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Daily Newsletter, Wednesday, 03/14/2007

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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

The Double Bottom

Its what all bulls look for and love to tradea successful retest of a previous low as the bell to get long. And long they did off this mornings low. Even though many indices undercut the March 5th low, that does not negate the bullishness of holding that low on a closing basis. The fact that most indices closed well above those lows looks bullish today and many have bullish daily candlesticks to boot (dont look behind the curtain at that man pulling the levers, thats just your friendly banker who is not looking so good here).

After what looked like another rout coming, and with the DOW down 137 at 11939 (the headlines were already out about the DOW back below 12K), it was beginning to look like another -200 or -300 day was coming. But then the buy programs hit and the shorts ran for cover. As soon as the bulls saw the spike up they started buying it too, fearing they were missing the great buying opportunity. By the end of the day the DOW had climbed nearly 200 points off the low. Very nice.

Looking at the table above I highlighted the high for the VIX todayit spiked above the high on March 5th, above 20 and once again that marked a good level for a reversal. The 20 level has consistently marked a level where the VIX has turned in the past. Weve seen it sub-20 for so long we forgot what it would do up there. Thats like the stratosphere. For those who said we should get used to a permanently low VIX (because its different this time), and Bernie Schaeffer might have been one of them, theyll be forced to eat their words big time.

But from a trading perspective, VIXs move back above 20 today warned that fear was getting to be too much, too fast. Also, take a look at the equity put/call ratioit spiked up to .98 today. Thats nearly 1 put for every call purchased and is nearly double what we typically see. That many put buyers normally signals a bottom is being put in. The difficulty in using that this week (and for the VIX as well) is that opex can really skew the readings and not mean anything. For example, many of the purchased puts today were likely closing tradesall the puts that had been sold for premium, with the assumption that the market would stay above the sold strike level, were underwater or threatening to go underwater and traders were closing their short puts.

Not that we have manipulation of the markets during opex week (cough), or any time for that matter (double cough), but one reader (thanks Dave) noticed some interesting option activity this morning. There were 800 SPX March 1370 puts traded near $13 at todays low. After only 30 minutes into the rally they traded for $4. Assuming a large hedge fund, or more likely one of the mega banks trading teams, sold those puts at todays low for the market (it was perfectly timed) and then hit the market with a big buy program to get things started to the upside, they then covered the puts and pocketed over $700K for 30 minutes worth of work.

Legal? Yes, but it does make your skin crawl knowing how much of this market is manipulated on an intraday basis. Most of you know of Jim Cramer on CNBC. Some of you may have seen the link where he was interviewed at the end of December where he gave a frank discussion about how hedge funds play with the market, and what little regard people have for the Fed and SEC. He also discussed how they spread rumors (Im being kind since he said they outright lie) through CNBC and other media outlets to get a stock or the market moving in the direction they want. Legal? Absolutely not but even as Cramer said, no one is out there policing this action. At any rate, its a fascinating look at whats going on in the hedge fund world: http://www.stockwire.com/content/view/238/87/

Speaking of manipulation, I came across a chart at bigtrends.com that I thought Id share. Its a great example of the absolutely pitiful job analysts do for the public. Why the market continues to react to analyst upgrades and downgrades is beyond me. Ive often said the only one the analyst is working for is his brokerage company and tries to manipulate stock price for the benefit of his employer and not the public. Take a look at this chart of New Century Financail (NEW) the most publicized mort-bust (we had the tech-bust in 2000 and itll be the mortgage/banking companies in 2007).

New Century Financial (NEW) chart, Daily, courtesy bigtrends.com

The red and green arrows show analyst upgrades (green) and downgrades (red). Notice the number of times investors were advised to buy or hold the stock. As was noted in the bigtrends article, the analyst who gave the buy recommendation back in November when the stock was nearing $35 has not changed his rating yet. Talk about a deer in the headlights! The first sell rating was given on the day it gapped down below $5. Considering its going to zero I guess that was a good rating. But a little late, no? What a worthless bunch of people. Listen to them at your own peril. Follow the charts and use trend lines, moving averages or whatever you like to use. But do not follow these mushrooms. You know, theyre kept in the dark and fed ___.

Were in a critical period for the market and I want to spend some time again on the big picture through the daily charts and also look at the intraday action to help you make some decisions for where you want to trade and which direction. But before getting to the charts, well look at the economic reports that came today.

Economic reports
It was a very quiet day for economic reports and those that did come out were not influential on price action. The futures came out of negative territory before the reports came out and there was barely a blip from either the 8:30 reports or the Crude Inventories out at 10:30.

Current Account
I was tempted to add Deficit to the above title since thats all it ever is. The number for Q4 showed a reduction in the deficit by -14.6%, from $229.4B in Q3 to $195.8B. The deficit amounted to 5.8% of GDP, also down from 6.9% in Q3. This was better than had been expected and it would be nice to see that trend continue. The bad news is that for all of 2006 the current account deficit grew to a record $856.7B, totaling 6.5% of GDP.

Export and Import Prices
Import prices (ex-oil) dropped -0.1% in February, the same as January. If you add in the oil prices then import prices were up +0.2% (+2.4% annualized) which of course adds to the inflationary pressures the Fed must worry about. The good news is that the higher prices were in the oil sector. The bad news is that those higher prices will be either pushed through to consumers or profits will suffer. Neither is helpful to our economy. The inflation numbers will be out on Friday and that could whip the market around a little.

Export prices for manufactured goods were up +0.6% in February and up +4.7% for the past year. Certainly helping our exporters is a declining dollar which allows companies to raise their prices without their customers feeling it. Exported agricultural products were up +2.3% in February and +16.9% for the past year.

Crude Inventories
Crude inventories were up 1.18M barrels as compared to being down 4.85M barrels the week before. Crude supplies remain in the upper end of the average range. Distillate inventories declined by 2.8M barrels but also remain in the upper half of the average range.

Now lets take a look at the charts and see what has happened since last Wednesdays Market Wrap.

DOW chart, Daily

Ive drawn in a preliminary down-channel that is based on the high in February and Mondays high. Assuming for now that the downtrend line will hold back todays bounce, this should be a pretty good guide for where price is headed. I show key levels for the DOW at 11940, todays low, and 12635. Very likely the better key level to the upside is just above the 50-dma at 12490 since any rally back above there would have a good chance of continuing to new all-time highs. After todays bounce, which could easily continue higher, a drop back below 11940 would be immediately bearish and a strong indication that it will drop to the 11500 area very quickly. By the price projection on this chart we could see DOW 11300 by the end of the month.

DOW chart, 60-min

For each of the 4 primary indices we follow (DOW, SPX, NDX and RUT) Ill show the 60-min charts for the intraday action to help get a better feel for some key levels to watch. This is a little confusing with the multiple scenarios but hopefully the color coding will help a little. My preferred wave count is represented by the dark red pathit shows a dip tomorrow followed by another push higher into the end of the day (want to be sure we get those European options to expire with as high a price as possible).

A rally up near its downtrend line around 12250 would be a good place to try shorting it. The reason it would be a great short is because from there we should get the 3rd of a 3rd wave down and it should be a screamer. If the market is held up into the end of the day on Thursday and then lets go on Friday I could see a very ugly Monday coming.

The more immediately bearish path is represented by light red (pink) which says todays bounce is all were going to see for a correction to the decline from Monday. As I mentioned for the daily chart, a break below 11940, todays low, would be your signal to get short and hang on.

More bullishly we could see a stronger rally back above Mondays high, perhaps up to the 12400 area where some Fibs line up. As labeled in green that would mean we have a larger A-B-C wave-2 bounce playing out from the low on March 5th. I dont particularly like this count on the DOW because of the deep sell off today, and the strength of the selling, but it wouldnt violate any EW rules. As Ill show for the NDX this count has some merit so needs to be respected by those trying to get short.

SPX chart, Daily

The SPX and DOW remain closely in synch and the daily chart here looks very familiar to the DOWs daily chart. Assuming todays decline was the kickoff for wave-3 (dark red wave count on the chart), then the afternoon bounce will be the one youll want to short. A failure at its downtrend line would probably make a great short entry. But instead of attempting to pick a top, if youre more comfortable waiting for proof of a breakdown, any break below todays low near 1374 would be your signal to get short. If on the other hand the bulls prove theyre not done with this market, a rally above its 50-dma at 1425 would be a signal that new highs are probably coming. Any push above 1440 would say get out of the way of the bulls.

SPX chart, 60-min

Again, like the DOW, my preferred count is the dark red path which shows a pullback tomorrow followed by another rally into the afternoon. The downtrend line at that time will be near 1395 (1398 tomorrow morning). A 62% retracement of the decline from Monday (not shown on the chart) is at 1392. If it breaks down immediately tomorrow and gets back down below 1374 itll be time to look for short entries.

If the bulls keep this rally going and get it above 1400, which would clearly be a break of its downtrend line, then the green wave count is very likely the correct one. In that case a larger A-B-C 2nd wave correction is still in play and upside targets would first be a retest of the Monday high but more likely a push up to 1415-1420. That kind of move would convince everyone and their brother that the correction is over and were heading for new highs. I seriously doubt that but well let price dictate.

Nasdaq-100 (NDX) chart, Daily

The NDX is the one index that gives me the feeling that we could see a rally push prices above Mondays high. I left a downtrend line on the daily chart (and the down-channel off that downtrend line) that presumes well get a little higher bounce before it rolls back over. If todays bounce fails at a lower high and then drops below 1711 then obviously were going to have an even steeper downtrend line controlling price action. Any stronger rally that were to get back up to 1800 should struggle at the that levelthe bottom of the gap. Any rally back up to close the gap, especially if it gets over 1830, would likely mean were headed to new highs.

Nasdaq-100 (NDX) chart, 60-min

This 60-min chart looks similar to the one shown for the DOW and SPX but between the 3 of them this one has the most potential for the more bullish green wave count to be the correct one. Thats the one that calls the move down from last Friday, March 9th, as a 3-wave move for wave-B of the A-B-C 2nd wave correction to the decline from the February high. In that case the upside targets are first a test of the Friday/Monday highs and then up to 1790 (where green wave-C would be equal to 162% of green wave-A).

The fact that the NDX broke its downtrend line heading into todays close opened up the door to this bullish possibility. It has already retraced more than 62% of this weeks decline so its definitely showing some bullish potential here. All the indices have been nicely in synch so watching the NDX here could provide some valuable clues as to what the others will do.

Nasdaq-100 (NDX) chart, 30-min

I wanted to show a little closer view of the price action since the low on March 5th and how the wave pattern looks to be developing on this one. This is for those of you trying to get a feel for the EW pattern and wave relationships. The high on Monday was not a new high and that makes it subject to interpretationit was either a truncated finish to an a-b-c move up from March 5th (to keep it in synch with the others). As I have it labeled, we had an a-b-c move down from last Friday to todays low. Wave-c went just beyond a Fib projection where it would equal 162% of wave-a (shown at 1715.44). Thats the level I mentioned today on the Market Monitor to watch for a long play to set up.

If the more short term bullish pattern is in play, where were into a larger c-wave for the an A-B-C 2nd wave correction from the March 5th low, then we should get a strong impulsive (5-wave) move up for it, and thats what I show with waves (i) through (v). Once again, but on a larger degree, if wave-C gets to 162% of wave-A (the first leg up from March 5th), then we get an upside target of 1790. If wave-C is to equal wave-A then well get a retest of the Friday/Monday highs near 1760 (shown in light red).

A rally above 1748 would tell me we should make it up to at least 1760 and if the wave pattern unfolds like the dark red depiction and it gets above 1760 then we should look to 1790. Any break back below todays low near 1711 would say the bears have the ball.

Russell-2000 (RUT) chart, Daily

The RUT is more similar to the NDX than to the DOW and SPX. This tells me the techs and small caps could be our canaries over the next couple of days. If todays bounce fails, especially at its downtrend line near 780, and drops back below 760 then short is the place to be. In that case the next stop should be closer to 720, maybe 700, before getting another shallower bounce.

Russell-2000 (RUT)chart, 60-min

If were to get a larger A-B-C bounce, similar to what I explained for NDX, then upside targets are 790.82 (equality between the legs in the correction) and then 809 (wave-C = 162% of wave-A). I noted the gap fill on the chart thats from March 1st. At 790.60 it was barely missed on the press higher into Mondays high. Perhaps it will go get it this time. But a pullback followed by another push higher that fails below 780 could be a nice setup for a turn back down in a strong 3rd wave down.

A quick peak at the semis shows SMH at 34.27, right in the middle of its 6-month long consolidation between 33 and 36. Next!

BIX banking index, Daily chart

Compare todays low to the one for NDX and RUT and you can see the banks are clearly leading to the downside. They easily broke the low from March 5th and couldnt even get back to it by the close. Of all the charts reviewed today, this is the one that tells me were only going to get a bounce that does not take out Mondays high and then turn back down into some very hard selling. Keep your eyes on the banks and brokers. MER is still the stock to watchit gave a good heads up this morning that the broader market was going to break down.

The home builders have taken a beating lately with all the negative press about the subprime lenders, and how its likely (very likely in my opinion) to spill over into all mortgage lenders which will of course affect buyers of new homes. Exit home builders, stage right. As bank officers become ever more fearful about any loans we will see a tightening in credit availability. No matter what the Fed does from here, even lowering rates to zero like Japan did, theyll be pushing on a string now. They can lower rates to their hearts content and they can create gobs of money but if there is a lack of demand for the money or credit (think of the number of prospective home buyers who have moved to the sidelines waiting for the market to correct before they buythey dont need, nor do they want, to borrow money right now) then they will become ineffective.

A tightening credit situation is what accelerates the slowing of business growth and greases the skids for a slide into recession. Its why the Fed cant stop recessionsits more a result of cycles in human emotions and behavior then Fed policy. As we collectively become more afraid and depressed we buy fewer things, take fewer risks and simply become less bullish. Preceding this of course is over-the-top ebullience and that has helped create some more bubbles that must be popped in order to bring things back to reality and normalcy. So it is with the home market. Theres some serious bubble-popping needed in this sector.

U.S. Home Construction Index chart, DJUSHB, Daily

With all the recent negative publicity about whats going on in the home lending business, the builders have tanked. But interestingly they look like they could get a bounce now. Unless weve got a very bearish EW pattern setting up here, which calls for a crash in the home builder stocks in the next week or so, it looks like a clean 5-wave move down completed today. Not shown on the chart, the 5th wave of the move down from February 2nd equaled the 1st wave at 595.84 and yesterdays low was 595.22. While the market tanked today the home builders were rallying.

So the setup is there for a correction to the decline from February 2nd. As I depict we could get a bounce that takes this index back up to its broken uptrend line (the bottom of its bear flag), which is where it might meet its 50-dma, around 680-690 by the end of the month. This bounce would likely result from some positive stories coming out about the bottom has been found in the housing market and the spring selling season will be strong, and some analyst upgrades. Just remember, theyll be the same analysts who gave you NEW that I showed at the beginning of this report. If we get the kind of bounce shown here youll want to find your favorite weak housing stock and short the heck out of it.

Oil chart, January contract, Daily

After breaking its downtrend line and then looking like a lost child, oil finally pulled back. While breaking back below its 50-dma that probably doesnt mean a whole lot. It did find support at its previously broken downtrend line so a bounce from here would be bullish. Oil has had a way of sliding down a downtrend like this so watch for that possibility as well. A break back down inside its down-channel would be bearish. If our economy is slowing, as I believe it is, it will be reflected in lower oil prices.

Oil Index chart, Daily

The 50-dma has been holding the oil stocks down so it needs a rally above recent highs to get something bullish going. If it drops back down below 600 it will be a confirmed break of its uptrend line and obviously bearish. In that case 560 would be next in a hurry and very likely would only be a speed bump.

