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Daily Newsletter, Monday, 01/22/2007

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Table of Contents

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

Market Wrap

Post Option Expiration Positioning

Some post January option expiration positioning and a late session reversal in into today's February NYMEX Crude Oil futures (cl07g) expiration found the major stock indices finishing in the red to start the week, with decliners outnumbering advancers roughly 2-to-1 at both the NYSE and NASDAQ.

Just as the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% found some volatility into its January options contract on what I believe was some NAKED call squeeze action, crude oil has witnessed some gyrations in recent sessions and today's February contract expiration was no exception.

Stocks darted lower at the open as the February Crude Oil futures (cl07g) contract jumped more than $1.00 from Friday's settlement to $53.44 just after 10:25 AM EST. The move in oil raised some trader's eyebrows into today's final February contract trade, as many were looking for a lower settlement in the downward trend. Eventually, sellers did overcome buyers with the February contract settling down $0.86, or -1.65% at $51.13. Perhaps today's final trade for the February contract was "calm" considering last Tuesday's 3% decline, Wednesday's 2% rise, Thursday's 3.3% decline and Friday's 3% rise.

Gold prices mirrored today's trade in oil with the StreetTracks Gold Trust (NYSE:GLD) $62.72 -0.44% (approx $627.72 spot) rising to $63.48 despite a higher U.S. Dollar Index (CEC:DXY) trade in the early morning. As oil prices softened, so did the yellow metal.

The U.S. Dollar index (CEC:DXY) finished Friday's trade at 84.91 and from that benchmark, the DXY was flat-to-higher at today's 03:00 PM EST mark of 85.02.

U.S. Market Watch - 01/22/07 Close

Today's economic calendar was light, with no major releases on the docket. The Chicago Fed National Activity Index showed above-trend economic growth for December, the first above-trend reading in four months. The National Activity Index was reported at +0.04, compared with -0.30 the month before.

Fed commentary had San Francisco Fed President Yellen saying current monetary policy may be "well positioned" to cool inflationary pressures.

Buyers nibbled at the major maturities with the 10-year yield ($TNX.X) falling 1.4 basis points to 4.759%, inverting from the shorter-dated 5-year yield ($FVX.X), which fell 1.1 basis point to 4.766%.

Tuesday's U.S. economic calendar is equally light with December's Leading Indicator Index (month-to-month) forecasted to show a 0.2% increase after a 0.1% gain in November.

Calendar fourth-quarter earnings for 2006 continue to roll in and grab the focus of traders and investors alike. In last week's OptionInvestor.com Market Monitor I mentioned that Standard & Poors had noted that while just 11% of the S&P 500 constituents had reported calendar Q4 earnings (Sep-Dec 2006), the early tally was 8.3% higher than analysts' expectations.

Shares of drug giant Pfizer (NYSE:PFE) $26.95 -0.99% finished down $0.27 per share after the company reported adjusted EPS of $0.43/share, which was a penny better than the consensus estimate. GAAP earnings came in at $9.45 billion, or $1.32 a share, boosted by the sale of its consumer division. The company said it plans to cut 10,000 jobs in a restructuring aimed at saving up to $2 billion a year.

American Express (NYSE:AXP) $58.06 -0.05% traded relatively flat. The financial-services firm's net income rose to $922 million, or $0.75/share, which was a penny shy of Wall Street's expectations. Revenue rose 13% to $7.21 billion, helped by record holiday cardmember spending. Analysts were expecting revenues of $7.33 billion.

General Motors (NYSE:GM) $32.35 +2.53%, which was last year's best performing Dow component was a standout again today, hitting a 2-month high. Bulls placed bets that the world's largest auto giant could be poised to announce better-than-expected earnings on January 30th. Current consensus is for the company to earn $1.14/share in the latest quarter on revenue of $42.52 billion.

Shares of Texas Instruments (NYSE:TXN) $28.59 +0.70% rose $0.20 during today's regular session, then jumped to $29.40 in tonight's extended session after the semiconductor maker posted Q4 net income of $668 million, or $0.45/share, which easily surpasses Wall Street's consensus estimate of $0.38/share. The company said Q4 revenue was $3.46 billion, which was slightly above the $3.43 billion consensus.

Tug and Pull Continues; QQQQ whipped at Op-EX

It has been more than a week since my last market wrap, and for the most part, the tug and pull continues.

However, I must now conclude that the action we've witnessed in the NASDAQ-100 (NDX and QQQQ) has largely been due to some NAKED call writers having gotten "squeezed" prior to Friday's expiration, and the recent weakness also looks very much like some of that "squeeze" has subsided, and equilibrium is being found.

I can only say this as I began following the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% January options montage closely, when on January 10th, the QQQQ lurched sharply above $44.30, a level I had stated "the QQQQ won't see the light of day above" several sessions prior.

