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Daily Newsletter, Saturday, 06/16/2007

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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

Never A Dull Moment

Whoever coined that phrase did not trade stocks. They say war consists of weeks of boredom interspersed by hours of sheer terror. That pretty much explains our markets this week. Days of boredom interspersed by five hours of major movement. The majority of activity was very low volatility sideways movement punctuated by two major sell programs and three major short squeezes. The result was a return from six-week lows to within a handful of points from the historic highs. All the worry about interest rates has evaporated with the tame inflation numbers and the bears were banished back to their caves at least temporarily.

Dow Chart - Daily

S&P-500 Chart - Daily

This was a major week for economic reports and Friday's CPI was the exclamation point for the week. Friday's Consumer Price Index (CPI) showed a headline jump in prices of +0.7% and slightly over consensus estimates. However the more important core rate increased a lower than expected +0.1% suggesting inflation was continuing to moderate bringing the trailing 12-month inflation rate down to +2.3%. The core rate calculation is coming under increasing fire as irrelevant since ignoring sharp price increases in food and energy is equivalent to sticking your head in the sand. Even the politicians are starting to take notice and question this practice.

The implied 2.3% CPI inflation rate for May was well below the 4.3% rate seen in June 2006. This decline has come despite the continuing sharp rise in energy related costs. Energy prices surged +5.3% in May producing an annualized rate for the trailing three-month spike to a whopping 70.9% if this rate continued. With ethanol production adding to the price of nearly every product made with corn and the current drought in the south east causing serious price hikes in wheat prices and those products made from wheat the prospect of a continued rise in food prices is very strong. Oil prices closed over $68 on Friday and that is without any hurricanes to fuel the spike. Officially inflation may be slowing but for those of us that use food and energy the prices are continuing to rise. Fortunately the markets are only concerned with the official numbers and their impact on the Fed. Friday's CPI report confirmed Thursday's PPI and suggests the Fed will be on hold for the rest of the year. That is good news for stocks.

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It appears the economy is rebounding strongly from the Q1 dip and that was evidenced in the NY Empire State Manufacturing Survey on Friday. The headline number soared to 25.8 from last months 8.0. Consensus estimates were for a slight gain to only 10.5. This is the third consecutive monthly increase from the low of 1.9 seen back in March. New orders rose to 17.2 from 8.0 and shipments to 29.8 from 14.1. The only components still weak were a drop in employment from 9.7 to 3.4 and a sharp drop in the average workweek to 3.2 from 11.1 and backorders remained flat. This would suggest an excess in capacity that has yet to be met with new orders. The availability of excess capacity will continue to prevent inflation in prices. It is when plants are running at full capacity with backorders building that prices rise at an inflationary rate. The price components bear this out. Prices paid rose +8 points but prices received fell -6 points. This imbalance suggests producers are eating the difference to keep orders flowing.

Another confirming indicator was a slow down in industrial production to a zero increase for May compared to a +0.4% increase in April and estimates of a +0.2% gain. Capacity utilization fell -0.2% to 81.3%. Production components were weak across all sectors but declines in auto production of -0.5% helped pull down the headline number. Capacity utilization fell to only 81.3% in May indicating a lot of slack capacity to keep prices in check.

Consumer Sentiment resumed its slide with a sharp drop to 83.7 in the initial June reading. This is down sharply from a reading of 88.3 in May. The decline was equally evident in both components. Present conditions fell to 100.2 from 105.1 and expectations fell to 73.0 from 77.6. The drop in the headline number took sentiment to the lowest level since last August. The drop in the stock market and continued high gas prices during the summer vacation season were given as the probable cause although the closing refinance window was also a drag.

