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Daily Newsletter, Saturday, 04/14/2007

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Thank Merck, McDonalds and Cisco

You can thank Merck, McDonalds and Cisco for Friday's low volume breakout. The bullish underlying bid was continuing to push prices higher on the back of several earnings upgrades but inflation fears were slowing that advance. On Friday Merck surprised traders when they revised guidance higher and the stock spiked +$4 on heavy volume. As a Dow component the spike in MRK gave the Dow a +30 point lift. Dow component McDonalds (MCD) also surprised traders saying March sales were stronger than expected and possibly its best month ever in Europe. MCD gained +$1 and that gave the Dow another +8 point boost. Cisco's CDO said at 2:30 on Friday that Cisco customers were at the early stages of a new upgrade cycle and sales were running toward the top of their prior projections. Cisco stock shot up nearly 75 cents on the comment but due to Cisco's weighting in the Nasdaq and the associated jump in companion stocks the Nasdaq spiked nearly +10 points in just seconds creating a short covering surprise that lasted into the close. Thank you Merck, McDonalds and Cisco for giving us a boost over that pesky resistance level that had plagued us all week.

Dow Chart - 240 min

Nasdaq Chart - Daily

Economically Friday was not a good day so we really needed those positive stock events to provide upward momentum. The Producer Price Index (PPI) rose sharply once again with a +1.0% gain. Most of that inflation was in food and energy so the core rate remained unchanged. Core inflation components were showing some signs of surging with the prices for intermediate crude goods jumping +7.7%. Finished goods rose by +6.9% on an annualized rate and core finished goods spiked +2.3%. Finished energy goods rose +9.4%. Taking the component lead was a jump in core crude goods at +59.3%. On the surface the flat core rate excluding food and energy prices may seem Fed positive but the Fed also has to take into account the impact of those factors. This suggests the Fed is much closer to a rate hike than a rate cut despite the impact of the subprime loan problem.

Consumer sentiment fell unexpectedly to 85.3 from 88.4 and well below expectations for a slight gain. The drop put the index at the lowest level since August. The biggest drop came in the expectations component, which fell -4.4 points to 74.3. The one-year inflation expectations component surged to 3.3% from 3.0% giving the Fed one more reason to stay away from any rate cuts. The weakening housing market was given as the major reason for the drop with higher gasoline prices a close second. The National Association of Realtors said on Thursday they expect home prices to fall in 2007 for the first time in the 40 years they have been tracking this data. The expectations component is strongly impacted by negative headlines and housing has definitely been producing those headlines.

Consumer Sentiment

Next week economic activity increases with the major reports being the Consumer Price Index (CPI) and New Residential Construction on Tuesday followed by the Philly Fed Survey on Thursday. There are plenty of filler reports but those three are the key. The CPI will show how much of the inflation shown in the PPI has filtered down to the consumer level. This will be another point for the Fed to ponder. The new home construction will be mostly a sentiment item for traders rather than a major economic event. If home construction has been better than expected this could help boost investor sentiment. The Philly Fed survey on Thursday has a high correlation to the national ISM report 10-days later. This will give traders a hint of what may be to come.

Economic Calendar

More important than economics next week will be the acceleration in earnings reports with several majors like Intel, Ebay, Yahoo and Google in the list. So far in this earnings cycle only 34 of the S&P-500 have reported with earnings growth of +14%. That was +9% over analyst estimates but this cycle is still very young and those should not be considered signs of a full quarter trend. Thomson Financial is still forecasting 3.3% growth after all 500 companies report. So far 61% beat estimates, 21% reported inline and only 15% missed their targets. 71% reported earnings equal to or higher than the same period in 2006 while 29% reported earnings that were lower.

Next week the earnings from Intel and AMD will be key for techs. Intel will report they are regaining market share AMD stole a couple years ago and AMD will confirm this share loss. The key here is sales volume at Intel and margins. If they are able to regain this share on strong margins and report rising volume then tech stocks should benefit. If Intel says anything about soft processor sales we could be in trouble because nobody is expecting anything but good news. Yahoo and Google both report and we will see if Yahoo is any closer to taking back some of its online ad share stolen by Google over the last couple years. Google investors will be holding their breath in hope Google has found some way to produce even more earnings in the future. Motorola earnings will tell us how well cell phones are selling worldwide. There are numerous financial stocks reporting and that sector has been performing very poorly. There are considerable fears that the subprime problem is going to really rear its ugly head in these reports and bank investors are running scared. Earnings will be the key next week with the CPI the highest profile report likely to steal some thunder from earnings.

Partial Earnings Calendar

The extent of the subprime problem has only been guestimated based on the various bankruptcies of 50 some odd subprime mortgage companies and a couple warnings from banks unable to resell loans into the securities market. On Friday GE reported earnings that were inline with estimates and they claimed no material impact from subprime loans already on the books. GE owns WMC Mortgage, the 8th largest mortgage loan originator in the country. The real problem did not come from loans on the books BUT from loan originations and this was largely overlooked by the street. In Q4 WMC originated $10 billion in loans. That fell to $3.5B in Q1, only $500 million in March and month to date only $50 million in April. If the current origination rate holds that suggests originations for Q2 could fall to less than $200 million and only 1/50th of the rate in Q4. This data should be surprising to everyone. In fact it should be downright shocking. If this loan origination rate is holding industry wide we are in deep trouble and the housing sector is about to take a serious drop. If loan originations have really skidded to a halt as evidenced by the GE loan rate then home purchases have fallen off a cliff in the last 45 days. Fortunately we are not seeing confirmation of this in the weekly MBA Mortgage Applications Survey. Originations in the survey are declining slightly but nothing catastrophic. Purchase loans actually increased +2.7% last week. That suggests the decline in GE's WMC originations are due to some other reason. However, I do expect to hear some more horror stories as financials begin to report and that is why they have been trading lower in a rising market.

Washington Mutual (WM) reportedly has 10% of its portfolio in subprime and they report on Tuesday. This will be seen as a major road sign on the subprime highway to oblivion. They can put everyone at ease or produce a complete dump in the sector.

Citigroup will report earnings on Monday and give us further guidance in relation to its restructuring plan announced this week. Citigroup also announced they were buying Old Lane Partners, a hedge fund founded by former Morgan Stanley executive Vikram Pandit. Terms were not disclosed but the price was thought to have been over $600 million. Pandit will become CEO of Citi Alternative Investments and oversee $59 billion in assets. This was not a bad career move for Pandit. Old Lane managed $4.5 billion in assets.

Student loan company Sallie Mae (SLM) is reportedly in talks to be acquired by a private group headed by Blackstone for something in excess of $20 billion. I never cease to be amazed. The buyout mania has evidently run its course if LBO firms are looking at a previously government supported company currently in serious trouble with various government agencies. SLM is under fire for questionable lending practices and the stock has fallen nearly 20% since November. They announced a $2 million settlement with the state of New York on Friday but that is only one of its current problems. Sallie Mae was created in 1972 as a government sponsored entity (GSE). SLM began cutting government ties in 1997 and completed their separation in 2004. The takeover rumors sent SLM credit default swaps up more than double to $78,000 per year for every $10 million of insured principal. This is a major blow to SLM and its future business profits.

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McDonalds reports earnings next week and Friday's sales update was nothing short of amazing. Same store sales jumped +8.2% for the month and +6.3% for the quarter. Across the Atlantic sales jumped +11.2% in Europe. Earnings expectations are now 62 cents and that is +5 cents more than analysts were projecting. S&P analyst Mark Basham upgraded MCD to a strong buy with a $58 price target. MCD closed at $47 with a +$1 gain.

Google announced after the bell it was buying DoubleClick for $3.1 billion. Doubleclick was a superstar during the dot.com boom but the company fell on hard times during the dot.com bust. Hellman & Friedman bought Doubleclick for $1.1 billion in 2005. That is the kind of return I like. $1 billion a year for each year they held the company and Google is taking them out for cash. Microsoft had been in the bidding but withdrew after bids rose over $2 billion. Doubleclick has more than 1500 corporate clients in its ad placement business. ValueClick (VCLK) spiked +5% in after hours on the increased valuations given DoubleClick.

Cisco does not report earnings for several weeks but their comments on Friday did wonders for the market. Cisco's Chief Development Officer (CDO) Charlie Giancario said in an interview that the company was seeing strong demand for its products. While we have seen strong demand over the year as of last quarter we are seeing really good growth around the world. He felt this was led by emerging markets overall and a rebound in Europe from the recent capex slump. Giancario said the market was still in the early phases of the current technology upgrade cycle and Cisco was heading in new directions equipping companies for increased communications both internally and externally. Cisco bought online conference producer WebEx to add to their capabilities in this area. The comments powered the Nasdaq over resistance at 2480 and produced short covering in techs that lasted until after the close.

Earnings are coming and trading profits are about to explode. However, that all depends on how you trade them. I mentioned on Tuesday night that RIMM earnings on Wednesday were a recipe for disaster. RIMM had traded as high as $149 the day it was to report earnings. This was a +$13 sprint in only five days on expectations it would report strong results. On Friday two days after earnings RIMM traded under $132 for a -$17 post earnings drop. Earnings were good but the forecast was disappointing. This is a perfect example of why you should not normally hold over an earnings report. For the last ten years I have been recommending in these pages for traders take profits on the earnings expectations by exiting a day or two before the actual report. There are always going to be those companies that surprise to the upside and race a few bucks higher but the vast majority will either do nothing in price or disappoint producing a monster loss as RIMM did last week. If you must hold a position over earnings at least try to make sure it is opposite the current trend. Whatever the trend has been attracts the most investors. When the trend changes due to something in the earnings report the strongest reaction is in the opposite direction. That would have been a put in the case of RIMM. Those holding optimistic calls saw their profit erased completely before options even opened for trading. Trade smart and exit before earnings to capture repeatable profits.

RIMM Chart - 30 min

Apple Chart - Daily

Apple shares fell for the 4th day losing nearly $2 after Apple said it was going to delay the next version of the Mac operating system codenamed Leopard. The operating system was initially slated to be released at its Worldwide Developers Conference on June 11th. Apple said the delay was due to the upcoming iPhone launch. The "iPhone contains the most sophisticated software ever shipped on a mobile device and finishing it on time has not come without a price. We had to borrow some key software engineering and quality assurance resources from our Mac OS X team." Analysts feel the priority switch was the right choice since the iPhone buzz is so strong. The iPhone release needs to be on time and with flawless software and the success will produce billions in profit for Apple. The Mac OS X operating system will not be a strong revenue driver relative to that of the iPhone. If you had to choose only one the iPhone was the right choice. Apple expects to sell 10 million units in 2008 and judging by the current waiting list at Cingular Wireless it will be a slam dunk. Current estimates put iPhone inquiries at more than two million with extreme pre launch demand. Apple always poked fun at Microsoft and its operating system delays. Apple rarely missed prior dates because they almost never gave dates. I guess they know how it feels now. They also missed the delivery date of the Apple TV device which was targeted for an early February launch. They did not begin shipping until March 21st.

Oil prices rebounded to $64.35 from their Monday low of $61.35 but faded at the close to $63.63. The majority of the rebound was powered by a sharp drop in gasoline inventories and expiring crude futures. On Wednesday gasoline inventories fell -5.5 million barrels, more than three times what was expected. Refinery activity levels improved but there are still outages at various plants and a bottleneck of crude in Cushing Oklahoma. Crude imports fell -440,000 bpd for the week. Gasoline supplies are now 4.5% below 2006 levels and implied gasoline demand has risen +2.5% on a four-week basis. Gasoline inventories have declined -27 million barrels in recent weeks. Analysts expect inventory levels to increase as refineries begin to come back online from outages and planned maintenance conversions to summer blends. This increase in refinery activity will produce a stronger draw on crude but those same analysts feel there is sufficient crude in the pipeline to cover demand. Time will tell and we are only about six weeks from the start of hurricane season. Boone Pickens was on CNBC last week saying he could see oil returning to $78 on any minor combination of outside events. This sentiment has been echoed by most major energy traders.

Friday's Cisco induced breakout by the Nasdaq helped drag the Dow over resistance at 12600 and sets the stage for a continuation rally next week on positive earnings news. The NYSE Composite ($NYA or ETF = NYC) is leading the pack with another strong performance to a new historic closing high on Friday at 9522. The index gained +45 points for the day and +96 for the week. Compared to the +51 weekly gain on the Dow and +20 on the Nasdaq this is a clear sentiment breakout in progress. The best performing sectors for the week were transports +2.4%, Oil Service +3.5% and Health Care at +2.3%. Commodities and gold in particular were also strong on inflation fears.

NYSE Composite Chart - Daily

Russell Chart - Daily

The Dow struggled to close over 12600 even with MRK and MCD adding nearly +40 Dow points by them selves. There are only two major resistance levels still left at 12680 and the historic high at 12800. The Dow rally has been lackluster and nearly a third of the Dow components closed in the red on Friday. Sentiment is shifting away from the large blue chips and into techs and small caps. This is very positive for the market since it suggests growing bullish sentiment among fund managers. If earnings continue to surprise to the upside the small caps could extend their performance lead.

The Nasdaq fought resistance at 2480 for the last six days and the Cisco news could not have come at a better time. The Nasdaq was trading at 2480.25 when the news broke and the resulting short covering rally and volume breadth in the QQQQ produced a spike that was still active after the close. The Russell and S&P futures both closed in after hours at the highs for the day. The Nasdaq will be keying on earnings from INTC, AMD, MOT, YHOO, GOOG and EBAY next week. This could light a real fire under techs or smother the rally completely depending on the results. Support is 2465 and resistance is the February high at 2525.

S&P-500 Chart - Daily

The S&P continues to plod along in the shadow of the other indexes but did manage to break into the current resistance range at 1450-1460 with a 1453 close. We will really see some fireworks if the S&P can break that 1460 level along with the NYA and RUT. Until then we are in danger of another failed breakdown at current resistance and a long slow grind into summer. What could cause this would be earnings disappointments on a wider scale like we saw on RIMM last week. Expectations are so bullish today after the first 34 S&P companies to report posted +14% earnings growth that disappointment could settle in hard if we get too many guidance warnings. Rather than burn a million brain cells trying to contemplate the various earnings scenarios we just need to play the cards we are dealt as next week progresses. I am bullish based on the NYA and RUT but conditions can change in an instant as we saw with RIMM. I will remain long with the S&P over 1450 or even 1445 but a move under 1440 would cause an immediate change in bias. April is normally a good month for stocks and it is starting off with a decent trend. Let's hope it continues.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CME None None
HES    
MCK    
TEX    
WYNN    

