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Daily Newsletter, Saturday, 05/12/2007

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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

It's Alive!

The Dow streak came back from the dead on Friday with a strong triple digit performance and rescued the Dow from a potentially down week. The triple digit bounce pushed the Dow to a 61-point gain for the week and to positive gains in 26 of the last 31 days. The real question for traders is this a real rebound or just a dead cat bounce?

Dow Chart - Daily

Nasdaq Chart - Daily

Friday's economic reports were led by the Producer Price Index (PPI), which came in at +0.7%. This makes three consecutive months of sharp gains in prices on the headline number. Fortunately for those rare individuals who don't use food or energy their core inflation rate was zero. I have never met anyone who lives in the "core" dimension but economists continue to track and report that inflation rate. Personally if it costs me $10 more at the gas pump or the grocery store that is inflation for me. Finished energy goods like gasoline rose +3.4% for the month and finished food products rose +0.4%. Vegetable price spiked +8.9% for the third month of big gains. While headline inflation remains in check the prices for core goods have risen for the last six months. April's increase was the largest in nearly a year. The core rate was discussed as a reason the Fed could be closer to a rate cut than previously thought but strongly disagree. I believe they will focus on the rise in food and energy prices and not be eager to jump back into a new rate cut cycle. The Fed Funds Futures rose slightly from a 42% chance to a 56% chance of a rate cut by year end but in reality this is just noise. There is no cut projected for the next six meetings.

We already know retail sales have been weak and they were blamed for the sharp drop in the markets on Thursday. The overall sales for the month fell -0.2% in April and that is much better than some of the double digit declines seen in several chain stores. Offsetting the strong gains in dollar value at gasoline stations was slowing automobile sales. March was revised up to +1% while year over year growth declined -3.2%. Most analysts claim we should not assign too much weight to the April numbers because of an early Easter and the coldest April in some states in 100 years. It is tough to sell bathing suits when it is snowing outside. Most analysts feel March, April and May should be averaged to offset the abnormal weather cycle and the calendar impact of the early Easter. This averaging concept helped to provide some of the boost to Friday's market rebound. Investors felt that bad news was not really that bad.

The Business Inventory report also showed continuing weakness in the economy. Inventories fell -0.1% compared to expectations for a gain of +0.2%. Inventories at retailers fell -0.7% for the month. The inventory to sales ratio fell to 1.27 and a seven-month low. This report will put another -0.2% drag on the GDP for Q1 and there is a very good chance it will show growth under 1% for the quarter. On the bright side the falling inventory to sales ratio indicates there will be an eventual rebound as manufacturers ramp up production to cover orders when the economy begins to improve. The lower the inventory level at that time the stronger the build cycle.

Business Inventories Monthly % Change

Next week's economic calendar is fairly strong with the two major reports being the Consumer Price Index (CPI) and the Philly Fed Survey. The CPI measures the rate of price inflation at the consumer level compared to last week's Producer Price Index, which measures inflation at the manufacturer level. The consensus estimates for the CPI are for a gain of +0.5% in the headline number. The March number (+0.6%) came in below expectations and a repeat surprise to the downside would be welcome news.

The Philly Fed Survey is also key because it tends to track very closely with the national Institute of Supply Management (ISM) number. The consensus is for a rise to +4 from last months barely positive 0.2 reading. After three months of hugging the flat line in the 0.2-0.6 range and just barely positive a rise to 4.0 would be very welcomed although it would start to push back the date for any potential rate cut. If the manufacturing sector is rebounding the Fed will want to see how this translates into the general economy and a rising economy could mean another rise in inflation pressures. Over the past two months the Philly Fed Survey has shown a significant drop in inventory levels and a slight rise in new orders. Analysts will be watching to see if this trend accelerates indicating a broader rebound.

Another interesting report on Tuesday will be the risk of recession. This attempts to project the risk of the country falling into a recession within the next six months. The chance has doubled over the last 12 months from 15.3% to nearly 28% in March. I actually view this as a lagging indicator rather than a predicting indicator and it will be interesting to see if April increased our chances or decreased them. Since the equity markets are an integral part of this calculations the constant new highs could have held the probability back artificially. The index peaked at 50% in April 2001 just before the last recession. The chart below does not instill a lot of confidence the economy is headed in the right direction. However, several times since the 2001 recession this index has returned to the 30% level and then faded as conditions improved. If it does return to its all time high at 50% we should be very worried.

Recession Probability Percent

In stock news Nvidia (NVDA) rose sharply after beating estimates on both earnings and revenue. Earnings of 42 cents beat estimates of 39 cents. Nvidia issued guidance that was termed encouraging by analysts. The current quarter is normally the toughest quarter of the year for personal computer products but Nvidia projected a slight gain in sales. I have five computers with Nvidia video cards and I would not replace them with ATI cards if you paid me. Nvidia has created a niche video business of uncomplicated high performance products at a reasonable price. Of course with a $1000 card just announced they are expanding that reasonable price envelope to encompass those gamers with more money than they can spend.

