Option Investor

Daily Newsletter, Monday, 03/26/2007

Printer friendly version

Table of Contents

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

Market Wrap

Weaker, yet stronger-than-expected...

After opening flat, the major indexes darted lower at 10:00 AM EDT on a weaker-than-forecasted February new home sales report, but by 11:00 AM, the major indexes began reversing losses to finish mixed with technology and miners offsetting weakness in homebuilders and transports.

The broader S&P Depository Receipts (AMEX:SPY) $143.20 -0.13% traded as low as $142.09 after the Commerce Department reported that sales of new single-family homes dropped 3.9% in February to a seasonally adjusted annual rate of 848,000 units, the slowest pace in nearly seven years. Consensus among economists was for sales to be at a steadier 990,000 annual rate.

Sales were notably weak in the Northeast and Midwest, to areas that were hit by snowstorms last months. The Commerce Department said sales fell 26.8% in the Northeast and were down 20.0% in the Midwest.

After plunging 25.8% in January, sales rebounded 24.6% in the West. February new home sales were down 7% in the South.

The decline in new home sales followed a sharper 15.8% decline in January, the biggest one-month decline in 13 years.

Meanwhile, the Commerce Department said the number of unsold homes jumped to 546,000 and that it would take 8.1 months to eliminate that backlog of unsold homes at February's sales pace. The 8.1 months supply is the longest period for this measurement in 16 years.

In today's Market Monitor at OptionInvestor.com, I showed the various months CME Housing futures contracts (May'07, Aug'07, Nov'07 and Feb'08). I thing/thought that the Nov'07 contract, which would encompass this spring/summer/fall season, which is also about 8 months of time, looks to be the benchmarking contract that "matches" today's revelation.

On Friday, the CME's Nov'07 housing futures had the Composite (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington DC) closing at contract lows of 212.00.

CME's Nov'07 Housing Futures - Dated Close Benchmarks

Due to limited width the above table is "squished," but a more readable version is displayed in the OptionInvestor.com Market Monitor today.

On 02/08/07 and then on 02/21/07 I benchmarked those dates to the news out of subprime lenders New Century Financial (trading on the "pink sheets"), as well as Novastar Financial (NYSE:NFI) $5.34 -8.08%. On 02/27/07, the S&P 500 (SPX.X) plunged 3.5% to close at 1,399.04.

I think one commentator was speaking tongue-in-cheek today when saying he was "shocked" by today's figures. Shock could really set in should the Nov'07 CME Housing futures Composite break above the 217.80 level and 02/13/07 benchmark.

Certainly some eyebrows are rising with the S&P 500 Index (SPX.X) 1,437.50 +0.09% now up just more than 38 points from its 02/27/07 close.

My eyebrows rose late this afternoon as the SPX/SPY got back in the green.

U.S. Market Watch - 03/26/07 Close

In last Monday's Market Wrap, I spotlighted crude oil, thinking oil traders might start getting bullish.

The U.S. Oil Fund (AMEX:USO) $51.17 +1.18% does depict that scenario playing out to an energy bull's liking. In today's OptionInvestor.com Market Monitor, I suggested that bulls long 1/2 positions, raise their stops to $49.74 to try and protect gains.

Undoubtedly exacerbating the rise in oil prices is heightened tensions between Iran and the West. Today, Iran said that the 15 U.K. naval personnel seized four days ago are well, but added that they could face legal proceedings and that it had no intention of using the naval personnel in any type of prisoner swap deal.

On Sunday, British Prime Minister Tony Blair called the seizure of the 15 sailors and marines "unjustified and wrong," saying that London saw their situation as "very serious."

SS&P Depository Receipts (SPY) - Daily Intervals

Equities have been volatile and some tionInvestor.com subscriber's observations regarding recent option action suggest call sellers were active late last week.

April "Max Pain" theory values have been quite volatile, seemingly changing on a daily basis, which makes some sense to this options trader. April's "Max Pain" theory has risen from $139 to $141 (at tonight's close) and with premiums having been "high" (VIX of 21 "high" relative to 12.5 readings), institutions that tend to be SELLERS of option premiums, may have the CALL side of their selling on the "wrong side" of the trade.

OOn 03/14/07, I had set up a March sell COVERED PUT trade just below the $137 level in the SPY, thinking the higher VIX and "jacked" premiums a good risk/reward trade for selling some premium, with just two (2) days of RISK. We just missed getting filled by about $0.10/contract, and boy has the SPY ramped higher since.

TThat "missed opportunity," but strong move higher in the SPY, has me thinking some institutional traders were also looking to sell premiums.