Consumer Sentiment Chart

This was a heavy week for important economics but next week returns with a very light calendar. The only report of note for next week is the Philly Fed Survey on Thursday. The new residential construction report on Tuesday would come in second in importance. Stocks will begin to focus on the two-day FOMC meeting the following week. The Fed is expected to remain on hold and continue saying the economy is growing and inflation is moderating. That should remain their mantra for the rest of the year. The problem now could be faster than expected growth rekindling inflation fears. Q2 GDP estimates are now starting to hit 4% and that is in the range where the Fed will come back off the sidelines to slow growth again. Goldilocks may have had a brief return as the analogy of choice for economic growth that was just right and be headed back into obscurity very quickly. Over 4% GDP will bring a complete set of new problems with the chance for an inflation spike the biggest fear.

Economic Calendar

The bond crash may appear to be over but some feel the gains of the last two days were just an oversold bounce. The problem remains a shift in buying habits by Asian investors and the surging stock market. We had new numbers released on Friday and it appears foreign treasury buyers only bought $376 million in treasuries in April compared to $30.5 billion in March. Yes, millions compared to billions. This extremely sharp drop in buying continued in May according to anecdotal reports from traders who deal with Asian accounts. In the same period foreign investment into equities rose to $76.5 billion in April from only $39.9 billion in March. China reportedly sold $6 billion in treasuries last week but that leaves them with nearly $414 billion in inventory. The selling in bonds may have paused but any continued buying strike from foreign investors will pressure prices because our need to sell debt has not disappeared. Total foreign holdings of Treasury bills, notes and bonds stood at $2.166 trillion at the end of April.

In stock news Intel continued its dramatic rally of more than +10%, which started on June 8th. Intel added +4.3% on Friday alone. The newly found popularity came on several analyst upgrades and a strong menu of new products coming to market in the near future. Intel is expected to cut prices by 50% on its top-end Core 2 Duo chips and that will hurt margins but increase sales. AMD remains in the house of pain as Intel continues to stretch its performance lead. In Q1 Intel increased its global market share by +4.5% to 80.2% but Intel margins fell to 19% from the historic range of more than 30%. The shrinking margins come from its war with AMD and its plan on maintaining the processor lead for years to come. AMD surprised Intel a couple years ago with a dramatic leap forward in chip performance and caught Intel sleeping. Intel paid the price in lost market share and margins as it raced to catch up. Now that Intel is back in the lead on chip performance I doubt AMD will be able to claim any major share gains for years to come. AMD reported a loss of 90 cents per share in Q1 and warned not once but twice during the quarter. AMD is expected to release its four-processor chip, the Barcelona, later this summer but Intel is way ahead on that architecture. Intel is expected to announce an eight-processor chip later this year to leapfrog AMD once again. With Intel cutting prices so steeply it cuts AMD's profits to the bone and deprives them of capital for new projects and advertising. I would be a seller of AMD on any Barcelona bounce.

Penn National Gaming (PENN) agreed to be acquired by Fortress (FIG) and Centerbridge Partners for $8.9 billion in cash and debt assumption. That equates to $67 per share and PENN spiked +11 points (+21%) to $62.12 on the news. JP Morgan said they expected the eventual price to rise to as much as $80 per share as other buyers made higher offers. PENN has the right to solicit other offers for 45 days following the announcement. With casino stocks very hot the odds are good other bidders will appear. The acquisition is expected to close in about 12 months. If not the price increases by $0.0149 per share per day, which equates to another $1 in price every 67 days. I thought the chance of a higher offer was so good I picked up some Oct $65 calls just in case a bidding war erupts. The two giants in the field MGM ($24B) and HET ($16B) are the current targets of buyouts so well managed $9B PENN could easily see other bidders appear. Isle of Capri (ISLE), Pinnacle Entertainment (PNK) and Boyd Gaming (BYD) also rose on the possibility they could become targets.