Amgen (AMGN) continued its plunge from Thursday with another drop to close at $56. Traders finally found a price they could buy when the stock hit $53.50 at the open. JP Morgan, Citigroup, Morgan Stanley, HSBC and Lazzard all downgraded Amgen after an FDA panel recommended additional warnings on its anemia drugs. The FDA wants the strictest possible warnings on the drugs concerning the severe side effects, which include death. They also said further marketing of the blockbuster drugs should be contingent on additional clinical studies. Sales of these drugs equal about $1.7 billion per quarter and a serious hit for Amgen if they can no longer market them.

Apple Inc, (AAPL) rose again adding +1.40 after saying they are very close to a deal to put the entire catalog of Beatles songs on iTunes. While this has been rumored for some time it still provided yet another reason for the momentum players to buy Apple. According to analysts it is a non-event for Apple profits since most feel they make very little on selling songs at 99 cents. They don't disclose their profits on music sales but Steve Jobs has said in the past that there is little in the way of profits in sales of music. It does bolster their iPod sales by having a broader assortment of tunes available.

Google finished putting out its press releases left over from the shareholder meeting on Thursday. One of those comments came from CEO Eric Schmidt who said they have no plans to split their stock. The question is put to Google frequently because of the lofty price of a share, currently at $467. Schmidt said Google had hired nearly 10,000 workers since the end of 2004 and would hire thousands more before the end of 2007. Schmidt also said Google will not bid for Dow Jones or Reuters as some had speculated could be possible. Schmidt said all the hurdles would be overcome on the DoubleClick acquisition by year-end. Google also said their new theme was "search, ads and apps." The apps refers to the various applications programs that Google is developing to steal some of Microsoft's Office business. Despite ever increasing price targets for Google stock the momentum has died and Friday's close was near the bottom of a month long slide.

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The Chicago Mercantile Exchange (CME) sweetened its bid for the Chicago Board of Trade (BOT) to a $9.95 billion all stock offer. This remains below the $10.58 billion from the Intercontinental Exchange (ICE). The CME also pledged a $3.5 billion stock (12%) buyback if the deal goes through. BOT Chairman Charlie Carey said a deal with CME made more sense because they both share platforms to clear contracts traded on their exchanges. He claimed significantly less integration risk with the CME than a potential merger with ICE. The problem lies in the new CME offer of $174.28 per share because the BOT shares are currently trading at $201. ICE had originally offered $191.49 but expectations of a competing offer helped push BOT higher. There are many forces trying to get BOT to reject both and try to hold out for a better offer next year. Analysts feel they are on the right path and could garner more money in a future sale. The downside would be the impact of a market crash that could knock shares of all three companies back significantly. Cash in hand today may be better than expectations for the future.

Chinese stocks rocketed higher on Friday on two separate events. First China's trade surplus rose to $16.9 billion in April from $6.9 billion in March bringing the total surplus from January to more than $63.3 billion and nearly double the $33.8 billion from the same period in 2006. Yes, business in China is very good. Secondly the China Bank Regulatory Commission issued a policy statement Thursday allowing Chinese banks to use up to 50% of their existing Qualified Domestic Institutional Investor (QDII) funds to invest in overseas equity markets. The majority of that capital will probably end up in the Hong Kong markets and in particular the "H" shares which until now were trading at a significant discount to their "A" share counterparts on Chinese exchanges. I know this sounds complicated but it is the equivalent of saying Chinese banks can suddenly throw $500 billion into the NYSE ADR shares for foreign companies. It will bring all the various Asian share offerings closer to parity. The various Chinese stocks rocketed higher with Sinopec (SNP) jumping +8% or $7.50, Petrochina (PTR) +6.33 and the FTSE iShare (FXI) +6.00 to name a few. Amazing what the prospect of a few hundred billion Yuan can do.

Earnings are nearly over with 89% of the S&P reported. Believe it or not we returned to double-digit growth at exactly 10% if the remaining players report as expected. Six weeks ago the estimate was for only +3.4% earnings growth and analysts have been extremely surprised. Of those already reported 67% beat estimates, 12% reported inline and 21% missed estimates. Those ratios are only slightly better than normal despite the nearly 200% miss by analysts on expectations. The problem now is what will investors focus on for future market momentum? Don't worry there are still hundreds of companies to report but as you can see from the list below the number reporting drops off significantly as the week progresses. Most of the companies reporting on Mon/Tue are ADRs and companies I doubt anyone would recognize. The highlights for the week are Agilent (A) on Monday, AMAT and WMT on Tuesday and it goes downhill from there.

