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Daily Newsletter, Saturday, 05/05/2007

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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

Watching Paint Dry

The major indexes struggled on low volume to close at new highs but Friday's market action was similar to watching paint dry. After the opening bounce on slowing job growth and the Microsoft/Yahoo news the indexes spent time on both sides of zero and the outcome was always in doubt. An end of day short covering spurt helped push the indexes just hard enough to close at new highs.

Dow Chart - Daily

Nasdaq Chart - Daily

The big economic news on Friday was the Non-Farm Payroll shocker. Only 88,000 jobs were created in April compared to consensus estimates for a gain of +115,000. The shock came when the prior two months were revised down by -26,000. That was the first downward revision in years. The trend has always been upward revisions indicating a better employment picture than previously reported. This report was a shock to many and the markets did not know how to react. Some thought it was a positive indicating the weakening job market would keep the Fed on the sidelines longer. Others thought it was a negative, especially after the downward revisions that suggest the economy is weakening more than prior estimates. The third group thought the +88K gain was right in the sweet spot, not too hot and not too cold. That became the market view by days end.

Payroll Chart

The unemployment rate rose to 4.5% and average hourly earnings rose only +0.2% and less than the 0.3% analysts had expected. Hours worked fell -0.3% indicating slowing activity. The biggest job loss came from the retail sector with a drop of -26,000 jobs. This appears to be a Goldilocks report and continued job growth in the 75K to 100K range will eventually reduce inflation and build a base for a future economic rebound.

The week was a mix of economic results with the ISM breaking out of the pack and spiking to 54.7 instead of the expected minor move to 51.1. This was the largest jump since Sept-2005 and the highest level since April 2006. After a stutter step in March it appears the manufacturing sector has regained traction and could be projecting the end of our period of economic weakness. This would have been Fed negative were it not balanced by the Fed positive payroll report. Considering all the weak regional reports this was a bullish surprise for investors.

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Next week there are few market moving reports but the FOMC meets again on Wednesday. Nobody expects any change in the interest rate but there is rapidly rising anticipation of what they will say in the statement. Are they going to continue their bipolar language from the last statement or move to a clear-cut indication of rate direction? I would bet on a continuation of language that is open to interpretation. If they lean any further to a softening bias the bond traders will push real rates lower before the Fed is ready to move. The Fed has to continue walking the tightrope and keeping traders on both sides off balance. The Fed Funds Futures are showing only a 2% chance of a rate cut at the May and June meetings. That chance rises to about 56% by the October meeting.

The other report that could be a market mover is the Producer Price Index (PPI) on Friday. Any signs of increasing inflation could compound any problems created by the Fed statement. However, the bulls have recently shown a complete lack of fear regardless of what the economics have shown. Good news produces rallies and new highs. Bad news produces minor dips that are quickly bought and followed by new highs. Even a lack of news produces continued bullish sentiment.

Economic Calendar

Yahoo gained $5.40 intraday on rumors they were in takeover talks with Microsoft. Yahoo is struggling to implement its online ad system code named Panama. Microsoft wants a vehicle to boost its paid search share and general online graphical advertising. The rumors are flying that a take out price could reach $50 billion. Many analysts expressed mixed opinions about the potential combination. Shortly before the close the WSJ said the talks were no longer active and the NY Times claimed they were talking about a partnership not a takeover and Yahoo fell back to gain only $2.80 to $31 at days end. YHOO traded 245 million shares or 25 times normal volume. Over one million option contracts were traded. Google has a 48.3% share of search revenues, Yahoo 27.5%, Microsoft 10.9%, Ask.com 5.2% and Time Warner 5.0%.

The housing sector was weak again on Friday after Hovnanian (HOV) said its Q2 loss will be larger than previously projected. HOV now expects a loss of 45-50 cents per share including charges. Excluding charges HOV now expects the loss to be 30 cents per share compared to prior projections of up to 20 cents. Orders fell -21% to 3,116 homes. The cancellation rate has improved to 32% compared to 36% in Q1. HOV said, "The adverse publicity surrounding the subprime market has further damaged home buyers' psychology." HOV lost 99 cents on the news but several other builders lost more than a buck.

