Option Investor

Daily Newsletter, Monday, 01/08/2007

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Table of Contents

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

Market Wrap

Tug and Pull

The major indices found modest gains to start the week after broker UBS made positive comments on the technology sector and upgraded shares of Dow heavyweight International Business Machines (NYSE:IBM) $98.90 +1.51%.

UBS cited improving fundamentals in IBM's core business and a belief that acquisitions in the software market will expand the company's growth rates and spur margin expansion.

While IBM was trading new multi-year highs in today's session, commodity prices as depicted by the CRB Index (CEC:CRY) 290.73 -0.13% hovered near Friday's 2-year low as crude oil found a choppy trade.

Stocks were weak at the open as February Crude Oil futures (cl07g) crept above the $57 level on news that Russian oil exports to Europe via neighboring Belarus had been halted as a trade dispute between Moscow and Minsk spread into several other European countries, including Germany and Poland.

Russia accused it neighbor of siphoning off oil destined for Europe via a 2,500-mile-long pipeline that has the capacity to transport over 1.2 million barrels a day to eastern and central Europe and generally works at, or close to full capacity.

February Crude (cl07g) settled down 22 cents, or -0.39% at $56.09 with trader's jitters calmed on thoughts that the impact of a short-term stoppage would have minimal impact on European supply, as refiners in the region (European Union) maintain strategic oil stocks, while warmer weather across much of the U.S. continued to keep buyers of the "black gold" on the sidelines.

Monday's economic calendar here in the U.S. was light. Consumer credit jumped to a 6.2% annual rate in November. The Federal Reserve said consumer debt increased a seasonally adjusted $12.3 billion during November, after falling $1.3 billion, or 0.6% annualized, in October. November's increase was the strongest in three months, and higher than economists' forecast of a $4.5 billion.

The Federal Reserve said outstanding debt stood at $2.39 trillion and the end of November. The figures do not include mortgages or any debts backed by real estate.

Most of the increase in November came in credit-card debt, which surged 11.9% annualized ($8.6 billion). Nonrevolving credit, such as auto loans, increased by a 3% annual rate ($3.8 billion) in November.

General Motors (NYSE:GM) $30.58 +1.12%, Ford Motor (NYSE:F) $7.73 +1.44% and Toyota Motor (NYSE:TM) $133.97 +0.18% finished Monday's trade with gains, while DaimlerChrysler (NYSE:DCX) $61.01 -0.35% finished fractionally lower.

U.S. Market Watch - 01/08/07 Close

Merger and acquisition activity remained brisk, with consolidation in the oil patch giving a modest lift to energy stocks.

Dow component General Electric (NYSE:GE) $37.55 -0.02% said it would pay $1.9 billion for privately held Vetco Gray, a supplier of drilling and production equipment. GE said the sellers were a consortium of Candover, 3i and JP Morgan (NYSE:JPM) $47.95 +0.33%.

The Houston Exploration Co. (NYSE:THX) $50.69 +4.10%, which traded a 52-week low on Friday said it reached an agreement to be acquired by Denver-based Forest Oil Corp. (NYSE:FST) $30.13 -3.49% for $1.5 billion in cash and stock. THX said shareholders would receive an estimated $740 million in cash and the rest in FST shares.

The THX/FST marriage found a lukewarm reception as FST's offer was well below the $62 that an activist hedge fund, Jana Partners, offered THX this past summer.

In June, Jana Partners disclosed it had acquired more than 12% of THX's shares on the open market, but doubts began to surface in September that a deal would be consummated between the two when THX said it wanted to explore strategic alternatives.

Caremark RX (NYSE:CMX) $56.64 +0.51%, which has agreed to be acquired by CVS (NYSE:CVS) $31.35 +0.57%, rejected a higher, unsolicited $25.5 billion offer from Express Scripts (NASDAQ:ESRX) $68.78 -0.11%. Express Scripts said that it has notified Caremark of its intentions to nominate four candidates to the Caremark board at the company's next shareholder meeting.

Shares of apparel retailer Gap Inc. (NYSE:GPS) $20.26 +7.25% jumped as high as $21.04 intra-day after CNBC, citing unnamed sources, reported that the parent of Gap, Old Navy and Banana Republic has hired Goldman Sachs (NYSE:GS) $203.73 +2.35% to help it look at strategic alternatives. Gap executives refused to comment on the report.


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Internals Look to be Impacting Price

I continue to test and monitor my recent commentary where I began alerting traders and investors to some sign of internal weakening at the NASDAQ spilling over to the NYSE.

In last Wednesday's Market Wrap I reviewed two VERY BROAD indicators, which measure advancing issues vs. declining issues.

At tonight's close, I want to update you on StockCharts.com's NASDAQ Summation Index ($NASI) and NYSE Summation Index ($NYSI), where internal weakness, though modest, does continue.

At tonight's close, the $NASI (see Wednesday's Wrap and charts) has slipped to a -40 measure on the 20-box chart, and that weakness does look to be "spilling over" to the $NYSI, which has slipped to a +760 measure. In essence, I'm seeing signs of WEAKNESS (NASDAQ) pulling STRENGTH (NYSE) lower.

As you review tonight's U.S. Market Watch (see above) and 5DyNet%, some of the internal concern for WEAKNESS does look to be unfolding.

It is a "pull and tug" between the VERY BROAD indexes like the NASDAQ Composite (COMPX) 2,438.20 +0.16% and the NYSE Composite (NYA.X) 9,041.12 +0.17% and their advance/decline lines, as well as recent PRICE action, which reveals a very good test of recent past PRICE action for the S&P 500 (SPX.X) 141.19 +0.46% and its "tracker" as depicted by the S&P Depository Receipts (AMEX:SPY) $141.19 +0.46%.

Tonight' I want to show you some "computerized" price action in the S&P Depository Receipts (AMEX:SPY), where for the first time since mid-August, I'm seeing some "hesitancy" from computers to be AGGRESSIVELY buying a MONTHLY Pivot. That is, a mathematically derived "midpoint" for a month.

S&P Depository Receipts (SPY) - Daily Intervals

Undoubtedly, some of the internal measures I've been commenting on the past couple of weeks have been "subtle weakness" and the broader (500 stocks) SPX/SPY price action from my 12/22/06 "neutral" market call in that evening's Market Monitor, and 12/27/06 Market Wrap would also depict "neutral" market call still justified.

In today's Market Monitor, it was noted that fellow market analyst Marc Faber, who some have nicknamed "Dr. Doom" issued some very bearish comments today.

Usually, I don't pay that much attention to what a long-term bear, or bull says, but I reviewed some of "Dr. Doom's" calls of late, and I was very interested is his change of posture since he turned short-term BULLISH on 09/22/06, just as some of the very internal indicators like the $NASI and $NYSI were signaling bullishness, as well the institutionally follow S&P 500 Bullish % ($BPSPX) was about to signal "bull confirmed" status for the S&P 500.

The PRICE action I want to point out tonight is that while VERY SUBTLE to my (Jeff Bailey's "neutral" stance), the SPY itself does linger BELOW its MONTHLY Pivot ($141.28) for a second-straight session.

Now to the past pattern that suggests institutional computers aren't AGGRESSIVELY buying. Perhaps they too are programmed to a more "neutral" stance. It is here that I think a trader/investor begins to monitor PRICE action for SIMILARITY to the past, or DIVERGENCE to the past.

On the above SPY chart, I've marked various inflection lows with a "This," where the SPY began to show BUYERS at/near a MONTHLY Pivot (M Piv). Yes, hindsight is 20/20, but do you see how it looks as if institutional computers have been programmed to buy each and every pullback at a monthly Pivot since mid-August?

Again, two days, or sessions of trade do NOT make for a "bear market," but over the years, during my tenure here at OptionInvestor.com, I've usually noted that the INTERNALS are first hint to PRICE action.

Similarity: SPY would hold above $140.28, if not see gains back above $141.28, then $142.28 and once again see gains above MONTHLY R1 (M R1= $143.58) as it has in November and December.

DIVERGENCE: This is what a trader and investor will also want to be alert for, and what the INTERNALS have been providing some alert to (in my opinion). SPY would make a move BELOW $140.27 and trade its MONTHLY S1 (M S1= $139.33).

And while the NASDAQ and NYSE Summation's have a/d breadth showing subtle weakness for the internals, I'm also continuing to follow each major market Bullish %.

While it would take a 72.00% reading for the S&P 500 Bullish % ($BPSPX) to reverse back lower, tonight's 74.00% reading also hints that some DEMAND (X) is abating at still strong, but overbought level.

S&P 500 Bullish % ($BPSPX) - 2% box chart

StockCharts.com's S&P 500 Bullish % ($BPSPX) achieved "bull confirmed" status in early September (red 9) and it would currently take a 72.00% reading to reverse lower to "bull correction" status. It would then take a 68.00% reading to fall further to "bear alert" status.

Conclusion: My observations continue to suggest a more cautious bull stance at what looks to be a bull market taking a rest. Internal measured discussed the past few weeks do show sign of weakening, and the S&P 500 (SPX/SPY), which most market followers deem a good measure for the U.S. economy, or "market," does have price action stalling near-term after an impressive gain this past summer.