Earnings Calendar

The International Energy Agency (IEA) raised concerns about the supply of oil for the summer driving season saying on Friday that gasoline could be in short supply in June. The IEA said the global inventories of gasoline were very low and there could be shortages that would drive up prices. They also felt OPEC was not willing to bump production by the needed 1.6 mbpd in June to offset the expected spike in demand. Seems OPEC countries are perfectly happy getting $60+ for their oil with $70 in their dreams. The IEA said March production by OPEC was a two-year low and the global draw down in Q1 took inventories to levels not seen since 1999. Also impacting the price of oil is continued outages in Nigeria with 100,000 bpd lost this week from pipeline sabotage and another 65,000 bpd from shutdowns at Chevron facilities. Chevron is removing all non-essential personnel and shuttering some facilities on fears of further violence. Despite the strong build in crude inventories in the U.S. last week the amount of gasoline in storage rose only 400,000 bbls and almost all of that was at one refinery. Demand continues to grow despite a national price average over $3.04 and well over on both coasts. The June crude contract closed at $62.37, +56 cents. This contract terminates trading on May 22nd so most investors have already shifted to future months. The July contract has fallen to somewhat meet the June contract price but remains firm at $64. The first named storm of the season, Andrea, appeared off the coast of Florida about three-weeks before the official start of the season. Andrea is not a threat with low winds and northeasterly track but it is a reminder that the season is just ahead. Abnormal weather such as the coldest April in 100 years and the hottest/driest weather in California in decades is just a precursor to what could be a strong hurricane season. I think OPEC is hoping we will get a Cat-5 storm right through the gulf to push prices to new records due to the currently low inventory levels. When the top five OPEC members are sitting on 58% of the world's known reserves they can afford to be patient.

June Crude Futures Chart - Daily

July Crude Futures Chart - Daily

As we head into expiration week the markets appear on the surface to be poised to move to new highs. Those new highs may prove as elusive as weapons of mass destruction in Iraq but it appears the bulls are betting on that coming to pass. The Dow refuses to die and returned to post its second highest close ever after a one-day drop of -150 points. If there was any bearishness in the market you could not tell it from a chart of the Dow. Intraday resistance at 13315 was broken at the close by a strong bout of buying. Short covering? Maybe, but the bulls were very evident across all markets at the open. Every single one-day dip in the Dow has been aggressively bought and the positive closes on 26 of the last 31 days indicate there are plenty of investors waiting for that next dip. Resistance, and I use that term loosely, would be the week's high at 13370 and initial support at 13200..

The Nasdaq is a little more complicated. The Nasdaq lost -6 points for the week and the first weekly loss since March 30th. While that sounds bullish the chart over the last month is far less exciting. We have been trading in the 2520-2580 range for three weeks and while every dip has been bought the new highs have been sold equally as routinely. The recent resistance highs at 2577 appear strong and there is little in the way of a tech event in our near future to break that ceiling. We had a nice rebound on Friday of +28 points but much of that could be short covering ahead of the weekend. The Nasdaq has a far weaker trend than the Dow and we will need some stronger internals than we have seen recently to push it higher.

SS&P-500 Chart - 30 min

The S&P-500 struggled for four days to break that roadblock at 1510 only to have those bulls that powered the breakout on Wednesday turned into barbeque fixings on Thursday. That 1510 resistance still exists and is followed closely by the all time resistance high at 1527. I would like to think we will push over 1510 again next week but I need to be convinced. Initial support is 1490.

You knew I would get to it eventually. The Russell is continuing to signal no confidence by fund managers in the current rally. The 835 level has been strong resistance for three weeks and it shows no signs of crumbling. Without a breakout by the Russell I believe the big cap rally will eventually fail. The Russell has been moving sideways since April 16th when a spike took it to 831. It has remained at that level ever since. The Russell is my fund manager sentiment indicator and it is showing a definite lack of confidence. I will continue to short every touch of 835 until proven wrong.

Russell-2000 Chart - 120 min

NYSE Composite Chart - 60 min

The NYSE Composite is showing only a slightly more positive picture than Russell. The NYSE Composite consists of a broad range of equities of more than 2000 stocks from the largest companies like GE, IBM and MMM to the smallest and includes ADRs, REITs and ETFs. As such it provides the best overall broad market sentiment indications. Up until a week ago it was strongly bullish but sellers have begun to appear at every bounce.

Friday's gain of 117 points (1.21%) was not specifically representative of the US markets. The sharp spike in all the Chinese ADRs produced a sharp opening spike in the index. If you look at an intraday chart of the NYSE and a Chinese ADR and they are identical. The large number of Asian ADRs on the NYSE and the severity of the spike produced the strong NYSE gain. I suspect the sharp spike in the NYSE Composite may have had a sentiment impact on the other indexes at Friday's open and indirectly caused a lot of the positive market momentum. If you look at the table below these are only a few of the Asian ADRs and their opening gains. It would not take but a few of these to spark serious momentum when short interest in the general market was heavy from Thursday's drop.