Countrywide Financial said this week that 19% of its subprime mortgages were in default and they expected 6% of all mortgages to go to foreclosure in 2007. Companies are trying to work with the borrowers rather than get stuck with the homes in a declining market. They are extending payments, letting borrowers skip payments and generally everything they can do to keep the loans from imploding. According to industry analysts mortgage companies lose about 40% of the loan value on the average foreclosure. Having a bunch of foreclosures in the same sub division as we are seeing today can make those numbers even worse. CSFB just released a new survey showing that 40% of borrowers who had their loans adjusted by lenders still resulted in an eventual foreclosure. Looking at it from the glass half full perspective that suggests 60% of those loans in trouble were rescued successfully to the delight of all concerned. Lenders also know that eventually housing values will rebound and these borrowers could then resell their homes and escape the mortgage trap.

AAA said average unleaded gasoline prices across the US hit $3.01 last week. That was not the bad news. The bad news was their warning that gasoline could hit record levels by month end. $4 is almost guaranteed baring any unexpected surge in inventory or drop in demand. Gasoline demand hit record levels since January and is continuing to rise. Normally there is a drop in demand around March to less than nine mbpd for 6-9 days. That drop never occurred and demand grew by more than 5% instead. The higher gas prices were due to refinery problems, expensive oil and that lack of demand drop. The high prices are already causing a pullback in consumer spending in other areas. Retailers SHLD, TLB, CC, GM, F and LIZ have already warned that sales were slowing as gas prices accelerated.

Despite the rise in gasoline prices the price of oil dropped sharply all week. Starting with Monday's high of $66.60 the June futures contract closed at $61.90 on Friday. This 7% drop was blamed on strong resistance at $66-67, a lack of headlines and hedge funds rolling over to the July contract. Since that contract also fell sharply it just proves the on air "analysts" had no clue and were grasping at straws to explain the drop. I believe it was simple profit taking on a lack of headlines. That resistance at $66.50 is very strong and the June contract tried for several weeks to break it with no success. With the equity markets breaking out to new highs and oil unable to breakout over $67 it was a perfect time to take profits and shift to equities.

June Crude Oil Chart - Daily

Some of that oil money may be setting up to move into uranium futures when they open for trading on Monday. The contract will be for 250 pounds of uranium and be cash settled. The symbol will be UX plus the month codes. Uranium prices have risen over 1000% in just the last three years. The world uses 180 million pounds a year and only 100 million pounds are produced. The difference is made up by dismantling Russian nuclear weapons. The highly enriched cores are broken down and diluted with other materials to reduce it to the strength needed for reactors. That source of uranium will be exhausted over the next several years putting even more of a premium on uranium production. Over 30 reactors are under construction worldwide to add to the 452 currently in operation. 16% of global electricity is generated by nuclear plants. There is literally no chance that uranium prices will fall in the future. Hedge funds have taken control of 25% of current inventories over the last two years and that trend is not likely to slow. Uranium is one of the scarcest commodities on the planet and those funds are counting on the short squeeze to get worse. Several analysts have suggested uranium prices could double again by 2010. Cameco (CCJ) at a new high on Friday is my favorite stock pick to capitalize on this trend.

The earnings cycle is 80% over with only a few stragglers remaining. Earnings have come in at +8% growth and more than twice what some analysts predicted. This is a clear case of under promise and over deliver in action. Companies were concerned about the forecast for a slower economy and guided lower when they reported the fourth quarter results. When the slowdown was lighter than predicted these companies were rewarded with better than expected results. Now that the cycle is nearly over the focus on earnings will diminish and the Fed will return to the spotlight. Wednesday's FOMC meeting is not expected to provide any material change in posture but I would not be surprised if we see some profit taking early in the week just to be on the safe side.

The most anticipated sporting event in the last five years for wagering will occur this weekend and it is not the Kentucky Derby. The event is the De La Hoya vs Mayweather fight at the MGM in Vegas. I was at the MGM for a conference last week and when I was leaving on Friday night there were long lines of strictly male guests checking in a full week ahead of the fight. The entire hotel had an air of anticipatory excitement. The MGM said this fight had more bets than any sporting event in the last five years. Front row seats are advertised for more than $100,000 and seats further back in the 35th row are selling for $25,000 each. MGM said the tickets sold out 3 hours after they went on sale. HBO is charging $55 for the pay per view on cable and they expect over two million subscriptions. That is a very nice chunk of change. De La Hoya will receive the lions share of the fight revenue with a 70% cut vs Mayweather's 30%. Not a bad deal when you consider he was on food stamps not too many years ago. Mayweather is undefeated in 37 professional fights and is expected to stretch that string to 38. The stock price of MGM broke to a new three month low on Friday despite the major payday it will receive for hosting the bout.

