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Daily Newsletter, Wednesday, 01/10/2007

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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

Not Much Traction

Introduction

This afternoon, a CNBC commentator noted that although stock markets' performance had not shown much traction this week, prices were finally beginning to move. Much of that movement was driven by the gains in the SOX. Component stock Marvell Technology Group (MRVL) is listed as one of the possible beneficiaries of the iPhone technology that Apple introduced this week and MRVL posted a strong gain today. Apple's (AAPL) gains helped support the Nasdaq, too, but the Russell 2000 proved a reluctant follower rather than taking its usual upside leadership role. Some other indices posted only modest gains in the under-0.20-percent ranges.

Carts

The SPX is one of the indices that failed to gain much traction today.

Annotated Daily Chart of the SPX:

The SPX remains squarely within its most recent narrow trading range. The RSI near 50 indicates nothing but rather confirms the lack of traction. A daily close above the 10-sma is needed to break the SPX out to the upside and one below the 50-sma is needed to break it to the downside, but even then I would expect nearby support or resistance to hold on the first test. Nearby resistance would be found at 1427-1431 and than at its former rising red trendline. Nearby support can be found at the 72-ema, coinciding with the lowest red trendline.

The 15-minute Keltner channels delineates the narrow channel in which the SPX has been trading. As of the close Wednesday, the channel's parameters were at about 1416 on 15-minute closes and 1405.15 on 15-minute closes. An upside break on a 15-minute close sets a short-term upside target of 1425.74 and a downside one of 1396.40. Absolutely nothing on the charts indicates whether that channel range will break or in which direction. Nothing on the daily chart shows this, either. There's no traction here.

The Dow's chart shows similar characteristics.

Annotated Daily Chart of the Dow:

The Dow's narrow consolidation band is visible on this daily chart as well as on an intraday one. Unfortunately, Keltner channel values for the Dow show a gap in my charting service, so that the channel lines are not as reliable. The 30-minute chart shows channel lines near 12,459-12,460 and 12,366, all on 30-minute closes. Since this echoes the approximate boundaries of the week's consolidation zone, it's not important that we see those intraday values.

Although the Nasdaq gained some traction today, fueled by Apple and the stocks in its food chain, it did not break out of the triangle I mentioned last week.

Annotated Daily Chart of the Nasdaq:

The Nasdaq ended the day jammed against this resistance. The Nasdaq also ended the day jammed against 30-minute Keltner resistance, with that resistance just under the day's high of 2461.34. Since last Thursday, the Nasdaq has adhered to this channel's resistance on 30-minute closes, including last Thursday's end-of-day spike during the last 30-minute period, so the possibility exists that it could do so this time, too. Personally, I wouldn't be surprised to see some early carry-through tomorrow morning, but, if so, I'd be alert to the possibility of a pop-and-drop move.

The 15-minute Keltner channel suggested that as long as the Nasdaq maintained 15-minute closes above a line near 2456, it might try for the next target at 2471.70.

Since the SOX was the driver of many of the day's gains, it's important to see what happened on that index.

Annotated Daily Chart of the SOX:

The SOX strength was apparent in the first close it produced above the 30-sma in a month. It did not, however, break above the top of the potential bull flag it's been producing since mid-November, and its gains remain suspect until it does so and confirms by closing above its December 493.25 intraday high.

As of the close, it was pausing at 15-minute Keltner resistance at about 484 on 15-minute closes, but had set a potential upside target of 485.88 on the 30-minute chart. It has to maintain 30-minute closes above a line at 481.67 (9-ema on the 30-minute chart) to maintain that upside target, however. The RSI on the 30-minute chart had reached levels that often indicate that a short-term pullback is needed. I also wouldn't be surprised to see some follow-through to the upside tomorrow morning, but would also be watchful for resistance catching hold soon if the SOX should attempt an early climb.

The RUT's behavior causes some concern among those seeking signs of the sustainability of today's gains.

Annotated Daily Chart of the RUT:

The RUT closed beneath its 50-sma for the first time since mid-August. Unfortunately, the Keltner channels for the RUT were also missing some bars, so the channel lines are not as reliable. However, it appeared that 30-minute resistance would be found near 780-781. The RUT needs to climb above that level and sustain values there to prevent sinking further, toward the aqua-colored 72-ema shown on the chart. With the 50-sma at 781.63, the importance of the 780-782 level's resistance is emphasized. If in long positions on the bounce from today's low, watch for resistance at that level, if touched, and for stronger resistance near 786-787.

The drop in crude did not provide much benefit to the TRAN today. Although the TRAN posted a gain, it did not fully participate in the bounce and it did not break out of a recent consolidation zone. With the TRAN sensitive to both crude prices and the economic outlook, one has to question what it might be telling about economic strength since it's not benefiting from declines in crude prices.

Annotated Daily Chart of the TRAN:

The TRAN needs to participate more fully and break above its 30- and 50-sma's if gains in the SPX, Dow and OEX are to prove sustainable. As of the close, the TRAN was reaching toward 30-minute Keltner resistance at about 4654.40, but seeming to have some difficulty with nearer and softer Keltner resistance. The lower channel band in which the TRAN has been traveling this week was at about 4600 as of the close.