New Plays

New Option Plays

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

New Calls

None today.

New Puts

eBay Inc. - EBAY - close: 29.70 change: -1.08 stop: 32.01

Company Description:
Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e-commerce for an ever-growing online community. (source: company press release or website)

Why We Like It:
Jim has mentioned EBAY as a bearish candidate in his wrap a couple of weeks ago. We think today's breakdown under technical support at its 100-dma and 200-dma in addition to price support near $30.00 looks like a good spot to consider buying puts. Volume was pretty strong on today's sell-off and that's usually a bearish sign. Driving the decline in EBAY were bearish comments from a Piper Jaffray analyst who believes that EBAY's listings for the fourth quarter were under what EBAY was forecasting. This would suggest that fourth quarter earnings will come in below estimates. EBAY has broken its bullish trend from 2006 but the low today was a bounce off an intermediate trendline of support (see chart). We would consider puts here but traders have a choice of entry points. You could wait for a new relative low (under $29.26) or look for a failed rally under $31.00. We're putting our stop loss at $32.01. Our target is the $26.00 level. We would aim lower but the company has earnings coming up in about two and a half weeks and we do not want to hold over the report.

Suggested Options:
We are suggesting the February puts even though we plan to exit before EBAY's late January earnings report.

BUY PUT FEB 30.00 XBA-NF open interest=3983 current ask $1.85
BUY PUT FEB 27.50 QXB-NY open interest=1734 current ask $0.85

Picked on January 08 at $ 29.70
Change since picked: + 0.00
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 14.5 million

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Lockheed Martin - LMT - cls: 93.69 change: +1.67 stop: 89.75

Shares of LMT helped lead the rally in defense stocks. The DFI index rose 0.9% while LMT rallied 1.8% to hit new highs. We didn't see any specific news to account for LMT's strength other than a successful test flight of its new F-35 fighter jet and another contract win for the U.S. air force. Currently we have two targets. Our conservative target is the $94.85-95.00 range. Our aggressive target is the $99.00-100.00 range.

Picked on November 29 at $ 90.62
Change since picked: + 3.07
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.1 million


Altria Group - MO - close: 87.98 change: +0.83 stop: 84.75

Shares of MO also displayed some relative strength today. The stock hit another new high and closed with a 0.9% gain. While we remain bullish on the stock be ready for some volatility tomorrow. We do not know how investors will react to news out late tonight that Altria's Kraft (KFT) unit plans to take a $245 million non-cash "impairment" charge (source: Reuters). If MO does dip tomorrow watch for a bounce near $87 or $86 as a potential entry point to buy calls. Broken resistance in the $85.00-85.60 region should offer support. We are targeting a rally into the $92.50-95.00 range. Expect some round-number resistance near $90.00. The P&F chart currently points to a $114 target. We do not want to hold over the late January earnings report.

Picked on January 04 at $ 87.65
Change since picked: + 0.33
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume = 8.8 million


Reynolds American - RAI - cls: 64.63 chg: +0.54 stop: 64.90

There is no change from our previous updates on RAI. The stock is trying to bounce but remains under resistance. It's our plan to buy calls on a breakout over resistance in the $66.00-66.50 range. Our suggested trigger to open call plays is at $66.55. If triggered our target is the $69.90-70.00 range. More aggressive traders may want to aim higher. FYI: If RAI doesn't rebound soon we'll drop it as a bullish candidate.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/07/07 (unconfirmed)
Average Daily Volume = 1.2 million


Sepracor - SEPR - close: 61.56 change: -0.32 stop: 59.65

We were expecting more relative strength out of SEPR but the stock struggled with resistance near $62 all afternoon. More traders may want to try our suggestion for conservative investors to wait for a move over $62.50 or $63.00 before initiating call positions. We are going to target the January 2005 highs with an exit target of $66.45. More aggressive traders may want to aim higher since the P&F chart points to a $68 target.

