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Daily Newsletter, Saturday, 03/17/2007

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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

Quadruple Waiting

Quadruple witching turned into quadruple waiting on Friday. After 30 min of record volume at the open the rest of the day turned into a very slow and lackluster day in the markets. After Wednesday's high volatility rebound traders were hoping for a continued move higher. What they got was a flat Thursday and a dreary Friday. Quadruple witching and an S&P rebalance at the close failed to provide any momentum in either direction.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday's economics were about as lackluster as the markets. The Consumer Price Index (CPI) had a headline number at +0.4% that doubled estimates for only a 0.2% rise. Helping to push the headline number higher was a sharp +0.9% jump in energy prices. The core rate of inflation came in at +0.2% and right inline with expectations. Core CPI for the full year is now 2.7% and well above the Fed's inflation target but well under the cyclical peak of 3.6% seen last May. Energy prices are up +14.7% on an annualized basis and continuing to push prices higher on a broad array of goods. This was a positive report despite the headline number being higher than expected. The continued moderation in the core CPI should keep the Fed on the sidelines for several more months.

Industrial Production spiked +1.0% to an eight month high and completely reversed the -0.3% decline in January. Capacity utilization rose +0.6% to 82.0 and a six-month high. While this may sound like the rebound is picking up speed the gain instead was due to very cold weather. The utility component rose +6.7% for the month as cold weather produced a heavy demand for electricity and natural gas. Natural gas utilities saw demand jump +11% for the month while electric utilities rose +5.9%. I did not hear anybody in the mainstream press pointing out these facts as they reported on the surge in Industrial Production all day on Friday. The headline number would have shown a slight gain even without the utility component thanks to gains in autos, auto parts, computers and electronics.

The constant chatter in the news about the subprime loan implosion knocked -2.5 points off Consumer Sentiment for March taking the headline number back down to 88.8. That is the lowest level for sentiment since the 85.4 in September. There were declines in both the present conditions and expectations components. Fear of falling housing values and the difficulty of refinancing current subprime loans helped drag the index lower. Rising gasoline prices also put a crimp in consumer attitudes.

The calendar for next week is very sparse and weighted heavily to the housing sector. There are three housing reports, which will be scrutinized heavily given the subprime meltdown. The Fed begins a two-day meeting on Tuesday and is expected to leave rates unchanged through July assuming there is no material economic change in the coming months. Still, the Fed announcement at 2:15 on Wednesday will provide additional market volatility as analysts try to second-guess the announcement language.

Economic Calendar

The quadruple witching event produced record volume on the NYSE for the first 30 min. This was due primarily to the expiration games on the S&P as market makers tried to pin the opening tick to 1400 so as many options as possible would expire worthless. Looks like they did a good job since 1397.51 was the high for the day on that opening settlement spike. At the close volume spiked again as the quarterly S&P rebalance occurred. Companies with large buyback programs like Exxon and Pfizer bought back enough stock during the quarter to change their S&P weighting. Funds indexed to the S&P had to reduce their holdings in these stocks to remain in balance. Some of that rebalance occurred at the open as well. For instance Pfizer traded nearly 11 million shares on the opening tick as fund managers took advantage of the S&P expiration games to sell into the opening spike. Exxon traded nearly 9 million shares on the opening tick. Hewlett Packard (HPQ) announced the biggest stock buyback in history at $8 billion. This is in addition to the $3.3 billion remaining on its prior $6 billion repurchase plan.

The subprime problem continued to take center stage with several lenders seeing stock gains for the second consecutive day. IndyMac Bancorp (NDE) released an announcement saying they were a Prime/Alt-A lender not a subprime lender as they had been characterized in the press many times recently. NDE said only 3% of its $90 billion loan portfolio is subprime paper. This does not even rank them in the top 25 in the country. S&P just upgraded the NDE portfolio from above average to "strong" and the highest level available. At the same time a different S&P analyst cut NDE to a sell with a price target of $26 but that is only -$2 below their current price. NDE said that despite their portfolio being strong they still expected defaults to rise from the current 0.63% to as much as 1.5%-2% by years end. This shows how the current default rate in subprime is expected to move up the credit ladder as standards toughen and adjustable rate mortgages continue to reset.

Bear Stearns, a major loan securitizer, posted earnings of $554 million for an increase of +8%. An S&P analyst said BSC still had exposure to the subprime problem but like any other problem there was money to be made for those quick to react. BSC could end up producing record revenues in the distressed debt sector as those companies in trouble sell off loans for substantial discounts to raise cash. S&P believes that the subprime problem has been blown out of proportion and this could be an opportunity for aggressive banks.

Accredited Financial (LEND) said it was going to sell $2.7 billion in subprime loans at a discount to free up cash so it could cover margin calls. LEND jumped +15% on the news. Fremont General (FMT) gained +20% after Credit Suisse boosted its credit line by $1 billion.

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Builders continued their plunge last week as fears of slowing sales and excess existing home inventories from foreclosed loans weighed on the sector. Nearly every day some builder repeats the familiar refrain that it may be too soon to call a bottom and the recovery will not be robust. The Center for Responsible Lending expects 2.2 million people to lose their homes either by forced sale or foreclosure. Adding those homes to the current inventory surplus will push prices lower. Add in the stricter lending policies we have today and to go into force on Sept-1st and that takes another 500,000 or more buyers, up to 25% of the buying pool, out of the market. Falling home prices will make home equity loans more difficult to get. Home equity loans have been the backbone of consumer buying since 2001. We have already seen how consumer confidence/sentiment has fallen on worries about falling home prices. High risk loans known as exploding ARMS, piggyback loans, liar loans (stated income) and no doc loans accounted for 47% of the total loans written in 2006. According to the IRS nearly 60% of those borrowers overstated their income by more than 50%. That means when the payments get tight they do not have the income to make up the difference.

Greenspan made news again on Thursday when he said the subprime shakeout will worsen. He said the mortgage defaults would spread to other areas of the economy, especially if home prices decline. Is Greenspan having a late life crisis? What do you suppose is prompting him to suddenly see himself as a harbinger of doom? Somebody needs to remind him that he is no longer in power and his comments are having a negative impact on the markets.

Private equity group Blackstone shocked Wall Street by saying it was planning on going public. Since Blackstone has made a career taking public companies private it was a shocker to think they would want to take on the regulation and reporting restrictions of a public company. Blackstone has purchased 85 companies for something over $150 billion in the last ten years. The two partners who started the firm with $200,000 each stand to make billions with a successful IPO. The value of the company could be as high as $30 billion according to some analysts. Not a bad return on your $200K investment. Hedge fund Fortress Investment Group (FIG), which made news with its IPO in early February, traded as high as $37 on opening day and has traded as low as $23.34 last week. That 33% haircut suggests the bright flame of IPO interest fades quickly once reality returns. As a public company they will quickly find the quarterly earnings reports may produce a crisis of confidence since investors are quick to judge a company's entire worth on their most current set of numbers.

The flow of deals has had a positive impact on the market since it indicates continued bullish sentiment. The CBOT was the target of a $9.9 billion unsolicited bid from the Intercontinental Exchange (ICE) that threatened to derail the current deal between the CBOT and CME. As long as M&A deals continue to be announced the long-term outlook for the market should remain bullish.

Wal-Mart said it cancelled plans to start a bank after months of contentious debate. Various groups feared Wal-Mart would severely dent the banking system with its low cost approach to everything. I think it would be a good idea to have Wal-Mart start a bank. Maybe it would eventually drive down the outrageous fees most banks currently charge.

April Crude Oil Chart - Daily

Oil prices continued their seven-day slide to close at $57. The OPEC meeting has come and gone and there was no effort to change production targets. Nobody expected it but evidently some traders were hoping for some production cut comments. Gasoline continued to hold at multi month highs ahead of the coming driving season. With falling oil prices and rising gasoline prices the refiners are going to be printing money.

Stock traders are not printing money and likely are seeing erosion in their accounts. The Dow set a new five-month low at 11940 on Wednesday followed by a sharp rebound to 12185. Unfortunately that 12185 level held as resistance on Thursday and Friday's decline took us back to support at 12100. This is likely to be weak support after last week's dip. That is unfortunate since the dip to 11940 was the last material support point dating back to early November. I would bet today that we are going to see that support broken. The dip to 11940 was a lower low than the March 5th low at 12039 and sets up the very real potential that we will need another dip to establish a bottom. As long as each dip continues to set a lower low that bottom has not formed. Traders are now looking for a retest of the prior low that does not penetrate as a sign that buyers have gathered to form a bottom. The dip to the Dow lows was a -6.6% retracement off the 12795 high. I am beginning to believe that we may see a full 10% correction and that would take us to 11515. We are approaching the place on the calendar where earnings warnings for Q1 will begin making news. Given the current softness in the markets a few key warnings could give us that last little push we need to break below 12000 for real.

The Nasdaq is in better shape than the Dow with Wednesday's dip to 2331 still above decent support at 2325. This would be the next real test for tech stocks. We are seeing some strength in semiconductors despite disappointing guidance from Texas Instruments. This would suggest there is buyer interest in techs but everyone is just cautious. At the Nasdaq low last week the index had fallen -7.9% from its high. A 10% retracement would take it to 2277 but that would require a break of that strong support at 2325. A break there could further sour sentiment, which could setup a potential target of 2200.

The S&P traded as low as 1364 last week before rebounding to find new resistance formed at 1395. I could see the S&P respect that 1364 level because there are several support zones from 1364 to its Friday close just over 1385. The Russell and the NYSE Composite are continuing to show a more bullish chart than the other indexes. Neither declined as low in relative terms as the Dow, Nasdaq and S&P and both held up better on Friday. I still don't see evidence of new fund buying but funds are not bailing on the small caps and that is a bullish point for the overall market.

S&P-500 Chart - Daily

Russell-2000 Chart - Daily

The biggest challenge is the break of the 100-day average on all of the indexes. Because I am using the Russell as our sentiment indicator the movement around this average is more critical. The Russell first broke below the 100-day at 785 on March 1st. It has fought to climb back over that level but has been unsuccessful. For me this is the sentiment indicator to watch. A break above it means the small caps are being bought again and fund managers are coming back into the market. A further move below that level is consolidation as long as it stays above 760. A move below 760 means more trouble ahead.

The housing sector will be front and center next week and even with positive reports there is likely to be more subprime news to push builders lower. As always the 2:15 release of the FOMC announcement on Wednesday will provide volatility but there is a possibility for a change in the statement. Given the Greenspan comments Bernanke may want to polish the statement slightly to produce a more positive spin. That could give added support to the indexes but you may need a secret decoder ring to decipher the message.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL ERTS None
CELG    

New Calls

Apple Inc. - AAPL - cls: 89.59 chg: +0.02 stop: 87.49

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and iLife and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online store. (source: company press release or website)

Why We Like It:
AAPL tends to march to the beat of its own drum and that's why shares may still make an attractive call candidate even though the major market indices look vulnerable to more selling. The stock has been creeping higher the last few weeks and is now challenging resistance in the $90.00-91.00 range. If AAPL can trade over $91.00 it would reverse its Point & Figure chart into a new buy signal. Therefore we are suggesting a trigger to buy calls at $91.01. We do want traders to note that the bottom of its January gap down, near $92, might be resistance so AAPL may bounce around the $90-92 range for a little while. If triggered at $91.01 our target is the $97.50-100.00 range.

Suggested Options:
We are suggesting the April calls but would prefer to buy Mays if they were available. Our suggested entry point is $91.01.

BUY CALL APR 90.00 QAA-DR open interest=81446 current ask $3.00
BUY CALL APR 95.00 QAA-DS open interest=71901 current ask $1.20

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

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Celgene - CELG - close: 52.02 chg: +0.87 stop: 49.45

Company Description:
Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation. (source: company press release or website)

Why We Like It:
We are labeling this an aggressive play. CELG's P&F chart is bearish and the BTK biotech index doesn't look super healthy. Meanwhile the DRG drug index is looking weak. Yet CELG has been consolidating sideways the past couple of weeks and appears to have built a base above the $50 level and its 200-dma. The last time CELG tested its 200-dma, it proved to be a great entry point for new bullish positions. We also noticed that volume is picking up on the rebound and shares rose 1.7% on Friday, displaying some relative strength. We are suggesting a trigger to buy calls in CELG at $52.65. More conservative traders may want to wait for a rise past $53.00 and use a tighter stop loss. There is potential resistance with the 50-dma and 100-dma around $54-55 but we suspect CELG could make a run at its old highs. Our target is the $57.50-60.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the April calls. Our suggested entry point is $52.65.

BUY CALL APR 50.00 LQH-DJ open interest=11390 current ask $3.80
BUY CALL APR 55.00 LQH-DK open interest=20855 current ask $1.40

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million
 

New Puts

Electronic Arts - ERTS - cls: 48.92 chg: -1.07 stop: 51.55

Company Description:
Electronic Arts Inc. (EA), headquartered in Redwood City, California, is the world's leading interactive entertainment software company. Founded in 1982, the company develops, publishes, and distributes interactive software worldwide for videogame systems, personal computers, cellular handsets and the Internet. (source: company press release or website)

Why We Like It:
ERTS garnered some analysts' attention this past week. One analysts was bullish on the video game sector in general while another stated that ERTS was likely to have a worse than expected quarter. Usually we tend to be bullish on the game makers this time of year as investors look ahead to the annual E3 convention traditionally held in May. This year the E3 expo is scaling back and has been scheduled for July pushing back any pre-expo excitement. Given the bearish trend of lower highs (failed rallies) in ERTS we suspect the next move will be down. Last Thursday's failed rally under the 200-dma and the 2% drop on Friday looks like a new entry point to buy puts. If you prefer you might want to wait for a new March low under $48.40 before initiating positions. Our target is the $45.00-44.00 range near the July 2007 gap. The P&F chart looks pretty bearish with a failed rally under resistance and a $40 target.

Suggested Options:
We are suggesting the April puts although June puts would also work well.

BUY PUT APR 50.00 EZQ-PJ open interest=1602 current ask $2.25
BUY PUT APR 45.00 EZQ-PI open interest=1033 current ask $0.45

Picked on March 18 at $ 48.92
Change since picked: + 0.00
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 4.0 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

3 BODY-->

Call Updates

Allegheny Tech. - ATI - cls: 102.30 chg: -0.74 stop: 97.95

Metal stocks, like most of the market, failed to see any follow through higher this past Friday. The technical picture is currently mixed with both buy signals and sell signals depending on what time period and what indicator you look at. At this time we would expect a dip back toward $100 or the simple 50-dma, near $98.50. A bounce near either level ($100 or $98.50) could be used as a new entry point to buy calls. ATI is facing short-term resistance near $105. 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:
If ATI provides another entry point we'd suggest the April calls.

Picked on March 14 at $101.50
Change since picked: + 0.80
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

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Cigna - CI - close: 142.33 chg: +1.45 stop: 136.49 *new*

So far so good. Shares of CI continued to rally on Friday with the stock posting another 1% gain. More importantly the rally was fueled by strong volume and shares cleared what looked like potential resistance near $141. We're not suggesting new positions at this time but a dip near $140 could be used as an entry point. More conservative traders who bought the dip near $137.50 might want consider taking some profits now. However, there doesn't appear to be any obstacles between here and the $145 region. Our target is the $145.00-146.00 range. Please note that we're raising the stop loss to $136.49, near technical support at the 50-dma.

Suggested Options:
We're not suggesting new positions now but if CI provides another entry point then we'd suggest the April calls.

Picked on March 13 at $137.49
Change since picked: + 4.84
Earnings Date 05/09/07 (unconfirmed)
Average Daily Volume = 759 thousand

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ConocoPhillips - COP - cls: 65.34 chg: -1.18 stop: 65.74

Blame it on the futures expiration. That's what some market pundits were blaming the late afternoon sell-off in crude oil on Friday. They claim that traders were exciting the current contracts ahead of expiration in preparation to buy the next month's contracts. If this is the case then the weakness in oil stocks may be a temporary buying opportunity. However, we would remain cautious. Aggressive traders might want to consider buying a bounce in COP near what should be support at the $65 level and its 200-dma. We are going to stick to our plan for now. 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. FYI: Considering the trendline of support that COP has near the $65 level we're going to keep a close eye on it. A strong bounce from $65 on good volume would be tempting just adjust the stop loss to under the trendline and the 200-dma.

Suggested Options:
If COP hits our trigger at $69.01 then we'd suggest the April or May calls.

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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ESSEX Prop. - ESS - cls: 128.46 chg: -1.38 stop: 125.95

ESS continues to trade sideways between resistance near $130 and support near $125 and its rising 200-dma. Our concern is that ESS as unable to breakout past the $130.00-130.25 zone. That leaves the stock ripe for a pullback toward support near $125. Our stop loss is at $125.95. More aggressive traders may want to widen their stop and put it under $125. We are not suggesting new bullish positions unless ESS can trade over $130.25. Even if ESS breaks out from its current two-week consolidation pattern the stock will encounter potential technical resistance at its 100-dma and 50-dma between $130 and $140. We reiterate our caution about starting new bullish plays. Our target is the $137.00-140.00 zone.

Suggested Options:
We are not suggesting new positions at this time unless ESS can breakout over $130.25.

Picked on March 12 at $130.26
Change since picked: - 1.80
Earnings Date 02/07/07 (confirmed)
Average Daily Volume = 196 thousand

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Holly Corp. - HOC - cls: 56.98 chg: +0.03 stop: 54.95

Oil stocks struggled on Friday as crude oil futures plunged in late afternoon trading, presumably on traders exiting the current futures contract before expiration. Shares of HOC held up relatively well and still managed to close in the green. We are suggesting new bullish positions in the $56-58 range. Readers can choose to buy a dip near $56 or a breakout over $58. Considering the current market environment we'd probably wait for a bounce or some show of strength before opening positions. 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=1843 current ask $3.40
BUY CALL APR 60.00 HOC-DL open interest= 558 current ask $1.05

Picked on March 14 at $ 57.87
Change since picked: - 0.89
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand

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Accredited Home Lenders - LEND - cls: 10.90 chg: +1.47 stop: n/a

Shares of LEND gapped open higher again and hit an intraday high of $13.75 before sliding back to close with a 15.5% gain. Driving the rally on Friday was more short covering and news that LEND would sell about $2.7 billion in loans at a discount so it could meet its margin calls. Our initial plan was to hold any call options until after the company announced any takeover news. We're only speculating that someone will make a bid for LEND but it's a big topic on Wall Street these days and the company did announce that they were "exploring" strategic options. The stock has risen substantially over the past couple of sessions and some traders may want to go ahead and take some profit off the table. We hesitate to open new plays here even though the strategy remains the same. Remember, this is a high-risk lottery play, but we might just exit early if LEND can rebound toward $14.50-15.00.

Suggested Options:
We're not suggesting new plays at this time.

Picked on March 14 at $ 6.04
Change since picked: + 4.86
Earnings Date 05/16/07 (unconfirmed)
Average Daily Volume = 3.0 million

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New Century - NEWC - close: 2.34 chg: +0.99 stop: n/a

The short-covering and oversold bounce in the sub-prime lenders continued into Friday. Shares of NEWC rose more than 73% and on huge volume. There could still be a good chance that someone will announce a buyout of NEWC but we hesitate to suggest new positions. This remains a very high-risk, speculative play. Given the big bounce we're not going to drop the stock from the newsletter yet.

Suggested Options:
We're not suggesting new plays in NEWC at this time.

Picked on March 11 at $ 3.21
Change since picked: - 0.87
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million

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Sunoco - SUN - close: 65.90 chg: -0.67 stop: 63.95

Oil stocks were a pocket of weakness on Friday but we're not willing to count them out of the rally yet. Shares of SUN pull back toward what should be technical support near its simple 200-dma. Aggressive traders may want to buy a bounce from here. We're going to stick to our plan, which suggests using a trigger to buy calls 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. As a refiner, SUN, should do very well over the summer driving season and investors should eventually begin buying ahead of the summer quarter.

Suggested Options:
If SUN hits our trigger to buy calls then we'd suggest the April or May calls.

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

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Molson Coors - TAP - cls: 88.83 chg: +0.98 stop: 84.49 *new*

An analyst upgrade on Friday morning helped send TAP to a new all-time high. Shares gapped open at $89.00 and traded to $89.67 before settling at a 1.1% gain. We remain bullish on the stock but would not suggesting new positions right here with shares under potential resistance at $90.00. If you're looking for an entry point consider buying a dip near $88.00 or $87.50. We are adjusting our stop loss to $84.49. Our target is the $92.50-95.00 range. The P&F chart is very bullish with a bullish triangle breakout buy signal that forecasts a $134 price target.

Suggested Options:
If TAP provides another entry point, we'd suggest the April calls.

Picked on March 14 at $ 87.15
Change since picked: + 1.68
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 782 thousand
 

Put Updates

Ashland Inc. - ASH - cls: 63.00 chg: -1.03 stop: 66.05 *new*

The oversold bounce in ASH stumbled on Friday. Shares reversed course and closed down 1.6%. Volume wasn't very high so it's tough to put a lot of emphasis behind today's move but the lack of follow through higher is still bearish. If you want to open new positions here we would use a much tighter stop loss. Speaking of stop losses we're going to adjust ours to $66.05. Our target is the $60.50-60.00 range.

Suggested Options:
Traders could buy the April puts to open new plays but we'd use a tighter stop.

Picked on March 04 at $ 65.82
Change since picked: - 2.82
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 770 thousand

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Bausch Lomb - BOL - cls: 49.51 change: -1.04 stop: 52.51

That's close enough! We're suggesting new put positions right here. We've been watching BOL for the last couple of weeks and waiting for a breakdown under support at the $50.00 mark. Our suggested trigger to buy puts was at $49.49. Friday's technical breakdown didn't hit our trigger because the intraday low was $49.51. However, that's close enough for us and we're suggesting new plays now. Our target is the $44.00-42.50 range but we want to warn readers that BOL may find some support near $47.50 and its December 2006 low.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 50.00 BOL-PJ open interest=5788 current ask $1.75
BUY PUT APR 45.00 BOL-PI open interest=1953 current ask $0.35

Picked on March 18 at $ 49.51
Change since picked: + 0.00
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume = 678 thousand

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Beazer Homes - BZH - close: 32.37 chg: -0.42 stop: 36.25*new*

There has been no reprieve for the homebuilders. The group continued to sink on Friday as investors fear that a liquidity crunch and tightening loan standards will impact new home sales. Shares of BZH produced a minor failed rally and closed down 1.2%. Probably the most important statistic for BZH on Friday was the big volume behind the decline. We remain bearish but hesitate to suggest new positions right here. Please note our new stop loss at $36.25. Our target is the $30.50-30.00 range. FYI: 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.

Suggested Options:
We're not suggesting new positions at this time.

Picked on March 12 at $ 34.20
Change since picked: - 1.83
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.2 million

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Harman Intl - HAR - close: 97.31 change: -1.32 stop: 102.01

HAR failed to see any follow through on last Wednesday's bounce. That's good news for the bears and Friday's decline (reversal) looks like a new entry point to buy puts. If you don't feel like buying puts here then consider waiting for a breakdown under technical support at its exponential 200-dma near $96.40. 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.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 100.00 HAR-PY open interest=2295 current ask $4.30
BUY PUT APR 95.00 HAR-PS open interest= 986 current ask $1.90

Picked on March 04 at $ 97.49
Change since picked: - 0.18
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 614 thousand

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MarineMax - HZO - close: 20.61 change: -0.43 stop: 22.59

The sell-off in HZO is starting to pick up speed. The stock closed down over 2% on Friday and hit an intraday low of $20.48. Shares of HZO are quickly approaching our target in the $20.25-20.00 range. More conservative traders may want to exit early right now. 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.

Suggested Options:
We are not suggesting new positions in HZO at this time.

