story on this.

Looking at the Nasdaq Composite chart below, my 'two-day' rule was NOT violated, in that there was only one day, not two, where COMP closed below its up trendline and not even one day where the Index closed under its 21-day average. Nasdaq is in danger of taking over the leadership in this market or at least, as the 'under-exploited' market sector, may now be where substantial gains can still be made.

The bullish action in COMP also shows us that finally the 'public' (never forgetting it's first love, technology) is getting excited about this market. It believes the bull and that all may be well, slowdown or not. Hey, can talk of a Fed EASING be far behind!


GOOD TRADING SUCCESS!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Contact Support with 'Leigh Stevens' in the Subject line.
 

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

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