Option Investor

Daily Newsletter, Monday, 12/11/2006

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Table of Contents

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

Market Wrap

All is Quiet Ahead of the Fed

After a flat to modestly lower open, traders placed conservative bets into tomorrow's Federal Reserve decision on interest rates in what turned out to be a very tight range of trade on light volume.

While volume at the big board has been averaging 2.63 billion shares per day so far this month, today's 2.2 billion shares has the look that traders were only making minor adjustments to their equity holdings. NASDAQ's 1.86 billion nearly matched Friday's 1.85 billion shares and was notably below December's 1.99 billion share per day average.

Treasuries found some action with the shorter-dated 5-year yield ($FVX.X) falling 3.0 basis points to finish at 4.494%, while the benchmark 10-year yield ($TNX.X) fell 3.2 basis points to 4.520%. The longer-dated 30-year yield ($TYX.X) recouped some of last week's rise and fell 3.3 basis points to 4.628%.

Forward-looking Fed Funds futures currently have market participants seeing no Fed action at tomorrow's meeting. The central bank raised rates 17 straight times starting in June 2004, but has left them unchanged the last three meetings at 5.25%.

Of late, it wouldn't be a Monday without some type of merger news.

Dow components American Intl. Group (NYSE:AIG) $71.00 +0.92% said it agreed to buy the U.S. port operations of state-owned Dubai Ports. AIG will take control of six U.S. ports. AIG Global's role, officials said, is purely as an investor and will involve only the American ports.

The U.S. ports involved in Monday's transaction have been purchased for an estimated $700 million, though the exact terms were not disclosed.

Copper producer Phelps Dodge (NYSE:PD) $122.87 -0.64% jumped as high as $124.75 at the open after hedge fund SAC Capital Advisors LLC said that it would vote against Freeport McMoRan's (NYSE:FCX) $61.35 -0.74% attempt to buy its rival. SAC Capital Advisors disclosed that it and fund manager Steven Cohen had bought 10.3 million shares in Phelps Dodge, or about 5.1% of the Phoenix-based copper miner's outstanding stock. The fund, which reportedly has bought and sold shares almost daily over the last two months, said that it will use its influence to convince Phelps Dodge to hold out for a better bid.

In late November, Freeport McMoRan offered to buy Phelps Dodge for $25.9 billion in cash and stock, with amounted to roughly $126.46 per share.

Medical device maker Biomet (NASDAQ:BMET) $41.54 +4.11% jumped to a new 52-week high on speculation that U.K.-based Smith & Nephew PLC might bit $11 billion to buy the company.

One of today's most actives had shares of Nuvelo (NASDAQ:NUVO) $4.05 -79.28% plunging on heavy volume of 90.1 million shares. The company said blood-clot-busting drug Alfimeprase failed in a late-stage clinical trial. Nuvelo officials said the mechanical delivery of the drug may have disrupted the clot so that it was not adequately delivered to the site of the clot, but carried beyond it.

Closing U.S. Market Watch - 12/11/06

Today's economic report wasn't thought to be a market mover, and it wasn't. October wholesale inventories rose 0.8%, which was slightly above economists' forecast for a 0.7% gain. Sales fell 0.4% from September, but were up a healthy 6.3% versus a year ago. Compared to last month, sales of machinery, equipment and supplies were down 3.3%, while sales of motor vehicle and motor vehicle parts and supplies, increased 2.5%.

October sales of non-durable goods, which are products intended to last three years or less, were down 0.6% from last month, but were up 5.5% from last year. Compared to last month, sales of petroleum and petroleum products decreased 5.1%.

I would note that at 10:00 AM EST, when October's wholesale figures were released, the CRB Index (CEC:CRY) 312.08 -0.09% did move sharply lower from 312.50 to 310.50 in a "knee-jerk" reaction.

I'm sure the Fed is keeping an eye on commodity price. Not intra-day moves, but I would also note that since the Fed last raised its target on Fed Funds to 5.25%, commodity prices as depicted by the CRB Index have been easing.

CRB Index - Daily Intervals

June 29th was the last meeting the Fed raised its target on Fed funds to 5.25%. The recent trade at 322 in the CRB would be considered a "normal" retracement of the May-October decline and a level of near-term resistance.