After-hours developments included Genetech's (DNA) stronger-than-expected fourth-quarter net income, with the company's stock gaining in after-hours trading. Atmel's (ATML) stock also gained in after-hours trading after Goldman Sachs said it held a 10.1-percent position in the stock. Sapient Corp. (SAPE) was gaining after reporting its earnings, but Ashworth Inc. (ASHW) declined after its loss widened and the company reported that it would be seeking a new CFO. It hasn't been a good day for executives with apparel makers today.

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Today's Developments

At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending January 5, with that survey revealing a big gain in volume. On a seasonally adjusted basis, volume climbed 16.6 percent over the previous week's volume. Now that the downturn in the housing industry has extended so long, these volumes have also been seeing some favorable year-over-year comparisons, with the overall volume rising 12 percent when compared to the year-ago level. This is on an unadjusted basis. All this occurred as the average interest rate for a fixed-rate thirty-year mortgage fell to 6.13 percent from the previous weeks 6.22 percent.

Components of the overall number also jumped. Four-week moving averages were mixed, still influenced by the month-ago downturn. The four-week moving average for the Refinance Index was down 5.1 percent.

These numbers come after builders revealed yesterday that their net sales orders are still down from year-ago levels. Those net sales are still being impacted by higher-than-normal buyer cancellations. In some cases, those cancellations have fallen over year-ago levels although they remain above the norm. Later in the day, a Raymond James & Associates' analyst claimed that the residential builders would remain soft this year and could show further declines.

A few minutes after the MBAA released those mortgage application volume figures, the Commerce Department released figures on November's trade gap. Those showed that the gap narrowed for the third month in a row. The gap narrowed 1.0 percent, to $58.2 billion, its lowest level in 16 months, surprising economists who had expected the gap to widen to $59.8 billion. October's deficit was also revised to $58.8 billion from its previous $58.9 billion.

A 9.5-percent decrease in the value of imported petroleum contributed to a smaller increase in import prices in November. Exports rose to a new record level, driven higher by exports of civilian aircraft.

Year-to-date, the deficit remains high, and 2006's deficit will surpass 2005's record of $716.7 billion. Year-to-date, the deficit is 7.5 percent, at $701.61 billion. The trade deficit with China also widened, with the year-to-date gap now at $213.5 billion, up from the $185.3 billion that had been hit by November of last year.

At least one economist took a look at the decline in the imports and attributed it to more than a decline in energy prices, however. He saw it as a sign of slowing U.S. demand. One could argue that the sharp decline in crude prices and not a decline in demand was responsible, but then some are questioning whether a decline in demand is at least partly responsible for the drop in crude prices, so the question of whether demand is decreasing doesn't entirely evaporate. As long as asking that question remains a plausible one to ask, it's not surprising that markets might not be gaining much traction.

For now, however, the decline in the gap was expected to positively impact our GDP, with the likely magnitude of that impact has not yet been calculated. That's both good news and bad news, depending on whether one is more concerned about a sharp slowdown or inflation. Bond yields turned higher, focusing on the risk of inflation from stronger-than-expected growth. Ten-year yields were to close at 4.69 percent, perilously close to the 200-sma and the neckline of a potential bottoming inverse head-and-shoulder formation, with that neckline at 4.74 percent. Traders watching interest rates to gauge whether interest-rate-hike fears are escalating should be aware that the current inverse H&S formation could be considered the head of a larger formation, so that another pullback to form a right shoulder could be anticipated if the 200-sma, now at 4.85 percent, is reached. The possibility exists, however, that yields could rise for a number of days through the 200-ema and to the 200-sma, spooking equity markets, so keep an eye on the ten-year yields (TNX).

A little later in the morning, the Commerce Department released November's Wholesale Inventories, and the news wasn't good, but this number isn't closely watched by many market participants. U.S. inventories rose 1.3 percent while sales rose only 1.0 percent, pushing the inventory-to-sales ratio to 1.20, its highest rate in three years. The build in inventories surprised economists, who had expected only a 0.5-percent gain. One spot of good news is that October's rise in inventories was revised lower, to 0.4 percent from the previous 0.8 percent.

The release of this number illustrates how difficult it's become, almost minute-by-minute, to judge where the economy might be going. While the narrowing of the trade deficit could be judged by some to show that the economy is strengthening and GDP might increase above previous estimates, this rise in inventory-to-sales figures may be indicating slackening demand.

As is typical, however, markets showed little reaction to Wholesale Inventories, perhaps treading water before the crude inventories release that was to come in thirty minutes. Crude costs and energy-related companies had been much in the focus all day and indeed all week with geopolitical developments in Russia, Belarus and Venezuela also impacting energy companies' stock, crude and natural gas prices. Late Tuesday, Chevron Corporation (CVX) provided its interim update and, in some respects, that update echoed ConocoPhilips' from last week and BP's from yesterday. CVX said that falling commodity prices and margins, when compared to the prior quarter's, would hit its earnings for the fourth quarter. Production volumes have also declined. The company also expects after-tax charges to climb to the high end of the standard range or perhaps be above that high end.