Picked on January 07 at $ 61.89
Change since picked: - 0.32
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume = 2.2 million

Put Updates

Cummins Inc. - CMI - close: 115.93 change: -0.06 stop: 118.15

There is no change from our weekend play description on CMI. We are waiting for a breakdown under support near $115.00 and its exponential 200-dma. More importantly CMI is poised to breakdown under its two-year trendline of support. If that occurs we want to be ready to capture the move. We are suggesting a trigger to buy puts at $114.50. If triggered we have two targets. Our conservative target is $110.50 and our aggressive target is the $106.00 level. Currently the Point & Figure chart has a triple-bottom breakdown sell signal with a $96 target but is also testing support in the $114-115 region. We do not want to hold over the late January or early February earnings report.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/29/07 (unconfirmed)
Average Daily Volume = 1.0 million


Group 1 Auto - GPI - close: 49.70 change: -0.08 stop: 52.01

This morning before the opening bell GPI issued an earnings warning for 2007. Analysts were looking for earnings of $4.28 a share for the year and GPI forecasts between $4.00 and $4.25 for the year. The stock gapped down to open at $48.82 and then dipped to $47.11 before bouncing back. We had a suggested entry point to buy calls at $49.25 so the gap open lower is now our entry point. If you are still on the sidelines we would wait and watch for a failed rally in the $50 region as a potential entry point to buy puts again. Our target is the $45.15-45.00 range. We do not want to hold over the February earnings report.

Picked on January 08 at $ 48.82 *gap down entry*
Change since picked: + 0.88
Earnings Date 02/19/07 (unconfirmed)
Average Daily Volume = 371 thousand


3M Co. - MMM - close: 77.60 change: +0.17 stop: 80.01

MMM managed a minor bounce this afternoon thanks in part to some positive analyst comments from Credit Suisse, who also raised their price target on MMM to $95. Technically MMM still looks bearish with a steady trend of lower highs. While we are suggesting plays here more conservative traders may want to wait for a drop under the exponential 200-dma (near $77.00) or the 100-dma (near $76.35). Our target is the $72.50-70.00 range. The P&F chart points to a $47 target.

Picked on December 17 at $ 78.31
Change since picked: - 0.72
Earnings Date 01/30/07 (confirmed)
Average Daily Volume = 2.8 million


NewMarket - NEU - close: 55.59 change: -0.59 stop: 60.35

NEU continues to sink and the stock looks poised to hit our target in the $55.00-54.75 range. More conservative traders may want to exit early now or just above the $55.00 level, which might be support given the rising 200-dma (currently near 54.98). We're not suggesting new positions at this time.

Picked on December 14 at $ 59.11
Change since picked: - 3.52
Earnings Date 01/29/07 (unconfirmed)
Average Daily Volume = 275 thousand


Sears Holding - SHLD - cls: 165.32 chg: -0.75 stop: 171.55

Retail stocks failed to bounce today. Shares of SHLD slipped 0.45% and further flirted with a breakdown under $165 and its rising 100-dma. We are still somewhat concerned about a potential oversold bounce from here so be prepared for it. The $170 level should act as short-term overhead resistance. Readers can use another failed rally under $170 or a new decline under $165.00 as a new entry point. The Point & Figure chart points to a $152 target. Our target is the $162.00-160.00 range. FYI: In the news today Sears announced it was opening an online showroom in Second Life, which is an online virtual world.

Picked on December 22 at $167.90
Change since picked: - 2.58
Earnings Date 02/15/07 (unconfirmed)
Average Daily Volume = 1.9 million


Vornado Realty Trust - VNO - cls: 118.14 chg: -1.41 stop: 122.65

Shares of VNO continue to sink and the stock lost 1.1% on strong volume today. We don't see any big changes from our new play description from this weekend. We are suggesting puts with VNO under $120. We have two targets. Our conservative target is $115.50, which is above potential support at its rising 100-dma. Our aggressive target is the $111.00 level, which is above potential support at $110.

Picked on January 07 at $119.55
Change since picked: - 1.41
Earnings Date 02/27/07 (unconfirmed)
Average Daily Volume = 945 thousand


YUM Brands - YUM - close: 58.05 change: -0.14 stop: 60.26

YUM dipped to a new two-month low on Monday with the stock breaking support on an intraday basis. Readers can choose to open new put positions now or look for a new relative low under $57.40 before opening plays. Our target is the $55.75-55.00 range but keep an eye on the rising 100-dma as potential support. FYI: A decline under $57.00 would reverse the P&F chart into a new sell signal.

Picked on December 12 at $ 58.49
Change since picked: - 0.44
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.)


Blue Nile - NILE - cls: 39.28 chg: +0.75 stop: n/a

NILE continues to rally and the stock hit new two-month highs today. We do not see any changes from our weekend update. January options expire soon. Odds are that the slow and steady buying in NILE is due to funds picking up shares before NILE is added to the S&P smallcap index, which was announced a few weeks ago. We're not suggesting new positions. We are adjusting our target to breakeven at $2.40, which was our estimated cost. 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: + 0.36
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand

Dropped Calls


Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Jeff Bailey 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.

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