Today's October wholesale data is from the month of October, and backward looking. Perhaps reflected in the CRB Index itself.

My "analysis" of the CRB Index, or what it is saying is that hyper economic growth has cooled, and the current upward trend may reflect a more "moderate growth" trend for various commodities that are used in the manufacture of goods and some services.

Energy prices were weak today. January Nat. Gas futures (ng07f) settled down 13.4 cents, or -1.77% and traded contract lows at $7.216 during today's floor trade. Trader's cited fall-like weather blanketing much of the U.S., curbing the need for natural gas to meet heating demand.

The last time gas futures settled lower was on Oct. 30 at $7.41/MMBtu, when the front-month December contract was trading.

Temperatures in the Northeast and Mid-Atlantic are set to rise 6-14 degrees above normal this week with high temperatures in the 50s to low 60s, said Jim Rouiller, senior energy meteorologist with Planalytics in Philadelphia.


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On the earnings front, shares of Dow component DuPont (NYSE:DD) $47.42 +1.10% rose after the chemical giant said it now expects to earn $3.25 per share in the quarter, which includes $370 million, or $0.39 per share, in net one-time gains as the company continues its restructuring and streamlining. The company said it was cutting 1,500 jobs at its agriculture and nutrition divisions. Analysts were looking for the company to post earnings of $2.86/share, including a $0.01 one-time gain.

After today's closing bell, mobile phone chipmaker Texas Instruments (NYSE:TXN) $29.30 -0.34% was trading relatively unchanged in an active post-market trade. The company cut its fourth-quarter outlook on lower-than-expected chip sales.

The company, which makes everything from calculators to chips for flat-screen televisions, said it now expects earnings from continuing operations of $0.37 to $0.40 a share compared with its earlier target of $0.40 to $0.46.

The company said it now expects revenue of $3.35 billion to $3.5 billion for the quarter. In October it had forecast fourth-quarter revenue of $3.46 billion to $3.75 billion.

On average analysts had expected earnings of $0.43 a share on revenue of $3.58 billion, according to Reuters Estimates.

Buyers stand their ground ....

In last Monday's Market Wrap, I noted some signs of weakness in the major indexes WEEKLY Pivot levels and established tests for WEAKNESS and STRENGTH.

With the S&P 500 ($SPX) and the S&P 500 Depository Receipts (AMEX:SPY) seeing new closing highs on Friday, I'm dragging up my 0% retracement on the SPY to Friday's closing high of $141.42, where conventional use of this retracement has the 19.1% retracement moving higher to $137.82.

S&P Depository Receipts (SPY) - Daily Intervals

Since I visit with you every Monday, I've been attaching, or "dragging up" the 0% retracement from the summer low closes when we get a new 52-week high Friday close.

In my opinion, the SPY still looks strong, it FAILED the bearish test I set in the WEEKLY Pivot levels last week, as it never traded its WEEKLY S1 (support 1) at $138.54 and showed SIMILARITY to the past

Here's the same SPY chart I showed last Monday with the MONTHLY Pivot Levels and QCharts' WEEKLY Pivot levels.

S&P Depository Receipts (SPY) - 60-minute intervals

At the conclusion of last Monday's trade, the SPY had jumped to its WEEKLY R1 ($141.56) and for the most part traded with side of that WEEKLY near-term resistance level.

Volatility watchers may want to note that the CBOE Volatility Index (VIX.X) surged to its WEEKLY R1 of 12.61 on Thursday, as the SPY fell to $141.00. It was my analysis in the Market Monitor at OptionInvestor.com that we were really seeing some pre quarterly option expiration action. In fact, that day, the UpTick volume vs. the DownTick volume on the SPY was very bullish with UpTick volume at 8.18 million vs. DownTick volume of 4.67 million.

Since Thursday, option volatility has reversed notably with the VIX.X back down below 11.00 at 10.71.

It has been a couple of weeks since I showed the daily interval bar chart of the NASDAQ-100 Tracker (NASDAQ:QQQQ) $44.06 +0.36% where I had raised the 0% retracement to its Friday, November 24 close of $44.65. Same pattern of "once above" then "no Friday close below" as the SPY chart earlier this evening.

NASDAQ-100 Tracker (QQQQ) - Daily Interval

Not much to say about the QQQQ, except that it is digesting some of November's gains.