Picked on February 11 at $ 22.59
Change since picked: - 1.98
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 300 thousand

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Ryland Group - RYL - close: 44.76 chg: -0.49 stop: 48.27

RYL is another homebuilder that has seen its oversold bounce run out of gas. Investors are still concerned about how the crash in the sub-prime lenders will impact home sales. Thursday and Friday's failed rally near its descending 10-dma and Friday's close back under the $45.00 level looks like a new entry point for puts. If you prefer you may want to wait for a new decline under $44.60 or $44.50 before initiating positions. More conservative traders may want to use a tighter stop loss. 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.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 50.00 RYL-PJ open interest= 9300 current ask $5.80
BUY PUT APR 47.50 RYL-PW open interest= 1307 current ask $3.90
BUY PUT APR 45.00 RYL-PI open interest=12764 current ask $2.35
BUY PUT APR 42.50 RYL-PV open interest= 2815 current ask $1.30
BUY PUT APR 40.00 RYL-PH open interest=11044 current ask $0.75

Picked on March 13 at $ 44.75
Change since picked: + 0.01
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.1 million
 

Strangle Updates

None
 

Dropped Calls

Carbo Ceramics - CRR - cls: 43.83 chg: -0.62 stop: 42.45

We are calling it quits on CRR. The stock has continued to slide and shares broke down under what should have been short-term support near $44.00 on Friday. We're suggesting an early exit now to cut our losses. We would keep an eye on CRR for a break out above $46 down the road.

Picked on March 11 at $ 45.55
Change since picked: - 1.72
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 458 thousand

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Noble Energy - NBL - close: 56.64 chg: -1.03 stop: 55.75

We remain relatively bullish on oil and oil stocks but NBL is showing a lot of relative weakness. The stock is breaking down from its two-month channel and many of the technical indicators are turning bearish. We'd rather exit early now and cut our losses. We will keep an eye on the stock for a bullish reversal down the road.

Picked on March 06 at $ 58.02
Change since picked: - 1.38
Earnings Date 05/24/07 (unconfirmed)
Average Daily Volume = 1.6 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Revisiting Nested Keltner Channels

A quirk in our website makes it difficult to access archived articles. That is, it's difficult unless one enjoys paging through old newsletters one by one, looking for something that might address the desired topic. When I began including intraday Keltner charts in my Thursday Wraps, readers asked for information. The only way to provide that information in any reasonable way is to revisit the topic in new articles. I will try to include new information that might benefit long-time subscribers, too, such as information on how I use Keltner channels to set up my credit spread trades. I literally would not trade without Keltner channels, so I hope readers old and new will glean something useful from studying them, too.

I won't be able to cover everything in a single article. However, I will go through the information in as few articles as possible.

I employ nested Keltner channels to determine where support or resistance might lie, make judgments about the strength of that support or resistance, and ask myself if/then questions that help me determine when my assumptions about the market might be confirmed or violated. I also use them to determine when markets are in a runaway mode, times when countertrend or so-called fading-the-move trades should not be attempted. Perhaps the manner in which Keltner channels helps me most resides in setting upside or downside targets if support or resistance is broken. This proved particularly helpful back when the Russell 2000 was hitting new highs earlier this year, and there wasn't any previous overhead supply to provide resistance. Where was resistance? Keltner channels helped me determine potential resistance levels.

The original purpose of Keltner channels was not included in that list, at least not as their presumed developer intended. Charles Keltner is credited with formulating these channels, considered a kind of moving-average envelope, for the purpose of identifying breakout moves that might be traded.

Keltner did not term these channels "Keltner channels." That's a name that traders using them have bestowed upon them. He called the system he developed that employed them the "Ten-Day Moving Average Trading Rule." He also did not claim that he was this indicator's developer. No one seems to know whether he was their developer or simply the person who first gave them enough press that they were noticed and used by others.

Although many traders abhor playing breakout moves, some old-time technical analysts believe that trading these breakout moves proves more profitable over the long run than trading the old buy-at-support/sell-at-resistance plays. However, traders must have enough patience, confidence in the ultimate long-term outcome and money in their trading account before they can capture that supposed long-term profitability. Trading breakout plays, hoping for long-term profitably, guarantees enduring long periods of whipsawed trades, one of the drawbacks of this type of trading pattern. Most of us just don't have all three of those characteristics. A series of nine whipsawed trades in a row would be more than most of us or our trading accounts could comfortably endure.

That's okay. We can use Keltner channels in many ways other than their intended use. I, too, want to identify breakout moves, for example, but my reasoning is different than Charles Keltner's. In my daytrading days, for example, I wanted to know when a move might be faded or when such a tactics was more dangerous than usual. Now that I trade differently, I want to know when an index is in a breakout mode and might blast through all the support or resistance levels between the current price and the sold strikes on my credit spreads.

I don't want to trade breakout moves. I want to know when to get out of their way.

Annotated 10-Minute Chart of the SML:

As is obvious, this wouldn't have been a particularly good setup for a long play on the breakout. It would likely have been one of those times when a trader going long would have been whipsawed out of a trade, and it points out one of the dangers of trading breakout moves. This time, the breakout instead served as a warning that an upside move off the 3/7 low had just about topped out.

However, if I had been considering a bearish scalp on the SML or RUT or one of their component stocks, I also would have been warned. In order for such a breakout to occur, the momentum in small caps must have been strong. That momentum renders oscillators such as the RSI almost useless. In this case, a bearish trader who entered a play early Thursday morning, as the upper channel line was tested, might not have even been shaken out of the play before the SML did indeed roll over and hit the central channel support again. However, what might have been intended as a scalp would have long turned into a daytrade as the trader waited out several hours until price began rolling down about 2:00. A more favorable entry, at least more favorable when frayed nerves are considered, could have been attempted as prices were sustained below the channel boundary again.

The channel pictured on that graph was based on a 120-period exponential moving average, not one of the moving averages that Charles Keltner used, a least not to my knowledge. I first discovered the settings I use in an article by Jerry Wawrzeniak ("The Case for Keltner Channels").

Keltner constructed these namesake channels around a central moving average, spacing the envelope around that moving average by a multiple of the average true range. The multiple employed on that channel pictured above is 7.2, and this is the widest of the three channels I typically employ.

It's possible to tinker around with the moving average, the multiple and the time frame to find a channel that contains most movements of the underlying trading vehicle. Until a new breakout occurs, that Keltner channel can then be coupled with an indicator such as RSI to trade the channel's parameters, employing a buy-low/sell-high approach.

If you're trading credit spreads and looking at a three-day or weekly chart instead of an intraday one, you could use Keltner channels to help determine where your credit spreads should be placed. Since these Keltner lines are dynamic and will move in the direction of price, I never place my sold strikes right at identified channel boundaries, but instead want to get outside them, allowing both for that dynamic quality and for any changes that might occur in the configuration of the channels during the time my spread might be working.

Remember that because of my family situation, which requires frequent and unscheduled times away from the markets due to a disabled family member, my articles are prepared in advance of their publication date and do not include current prices.

Annotated 10-Minute Chart of the SML:

I set up this channel, based on a 45-ema, by using a multiple of 3. This is the second widest of the channels I employ. On many indices, intraday moves during non-trending periods tend to be contained within this channel on the 7-minute, 10-minute or 15-minute charts. The time interval chosen tends to vary according to the index being watched. For a period during late February and early March, the SML and the Russell 2000 tended to stay within the boundaries of this channel on the 10-minute chart on the quiet days between breakouts.

The channel can be watched on daily or other intervals, too.

Annotated 3-Day Chart of the SML:

You might be thinking that's no great trick. The 45-ema channel on the 10-minute chart (not the 3-day one immediately above) has flattened, and you might as well draw straight trendlines across the chart to determine where support or resistance might lie as go to the bother of constructing Keltner channels. It's true that on a trend-less day, the channels tend to go horizontal after a period of time. However, that flattening of the channel does not render it useless. The flattening provides information that the current movement is without trend.

An upturning or downturning channel also often contains price movement, but such changes in direction of the channels can alert traders to watch out for breakout moves and not to assume that channel resistance or support will hold.

Annotated 3-Day Chart of SML:

These charts have introduced ideas about using Keltner channels to pinpoint breakouts and determine support and resistance, but that second topic is far from exhausted. That topic will be covered further in the Trader's Corner article next weekend, and discussions about setting targets will be added.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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