New Calls

Chicago Merc.Exc. - CME - cls: 551.49 chg: +1.86 stop: 544.75

Company Description:
CME is the world's largest and most diverse financial exchange. As an international marketplace, CME brings together buyers and sellers on the CME Globex electronic trading platform and on its trading floors. CME offers futures and options on futures in these product areas: interest rates, stock indexes, foreign exchange, agricultural commodities, energy, and alternative investment products such as weather, real estate and economic derivatives. (source: company press release or website)

Why We Like It:
The consolidation in CME over the last several days has left the stock poised to breakout over its trendline of resistance from the last three months. We are labeling this as a high-risk play for several reasons. First and foremost is the stock. CME can be a very volatile stock. The big swings are great if you catch one but they can be fatal if the stock swings against us. Second, is the time frame. CME is due to report earnings on April 24th before the market's open. That means we need to exit at the closing bell on Monday, April 23rd if CME doesn't hit our target. We want to catch a breakout so we're suggesting a trigger to buy calls at $557.50. If triggered our short-term target is $574.00-575.00. If we had more time we could aim for the highs. We'll start the play with our stop under the recent low. Remember, this is a high-risk play and we don't have a lot of time but if the market moves higher then CME could really run. One of the biggest challenges for the bulls would occur if investors suddenly decided to wait and see ahead of CME's earnings report and the stock just bounced around sideways.

Suggested Options:
We are suggesting the May calls. Our suggested trigger to buy calls is at $557.50.

BUY CALL MAY 550 CNM-QJ open interest=242 current ask $21.00
BUY CALL MAY 560 CNM-QZ open interest=184 current ask $16.00
BUY CALL MAY 570 CNM-QU open interest=145 current ask $12.00

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 733 thousand

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HESS Corp. - HES - cls: 57.87 chg: +0.25 stop: 54.75

Company Description:
Hess Corporation, with headquarters in New York, is a global integrated energy company engaged in the exploration for and the production, purchase, transportation and sale of crude oil and natural gas, as well as the production and sale of refined petroleum products. (source: company press release or website)

Why We Like It:
We remain bullish on the oil stocks. HES is trying to breakout to new all-time highs. We are suggesting call positions in the $56.00-59.00 range. There is potential round-number, psychological resistance near $60.00 but our target is the $62.00-63.00 range. We do not want to hold over HES' earnings report coming up on April 25th before the market open. That means we plan to exit on the 24th at the closing bell.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 55.00 IGG-EK open interest=4264 current ask $4.10
BUY CALL MAY 60.00 IGG-EL open interest=2036 current ask $1.30

Picked on April 15 at $ 57.87
Change since picked: + 0.00
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 3.0 million

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McKesson Corp. - MCK - cls: 59.57 chg: +0.56 stop: 57.99

Company Description:
McKesson Corporation is a Fortune 16 healthcare services and information technology company dedicated to helping its customers deliver high-quality healthcare by reducing costs, streamlining processes and improving the quality and safety of patient care. (source: company press release or website)

Why We Like It:
Biotech and drugs stocks have been market leaders for days. Yet shares of MCK have been stuck in a trading range for the last few weeks. Friday's bullish breakout in MCK could be the start of something bigger as shares try and catch up to their peers. Aggressive traders may want to open positions now. We see potential round-number resistance at $60.00. Therefore we are suggesting a trigger to buy calls at $60.15. If triggered at $60.15 our target will be the $64.00-65.00 range.

Suggested Options:
If triggered at $60.15 we would suggest the May calls.

BUY CALL MAY 55.00 MCK-EK open interest= 819 current ask $5.20
BUY CALL MAY 57.50 MCK-EY open interest=1347 current ask $3.10
BUY CALL MAY 60.00 MCK-EL open interest=2079 current ask $1.45

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume = 1.7 million

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TEREX - TEX - close: 73.95 chg: +0.41 stop: 69.89

Company Description:
Terex Corporation is a diversified global manufacturer with 2006 sales of approximately $7.6 billion. Terex operates in five business segments: Terex Aerial Work Platforms, Terex Construction, Terex Cranes, Terex Materials Processing & Mining, and Terex Roadbuilding, Utility Products and Other. (source: company press release or website)

Why We Like It:
TEX is hitting new highs again. The stock has shown a lot of relative strength. Instead of consolidating lower over the past several weeks the stock merely churned sideways above the $70.00 level. Now the latest bounce has TEX edging higher past resistance at the top of its trading range. We are suggesting call positions now with TEX above the $73.00 level. However, traders can choose to wait for more confirmation of a breakout and look for a rise past $74.25 or look for another dip near support in the $70 region. We do not want to hold over the April 25th earnings report. Our target is the $79-80.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 70.00 TEX-EN open interest= 137 current ask $6.30
BUY CALL MAY 75.00 TEX-EO open interest=1061 current ask $3.40
BUY CALL MAY 80.00 TEX-EP open interest= 105 current ask $1.55

Picked on April 15 at $ 73.95
Change since picked: + 0.00
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.4 million

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Wynn Resorts - WYNN - cls: 102.44 chg: +2.27 stop: 97.49

Company Description:
Wynn Resorts, Limited is traded on the Nasdaq National Market under the ticker symbol WYNN and is part of the NASDAQ-100 Index. On September 6, 2006, Wynn Macau, a destination casino resort in the Macau Special Administrative Region of the People's Republic of China, opened, featuring 600 deluxe hotel rooms and suites, approximately 220 table games and 380 slot machines in approximately 100,000 square feet of casino gaming space, seven restaurants, approximately 26,000 square feet of retail space, a spa, a salon, entertainment lounges and meeting facilities. Additionally, the Company owns and operates Wynn Las Vegas, a luxury hotel and destination casino resort located on the Las Vegas Strip. Wynn Las Vegas features 2,716 luxurious guest rooms and suites; an approximately 111,000 square foot casino; 22 food and beverage outlets; an on-site 18-hole golf course; approximately 223,000 square feet of meeting space; an on-site Ferrari and Maserati dealership; and approximately 76,000 square feet of retail space. (source: company press release or website)

Why We Like It:
WYNN is on the move again. The stock has a bullish pattern of higher lows. Investors have been buying the stock again since its pull back toward $90 in early March. The current rally looks like a bullish entry point given the breakout over the 50-dma and the recent highs. We suspect that the stock will march toward the February highs. However, we only have a limited time frame and plan to exit ahead of the early May earnings report. Therefore we are setting our target in the $108.00-110.00 range. More conservative traders may want to exit early near the late February highs around $106.60.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 100 UWY-ET open interest=986 current ask $6.10
BUY CALL MAY 105 UWY-EA open interest=358 current ask $3.50
BUY CALL MAY 110 UWY-EB open interest=990 current ask $1.75

Picked on April 15 at $102.44
Change since picked: + 0.00
Earnings Date 05/05/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Advance Auto Parts - AAP - cls: 39.65 chg: -0.30 stop: 37.95

Friday was the second day in a row that traders bought the dip in AAP near $39.40. While that alone is encouraging it is discouraging to see the slow down in AAP's upward momentum. The markets were mostly bullish on Friday but AAP closed down 0.7%. The overall pattern for AAP is bullish but shares may be headed for a dip toward $39.00 or its 50-dma near 38.40. We would either watch for another bounce in the $39.00-39.50 range or wait for a new relative high before opening new positions. Our target is the $44.50-45.00 range. We do not want to hold over the mid-May earnings report. FYI: The P&F chart points to a $48 target.

Suggested Options:
If AAP provides another entry point we'd use the May calls. FYI: The CBOE.com website seems to be having trouble providing option data on AAP.

Picked on April 11 at $ 40.05
Change since picked: - 0.40
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand

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Apple Inc. - AAPL - cls: 90.24 chg: -1.95 stop: 87.45 *new*

It's time traders made another decision on AAPL. Do you keep your bullish positions or do you exit? We have been warning readers for days that shares looked poised to dip toward support near $90.00. News out on Thursday night that AAPL would delay their new Mac OS named Leopard because they're focusing more resources on the iPhone was the main reason behind AAPL's decline on Friday. Will shares bounce from support at $90.00? The fact that shares did not break this level on an intraday basis today is a positive. Last night shares traded toward $89.50 in after hours but never broke $90.00 during the regular trading session. We are suggesting that more conservative traders strongly consider an early exit. The short-term technicals have turned bearish and the weekly chart has produced a bearish engulfing candlestick pattern, which is typically seen as a bearish reversal. We are altering our risk on this play. We want to give AAPL a little bit more room so we're taking on more risk by adjusting the stop loss to $87.45. We suspect that shares could dip toward the rising 100-dma near $88.60 and we wanted to give AAPL some room to maneuver. This definitely raises our risk, especially with the short-term outlook turning bearish. We reiterate our suggestion that more conservative traders may want to exit early right now. Alternatively, a rebound back above the $92.00 level would look bullish and readers might want to consider new long positions on a bounce back above the $92 mark or its 10-dma. We do not want to hold over the April 25th earnings report. Our target is the $97.50-100.00 range.

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

Picked on March 19 at $ 91.01
Change since picked: - 0.77
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

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Amgen - AMGN - cls: 59.03 change: +1.39 stop: 55.74

Shares of AMGN surged on Friday on what seemed like mixed news regarding one of its drugs. AMGN closed up 2.4% on above average volume. After hours a rival biotech firm filed a patent infringement lawsuit against AMGN but the stock did not seem to move on the news in after hours trading. We remain bullish on AMGN but given the pull back from its session highs on Friday we suspect that traders may get another entry point on a dip near $58.00. Our target is the $62.40-62.50 range, which is very close to the 38.2% Fibonacci retracement of the January-April decline. We do not want to hold over the earnings report so we plan to exit at the closing bell on April 23rd if AMGN hasn't hit our target by then.

Suggested Options:
We are suggesting the May calls. It is up to you, the individual trader, to decide which month and which strike price best suits your trading style and risk level for all of our suggested trading candidates.

BUY CALL MAY 55.00 YAA-EK open interest=24390 current ask $5.30
BUY CALL MAY 57.50 YAA-EY open interest=17362 current ask $3.50
BUY CALL MAY 60.00 YAA-EL open interest=34868 current ask $2.05

Picked on April 12 at $ 57.64
Change since picked: + 1.39
Earnings Date 04/23/07 (confirmed)
Average Daily Volume = 16.6 million

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Allegheny Tech. - ATI - cls: 113.76 chg: +0.65 stop: 105.75

So far so good. ATI has spent the last week consolidating its bullish breakout over resistance at the $110 level. Now that it has rested shares look poised to move higher. Steel and metal stocks as a group continue to look bullish. Readers can choose to buy calls now or look for another dip near the $111-110 region. We would prefer to buy a dip. Watch for the simple 10-dma near $111 to offer another level of short-term support. More conservative traders may want to tighten their stops toward the $108-110 area. Our target is the $117.00-120.00 range. FYI: The P&F chart points to a $123 target. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls. We would prefer to buy a dip in the $111-110 range.

BUY CALL MAY $110 ATI-EX open interest=1148 current ask $7.80
BUY CALL MAY $115 ATI-EC open interest=3131 current ask $4.90

Picked on April 03 at $110.26
Change since picked: + 3.50
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 2.6 million

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Boeing - BA - close: 91.03 change: +0.18 stop: 89.35

We do not see any changes from our Thursday night new play description on BA so we are reposting it here:

We are going to try again with BA as a bullish call candidate. We had the stock on the newsletter several days ago but shares never broke out and never hit our trigger. We're trying again but we have a short time frame. We do not want to hold over the April 25th earnings report. Thus we plan to exit at the closing bell on April 24th unless BA hit our target first. We'll wait for a breakout over resistance at the $92.00 level. Our trigger to buy calls will be $92.35. If triggered our target is the $97.50-100.00 range. More aggressive traders might want to consider jumping the gun if BA can traded over short-term resistance near $91.00.

Suggested Options:
We are suggesting the May calls. Our suggested trigger to buy calls is at $92.35.

BUY CALL MAY 90.00 BA-ER open interest=10124 current ask $3.10
BUY CALL MAY 95.00 BA-ES open interest=10636 current ask $0.90

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 4.1 million

---

Boston Properties - BXP - cls: 116.32 chg: +0.67 stop: 114.49

Aggressive traders might want to consider buying Friday's bounce in BXP. We would be careful. Technicals are mixed and it looks like support is closer to the $114-113.50 zone. Currently our plan is to buy calls on a breakout through the top of its trading range near $120. Our suggested trigger to open positions is at $120.75. One of the biggest challenges we face is the time frame since we do not want to hold over the April 24th earnings report. If BXP doesn't continue to bounce early next week we'll drop it as a bullish candidate. FYI: The rising channel on the weekly chart makes a bounce from current levels a tempting entry.

Suggested Options:
If BXP provides a new entry point with a breakout over $120 (our trigger is $120.75) we would suggest buying the May calls.

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

---

Cigna - CI - close: 148.93 chg: +2.70 stop: 142.49 *new*

Friday proved to be a strong session for CI. The stock rallied sharply rising 1.8% and closing near its all-time highs. Driving the stock higher was a rising expectation for strong earnings in the managed healthcare industry. Friday's rebound looks like a new entry point for us. More conservative traders may want to wait for a breakout past potential resistance at the $150 level. We only have a couple of weeks before CI reports earnings and we want to exit ahead of the announcement. Speaking of earnings, rival UNH is due to report earnings on April 19th before the opening bell. UNH's results could produce some volatility in CI. Our target for CI is the $154.50-155.00 range. FYI: We are adjusting the stop loss to $142.49.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 145 CI-EI open interest=323 current ask $7.30
BUY CALL MAY 150 CI-EJ open interest=362 current ask $4.20
BUY CALL MAY 155 CI-EK open interest=321 current ask $2.10

Picked on April 05 at $147.75
Change since picked: + 1.18
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 910 thousand

---

Seacor - CKH - cls: 99.27 chg: -0.88 stop: 96.49

Lack of follow through on Thursday's bullish breakout in CKH is a little disappointing. However, traders bought the dip near the rising 10-dma and 50-dma. Readers can choose to buy the dip now or wait for a new relative high over $100.22. We don't see any real changes from our Thursday night new play description so we're reposting it here:

The consolidation in CKH appears to be ending as shares breakout from its trading range and through round-number resistance at the $100 level. The longer-term trend is bullish with a steady pattern of higher lows. Plus, the P&F chart has a compelling pattern for bullish positions. Yet we want to caution traders that this is probably an aggressive entry point with clear overhead resistance in the $102.50-103.25 range. It would not surprise us to see CKH fail on its first try to breakout past $103. We are suggesting call positions with CKH above $100. Our target is the $107.00-110.00 range. The P&F chart points to a $115 target. We do not want to hold over the late April or early May earnings report.

Suggested Options:
We are suggesting the May calls. The low option volume might raise the difficulty level of this trade.

BUY CALL MAY 95.00 CKH-ES open interest= 2 current ask $6.80
BUY CALL MAY 100.0 CHK-ET open interest= 0 current ask $3.50

Picked on April 12 at $100.15
Change since picked: - 0.88
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 227 thousand

---

Core Labs - CLB - cls: 88.31 chg: -0.48 stop: 83.45*new*

Oil service stocks continued to inch higher on Friday. Unfortunately, CLB displayed some relative weakness. We shouldn't be too surprised. Shares of CLB have been stair-stepping higher for weeks and the stock is currently in a consolidation period before the next step higher. We hesitate to suggest new plays but readers can choose to open positions now or try and time an entry on a dip near the $87.00-86.00 range. Previously we had two targets. A conservative one at $92 and an aggressive one in the $97.50-100.00 range. Unfortunately, we only have six trading days left so we're eliminating the aggressive target and would exit at $92.00 near the December 2006 highs. We plan to exit ahead of the April 23rd earnings report. FYI: Please note our new stop loss at $83.45.

Suggested Options:
Given our time frame we're not suggesting new positions but a dip near $87.00-86.00 would look like a new entry point.

Picked on April 08 at $ 87.25
Change since picked: + 1.06
Earnings Date 04/23/07 (confirmed)
Average Daily Volume = 275 thousand

---

ConocoPhillips - COP - cls: 70.54 chg: +0.05 stop: 66.19

COP struggled to build on Thursday's bullish breakout over the $70.00 level. However, traders did buy the dip near $70 (actually 69.83) and COP still managed to close higher. We remain bullish on oil. If you're looking for a new entry point this could be it although you may want to use a tighter stop loss. We're aiming for the $74.00-75.00 range in COP. We do not want to hold over the late April earnings report.

Suggested Options:
If you are willing to buy the bullish breakout over $70 then we'd use the May calls.

Picked on March 20 at $ 66.31
Change since picked: + 4.23
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 12.1 million

---

Joy Global - JOYG - cls: 46.19 chg: -0.29 stop: 43.89

A little bit of profit taking after Thursday's big gain in JOYG is not a surprise. Readers can choose to buy this dip or hope for another drip near the $45.50 or even the $45.00 area. If shares trade near $45.00 it might be better to wait for signs of a bounce first. Overall we don't see any changes from our Thursday night new play description so we're reposting it here:

Positive comments from a Lehman Brothers analyst helped JOYG produce a strong 3.6% rally Thursday. An AP article discussed his expectation that JOYG's business was doing well globally. The analyst has a $65 price target. The Point & Figure chart, which has a very tempting buy signal following a bounce from support, points to a $57 target. We see the rebound from $44-45 as a new entry point to buy calls. If you don't want to chase it here then look for a dip near $45 as another entry point. There is potential resistance near $47.00 at the bottom of its February gap down. However, we are suggesting two targets. Our conservative target is $49.85-50.00. Our aggressive target is the $52.25-55.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 45.00 JQY-EI open interest=4735 current ask $2.95
BUY CALL MAY 50.00 JQY-EJ open interest=1949 current ask $0.90

Picked on April 12 at $ 46.48
Change since picked: - 0.29
Earnings Date 05/30/07 (unconfirmed)
Average Daily Volume = 2.5 million

---

Nucor - NUE - cls: 66.79 chg: +0.09 stop: 65.74 *new*

Monday saw NUE breakout to a new high but there has been no follow through on the move. Shares spent the week consolidating sideways. Many of the steel stocks have been showing relative strength so we're a little surprised that NUE is struggling. Lack of momentum higher this past week has put a bearish curve into the short-term technicals. We don't have much time left. NUE is due to report earnings before the opening bell on April 19th. That means we need to exit on Wednesday, April 18th at the close. With only three trading days left we're not suggesting new positions. Please note that we're adjusting our stop loss to $65.74. Our target is the $72.50-75.00 range.

Suggested Options:
We are not suggesting new plays in NUE at this time.

Picked on April 09 at $ 67.55
Change since picked: - 0.76
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 3.8 million
 

Put Updates

F5 Networks - FFIV - cls: 66.86 chg: -1.89 stop: 70.55 *new*

We are honestly surprised that the positive comments from CSCO, that lifted the markets late on Friday, did not rub off on rival FFIV. Shares of FFIV were weak from the start and closed down 2.7% on improving volume. The move looks like it cancels out Thursday's big rally. We hesitate to suggest new bearish put positions at this time but given FFIV's relative weakness on Friday we're not willing to just drop it. Please note that we're adjusting the stop loss to $70.55. Our target is still the $60.50-60.00 range but more conservative traders may want to exit near the 200-dma around $62.50. Don't forget that we want to exit ahead of earnings.

Suggested Options:
We are not suggesting new plays in FFIV at this time.

Picked on April 01 at $ 66.68
Change since picked: + 0.18
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.0 million

---

MDC Holdings - MDC - cls: 49.25 chg: -0.62 stop: 50.05

The homebuilders have seen something of a rocky week. It seems like every other day brings another story that reverses the previous day's move. This has left shares of MDC in a $48.00-50.00 trading range. Nimble traders might want to consider buying calls on a breakout over $50.00 or its 200-dma near $50.45. We are waiting for a breakdown under $48.00. Our suggested trigger to buy puts is actually at $46.95, which is under the March low. If triggered at $46.95, our target is the $41.00-40.00 range. If MDC closes over $50.00 we'll drop it as a bearish candidate. Please note that we do not want to hold over the late April earnings report.

Suggested Options:
If triggered at $46.95 we would suggest the May puts.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 870 thousand
 

Strangle Updates

None
 

Dropped Calls

Caterpillar - CAT - cls: 66.79 chg: +0.15 stop: 65.45

Time is almost up as CAT's earnings report nears on April 20th. The stock is trying to bounce from the $66 level but we just don't have enough time to wait and watch. We were suggesting a trigger to buy calls at $68.55 but CAT has failed to hit our trigger so far. We're dropping the stock as a bullish candidate for now.

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
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Where's the Exit?

Early one morning several weeks ago, one of CNBC's "Fast Money" commentators warned that it's possible to devise the right trading strategy but employ it at the wrong time. Traders who hold on as markets move too far against them may soon run through their accounts. Without an exit strategy, they could be left without funds to trade the move when it happens, that commentator warned.

Options traders understand that warning. Having occasionally in past years been long an OEX option that expired worthless on an expiration-week Friday only to see the anticipated move happen the next Monday, I certainly understand it. That CNBC "Fast Money" commentator may have thought he was speaking to those trading stocks, but it's the options traders with whom his cautions most resonate.

His solution, his proposed exit strategy? I'm afraid it was a bit simplistic. Let the winners run and cut the losses quickly, he advised. That's an axiom we traders have all heard from time to time. It's also a valid exit strategy, if a simplistic one. I know the experienced traders among you can sympathize when I say that I've employed the opposite strategy a time or two, cutting winners short and letting losses run far too long. I don't advise that strategy.

Although the CNBC guy had the right idea when he quoted that often-mentioned trading axiom, he wasn't quite specific enough. What constitutes a "small" trading loss for example?

Later that same day, a seasoned options trader sent me the one-page exit strategy that he employs. He's a smart guy, with a well-thought-out plan that calls for him to exit partial positions on his credit spread trades if the play moves against him in certain ways. His plan includes specific percentages and amounts. It allows those credit spreads to work, to run, so to speak, while keeping losses small. His plan mentions his trading personality, factoring that trading personality into his decision of what constitutes a small loss for him. He calculated a loss amount that he felt appropriate for his account and devised a strategy that would keep losses at that level, barring some event that gapped prices so high or so low that he could not employ that exit strategy.

His plan had all the characteristics needed for a sound exit strategy. If you haven't revised your exit strategy in a while, it may be time to take a look at it again.

Factor the size of your trading account and your trading personality into your determination of the appropriate loss you'd be willing to take. A Trader's Corner article titled "Risk of Ruin" advocated that traders consider "risk of ruin" calculations, more typically employed by gamblers, to understand how too large a loss can run through accounts too quickly. Acceptable losses must be kept small enough that the inevitable series of losing trades that hits all traders won't run through the account. The article also explained that traders must factor their personalities into the equations. Losses that are too large for traders' comfort, no matter what the size of the account, can trigger panicked behavior. The article can be found at this link.

What constitutes a small loss may also depend on market conditions. When volatility began expanding in late February, traders likely had to adjust their exit strategies. A Trader's Corner article titled "Chandelier Exits" detailed how and why such changes might be made. The chandelier exit employs the average true range to determine exit levels, and the average true range expands and contracts as volatility does. A 1.5-point OEX stop might be effective when volatility is small, but might result in too many stopped plays that would have eventually been profitable in a more volatile market condition. Some traders choose to widen stops in such conditions. The article on chandelier exits can be found at this link.

I've heard from other traders who choose an opposite strategy. They tighten stops when volatility expands, accepting multiple tiny losses before they catch the right move. I don't know whether that's effective for some other traders or not, but I've found myself multiple-tiny-stopped out of a significant number of plays in a row before, and the ouch is just as big.

When I was still daytrading, I loosened stops, but if I got stopped multiple times, I stopped trading, reasoning that markets were not tradable or else that I just wasn't in tune with the markets at that moment. I waited for a tradable formation or trend before I reentered. An effective trading plan might also set up the number of losses that will be accepted before the trader retreats and regroups in addition to setting up the size of an acceptable loss.

Many brokerages or charting programs allow you to test your exit strategy. If yours does, I urge you to go through this exercise. It won't be the same as making the decisions in the heat of the fray, but that's what hard or trailing stops are meant to do. Write down your plan. Tell a trading buddy what your plan will be so you won't be so tempted to fudge on it.

Then the next time a CNBC correspondent urges you to keep losses small, you'll know exactly what a small loss is to you.

I wanted to let regular readers of this weekend Trader's Corner know that Jeff Bailey will soon be contributing an article on the Point & Figure charting that he knows so well. It should appear in this space within the next couple of weeks.
 

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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