Top 12 Asian Stock Gains on NYSE

I don't know how long the Chinese policy decision will continue to benefit Asian stocks and their associated ADRs but I would be very surprised if we saw the same impact on Monday. As we have seen hundreds of times before when a news event produces a spike in a particular stock the day after that event produces a bout of profit taking from those wanting to capture those profits. This could provide a negative influence on the NYSE and by association the other indexes as well. That would be a good chance for the bulls to appear and prove their conviction. Until they appear again I remain cautious with a short bias below Russell 835.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BIDU IWM None
GS    
PCP    
SHLD    
VWO    

New Calls

Baidu.com - BIDU - cls: 128.12 chg: +3.24 stop: 124.95

Company Description:
Baidu.com, Inc. is the leading Chinese language Internet search provider. As a technology-based media company, Baidu aims to provide the best way for people to find information. In addition to serving individual Internet search users, Baidu provides an effective platform for businesses to reach potential customers. Baidu's ADSs, each of which represents one Class A ordinary share, currently trade on the NASDAQ. (source: company press release or website)

Why We Like It:
The market loved BIDU's latest earnings report back in April. The stock soared to new three-month highs. Since then the stock hasn't seen much profit taking. Instead BIDU has consolidated sideways with a bullish pattern of higher lows. We suspect that BIDU is poised to breakout over the $130 level again. We're suggesting a trigger to buy calls at $130.51. More conservative traders may want to set their trigger above the April 27th high of $132.80 or set their trigger above the January 2007 high at $134.10. If we are triggered at $130.51 then our target is the $139.50-140.00 range. The P&F chart is bullish with a $203 target. FYI: Due to BIDU's volatility we would consider this a more aggressive, higher-risk play.

Suggested Options:
We are suggesting the June calls. Our trigger to open positions is at $130.51.

BUY CALL JUN 125 BDQ-FE open interest=7937 current ask $8.20
BUY CALL JUN 130 BDQ-FF open interest=3770 current ask $5.50
BUY CALL JUN 135 BDQ-FG open interest=2185 current ask $3.50

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 2.2 million

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Goldman Sachs - GS - cls: 227.50 chg: +4.40 stop: 222.45

Company Description:
Founded in 1869, Goldman Sachs is one of the oldest and largest investment banking firms. Goldman Sachs is also a global leader in private corporate equity and mezzanine investing. (source: company press release or website)

Why We Like It:
The broker-dealer stocks and the XBD index are rebounding. If you study the XBD index's daily chart you can see that it's bouncing from a three-month trendline of support. We do note that the technical indicators are mixed for the XBD and the group does have resistance near 260. However, in this current environment of fast-paced M&A activity we believe the brokers will continue to out perform. Leading the way is GS. The stock is bouncing from the bottom of last week's trading range. We're going to try and keep our risk to a minimum with a stop loss under Thursday's low. We're suggesting call positions now. More conservative traders may want to wait for a rally past $230 before initiating plays. Our target is the $238.00-240.00 range. The P&F chart currently points to a $246 target. We do not want to hold over the mid June earnings report.

Suggested Options:
We are suggesting the June calls since we plan to exit ahead of the mid June earnings report. The July strikes would also work well.

BUY CALL JUN 220 GPY-FD open interest=9340 current ask $12.70
BUY CALL JUN 230 GPY-FF open interest=4138 current ask $ 6.80
BUY CALL JUN 240 GPY-FH open interest=4797 current ask $ 3.00

Picked on May 13 at $227.50
Change since picked: + 0.00
Earnings Date 06/12/07 (unconfirmed)
Average Daily Volume = 7.4 million

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Precision Castparts - PCP - cls: 110.91 chg: +2.45 stop: 105.75

Company Description:
Precision Castparts Corp. is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power generation, automotive, and general industrial and other markets. PCC is the market leader in manufacturing large, complex structural investment castings, airfoil castings, and forged components used in jet aircraft engines and industrial gas turbines. The Company is also a leading producer of highly engineered, critical fasteners for aerospace, automotive, and other markets. (source: company press release or website)

Why We Like It:
The momentum in PCP continues. The company recently reported earnings on May 9th and beat the estimate by 14 cents. Traders are buying the post-earnings dip and the trend of higher lows continues. The close over $110 is bullish and we're suggesting new call positions after Friday's rally. We're setting our stop loss at $105.75. More conservative traders may want to put their stop closer to the 10-dma. Our target is the $118.00-120.00 range.

Suggested Options:
We are suggesting the June calls although the September's (which are the next available) would work too.