A downgrade on Oracle (NASDAQ:ORCL) $18.07 +1.51% from last Tuesday's close of $18.86 weighed on the Software sector, with the GSO.X 184.33 +0.53% down from last Monday's close of 187.85 (see U.S. Market Watch -1.87% decline recent 5-days), where the software group really accelerated gains from mid-September for the QQQQ.

The Semiconductor HOLDRs (SMH) $34.08 -0.32% closed at $33.63 back on 09/11/06 and have traded between $32.75 and $35.95 for about three months.

With Texas Instruments (TXN) $29.30 -0.34% giving a lukewarm outlook for Q4, the heavy weight software and biotech components of the QQQQ will remain key drivers.

New Plays

New Option Plays

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

Play Editor's Note: The markets are likely to trade sideways tomorrow as investors wait for the FOMC meeting announcement. We will wait to add new plays to the newsletter until we see the market's afternoon reaction to the Fed's policy statement.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

B.P.Prudhoe Bay - BPT - close: 75.43 chg: -0.07 stop: 73.75

Oil stocks struggled to maintain any gains on Monday as crude oil slipped more than 80 cents to close under $62 a barrel. Shares of BPT spent most of the session trading sideways and eventually closed in the red but shares remain above round-number support at the $75.00 level and its 200-dma. We would view a bounce near $75 as a new entry point to buy calls but bear in mind that crude may continue to trade flat to down over the next couple of days. Our target is the $79.75-80.00 range. The P&F chart is bullish with an $85 target.

Picked on November 29 at $ 75.25
Change since picked: + 0.18
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 219 thousand


Biosite - BSTE - close: 48.94 change: -0.38 stop: 47.95

Biotech stocks continued to see some selling pressure on Monday but aside from a few stock-specific movers the sector traded sideways. BSTE lost 0.77% but did so on below average volume, which doesn't suggest a lot of downward pressure. We would wait for a rally past $50.25 before considering new call positions. Our target is the $54.50-55.00 range. FYI: The P&F chart points to a $65 target.

Picked on December 05 at $ 50.05
Change since picked: - 1.11
Earnings Date 02/07/07 (unconfirmed)
Average Daily Volume = 263 thousand


Centex - CTX - close: 56.15 change: +0.02 stop: 53.99

The homebuilders popped higher on Monday morning but by the closing bell had given back most of their gains. That pattern held true for shares of CTX, which closed virtually unchanged. The lack of upward momentum contributes to the growing bearish technical picture. We would wait and watch for a bounce near its 10-dma or the $55.00 level as a new entry point to buy calls. Broken resistance near $55 should now offer support. Currently we have two targets. Our conservative target is the $59.50-60.00 range. Our aggressive target is the $63.50-64.00 range. Be aware that the bottom of CTX's April 2006 gap down near $57.25 might be resistance as may the to of its gap near $60.00. FYI: The Point & Figure chart points to a $77 target.

Picked on December 03 at $ 55.89
Change since picked: + 0.26
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.0 million


Diamond Offshore - DO - close: 81.50 change: +0.40 stop: 76.99

DO displayed some relative strength on Monday. Traders bought the dip on Monday morning near $80.00 and the stock closed with a 0.49% gain. The move looks like a new entry point to buy calls. Our target is the $85.00-86.00 range near its early July high. The P&F chart points to a $92 target.

Picked on December 03 at $ 80.59
Change since picked: + 0.91
Earnings Date 01/26/07 (unconfirmed)
Average Daily Volume = 3.8 million


Enerplus - ERF - close: 46.31 change: +0.25 stop: 44.45

ERF also displayed some relative strength today with a 0.5% bounce to out perform its peers and the broader markets. We remain concerned about potential resistance at the 50-dma directly overhead and the lack of momentum in the MACD indicator. Traders may want to tighten their stop loss toward the $45.00 level. We would not suggest new bullish positions at this time. The Point & Figure chart is bullish and points to a $64 target but shows potential resistance near $52. We are aiming for a rise into the $50.00-51.00 range.

