Option Investor

Daily Newsletter, Tuesday, 05/01/2007

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Table of Contents

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

Market Wrap

News Corp's Bid for Dow Jones Sparks Gains

The major indexes started out mix-to-lower at the open after the Institute for Supply Management said its manufacturing index bounced back to a stronger-than-expected 54.7% in April from 50.9% in March. Readings above 50% in the diffusion index mean more firms were reporting business expansion.

April's 54.7% reading reversed seven months of weakening readings that have ranged between 49.3% and 52.3% and was much stronger than economists forecast of 51.0%. April's 54.7% was the highest since May 2006.

Economists saw the ISM Manufacturing data healthy and if sustained, would be consistent with growth of 4% for the economy.

Some of the sub-index measures showed the new orders index rising to 58.5% from 51.6%, the highest in 14 months. The production index rose to 57.3% from 53%, the highest in a year.

On the supply side, the inventories index fell to 46.3% from 47.5%, indicating contraction in inventories for a ninth straight month. The prices-paid index rose to 53.1% from 48.7%, the highest since August of last year.

Of the 18 industries measured, 11 showed expansion, led by wood products, apparel and food.

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 637.21 +1.21% found their session low just after 10:00 when the National Association of Realtors its pending-home-sales index declined 10.5% from March 2006 and sits at its lowest level since March of 2003.

David Lereah, the NAR's chief economist said "Although the weather improved in March, we're starting to see the effects of a decline in subprime lending and tighter lending standards."

The NAR's report showed pending home sales rose in the West, but dropped in all other parts of the country.

In the West, pending sales were up 1.6% in March, but is still 8.6% below last year. In the Northeast, pending sales fell 4.9% from February, while the Midwest fell 6.9%. The South's index fell 7.1%.

After finding selling in early morning trade on the stronger ISM data, the benchmark 10-year Treasury Yield ($TNX.X) eased from a yield high of 4.666% to finish up 1.2 basis points at 4.642%. The shorter-dated 5-year yield ($FVX.X) finished up 2.5 bp at 4.539%, while the longest-dated 30-year yield ($TYX.X) finished down a fractional 0.1 bp at 4.816%.

Automotive manufacturers reported their monthly sales figures today, with no real surprises to speak of.

April's U.S. vehicle sales came inline, but weak. Every manufacturer except DaimlerChrysler (NYSE:DCX) $80.91 +0.49% reported a decrease from the same month last year.

DaimlerChrysler's overall sales increased to 213,999 from 211,365 a year ago, due to an increase at its Chrysler Group. Chrysler sales rose by 1.6% to 193,104 last month from 190,095 last year. Mercedes sales slipped 1.8%, from 21,270 to 20,895.

Yes, even Toyota Motor (NYSE:TM) $121.53 +0.09% reported a decline. The automaker said sales dropped 4.4% to 210,457 last month, from 219,965 in April 2006. It was the first year-over-year monthly decline for Toyota since May 2005.

General Motors (NYSE:GM) $31.25 +0.06% said sales dropped 9.5% from April of last year, while Ford Motor (NYSE:F) $8.05 +0.12% said sales were down 12.9%, largely due to a 23.6% decline in car sales compared to a 5.7% decline in truck sales.

Are you still with me?


It looked like today's session was going to be a sleeper until just before noon when suddenly, shares of publishing giant Dow Jones (NYSE:DJ) $56.20 +47.53% surged higher from the $36 level on word that Rupert Murdoch's News Corp. (NYSE:NWS) $22.99 -4.20% made an unsolicited bid for the company. Shares of Dow Jones were halted just as the stock achieved its point and figure chart's bullish vertical count of $55 (Dorsey/Wright) and $54 from a dividend-adjusted StockCharts.com's PnF chart.

The trading halt had news disseminating that News Corp. was offering $5 billion, or $60/share for the company.

Dow Jones said it was informed by a representative of the Bancroft family, which holds 64.2% of voting power, that it would cast slightly more than 50% of the outstanding voting power against the proposal.

Boy, you don't see that type of move come around that often, and while the Bancroft family might be able to hold onto the shares, I suggested traders/investors take profits with a longer-term target achieved.

The news sent some shockwaves into the market and lifted the Dow Jones Industrial Average ($INDU) 13,136.14 +0.56% to a record close.

Here's why ....

Just after Dow Jones (DJ) was released for trade, computers began gobbling up the deep cyclicals as depicted by the Morgan Stanley Cyclical Index (CYX.X) 1,020.56 +1.99%.

Morgan Stanley Cyc. Indx Components - Equal Weighted

When an equal weighted index sees a member surge 47.5%, there's some "basket buying" that usually takes place as institutional computer try and get things squared up.

Not unlike the Dow Industrials, the CYC.X has just 30 stocks. Pink ** note 8 Dow Industrials' components and an index can bust a move in the direction of the gainer, or loser.

Morgan Stanley Cyclical Index (CYC.X) - 5-point box

I had an alert set on the CYC.X just above the recent 52-week high. When Dow Jones (DJ) was released for trade, even though it had made the big move prior to being halted, the "basket buying" began.

In this weekend's update, I wrote an article on the point and figure "bullish vertical count."

Now, I don't put a lot of weight in an index, or broader market average's bullish vertical count, mostly because I think it more difficult for the MARKET to move a basket of stocks to a bullish, or bearish vertical count, but when I see a narrower index like the CYC.X achieving a bullish vertical count, and one of its components doing the same, my first thought is to protect gains if you've got them.

U.S. Market Watch - 05/01/07 Close

The CYC.X is a basket full of deep-rooted and economically sensitive stocks. You saw the list and it is an index that market participants will, or should keep an eye on.

Today's decline in energy prices didn't hurt for an equity rebound. However, it would have to be my opinion that into May's Unleaded expiration, gasoline prices have been the most "worrisome" to broader-market equity bulls.

Tomorrow we'll get another EIA report. One comment I heard on CNBC was that oil analysts were looking for a build in crude oil stockpiles of 1.4 million barrels.

June Crude Oil (cl07m) did find sellers at the $65.50 level when Kuwaiti's Oil Minister said he thought the oil markets were stable and didn't see any supply bottlenecks. He said that OPEC ministers "will be ready to meet if any bottlenecks occur," and added "there won't be any meetings before September."

NYSE Summation Reverses Back Lower

In last night's Market Wrap, I touched, if not talked you to boredom about both the NYSE and NASDAQ new high and new low ratios.

But just as this weekend's Trader's Corner article had a purpose as to assessing RISK/REWARD in a trade, or investment, the new high and new lows do to.

I once wrote an article titled "The Market is My Inchworm."

Ah yes, a favorite to some long-time subscribers.


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An article then made note of how a stock market tends to move like and inchworm as it tries to move UP a tree, or starts to slide lower.

That's what the new highs and new low indications hope to depict. If the "head" is moving higher, then likely, the inchworm has EXPANDED, it stretches itself out, and the "tail" will slink higher, with fewer new lows, dig themselves in, get some traction, and provide support for the head to move higher still, see an expansion of new highs, and the inchworm, or the market, press higher.

But that's not what we were seeing last night. And I can't say that it improved all that much today.

Another indicator of breadth that I like to follow is a very neat set of data that StockCharts.com has called the NYSE Summation Index ($NYSI), which in its simplicity, measures on a continual basis the number of advancing issues against declining issues.

It is a "faster" moving internal measure than the most important NYSE Bullish % that institutional money managers follow.

But this is perhaps a good indicator of what is going on between the "head" and the "tail" of a market. Which direction are the juices flowing?

This is a FANTASTIC point and figure internal indicator, but over the years, I've seen some chart watchers do some damage to their accounts when they try and use stochastics, or other oscillators in combination.

NYSE Summation Index ($NYSI) - 20-point box

Don't make it any more difficult that it has to be. All the NYSI is doing is measuring the supply/demand relationship between the number of advancing issues against declining issues as each day passes.

The PRIMARY reason for addressing the new highs and new lows, is to see where the "leadership" is headed. And it has been "resting" from a very bullish NYSE NH/NL 5-day ratio reading of 94.1% on 4/26/07 (see last night's wrap). If 100% is a goal, from 94%, how much higher to 100% can you go?

It's somewhat like a snake swallowing an apple isn't it? You can see the apple slowly moving into the snake's body as the process of digesting that apple begins.

OK ... now, you'll note that I mark 12/26/06 at a NYSE Summation reading of 900. See, in a way, that was a "sell signal" for this measure.

Then ... see the PINK dates circles? I've played with the "scale" at 20-point box size over the years, and find this scale to be the best for smoothing out some of the noise. I'm looking for a flow. I don't want a bunch of "false" buy and sell signals. I want a flow.

To get the flow, I'm not trying to trade the indicator and "catch the high" or "catch the low." I'm looking for it to reverse 3-boxes at any given measure, and let me know when demand (X), or supply (O) is in control.

You don't need to be hit over the head with an iron skillet to know this measure of NYSE advancing/declining issues was once again at some type of important level.

Now, bar chartists can pull up their bar charts and follow the NYSE Composite ($NYA.X) and match some of the benchmark dates I've highlighted in the NYSE Summation Index, but let's take a look at the point and figure chart, get a look at supply/demand with the same date benchmarks.

NYSE Composite ($NYA) - 50-point box

Now, I coughed up a mouthful of milk last night when I read "bull got caught asleep Monday." Not on my watch, and I don't think the chart of the NYSE Comp shows bulls getting whacked of late.

But I wouldn't be a complacent bull either.

Yes, on 12/26/06 the NYSE Summation ($NYSI) was saying "I'm getting weak," but the NYSE Comp ($NYA.X) reversed 4-boxes to 9,000, then went on to another record high of 9,450. Then it got "whacked."

But if long, or out of a short when this very broad MARKET (over 3,000 stocks) gave the "buy signal" at 9,150, with NYSE Summation confirming, then demand really took control and we've seen another all-time high.

The point here is that yes, bulls have reaped another big gain. At this point, I'd say bullish leadership is taking a rest, and maybe, there are some "buying climax" signals. Hey, don't let that stop you from taking some profits off the table.

Don't just sit there either, with 100% cash in your account. Look for some stocks that have pulled back to support, pick away at them with partials positions.

How "short" would I want to be with a NYSE Composite looking as it is? Oh, maybe 1/4 position in a stock/security that meets your criteria, but as I look at the NYSE Comp, I think a short is looking for REWARD to 9,500 at this point and RISK is another new high at 9,800. That's about 50/50 from tonight's close.


I do think that Dow Jones (DJ) had a lot to do with today's gains. Yes, a bit hard to believe, but with all the wonder of "is the economy slowing..." those cyclicals are being monitored closely.

Yes, the Dow Industrials (INDU) closes at a record high. But with several INDU components in the cyclical index, we have an idea why.

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: 40.94 chg: -0.47 stop: 39.90

AAP just posted its fourth decline in a row following last week's spike higher. Volume was above average on today's loss and breakdown under the 10-dma. We're growing more concerned over the lack of upward momentum. More conservative traders may want to exit early. We are not suggesting new positions at this time. Our target is the $43.90-45.00 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: + 0.89
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand


Armor Holdings - AH - cls: 70.69 chg: -0.81 stop: 68.99

It was something of a volatile session for AH. The stock plunged lower at the open but traders bought the dip near $70.00. The afternoon bounce looks like a new entry point to buy calls although more conservative traders may want to wait to see some follow through higher first. We have two targets. Our first target is the $74.75-75.00 range. Our aggressive target will be $77.50-80.00. The P&F chart is bullish and points to a $73 target.

Picked on April 30 at $ 71.51
Change since picked: - 0.82
Earnings Date 04/19/07 (confirmed)
Average Daily Volume = 482 thousand


Ctrip.com - CTRP - cls: 69.98 chg: -0.94 stop: 67.45

We need to urge caution on CTRP. The stock under performed the broader market today with a 1.3% decline. Volume was light so it's tough to put much weight behind today's move. Traders did buy the initial dip at near $69.50 this morning. A rebound from here could be used as a new entry point. Our short-term target is the stock's highs in the $74.50-75.00 range. The Point & Figure chart forecasts a $93 target. We do not want to hold over the May 16th earnings report.

Picked on April 29 at $ 70.63
Change since picked: - 0.65
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand


General Dynamics - GD - cls: 78.49 chg: -0.01 stop: 76.45

GD's intraday dip today completely filled the gap from last month. The rebound looks like a new entry point. If you're feeling conservative consider buying calls here with a stop loss under today's low. An alternative entry would be to wait for a breakout over $81.00. Our target is the 84.75-85.00 range. More aggressive traders may want to aim higher. The P&F chart has produced a triple-top breakout buy signal with a $96 target.

Picked on April 29 at $ 80.27
Change since picked: - 1.78
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million


Holly Corp. - HOC - cls: 63.14 chg: -0.46 stop: 59.49

A decline in crude oil undercut any strength in the energy stocks today. Yet the afternoon rebound in HOC looks like a potential entry point, especially after traders bought the dip near $62.50 midday. If you're feeling cautious consider tightening your stop loss. Watch out for some volatility tomorrow morning as investors react to the weekly oil inventory numbers. 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: + 0.84
Earnings Date 05/08/07 (confirmed)
Average Daily Volume = 669 thousand


Wynn Resorts - WYNN - cls: 101.37 chg: -0.83 stop: 99.95

Traders bought the dip in WYNN at $100.70 this morning and the afternoon rebound looks like another bullish entry point. Unfortunately, we're almost out of time. WYNN is due to report earnings on or near May 7th. We plan to exit ahead of the early May earnings report. Our target is the $108.00-110.00 range. FYI: WYNN's P&F chart points to a $120 target. Readers should also note that the gaming sector will have lots of news this week with ASCA reporting earnings on Tuesday, LVS reporting on Wednesday, and MGM reporting on Thursday.

Picked on April 15 at $102.44
Change since picked: - 1.07
Earnings Date 05/07/07 (confirmed)
Average Daily Volume = 1.4 million

Put Updates

AvalonBay - AVB - cls: 120.23 chg: -2.03 stop: 130.05

AVB continued to sell-off on Tuesday with another 1.66% decline on big volume. The high volume on the decline is usually a bearish sign. The selling stalled near $120 as expected. More conservative traders may want to think about taking a profit here. Our target is the $112.50-110.00 range. The P&F chart points to a $110 target.

Picked on April 30 at $124.45
Change since picked: - 4.22
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand


British Airways - BAB - cls: 101.08 chg: -0.10 stop: 104.26

The slow drift lower in BAB continued on Tuesday. The stock looks poised to test and breakdown under the $100 level. We don't see any changes from our weekend comments. More conservative traders may want to wait for a decline under $100. We'll use a $96.00-95.00 target range. More aggressive traders may want to aim for the rising 200-dma near $92. We do not want to hold over the mid-May earnings report.

Picked on April 29 at $101.42
Change since picked: - 0.34
Earnings Date 05/18/07 (unconfirmed)
Average Daily Volume = 65 thousand


Ceradyne - CRDN - cls: 59.87 chg: +1.02 stop: 62.51

The rebound in CRDN on Tuesday was fueled by positive analyst' comments and a new higher price target ($70). It may be noteworthy that the rally stalled at its 10-dma, which is now short-term overhead resistance. A decline (failed rally) from here could be used as a new entry point for puts. More conservative traders may want to use a tighter stop loss. Our short-term target is the $55.25-55.00 range. Watch out for potential support at the rising 50 or 100-dma.

Picked on April 29 at $ 59.08
Change since picked: + 0.79
Earnings Date 04/27/07 (confirmed)
Average Daily Volume = 667 thousand


Lockheed Martin - LMT - cls: 96.23 chg: +0.09 stop: 97.51

LMT under performed the broader indices and under performed the Defense sector on Tuesday. The pattern looks like LMT wants to trade lower but with major averages bouncing back it's hard for bears to get any traction. We're not suggesting new positions until we see a new decline under $95. We still see potential resistance near $97.50 and its 50-dma near $97.84. More aggressive traders may want to place there stop above the 50-dma.

Picked on April 24 at $ 94.82
Change since picked: + 1.41
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.7 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.)


Lockheed Martin - LMT - cls: 96.23 change: +0.09 stop: n/a

There is no change from our previous comments on LMT as a strangle play. The lack of movement is bad news for this kind of strategy. We need LMT to pick a direction and go. If the stock doesn't break one way or the other soon more conservative traders may want to abandon this play early. We're not suggesting new strangle plays at this time. 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: + 0.83
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million

Dropped Calls

Abercrombie - ANF - cls: 80.99 chg: -0.67 stop: 79.85

We have been stopped out of ANF at $79.85. The stock sold off sharply this morning and plunged through support near $80.00 to an intraday low of $79.61 before bouncing back. Nimble traders may want to reconsider new bullish positions on a rebound over $82.00 or $82.50.

Picked on April 22 at $ 83.51
Change since picked: - 2.52
Earnings Date 05/23/07 (unconfirmed)
Average Daily Volume = 1.9 million

Dropped Puts


Dropped Strangles


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


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