BUY CALL JUN 110 PCP-FB open interest=2056 current ask $4.70
BUY CALL JUN 115 PCP-FC open interest= 585 current ask $2.30

Picked on May 13 at $110.91
Change since picked: + 0.00
Earnings Date 05/09/07 (confirmed)
Average Daily Volume = 1.0 million

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Sears Holding - SHLD - cls: 177.96 chg: +1.94 stop: 174.74

Company Description:
Sears, Roebuck and Co., a wholly owned subsidiary of Sears Holdings Corporation, is a leading broadline retailer providing merchandise and related services. Sears, Roebuck offers its wide range of home merchandise, apparel and automotive products and services through more than 2,400 Sears-branded and affiliated stores in the United States and Canada, which includes approximately 926 full-line and 1,100 specialty stores in the U.S. (source: company press release or website)

Why We Like It:
The big drop in SHLD earlier this month was a reaction to SHLD's earnings warning. The retailers had a tough April with it being the coldest April in the last 100 years. Volume has been strong on the sell-off but bears are having a hard time breaking its trendline of support (see chart). Many of the technical indicators are negative and SHLD has been showing relative weakness so this should be considered an aggressive, speculative play. We'll try and limit our risk with a stop under last week's low. Our target is the $184.00-185.00 range.

Suggested Options:
We are suggesting the June calls. Please note we do not want to hold over the late May earnings report.

BUY CALL JUN 175 KDU-FO open interest=5062 current ask $7.90
BUY CALL JUN 180 KDU-FP open interest=6429 current ask $5.00
BUY CALL JUN 185 KDU-FQ open interest=7516 current ask $3.00

Picked on May 13 at $177.96
Change since picked: + 0.00
Earnings Date 05/31/07 (unconfirmed)
Average Daily Volume = 1.7 million

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Vangard Emergy Mkts ETF -VWO- cls: 85.80 chg: +2.19 stop: 83.45

Company Description:
This Exchanged Traded Fund seeks to mimic the performance of the MSCI Emerging Markets index. It's commonly called the VIPERs.

Why We Like It:
The VWO has seen a ton of momentum and every time it looks like it's over traders buy the dip. The sell-off on Thursday looked like another bearish reversal but traders bought the dip. Currently shares are trading near the top of its recent trading range. We want to buy calls on a breakout over $86.00. Therefore we are suggesting a trigger at $86.15. If triggered our target is the $89.85-90.00 range. More aggressive traders may want to aim higher since the P&F chart points to $113.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 85.00 VWO-FQ open interest=16 current ask $3.50
BUY CALL JUN 90.00 VWO-FR open interest=10 current ask $1.10

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand
 

New Puts

Russell 2000 Ishares - IWM - cls: 82.34 chg: +0.76 stop: 83.55

Company Description:
This Exchanged Traded Fund seeks to mimic the results of the Russell 2000 smallcap index.

Why We Like It:
Currently the market's trend is up and we've been playing the trend with a majority of bullish candidates on the newsletter. The trend in the Russell 2000 and IWM is also up but the IWM has really been struggling with resistance near 83.00. If the market decides to reverse course we want to take advantage of it with a put on the IWM. Here's the plan. The IWM is bouncing and will probably retest resistance near $83 soon. We're suggesting a trigger to buy puts at $82.90. We'll try and limit our risk with a tight stop at $83.55. More aggressive traders may want to put their stop just above $84.00. If we are triggered at $82.90 then we will have two targets. Our conservative target is $80.25-80.00. Our aggressive target is the $78.25-78.00 range.

Suggested Options:
We are suggesting the June puts. Our trigger is at $82.90. Take your pick on a strike price.

BUY PUT JUN 84.00 IOW-RF open interest= 6975 current ask $2.47
BUY PUT JUN 83.00 IOW-RE open interest=87967 current ask $1.95
BUY PUT JUN 82.00 IOW-RD open interest=97612 current ask $1.55
BUY PUT JUN 81.00 IOW-RC open interest=77416 current ask $1.23
BUY PUT JUN 80.00 IOW-RB open interest=224284 current ask $0.97

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 58.4 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Allegheny Tech - ATI - cls: 115.18 chg: +2.67 stop: 109.99*new*

The market's rebound on Friday was enough to fuel a 2.3% bounce in ATI. The initial bounce struggled at near $116 but traders were buying the dip again on Friday afternoon. This looks like a new entry point to buy calls on ATI but more conservative traders may want to put their stops under Thursday's low. We're raising our stop loss to $109.99. Our target is the $119.00-120.00 range. FYI: The Point & Figure chart forecasts a $122 target.

Suggested Options:
We're suggesting the June calls. Last week we mentioned how the option suffix for the 110 and 120 strikes look different than normal. Verify with your broker.