Picked on November 29 at $ 46.01
Change since picked: + 0.30
Earnings Date 11/10/06 (confirmed)
Average Daily Volume = 973 thousand


General Dynamics - GD - cls: 74.62 chg: +0.48 stop: 73.39

Investors bought the dip in GD on Monday morning and the intraday chart action looks relatively bullish for tomorrow. Unfortunately some of the daily chart's technical indicators are still suggesting a bearish move after last week's pull back. Traders can choose to buy this bounce or wait for a new move over $75.00. More importantly you might want to wait and see the market reaction to the Fed meeting tomorrow before opening new positions. Our target is the $78.00-80.00 range. The Point & Figure chart points to an $82 target.

Picked on November 29 at $ 74.35
Change since picked: + 0.27
Earnings Date 01/24/07 (unconfirmed)
Average Daily Volume = 1.4 million


KB Home - KBH - close: 51.64 change: +0.10 stop: 49.45

We are pleasantly surprised by the relative strength in KBH on Monday. Last Friday the company issued some bearish comments after the closing bell and there was new data on its investigation into its executive option plan. We were expecting a knee-jerk reaction lower this morning but it failed to appear. It looks like an analyst firm upgrade and a higher price target before the opening bell may have short circuited any potential sell-off. We remain bullish on KBH with the stock above $50.00 and readers might want to buy today's bounce from its rising 10-dma.

Picked on December 03 at $ 52.04
Change since picked: - 0.40
Earnings Date 03/00/07 (unconfirmed)
Average Daily Volume = 2.7 million


L-3 Comm. - LLL - close: 82.43 change: -0.39 stop: 79.99

LLL continued to dip on Monday but as expected traders bought the dip near broken resistance, now new support, at the $82.00 level. We see the intraday bounce near $82 as a new entry point to buy calls. Our target is the $88.00-90.00 range.

Picked on December 04 at $ 83.81
Change since picked: - 1.38
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 840 thousand


Lockheed Martin - LMT - cls: 91.33 change: -0.49 stop: 87.65

There is no change from our weekend update on LMT. Shares continued to trade sideways hugging its simple 10-dma. We believe that investors are just waiting for tomorrow's FOMC meeting. In the news today LMT announced it had won a couple of more contracts for various military aircraft. More conservative traders may want to raise their stops. We have two targets. Our conservative target is the $94.85-95.00 range. Our more aggressive target is in the $99-100 range.

Picked on November 29 at $ 90.62
Change since picked: + 0.71
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.1 million


Sepracor - SEPR - close: 56.57 chg: -0.71 stop: 54.69

SEPR continues to consolidate lower. The stock lost 1.2% and is now in jeopardy of breaking down under its 10-dma. The technical indicators continue to worsen due to a lack of upward momentum. We warned readers over the weekend to expect a dip toward $56 and SEPR delivered one midday. We are not suggesting new plays at this time. Our target for SEPR is the $59.50-60.00 range.

Picked on November 19 at $ 54.69
Change since picked: + 1.88
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 2.3 million


Valero Energy - VLO - close: 55.74 change: +0.83 stop: 53.45

Good news! VLO rebounded early this morning. As of Friday the stock looked in trouble with a bearish breakdown under $55.00. Fortunately, there was no follow through and traders bought the dip. The stock rose 1.5% and looks poised to move higher. Readers may want to use today's rise past $55 as a new entry point. Our target is the $59.50-60.00 range.

Picked on December 03 at $ 55.85
Change since picked: - 0.11
Earnings Date 01/30/07 (unconfirmed)
Average Daily Volume = 14.3 million


MEMC Electronic - WFR - close: 43.32 change: +0.92 stop: 39.49

WFR continues to out perform its peers and the SOX index. The stock rose 2.16% following Friday's intraday rebound. We don't see any changes from our weekend play description. Our target is the $47.50-50.00 range. The P&F chart is bullish with a $48 target.

Picked on December 10 at $ 42.40
Change since picked: + 0.92
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 4.4 million

Put Updates

Expeditors Intl.- EXPD - close: 43.05 change: -0.63 stop: 46.05

EXPD continued to slide on Monday. Shares lost 1.44% on rising volume and confirmed last week's breakdown under a number of support levels. We don't see any changes from our weekend play description. If the transport sector suddenly sees some strength readers can watch for EXPD to find resistance near the $45 level and a failed rally under $45 can be used as another entry point. Our short-term target is the $40.15-40.00 range. More aggressive traders may want to aim for the August lows.

