Option Investor

Daily Newsletter, Monday, 02/05/2007

Printer friendly version

Table of Contents

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

Market Wrap

Bullish Breadth Returns!

The major indexes finished mixed-to-lower to start the week, where despite a plethora of earnings reports and more M & A activity, the broader S&P 500 Index (SPX.X) slid just more than a point, or -0.10% after closing at a new multi-year high on Friday.

While last week's internals improved markedly with both the NYSE Summation Index ($NYSI) and NASDAQ Summation Index ($NASI) reversing back up into columns of X and following their NH/NL ratios higher, today's breadth finished negative with decliners outnumbering advancers by an 18:13 margin at both major exchanges.

At tonight's close, StockCharts.com's $NYSI improves from last Monday's closing reading of +670 to +814 and has reversed up 6 boxes on the 20-point box chart I've been following and commenting on in the Monday Market Wrap. Here a 20-point box chart to the $NYSI.

While the NYSE has been the "stronger" internal and PRICE index relative to the NASDAQ Composite, tonight's closing reading of +58.58 versus last Monday's -76.11 also shows DEMAN (X) building. Here's a 20-point box chart to the $NASI.

In essence, buying, or DEMAND is once again showing some breadth and confirming last week's bullish PRICE action, with both the NYSE Composite ($NYA.X) 9,313.21 -0.12% and NASDAQ Composite ($COMPX) 2,470.60 -0.21% a/d lines bullish on an intermediate-term basis.

Closing U.S. Market Watch - 02/05/07 Close

Last week's (see 5DyNet%) +1.90% and +1.20% respective gains for the NYSE Composite and NASDAQ Composite are impressive, and while not nearly as broad, the frequently quoted S&P 500 Index (SPX.X) 1,446.99 -0.09% tacked on some bullish weight.

Despite some horrific earnings reports and uncertain guidance, the homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 773.58 -1.45% has fabricated a 7.23% gain since last Monday, while the benchmark 10-year Treasury Yield ($TNX.X) has fallen 8.4 basis points to 4.808% during the same time.

The longer-dated 30-year Yield ($TYX.X) was down 1.6 basis points after sticking its head above the 5.0% yield level early last week.

I didn't see any news regarding "utilities" in today's session, but this group of dividend-paying stocks was among today's sector winners with the Utilities HOLDRs (AMEX:UTH) $131.08 +1.32% continuing to impress after a recent 01/12/07 relative low of $124.25.

Another Merger Monday!

There were plenty of merger and acquisition announcements to start the week.

Triad Hospitals (NYSE:TRI) $49.65 +14.74% gave a notable lift to the RXH.X 484.39 +1.57% after the company said it agreed to be acquired by affiliates of CCMP Capital Advisors and GS Capital Partners for $50.25/share in cash. Including the assumption of $1.7 billion in debt, the deal's total value tops $6.4 billion.

Shares of Investors Financial Services Corp. (NASDAQ:IFIN) $59.80 +27.36% surged after State Street Corp. (NYSE:STT) $67.08 -6.50% offered to buy the financial services administrator in a deal valued at roughly $4.5 billion in stock.

Carl Icahn's affiliate group, American Real Estate Partners (NYSE:ACP) $103.66 -2.18% announced it was offering $36/share, or $2.75 billion for Lear Corp. (NYSE:LEA) $38.64 +11.45%. Lear provides several manufacturing systems to the automotive industry.

After reporting stronger-than-expected earnings on Friday and offering upbeat guidance, shares of American Axle (NYSE:AXL) $23.57 +5.45% traded as high as $24.68 on speculation of further consolidation in the automotive part manufacturing sector.


Get 50% of your trades wrong and still make big profits in the stock market!

We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!

CLICK HERE: http://www.hotstix.com/public/default.asp?aid=10383

The bidding war for Equity Office Partners (NYSE:EOP) $55.46 +0.14% remains feverish as the stock remains one of the more actively traded issues on the big board. Today, Vornado (NYSE:VNO) $125.10 -0.19% said it was accelerating payment of the cash portion of its $23.24 billion offer for the for the Real Estate Investment Trust (REIT). Vornado and Blackstone Group have been in a bidding war for Equity Office Properties. Last week, Vornado bid $56 per share for the Equity Office Properties, topping a $54-per-share bid from Blackstone. However, Blackstone's offer is all cash, while Vornado is offering $31 per share in cash and $25 per share in stock.

Shares of Rambus (NASDAQ:RMBS) $23.50 +24.20% gained more than $4.00/share on heavy volume of 40 million shares as FTC antitrust decisions keep traders active. Today, the memory-chip technology company said it would appeal an FTC ruling which caps royalty rates for the firm. The FTC said that Rambus can collect royalties of 0.25% for SDRAM products, 0.5% DDR SDRAM products, 0.5% for SDRAM memory controllers or other non-memory chip components, and 1% for DDR SDRAM memory controllers or other non-memory chip components. Today's FTC decision said that after three years, the royalty rates would fall to zero.