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

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

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

There was a notable IX and SPY correlation that took place today. Just when it looked like bulls got their horns trimmed on the new home sales data, the jump in the VIX hit a key institutional level where we'd monitor for put option SELLING/call option BUYING at its MONTHLY Pivot of 14.71 (see above U.S. Market Watch and VIX's intra-day high of 14.70). Then at important near-term VIX support and the institutionally monitored WEEKLY Pivot (13.33), the VIX did move below that level.

Here's an intra-day chart of the S&P Depository Receipts (AMEX:SPY), but instead of the conventional use of fibonacci retracement show above, I'll match it up with the VIX and tie together its MONTHLY Pivot, WEEKLY Pivot action.

I will also revisit the dollar/yen (USD/JPY) cross rate benchmarks, where the dollar has firmed, and shown some gains against the Japanese yen. We should remember that "one reason" the major market indexes around the world fell sharply in late February, was the sudden RISE in the yen against both the U.S. dollar and the euro!

SS&P Depository Receipts (SPY) - 60-minute intervals

A pivot trader looking just at a "longer-term" MONTHLY Pivot etracement should have expected institutional computers to SELL against MONTHLY Pivot ($142.12) after seeing February's action almost test MONTHLY S2, then trade MONTHLY S1 in March. In essence, institutional computers SHOULD have tried to get squared up at $142.12.

Last week's strong move above MONTHLY Pivot $142.12, finds BUYERS today! Even with so much "bad news" (rising oil prices, new home sales). As if computers were bound and determined to buy that level and SELL premiums, if observing the VIX.

I've marked three (3) observations of the USD/JPY, where I'd have to observe that any USD/JPY jitters from equity bulls have eased.

Over the last three trading sessions, the USD/JPY has closed 118.11, 118.11 and today's 118.13, so VERY LITTLE action.

MMarket Volatility Index (VIX) - 60-minute interval

It is one thing to see a broader-market index like the SPY "peg" a PIVOT, but in my opinion, today's "jump" right to a MONTHLY Pivot and reversal in the IX, even as a closely monitored February new home sales comes in much weaker than forecasted, strongly suggests to me that institutional computers, were already set to trade BULLISH. Either that, or the February new home sales data wasn't "weaker than expected."

Major Market Bullish % changes!

At tonight's close, I should also update some changes in StockCharts.com's major market bullish %.

On Thursday of last week, StockCharts.com's narrower S&P 100 Bullish % ($BPOEX) reversed back up to "bull confirmed" status at 70%, and saw a net gain of 2 stocks (or +2%) to reversing higher point and figure buy signals today to 72%.

In this evening's Market Monitor at OptionInvestor.com, I also noted that StockCharts.com's NASDAQ-100 Bullish % ($BPNDX) reversed back up to "bear correction" status at 62%, with a net gain of 2 stocks' (or +2%) point and figure charts showing reversing higher "buy signals."

II ran through some of today's percentage gainers for the NASDAQ-100 (NDX/QQQQ) and saw Lam Research (NASDAQ:LRCX) $48.08 +1.60% giving a reversing higher PnF "buy signal" at $48.00.

MedImmune (NASDAQ:MEDI) $34.61 +1.46% was another NASDAQ-100 component giving a reversing higher PnF buy signal when it traded $35.00.

One "news item" from a fundamental standpoint that may be of interest to computer-related technology stock traders was Microsoft (NASDAQ:MSFT) $28.22 +0.71% announcing today that it has sold 20 million copies of its new Vista operating system for consumers since its January launch, outpacing sales of earlier Windows versions.

Microsoft said it included the sales from Vista copies featured on new personal computers, individual box sales of the programs, upgrades and the coupons distributed by PC manufactures in the fourth quarter that provided free discounted upgrades to Vista customers who purchased machines between Oct'06 and March'07 (remember MSFT "delayed" its Vista launch last year).br>
The company said current trends indicate that more people are buying the higher-end version of Vista than past operating systems, noting that during the same time period, the earlier Windows XP sold about 17 million versions in 2002.

New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 95.85 chg: +2.33 stop: 88.85

Monday turned out to be a strong session for AAPL. The stock immediately reversed the widespread morning weakness and rallied to a new two-month high. More conservative traders may want to consider taking some profit off the table now. We are not suggesting new positions with AAPL this close to our $97.50-100.00 price target.