Belarus' president announced today that Belarus and Russia had reached some sort of agreement in their energy showdown, but Russia had not yet confirmed that agreement as of the last announcement I read.

The European Commission must have been watching this development quite closely. Today, the European Commission stepped into the arena of global discussion concerning energy. The commission wants a "new industrial revolution" that would reduce the EU countries' dependence on foreign energy sources. This could be accomplished, the commission said, by increased investments in renewable energy and nuclear power, cutting greenhouse emissions, and liberalization of gas and electricity markets in Europe, cutting the power of the big energy utilities. Without changes, Europe will depend on imports to supply 84 percent of its gas and 93 percent of its oil needs by 2030, with those imports jumping to 65 percent of consumption. The European Commission may have a tough task of convincing all its members with divergent lifestyle, political and industrial needs to agree on a single platform, however.

Similarly, OPEC may have difficulty deciding on a unified platform as it seeks to stabilize crude prices. OPEC is currently meeting, a guest speaker on CNBC explained, trying to get the quota system working again, but that's a cumbersome process that could require some finesse and some time, the guest speaker said. Seasonal influences are also at work, as demand typically drops beginning about January 15.

Developments in Venezuela added to the upheaval. Venezuela's President Chavez was sworn in to his second term today. He gave few details of his plans to nationalize telecoms, utilities and some crude-related companies, at least in the first hour and a half of his speech. He praised socialism, the aegis under which he plans the nationalizations. This morning, the Venezuelan financial market and some companies in particular were rebounding from yesterday's drubbing, with some sketchy hopes that the investors would be repaid for their shares of the seized companies. The National Assembly retained the right to set the fair price for those shares.

It was into this climate that the government released its crude inventories figures for the week. Industry watchers were wrong on their predictions on almost all counts. Crude inventories dropped more than expected, by 5.0 million barrels. Gasoline supplies rose 3.8 million barrels, and distillates rose almost double the expected amount, increasing by 5.4 million barrels. Crude for February delivery, with that contract to expire next week, took a hit, dropping to a close of $54.02 a barrel, down $1.62. As this report was prepared shortly after the equity markets closed, crude had dropped to $53.90 in extended trading.

An Andrew O'Day podcast on Marketwatch.com this morning addressed the reasons being floated for crude's decline. Among those are the continued mild weather and skepticism about OPEC's production cuts. Jim Brown gave readers specific data last night in his Wrap that heightens that skepticism. A guest speaker on O'Day's podcast also suggested that a softening economy could be behind the decline, with some also theorizing that a softening in emerging markets could be behind the decline in many commodities. Jim also addressed this theory last night, warning that we also must consider the possibility that something as mundane as profit-taking could be responsible for the drop in copper and other such commodities. Jim and others have mentioned the rise in the dollar, with fewer dollars now needed to buy the mostly dollar-denominated crude.

Again, though, the specter of softening economies arises from this discussion. Thailand has done its part in complicating any understanding of what is happening with emerging and other foreign markets. The government appears inept or wishy-washy, throwing out ideas, testing the waters, and then withdrawing those that don't appear to work. The government drafted an amendment designed to limit foreign control over domestic companies in certain sectors by capping voting rights by foreigners in companies deemed important for national security. The negative reaction perhaps prompted the government last night to say that the telecommunication sector would be exempt from some aspects of the new rules. They must cap their foreign shareholdings at 49 percent, but voting rights aren't capped at 49 percent. One writer's interpretation of the news was that the foreign investors who were board members of a telecommunications company would be allowed to retain control of the board. The overall impact of these changes by the Thai government will be to limit foreign investments in Thai companies and perhaps will broaden, scaring investors out of many emerging countries, limiting the capital those countries have available and hamstringing further development.

Later in the afternoon, Ecuador announced that all sovereign debt accrued over the last thirty years was illegal. This added to the discomfort brought about by Thailand and Venezuela and perhaps to the lack of traction seen in some indices.

Michael Moskow, President of the Federal Reserve Bank of Chicago, spoke to a business conference in Iowa today, affirming that his main concern remains the threat of higher inflation. He cautioned that it's not yet the time to begin thinking about cutting interest rates although he believes that recent news has proven more favorable to the wanted economic and inflation outlooks. He wants to ensure that recent developments that point to a possible easing of inflation concerns are not temporary, especially since the unemployment rate may be approaching levels that will add wage inflation pressures. Moskow believes that, other than the housing sector, the economy performs well and that GDP may pick up. He rejected worries that weakness in housing could still spill over into a general economic decline.

In addition to these economic developments, sector-related and company-related developments were discussed. As they were last Wednesday, analysts were active today. Bear Stearns cut the health care, staples and utilities sectors to an underweight rating. The firm raised the tech sector to an overweight rating. A.G. Edwards downgraded IBM to a hold rating from its previous buy rating, citing "IBM's recent lack of growth in bookings in its services business." Raymond James upgraded Peabody Energy (BTU). Jefferies & Co. cut Motorola (MOT) to a hold rating. Citigroup raised its price target for XM Satellite Radio (XMSR) to $21 from its former $16 target.

Other corporate news surfaced today. GE is selling its plastics business, reportedly for $10 billion. Gap Inc.'s (GPS) adult-division president will leave as of January 12, and an Old Navy executive will be leaving a few days later. The company did not say that these executives had been fired or provide any other explanation for the executive shake-up, but many have speculated that the shake-up may be related to GPS's recent poor performance. Paramount Pictures Production also announced that its head was leaving.

Another retailer, Sears Holding Company (SHLD), said that sales fell in the November-December period, but that falling sales were more than offset by gains attributed to property sales. These property sales were part of complicated total return swap investments. Derivatives trading showed losses, but the company expects to end the year with a hefty $3.5 billion in cash and cash holdings. Some speculate that the company could use this cash to move away from its core business, which continues to decline. The result of its various dealings, core business and otherwise, prompted the company to announce that fourth-quarter profit could gain as much as 28 percent.

In other news, U.S. Airways Group (LLC) raised the stakes in its hostile merger bid with Delta Air Lines (DALRQ). It offered an additional $1 billion in cash and set an offer deadline of February 1 for Delta to pause its bankruptcy reorganization. LLC wants to see creditor support that allows it to study Delta's books and an antitrust filing. Delta has said that its board would consider the revision, but a spokesperson also pointed out several potential problems, saying that the increased cash offer actually increased the debt load for the combined companies. Some doubt that the two companies could get past antitrust scrutiny anyway.

Later in the day, news surfaced that Delta was in talks with Northwest Airlines Corp. (NWACQ), but with any joining to occur after both have emerged from bankruptcy-court protection. Still, this provides Delta's creditors with a possible alternative to accepting LCC's hostile takeover bid.

In other M&A news in the same sector, Midwest Air Group Inc. (MEH) rejected a $290 million offer from AirTran Holdings (AAI). In early December, MEH rejected another AAI proposal.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases include the jobless claims release at 8:30, natural-gas inventories at 10:30 and December's Treasury Budget at 2:00, all these times EST. Some don't consider the Treasury Budget a market-moving announcement because it can be so volatile. If the number comes in far off the expected $24.0-26.0 billion number, that tendency might change.

As we move further into warnings season, though, any warnings could have more impact. Outside of warnings or other updates, few companies report tomorrow. As Jim noted last night, earnings season begins to heat up next week, but companies reporting tomorrow include CRAI, NASI, and SRR.

What about Tomorrow?

Last Wednesday, I said that I was stymied, but so were other market participants, including the big-money people who could push markets around. Some want a the-market-will-do-this-or-that reading here on these pages, but sometimes it's valuable to know that the markets are not likely to do anything at all. Most charts provided absolutely no prediction of next direction last week, and I said so. There was a reason they didn't provide any prediction: they weren't going to be going anywhere.

Today, some indices tried for an upside breakout, specifically the SOX, Nasdaq, NDX, and BIX (although neither the NDX nor the BIX was covered among the charts shown in this article due to space constraints). All ended today near resistance, and so it becomes important to watch how they perform with regard to that resistance tomorrow. The BIX and SOX, in particular, can be market-leading indices, and they appear to be trying to lead to the upside.

However, they were gaining little assistance from other indices. In particularly, neither the RUT nor the TRAN turned in strong performances, and those, too, tend to be market-leading indices. Any rally attempt must remain suspect when they're not participating. As I've said many times on these pages, the SPX, OEX, and Dow are not going to get too far in any direction if the TRAN is headed another direction.

Frankly, I don't consider any of these discussed indices to have broken out today, and the so-called traction that was gained was gained only among a narrow group. The bounce remains suspect for now. For tomorrow, bulls want early and sustained breakouts in the SOX, NDX and BIX, and they want the Russell 2000's participation this time. In order for the RUT to participate, bond yields probably need to stabilize or turn lower. The TRAN also needs to participate if the SPX, Dow and OEX are going to participate, with those indices all needing to climb above and sustain values above their 10-sma's.

I don't yet trust the bounce, but it must be watched. I've long-ago given my advice to long-term longs, and now I suggest that short-term longs, perhaps long from the bounce from today's low, spend some time tonight formulating how they'll deal with tests of the resistance levels I've outlined above, including those 10-sma tests in the SPX, OEX, and Dow, should they occur. Know whether you'll take automatic profit at those levels and then sit out the test until direction is decided or whether a different decision will be made.

The possibility remains that the tests of those levels will not occur at all tomorrow, however, given the reasons I've outlined for distrusting the bounce as yet. No breakouts have occurred on many indices, so the chances are just as strong that tomorrow will see another rollover toward the consolidation zones' support levels, perhaps after some early upside follow-through on some indices but perhaps just from the get-go. If I were following my gut instincts alone, that would be my best-guess scenario (for a rollover toward support), but traders should be aware that tomorrow is the Thursday before option-expiration week, and such Thursdays can be wild as big-money people and institutions roll over into new positions.

So, while I'd probably have to reluctantly give the rollover-toward-support scenario my vote (perhaps after some initial upside follow-through by the SOX and some other indices) due to the non-participation by the RUT and TRAN, any strong bounce by those two indices, if not quickly reversed, would change my short-term outlook. The bond market opens before the cash market, so you can watch ten-year yields, the TNX, to gain some idea of how the RUT might be impacted before the cash markets even open. Futures will be of some help, at least for the opening bias.

My strongest advice is not to let any position get too far into the losing camp tomorrow, with that being the Thursday before option-expiration week. Any positions entered early in the day should be small ones because of the possibility that the opex-related action will undo anything discerned tonight on a technical-analysis basis. So could geopolitical news. If you don't believe that to be true, think back to the time when the news about Thailand's government's imposition of changes related to foreign investment first hit the markets.
 


New Plays

New Option Plays

PLAYS TABLE-->
Call Options Plays
Put Options Plays
Strangle Options Plays
GS None None
LEH    
MER    
SNDK    

New Calls

Goldman Sachs - GS - close: 208.11 chg: +4.03 stop: 199.75

Company Description:
Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. (source: company press release or website)

Why We Like It:
The XBD broker-dealer index is breaking out to new all-time highs (again). Leading the way are the big names in the group. We're adding multiple call candidates in this sector but suggest you only pick one or two that you like the best to play. GS has spent the last few weeks consolidating sideways but today's rally confirms the recent breakout over its short-term trendline of lower highs and short-term resistance at $205. Volume has been strong on the rally too, which tends to be bullish. The MACD on the daily chart just produced a new buy signal for GS. We're suggesting call positions with GS above $205. Our target is the $214.00-215.00 range. We do not want to hold over the early March earnings report. Other candidates we're adding are LEH and MER. BSC might be a decent candidate on a dip back toward $166-165.

Suggested Options:
We would prefer to play March options but only have February or April available (January's expire too soon for us). We're suggesting the February calls.

BUY CALL FEB 200 GPY-BT open interest=6374 current ask $11.50
BUY CALL FEB 210 GPY-BB open interest=1637 current ask $ 5.50

Picked on January 10 at $208.11
Change since picked: + 0.00
Earnings Date 03/13/07 (unconfirmed)
Average Daily Volume = 4.7 million

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Lehman Brothers - LEH - cls: 79.55 change: +1.31 stop: 75.99

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in investment banking, equity and fixed income sales, trading and research, private investment management, asset management and private equity. The Firm is headquartered in New York, with regional headquarters in London and Tokyo, and operates in a network of offices around the world. (source: company press release or website)

Why We Like It:
LEH is another candidate in the bullish broker-dealer sector. The stock rose 1.6% on above average volume on Wednesday. We are suggesting readers wait for a breakout over resistance at the $80.00 level. Our suggested entry point to buy calls is at $80.25. If triggered we will have two targets. Our conservative target is the $84.85-85.00 range. Our aggressive target is the $89.00-90.00 range. We do have a relatively wide stop loss for this play. LEH's Point & Figure chart shows a very bullish pattern called a bullish triangle breakout that points to a $111 target. We are also suggesting call plays on GS and MER. However, we suggest you pick the one or two stocks in the group you like instead of trying to play them all.

Suggested Options:
We would prefer to play March options but only have February or April available (January's expire too soon for us). We're suggesting the February calls. Our suggested trigger for LEH is $80.25.

BUY CALL FEB 75.00 LES-BO open interest= 264 current ask $5.80
BUY CALL FEB 80.00 LES-BP open interest=1682 current ask $2.35
BUY CALL FEB 85.00 LES-BQ open interest= 499 current ask $0.65

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 3.4 million

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Merrill Lynch - MER - close: 94.44 change: +0.91 stop: 91.25

Company Description:
Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies with offices in 37 countries and territories and total client assets of approximately $1.5 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. (source: company press release or website)

Why We Like It:
MER is our third candidate in the bullish broker-dealer sector. Both the XBD index and shares of MER are breaking out to new all-time highs. Today's bullish breakout over resistance at the $94.00 level looks like a new entry point to buy calls in MER. Volume came in above average on the move. MER is a more aggressive play because we have a very limited time frame. The company is due to report earnings on January 18th before the opening bell. That gives us about one week. Aggressive traders can put their stop under support and the 50-dma near $90.00. We're going to place our stop at $91.25 and more conservative traders may want to put theirs closer to $92.00. Conservative types may also want to wait for a rally past $95 before opening positions. Our target is the $99.50-100.00 range. We do not want to hold over the January 18th earnings report.

Suggested Options:
We are suggesting the February calls but we plan to exit on or before January 17th.

BUY CALL FEB 90.00 MER-BR open interest=2041 current ask $5.80
BUY CALL FEB 95.00 MER-BS open interest=2157 current ask $2.40
BUY CALL FEB 100.0 MER-BT open interest=1139 current ask $0.65

Picked on January 10 at $ 94.44
Change since picked: + 0.00
Earnings Date 01/18/07 (confirmed)
Average Daily Volume = 4.6 million

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SanDisk - SNDK - close: 45.70 change: +1.59 stop: 42.45

Company Description:
SanDisk is the original inventor of flash storage cards and is the world's largest supplier of flash data storage card products, using its patented, high-density flash memory and controller technology. SanDisk is headquartered in Milpitas, California, and has operations worldwide, with more than half of its sales outside the U.S. (source: company press release or website)

Why We Like It:
Investors appear to be pulling money out of energy stocks and into tech stocks. Further fueling this trend is the excitement over AAPL's new products, which is producing something of a rising tide for the rest of the tech/hardware-related stocks. The recent rally in SNDK has been powered by rising volume. The stock just broke out over resistance near $45.00 and its descending 50-dma. We are suggesting call positions with SNDK above $45.00. Our target is the $49.00-50.00 range, where SNDK could encounter resistance with its 100-dma and 200-ema. We're placing our stop loss at $42.45 but more conservative traders might want to try their stop closer to $43.49. We do not want to hold over SNDK's January 30th earnings report, which gives us about three weeks.

Suggested Options:
We are suggesting the February calls but plan to exit ahead of the late January earnings report.

BUY CALL FEB 45.00 SWF-BI open interest=13097 current ask $3.90
BUY CALL FEB 47.50 SWF-BW open interest= 2865 current ask $2.70
BUY CALL FEB 50.00 SWF-BJ open interest= 4359 current ask $1.80

Picked on January 10 at $ 45.70
Change since picked: + 0.00
Earnings Date 01/30/07 (confirmed)
Average Daily Volume = 10.9 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Lockheed Martin - LMT - cls: 94.58 change: +0.98 stop: 89.75

Target achieved. Shares of LMT continue to show relative strength. The stock added another 1% and LMT hit our conservative target at $94.85. We are not suggesting new plays at this time. 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: + 3.96
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.1 million

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Altria Group - MO - close: 89.19 change: +1.07 stop: 84.75

MO continues to set new all-time highs. The stock rose 1.2% on above average volume, which tends to be a bullish sign. Word on the street was more positive comments about the company's potential spin-off of its Kraft unit is fueling the run in MO. We suggest that readers be prepared for potential resistance at the $90 level and odds are good for some profit taking. We are targeting a rally into the $92.50-95.00 range. 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: + 1.54
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume = 8.8 million

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Reynolds American - RAI - cls: 64.55 chg: +0.48 stop: 64.90

There is no change from our previous updates on RAI. The stock is under performing and if it doesn't rally past $65 soon we'll drop it as a bullish candidate. 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.

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

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Sepracor - SEPR - close: 62.03 change: +0.16 stop: 59.65

Unfortunately, there is little change in shares of SEPR. The stock is still hovering around the $62 level. The lack of upward momentum makes us cautious and more conservative traders may want to turn defensive or just exit early. If you're looking for a new entry point consider waiting for a rally past $62.50 or $63.00 before initiating 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: + 0.14
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume = 2.2 million
 

Put Updates

Cummins Inc. - CMI - close: 114.30 change: -2.96 stop: 118.15

Our put play on CMI is now open. The stock spiked lower this morning on news that it would be getting new competition from PCAR. Last night PCAR announced plans to build a $400 million engine manufacturing plant in the Southeast U.S. Shares of CMI reacted with a spike under support near its 200-dma and its two-year trendline of support. Our suggested entry point to buy puts was at $114.50. Now that the play is open 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 10 at $114.50
Change since picked: - 0.20
Earnings Date 01/29/07 (unconfirmed)
Average Daily Volume = 1.0 million

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eBay Inc. - EBAY - close: 29.30 change: -0.45 stop: 32.01

EBAY under performed the markets on Wednesday with a 1.5% decline on strong volume. The rumor all day was that EBAY was in talks to buy StubHub, an online sports ticket marketplace, for close to $300 million. CNBC mentioned that EBAY had a chance to buy Stubhub years ago for about $20-30 million. After the closing bell EBAY did confirm that it had signed a deal to buy Stubhub for $310 million. We remain bearish on EBAY but it's worth noting that shares were trading slightly higher in after hours around $29.40. 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.

Picked on January 08 at $ 29.70
Change since picked: - 0.40
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 14.5 million

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3M Co. - MMM - close: 77.85 change: +0.17 stop: 79.05 *new*

There is still no change in MMM. The stock continues to oscillate sideways with support near $77.00. We are not suggesting new plays at this time. More conservative traders may just want to exit early now. We're going to inch our stop loss down to $79.05. 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: - 0.63
Earnings Date 01/30/07 (confirmed)
Average Daily Volume = 2.8 million

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Vornado Realty Trust - VNO - cls: 121.55 chg: +1.65 stop: 122.65

Warning! It may be time to exit any put positions on VNO. The stock has continued to rebound and shares rallied right past potential resistance at $120.00 and its simple 50-dma and 10-dma. Volume was above average on the move, which tends to be a bullish sign. The sharp bounce is making the recent breakdown look like a bear trap. More conservative traders may want to exit immediately or consider tightening your stop loss to $121.85 or $122.01. We are not suggesting new positions and suspect that we will be stopped out tomorrow.

Picked on January 07 at $119.55
Change since picked: + 2.00
Earnings Date 02/27/07 (unconfirmed)
Average Daily Volume = 945 thousand

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YUM Brands - YUM - close: 58.82 change: +0.55 stop: 60.05 *new*

It might also be a good time to exit early in YUM. The stock has bounced back into its previous trading range and closed near its highs for the session on Wednesday. Furthermore YUM has broken out above its 10-dma and many of the short-term technical oscillators are starting to look bullish. YUM should still have resistance in the $59-60 region but again more conservative traders may want to exit early now. We're adjusting our stop loss to $60.05.

Picked on December 12 at $ 58.49
Change since picked: + 0.33
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.)

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Blue Nile - NILE - cls: 38.49 chg: +0.51 stop: n/a

NILE produced a nice bounce from its rising 10-dma today. The stock might have gotten a boost from rival Tiffany (TIF) who reported same-store sales were up 7% for the previous month. We do not see any changes from our previous updates on NILE. We're not suggesting new positions. We are adjusting our target to breakeven at $2.40. 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: - 0.43
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand
 

Dropped Calls

None
 

Dropped Puts

Sears Holding - SHLD - cls: 172.09 chg: +5.86 stop: 171.55

We have been stopped out of SHLD at $171.55. Sears neglected to inform us beforehand that they would be raising their earnings guidance. The company reported the news this morning and said that fourth-quarter earnings would be in the $4.87-5.39 range versus analysts estimates near $4.86. The company also announced same-store sales for December fell 1.2% for Kmart and dropped 5.6% for Sears. There seems to be a disconnect somewhere between SHLD's falling same-store sales and rising earnings but no one said the market was logical.

Picked on December 22 at $167.90
Change since picked: + 4.19
Earnings Date 02/15/07 (unconfirmed)
Average Daily Volume = 1.9 million
 

Dropped Strangles

None
 


Trader's Corner

'Post Mortems' and Other New Year's Resolutions

My New Year's resolution as far as this weekly (Trader's Corner) Wednesday column is to write about market analysis principles that are reflected in some way only in CURRENT chart and technical patterns. Based on the e-mails I've gotten over the months, OIN readers are mostly interested in the way things are unfolding NOW, relating to options trades their in, were in, or are thinking about making; my interest also. As I note often in my book (Essential Technical Analysis), if technical patterns and indicators arent useful for predicting the trend, which is how profits are made, they aren't of practical use to us.

What makes us better traders doesn't tend to stem just from the winning traders, but also from the losing ones or from where we predicted the trend based on an incomplete or inaccurate analysis and outlook. We don't tend to do post mortems on trades that we were right on; but probably should, at least to a degree, by confirming that what instincts and analysis were most accurate. For sure we should review losing trades, or just where a trend reversal surprised us, so that we reinforce what factors WERE predicting the outcome that developed.

If you believe that the market is moved by random events and news that can't be predicted ahead of time, my discussion here may seem strange. But, 30 years of trading experience continue to convince me that there is very little that happens that the market was not somehow 'setting up' for. The market as a mechanism of price prediction is nothing short of incredible. But, reading the 'tea leaves' can be a lot of work and requires a substantial focus and continued evaluation and reevaluation as the trend unfolds. Not for nothing that only a very few make fortunes by trading. The one I knew well, and this was typical of the other 'Trading Wizards' that my old UBS colleague Jack Schwager wrote about, who learned the MOST from mistakes and misperceptions.

As far as the experts, the talking heads you see on CNBC and the other market media ... well, a Psychologist named Philip Tetlock recently wrote a book called "Expert Political Judgment: How Good Is It?" He studied in detail not only political 'experts', but those doing all kinds of forecasting, including economic. I wish he had included all the market prognosticators, but the findings are likely similar for all; namely, that the 'experts' arent much better than you and I in predicting the outcome of events and trends.

Actually it's worse than that, as there is a tendency for predictions to have less than a chance outcome. For example, if the market can go up, down or sideways, each has a 33.3% chance of being the outcome ahead. Tetlock's research suggested in some cases that experts' predictions were right less than a third of the time, or less than a 'chance' outcome.

This is the old 'dartboard' theory of picking stocks for example; i.e., the studies where stock selection was done by throwing darts at a stock page; and which will sometimes outperform the average mutual fund gain that year.

Now there were some experts that did better than others, but the KEY difference was what a writer said in his Tolstoy essay called "The Hedgehog and the Fox", where the KEY was what kind of thought process is used to predict future outcomes.

So called hedgehogs professed to "know one big thing"; e.g., market trends are determined by what the Fed does; Elliott Wave tells all, etc. "Foxes" on the other hand, don't see a SINGLE determining explanation about why things happen the way they do. They tend to see a shifting mix of factors that suggest the way things will go THIS time. On balance the 'foxes' do better than 'chance' in predicting. Not that the 'hedgehogs' don't also have some BIG wins. When they're right, they're very right.

THINKING LIKE A FOX IN THIS MARKET:
I had not been heavily bearish about this recent trend-less market for a couple of reasons which I'll go into, but then saw last week's downside action was now suggesting deeper retracements than the shallow ones we had been seeing in the month from late-November to late-December. The major upside reversal of the past two days made this view obviously WRONG!

What did I miss? By doing the same thing that 'hedgehogs' do that makes predictions sour: getting too convinced by the apparent obvious.

There were 3 BEARISH technical patterns/aspects that developed:
1. The failure of rallies to penetrate the 'line' of repeated highs in the major indexes. This is still the case.
2. Last week's fall below prior (down) swing lows in the major indexes; which I suggested pierced the low end of 'rectangles', or lengthily sideways trading range patterns. More on #2 later.
3. The downside price 'gaps' of last week in the Nasdaq that suggested the possibility of that the indexes could have substantially more downside ahead, perhaps even half-way in a move lower.

Instead, the indexes reversed after the S&P 100 (OEX) and the Nasdaq 100 (NDX) only retraced around a 'minimal' 38% retracement of the Oct-Nov advance; suggesting a still strong UPtrend.

Besides the perception that the Fed was perhaps done raising rates, my post mortem is on what technically was suggesting that the market had substantial rebound potential; once it was done 'coiling', ahead of its spring back move?

The 2 BULLISH factors I wrote about last week in this column:
1. The contraction of 10-day Nasdaq total UP volume to 'baseline levels where major intermediate-term rallies are highly likely.
2. The lengthily sideways move had the earmarks of a 'time correction' that was 'throwing off' the prior overbought condition; and is often suggestive of a shallow correction only, before a resumption of the major trend; i.e., up.

These factors argued AGAINST a steep further drop. What did continue to be highly predictive for the rebounds from Tuesdays' lows, was the pullback to and rebound from the S&P and Nasdaq UP trendlines, shown in the charts coming up. Not for nothing that I rely on trendlines so: they 'work'.

I also wrote last week about the possible formation of 'rectangle' patterns, which when pierced on the downside, suggested deeper downside targets than was the case (ahead of yesterday's strong upside reversal). This (12/28) article can be viewed/re-viewed by clicking here.

Before going into the TWO bullish factors, was I right (a fox) or wrong (a hedgehog) on seeing the last (lower) low as a breakdown below a RECTANGLE? Not that prices won't do the unexpected, REGARDLESS of any technical pattern.

The question is was I too 'loose' in my interpretation of possible rectangle top patterns because it supported a too-lazy analysis and a feeling that the market should go down in early-January like it did LAST year??? You have to identify the pattern correctly BEFORE expecting that price action will conform to the common outcome for breaks of this pattern.

Getting this pattern right is important because 'rectangle tops' and 'rectangle bottoms' are one of the 5 patterns that were shown to have a good predictive value in Dr. Andrew Lo's MIT study; the others were the 3.) Head & Shoulder's, 4.) double top and 5.) the broadening bottom.

The S&P 500 (SPX) chart below as outlined had the most likely RECTANGLE top pattern but, and I should review my own book, this interpretation would have been more likely had there been another low or two in the same area as in early-December. It was a bit of a stretch to say that the lows this week penetrated the low end of a well-defined rectangle. By the way, a 'bear trap' reversal is always a new low for a move, followed by an immediate (and, frequently strong) upside reversal.

Yet to come is a break out above the prior highs at SPX 1275, but this looks possible given how fast the Index came back here.

The reliability of the UP TRENDLINE shown above dating back to the October lows) as offering technical support was great. The low was also near the 50-day moving average, adding some bullish credence to the low seen yesterday.

The reason that you want to check one Index against other related indexes is illustrated by the fact that in the S&P 100 (OEX) chart shown below, there is NO, zero, nada rectangle top pattern; only a move to a lower low, down to the trendline followed by a strong reversal and upside rebound. As with SPX, yet to come is a breakout move, In the case of the OEX, above the possible Double Top. Stay tuned on that!

By the way, yesterday's OEX low makes the THIRD point in the up trendline, putting it beyond the 'minimal' TWO lows necessary to form a valid trendline.

As I discussed about 'TIME' corrections earlier on, OEX's strong rebound after the RSI was getting close to an oversold area (after a lengthily sideways move) is suggesting that its correction has run its course; the retracement (not shown) did not even reach 38%, which tends to be a 'minimal' retracement.

As far as my speculation about a possible rectangle top in the Nasdaq, we were not even close to it in the Nasdaq 100 (NDX), shown below. EXACT however, was the rally from the up trendline shown, after the completion of a 'Fibonacci' 38% retracement.

The same oversold reading in the NDX's Relative Strength Index, RSI (above), similar to the OEX, was close to being realized before NDX took off like a shot.

LAST BUT NOT LEAST
My Up Volume 'indicator', which is simply that major tradable S&P bottoms tend to occur around the time of, or just AFTER, similar reoccurring 'baseline' levels are seen in the 10-day moving average of total daily NYSE UP (Advancing) volume. This fits the old adage that 'volume (tends to) precedes price'.

This way of looking at Up volume, which was an historical stable in key market stats shown in the S&P 'Trendline' charts, continues to amaze as to how simply and reliably it 'works' in marking bottoms; not so in tops, which are not easily defined by this indicator.

The Nasdaq 10-day Up Volume indictor shown below under the price chart for the Nasdaq Composite (COMP), was the most reliable indication that the market was coming down to another 'bottom', ahead of yet another up 'leg'.

I've seen this pattern over the years 'signal' numerous bottoms just ahead (over decades even), yet I still sometimes get overly taken in by a bearish point of view when an apparent top is forming, as occurred from late-Nov to late-Dec. Stay tuned of course, as to a breakout to new highs!

** 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.

** Good Trading Success! **
 

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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