BUY CALL JUN 110 ATI-FX open interest=1294 current ask $8.60
BUY CALL JUN 115 ATI-FC open interest=2588 current ask $5.60
BUY CALL JUN 120 ATI-FY open interest=1066 current ask $3.50

Picked on May 08 at $113.45
Change since picked: + 1.73
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.4 million

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Bear Stearns - BSC - cls: 156.40 chg: +2.87 stop: 154.75

We are very tempted to buy this bounce in BSC. Friday's rebound pushed BSC to a 1.8% rally and a bullish breakout back above its simple 10-dma. On top of this the XBD broker-dealer index is bouncing from its trendline of support. More aggressive traders may want to buy calls now with a stop under last Thursday's low. We are going to refrain from jumping in now and stick to the plan, which is to wait for a breakout over resistance at $160. Our trigger to buy calls is at $160.25. Our target would be the $169.75-172.50 range. The Point & Figure chart is bullish with a triple-top breakout and a $184 target but the P&F chart also shows resistance at $160.

Suggested Options:
If BSC hits our trigger at $160.25 we would suggest the June or July calls.

BUY CALL JUN 155 BSC-FK open interest=1665 current ask $6.70
BUY CALL JUN 160 BSC-FL open interest= 770 current ask $4.10
BUY CALL JUN 165 BSC-FM open interest=1344 current ask $2.30

BUY CALL JUL 160 BSC-GL open interest=1488 current ask $5.90
BUY CALL JUL 165 BSC-GM open interest=4876 current ask $3.80
BUY CALL JUL 170 BSC-GN open interest=1907 current ask $2.30

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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Peabody Energy - BTU - cls: 50.53 change: +1.03 stop: 47.99

Coal stocks were able to rebound along with the rest of the market on Friday. There was no follow through on Thursday's bearish reversal. BTU's bounce back above the $50.00 level looks like a new entry point to buy calls again. BTU might look overbought if you study the weekly chart but on a more short-term basis the stock is breaking out from a three-week consolidation under resistance at $50.00. Our target is the $54.50-55.00 range. The P&F chart is very bullish with a $69 target. Our biggest concern with calls on BTU is M&A news. The risk is that BTU might announce it is acquiring one of its smaller rivals and normally shares of the acquirer go down on the announcement.

Suggested Options:
We are suggesting the June calls. 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 45.00 BTU-FI open interest=19687 current ask $6.20
BUY CALL JUN 50.00 BTU-FJ open interest=14583 current ask $2.50
BUY CALL JUN 55.00 BTU-FK open interest= 4466 current ask $0.65

Picked on May 09 at $ 50.70
Change since picked: - 0.17
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 5.3 million

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Ctrip.com - CTRP - cls: 72.60 chg: +1.76 stop: 69.99 *new*

We are almost out of time with CTRP. The company is due to report earnings on May 16th after the closing bell. We plan to exit on Wednesday at the close to avoid holding over earnings - unless the stock hits our target first, which is the $74.50-75.00 range. Traders bought the dip near $70 on Friday and the big bounce looks like a short-term bullish reversal. We're inching our stop loss up to $69.99. Given our time frame we're not suggesting new positions.

Suggested Options:
We're not suggesting new positions in CTRP at this time.

Picked on April 29 at $ 70.63
Change since picked: + 1.97
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

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General Dynamics - GD - cls: 80.15 chg: +0.64 stop: 77.75

The Friday bounce in GD was kind of weak. The larger pattern in the stock remains bullish but last week's trend was bearish with a series of lower highs. We would suggest readers waiting for a new rally past $81.00 or to a new high over $81.55 before starting new call positions. 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.

Suggested Options:
If GD bounces we would suggest the June or August calls.

Picked on April 29 at $ 80.27
Change since picked: - 0.12
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

---

Lehman Brothers - LEH - cls: 75.35 chg: +0.47 stop: 74.85

LEH may be in trouble! The stock only managed a meager bounce on Friday (+0.6%) and under performed the XBD index (+1.2%). Almost any dip under $75.00 is going to stop us out at $74.85. More aggressive traders may want to widen their stop to under the 200-dma (near $74.50). We would rather readers roll out of LEH and into another stronger brokerage stock like GS or MER. At this point we are suggesting that readers wait for a rally past $77.00 or $77.50 in LEH before considering new call positions. The P&F chart is bullish with a $100 target but it's struggling with overhead resistance.

Suggested Options:
If LEH provides a new entry point (above $77) we would suggest the June or July calls.

Picked on May 06 at $ 77.30
Change since picked: - 1.95
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 5.9 million

---

Marathon Oil - MRO - cls: 107.39 chg: +1.84 stop: 101.95 *new*

The rally in MRO continues. Shares rebounded 1.7% and set a new closing high on Friday. We remain bullish on the stock with shares above $105. If you don't feel like chasing it here wait for a potential dip into the $105.50-106.00 region. We 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. Please note that we're raising the stop loss to $101.95.

Suggested Options:
If MRO provides another entry point we would suggest the June or July calls.