"The order is designed to remedy the effects of the unlawful monopoly Rambus established in the markets for four computer memory technologies that have been incorporated into industry standards for dynamic random access memory -- DRAM chips," the FTC said in a statement.

Investors appeared to interpret the FTC ruling to be less severe than expected.

Today's economic calendar had the Institute for Supply Management saying its Services Index rose for a 46th-straight month to a 59.0 reading in January, up from a 57.1 reading in December. The 59.0 reading was above economists' forecast of 56.8. Levels above 50.00 signal expansion, while readings below 50.00 show contraction. The Services Price Index eased to 55.2 from December's 59.1. Economists' forecasted a more inflationary 58.0 measure.

Colts Win! Blue Horseshoe says, "2007 should be bullish!"

While upsetting to many of our friends at the CBOT and CME, as well as my brother-in-law, the Indianapolis Colts defeated the Chicago Bears in this year's Super Bowl by the score of 29 to 17 on Sunday.

While January's 20-point, or 1.4% gain for the S&P 500 Index (SPX.X) had the historical "January Barometer" pointing to a bullish year for stocks, this year's "Super Bowl Indicator" was also stacked in the bull's favor as both the Colts and the Bears were NFL teams prior to the merger of the American Football League (AFL) and National Football League (NFL).

For you historians, the "Super Bowl Indicator" has been correct 30 out of 37-times when a pre-merger NFL team wins the Super Bowl. That's an 81% success rate.

However, as fellow analyst and market historian Jack Albin, Harris Bank's Chief Investment Officer, pointed out, most market bulls were likely rooting for the Bears on Sunday, as his research shows National Football Conference (NFC) wins correlate to much stronger years for the S&P 500 (SPX.X).

When National Football Conference teams win (such as the Bears), Ablin said, the average price return for the market is 13.8%, compared with a mere 3% return when an AFC team (such as the Colts) holds the Lombardi trophy.

In 1986, the year Mike Ditka's Bears won Super Bowl XX, the S&P 500 surged 14.6% that year. Not bad considering January's tepid 0.2% gain.

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

With internals measures in order of importance ($BPSPX, $NYSI, $NASI and NYSE as well as NASDAQ NH/NL) measures all back in a column of X, bulls can once again begin shifting from a "neutral" stance per my 12/22/06 commentary at SPX 1,410.

As I "drag up" the 0% retracement to Friday's multi-year closing high, I would think the first "alarming" sign of technical weakness would be an SPX close that is 2-points below 1,405 and the 19.1% retracement.

The action in early November at the 38.2% and now the early December action at 19.1% is interesting, almost as if those two levels were "in play" before Friday's closing high of 1,448.39 were known.

There are additional indications from the institutionally followed MONTHLY Pivot Analysis levels that 1,405 is deemed an important level of support, and into next week's option expiration, be alert for selling at 1,451.

Review the ABOVE chart, with conventional use of fibonacci retracement, then look at the SPX chart below, with January's (just completed) and now February's MONTHLY Pivot retracement, where I like to take a fibonacci retracement bracket from the mathematically derived MONTHLY R2 (resistance 2) to MONTHLY S2 (support 2).

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

For several months now, ANY DIP BELOW the SPX's MONTHLY Pivot (midpoint of prior months High/Low/Close) has been gobbled up by buyers.

On January 24, the SPX surged to its January MONTHLY R1 (1,438) and found sellers. As such, I'd be HESITANT with new bull long entries here, if measuring potential REWARD to 1,451.

With "1,405" as an initial measure of DOWNSIDE RISK for bull entries, it rate 1,437 as a "good buy" entry, 1,428 as a "better buy" entry and 1,419 as a "great buy" entry point. Each better than the next as RISK to 1,405 is smaller for a bull entry and greater potential REWARD to MONTHLY R1 (1,451) is given.

That is... if history repeats itself.

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

Burlington Nor.SantaFe - BNI - cls: 80.79 chg: -0.63 stop: 77.99

Monday turned out to be a day of consolidation. Most of the market felt some profit taking after last week's strong performance. The transports slipped 0.8% and the railroad index dropped 0.5%. Shares of BNI closed down 0.77% and looks poised to continue lower. Traders bought the initial dip this morning near $80.00 but we suspect that BNI will dip toward $80.00 again and potentially toward the $79 region. We are suggesting readers buy calls on a dip or a bounce in the $79.00-80.25 zone. Our target is the $87.00-87.50 range. The Point & Figure chart points to $100 and BNI's inverse H&S pattern also suggests a $100 target.