Picked on March 19 at $ 91.01
Change since picked: + 4.84
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million


Allegheny Tech. - ATI - cls: 108.62 chg: +0.61 stop: 105.75

ATI managed to post another gain in spite of the morning downdraft. Yet shares remain under resistance at the $110 level. More aggressive traders might want to consider buying today's bounce. We don't see any changes from our weekend comments. We're suggesting a trigger to buy calls at $110.26. If triggered our target is the $117.00-120.00 range. An alternative entry for the more nimble trader would be a dip near $105.00-106.00. FYI: The P&F chart points to a $123 target. We do not want to hold over the late April earnings report. Caution, we do see a bearish divergence between price and the MACD on the daily chart.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million


Boeing - BA - close: 90.83 chg: -0.15 stop: 88.95

News that Indonesian airline company, Garuda, had ordered 25 new planes from BA this morning may have helped stall any profit taking. Dow-component BA dropped with the rest of the market on the new-home sales numbers but shares of BA eventually bounced. We don't see any changes from our weekend comments. More aggressive traders might want to consider new positions now. We're going to stick to our plan, which is to wait for a breakout over resistance near $92.00. Our suggested entry point to buy calls is at $92.15. If triggered our target is the $99.50-100.00 range. We do not want to hold over the late April earnings report. The P&F chart is already bullish and points to a $107 target.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 4.2 million


Bunge Ltd. - BG - cls: 81.75 chg: +1.86 stop: 77.95

BG displayed a large amount of relative strength by resisting the market's sell-off this morning. Shares actually turned higher at the open, consolidated sideways and then rallied higher into the afternoon. Shares had broken past short-term resistance near $80.70 by the close and hit our entry point to buy calls at $80.75. Now that the play is open our target is the $85.00-85.50 range. We do not want to hold over the late April earnings report.

Picked on March 26 at $ 80.75
Change since picked: + 1.00
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 990 thousand


CACI Intl - CAI - cls: 48.09 chg: +0.09 stop: 46.64

Traders bought the dip in CAI near its 50-dma. The stock's afternoon bounce put it back in the green. Potentially boosting shares was news that CAI had won $ 59.8 million contract from the Missile Defense Agency. Today's rebound looks like a new entry point to buy calls. Or you can wait for a new rally past $48.50. More conservative traders may want to wait for a move over the January 18th high near $48.90 first. Our target is the $52.50 mark. We do not want to hold over the late April earnings. FYI: The P&F chart is still bearish from the big drop in January.

Picked on March 21 at $ 48.36
Change since picked: - 0.27
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 517 thousand


Chaparral Steel - CHAP - cls: 56.98 chg: +1.25 stop: 51.75

CHAP continues to show strength. The stock barely dipped during this morning's market weakness. By the closing bell shares had rallied 2.2% on strong volume. Our target is the $59.50-60.00 range. The P&F chart has a triple-top breakout buy signal with a $72 target.

Picked on March 25 at $ 55.73
Change since picked: + 1.25
Earnings Date 03/20/07 (confirmed)
Average Daily Volume = 627 thousand


Celgene - CELG - close: 54.00 chg: -1.02 stop: 49.95

CELG reversed course on Monday and never recovered. Shares closed down 1.8% while testing its 50-dma with its intraday lows. We would not be surprised to see a dip towards the 10-dma near $53.00. We're not suggesting new positions at this time. Our target is the $57.50-60.00 range. We do not want to hold over the late April earnings report.

Picked on March 19 at $ 52.65
Change since picked: + 1.35
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million


ConocoPhillips - COP - cls: 69.56 chg: +0.31 stop: 64.85

Growing tensions with Iran and the current hostage situation with 15 British forces pushed crude oil higher on Monday. Shares of COP inched up 0.4% but remains under the $70.00 mark. COP's breakout over $69 last week has produced a new quadruple top breakout buy signal on the Point & Figure chart with a $78 target. We're aiming for the $74.00-75.00 range. However, traders may want to wait for a dip toward $68.75-68.50 as a new entry point or look for a move over $70.00 as a new entry point. We do not want to hold over the late April earnings report.

Picked on March 20 at $ 66.31
Change since picked: + 3.25
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million


ESSEX Prop. - ESS - cls: 132.16 chg: -2.87 stop: 129.75

REITs were down sharply on Monday presumably on the worse than expected new-home sales figures. ESS had been up several days in a row so some profit taking is not a surprise. Watch for a bounce near its rising 10-dma (near $131.15) or a bounce near the $130 level as a new entry point. We see potential resistance at its 50-dma overhead so we're aiming for an exit in the $137.00-140.00 range.

Picked on March 12 at $130.26
Change since picked: + 1.90
Earnings Date 02/07/07 (confirmed)
Average Daily Volume = 196 thousand


Holly Corp. - HOC - cls: 60.81 chg: -0.56 stop: 56.45

Negative comments from a Deutsche Bank analyst on the oil refiners prompted some profit taking in the group. The analyst believes that margins will slide and suspects that the stocks will have little upside from here. HOC was not named specifically but investors decided to do some profit taking since HOC was at all-time highs. We are not suggesting new positions at this time. Our target is the $62.00-62.50 range.

Picked on March 14 at $ 57.87
Change since picked: + 2.94
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume = 651 thousand


Johnson Controls - JCI - cls: 94.90 chg: -0.78 stop: 93.99

The battle for control in JCI intensified on Monday. Shares spiked higher at the open and then plunged to technical support at its 50-dma near $94.00. JCI did pare its losses but the move today looks like a bearish engulfing candlestick pattern, which is usually seen as a bearish reversal. More conservative traders may want to exit early right now to cut their losses. We would not consider bullish positions until JCI traded above today's high at $96.64. Our short-term target is the $99.75-100.00 range. More aggressive traders may want to aim higher! We do not want to hold over the late April earnings report.

Picked on March 21 at $ 96.03
Change since picked: - 1.13
Earnings Date 04/20/07 (unconfirmed)
Average Daily Volume = million


Accredited Home Lenders - LEND - cls: 10.81 chg: -0.96 stop: n/a

News that Morgan Stanley (MS) has decided to auction off almost $2.5 billion in home mortgages that it received from New Century (NEWC.PK) that it sparked new bankruptcy fears for the sub-prime lenders. This send shares of LEND to a 8.1% decline. More conservative traders may want to exit immediately to protect any gains they have or at least consider placing a stop loss under the $10.00 level. We are not suggesting new positions. We are planning to exit on any take-out news or a rally into the $14-15 range.

Picked on March 14 at $ 6.04
Change since picked: + 4.77
Earnings Date 05/16/07 (unconfirmed)
Average Daily Volume = 3.0 million


Lockheed Martin - LMT - cls: 98.42 chg: -0.73 stop: 97.49

News that LMT had won a $260 million weapons deal from the U.S. Navy failed to move the stock price. We remain on the sidelines. Currently shares are consolidating under resistance at the $100.00 mark. We're suggesting a trigger to buy calls at $100.25. If triggered our short-term target is $104.85-105.00. More aggressive traders may want to aim higher since the P&F chart aims at a $128 target. We do not want to hold over the late April earnings report.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.8 million


New Century - NEWC - close: 1.56 chg: -0.44 stop: n/a

It was another rough day for NEWC (or NEWC.PK). The stock dropped 22% and gave back all of Friday's gains. Pulling the carpet out from under the stock price was news that Morgan Stanley (MS) had decided not to keep the $2.5 billion in mortgages it recently received from NEWC as payment for a $2.5 billion line of credit. MS announced it was auctioning off the loans and that sparked new fears that NEWC was closer to bankruptcy. We don't have very high expectations at this point. We initially added NEWC as a lottery ticket play with a big risk and big reward on the speculation that someone would step in and buy the company. So far that has failed to materialize. It could still happen but we wouldn't bet on it any further. Thus we're not suggesting new positions.

Picked on March 11 at $ 3.21
Change since picked: - 1.65
Earnings Date 11/02/06 (confirmed)
Average Daily Volume = 6.7 million


Sunoco - SUN - close: 70.73 chg: -0.43 stop: 65.65

Negative comments on the oil refiners from a Deutsche Bank analyst prompted some profit taking in SUN. The analyst believes that the oil refiners will see margins decrease and that shares were becoming fully valued. Volume on today's pull back in SUN was high but it's worth noting that SUN rebounded sharply from its lows. We see the intraday bounce as a new entry point to buy calls. The P&F chart is very bullish with an $82 target. Our target is the $74.00-75.00 range. Please note that we're adjusting the stop loss to $65.65.

Picked on March 20 at $ 68.15
Change since picked: + 2.58
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million

Put Updates

Bausch Lomb - BOL - cls: 49.50 change: -0.39 stop: 52.51

Another round of weakness in BOL, under resistance at the $50.00 level, looks like a new entry point for puts. More conservative traders can tighten their stops. 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.

Picked on March 18 at $ 49.51
Change since picked: - 0.01
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume = 678 thousand


Beazer Homes - BZH - close: 32.32 chg: -0.84 stop: 36.25

The market was very surprised by the new home sales numbers that came out this morning. Sales were worse than expected and it renewed concerns over the housing market. The DJUSHB home construction index lost 1.7%. Shares of BZH slipped 2.5% and near its March lows. More conservative traders may want to tighten their stops. 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.

Picked on March 12 at $ 34.20
Change since picked: - 1.88
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 1.2 million


Electronic Arts - ERTS - cls: 50.34 chg: +0.21 stop: 51.55

ERTS continues to churn sideways. The stock rebounded from its intraday lows but remains inside the pattern of lower highs and higher lows. We are suggesting readers wait for a new relative low under $48.70 before initiating new plays. Our target is the $45.15-44.00 range. In the news today ERTS announced that it was joining forces with Nettwerk One Music Ltd to form Artwerk a new music label.

Picked on March 18 at $ 48.92
Change since picked: + 1.42
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume = 4.0 million

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles


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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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

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

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives