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Daily Newsletter, Sunday, 04/08/2007

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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

Going To Be Exciting

Monday in the markets is going to be very exciting. There are no economic reports on Monday but Friday's employment surprise will be all the economic incentive traders will need. Several new events in the housing/mortgage sector will also be providing an incentive to trade. Friday may have been a market holiday but Monday is likely to make up for it.

Dow Chart - Daily

Nasdaq Chart - Daily


It was probably a good thing that the markets were closed on Friday given the surprise in the jobs numbers. Otherwise the on air analysts would have spent the day warning about future Fed rate hikes and the market may have reacted badly. On Monday investors will have had three days to ponder the jobs strength and what it means to our economic future. The headline number showed a gain of +180,000 jobs in March and well over most whisper numbers of 80K to 100K. The official consensus had risen to 165K by Thursday evening but finding an analyst who actually expected that large a number would have been tougher than finding Iranian insurgents in Iraq. All the major players were expecting another decline in hiring as the economy softened under the housing blowup. We also saw the prior two months revised higher by +32,000 jobs making the total gain in reported jobs +212,000. The unemployment rate fell to 4.4% and a cycle low. Hourly earnings rose +0.3% to $17.22 and pushing the year over year rise to +4%. This wage inflation should be expected with the low unemployment but it will not be good news for the Fed. Helping push the headline number higher was an unexpected spike in construction jobs of 56,000. The came after a drop of -67,000 in February that was likely weather related. Retail payrolls also gained unexpectedly by +36,000 despite several high profile mass layoffs announced last week. The services businesses were booming with education and healthcare adding +54,000 and leisure/hospitality adding 21,000. Overall this was a very strong report that has yet to show a declining influence to the subprime problem. It suggests the economy is growing faster than expected and after the recent inflation comments from the Fed it is likely to bring them back to the table with a strong rate hike bias. On Wednesday we will get the FOMC minutes from the recent Fed meeting and that will give us more info on why they chose to change the language in the last post meeting statement. Combine the strong jobs gain, low unemployment, rising wages and rising inflation numbers from the core PCE last week and you get a nervous Fed and a nervous market. The chance of a rate cut as evidenced by the Fed Funds Futures fell from around 20% to nearly zero after the jobs news broke.

The only two economic reports next week that could be market moving are the FOMC minutes on Wednesday and the Producer Price Index (PPI) on Friday. The rest are just filler. The PPI is key because producer prices jumped +1.3% in February and another strong jump like that would have the Fed members jumping like ants on a griddle. The tenuous balance between fearing inflation and worrying about slow growth would be thrown completely out of line.

Economic Calendar


In stock news Kirk Kerkorian appears to be making another play for Chrysler. He offered $22.8 billion back in 1995 but then lost out after a bitter battle with Daimler-Benz in 1998. Their merger of equals won the day and captain Kirk moved on to other targets. Last week Kerkorian made a $4.5B cash offer for the remains of Chrysler. I say remains because Chrysler lost $1.5 billion in 2006 and announced 13,000 job cuts in North America. I said it appears he is making another play for Chrysler. In reality I think it is just another publicity stunt by KK. He claims he wants to rebuild Chrysler and give some equity ownership to UAW. The offer is subject to Chrysler reaching a new collective bargaining agreement with the UAW as well as an agreement with Daimler Chrysler on the $22 billion in unfounded pension liabilities. Getting them to keep a large portion of those liabilities is going to be a tough uphill battle. Analysts give Kerkorian's low ball, high restrictions offer nearly zero chance of being accepted. According to those in the know there are three other major players in the game and a real offer could be in the $6-$7 billion range. DCX gained nearly $4 on the news. KK does have a thing about automakers and has been an investor in GM and Chrysler for many years. He tried to muscle his way into GM last year and the plan fell apart. KK is also the majority stockholder (55.9%) in MGM Mirage.

The housing sector continues to make the news on a daily basis. Ryland Homes (RYL) warned on Thursday that they would post a Q1 loss of 50-60 cents per share on an impairment charge of about $65 million. They were cautiously optimistic at the end of Q4 saying prices had begun to stabilize. As Q1 progressed they found that was not the case as "aggressive pricing strategies" in some markets persisted requiring a write down of some assets. On the bright side cancellations in Q1 fell to only 28% compared to 48% in Q4.

Dominion Homes (DHOM) reported a 54% drop in sales in Q1 but said it was still the best quarter since Q2-2006. Dominion just completed a four-year renewal of its credit facility to help "weather an anticipated loss in 2007 and to respond aggressively when the market recovers."

I am sure everyone has heard that New Century filed for bankruptcy earlier in the week. They announced on Friday they had sold or disposed of all pending loan applications. They also sold their loan servicing unit to Carrington Capital Management for $139 million as well as a loan portfolio to Greenwich Capital. They are currently trying to sell their loan origination platform. They also fired 3200 employees or 54% of their workforce. Rumor has it the other 46% is already looking for a new home. The Countrywide Financial CEO said on Thursday they had been deluged with good candidates and were staffing up using quality people they had not been able to attract before. I wrote earlier in the week that MBT was reporting deteriorating conditions higher up the mortgage ladder and American Home confirmed that on Friday. AHM cut its Q1 and full year earnings projections by 25% because of increasing difficulty in getting loans closed and resold in the capital markets. They quit offering several types of Alt-A mortgages and warned that delinquencies were rising. They said, "During March, conditions in the secondary-mortgage and mortgage-securities markets changed sharply." And, "While the market may recover - our working assumption must be that current market conditions will persist." AHM is not a subprime lender with less than 1% of its portfolio in subprime paper but the meltdown is now melting up into better credits and the mortgage resale market. AHM said investors in the mortgage-backed securities market were now offering to buy loans at "materially lower" prices. These are the same comments we got from MBT earlier in the week. If you are planning on buying a house this summer you should plan on paying a lot higher rate.

Vonage received what some were calling a death sentence on Friday morning when a District Court in Virginia signed an order preventing Vonage from signing up any new customers. The order came from a ruling that Vonage was violating three patents held by Verizon on the VOIP service. The judge also ordered Vonage to pay $58 million in damages on top of some monster royalty fees. Late Friday Vonage received a stay of execution by the Federal Court of Appeals pending further legal arguments in the case. Vonage now claims it has a work around, which it has just signed with Voice One, to get around the Verizon patents. Either way the stock of Vonage is apparently doomed to trade in the low single digits for quite some time.

Norfolk Southern (NSC) warned on Thursday that earnings would fall about 3% for Q1 on lower traffic due to slumping auto sales, extreme weather and lower gains on property sales. All the railroad stocks took an initial hit but rallied by the close as analysts came to their rescue. I have been waiting for the stocks to crack to gain an entry point for a long position but they refuse to die. Remember the comments last week about the 94 million acres of corn being planted? A lot of that corn will move by train and the ethanol being produced from the corn will also move by train. Coal demand is continuing to rise and petroleum, chemicals, ore and lumber imports from Canada are exploding. If you read the reasons for Norfolk's warning there was nothing new and nothing material. Everyone knows auto sales have been down and extreme weather played havoc with the airlines, trucking and now the railroads. No surprise there. I would look at any future dip as a buying opportunity.

Speaking of coal the sector got a boost last week from Arch Coal. The company said it was looking for acquisitions this year and beyond that strategically fit and add shareholder value. The CEO said he expected something to happen within the next few months. Since the various coal opportunities are limited it should not take a rocket scientist to realize his comments just lit a fire under the various candidates. Also, by making the comments he warned the 800-lb gorilla in the sector, Peabody Energy, that they were going to be on a shopping spree for strategic opportunities. If you were Peabody would you just sit back and watch Arch grow bigger by snapping up the various acquisition targets you had been coveting? I doubt it. By making the announcement the Arch Coal CEO may have shot himself in the foot or maybe I should say the mouth. If you want to acquire something cheap you should not tell anyone else you are shopping. Other companies in the sector include FCL, MEE, ARLP, ANR, JRCC, WLB, NRP, NCOC and EEE. That is a rather small shopping list.

The big electronics retailers (BBY & CC) reported earnings on Wednesday and the difference was night and day. Best Buy continues to gain market share and Circuit City is going backwards. CC is closing stores and replacing 3400 experience workers with cheaper help. They are moving away from "experienced sales people" to "cheaper workers." Translated that means those employees who have been with CC for years and risen up the salary ladder as they gained experienced are now being replaced with minimum wage entry level workers. This is exactly opposite the Best Buy strategy of offering knowledgeable sales staff and technicians as well. The theory for CC is that most customers do their research online and don't need an "experienced, high paid" sales person to take their money and print a receipt. I agree with that to some extent but there is a lot to be said to able to bounce ideas off somebody who knows what they are talking about. I recently had the projector in my theater room die. I spent two weeks wandering the net reading reviews and actual customer comments. Be careful relying on the reviews since many sites are compensated for their favorable views. However, it is tough to influence the hundreds of actual buyers of the product who have suffered the trials and tribulations of installing and using the product. Those venturing back on the net to post their views either love their product or hate it with very few in between. That is where the real truth appears. The advertising hype is separated from reality. But, back to the story. I had decided on a specific 1080P projector and went to Best Buy to get it. Surprise, they had no inventory other than a couple $1000 entry-level models. The sales staff was very knowledgeable BUT their sales tool was a PC with a big flat screen monitor connected to the Internet. Every question I asked was fed into Google or to book marked manufacturer sites. The answers were quick and precise since I did not have to depend on the memory of a pimpled teenager more concerned with watching the clock until closing than actually helping a customer. The Best Buy staff was very helpful even though they had no inventory. Everything was special ordered from their warehouse when sold, which makes sense to cut down on inventory costs. I ended up buying my receiver from Ultimate Electronics because they had the largest inventory AND even smarter sales people. The projector I bought online to save $1000 and I love it. Warning, there is a sales recommendation ahead. If you are looking for the best 1080P HD home theater projector on the market the Mitsubishi HC5000BL can't be beat for the price. I love it and it was worth every penny. This experience is why Best Buy does not stock high dollar items other than flat screen TVs. They may be kicking CC butt but the Internet retailers are doing the real volume with ZERO experienced sales people.

CC has already been sued by workers they are letting go claiming wrongful termination. They are seeking class action status. CC said it laid them off because they were making "well above the market-based salary range for their role" and replaced them with lower-paid new hires. In California the use of salary as the basis for determining who gets laid off is potentially illegal and may constitute age discrimination. The laid-off workers will get a severance package and, get this, a chance to reapply for their former jobs, at lower pay, after a 10-week wait. So, if CC can't replace them over the next 10 weeks with lower paid workers they will let them come back to work for minimum wage. Now that is not a worker I would want wandering around my store dealing with customers.

S&P-500 Chart - Daily

For next week the markets could be under pressure on fears about the Fed reaction to recent data. The rally last week came on the back of three distinct buy programs on Tuesday and without those three programs the Dow would have only gained +77 for the week and even that would have been doubtful. The programs busted resistance at 12500 by 10:30 on Tuesday but the Dow was only able to add +46 points from 10:30 on Tuesday until Thursday's close. This was not a particularly exciting performance. 12600 is the next material resistance level and 12500 should be primary support. A break of 12500 could easily see a retest of 12300. It all depends on how investors feel about the jobs data after a long holiday weekend. I would buy a dip to 12500 but reverse positions if support at 12500 breaks.

Russell-2000 Chart - Daily

NYSE Composite Chart - Daily

The Nasdaq rallied into Thursday's close to exactly 2470 and strong resistance. This is where I would expect trouble if trouble is going to appear with 2500 the next material resistance on any continued uptrend. The Russell and NYSE Composite continued to exhibit bullish signals and both closed at five-week highs. Unfortunately these moves were on very light holiday volume that barely broke four billion shares on Thursday. Were it not for the jobs data I would still be maintaining a bullish bias. April has a good record for market gains and earnings expectations are dropping so fast there is a good chance we could see some positive surprises.

However, it all depends on how investors react to the jobs data. The bulls could cheer the strength and claim an economic rebound in progress. Conversely the bears will be shouting inflation in a crowded market and trying to stampede everyone to the exits. About the only thing for sure is a lot of volatility at Monday's open. That will set the stage for Wednesday's FOMC minutes and worry over Friday's PPI.

Earnings Calendar

Not to be forgotten this is the start of Q1 earnings and that will give traders something to focus on besides economics. Alcoa earnings on Tuesday is normally accepted as the official kickoff of the cycle as the first Dow stock to report. RIMM on Wednesday is the first big tech and results are expected to be strong. Products from PALM and MOT are just not keeping up with the popularity of the crackberry. GE ends the week with the consensus earnings estimate dead in the middle of GE's own projected range. Nobody is going out on a limb here since GE normally reports exactly what they say they are going to report. The only material benefit to GE's earnings is their guidance. They are so big and so diverse that they are seen as a proxy for the economy and whatever they say in guidance goes a long way towards soothing investor qualms about the economy. Recently GE has been repeatedly bullish about the economy and expectations and nobody expects any change. GE does have minimal subprime exposure but not enough to really impact their earnings. Analysts will still be looking for any comments about that division but baring a sudden change in outlook the GE earnings will be just another event to forget before the market closes for the day.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAP None None
CLB    
NUE    

New Calls

Advance Auto Parts - AAP - cls: 39.56 chg: +0.91 stop: 37.95

Company Description:
Headquartered in Roanoke, Va., Advance Auto Parts is the second-largest retailer of automotive aftermarket parts, accessories, batteries, and maintenance items in the United States, based on store count and sales. As of December 30, 2006, the Company operated 3,082 stores in 40 states, Puerto Rico, and the Virgin Islands. The Company serves both the do-it-yourself and professional installer markets. (source: company press release or website)

Why We Like It:
We suspect that the slow march higher in AAP is going to turn into a breakout as the stock coils under resistance at the $40.00 level. AAP has a bullish trend of higher lows and a bullish Point & Figure chart with a $48 target. We are suggesting a trigger to buy calls on AAP at $40.05 to capture any breakout higher. If triggered our target is the $44.50-45.00 range. We do not want to hold over the mid-May earnings report.

Suggested Options:
We are suggesting the June calls although May strikes would also work well. As with all of our suggested plays, it is up to the individual trader to determine which strike price and which month best suits their trading style and risk. Our suggested trigger for AAP is $40.05.

BUY CALL JUN 35.00 AAP-FG open interest=9233 current ask $5.50
BUY CALL JUN 40.00 AAP-FH open interest=1208 current ask $1.95
BUY CALL JUN 45.00 AAP-FI open interest= 284 current ask $0.40

Annotated Chart:

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand

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Core Labs - CLB - cls: 87.25 chg: +2.56 stop: 81.95

Company Description:
Core Laboratories N.V. is a leading provider of proprietary and patented reservoir description, production enhancement, and reservoir management services used to optimize petroleum reservoir performance. The Company has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world. (source: company press release or website)

Why We Like It:
We remain bullish on oil and oil stocks in spite of last week's pull back. Shares of CLB didn't see much of a dip. Instead the stock continued to trade sideways in the $82-86 trading range. That changed on Thursday after one analyst firm started coverage on the stock and slapped a $92 price target on it. They weren't going out of their way with the price target since CLB has resistance at its old highs near $92.50 back in December 2006. The news still fueled a bullish, technical breakout and volume surged to almost three times the normal in spite of the holiday weekend. Technical indicators are turning bullish and the P&F chart is already bullish with a $115 target. We are suggesting call positions with CLB above $86.00. We'll set two targets. Our conservative target is $92.00. Our aggressive target is the $97.50-100.00 range, which might be a too optimistic given our time frame. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls although June calls would work and have more open interest.

BUY CALL MAY 85.00 CLB-EQ open interest=79 current ask $5.30
BUY CALL MAY 90.00 CLB-ER open interest= 8 current ask $2.70

BUY CALL JUN 95.00 CLB-FS open interest=136 current ask $2.25

Annotated Chart:

Picked on April 08 at $ 87.25
Change since picked: + 0.00
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = 275 thousand

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Nucor - NUE - cls: 66.51 chg: +0.85 stop: 63.89

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel - in bars, beams, sheet and plate; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; light gauge steel framing; steel grating and expanded metal; and wire and wire mesh. Nucor is the nation's largest recycler. (source: company press release or website)

Why We Like It:
Shares of NUE were upgraded on Thursday and the stock touched a new three-month high and came close to breaking out to new all-time highs. If the markets can keep climbing then a new high in NUE seems like a good bet. The P&F chart is already bullish and points to an $80 target. Given the relative strength in the steel sector this looks like a good spot to bet on a breakout. We're suggesting a trigger to buy calls at $67.55. If triggered our target is the $72.50-75.00 range. We would aim higher but we don't have much time. Traders will need to exit ahead of the April 19th earnings report. FYI: We do expect some resistance at $70. Don't be surprised to see NUE bounce around the $67.50-70.00 range for a couple of days.

Suggested Options:
We are suggesting the May calls. Our trigger is at $67.55.

BUY CALL MAY 65.00 NUE-EM open interest=1502 current ask $4.30
BUY CALL MAY 70.00 NUE-EN open interest=2851 current ask $1.85
BUY CALL MAY 75.00 NUE-EO open interest= 271 current ask $0.55

Annotated Chart:

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 3.8 million
 

New Puts

None Today.

New Strangles

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 94.68 chg: +0.41 stop: 89.49

AAPL shares started Thursday's session in the red but traders bought the dip near $93.50. The stock began to gain some momentum late in the session and actually closed up 0.4%. The bullish trend of higher lows is still intact and most of the technical indicators remain bullish. The P&F chart points to a $123 target. Our target is more conservative. We're aiming for the $97.50-100.00 range and expect some resistance near the January 2007 highs (between $97.50-98.00). Nimble traders might want to consider new call positions now but if you do open new plays we'd use a tighter stop loss than our own at $89.49. More conservative traders might want to tighten their stops toward $92.00. We do not want to hold positions over the April 25th earnings report and plan to exit ahead of the announcement. More aggressive traders wanting to ride any pre-launch excitement for Apple's iPhone may want to break this rule and hold positions for several more weeks.

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

Annotated chart:

Picked on March 19 at $ 91.01
Change since picked: + 3.67
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

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Allegheny Tech. - ATI - cls: 110.86 chg: +0.06 stop: 105.75

We are still suggesting new call positions on ATI. The stock garnered more positive analyst comments on Thursday but was unable to truly capitalize on it. Shares posted a meager gain but managed to bounce from the $110 level midday. Iron and steel stocks have been a pocket of strength in the market and ATI is hitting new all-time highs. The breakout over resistance near $110 looks like a new entry point. Our target is the $117.00-120.00 range. Chart readers will note a few concerns. The weekly chart's MACD looks tired and poised to turn lower. Meanwhile the RSI on the daily chart has a bearish pattern of lower highs. Plus, volume on the recent rally has not been very convincing. More conservative traders may want to use a tighter stop loss. FYI: The P&F chart points to a $123 target (this is not a typo, both AAPL and ATI's P&F chart point to $123). We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls. Our suggested entry point to open positions was at $110.26. FYI: Normally a May $110 call would have a -EB suffix so verify your symbol with your broker.

BUY CALL MAY 110 ATI-EX open interest=873 current ask $6.50
BUY CALL MAY 115 ATI-EC open interest=693 current ask $4.00

Annotated chart:

Picked on April 03 at $110.26
Change since picked: + 0.60
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 2.6 million

---

Boston Properties - BXP - cls: 118.09 chg: -0.48 stop: 114.49

REIT stocks didn't do much on Thursday and shares of BXP continued to slip following Wednesday's failed rally under $120. Thus far shares aren't seeing a lot of selling pressure. The stock is still hugging its rising 100-dma and volume on Thursday was pretty low. At this time we remain on the sidelines. Our suggested strategy is to buy calls on a breakout from its current trading range ($113-120). Our suggested trigger to open positions is $120.75. More conservative traders may want to put their trigger above the 50-dma near $121.26. If triggered at $120.75 our target is the $127.00-130.00 range. Technical traders will note that most of the indicators are turning positive and BXP appears to have produced a potential double-bottom, which is bullish, with the two March lows. We do not want to hold over the April 24th earnings report.

Suggested Options:
We are suggesting the May calls. Our suggested trigger to open positions is at $120.75.

BUY CALL MAY 115 BXP-EC open interest= 0 current ask $6.40
BUY CALL MAY 120 BXP-ED open interest=13 current ask $3.40
BUY CALL MAY 125 BXP-EE open interest= 9 current ask $2.00

Annotated chart:

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.3 million

---

Caterpillar - CAT - cls: 67.63 chg: +0.15 stop: 65.45

CAT continues to show relative strength but at its current pace we'll run out of time and the options will wither away. Shares inched closer to a breakout over resistance near $68.00 on Thursday. We also want to see a rise past the February highs. That is why we are suggesting a trigger to buy calls at $68.55. If triggered at $68.55 our target is the $73.00-74.00 range under the August 2006 highs. Traders should keep in mind that we do not want to hold over CAT's earnings report, which has recently been confirmed as April 20th. That gives us less than two full weeks to see the play triggered and run toward our target. It is very possible but each passing day makes it less likely.

Suggested Options:
We are suggesting the May calls. Our trigger is at $68.55.

BUY CALL MAY 65.00 CAT-EM open interest=25211 current ask $3.80
BUY CALL MAY 67.50 CAT-EU open interest=12524 current ask $2.20
BUY CALL MAY 70.00 CAT-EN open interest=12792 current ask $1.15
BUY CALL MAY 72.50 CAT-EA open interest= 5994 current ask $0.53

Annotated chart:

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/20/07 (confirmed)
Average Daily Volume = 6.3 million

---

Cigna - CI - close: 147.62 chg: +0.16 stop: 141.39

Our bullish call play on CI is now open. The stock continued to creep higher on Thursday and hit an intraday high of $148.16. Our suggested trigger to buy calls was at $147.75, above recent resistance near $147.50. Short-term technicals are turning positive again after the stock's five-day bounce. If shares do see any profit taking/consolidation we would watch for a bounce in the $145-144 region, which readers could use as a new entry point. Our target is the $154.50-155.00 range. We do expect some resistance near $150 but given the stock's momentum CI should be able to plow through it. We do not want to hold over the May 2nd earnings report.

Suggested Options:
We are suggesting the May calls. Our trigger was at $147.75.

BUY CALL MAY 145 CI-EI open interest=302 current ask $6.70
BUY CALL MAY 150 CI-EJ open interest=247 current ask $3.90

Annotated chart:

Picked on April 05 at $147.75
Change since picked: - 0.13
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 910 thousand

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ConocoPhillips - COP - cls: 67.96 chg: +0.22 stop: 64.85

Oil has pulled back from its recent highs thanks to Iran's release of 15 captured British forces. While the release reduced some of the risk premium, it's not gone, and crude still looks poised to move upward as it consolidates above the 200-dma. Crude doesn't appear to have any resistance until the $68-70 region. Shares of COP continued to bounce on Thursday following Wednesday's intraday rebound. We see the bounce as a new entry point but more conservative traders may want to wait for a breakout over the 10-dma near $68.66 or the $70 level. The stock's Point & Figure chart is bullish with an $81 target. We're aiming for 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=38036 current ask $4.30
BUY CALL MAY 70.00 COP-EN open interest=44123 current ask $1.45

Annotated chart:

Picked on March 20 at $ 66.31
Change since picked: + 1.65
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 12.1 million

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Holly Corp. - HOC - cls: 60.76 chg: -0.44 stop: 57.45

HOC's lack of follow through on Wednesday's big rally is a little disappointing but understandable given the lackluster markets on Thursday. Traders bought the initial dip near $60 on Thursday morning, which is positive but the stock remain sunder last month's lows. Currently we have two targets. Our conservative target is the $62.00-62.50 range. Our aggressive target is the $64.75-65.00 range. The Point & Figure chart is bullish with a $74 target. Readers can choose whether they want to exit completely at the first target or just take a partial exit or whatever else suits their trading style.

Suggested Options:
If you want to buy a bounce from $60.00 we would suggest the May calls.