Picked on February 1 at $ 82.01
Change since picked: - 1.22
Earnings Date 01/23/07 (confirmed)
Average Daily Volume = 2.4 million


Bear Stearns - BSC - cls: 165.06 chg: -1.29 stop: 161.49

The broker-dealers did not escape Monday's profit taking. The XBD index slipped 0.3% and BSC closed down 0.7%. We are still suggesting new positions but odds are good that we'll get a better entry on a dip soon. We would watch for a dip into the $162.50-163.50 region as a new entry point to buy calls. BSC should have support at its rising 50-dma near $162.50, which is also near the bottom, supporting edge of its rising channel. More conservative traders may want to wait for a rally past $167.50 before initiating positions. We have two targets. Our first target is the $172.00 level. Our second target is the $174.75-175.00 range. We do not want to hold over the mid-March earnings report.

Picked on February 04 at $166.35
Change since picked: - 1.29
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 1.3 million


Garmin - GRMN - close: 50.91 change: -0.24 stop: 48.79

We do not see any changes from our weekend new play description on GRMN. The stock remains a short-term swing trade and we're suggesting new positions with the stock above $50.00. The company is expected to report earnings on the morning of Wednesday, February 14th. That means we need to exit the night before. More conservative traders may want to use a tighter stop loss (maybe 49.49). Our target is the $54.75-55.00 range. We have six trading days.

Picked on February 04 at $ 51.15
Change since picked: - 0.24
Earnings Date 02/14/07 (confirmed)
Average Daily Volume = 2.3 million


Macerich - MAC - close: 97.30 change: +0.70 stop: 93.46*new*

Almost there! MAC continues to rally and just posted its ninth gain in a row. We are not suggesting new positions. Our target is the $98.00-100.00 range. More conservative traders may want to exit early now. Please note that we're adjusting the stop loss to $93.46 (breakeven). This remains an aggressive, higher-risk play. We do not want to hold over the February 13th earnings report.

Picked on January 28 at $ 93.46
Change since picked: + 3.84
Earnings Date 02/13/07 (confirmed)
Average Daily Volume = 436 thousand


OM Group - OMG - close: 48.09 change: -1.57 stop: 45.75

What happened to OMG today? We could not find anything specific to account for the stock's gap down this morning and dip to $47.11 shortly after the opening bell. We did see a press release that OMG was paying off some debt, which should be a good thing. Shares closed off their worst levels of the session but the bounce was fading from its highs. We remain bullish with the stock above $47.00 but today's unexpected sell-off puts us in a defensive mood. A bounce from here can be used as a new entry point. We are aiming for the $54.00-55.00 range. We do not want to hold over the early March earnings.

Picked on January 25 at $ 48.05
Change since picked: + 0.04
Earnings Date 03/02/07 (unconfirmed)
Average Daily Volume = 770 thousand


Research In Motion - RIMM - cls: 136.81 chg: +3.99 stop: 124.95

RIMM is definitely marching to the beat of its own drum. The stock ignored any profit taking in tech stocks and rose another 3% following Friday's bullish breakout. There were some reports that today's rally was fueled by enthusiasm over RIMM's next hand-held product called "Indigo", which is due to be released soon. We do not see any changes from our weekend new play description. Our target is the $140.00-142.50 range. FYI: The P&F chart is still bearish due to the January sell-off.

Picked on February 04 at $132.82
Change since picked: + 3.99
Earnings Date 03/22/07 (unconfirmed)
Average Daily Volume = 9.2 million


RTI Int. - RTI - close: 83.00 change: +0.44 stop: 76.75

This is the second day in a row that traders bought the dip near $81.20. Yet it's the third day in a row that RTI has struggled with resistance near $84.00. Overall we don't see anything out of the ordinary. This looks like a normal consolidation after the recent bullish breakout. We would still continue to buy dips anywhere above $80.00. More conservative traders may want to tighten their stops. The P&F chart points to a $105 target. Our target is the $88.00-90.00 range.

Picked on January 31 at $ 81.75
Change since picked: + 1.25
Earnings Date 03/12/07 (unconfirmed)
Average Daily Volume = 737 thousand


Ryland Group - RYL - close: 58.23 chg: -1.06 stop: 54.99

The homebuilders experienced some profit taking on Monday following last week's big rally. We told readers over the weekend that our preferred entry point would be on a dip near $57.50. RYL provided that dip today with an intraday low at $57.56. If you missed the move it looks like RYL might dip toward $57.50 again tomorrow. Broken resistance near $57.50 should now act as support. The Point & Figure chart for RYL has produced a double-top breakout buy signal with a $70 target. We are aiming for the $64.00-65.00 range.

Picked on February 04 at $ 59.29
Change since picked: - 1.06
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.2 million


Teleflex - TFX - close: 66.97 chg: -0.82 stop: 64.75

We do not see any changes from our weekend comments on TFX. We remain concerned by the lack of volume. We suspect that TFX is poised to dip back toward $66.50-67.00. If you're looking for a new bullish entry point wait and watch for a dip or a bounce above $66.00. Our target is the $71.00-72.00 range. The P&F chart points to an $81 target. We plan to exit ahead of the mid February earnings report. FYI: We cannot find a confirmed earnings date and it looks like TFX is due to report in the February 14th-27th range. More conservative traders may not want to open plays with a potential earnings announcement just seven trading days away.

Picked on January 14 at $ 67.11
Change since picked: - 0.14
Earnings Date 02/14/07 (unconfirmed)
Average Daily Volume = 202 thousand

Put Updates

F5 Networks - FFIV - close: 71.98 change: +1.00 stop: 76.25

FFIV produced a 1.4% oversold bounce on Monday. The rebound failed at short-term resistance near the sliding 10-dma. At this point in the game readers may want to wait for a new decline under $70.00 before considering new put plays. More conservative traders may want to wait on new plays until after rival Cisco Systems (CSCO) reports earnings tomorrow after the closing bell. CSCO's results and guidance could have a big influence on shares of FFIV. Our target is the $66.00-65.00 range. Traders should be aware that the rising 100-dma near $67 might offer some support. FYI: The Point & Figure chart has produced a triple-bottom breakdown sell signal with a $63 target. Plus, the company recently announced an analyst meeting for February 7th in New York.

Picked on January 28 at $ 72.70
Change since picked: - 0.72
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 1.0 million


Ventana Medical - VMSI - cls: 40.68 chg: +0.54 stop: 42.05

VMSI produced a 1.3% oversold bounce after one analyst firm defended the stock. We half expected a bounce from $40.00, which is why we're suggesting a trigger to open plays at $39.75. More conservative traders may want to set their trigger lower to try and confirm the breakdown under $40.00. If we are triggered at $39.75 our target is the $35.50-36.00 range.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/07 (confirmed)
Average Daily Volume = 351 thousand

Strangle Updates

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


Google - GOOG - cls: 467.16 change: -14.34 stop: n/a

The sell-off resumed course on Monday. Shares of GOOG slipped almost 3% and closed near its lows for the day, which tends to be a bearish sign for the next trading day. We don't know if today's weakness was a reaction to the Viacom fight or just a delayed reaction to last week's earnings. The news in GOOG today was an announcement that GOOG, who recently purchased Youtube.com, had removed over 100,000 videos from the Youtube.com website at Viacom's request, who claimed copyright infringement. GOOG disagrees that some of the videos were violating any rights but took them down anyway as they work (or fight) with Viacom. Traders should note that GOOG might see an oversold bounce from its 100-dma near $463 soon. We would also expect some support in the $450-455 region. We are not suggesting new positions. In our original play description we suggested two different potential strangle strategies. One involved the February $530 call (GOP-BW) and the February $470 put (GOP-NG). This strategy had an estimated cost of $17.40 and we want to exit if either option rises to $29.00 or more. The second strangle strategy involved the February $550 call (GOP-BY) and the February $450 put (GOP-NJ). This second strategy had an estimated cost of $8.70 and we want to sell if either option rises to $16.00 or more.

Picked on January 28 at $495.84
Change since picked: -28.68
Earnings Date 01/31/07 (confirmed)
Average Daily Volume = 5.2 million


United Parcel Srv. - UPS - cls: 73.68 chg: -0.49 stop: n/a

UPS, like most of the transportation sector, did not move much on Monday. Lack of movement is bad news for a strangle play. We are not suggesting new strangle positions at this time. February options expire in two weeks and considering UPS' failure to move on its earnings report more conservative traders may want to adjust their targets to break even. Our estimated cost was $1.65. We suggested the February $75 call (UPS-BO) and the February $70 put (UPS-NN). FYI: UPS announced plans to buy 27 new planes from Boeing.

Picked on January 28 at $ 72.49
Change since picked: + 1.19
Earnings Date 01/30/07 (confirmed)
Average Daily Volume = 2.9 million

Dropped Calls


Dropped Puts

Whole Foods - WFMI - close: 45.37 chg: +0.70 stop: 45.51

We have been stopped out of WFMI at $45.51. The stock posted another 70-cent gain and broke out past the $45.00 level and hit an intraday high of $45.54. This rebound could have legs given the recent bullish breakout past resistance and it might spark a short squeeze.

Picked on January 19 at $ 44.85
Change since picked: - 0.18
Earnings Date 02/13/07 (confirmed)
Average Daily Volume = 3.3 million

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives