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Daily Newsletter, Monday, 05/07/2007

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Table of Contents

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

Market Wrap

Alcoa Can't Wait!

In the mid 1970's, Dow Industrial's component Alcoa (NYSE:AA) $38.63 +8.32% commissioned a theme song for radio and TV advertising titled "We Can't Wait for Tomorrow." The song's lyrics told a story of a brighter future for America.

Today, shareholders of Alcoa (AA) cheered, but not as loud as shareholders of Canadian-based Alcan Aluminum (NYSE:AL) $82.11 +34.54%, whose shares surged higher by $21.08 after Alcoa made a hostile bid of nearly $27 billion.

After nearly two years of private talks between the two companies, which failed to reach a negotiated deal, Alcoa's hostile bid comes as both companies try to keep pace with growing Russian rival Rusal.

"The reality is that commodities businesses are consolidating globally," Morningstar analyst Scott Burns said. "When foreign countries like Russia allow their two largest aluminum producers to merge and really dominate that market, and you've got a company called Chalco in China where the Chinese government has made no secret that they want this to be a national champion, I think it really gives a company like Alcoa a nice leg to stand on in terms of regulatory objection."

Alcoa, which founded Alcan in 1902, split it off as a separate company in 1928, and retained largely common ownership until 1951 when major shareholders were divested by U.S. court order because of antitrust issues.

As Alcoa looks to reunite, the company offered Alcan shareholders a combination of cash and stock that values Alcan at $73.25/share.

The bid includes $58.60 a share in cash and 0.4108 of an Alcoa (AA) share for each share of Alcan (AL).

Including Alcan debt, Alcoa said the deal is valued at $33 billion.

In today's Market Monitor at OptionInvestor.com, I noted that shares of Alcan (AL) $82.11 +34.54% had exceeded their point and figure chart's bullish vertical count of $78.00 and suggested those long the shares, look to take profits, or at least protect gains as U.S. antitrust regulation may not be as "receptive" as Chinese and Russian regulators.

While not a "heavyweight" in the price-weighted Dow 30, today's gains for Alcoa (AA) helped the very narrow Dow Industrials (INDU) 13,312.97 +0.36% close at another all-time high, and posting a gain for the 16th-time in 18 sessions!

At tonight's close, Alcoa looks to finish as the S&P 100's (OEX.X) 692.79 +0.26% 63rd-largest market cap component.

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

Financials put in a mixed session on Monday, but broader strength in the regional S&P Banks Index (BIX.X) 404.35 +0.52% and KBW Bank Index (BKX.X) 117.78 +0.34% into Wednesday's FOMC decision on interest rates helped offset weakness in the brokers as depicted by the XBD.X 257.28 -0.73%.

Today's economic calendar was light.

At 02:00 PM EDT, Federal Reserve figures showed March consumer credit, or non-mortgage loans to individuals, increased to $13.5 billion. The Federal Reserve said March's gain was the most in four months and has consumer credit growing at a 6.7% annual rate to $2.425 trillion. In February, consumer debt rose by $5.65 billion.

The increase in March consumer credit was the largest since a $20.1 billion gain in November according to Fed statistics.

Credit watchers saw today's figures as sign that recent credit-tightening standards among mortgage refinancing lenders had consumers turning toward revolving credit and other financial avenues for larger ticket items like automobiles and durable goods.

In geopolitical news, French voters elected Conservative Nicolas Sarkozy in their presidential election. The CAC-40 (France's blue chip index) edged up 0.04% to 1,594.61. Trading volumes were lighter than usual due to a holiday in Britain.

The news of Sarkozy's victory may well have been felt here at home. Earlier this month, President Sarkozy told reporters the he would like to arm 100,000 of the country's police cruisers with stun guns.

Shares of TASER International (NASDAQ:TASR) $9.92 +4.09% jolted as high as $10.25 intra-day, closing just below their 5/11/06 close of $10.14.

It is notable that shares of TASR have risen from the $8.00 level in late April, suggesting some market participants may have had insight into France's election outcome.

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Energy prices were weak again today. Last week, the US Oil Fund (AMEX:USO) $48.06 -0.49% broke below the $49.00 level and triggered my 1/4 bullish position stop at $48.90 after the Energy Information Association (EIA) data showed continued builds in crude oil inventories (+1.169 million barrels), and draws in unleaded stockpiles (-1.12 million barrels).

Today, Energy Secretary Bodman said that U.S. crude oil supplies as being stable, but said a bottleneck at the refining end has had unleaded fuel prices rising at the pump.

Hopefully, Mr. Bodman's comments do not come as a surprise to trader's and investors.

June Crude Oil futures (cl07m) at the Nymex settled down $0.46, or -0.74% at $61.47, it sixth-straight session loss.

June Unleaded futures (rb07m) settled down $0.0268, or -1.21% at $2.1896.

On April 30th, I turned notably more cautious the refiners, with my fundamental thinking surmising that we would begin to see refiners get the bulk of their facilities back online, thus seeing draws in crude oil stockpiles, and refined products (like unleaded and jet fuel) inventory builds.

That certainly didn't come to fruition by last Wednesday's EIA report.

On 04/30/07 I turned bearish on shares of Valero Energy (VLO) $72.48 -1.18% at the $70.70 level with the VLO May $70 Put (ZPY-QN) at $1.45. Perhaps my convictions too great, but on Friday, 05/04/07 I felt an additional ZPY-QN still attractive at $0.55, with a pre-May expiration (5/18/07) target of $68.05 in the underlying.

Valero is the nation's largest independent refiner.

In order to get such a meaningful decline in shares of Valero (VLO), which remain technically strong, I think this Wednesday's EIA data needs to show a MINIMUM draw of 3 million barrels oil, and at least a 1.5 million build of unleaded stockpiles.

EIA's Weekly Crude Oil and Unleaded Stockpiles Table

The "bottleneck" I've noted, and Energy Secretary Bodman notes again today is more evident at the bottom of the EIA table I keep track of.

Each week that passes, where damage from fires, and shut-down refining production due to extended maintenance has had on the supply/demand relationship, has kept crude oil supplies building, but unleaded supplies falling.

The "bottleneck" has been a HUGE positive for refiners as their costs (oil) have fallen, but their refined product (unleaded) has risen due to the lack of supply!

Each week's EIA report should have trader's on their toes.

Shares of Valero Energy (VLO) $72.48 -1.18% closed at $55.62 on 02/09/07, and have surged higher from their Wednesday 02/14/07 (day that 02/09/07 inventory was released) close of $55.91.

Weather long, or short the refiners, I would have to think that once (if ever) we see a build in unleaded inventories begin, there should be some profit taking among bulls.

Valero Energy (VLO) - Daily Intervals

Refiners have been VERY STRONG and have been one of the more BULLISH oil-related groups.

The energy sector as a whole has also helped lift the S&P 500 (SPX.X) 1,509.48 +0.25% to new multi-year highs.

My "fundamental" thoughts that we'd have started to see seasonal draws for crude oil, and builds in unleaded have NOT played out to this point.

As recently as 4/23/07, shares of VLO surged higher still on "bad news" that its St. Charles gasoline refinery was going to experience delays due to extended repairs.

That "bad news" was actually "good news" as it delayed supply of refined products.

Oil Service HOLDRs (AMEX:OIH) - Daily Intervals

The Oil Service HOLDRs (AMEX:OIH) $160.34 -0.59%, does not contain any "refining" stocks, but contains names like Schlumberger (NYSE:SLB) $75.00 +0.52%, Halliburton (NYSE:HAL) $32.26 -0.06% and Baker Hughes (NYSE:BHI) $81.70 -0.69%. Companies where profits depend more on the prices of the underlying commodities like oil and natural gas, where higher prices there stimulate demand for drilling and work-over of existing wells in production.

Last week the Department of Minerals Management Services (MMS) approved a major federal initiative to boost oil and natural gas production on the U.S. Outer Continental Shelf in the Gulf of Mexico and offshore Alaska, which could produce 10 billion barrels of oil and 45 trillion cubic feet of natural gas over 40 years.

The interiors Minerals Management Service developed the initiative, known as the Five Year Outer Continental Shelf Oil and Gas Leasing Program, to guide domestic energy leasing on the Outer Continental Shelf (OCS) from 2007 to 2012. The program proposes 21 lease sales in 8 planning areas. Twelve sales are slated for the Gulf of Mexico, 8 off of Alaska and, at the request of the Commonwealth of Virginia, one in the Mid-Atlantic Planning Area, about 50 miles off the coast of southern Virginia.

S&P Depository Receipts (AMEX:SPY) - 60-minute intervals

Last week I was monitoring internals closely, and to a bear's chagrin, internals steadied and resumed strength, confirming price action for the broad S&P 500 Depository Receipts.

Volumes have been light the past couple of sessions at both the NYSE and NASDAQ, and with volume turned on for the SPY, volume a bit light here too.

There has been comment regarding the "narrow bullish breadth" as the SPY reversed last week's early losses to go on to trade new multi-year highs.

There was some option action Friday that suggests the SPY is about to trade WEEKLY R1 and $152.14. One thing I do think bulls want to see is for at least 81 S&P 500 Components to trade new 52-week highs. On April 25th, my records show 81 S&P 500 components traded a new 52-week high.

What happened to Mike Burke's "buying climax," and this "topping" pattern discussed in last Monday's Market Wrap?

AT&T (NYSE:T) - Daily Intervals

I added shares of AT&T (NYSE:T) $39.60 +0.30% to my OptionInvestor.com's Market Monitor "Watch List" as one way to monitor at least one stock that exhibited the "buying climax" pattern. In last Monday's Market Wrap, we noted Mike Burke's alertness to a growing number of stocks that were exhibiting this action.

While I would be hard pressed to "call a market top" based solely on AT&T's action, T may be a closely monitored stock in comings sessions.

For instance, what if T were to surge to $41.00 this week? That may give an observation that other "buying climax" stocks still have room to the upside.

Conversely, should T fall sharply back below $38.64, and we see a lack of bullish leadership (new highs at NYSE), or S&P 500, then we would still be very alert that Mike Burke is onto something.
 


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

Apple Inc. - AAPL - cls: 103.92 chg: +3.11 stop: 99.85

We didn't have to wait very long for AAPL to breakout for us. Shares took off early this morning and quickly hit a new high above the April peak. Our suggested trigger to buy calls was at $102.55. AAPL eventually closed up 3% on above average volume, which is bullish. Fueling the move was some positive chatter about an iPod upgrade and the upcoming launch of the iPhone. Now that the play is open our target is the $108.00-110.00 range. FYI: The Point & Figure chart forecasts a $123 target.

Picked on May 07 at $102.55
Change since picked: + 1.37
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 23.9 million

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Abbott Labs - ABT - cls: 58.95 chg: +0.65 stop: 55.69

Shares of ABT were upgraded to an "over weight" this morning, which sparked the surge higher at the opening bell on Monday. Volume is still under the daily average but it's improving. The stock is nearing potential resistance at the April highs. If you don't feel like chasing it you could wait for a potential pull back. The $58.00 level should be short-term support so consider watching for a dip near $58.00-57.50. Our target is the $62.00-62.50 range. FYI: The P&F chart points to a $65 target.

Picked on May 06 at $ 58.30
Change since picked: + 0.65
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 7.1 million

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Bear Stearns - BSC - cls: 155.85 chg: -1.92 stop: 154.75

In spite of more merger news today the broker-dealers failed to rally. Shares of BSC couldn't make it past the simple 100-dma. We are waiting for a breakout over $160. 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.

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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Ctrip.com - CTRP - cls: 71.10 chg: -0.68 stop: 67.45

Internet-related stocks under performed on Monday. Shares of CTRP slipped almost 1% on very light volume. Watch for a dip or a bounce near $70.00 as a new entry point. 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.

Picked on April 29 at $ 70.63
Change since picked: + 0.47
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

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General Dynamics - GD - cls: 81.41 chg: +1.72 stop: 77.75

Some M&A activity in the defense sector fueled another new high for the DFI index. Shares of GD showed relative strength with a 2.1% gain and a bullish breakout over resistance near $81.00. This looks like a new entry point to buy calls. However, if you're opening positions now considering aiming higher. We're adjusting our strategy so that we have two targets. Our conservative target will be the $84.75-85.00 range. Our aggressive target will be the $89.00-90.00 range. 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: + 1.14
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

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Lehman Brothers - LEH - cls: 76.85 chg: -0.45 stop: 74.85

LEH suffered a little bit of profit taking on Monday. Actually the move looks like a possible short-term top. We remain bullish here but it might pay off to wait for a dip near the $75.50-75.00 range. 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.

Picked on May 06 at $ 77.30
Change since picked: - 0.45
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 5.9 million

---

Marathon Oil - MRO - cls: 104.40 chg: -0.01 stop: 99.75

We do not see any changes from our weekend comments. 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.

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

---

Research In Motion - RIMM - cls: 139.83 chg: +1.81 stop: 134.50

Our new call play in RIMM has been opened. The stock broke out over resistance at $140.00 on an intraday basis. The high was $140.70. Our suggested trigger to buy calls was at $140.25. Now that the play is open our target is the $149.00-150.00 range. Should the stock dip from here watch for a bounce in the $137-138 range as a new entry point otherwise wait for a new relative high (over $140.70) before initiating positions. 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.

Picked on May 07 at $140.25
Change since picked: - 0.42
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = million

---

WATSCO - WSO - cls: 55.75 change: +0.02 stop: 53.95

We don't see any changes from our weekend comments. WSO continues to look bullish and traders bought the dip midday. 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.

Picked on May 06 at $ 55.73
Change since picked: + 0.02
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 382 thousand
 

Put Updates

Equinix - EQIX - cls: 81.61 chg: -1.22 stop: 86.05

EQIX continues to under perform. The stock lost 1.4% on Monday. We do not see any changes from our weekend comments. 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.

Picked on May 06 at $ 82.83
Change since picked: - 1.22
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 515 thousand

---

Essex Property - ESS - cls: 127.14 chg: -0.16 stop: 130.05

ESS is still drifting lower but we remain on the sidelines. 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.

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

---

Itron - ITRI - cls: 66.33 change: -0.12 stop: 70.01

ITRI under performed the market again but shares are clutching on to technical support at the 50-dma. The trend continues to look bearish and the stock looks 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.

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

---

AvalonBay - AVB - cls: 120.02 chg: +0.99 stop: 125.26

AVB experienced a minor oversold bounce on Monday. Shares rose 0.8% and managed to close over the $120 level. We're not suggesting new positions at this time. 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.

Picked on April 30 at $124.45
Change since picked: - 4.43
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand

---

Las Vegas - LVS - cls: 80.24 change: -1.57 stop: 85.01

Warning! LVS continued to sink on Monday and slipped to $79.35 intraday. We had a trigger to buy puts on a breakdown under $80.00 support at $79.85. The play is now open. We have to issue a warning because fellow casino operator WYNN just reported earnings after the closing bell and beat the estimates. Shares of WYNN will likely gap open higher tomorrow and this will be a bullish influence on shares of LVS. We would watch for a failed rally under $84.00 or a new low in LVS before considering new positions. 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.

Picked on May 07 at $ 79.85
Change since picked: + 0.39
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 2.1 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: 98.07 change: +1.43 stop: n/a

Today's bullish breakout in LMT, above resistance near $97 and its 50-dma, is good news for this strangle play. We needed LMT to move and do it quick before May options expire. 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: + 2.67
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

Holly Corp. - HOC - cls: 63.90 chg: +0.78 stop: 61.95

Crude oil slipped again but HOC displayed relative strength with a 1.2% gain on improving volume. The stock is still struggling under the $65.00 level but looks poised to breakout. Unfortunately, we're out of time. It was our plan to exit today at the closing bell to avoid holding over HOC's earnings report due out tomorrow morning.

Picked on April 22 at $ 62.30
Change since picked: + 1.60
Earnings Date 05/08/07 (confirmed)
Average Daily Volume = 669 thousand

---

Wynn Resorts - WYNN - cls: 101.85 chg: -0.67 stop: 100.89

We have been stopped out of WYNN at $100.89. It can be pretty tough to swallow a loss like this when shares came within two cents of our target on May 2nd (the high was $107.98). We were planning to exit anyway to avoid holding over tonight's earnings report. This loss is especially sour now that we see that WYNN beat estimates by 13 cents and is trading between $104.00 and $108.70 in after hours markets.

Picked on April 15 at $102.44
Change since picked: - 0.59
Earnings Date 05/07/07 (confirmed)
Average Daily Volume = 1.4 million
 

Dropped Puts

Lockheed Martin - LMT - cls: 98.07 chg: +1.43 stop: 97.51

Some merger news in the defense sector fueled another all-time high for the DFI defense index. Shares of LMT finally gave in and joined the crowd by moving higher. We would have been stopped out at $97.51. It's worth noting that this bullish breakout looks like a new entry point to buy calls but watch for resistance near $100.

Picked on April 24 at $ 94.82
Change since picked: + 3.25
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Strangles

None
 

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

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