Transportation Index chart, TRAN, Daily

After dropping through its 200-dma the Trannies got a nice rebound and left a very bullish looking hammer (or an even more bullish dragonfly doji) on that support level. An up day tomorrow would confirm the bullish signal and then all the bulls would need to do is rally the Transports back above Mondays high. If that cant be done and they drop back below todays low then it would be lights out for the bulls. In that case I double the uptrend line from March 2003 would be much more than a speed bump.

U.S. Dollar chart, Daily

The dollar continues to chop lower and that leaves open several possibilities. I show a choppy grind lower into the summer before it bottoms near $80-81. But if at any time the dollar rallies above its downtrend line, currently near $84.60 then we could see it rally at least up to the $87 area. If traders are cashing in their yen carry trades and paying back their yen loans, that could depress the value of the yen and support the dollar. I dont see that happening yet so its tough to tell how the whole yen carry trade will affect the dollar.

Gold chart, February contract, Daily

I continue to wonder how the gold/dollar relationship will work out over time. Typically theyre counter-cyclical but lately theyve been more in synch than not. It might have to do with a fundamental shift going on in the market as we head into the next bear market. It shows why you cant reliably trade one vehicle off the other. Trade each on its own merits and chart.

As depicted on the chart Im expecting gold to drop down a little further and find support on its uptrend line from August 2005, bounce and then break that support. If the current bounce gets a little bigger then the next break down, if it happens, will likely just sail right through that uptrend line. The larger pattern supports the idea that gold will drop down to $500, potentially lower, before its ready for the next rally leg.

From a fundamental perspective, in a recessionary environment gold is not necessarily a good investment. It may be good to have for a rainy day but not necessarily as an investment. As assets lose their value, very little is exempted and gold is no exception. When investors become fearful as their asset values drop, theyll sell whatever they have in order to generate cash. Only later when investors fear their cash is becoming worthless will they flock to gold.

Results of today's economic reports and tomorrow's reports include the following:

The PPI numbers and NY Empire Index will probably have some influence on the market tomorrow morning. Later in the day will be the Philly Fed number which also could have some effect. My guess right now is that well see some concern about the early morning numbers that pulls the market back in the morning. Then the bulls will regain control and push it back up to new highs for the day. That would be a good setup for a first look at shorting the indices at their downtrend lines (except NDX which may already be above its downtrend line).

As mentioned above for the various charts, if we get an early sell off that picks up speed and drops below todays low then that will mean the correction to this weeks decline is already complete and youll want to get short and go for a ride. But with opex and probably a strong desire by many of the hedgies to keep this market up in order to keep as many sold puts above water as possible, we should see a bid under the market, at least through tomorrows close. Once we get the settlement numbers on Friday then all bets are off as to where the market may head to next.

SPX chart, Weekly, More Immediately Bearish

Always keeping things in perspective, you can see that the large decline weve had this month is actually pretty puny as related to the rally off the October 2002 low. Thats a long ways back down. By this time next year it shouldnt look so far away.

Theres not even a hint of lifting on the weekly oscillators and I use the faster settings. This decline is not finished and it should have another leg down at least equal to the one from the February high to the March 5th low. The decline should be faster than the rally from July, the last time the SPX was at the bottom of its up-channel.

Tomorrow could be a little tricky because were in the middle of a correction, either a big correction from Monday March 5th with a bigger leg up coming, or just a small one thats correcting this weeks decline. Either one is bearish but its a matter of where do we get short for the next ride down, which should be a doozy. This will be the money maker that comes along only rarely.

So watch those downtrend lines and try nibbling on some shorts when it appears it might be rolling over. Its relatively easy to control your risk that wayif the market pulls back but then rallies to another high, stop out and try it again slightly higher. If you do that 3 times and its not working, sit back and watch for a little bit. A more conservative way is to let the market tell you its time to get shortwait for a break below todays lows and then short any small bounce or just short the break lower. Its a little harder to control risk that way but Im thinking the next break lower is going to be fast and shorting it shouldnt be a problem.

Good luck and as always Ill do my best to identify the turns on the Market Monitor. We had pretty good luck at todays low and Im hoping the high for the bounce will be equally as obvious. Good luck in your trading and Ill be back here next Wednesday.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ATI None None
COP    
HOC    
LEND    
SUN    

New Calls

Allegheny Tech. - ATI - cls: 101.50 chg: +1.15 stop: 97.95

Company Description:
Allegheny Technologies Incorporated is one of the largest and most diversified specialty metals producers in the world with revenues of $4.9 billion during 2006. ATI has approximately 9,500 full-time employees world-wide who use innovative technologies to offer growing global markets a wide range of specialty metals solutions. (source: company press release or website)

Why We Like It:
Traders were quick to buy the dip in ATI near its rising 50-dma midday. Volume came in pretty strong and shares posted a 1.1% gain. There is some resistance near $105 but we suspect that ATI will make a run at its highs near $110. We're suggesting call positions with ATI above $100. Our target is the $109.00-110.00 range. We do not want to hold over the late April earnings report. FYI: The P&F chart points to a $123 target.

Suggested Options:
We are suggesting the April calls since Mays are not yet available.

BUY CALL APR 100 ATI-DT open interest=3411 current ask $6.60
BUY CALL APR 105 ATI-DA open interest=2549 current ask $4.10
BUY CALL APR 110 ATI-DB open interest=4239 current ask $2.40

Picked on March 14 at $101.50
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

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ConocoPhillips - COP - cls: 67.91 chg: +1.32 stop: 65.74

Company Description:
ConocoPhillips is an integrated petroleum company with interests around the world. (source: company press release or website)

Why We Like It:
Many of the oil stocks look poised to breakout higher from their current consolidation patterns. COP is one of them and shares have rallied back toward resistance in the $68.75 region. We are suggesting a trigger to buy calls at $69.01 since a move over $69.00 would produce a new triple-top breakout buy signal on the P&F chart. If we are triggered at $69.01 our target is the $74.00-75.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 65.00 COP-EM open interest=37160 current ask $5.10
BUY CALL MAY 70.00 COP-EN open interest=42609 current ask $2.20

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million

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Holly Corp. - HOC - cls: 57.87 chg: +1.42 stop: 54.95

Company Description:
Holly Corporation, headquartered in Dallas, Texas, is an independent petroleum refiner and marketer that produces high value light products such as gasoline, diesel fuel and jet fuel. (source: company press release or website)

Why We Like It:
HOC is an oil stock that is already breaking out higher. Shares broke out to new all-time highs yesterday and today's 2.5% rally on strong volume marks a new closing high. We see the rally past resistance near $57.00 as a new entry point to buy calls. More conservative traders may want to wait for a rise past $58.00 before opening plays. Our target is the $62.00-62.50 range. The P&F chart is bullish with a $74.00 target.

Suggested Options:
We are suggesting the April options but would prefer Mays, which will probably become available next week.

BUY CALL APR 55.00 HOC-DK open interest=1772 current ask $4.10
BUY CALL APR 60.00 HOC-DL open interest= 469 current ask $1.45

Picked on March 14 at $ 57.87
Change since picked: + 0.00
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand

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Accredited Home Lenders - LEND - cls: 6.04 chg: +2.07 stop: n/a

Company Description:
Accredited Home Lenders, Inc., is a premier mortgage banker servicing all U.S. markets for non-prime residential mortgage loans. (source: company press release or website)

Why We Like It:
We might have better luck with a lottery play on LEND. This past weekend we suggested a lottery play on NEW but the stock continued to implode. LEND might be in the same boat but now rumors are circulating that LEND is a takeover candidate and one of the bigger brokers might bite. There is no guarantee that LEND won't implode too. By nature a lottery play is very risky. We are suggesting some out of the money options in a gamble that LEND will be taken over and the buyout price will suddenly put our options in the money. You can choose the April or June options but we suspect that any sort of deal will probably happen before April options expiration. FYI: It's possible that if investor sentiment improves on the sub-prime lenders then short-covering alone might push LEND back above $10 over the next few weeks.

Suggested Options:
We're suggesting the April calls. Remember, this is a very speculative play.

BUY CALL APR 7.50 QFW-DU open interest=2658 current ask $1.40
BUY CALL APR 10.00 QFW-DB open interest=1415 current ask $0.75
BUY CALL APR 12.50 QFW-DV open interest= 464 current ask $0.35

Picked on March 14 at $ 6.04
Change since picked: + 0.00
Earnings Date 05/16/07 (unconfirmed)
Average Daily Volume = 3.0 million

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Sunoco - SUN - close: 67.21 chg: +0.99 stop: 63.95

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, nearly 4,700 retail sites selling gasoline and convenience items, approximately 5,500 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. (source: company press release or website)

Why We Like It:
SUN is another oil-related stock that looks poised to breakout from its consolidation pattern. Shares recently pushed through technical resistance at its simple and exponential 200-dma. Plus, volume has been very strong on the recent rally. More aggressive traders may want to consider buying calls now. We want to see a breakout over $68.00 first. Our suggested trigger to open positions is at $68.15. If triggered our target is the $74.00-75.00 range. We do expect some resistance near $70.00. The P&F chart is very bullish with an $82 target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 65.00 SUN-EM open interest=2730 current ask $5.10
BUY CALL MAY 70.00 SUN-EN open interest=4939 current ask $2.50

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cigna - CI - close: 139.11 chg: +2.04 stop: 134.75

Thus far our call play in CI is working as planned. Shares dipped into our suggested entry zone yesterday and the stock rebounded with the market today. However, the sell-off may not be over yet as CI has not yet broken out past its bearish trend of lower highs and short-term resistance at its 10-dma near $140. If the stock dips again, we'd use a bounce above the 50-dma as a new bullish entry point. If you prefer to buy on momentum then look for a rally past $141. Our target is the $145.00-146.00 range.

Picked on March 13 at $137.49
Change since picked: + 1.62
Earnings Date 05/09/07 (unconfirmed)
Average Daily Volume = 759 thousand

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Carbo Ceramics - CRR - cls: 44.90 chg: -0.06 stop: 42.45

CRR's failure to bounce with the market today is a danger sign. The stock traded flat to down and closed with a minor loss. It's hard to put a lot of credence behind a minor loss with below average volume but it's still a show of relative weakness. Readers may want to wait for a new bullish breakout over $46 before opening positions. Our [corrected] target is the $49.75-50.00 range. FYI: CRR might qualify as an oil services stock. The most recent data (February) puts short interest at over 15% of CRR's 18.7 million-share float. That's a relatively high degree of short interest and raises the risk of a short squeeze.