Picked on May 08 at $105.55
Change since picked: + 1.84
Earnings Date 07/31/07 (unconfirmed)
Average Daily Volume = 3.8 million

---

Terex - TEX - cls: 82.34 change: +1.58 stop: 77.95

Most of TEX's gains came at the open on Friday. Shares gapped open higher at $81.60 and eventually closed up with a 1.9% gain. Volume came in at a healthy clip, which is bullish. We couldn't find anything specific to account for the gap higher on Friday. The new highs over the last two days has produced a new triple-top breakout buy signal on the P&F chart, which already pointed to a $105 target. We remain bullish here and readers can choose to open positions now or wait for another dip in the $81-80 range. Our target is the $87.00-90.00 range.

Suggested Options:
We are suggesting the June calls although Julys would also work.

BUY CALL JUN 80.00 TEX-FP open interest= 458 current ask $5.10
BUY CALL JUN 85.00 TEX-FQ open interest= 990 current ask $2.45

Picked on May 09 at $ 81.16
Change since picked: + 1.18
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 1.2 million

---

WATSCO - WSO - cls: 56.75 change: +0.17 stop: 53.95

WSO is another bullish breakout and momentum play. The stock broke through resistance at the $55.00 level several days ago. Meanwhile the P&F chart has produced a very bullish pattern called a bullish triangle breakout, which has a $68 target. If you're looking for a new entry point on WSO watch for a dip into the $55.50-55.00 zone near its rising 10-dma. Our target is the $59.50-60.00 range.

Suggested Options:
If WSO provides a new entry point we suggest the June calls.

Picked on May 06 at $ 55.73
Change since picked: + 1.02
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 382 thousand
 

Put Updates

AvalonBay - AVB - cls: 123.84 chg: +4.71 stop: 125.26

Many of the REIT stocks were rebounding strongly on Friday as rumors about more M&A in the group began to circulate again. Shares of AVB might be a potential takeover target given the sharp spike seen on Friday morning. AVB should have resistance near $125 but more conservative traders may want to exit early now just to protect themselves. We're not suggesting new put positions at this time.

Suggested Options:
We're not suggesting new put positions in AVB at this time.

Picked on April 30 at $124.45
Change since picked: - 0.61
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand

---

Equinix - EQIX - cls: 82.53 chg: +1.47 stop: 86.05

Warning! The volume wasn't very strong on Friday but EQIX still produced a bullish reversal. Traders bought the dip near short-term support at $80 and the move ended up with a bullish engulfing candlestick pattern. EQIX is testing the 10-dma and will soon test potential resistance at the 100-dma and 50-dma overhead. We're not suggesting new positions at this time but a failed rally under the 50-dma (around $85) could be a new entry point. It's worth noting that EQIX is presenting at a couple of investor conferences this week on the 15th and 17th. 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're not suggesting new positions in EQIX at this time.

Picked on May 06 at $ 82.83
Change since picked: - 0.30
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 515 thousand

---

Essex Property - ESS - cls: 127.58 chg: +2.20 stop: 130.05

Rumors of more consolidation in the REIT sector combined with some positive analyst comments on Friday morning to push ESS sharply higher. Shares rallied straight to resistance near $129-130 and its 50-dma and 200-dma. We are still waiting for a breakdown under support at $125.00. Our suggested trigger to actually buy puts is at $124.65, which is under the March 2007 low. 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:
If triggered at $124.65 we would suggest the June or July puts.

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: 67.89 change: +1.69 stop: 70.01

The bears may be in trouble on ITRI. There was no follow through on Thursday's bearish reversal under the 10-dma. Instead the market's widespread rebound fueled a 2.5% gain in ITRI and shares broke out over its 10-dma. Now the recent consolidation is starting to look like a sharp, bullish flag pattern. ITRI should still have resistance in the $68-70 range but we're not suggesting new positions at this time. Wait for a new decline under $66.00 before jumping in again. More conservative traders may want to exit early if they see ITRI trade over $68.50 or more. Our target is the $60.50-60.00 range.

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

Picked on May 08 at $ 65.85
Change since picked: + 2.04
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 547 thousand

---

Las Vegas - LVS - cls: 79.51 change: +2.31 stop: 85.01

LVS just erased most of our unrealized gains with a 2.99% rebound on Friday. We shouldn't be too surprised. Our recent comments were warning readers to expect an oversold bounce soon. So far the $80 level is holding as support but we should be prepared for a rebound toward the $10-dma near $82.00. Wait for a failed rally to appear before opening 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.

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

Picked on May 07 at $ 79.85
Change since picked: - 0.34
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: 98.84 change: +0.24 stop: n/a

We are down to our last five days with this strangle on LMT. May options expire after the 18th. At this point we need to see LMT trade to $101.50 or 88.50 just to breakeven. 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 $2.00 or more (note the change in target price).