Annotated chart:

Picked on March 14 at $ 57.87
Change since picked: + 2.89
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume = 651 thousand

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Infosys - INFY - cls: 51.83 chg: -0.26 stop: 49.79

The Indian markets are struggling after a strong 2006 performance. We listed INFY as a speculative, higher-risk call play because shares were bouncing near round-number support at the $50 level, near technical support at its rising, simple 200-dma and near technical support at its 38.2% Fibonacci retracement level. We're placing the stop under the recent low and aiming for the $54.75-55.00 range, where we expect shares to encounter resistance with the 50-dma and 100-dma overhead. We plan to exit on Thursday, April 12th to avoid earnings on Friday the next day. Given our time frame you may not want to open new positions.

Suggested Options:
If you feel nimble enough to jump in and out before we exit on Thursday at the close, we'd suggest the May calls.

Annotated chart:

Picked on April 03 at $ 51.69
Change since picked: + 0.14
Earnings Date 04/13/07 (confirmed)
Average Daily Volume = 1.6 million

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Lockheed Martin - LMT - cls: 96.71 chg: -0.34 stop: 97.49

We have been watching LMT for several days now, waiting for a breakout over resistance at the $100 level. The current, short-term trend has the stock drifting toward support near $96.00 and most likely toward the $95.00 level and technical support at its rising 100-dma. We would seriously considering buying a bounce from the $95 region but for now we are sticking to our plan and waiting for a breakout over $100. Our suggested trigger to buy calls is at $100.25. Our target is the $104.85-105.00 range. 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. FYI: Nimble traders might want to switch directions and buy puts on a breakdown under $95.00 and aim for support near $90 and its 200-dma.

Suggested Options:
If LMT provides an entry point we are suggesting the May calls.

Annotated chart:

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
 

Put Updates

F5 Networks - FFIV - cls: 66.68 chg: +0.75 stop: 71.01

Bulls bought the dip near $65.00 on Thursday morning. FFIV managed a 1.1% rebound. Normally we wouldn't read too much into it since the stock had been somewhat oversold and due for a bounce. Unfortunately, volume came in above average on the bounce and that should make the bears (and put holders) cautious. If the stock breaks out past the 10-dma near $67.85 we'll really get concerned. Right now the trend remains bearish. A failed rally under the 10-dma can be used as a new entry point. Our target is the $60.50-60.00 range. We do not want to hold over the late April earnings report. FYI: FFIV can be volatile so expect a lot of up and downs in the option prices.

Suggested Options:
If FFIV produces another entry point we'd suggest the May puts.

Annotated chart:

Picked on April 01 at $ 66.68
Change since picked: - 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

MDC Holdings - MDC - cls: 49.04 chg: +0.98 stop: 50.05

A better than expected earnings report and somewhat positive comments from homebuilder Ryland on Thursday helped fuel another round of short covering in the sector. The DJUSHB home construction index rose 1.6%. Shares of MDC managed a 2% rebound to erase Wednesday's losses. We are still on the sidelines waiting for a breakdown. We are suggesting a trigger to buy puts at $46.95. If triggered our target is the $41.00-40.00 range. Prepare for some support near $45.00. The P&F chart looks very bearish with a $35 target. We do not want to hold over the mid-April earnings report so our target might be a little optimistic. Then again, stocks tend to drop faster than they rise.

Suggested Options:
If MDC hits our trigger to buy puts at $46.95, we would suggest the May puts.

Annotated chart:

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/07 (unconfirmed)
Average Daily Volume = 870 thousand
 

Strangle Updates

None Today.

Dropped Calls

Celgene - CELG - close: 58.03 chg: +2.53 stop: 51.49

Target achieved. Biotech giant Amgen (AMGN) showed a lot of strength on Thursday and this helped fuel the biotech sector. Shares of CELG also showed leadership after one analyst firm reiterated their positive view and raised their price target to $68. CELG surged higher throughout Thursday's session and closed near its highs for the day with a 4.5% gain. Our target was the $57.50-60.00 range.

chart:

Picked on March 19 at $ 52.65
Change since picked: + 5.38
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume = 3.5 million

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Sunoco - SUN - close: 74.17 chg: +0.95 stop: 68.15

Target achieved. The oil refiners continued to rally on Thursday and SUN posted a 1.29% gain on above average volume. The intraday high was $74.50. Our target was the $74.00-75.00 range. The $75.00 level looks like potential resistance and we urge caution if you haven't exited yet. We will be watch for new opportunities to buy calls on SUN. A dip and bounce near $72 or $70 might be a good spot to look for an entry point.

chart:

Picked on March 20 at $ 68.15
Change since picked: + 6.02
Earnings Date 05/02/07 (unconfirmed)
Average Daily Volume = 2.8 million
 

Dropped Puts

None Today.

Dropped Strangles

None Today.


Trader's Corner

Disagreement, Variance, Divergence

Those three words are synonyms, but only one, divergence, is typically used in technical analysis. Perhaps the concept of divergence would prove easier to understand if one of its synonyms were used. Divergence is any disagreement or variance in price and indicator action. Look for bearish divergences at highs and bullish divergences at lows.

It's as easy as that.

Some examples illustrate the concept.

Note: Charts do not reflect current prices.

Annotated Daily Chart of MER:


Annotated Daily Chart of the OEX:


Divergences can take many forms. Bearish divergences can occur when prices hit a lower high but the oscillator hits a higher or equal one, prices hit an equal high but the oscillator hits a lower or higher one, or prices hit a higher high and the oscillator hits a lower or equal one. The idea is that there's disagreement, variance or divergence in where prices and the oscillator go. Bullish divergences occur when there is any difference in what prices are doing at lows and what the oscillator is doing.

Simple, right? I might think so, but not all experts agree as to what constitutes divergence. Some would limit bearish divergence to a certain combination of price and oscillator highs and bullish divergence to a certain combination of price and oscillator lows. Others believe, as I do, that any disagreement or variance in price and oscillator highs is bearish divergence and any in price and oscillator lows is bullish divergence.

Think of the oscillator action as representing the push behind a move. Price action is the result of that push. If the oscillator indicates that a bigger push resulted in a lower price high, that's bearish divergence. All that pushing couldn't produce a higher price high, so something was wrong. There was some resistance to going higher, with that resistance likely produced by selling into the rise. The same thing would be true if the push were equal but resulted in a lower price high. If prices reached higher, but the oscillator indicated that there was less push behind the move, then something is wrong then, too. The move isn't supported. Similar arguments can be made for any variance in price action and oscillator action at price lows, too, producing bullish divergences.

Even if determining bearish or bullish divergence proves relatively simple, it's not always a wise idea to act immediately when they appear. Bearish divergence worked beautifully to predict the pullback in MER as seen on the chart above, and bullish divergence worked equally well to predict a bounce in the OEX, but divergences don't always work so quickly or beautifully.

Annotated Daily Chart of the NDX:


Although a bearish swing trader could have amply benefited from that first divergence if using a trailing stop that would have protected profits, a position trader thinking that a major rollover was being predicted would have been disappointed. A long trader who had been alerted and who had exited at the first bearish divergence might not have been disappointed.

Divergences warn traders to prepare their trading plans. They do not promise that a move will occur or that the plan will immediately be put into effect.

Notice divergences, devise or revise your trading plan accordingly, but then wait for price action to confirm. For example, it's possible to draw a trendline on that NDX chart supporting prices from early November through February 27, when that trendline was broken. Bullish traders were alerted to potential weakness when the NDX began producing those bearish divergences. Exits for intermediate-term or long-term long plays might have been placed below that trendline. If that trendline hadn't been violated, bullish traders still would have been alerted to keep their exit plans updated.

Divergences are traditionally found when comparing price action with oscillator action, but I also look for another type of divergence: Keltner-style divergence.

Annotated Daily Chart of INTC:


This divergence did result in a downturn in prices. Just as is true with price/oscillator divergences, Keltner-style ones alert traders to refine their trading plans, but those traders still need to wait for price action to confirm.

Divergence isn't difficult to spot, even for the novice technical analyst. I've employed daily charts in this article, but they're just as easy to find on intraday charts, and the same benefits and cautions apply. Whether refining an exit plan or an entry one, use divergences to alert you to be ready, but let price action actually confirm that it's time to put the plan into effect.

 

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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