In summary, what I started to alert short-term traders to on January 10th, AFTER I had profiled QQQQ Feb. $43 Puts (QQQ-NQ) for $0.50/contract, when the QQQQ was trading $44.26, was that there may well have been a NAKED Call "squeeze" developing, as the QQQQ broke above a key level of near-term resistance at $44.40.

Traders and investors that have followed my commentary and analysis over the years know that when "something goes wrong," I tend to look for answers as to WHY!

I will not show all of the QQQQ option montages that I showed traders since 01/10/07 at 01:38:07, but want to recap some things here. Yes, it may seem "too late" for some, but I think it is important to understand what I (Jeff Bailey) think took place, so you and I can try to grasp why the volatility in the NDX/QQQQ took place (relative to other major equity indices).

Here's the CALL option side of the QQQQ January option montage. At the time of this screen capture, I began to "worry," or alert traders that a NAKED Call squeeze could be in the making should the QQQQ move much above that day's then high of $44.43.

For those not familiar with what a NAKED call is, that is when an option trader/investor has SOLD something, that is un-hedged in the underlying security.

QQQQ Call Options - 01/10/07 01:38 PM EST

I had noted that Open Interest in the QQQQ $44 Calls (QQQ-AR) was the LARGEST open interest for the QQQQ Calls for January expiration (which ended on Friday 01/19/07). I point to the notable 2,112 DnTickVol (Down Tick Volume, which depicts SELLING of that call) even at the time of that screen capture. In essence, there still appeared to be SELLERS of those calls, even as the QQQQ traded ABOVE the $44 strike at $44.36. The Open Interest of 359,168 equates to, or represents 35.9 million shares of QQQQ at $44.00.

I had a bit of a "lump" in my throat, as I had just profiled some QQQQ Feb. $43 Puts, without having looked at the above options montage.

We had witnessed NAKED Call squeezes into option expirations in recent months July, August, September, October and November in some of the major indices. It appeared that one was in the making for the QQQQ!

NASDAQ-100 Trust (QQQQ) - Daily Intervals

Based on the TECHNICALS, and some rather detailed following/monitoring of the QQQQ option montage, as well as the recent action in the QQQQ, I think the recent volatility in this index (NDX.X too) has been largely due to January's option expiration, and some NAKED $44 Call writers having gotten squeezed.

I showed a similar chart of the QQQQ in the 12/27/06 Market Wrap. However, at that time, my PINK 100% retracement level, which I had been dragging up to a relative high Friday close was at $44.65 (a 11/24/06 high Friday close).

While following an Option Montage can be as much of an art, as it is a science, I also have benchmarked the November and December QQQQ option expiration closes ($44.30 and $44.43) with horizontal green.

We can perhaps see how "easy" it had/has been to just SELL NAKED Calls at the $44.00 strike for November and December expiration, keep the BULK of those premiums, then just do it again for January.

Well.... when Open Interest built to notably higher levels than other CALL option strikes and the QQQQ began moving ABOVE $44.00, say $44.50, suddenly a NAKED Call short-squeeze took place.

All is fair in love and war, as it is in trading.

On Friday, 1/12/07, I did "drag up" my PINK retracement from a prior Friday high close from 11/24/06 (see the 12/27/06 Market Wrap) and while today's low didn't quite test the $43.47 level, I get the distinct feeling that that PRICE level, using this simple fibonacci retracement technique, is being TRADED as support by market participants, just as the $42.94 PINK retracement (see the 12/27/06 Market Wrap) was on 12/26/06).

In essence, UNTIL a QQQQ Close below $43.47 (say $43.45) is found, then that PINK level is deemed support. If BROKEN to the downside, then $42.84 becomes the next DOWNSIDE risk level.

For now, the still RISING "bullish resistance" trend is an UPSIDE trend that bears will assess RISK to, and bulls will assess REWARD to.

S&P 500 Index (SPX.X) - Daily Intervals

At tonight's close, I also want to take a moment and update my "neutral" call as it would relate to the broader market, as I believe the S&P 500 (SPX.X) depicts.

At the close of trading on 12/22/06, I thought traders and investors should take on a more "neutral" from "bullish" stance, as some of the internals I follow, which I think hold HIGHER RISK FOR BULLS, and where other internals such as the advance decline ratios at the NYSE and NASDAQ, continue to suggest a more cautious stance among BUYERS of equities.

The advance/decline measure for the NASDAQ that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continue to show some "downside pull." At tonight closing reading, the NASDAQ Summation Index ($NYSI) from StockCharts.com has fallen further to a -84.61 reading.

The advance/decline measure for the NYSE that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continues to show softening, or weakening as it FOLLOWS the NASDAQ a/d weakness. At tonight close, the NYSE Summation Index ($NYSI) from StockCharts.com now reads +679.61.