Picked on December 10 at $ 43.68
Change since picked: - 0.63
Earnings Date 02/06/07 (unconfirmed)
Average Daily Volume = 1.4 million


Genzymme - GENZ - close: 62.12 change: -0.12 stop: 66.05

The biotech sector traded flat to down and GENZ followed suit. In the news today there was a report about the latest Phase III study on Campath, a drug being developed by GENZ and Bayer(Schering), was producing positive results as therapy for chronic lymphocytic leukemia. The press release didn't do anything to help shares of GENZ and we don't see any changes from our weekend update. The Point & Figure chart looks pretty bearish with a quadruple-bottom breakdown sell signal with a $51 target. Our target is the $58.00-56.00 range. More conservative traders may want to think about tightening their stops toward the $64 level.

Picked on December 03 at $ 62.77
Change since picked: - 0.65
Earnings Date 02/15/07 (unconfirmed)
Average Daily Volume = 1.9 million


NewMarket - NEU - close: 61.07 change: -0.96 stop: 62.25

We do not see any changes from our previous updates on NEU. Aggressive traders might want to consider new positions. We're still waiting on a breakdown. We want to see a drop under the early December low so we're suggesting a trigger to open positions at $58.25. If triggered our target will be the $53.50-52.50 range, which is an adjustment from our original target due to potential support at its rising 200-dma.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/29/07 (unconfirmed)
Average Daily Volume = 275 thousand


Yahoo! Inc. - YHOO - close: 26.49 chg: +0.15 stop: 27.05

There are no changes from our new play description on YHOO. The stock is still bouncing above support near $26.00. Technicals are bearish and the P&F chart points to a $16 target. We are suggesting that readers wait for a breakdown under support near $26.00 and its 50-dma. Therefore we're suggesting a trigger to buy puts at $25.85. If triggered our target is the $22.65 level near the October low. More aggressive traders may want to aim lower.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/16/07 (unconfirmed)
Average Daily Volume = 29.3 million


YUM Brands - YUM - close: 59.50 change: -0.22 stop: 60.51

Some positive analyst comments for YUM this morning helped send the stock higher. Yet once YUM came close enough to "fill the gap" from Friday morning the stock reversed lower again. This failed rally looks like a new entry point to buy puts. However, we want to see more confirmation so we are suggesting a trigger to open plays at $58.49. If triggered our target will be the 55.75-55.00 range. After the closing bell today a news report hit the wires stating that the U.S. health department was "not ready to declare the Taco Bell E.coli out break over" (source:Reuters). This is likely to put more pressure on the stock tomorrow.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/07/07 (unconfirmed)
Average Daily Volume = 1.6 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: 63.07 chg: -0.33 stop: n/a

No change from our previous updates on CAT. We're not suggesting new positions. Our estimated cost was about $0.75. We want to exit if either options rises to $1.50. The options in our strangle are the December $65 call (CAT-LM) and the December $55 put (CAT-XK).

Picked on November 08 at $ 60.10
Change since picked: + 2.97
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million


Blue Nile - NILE - cls: 33.49 chg: +0.17 stop: n/a

CAUTION! After the close of trading today Standard & Poors announced plans to replace Lone Star steak house with NILE in the S&P SmallCap 600 index. That means that funds who track the smallcap index will eventually need to replace their shares of STAR with shares of NILE. This news could ruin a play that has thus far been moving in our favor. The reaction in after hours was sharp with the stock trading near $35.00. We would expect a gap open higher tomorrow. If NILE doesn't gap higher more conservative traders may want to exit early immediately. We're not suggesting new positions at this time. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).

Picked on October 29 at $ 38.92
Change since picked: - 5.43
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

Dropped Calls

Thomas & Betts - TNB - close: 49.98 chg: -2.84 stop: 49.90

We have been stopped out of TNB at $49.90. Investors reacted quickly to news that another player in the industry, Hubbell, issued an earnings warning. TNB sold off as traders tried to lock in profits for fear that TNB might also miss estimates. Volume was very big on today's bearish breakdown below support.

Picked on November 12 at $ 51.36
Change since picked: - 1.38
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 thousand

Dropped Puts


Dropped Strangles



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