The American markets are hitting new highs almost every day but they are actually lagging many foreign markets. China, Brazil, Mexico, France, Germany and the UK markets are all at historic highs or multi-year highs. The American markets are playing catch up and doing so rather reluctantly. The Dow moved over light resistance at 13200 at the open on Wednesday and only managed to add +65 points by Friday's close. This is not a strong move but it has been steady. The Dow has gained in 23 of the last 26 days but only three days of the last 30 have seen strong gains. This is the strongest Dow performance in terms of positive days since 1955. Dips have been bought and somehow, regardless of the news it continues to creep slowly higher. Over the last month the Dow has averaged only +35 points per day. This lackluster rally has convinced the bears that every day could be the day the market breaks. Short interest on the NYSE is at record levels but market continues to rise. About once a week we see some event that triggers another short squeeze and the bears run to the exits. Over the next several days the lack of movement and lackluster internals convince those same bears to go short once again. It has to be very frustrating to be on the wrong side of the trade for the last 30 days. As shown by the Tuesday dip the Dow has strong support at 13050 and almost no definable overhead resistance.

The Nasdaq has moved even slower than the Dow but finally broke out to a new high as April ended. However it only managed to add +60 points from April 16th through May 3rd or barely +4 points per day. This lethargic advance saw only two days of major gains with the rest evenly distributed in random single digit moves. Current resistance is 2580 and major support at 2500. The NDX only managed a gain of +0.06 on Friday. For the week it only gained +4.64 points. This very weak performance at market high is like trolling for bears by dragging sirloin steak through the woods. The single digit advances interspersed with an equal number of declines is bear bait at its best.

S&P-500 Chart - Daily

S&P-500 Chart - Monthly

All eyes are riveted to the S&P-500 as the last major index to make new highs. The S&P is also creeping slowly higher with the historic closing high of 1527 the current price magnet. The other indexes appear to be just passing time while we wait for the S&P to reach and break that high to confirm the rally. The real question everyone wants answered is what will happen when that 1527 point is reached? Will the volume accelerate and the current stealth rally turn into a raging bull? OR, will that touch of 1527 turn into an exhaustive climax and signal the start of a summer decline? The "sell in May and go away" crowd are holding their breath today and trying to decide if they should hold any longer or run for cover.

NYSE Composite Chart - Weekly

Russell-2000 Chart - Weekly

Russell-2000 Chart - 120 min

The most bullish index continues to be the NYSE Composite with a clear historic high breakout in progress. 9600 is strong support and there is no material overhead resistance. As one of our sentiment indexes this is a very bullish sign. Unfortunately our mutual fund sentiment indicator the Russell-2000 has stalled at strong resistance around 830. For the last three weeks the Russell has failed to cross 830 and hold it for more than a few minutes. Only a bout of short covering at Friday's close managed to produce a weekly close at 832. Even more concerning was the severity of the Monday drop to 807.69. This was a -3.3% drop from the prior week's highs and much stronger than the other indexes. To its credit it did rebound back to that 830 resistance the following day but sentiment may have been damaged. When the Russell finally breaks out and sprints to new highs I will feel much better about being long this market.

Open Interest and Volume on Russell iShares (IWM)

A reader pointed out the imbalance in the volume and open interest of the Russell iShares (IWM). The May $82 and $83 puts have an open interest of nearly 320,000 contracts compared to only 260,000 calls. The daily volume was even more amazing with nearly 50,000 82/83 puts traded on Friday compared to only 18,000 calls. The June open interest on the same strikes are paired at about 66,000 each and only one fifth of the open interest for those strikes in May. Think about that a minute. There are five times as many May puts in those two strikes as in the June strikes. For all May strikes the open interest for May puts totals 2,314,767 contracts. The open interest for all May calls is 1,198,874 or nearly one million less than puts. Until the Russell loses its grip on 830 I have to maintain a bullish bias. The strong NYSE Composite helps me to overcome my concerns over the Russell weakness.

Most analysts claim the indexes are extremely overbought but I believe the slow pace has allowed for consolidation in place as the rally progressed. Is there more upside ahead? Nobody knows for sure but watch Russell 830 as a long short indicator and don't try to out think the markets.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL EQIX None
ABT ESS  
BSC ITRI  
LEH LVS  
MRO    
RIMM    
WSO    

New Calls

Apple Inc. - AAPL - cls: 100.81 chg: +0.40 stop: 99.85

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and will enter the mobile phone market this year with its revolutionary iPhone. (source: company press release or website)

Why We Like It:
Shares of AAPL vaulted higher after its latest earnings reprot in late April. There has been almost no profit taking and the stock is developing a short-term bullish trend of higher lows. A breakout over resistance near $102 would be bullish. We are suggesting a trigger to buy calls at $102.55, which is above the April 26th high. We'll set our stop loss at $99.85. More aggressive traders may want to jump in early on a move over $102 and use a wider stop under $98.00. Our target is the $108.00-110.00 range. FYI: The Point & Figure chart forecasts a $123 target.

Suggested Options:
We are suggesting June calls. Our suggested trigger to open positions is at $102.55. Please note that with all of our plays it is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL JUN 100 QAA-FT open interest=15737 current ask $4.20
BUY CALL JUN 105 QAA-FA open interest=16294 current ask $2.00

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 23.9 million

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Abbott Labs - ABT - cls: 58.30 chg: +0.89 stop: 55.69

Company Description:
Abbott is a global, broad-based health care company devoted to the discovery, development, manufacture and marketing of pharmaceuticals and medical products, including nutritionals, devices and diagnostics. The company employs 65,000 people and markets its products in more than 130 countries. (source: company press release or website)

Why We Like It:
Drug stocks rallied on Friday. The DRG drug index rose 0.8% and broke out from a two-week consolidation pattern. Contributing to the sector's strength was a 1.5% rally in ABT. The company announced positive test results on a potential psoriasis drug. Technically ABT looks strong with the recent bounce from $56 near the bottom of its rising channel. We are suggesting call positions now although a dip back toward $57.50 would also be an attractive entry point. Our target is the $62.00-62.50 range. FYI: The P&F chart points to a $65 target.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 55.00 ABT-FK open interest= 719 current ask $4.10
BUY CALL JUN 57.50 ABT-FY open interest=1484 current ask $2.10
BUY CALL JUN 60.00 ABT-FL open interest= 418 current ask $0.80

Picked on May 06 at $ 58.30
Change since picked: + 0.00
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 7.1 million

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Bear Stearns - BSC - cls: 157.77 chg: 1.52 stop: 154.75

Company Description:
Founded in 1923, The Bear Stearns Companies Inc. is a leading financial services firm serving governments, corporations, institutions and individuals worldwide. The Company's core business lines include institutional equities, fixed income, investment banking, global clearing services, asset management, and private client services. Headquartered in New York City, the company has approximately 14,500 employees worldwide. (source: company press release or website)

Why We Like It:
There has been no slow down in merger and acquisition activity, which is helping push the broker-dealers toward their 2007 highs. The sector could be poised to breakout to new all-time highs soon. If the XBD index does breakout then we expect BSC To follow. Currently the stock is consolidating sideways under resistance near $160. More aggressive traders might want to buy last week's bounce right now. We would rather wait for the breakout so we're suggesting a trigger to buy calls at $160.25. If triggered then our target is the $169.75-172.50 range. The P&F chart is hitting some resistance but shows a triple-top breakout buy signal with a $184 target. Chart readers will note that BSC appears to have an inverse (bullish) head-and-shoulders pattern that points to a $170 target.

Suggested Options:
We are suggesting the June calls. Our trigger to open positions is at $160.25.

BUY CALL JUN 155 BSC-FK open interest=1617 current ask $7.80
BUY CALL JUN 160 BSC-FL open interest= 410 current ask $5.00
BUY CALL JUN 165 BSC-FM open interest= 269 current ask $2.90

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = 2.7 million

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Lehman Brothers - LEH - cls: 77.30 chg: +1.65 stop: 74.85

Company Description:
Lehman Brothers (ticker symbol: LEH), an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. (source: company press release or website)

Why We Like It:
We're going to double up in the brokers sector today. LEH also looks attractive with a strong bounce from technical support near its 50 and 200-dma. Many of the technical indicators are turning bullish again. The P&F chart is bullish with a $100 target but it's worth noting that the P&F chart does have potential resistance near $79. We see potential resistance near $80 on the daily chart. Our target is the $84.00-85.00 range.

Suggested Options:
June options will work but we're suggesting the July calls, which have more open interest.

BUY CALL JUL 75.00 LES-GO open interest=5468 current ask $5.70
BUY CALL JUL 80.00 LES-GP open interest=4477 current ask $2.90
BUY CALL JUL 85.00 LES-GQ open interest=6354 current ask $1.20

Picked on May 06 at $ 77.30
Change since picked: + 0.00
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 5.9 million

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Marathon Oil - MRO - cls: 104.41 chg: +0.83 stop: 99.75

Company Description:
Marathon Oil Corporation is engaged in the worldwide exploration and production of crude oil and natural gas, as well as the domestic refining, marketing and transportation of petroleum products. Headquartered in Houston, Texas, Marathon is among the leading energy industry players, applying innovative technologies to discover valuable energy resources and deliver the highest quality products to the marketplace. (source: company press release or website)

Why We Like It:
Oil stocks have held up relatively well considering the decline in crude oil futures this past week. The breakdown in oil looks bearish on a technical basis but we're quickly approaching the summer driving season and any weakness is oil is probably temporary. MRO is a tempting bullish candidate thanks to its relative strength. The stock looks like it wants to breakout higher after a six-week sideways consolidation pattern. We're suggesting a trigger to buy calls at $105.55, which is just above Friday's intraday peak. If triggered at $105.55 we'll have two targets. Our conservative target is the $109.85-110.00 range. Our aggressive target will be the $114.00-115.00 range. FYI: The P&F chart points to $110 and MRO has a 2-for-1 split coming up on June 19th.

Suggested Options:
We are suggesting the June and/or July calls. Our suggested trigger to buy calls is at $105.55.

BUY CALL JUN 100 MRO-FT open interest=1739 current ask $6.50
BUY CALL JUN 105 MRO-FA open interest=1415 current ask $3.60
BUY CALL JUN 110 MRO-FB open interest=1720 current ask $1.70

BUY CALL JUL 105 MRO-GA open interest=2648 current ask $5.10
BUY CALL JUL 110 MRO-GB open interest=2309 current ask $2.95
BUY CALL JUL 115 MRO-GC open interest= 449 current ask $1.60

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/31/07 (unconfirmed)
Average Daily Volume = 3.8 million

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Research In Motion - RIMM - cls: 138.02 chg: +2.52 stop: 134.50

Company Description:
Research In Motion is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. (source: company press release or website)

Why We Like It:
Expectations were running pretty high for RIMM ahead of its April 11th earnings report. Investors sold the news and the stock gapped down. Since then shares have been consolidating sideways. It now appears that the consolidation is over with Friday's bullish breakout from its trading range and above its simple 50-dma. However, RIMM still has resistance at $140.00. We're suggesting a trigger to buy calls at $140.25. If triggered our target is the $149.00-150.00 range. Readers should note that RIMM will probably encounter some resistance near the top of its gap down around the $145 region. FYI: The P&F chart is bearish and points to a $110 target. More aggressive traders might want to consider buying a bounce from $135.

Suggested Options:
We are suggesting the June calls. Our trigger to open positions is at $140.25.

BUY CALL JUN 135 RFY-FG open interest=5908 current ask $7.90
BUY CALL JUN 140 RFY-FH open interest=9568 current ask $5.10
BUY CALL JUN 145 RFY-FI open interest=6648 current ask $3.20

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

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WATSCO - WSO - cls: 55.73 change: +1.42 stop: 53.95

Company Description:
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies in the HVAC industry, currently operating 380 locations serving over 40,000 customers in 32 states. (source: company press release or website)

Why We Like It:
WSO has been showing relative strength in the face of bad news. The company reported earnings on April 19th and missed estimates. If that wasn't bad enough they warned for the year. Yet the stock shot higher post-earnings and has been trending higher since. Friday's 2.6% rally is a bullish breakout over resistance at the $55.00 level. The move looks like a new entry point for call positions. The P&F chart looks very positive with a bullish triangle breakout pattern and a $68 target. We're suggesting calls with WSO above $55. Our target is the $59.50-60.00 range.

Suggested Options:
We are suggesting the June calls. We don't see any data for the June $60 calls yet.

BUY CALL JUN 55.00 WSO-FK open interest= 209 current ask $2.60
BUY CALL JUN 60.00 WSO-FL open interest= 0 current ask $

Picked on May 06 at $ 55.73
Change since picked: + 0.00
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 382 thousand
 

New Puts

Equinix - EQIX - cls: 82.83 chg: -1.58 stop: 86.05

Company Description:
Equinix is the leading global provider of network-neutral data centers and Internet exchange services for enterprises, content companies, systems integrators and network services providers. Through the company's Internet Business Exchange(TM) (IBX) centers in 10 markets in the U.S. and Asia, customers can directly interconnect with every major global network and ISP for their critical peering, transit and traffic exchange requirements. (source: company press release or website)

Why We Like It:
EQIX recently reported earnings and the stock initially rallied on the positive earnings guidance. Yet the intraday breakouts over resistance at $90.00 proved to be a bull trap. The stock produced a big breakdown and bearish reversal on April 30th. EQIX did see an oversold bounce from the $80 level but that rebound is already failing. Last Friday's session produced another bearish engulfing candlestick. We are suggesting puts now with a stop loss above $86.00 (and its 50-dma). More conservative traders may want to wait for a breakdown under $80.00 before initiating positions. Our target is the $75.25-75.00 range. Aggressive traders may want to aim closer to $70 but be aware that the 200-dma might offer new technical support. FYI: The P&F chart points to a $70 target.

Suggested Options:
We are suggesting the June puts.

BUY PUT JUN 85.00 FQS-RQ open interest=1486 current ask $4.50
BUY PUT JUN 80.00 FQS-RP open interest= 512 current ask $2.30
BUY PUT JUN 75.00 FQS-RO open interest= 365 current ask $1.00

Picked on May 06 at $ 82.83
Change since picked: + 0.00
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 515 thousand

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Essex Property - ESS - cls: 127.30 chg: -2.95 stop: 130.05

Company Description:
Essex Property Trust, Inc., located in Palo Alto, California and traded on the New York Stock Exchange (ESS), is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast communities. Essex currently has ownership interests in 132 multifamily properties (27,087 units), and has 908 units in various stages of development. (source: company press release or website)

Why We Like It:
Investors usually don't like it when companies dilute an investor's position by offering additional stock for sale. ESS just announced another 1.5 million shares for sale in a secondary offering at $128/share. ESS only has 24.2 million shares outstanding. On top of this news the REITs have been showing relative weakness. ESS is developing a bearish trend of lower highs and the Thursday-Friday action last week is a failed rally under the 50-dma. We want to catch any further breakdown under support at the $125.00 level. The March 2007 low was $124.78. We are suggesting a trigger to buy puts at $124.65. There is potential support near $120 but if triggered our target is the $115.50-115.00 range. FYI: The P&F chart points to a $100 target.

Suggested Options:
We are suggesting the June and/or July strikes. Our trigger to open plays is at $124.65.

BUY PUT JUN 125 ESS-RE open interest= 32 current ask $2.50

BUY PUT JUL 125 ESS-SE open interest= 57 current ask $3.90
BUY PUT JUL 120 ESS-SD open interest= 28 current ask $2.35

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 281 million

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Itron - ITRI - cls: 66.45 change: -0.44 stop: 70.01

Company Description:
Itron is a leading technology provider and critical source of knowledge to the global energy and water industries. Nearly 3,000 utilities worldwide rely on Itron's award-winning technology to provide the knowledge they require to optimize the delivery and use of energy and water. (source: company press release or website)

Why We Like It:
The bull run in ITRI may be ending soon. The stock has produced a bearish reversal in the last few days. The high-volume drop on April 30th was the first clue and the bounce back struggled to make it past $70 again. Now shares are falling on big volume and look poised to break down under technical support at the 50-dma. We are suggesting a trigger to buy puts at $65.85, under the 50-dma and under short-term support near $66.00. If triggered at $65.85 our target is the $60.50-60.00 range. More conservative traders may want to aim for the rising 100-dma (currently near 60.73) since the 100-dma could be support.

Suggested Options:
We are suggesting the June puts. Our trigger to open positions is at $65.85. At this time we don't see any June $60 puts available.

BUY PUT JUN 70.00 IUP-RN open interest= 21 current ask $4.70
BUY PUT JUN 65.00 IUP-RM open interest= 20 current ask $1.95

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 547 thousand

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Las Vegas - LVS - cls: 81.81 change: -2.32 stop: 85.01

Company Description:
Las Vegas Sands Corp. is one of the leading international developers of multi-use integrated resorts. The Las Vegas, Nevada-based company owns and operates The Venetian Resort-Hotel-Casino and the Sands Expo and Convention Center in Las Vegas and the Sands Macao in the People's Republic of China (PRC) Special Administrative Region of Macao. The company is currently constructing four additional integrated resorts: The Venetian Macao Resort-Hotel in Macao; The Palazzo Resort-Hotel-Casino in Las Vegas; Sands Bethworks(TM) in Bethlehem, Pennsylvania; and The Marina Bay Sands(TM) in Singapore. (source: company press release or website)

Why We Like It:
Investors were not satisfied with LVS' latest earnings report last week. Shares gapped lower and the follow through decline on Friday looks bearish with its close under technical support at the 200-dma. Volume has been very big on the sell-off, which is another bearish clue. We want to catch any further breakdown under support at the $80.00 level. Thus we're suggesting a trigger to buy puts at $79.85. If triggered our target is the $71.50-70.00 range. Currently the P&F chart sports a triple-bottom breakdown sell signal with a $75 target.

Suggested Options:
We are suggesting the June puts. Our triggered to open positions is at $79.85.

BUY PUT JUN 80.00 LVS-RP open interest=10656 current ask $2.80
BUY PUT JUN 75.00 LVS-RO open interest= 2986 current ask $1.30

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 2.1 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ctrip.com - CTRP - cls: 71.78 chg: +1.55 stop: 67.45

Shares of CTRP woke up from their three-day nap on Friday. Shares rose 2.2% and short-term indicators are now improving. We suspect that some of CTRP's strength may be reflecting the big bullish breakout in Priceline.com (PCLN) today. The trend in CTRP still looks bullish but more conservative traders may want to tighten their stops toward $69.50. 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. FYI: Readers should also note that EXPE is due to report earnings on May 8th and that news could impact shares of CTRP.

Suggested Options:
We are suggesting the June calls although May calls would also work since we plan to exit ahead of earnings.

BUY CALL JUN 70.00 QCT-FN open interest=522 current ask $5.20
BUY CALL JUN 75.00 QCT-FO open interest=617 current ask $2.85

Picked on April 29 at $ 70.63
Change since picked: + 1.15
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

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General Dynamics - GD - cls: 79.69 chg: -0.78 stop: 77.75

The DFI defense index posted another new all-time high on Friday. Unfortunately, GD failed to participate and produced a failed rally under the $81.00 level. At this point we would either wait for another bounce (dip) near $78.00 or wait for a breakout over $81.00 before initiating new positions. 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.

Suggested Options:
If GD provides a new entry point we would suggest the June calls. It's worth noting that both May and August strikes have more open interest.

BUY CALL JUN 75.00 GD-FO open interest= 94 current ask $5.70
BUY CALL JUN 80.00 GD-FP open interest=224 current ask $2.10
BUY CALL JUN 85.00 GD-FQ open interest=794 current ask $0.50

Picked on April 29 at $ 80.27
Change since picked: - 0.58
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

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Holly Corp. - HOC - cls: 63.12 chg: -0.40 stop: 61.95 *new*

Crude oil futures suffered a substantial decline this past week yet the oil and energy stocks actually held up relatively well. The trend in HOC is still bullish. However, we are concerned because the sell-off in crude futures has broken technical support. A bounce in HOC near $62.00 could be used as a new entry point but we just don't have the time left. We plan to exit on Monday afternoon at the closing bell to avoid holding over the Tuesday morning earnings report for HOC. Please note that we're adjusting the stop loss to $61.95.

Suggested Options:
We are almost out of time so we're not suggesting new positions.

Picked on April 22 at $ 62.30
Change since picked: + 0.82
Earnings Date 05/08/07 (confirmed)
Average Daily Volume = 669 thousand

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Wynn Resorts - WYNN - cls: 102.52 chg: -1.11 stop: 100.89*new*

Casino stocks are still struggling with lackluster earnings reports from LVS and MGM this past week. This turns into profit taking for WYNN and WYNN's upward momentum is now in jeopardy. It is our plan to exit on Monday at the closing bell to avoid holding over WYNN's earnings report on Monday after the close. Due to our limited time left we're going to adjust our stop loss to a very unconventional spot in an effort to reduce our risk. Our new stop is at $100.89.

Suggested Options:
We are out of time with WYNN so we're not suggesting new positions.

Picked on April 15 at $102.44
Change since picked: + 0.08
Earnings Date 05/07/07 (confirmed)
Average Daily Volume = 1.4 million
 

Put Updates

AvalonBay - AVB - cls: 119.03 chg: -2.22 stop: 125.26 *new*

REITs suffered some profit taking on Friday and AVB saw its oversold bounce quickly reverse course. Shares of AVB lost another 1.8% and close at a new relative low. Today's move could be used as a new entry point but if you're opening new positions now we suggest a much tighter stop loss. Speaking of stops we're going to tighten ours to $125.26. Our target is the $112.50-110.00 range. The P&F chart points to a $110 target. More conservative traders might want to think about taking some money off the table here.

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

Picked on April 30 at $124.45
Change since picked: - 5.42
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand

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Lockheed Martin - LMT - cls: 96.64 chg: +0.24 stop: 97.51

We remain encouraged by the relative under performance in LMT. The stock has ignored the new highs in the defense sector. LMT has been stuck under resistance near $97 and its 50-dma. It's worth noting that volume is drying up and it looks like LMT could be coiling for a breakout move. The question is which way will it break? Given the trend of lower highs we suspect LMT will breakdown but the sector strength and market strength could eventually pull LMT higher. We would wait for a breakdown under $95.00 before considering new put positions. More aggressive traders might want to consider an earlier entry on a breakdown under $96 or $95.75. Our target is the $90.50-90.00 range but we might need to adjust our target to account for the rising 200-dma, which will probably be technical support. FYI: LMT announced that it will be presenting at an investor conference on Tuesday, May 8th.

Suggested Options:
If LMT provides a new entry point we'd suggest the June puts.

Picked on April 24 at $ 94.82
Change since picked: + 1.82
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.)

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Lockheed Martin - LMT - cls: 96.64 change: +0.24 stop: n/a

We only have two weeks left for our May options in this strangle play. LMT needs to move pretty soon. Shares have been consolidating sideways this past week so we're expecting a breakout sooner rather than later. 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.

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

Picked on April 22 at $ 95.40
Change since picked: + 1.24
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

Advance Auto Parts - AAP - cls: 40.35 chg: -0.38 stop: 39.90

We are giving up on AAP as a bullish candidate. There is still a chance that shares will bounce from the $40.00 level but the stock has been showing way too much relative weakness lately. We're suggesting an early exit immediately.

Picked on April 11 at $ 40.05
Change since picked: + 0.30
Earnings Date 05/17/07 (unconfirmed)
Average Daily Volume = 854 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

From Sticking Points to Stikky Charts

It caught my eye immediately, this inexpensive little book titled STIKKY STOCK CHARTS. Long ago, Jane Fox, a commentator on the live portion of the website, and I used to talk about "sticking points," places where prices tended to stick whenever they approached them. Turns out, the book didn't have anything to do with those sticking points, but the book still might have much to teach newbies in technical analysis and much to remind experienced chartists.

The book has been around a while, as you'll realize immediately if you should decide to buy the book. The pages dealing with placing orders provide readers with explicit instructions on how to talk to a broker but none on how to place an online order.

That doesn't render the book antiquated or useless. Neither does the simplicity of the ideas presented nor the workbook format in which they're presented. You're going to be asked to pick up ruler and pencil and draw some trendlines. In fact, the publisher insists that readers draw trendlines on the pages, in the best approximation of an interactive technical analysis text that can be found in a printed text.

If you're an experienced technical analyst, you might think this little book has nothing to teach you, but you'd be wrong. How many times have you been stopped repeatedly, trying to catch the turning point of a trending move? Perhaps this little ditty from STIKKY would have saved you from some of those stopped plays: "Hint: the rule is 'when a chart approaches a trendline the most likely outcome is a bounce.'" (61) This "bounce" refers to a bounce down, away from a descending trendline, as well as a bounce up, away from an ascending one.

STIKKY is a simple book, and the concepts it presents are simple, but those concepts bring technical analysis back to its most powerful roots: determining the short-term, medium-term and long-term trends and expecting those trends to continue . . . until they don't. "Trendlines are so powerful that some successful traders use them and nothing else to decide when to buy or sell," the book notes. (68)

Note: Remember that my articles are prepared in advance and do not feature up-to-date charts and prices.

Annotated Weekly Chart of the OIX:

This chart and many similar ones might resonate for some of those traders who have been trying to anticipate a reversal in other indices over the last weeks. It points out the wisdom of determining the trend and trading it, keeping your stops moved along just under the rising trendline you're trading and just above a descending trendline you might be trading. It's a concept that would have helped many a trader not only preserve trading capital but add to it while also setting appropriate exit levels.

Of course, many of us watching recent market action worry about some signs we're seeing in the markets lately, including some troubling breadth measurements. Is such a simplistic little book going to help when the trend does change?

The book certainly intends to do so, and some experienced traders have raved about the book. Those comments in STIKKY about how trendlines are so powerful that some traders just buy or sell bounces from ascending or descending trendlines? The book goes on to comment that they'd be missing some other important opportunities and information.

The publisher divides the book into sections, with trend-determination tips, practice and comments included in the first section. Next week's Trader's Corner will delve into the other patterns that STIKKY considers the most important ones for traders to recognize, the ones that help traders employ techniques in addition to the simple but powerful trend-following ones.
 

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.

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.

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