Suggested Options:
We're not suggesting new positions at this time.

Picked on April 22 at $ 95.40
Change since picked: + 3.44
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Sticking with Stikky

Last week's Trader's Corner article delved into the first section of an inexpensive and seemingly simplistic little book on technical analysis: STIKKY STOCK CHARTS. In truth, the book offers the technical analysis tools the authors feel are most powerful.

The book requires readers to pause for a few days to absorb each section's material before moving to the next section, asking for a sort of honor code to be followed. I may actually be cheating to discuss the last two sections in this article, breaking the honor code, but that's what I'm going to do.

As I mentioned last week, don't be put off by that honor code, the asked-for promise that readers of the book will actually draw on the charts and not just eyeball them, or even the antiquated information that assumes you'll be calling your broker rather than punching in your own orders online. You won't encounter information on adaptive trading bots or entropic analysis of prices, but the information remains helpful for both new and experienced traders nonetheless. Newbies to technical analysis benefit from the quick introduction to trendlines and several tradable patterns while more experienced chartists are reminded of the benefits of keeping analysis simple.

Section 2 of the book identifies eight tradable patterns: rectangles, channels, double tops, head-and-shoulders tops, megaphones, ascending triangles, descending triangles and symmetrical triangles.

Some Formations from STIKKY CHARTS:

The publishers provide blank price charts with no trendlines drawn. They ask readers to identify patterns and predict the next price movement before turning the page, where they'll discover the authors' interpretations of the action. If you have young children and are reading to them, you'll recognize the technique employed to engage and teach readers, but try not to feel manipulated and indulged. It truly is a useful technique to take pen and pencil and actually draw some lines. In the intervening years since the book was published, some patterns have become recognizable to even the novice chartist, but the practice can prove humbling to even experienced chartists.

In those intervening years, some patterns have become more recognizable to even novice chartists. In some cases, that recognition sometimes seems to work against the reliability of some patterns, but pattern recognition remains an important tool for any trader gazing at a chart. While I might no longer count on a head-and-shoulders top to confirm or to meet any downside objectives if it does confirm, watching such patterns confirm or unravel proves equally useful. If traders see a bearish pattern fail to confirm or to fail to see follow through after confirmation, they've gained useful information about the strength of bullish intentions or upward momentum. Isn't that as helpful to know as a confirmation of a pattern?

Contrary to what some believe when they've been trading a number of years, hunting for and then drawing these patterns on charts does prove useful. Just as the trendline-drawing exercises in the first portion of the book reinforce important ideas about trading the trend, this section provides tactile reinforcement of ideas that mostly work, even if they don't always do so.

The second section and third sections also reinforce the need to set stops, with the pattern-recognition tools helping traders to determine the correct place for those stops. Failing to set stops results in temptation to stay in a trade going wrong, "which is exactly how investors the world over lose their money" (161) the book cautions, adding that it's also exactly how professional traders make their money from undisciplined traders. Learning where to set stops to minimize losses is "the most important concept" in the book, the authors claim (211).

These two sections also introduce the need to pay attention to volume patterns, too. Lately, Keene Little has been including charts in his Wednesday Wraps that show that while the NYSE was climbing through the last months, breadth measurements were dropping. STIKKY CHARTS' authors believe that to be a clear danger signal.

I would agree. I don't agree with all conclusions reached in the book, however. Those technicians pay attention to Fibonacci brackets are "cranks," the book concludes. However, so many traders watch prices in relationship to Fib brackets that they may be somewhat self-fulfilling: traders may automatically bail from a bullish scalp play when a possible bear flag has retraced 38.2-50.0 percent of the decline that immediately preceded it, for example, meaning that the Fib resistance "worked." Perhaps Fib brackets may have that true connection to trading patterns that it certainly seems to have in nature, as evidenced by the relationship of Fib numbers to the numbers of petals on flowers. Flowers certainly aren't fulfilling some expectations. Whatever the reason, I wouldn't label traders who diligently study price action around Fib numbers as "cranks," but rather as cautious and observant traders.

Candlesticks hold no advantage over the standard OHLC bars, the book's writers intone. Really? If nothing else, the filled-in and colored candle bodies make it much easier to distinguish whether a close was higher than the open or vice versa, I would counter. It's much easier to glance quickly at a chart and see whether most closes have been higher than opens across a certain period or time. It's easier to just plain see than trying to squint at those little nubs on the left and right sides of price bars. If for no other reason, I assert that candlesticks do have an advantage, at least for traders of a certain age.

Still, this book probably costs a third of what most technical analysis texts costs, it's quick to read and easy to understand, and its tenets are important for newbies to learn and experienced technical analysts to remember. I recommend it, even if I'd likely be labeled a crank who studies useless candlesticks by its publishers.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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