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Daily Newsletter, Monday, 04/23/2007

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Table of Contents

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

Market Wrap

Bullish Surprises as Big as Texas

Stocks edged lower on Monday after last week's bullish option expiration, as a mixed morning session turned modestly weaker just after 01:00 PM EDT on news out of Nigeria that gunmen battled security forces in the country's southern oil region.

After settling lower into Friday's May crude oil expiration, the unrest in Nigeria found June Crude Oil futures on the Nymex (cl07m), now the front month contract, settling up $1.78, or 2.78% at $65.89.

One of tonight's after-hours winners comes from an earnings report out of chip maker Texas Instruments (NYSE:TXN). The stock finished today's regular session down 9 cents at $32.41, but surged to $35.47 in tonight's extended session after reporting quarterly earnings of $0.35/share, which was above consensus estimates for $0.31/share. The company said Q4 revenues were $3.19 billion, which was slightly above consensus estimates for $3.15 billion.

Texas Instruments is the largest weighted stock in the Semiconductor HOLDRs (AMEX:SMH) $35.97 -0.71%, which jumped to $36.81 in Monday's extended session.

On Friday (04/20/07) the SMH closed above the $36.00 level, something it hasn't been able to do since May'06. There was great debate on Friday (04/13/07) in the OptionInvestor.com Market Monitor regarding "valuations" and the SMH's range between $33.00 and $36.00. If tonight's extended session trade is any indication of the future, then market participants seems to side with the "undervalued" camp, and a major technical breakout to the upside is at hand.

Last week's 4.6% gain in the S&P Banks Index (BIX.X) 397.34 -0.85% was paramount to last week's new highs for the S&P 500 (SPX.X) 1,480.93 -0.23% in my opinion. As I get caught up on last week's action, the gains for the financials, where regional bank weakness was providing bullish caution, was last week's biggest bullish surprise in my opinion.

Monday tends to be a day where merger and acquisition deals are announced. Today's biggest deal had London-based banker Barclays PLC (NYSE:BCS) $58.27 -2.88% saying it was buying Amsterdam-based ABN Amro (NYSE:ABN) $48.16 -2.29% in a $91 billion stock deal. ABN said it had also agreed to sell its LaSalle unit, which operates more than 400 branches across Illinois, Michigan and Indiana to US-based banking giant Bank of America (NYSE:BAC) $50.51 -1.03% for $21 billion.

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Other M&A deals had NASDAQ-100 component MedImmune (NASDAQ:MEDI) $56.57 +17.82% finishing atop today's most actively traded after the biotech-concern said it agreed to be bought by London-based AstraZeneca PLC (NYSE:AZN) $55.91 -5.30% for $15.6 billion (11.5 billion euro). Two weeks ago, shares of MedImmune surged from the $38 level after the company said it would no longer resist disappointed shareholder's calls for the sale of the company.

Activist investor and billionaire Carl Icahn recently revealed that he owned just over 1% of MedImmune's stock, and called the company's management "lackluster."

AstraZeneca hopes to close the deal in June. If consummated, AstraZeneca said the acquisition would increase the company's proportion of biotechnology drugs in its pipeline from 7% to 27%, and enlarge its total pipeline by 45 projects to 163 projects.

While MedImmune was trading another multi-year high, shares of fellow NASDAQ-100 component Sirius Satellite Radio (NASDAQ:SIRI) $2.80 -6.04% fell to its lowest since September 2004 as pessimism grows for how much value a combination between it and fellow NASDAQ-100 component XM Satellite Radio (NASDQ:XMSR) $11.13 -3.13% will generate.

Bank of America's Jonathan Jacoby said implied stock prices of SIRI and XMSR suggest the odds of an SIRI/XMSR merger coming to fruition have dropped to 35%. Mr. Jacoby cut his price target on SIRI to $2.75 from $3.50 and XMSR's to $12.50 from $17.00.

U.S. Market Watch - 04/23/07 Close

While the AMEX Biotechnology Index (BTK.X) was today's sector winner, closing at another all-time high, homebuilders as depicted by the Dow Jones US Home Construction Index (DJUSHB) 634.99 -2.03% and the AMEX Airline Index (XAL.X) 52.68 -1.93% were today's sector losers.

After reviewing last Wednesday's Mortgage Bankers Association's weekly application survey and the CME's various regional housing futures contracts (Aug'07, Nov'07 and Feb'08) I'd have to surmise that last week's +8.82% rise was largely short-covering.

On Friday, the CME's Aug'07 Composite Housing Futures (composite of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington DC) settled 214.80, just off a benchmarking low of 213.20 observed on 03/30/07. The CME's Nov'07 Composite Housing Futures settled 211.60 on Friday, also just off a 03/30/2007 benchmarking low of 211.40.

Housing sector watchers might perk up should we see Nov'07 futures exceed the Aug'07 contract prices.

Dow Jones US Home Cons. ($DJUSHB) - 5-point box chart

The supply (O) and demand (X) chart of the DJUSHB has been giving some conflicting buy signals of late. In late February, the traded at 715 on 2/22/07 was quite bearish as a spread triple bottom sell signal was given just below bullish trend. The double top buy signal at 640 didn't was "false", or weakness was found once again on 3/27/07 when a double bottom sell signal was generated at 615. On Tuesday of last week (4/17/07) a reversing back higher buy signal was generated at 610.

The pattern the DJUSHB has NOT been able to produce is two consecutive "buy" signals.

When looking at the above chart of the DJUSHB, a BULL and/or BEAR is probably observing some confusion as market participants feel things out.

I'd be more DEFENSIVE, or bearish below the recent relative high of 655. My bar chart shows the 200-day SMA trying to round flat from downward trend 660.00.

This is probably the TOUGHEST sector to trade bullish/bearish right now, but continues to be a MAJOR focus of traders and investors. I would avoid the group if at all possible.

Today, Dow Jones News Wire noted that a paper co-authored by Mr. Greenspan said home equity served as a growing source of funds for U.S. consumer spending from 2001-2005, financing close to 3% of total personal consumption expenditures.

Semiconductor HOLDRs (SMH) - Weekly Intervals

Tonight's news and after-hours action in Texas Instruments (TXN) should bring renewed interest to the sector, which has been lacking for more than 6-months. While TXN is not a component of the NDX/QQQQ, three of the 5 top-weighted stocks in the SMH are NASDAQ-100 components. Tonight's bullish-looking surprise of TXN should have bears running for cover in the group as earnings season is just beginning.

With the major indexes either at all-time highs, or new multi-year highs, overhead supply is limited, and bulls on a broader scale may hold back their willingness to sell, instead, looking for further gains.

The SMH is perhaps an "ideal" sector to be buying the technical breakout that has been doing nothing for 6-months, where the break higher really brings in the momentum bulls, and short-covering from bears that questioned valuations, but can no longer question the price action.

I'd like to thank Linda Piazza for filling in for me last Monday.
 


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

Advance Auto Parts - AAP - cls: 41.19 chg: +0.39 stop: 38.59

AAP's rally continued on Monday in spite of the market's pause. The stock is hitting new nine-month highs. The weekly chart shows potential resistance near $42.50 and then significant resistance near $45.00. 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.

Picked on April 11 at $ 40.05
Change since picked: + 1.14
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand

---

Apple Inc. - AAPL - cls: 93.51 chg: +2.54 stop: 89.45

Shares of AAPL displayed plenty of relative strength on Monday. Shares soared 2.79% and on improving volume. It could be some pre-earnings excitement but odds are good today's rally was influenced by news that CEO Steve Jobs will probably not face criminal charges on the backdating options issue. We are planning to exit at the closing bell on Wednesday to avoid holding over the earnings announcement. Our target is the $96.50-97.00.

Picked on March 19 at $ 91.01
Change since picked: + 2.50
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 35 million

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Abercrombie - ANF - cls: 82.88 chg: -0.63 stop: 79.85

Retail stocks struggled a bit on Monday. Investors could start to worry that rising oil prices will hit consumers harder at the pump and negatively impact retail sales. ANF slipped 0.75%. We would look for a dip or a bounce near $82.00, the 10-dma (near 81.00) as a new entry point to buy calls; even a dip near $80, which should be support, will work as an entry point. If ANF can trade over $84.00 it should reverse the Point & Figure chart into a new buy signal. Our target is the $89.00-90.00 range. We do not want to hold over the late May earnings.

Picked on April 22 at $ 83.51
Change since picked: - 0.63
Earnings Date 05/23/07 (unconfirmed)
Average Daily Volume = 1.9 million

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Boeing - BA - close: 93.64 change: +0.35 stop: 89.85

Time is almost up for our bullish play on BA. The company is due to report earnings on April 25th before the market's open. That doesn't give us a lot of time so we're not suggesting new positions. We will plan to exit at the closing bell on Tuesday to avoid holding over earnings. Our target is the $97.50-100.00 range.

Picked on April 18 at $ 92.35
Change since picked: + 1.29
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 4.1 million

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Cigna - CI - close: 152.64 chg: +0.37 stop: 144.95

CI is still inching higher. Shares are getting closer to our target in the $154.50-155.00 range so we're not suggesting new positions. If you plan to aim higher you might want to use Friday's rebound as a new entry point - just consider using a tighter stop loss. We do not want to hold over CI's earnings report in early May.

Picked on April 05 at $147.75
Change since picked: + 4.89
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 910 thousand

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ConocoPhillips - COP - cls: 70.60 chg: -0.65 stop: 68.75

Crude oil futures rose over 2% and are flirting with the $66/barrel region. This strength fueled a bounce in oil stocks but some of the leaders struggled to build on their gains. COP was actually downgraded to a "hold" this morning. More conservative traders may want to consider locking in some gains soon (or now). We plan to exit on Tuesday at the closing bell to avoid holding over COP's earnings report on Wednesday morning.

Picked on March 20 at $ 66.31
Change since picked: + 4.29
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 12.1 million

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FedEx - FDX - cls: 107.94 change: -1.09 stop: 106.85

The sharp rise in oil today could put the brakes on any FDX rebound. The stock produced a failed rally under $110 this morning and today's candlestick looks like another bearish reversal. You can see that FDX has resistance at its 200-dma near $110.25-110.50. We are suggesting calls if FDX can breakout over resistance. Our suggested trigger to buy calls is at $110.55. This might be considered an aggressive entry point given potential resistance at the 50-dma and 100-dma still overhead near $112. If we are triggered at $110.55 our target is the $116.00-117.50 range. More conservative traders may want to exit early near $115. FYI: The P&F chart is still bearish from the March sell-off. Traders should be aware that rival UPS reports earnings on April 25th before the market's open. UPS' earnings announcement could have a big impact on FDX for better or for worse.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/20/07 (unconfirmed)
Average Daily Volume = 1.8 million

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HESS Corp. - HES - cls: 57.31 chg: -0.25 stop: 55.45

Concerns about crude oil supplies following troubled elections in oil exporter Nigeria sent crude futures soaring. Yet shares of HES could not build on the commodities gain. We're almost out of time. Earnings are due out on Wednesday morning so we plan to exit on Tuesday at the closing bell.

Picked on April 15 at $ 57.87
Change since picked: - 0.56
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 3.0 million

---

Holly Corp. - HOC - cls: 62.84 chg: +0.54 stop: 59.49

HOC continued to show relative strength and shares rose 0.8% on Monday. We don't see any changes from our weekend comments. We are suggesting call positions now or on a dip near $60.00. Our target is the $67.50-70.00 range. The P&F chart is bullish with a $74 target. We do not want to hold over the May 8th earnings report.

Picked on April 22 at $ 62.30
Change since picked: + 0.54
Earnings Date 05/08/07 (confirmed)
Average Daily Volume = 669 thousand

---

Jones Lang Lasalle - JLL - cls: 110.48 chg: +0.52 stop: 106.75

Bullish breakout or bull trap? JLL broke out over resistance at the $110 level, which is very positive. Unfortunately, the rally reversed course sharply under $112 and the move looks like a short-term reversal or top. Our suggested trigger to buy calls was at $110.51. The play is now open and our target is the $114.75-115.00 range. Readers can choose to look for a dip towards $110 as a new entry point or wait for a bounce. More conservative traders may want to tighten their stops. The P&F chart looks bullish with a triple-top breakout buy signal and a $135 target.

Picked on April 23 at $110.51
Change since picked: - 0.03
Earnings Date 05/01/07 (confirmed)
Average Daily Volume = 300 thousand

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Joy Global - JOYG - cls: 49.88 chg: +2.07 stop: 44.75

Target achieved. Positive analyst comments in Barron's over the weekend helped JOYG produce a 4.3% gain today. Our conservative target was the $49.85-50.00 range. The stock now looks short-term overbought and is testing resistance near $50. We are not suggesting new positions. Our aggressive target is the $52.25-55.00 range.

Picked on April 12 at $ 46.48
Change since picked: + 3.40
Earnings Date 05/30/07 (unconfirmed)
Average Daily Volume = 2.5 million

---

McKesson Corp. - MCK - cls: 60.48 chg: +0.26 stop: 57.99

MCK is still creeping higher. We remain bullish on the stock with shares above $60.00. Readers can choose to buy calls now or look for a dip (or bounce) near $59.00 as a new entry point. Our target is the $64.00-65.00 range. FYI: The Point & Figure chart points to a $73 target.

Picked on April 19 at $ 60.15
Change since picked: + 0.33
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume = 1.7 million

---

Nucor - NUE - cls: 68.54 change: +0.85 stop: 63.99

Bullish breakout! NUE pushed past resistance near $68 and hit our suggested trigger to buy calls at $68.51. Our only complaint was the lack of volume behind today's move, which should make us cautious. Now that the play is open our target is the $74.00-75.00 range. The P&F chart is bullish with an $83 target. FYI: We would expect a little bit of resistance near $70.

Picked on April 23 at $ 68.51
Change since picked: + 0.03
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 3.6 million

---

Wynn Resorts - WYNN - cls: 103.44 chg: +0.93 stop: 97.49

WYNN continued to rally with traders buying the dip near its rising 10-dma today. The stock closed up 0.9% and looks poised to breakout over $104. We plan to exit ahead of the early May earnings report. Our target is the $108.00-110.00 range. More conservative traders may want to exit early near the late February highs around $106.60. FYI: WYNN's P&F chart points to a $120 target.

Picked on April 15 at $102.44
Change since picked: + 1.00
Earnings Date 05/05/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

Put Updates

Intl.Bus.Mach. - IBM - cls: 95.21 chg: +0.63 stop: 96.06

Surprise! We finally add a new put play on the newsletter and the stock is upgraded before the opening bell. Fortunately, our plan is using a suggested entry point at $93.89. More aggressive traders may want to watch for a failed rally from here as a new entry. The overall pattern continues to look bearish. If triggered at $93.89 our short-term target is the $90.10-90.00 range. An alternative target would be the slowly rising 200-dma currently near $89.37. The P&F chart looks very bearish with a $77 target.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = 6.8 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

---

Chicago Merc.Exc. - CME - cls: 547.40 chg: -8.49 stop: n/a

Today was our only chance to open strangle positions on CME ahead of its earnings report tomorrow morning. The stock gave us a couple of great entry point near $550 during the session. We need to see a big reaction in the stock price to make this aggressive, strangle play work. Wall Street is looking for CME to report earnings of $3.59 a share. The suggested options we had listed were the May $580 call (CNM-EV) and the May $530 put (CNM-QF). Our estimated cost was $13.00. We want to see if either option rises to $18.50 or more.

Picked on April 22 at $555.89
Change since picked: - 8.49
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 693 thousand

---

Lockheed Martin - LMT - cls: 95.40 change: -0.23 stop: n/a

LMT produced a nice pop on Monday just ahead of the company's earnings report due out tomorrow morning. Today was our only day to open strangle positions. The market is looking for LMT to announce a profit of $1.37 a share. The suggested options we had listed were the May $100 calls (LMT-ET) and the May $90 puts (LMT-QR). Our estimated cost was $1.50. We want to sell if either option rises to $2.25 or more.

Picked on April 22 at $ 95.40
Change since picked: + 1.67
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

Core Labs - CLB - cls: 86.71 chg: +1.21 stop: 83.99

Another rally in crude oil helped CLB post a 1.4% gain ahead of its earnings report tonight. It was our plan to exit at the close to avoid holding over the report. CLB reported 7 cents better than expectations and the stock is trading slightly higher in the $87-88 range after hours.

Picked on April 08 at $ 87.25
Change since picked: - 0.54
Earnings Date 04/23/07 (confirmed)
Average Daily Volume = 275 thousand

---

Chicago Merc.Exc. - CME - cls: 547.40 chg: -8.49 stop: 544.75

It's time to cut this aggressive, high-risk call play in CME loose. The stock failed to see any follow through on its bullish breakout April 16th. Today's move actually looks pretty bearish with the breakdown under $550 and its 50-dma and 100-dma. It was our plan to exit ahead of the earnings report expected tomorrow.

Picked on April 16 at $557.50
Change since picked: -10.10
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 733 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

DISCLAIMER

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.

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