Picked on March 11 at $ 45.55
Change since picked: - 0.65
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 458 thousand

---

ESSEX Prop. - ESS - cls: 128.33 chg: +0.62 stop: 125.95

We're honestly surprised that ESS didn't stop us out today. Given the market's intraday weakness we would have expected ESS to dip toward support near $125 and its 200-dma. Instead the low was $126.34. We would watch for a breakout over $130.00 or $130.25 before considering new bullish call plays. Our target is the $137.00-140.00 zone.

Picked on March 12 at $130.26
Change since picked: - 1.93
Earnings Date 02/07/07 (confirmed)
Average Daily Volume = 196 thousand

---

Noble Energy - NBL - close: 57.85 chg: +1.59 stop: 55.75

Oil stocks rebounded sharply higher this afternoon and that helped NBL bounced from support near $56. This looks like a new entry point to buy calls but more conservative traders may want to wait for a rally past $58.00 or $60.00 before opening new positions. We're going to adjust our target from $62.00-62.50 to $64.00-65.00.

Picked on March 06 at $ 58.02
Change since picked: - 0.17
Earnings Date 05/24/07 (unconfirmed)
Average Daily Volume = 1.6 million

---

New Century - NEWC - close: 0.67 chg: -0.175 stop: n/a

It was another rough day for New Century. We don't see any changes from our previous comments. The new stock symbol is NEWC and prices are being quote on www.pinksheets.com. It now looks like odds that NEW will file bankruptcy are higher than odds the company will be bought out. We're not suggesting new positions. If you did want to speculate we'd use the $2.50 calls. At this time we're going to keep an eye on NEW through the end of the week. If nothing happens we might just drop it. Please see our weekend play description for more details behind our strategy.

Picked on March 11 at $ 3.21
Change since picked: - 2.54
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million

---

Molson Coors - TAP - cls: 87.70 chg: +1.77 stop: 83.49

TAP displayed relative strength today with a 2% rally on above average volume and a breakout over short-term resistance near $87.00. Our suggested trigger to buy calls was at $87.15 so the play is now open. If you missed this afternoon's entry point we'd still consider new positions now or on a rally past $88.00 and its February 2007 high. Our target is the $92.50-95.00 range.

Picked on March 14 at $ 87.15
Change since picked: + 0.55
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 782 thousand
 

Put Updates

Ashland Inc. - ASH - cls: 62.95 chg: +0.19 stop: 66.51 *new*

ASH traded to an intraday low of $61.66 but the sharp afternoon market rebound produced a similar bounce in ASH. We're not suggesting new positions at this time and more conservative traders may want to do some profit taking. We are adjusting our stop loss to $66.51. More conservative traders may want a tighter stop loss. Our target is the $60.50-60.00 range.

Picked on March 04 at $ 65.82
Change since picked: - 2.87
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 770 thousand

---

Bausch Lomb - BOL - cls: 50.80 change: +0.59 stop: 52.51

BOL displayed relative strength today. Even though the major averages were showing a lot of weakness midday shares of BOL never broke down under the $50.00 mark. We're still on the sidelines. We're suggesting a trigger to buy puts at $49.49. More conservative traders may want to wait for a decline under $49.00 to lessen the risk that we'll be triggered on an intraday spike lower. If we are triggered at $49.49 our target will be the $44.00-42.50 range.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume = 678 thousand

---

Beazer Homes - BZH - close: 32.99 chg: +0.97 stop: 37.55

Homebuilders produced an oversold bounce today. BZH rose 3% and on strong volume but the end result is what's called an "inside day" where shares never strayed beyond yesterday's open or close. We would not be surprised to see a bounce and a failed rally near $35.00 and its 10-dma, which could be a good spot to consider new positions. Our target is the $30.50-30.00 range. FYI: More conservative traders may want to use a tighter stop loss. Traders should note that BZH does have a relatively high amount of short interest (17% of the float) and that does raise the risk of a short squeeze.

Picked on March 12 at $ 34.20
Change since picked: - 1.21
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.2 million

---

Harman Intl - HAR - close: 98.86 change: +1.63 stop: 102.01

The rebound in HAR looks dangerous if you're a bear or holding puts. We would expect the bounce to reach the $100 level. The question is whether or not the $100 level will hold as overhead resistance. More conservative traders may want to use tighter stops. Our target is the $92.50-90.00 range near its simple 200-dma. FYI: The P&F chart points to a very bearish $80 target.

Picked on March 04 at $ 97.49
Change since picked: + 1.37
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 614 thousand

----

MarineMax - HZO - close: 21.12 change: +0.09 stop: 22.59 *new*

The market's afternoon bounce also inspired some short covering or bargain shopping in HZO. We would look for overhead resistance at its 01-dma under $22.00. We're adjusting our stop loss to $22.59. We're not suggesting new positions at this time. Our target is the $20.25-20.00 range. FYI: It may be worth noting that HZO has a high amount of short interest. The latest data (February) puts short interest at almost 24% of the stock's 16.8 million-share float. That definitely increases the risk of a short squeeze should the stock unexpectedly rally and breakout higher.

Picked on February 11 at $ 22.59
Change since picked: - 1.47
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 300 thousand

---

Ryland Group - RYL - close: 44.79 chg: +1.69 stop: 48.27

RYL is another homebuilder that experienced an oversold bounce after multiple days of selling. Watch for resistance near $45.00 and again near its 10-dma around $46.30. Look for a failed rally under $45.00 as a new entry point. More conservative traders may want to tighten their stops. Our target is the $40.50-40.00 range. FYI: The P&F chart for RYL points to a $29 target. The stock does have a high amount of short interest at 24% of the float and that raises the risk of a short squeeze.

Picked on March 13 at $ 44.75
Change since picked: + 0.04
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Follow Up on Technical Bottom Indications

From my OI SUBSCRIBER mailbag came the following e-mail:

"It seemed that your charts in your weekend Index column were out of date, but you predicted a new low would be made and it happened today. What did you see in price action so far that might confirm the things you said last week that would suggest a tradable bottom? I bought some calls today after the strong rally coming off a new low something I've heard from you before as bullish."

RESPONSE:
I didn't notice until the day after I wrote on Saturday that I was missing the last two days of this past week's price data. My software stopped updating and I was jetlagged (in Spain) without Friday's date in my mind. Shows what happens when you're not trading that week! Fortunately, I was concentrated on seeing the PATTERN being traced out and thinking that we had NOT seen a final low. As to a low for this correction, it MAY have come today. I'll give my take on some of the technical aspects that could suggest that that's the case.

** E-MAIL QUESTIONS/COMMENTS **
As you can see I don't have any good ideas of my own that a Subscriber doesn't put in my head! Please send any technical and Index-related questions for answer in any of my articles to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

The following chart is from my LAST WEEK'S Trader's Corner column so yes, THIS chart reflects the close as of 3/7 and is for illustration of a pattern I was looking to develop from that time forward. I'll follow this with the same Index (SPX) chart, reflecting prices through TODAY:

FROM MY LAST WEEK'S TRADER'S CORNER:
THE COMMON CORRECTIVE PATTERN OF A LOWER SECOND LOW


HERE'S HOW THE SAME DOWN-UP-DOWN (ZIGZAG) PATTERN LOOKED THROUGH TODAY:
I thought a next low might carry the S&P 500 (as seen below) toward the 1340 area or lower, but today's low in SPX looks like it be a bottom and low point for this current move. Sometimes the second downswing will equal a move that is MORE than the first decline. This would be the 'classic' A-B-C corrective wave pattern in (Elliott) wave terms, but the PATTERN is consistent: a first decline, a rebound that retraces at least half of the first downswing, followed by another sharp decline that carries prices to a lower low; typically on technical selling and preset 'stops' or exit points, particularly in the index futures contract.

Some other things that tend to occur at bottoms could include the following (technical) aspects and are updates from my Trader's Corner article of last Wednesday (3/7) and which can be seen by going back to that day's Option Investor (OI) Newsletter or by clicking here.

FINDING SUPPORT AT A PRIOR LOW PLUS RETRACEMENT CONSIDERATIONS
As can be seen in the SPX chart above, this occurred at a significant prior low from early-November. This is not the 'most' significant past low but it is distinct and occurred before the market had another upside run of a few weeks. Interesting, the recent rebound high occurred in the area of a cluster of prior lows in Dec-Jan. before SPX took off again. Prior lows can offer support. Prior lows that are pierced, can 'become' resistance later on. Sorry, I am mostly focusing on significant prior lows as later support. Looking at another Index chart, or a market 'Average' in the case of the Dow 30 (INDU) as it's a price-weighted average not an index:

This wasn't my primary point, but notice how the rebound off the first low carried back to the area of some prior lows around 12,337 in the Dow Industrial Average. My primary point is what I noted in my Index Trader column of Saturday (3/10) where I was looking for major support in INDU in the 12,000 area. The even 10 and 100 levels in stocks and other lower priced indexes/sector indices; or the 1,000 levels in the case of the Dow Jones, are often very significant as support or resistance.

The other significant aspect of the 12000 area is that it is the approximate area where INDU retraced 38 percent of its last big run up, from July '06 to the February '07 peak. In a strong market or in a strong advance, a fibonacci 38% retracement is about as much as will be seen. In a more normal trend, one simply rising (or falling) at a more modest rate over time, its somewhat more common to see a one-half/50 percent retracement or even to see a retracement of the prior move equal to 62-66 percent.

The other pattern seen in the Dow, as outlined above, is a so-called bearish rising wedge pattern, which is the pie shaped upward sloping triangle. This is basically where buyers and sellers get enough in balance so that the price swings narrow in and the distance between rally peaks and pullback lows covers less and less ground; this is a type of 'compression'. Compression in an Index or a stock is usually followed by EXPANSION and the next price swing carries significantly further than the preceding back and forth movement, usually in a reverse direction. [A downward sloping wedge pattern often suggests a substantial bullish upside reversal ahead.]

The note I made on the chart above about the upward sloping wedge is there is also a 'measuring' implication for a corrective move as being to at least back to the start of the wedge pattern. This has been seen already, which is another small indication that the market may have seen its low already.

EXTREMES IN THE OVERBOUGHT/OVERSOLD TYPE INDICATORS

Overbought/oversold type indicators like the Relative Strength Index (RSI) usually don't provide traders with a lot of help in making entry and exit decisions when there is a VERY strong trend with only limited or shallow corrections. This is because in an uptrend for example, the market gets 'overbought' in terms of these type indicators and stays that way; or, at least, doesn't get 'oversold' for very long periods.

However, given the sharpness of the recent break, I fully expected the lead S&P Index (the 500) to get 'fully' oversold again, not only on a daily chart basis but on a weekly chart basis. Going back to the same S&P 500 (SPX) chart seen above, I could point out the following about the RSI, at least on a 13-day basis. I tend to use a 'length' setting of 13 (a fibonacci number in the fibonacci number series from 5 to 8, 13, 21, etc.

As can be seen from the (13-day) RSI above, we got at least ONE 'oversold' reading in the RSI. In a bull market and I assume that this market is still in a bull mode (unless it starts Closing under SPX 1300), we wouldn't normally see a series of dips into 'oversold' readings; i.e., below 30. The weekly chart can be the most telling in terms of overbought/oversold indications in a strongly trending market. On weekly charts I most often use a length setting of "8". Sometimes 13, but my most common selection is 8 on weekly charts. (21 for hourly charts always.)

Using the longer-range Weekly chart for the same SPX Index shown below, I've applied the RSI with a setting of 8, to measure the rate of change up or down for a 2-month time frame. You'll see with the weekly RSI indicator that this recent pullback put the RSI down to 40. While the classic definition and common 'default' setting for suggesting an oversold condition is 30, its necessary to adjust this level line upward in a strong bull market trend; e.g., to 35 t0 40.

On the way I've 'defined' the oversold zone for the weekly Relative Strength Index above, the recent weekly close registered an 'oversold' situation and something of a 'minimum' to me in suggesting that SPX may have reached a tradable low. While in a strongly upward trending market, there tends to be an 'early', often quite premature, oversold extreme; as suggested by the RSI chart highlighted above. An 'early' oversold reading in a strong bull market trend is not often the case with readings on the low end of this indicator. Of course, if SPX fell back to its long-term weekly up trendline seen above, most likely there would be an even lower extreme in the RSI indicator, perhaps even on a 13-week basis.

I made the point last week also that I anticipated ANOTHER low in bullish sentiment per my indicator and seen next with the S&P 100 (OEX) chart.

MARKET 'SENTIMENT' CONSIDERATIONS IN A CORRECTIVE LOW(S)

THESE WERE MY TRADER'S CORNER COMMENTS FROM LAST WEEK:
"Often, the first low of a big correction like we've seen will be preceded by at least a 1-day bearish extreme in sentiment or the outlook for the market ahead, which I measure as occurring when total volume of CBOE equities calls is down to 1.1 times (or less) of the total put volume traded that day. This is seen graphically in my (CBOE) equities call to put daily volume ratio seen above noted at the green up arrow. As soon as the lower extreme in this ratio occurred, the next day brought a tradable low and the beginning of this recent rebound.

The sharpness of the recent correction and the fact that my sentiment indicator has rebounded quickly, suggests to me that there will be another low, perhaps a lower one, that is showing an 'oversold extreme' in this indicator. Stay tuned on that!"

Well, it's time to TUNE INTO this indicator again a week later and see how option traders as a group are go very good at picking reversals, but in a CONTRARIAN sense! If they are overly bearish, a market bottom often follows within 1-5 trading days. Overly bullish for long enough: look for a top.

Before skipping down to the bottom of this chart of the S&P 100 (OEX), I would just note that the yellow circle indicated a trendline that I thought in my weekend comments might mark a next significant support in the 625 area. Hey, all you need is a ruler, straight edge or an opened up matchbook!

Well, I'll be darned indeed, the ratio of total daily CBOE volume for equities option calls relative to daily put volume was under the 1.1 level that typically suggests that an upside reversal should be 1-5 days away. It was 1-day in this most recent instance and 1-day in the instance before yesterday's reading; these readings are noted at the green up arrows on the "CPRATIO" indicator above. Not much more to say about this. I bought OEX calls on a 'sentiment' basis, the fact of the fall to 625 and likely trendline support, as well as an oversold condition showing on the 21-hour, 13-day and 8-week RSI. Well, it's one thing to buy em and another to wind up with a profit, but so far so good.

LAST BUT NOT LEAST...
KEY REVERSALS/BEAR TRAP REVERSALS
People define them in different ways, but I usually define a 'key' upside reversal as a move to a decisive new low, followed by a Close that is above the prior 1-2 days HIGH. Others define key or a just plain upside 'reversal' pattern as a move to a decisive new low, followed by a close that is above the prior 1-2 days Closing level(s); e.g., a 1-day upside reversal. The pattern seen above with OEX or below with the Nasdaq Composite (COMP) below qualifies as a 1-day upside reversal in these terms. The key reversal, a Close above the prior day's High, is more rare.

There is another way to define upside (or downside) reversals as bull or bear 'trap' reversals, as defined by my old friend Jack Schwager. This is an interesting/insightful way to look at a reversal pattern. In a bear trap reversal ('traps' the bears so to speak), there is a move to decisive new low, followed by an immediate (same hour, same day, same week, etc.) upside reversal that soars above (at least) the prior day's Close. [A bull trap reversal is the opposite: after a period of rising prices, a move to a decisive new high is followed by a fairly immediate collapse in prices.]

The bull trap (upside) reversal seen in the COMP chart above is typical of all the indices. The fact that today's COMP low exactly equaled a 38 percent retracement was another powerful factor in suggesting that a ride on the call side of Nasdaq could have a good risk to reward equation; e.g., 'risking' to just under the prior Nasdaq 100 (NDX) low at 1710 (and a minor double bottom) for NDX calls, just under 42 in QQQQ or to just below 760 in the Russell 2000 (RUT) in terms of call purchases.

GOOD TRADING SUCCESS!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.
 

Today's Newsletter Notes: Market Wrap by Keene H. Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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