I continue to follow the major market bullish %, but at the time of this writing, I have not witnessed any MAJOR warning signs that SUPPLY (O) is outstripping DEMAND (X).
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Chaparral Steel - CHAP - cls: 44.70 chg: -0.46 stop: 41.99

Market weakness weighed on shares of CHAP and the stock failed to see any follow through on Friday's rebound. We would be extra cautious with the major indices looking poised for more profit taking. We would expect shares of CHAP to dip toward the $44 region. More conservative traders may want to tighten their stops. Traders may want to wait for a rise past $45.75, which would be a new three-week high, before opening new call plays. Our target is the $49.00-50.00 range. The P&F chart points to a $64 target.

Picked on January 14 at $ 45.16
Change since picked: - 0.46
Earnings Date 03/20/07 (unconfirmed)
Average Daily Volume = 635 thousand

---

iShares China Index - FXI - close: 107.00 chg: +0.65 stop: 99.49

The Chinese markets turned in a strong session on Monday and closed near their highs for the day. This strength was reflected in the FXI gapping open at $108. Unfortunately, the U.S. markets were weak and the FXI ETF did not see any follow through here in the states. We remain bullish on the FXI but readers may want to tighten their stops. A dip or bounce near $105 could be used as a new entry point. The FXI can be volatile so we have a wide stop, making this a more aggressive play. Our target is the $115.00-117.00 range. Remember, this is a Chinese ETF and it tends to gap open every day as it adjusts to how the Chinese markets traded the night before.

Picked on January 14 at $105.40
Change since picked: + 1.60
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 1.3 million

---

KB Home - KBH - close: 51.47 change: -0.27 stop: 48.99

Friday's bullish breakout in housing stocks failed to see any follow through. U.S. markets were weak and buyers chose to sit on the sidelines. Fortunately, the profit taking in shares of KBH was pretty mild. Traders bought the initial dip to $51.00. We would still consider new positions now but with the major averages looking like they want to move lower it might pay off to wait and watch for KBH to dip towards the $50.50-50.00 region before considering a new entry. Our target is the $54.90-55.00 level. More aggressive traders may want to aim higher. Traders should be aware that rival homebuilder DHI is due to report earnings on January 23rd and their results and guidance could have a big impact on the sector's direction.

Picked on January 21 at $ 51.74
Change since picked: - 0.27
Earnings Date 03/19/07 (unconfirmed)
Average Daily Volume = 2.2 million

---

Lehman Brothers - LEH - cls: 82.12 change: -1.03 stop: 78.95

Reversal alert - again! Shares of LEH produced another bearish reversal with today's bearish engulfing candlestick pattern. This is the second one in three trading days. More conservative traders may want to exit early or tighten their stops even further. We hesitate to suggest new positions at this time. A bounce from support near its 10-dma or the $80 level would be a preferable entry point. We have two targets for LEH. Our conservative target is the $84.85-85.00 range. Our aggressive target is the $89.00-90.00 range. FYI: LEH has a very bullish pattern on its Point & Figure chart called a bullish triangle breakout and it forecasts a $111 target.

Picked on January 11 at $ 80.25
Change since picked: + 1.02
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 3.4 million

---

China Life Ins. - LFC - close: 47.11 change: +0.42 stop: 43.95

Shares of LFC gapped open higher thanks to a strong day in the Chinese markets but like the Chinese ETF FXI there was no follow through on the early strength today. LFC remains under short-term technical resistance at its simple 10-dma near $48.00. Aggressive traders may want to buy this bounce. More conservative traders may want to wait for a breakout past its simple 10-dma near $48.00. Our target is the $52.50-55.00 range. We want to remind readers that this is an aggressive, higher-risk play. Most of LFC's technical indicators are bearish and the P&F chart is bearish with a $36 target. If LFC doesn't bounce higher on Monday it might be a good idea to exit early and cut your losses. More conservative traders might want to go ahead and tighten their stops toward $45.00.

Picked on January 14 at $ 46.86
Change since picked: + 0.25
Earnings Date 04/18/07 (unconfirmed)
Average Daily Volume = 1.7 million

---

Lockheed Martin - LMT - cls: 96.77 change: -0.50 stop: 93.95

LMT continues to show relative strength with a decent rebound from its intraday lows near its rising 10-dma on Monday. A downgrade for defense contractor Boeing weighed on the sector but traders stepped in to buy the dip in LMT. We do not see any big changes from our weekend comments. We strongly suggest that more conservative traders, who did not exit at our first target in the $94.85-95.00 range, consider an exit now. We're currently aiming for the $99.00-100.00 zone to exit. Due to LMT's fast approaching earnings report on January 25th and its proximity to our target we're not suggesting new positions.

Picked on November 29 at $ 90.62
Change since picked: + 6.15
Earnings Date 01/25/07 (confirmed)
Average Daily Volume = 2.1 million

---

Mohawk Ind. - MHK - close: 78.75 chg: +0.37 stop: 76.49

MHK displayed relative strength with a 0.47% gain on Monday. We do not see any changes from our weekend comments. We are suggesting new call positions now but this is an aggressive, higher-risk entry point. More conservative traders should use a trigger above resistance at the $80.00 mark! We'll try and keep our risk to a minimum with a stop loss under Friday's lows. Our target is the $84.00-85.00 range. We do not want to hold over the February earnings report.

Picked on January 21 at $ 78.38
Change since picked: + 0.37
Earnings Date 02/16/07 (confirmed)
Average Daily Volume = 557 thousand

---

Altria Group - MO - close: 87.07 change: -0.19 stop: 85.95

Dow-component MO did a decent job resisting the sell-off that hit the DJIA on Monday. We remain on the defensive here and it might be time to consider an early exit. However, MO still has a supporting trendline near the $86.00 level and there is still a chance for a rebound from support. If you're looking for a new entry point we'd watch for a bounce from current levels near $87.00 or a bounce near $86.50 (fyi - the low today was $86.62). Don't forget that MO reports earnings on January 31st and we do not want to hold over the report. We are targeting a rally into the $92.50-95.00 range. The P&F chart currently points to a $114 target.

Picked on January 04 at $ 87.65
Change since picked: - 0.58
Earnings Date 01/31/07 (confirmed)
Average Daily Volume = 8.8 million

---

Marathon Oil - MRO - close: 87.49 change: +0.32 stop: 83.90

Another round of cold-weather forecasts first pushed up natural gas and crude oil followed it higher. Yet the rally failed as traders decided to exit ahead of crude oil futures expiration today. The early strength in oil lifted shares of MRO above resistance at the $88.00 level and the stock hit our trigger to buy calls at $88.05. The play is now open and our target is the $93.50-94.00 range. However, we would wait for another rise past $88.00 or today's high at $88.18 before considering new positions. There is potential resistance near $90 and its 50-dma.

Picked on January 22 at $ 88.05
Change since picked: + 0.56
Earnings Date 02/01/07 (confirmed)
Average Daily Volume = 3.7 million

---

Teleflex - TFX - close: 66.39 chg: -0.28 stop: 64.75

Industrial stocks were hit with profit taking on Monday and shares of TFX dipped to $66.06, just under its rising 10-dma before bouncing. We have been warning readers to expect a dip toward $66, which should be support. The bounce from today's lows can be used as a new entry point. Yet traders may want to wait for signs of a bounce in the major market averages before opening new call plays anywhere. Normally we would expect the $70.00 level to act as resistance but looking at TFX's history the stock seems to encounter resistance in the $72.00 region. Our target is the $71.00-72.00 range. FYI: The P&F chart points to an $81 target. We plan to exit ahead of the mid February earnings report.

Picked on January 14 at $ 67.11
Change since picked: - 0.72
Earnings Date 02/14/07 (unconfirmed)
Average Daily Volume = 202 thousand
 

Put Updates

Celgene Corp. - CELG - close: 54.17 change: -0.81 stop: 57.01

The BTK biotech index continues to look like it's building a bearish double-top pattern. Meanwhile shares of CELG continued to slide lower under its bearish trend of lower highs. The stock lost 1.47% and looks poised to break potential support near $54.00 soon. We are suggesting put positions with CELG under $56.00 (the 10-dma). Our target is the $50.50-50.00 range, near its rising 100-dma. We do not want to hold over the February 1st earnings report so we have eight trading days.

Picked on January 18 at $ 54.98
Change since picked: - 0.81
Earnings Date 02/01/07 (confirmed)
Average Daily Volume = 4.4 million

---

eBay Inc. - EBAY - close: 29.32 change: -0.34 stop: 31.26

This morning an upgrade for AMZN put a bid under Internet stocks but the rally quickly failed. Shares of EBAY produced a failed rally under the $30.00 level this morning. We have two days to go before EBAY reports earnings. We want to remind readers that over the weekend we changed our strategy and plan to hold over EBAY's earnings report. More conservative traders will still want to exit ahead of the Wednesday afternoon (post-market) earnings report. Our target is the $26.00-25.00 range.

Picked on January 08 at $ 29.70
Change since picked: - 0.38
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 14.5 million

---

Whole Foods - WFMI - close: 44.19 chg: +0.23 stop: 46.55

WFMI produced a minor oversold bounce on Monday following Friday's technical breakdown under support near $45.00. We would still consider new put positions here or on a failed rally under the $45.00 mark. Our target is the $40.25-40.00 range. We do not want to hold over the early February earnings report. FYI: The P&F chart points to a $26 target.

Picked on January 19 at $ 44.85
Change since picked: - 0.66
Earnings Date 02/08/07 (unconfirmed)
Average Daily Volume = 3.3 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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