The New York Mercantile Exchange (NMX) spiked +2.32 to climax a four-day +$20 run on reports they were exploring a sale for $14.3 billion. Reportedly the Nymex has had discussions with the NYSE Euronext (NYX), Chicago Mercantile Exchange (CME) and the Paris and Deutsche Bourses. Late Friday the CME said it is not currently in discussions with the Nymex and was focused on completing its CBOT merger. This caused a loss of -$7 from the morning highs as expectations dimmed. Analysts feel a Nymex/CME merger would be the best fit although tough to handle from a regulator approval standpoint. A merger with the NYSE would create a powerhouse to compete with the combined CME/CBOT entity. For a cash exchange like the NYSE to acquire the Nymex would allow it to offer futures products from a proven platform to all its current customers. The race to find dance partners is heating up as the exchanges try to increase their global footprint before all the partners are gone. The Nasdaq currently owns 30% of the London Stock Exchange and the Deutsche Boerse in Frankfurt agreed to buy the International Securities Exchange (ISE) for $2.8 billion. It is only a matter of time before a deal with the Nymex is announced so I would be a buyer on any pullback.

Apple Inc. (AAPL) had a tough week with a dip into the $116 range after trading as high as $127.61 last Thursday. With the iPhone release scheduled for the end of June we are seeing analyst downgrades on price and expectations being fully priced. Reviewers are starting to complain about things they don't like about the phone and caution on bandwidth, battery life, keyboard problems, etc. All this and the phone is not even out in the public hands. This sets up a strong potential for a real sell the news event if the actual consumer product fails in any area or feature. With Apple near historic highs there is more risk to the downside than the upside on the release date. Analysts are starting to turn their attention to Nokia, which claims a significant share of the global handset market, and their new N95 phone. This will be a direct competitor to the iPhone and includes more features than I could list in this commentary. It is a cross between Blackberry and iPhone with a lot of Nokia features thrown in. Analysts claim hitching your wagon to the Nokia star before the N95 is officially announced with a carrier in the U.S. would be a wise move. With Nokia (NOK) at $29 those long-term options are a lot cheaper than AAPL. Research in Motion (RIMM), maker of the Blackberry, is also expected to get a strong boost by the delivery of the iPhone and the announcement of the N95 by Nokia. Both are very expensive relative to prior fully featured phones with the iPhone around $500 and the N95 at $700. That is prime Blackberry territory and some analysts believe a group of consumers will watch the ads and handle the products and then opt for the proven capabilities of the Blackberry product. Once you rationalize spending $600 for a phone your product shopping has to factor the Blackberry back into the picture. On the RIMM chart you will see RIMM began to rise when AAPL began to fall last week.

On Friday it was reported that China was supplying weapons and explosives to the Iraq insurgents and the Taliban. Weapons being delivered to these groups include HN-5 anti-aircraft missiles, large caliber rifles, millions of round of ammo, rocket-propelled grenades and components for roadside bombs. All are being used to step up the attacks on U.S. soldiers. This should create chill bumps on defense planners who already know that China is concealing nearly two-thirds of its military budget to prevent the world from realizing how rapidly they are modernizing and building their forces. Why China would want to take sides with the Taliban against the terrorist coalition headed by the U.S. is a serious question. On Friday the administration said it was tightening controls on a range of high-technology products eligible for export to China for fear they would end up in military applications. A pentagon official testified before Congress this week that China was spending as much as $125 billion on defense this year while reporting only $45 billion. He also testified China was making strides on anti satellite weapons that only have one major target and that is U.S. communication and spy satellites. Last month the Pentagon reported to Congress that China was modernizing its capability to mount surprise attacks potentially far from its borders. In a world where a Chinese official says at least once a month that war with the U.S. is inevitable and the U.S. is monitoring the preparations for a potential war I would not expect any material gains on the yuan devaluation problem, human rights, censorship or additional major purchases of U.S. debt. Maybe it is just me but hopefully the pentagon and stock market analysts are drawing the right conclusion. I don't view any confrontation any time soon but once the 2008 Olympics are behind us and China's economic revitalization program is completed I expect relations to become increasingly tense. China is continuing to acquire strategic assets around the world with miner BHP rumored to be an acquisition target to guarantee future metal supplies. Once peak oil officially arrives the shooting war will not be far behind.

Tensions around the world led by Iran's vow to never halt uranium enrichment and the problems in Israel sent oil prices to $68.05 and a nine-month high close on Friday. This spike was aided by a drop in refinery utilization and no increase in inventory levels of oil or gasoline in the weekly report. OPEC continues to claim no production adjustments will be made before the regular September meeting and we are now in hurricane season where a storm could be reported any day. This list of problems should keep a floor under crude for weeks to come. Gasoline prices continued to decline with a drop of -8 cents in the national average for regular gasoline. At $3.08 it is still nearly a buck over the futures price at $2.12 per gallon. On Wednesday oil and gasoline inventory levels were flat over the prior week in contrast to expectations for a decent build. What really pushed prices higher in the U.S. was the drop in refinery utilization to 89.2%, more than a full percent below estimates and at a time when utilization should be running around 94%. Refiners just can't seem to keep them running this year and this is without any hurricane problems that kept some offline for months in 2005. July crude futures terminate trading next Tuesday so expect further volatility as the contract month's change.

GGas Demand Chart

July Crude Futures - Daily

Wheat prices soared to a 10-year high this week as wet weather drowned crops on the plains and droughts killed crops in the south and other major production areas like the Black Sea region and Australia. With global supplies at a 30-year low and three of the six major producers hammered by weather problems we can expect wheat prices to continue to rise. This will impact the prices consumers pay for bread and any other product made with wheat. Wheat prices hit $6.11 a bushel on Thursday, +83 cents for the first four days of trading, and the first time over $6 since an Australian drought in 1996 sent prices to an all-time high of $7.50. This spike in both corn and wheat prices will pressure profits at cereal makers like Kellogg (K) and General Mills (GIS). Both have fallen sharply since the beginning of June despite 10% increases in cereal prices over the last year. Every time I buy cereal it appears the boxes got smaller and the price was higher.

December Wheat Futures Chart - Daily

December Corn Futures Chart - Weekly

The sharp increase in corn prices to create ethanol has pushed the price of milk to more than $4 per gallon in some areas and analysts expect it to top $5 before the year is out. Corn prices have risen +73% in the past year due to ethanol demand. Corn also hit a three-month high of $4.095 per bushel on Thursday after hitting a 10-year high of $4.5025 on Feb-26th. The government is subsidizing ethanol producers at a rate of 51 cents per gallon to stimulate production. This allows producers to pay more for corn and that pushes feed higher impacting both milk and beef prices. The USDA expects food prices to rise +4.5% in 2006 as a result of the corn and wheat price hikes. Don't worry though the government economists claim there is no inflation at the consumer level. Obviously they don't consume. The way to play the agriculture trend is with the fertilizer and tractor companies, Deere (DE), Monsanto (MON), Potash (POT) and Terra Nitrogen (TNH - No options).

Friday was a quadruple witching options expiration and a rebalance day for the S&P-500. This produced very strong volume and helped feed the short covering. The S&P is a capitalization weighted index and they rebalance every quarter for things like stock buybacks, which reduces the market cap of those companies. This was a particularly strong quarter for buybacks with companies like Microsoft buying back billions in stock. Actually $6.8 billion or nearly 2% of outstanding shares for Microsoft. Other companies taking stock off the market during the quarter include XOM $5.0B, T $3.1B, JPM $2.9B and WMT $2.1B. Remember this lowers their outstanding shares and increases the earnings per share making it more likely they will meet or beat the street estimates for Q2. Many times companies have this as an ulterior motive for a sudden large buyback program. Fund managers must sell shares in those companies to reduce their weighting as of Friday's close while at the same time buying shares of those companies moving up in the ranks. The quarterly rebalances on the S&P rarely impacts the market because the changes are so trivial and those few companies getting sold are being offset by those being bought. In theory it is a zero sum rebalance unlike the Russell rebalance next Friday.

The expiration activity pushed volume across all markets to 6.49 billion shares. I heard one analyst talking about the possible Nymex merger/acquisition saying we could see 10 billion share days by 2010. I doubt it will take that long given the number of ETFs being announced each week. Those are becoming the investment vehicles of choice and investors can move in and out of multiple baskets of stocks both domestic and foreign with a simple mouse click. Overall volume was weighted 3:1 advancers over decliners with about a 2:1 advantage of advancers to decliners in individual stocks. New 52-week highs hit 629 and a level not seen since June 1st.

The Dow rebounded to within 3 points of its all time intraday high of 13691 set back on June 1st. That high was attained on the morning short squeeze produced by the supposedly tame inflation in the CPI report. The Dow hit a low for the week at 13287 on Wednesday morning. Three reports, Beige Book, PPI and CPI, and three short squeezes later the Dow had added nearly +400 points from those Wednesday morning lows. That was only a 200-point gain for the week but still a nice performance. In the graphic below I highlighted the three squeezes that powered this move. Each was event related and took advantage of a heavily shorted market. Please note the absolutely lackluster periods that followed the opening squeeze on Thr/Fri. If this were a true buying binge on low inflation excitement it would have continued all day. The excitement faded just as quickly as it started and the return to the highs from two weeks ago did not produce any bullish confirmation signs.

Dow Short Squeeze Chart - 10 min

Nasdaq Chart - Daily

The Nasdaq gapped open +30 points to 2630 and then traded in a very narrow 5-point range for the rest of the day. The dead stop at long-term resistance created a Doji candle that could be the start of a new decline. Every candlestick formation that includes the doji requires the next candle to form a pattern. Most are reversals of some form.

Am I predicting a reversal, definitely not. I would rather just play what the market gives us on Monday. A failure here on the Dow would give the bears a nice opportunity to short a double top. Without any economic reports to feed the next squeeze we will be at the mercy of any buyout reports on Monday OR the lack of any buyouts. I simply feel the lack of any material intraday uptrend after the morning squeezes suggests there was no bullish conviction behind the spikes. It could also mean the bulls just did not want to buy the spike and would prefer to wait for another pullback once the expiration pressures evaporated. For next week we have a nearly perfect setup for the bears to short and give the bulls one more chance to trample them. There are no economics to cloud the issue and the Fed meeting on the 27th/28th will start becoming a focus late in the week as well as some pressure on the Russell from the rebalance on Friday. I would trade whatever the market gives us and I do expect some triple digit days. A successful reversal at this level could lead to another dramatic drop but once the bears become entrenched on Monday morning any concentrated bull rush could produce a true breakout rally over the prior highs. I would not hesitate to buy the breakout or short any failure. Friday's close was a nearly perfect setup for a big move in either direction.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BP LVS None
CETV    
CVX    
DE    
MAN    
PCR    
PENN    
SNDK    
SPWR    
VLO    

Play Editor's Note: The markets staged a very sharp rebound this past week. The Dow Industrials rallied more than 350 points from its lows and the S&P 500 index rebounded with a 2.6% gain. Yet in spite of these big moves the Industrials and the S&P 500 remain under resistance at their early June highs. A breakout here would be very bullish. However, this looks like a set up for a failed rally at resistance and a potential (bearish) double-top pattern. After such a strong week most of the candidates we found were bullish. Please note that while we are adding several new bullish plays to the newsletter we STRONGLY suggest that readers wait for the Industrials to breakout over 13,700 and/or the S&P 500 index to breakout past 1,541 before opening new bullish positions. We are at a pivotal spot in the market's rally and this could be a turning point.


New Calls

BP Plc. - BP - close: 69.29 change: +0.43 stop: 67.85

Company Description:
BP is one of the world's largest energy companies, with interests in more than 100 countries and over 100,000 employees across six continents. BP's business segments are Exploration and Production; Refining and Marketing; and Gas, Power and Renewables, which includes its Alternative Energy business. Through these business segments, BP provides fuel for transportation, energy for heat and light, retail services, and petrochemical products. (source: company press release or website)

Why We Like It:
Oil stocks have been very strong. The OIX oil index is hitting new all-time highs. Oil is likely to remain high thanks to the summer driving season, refinery outages, geo-political tensions, and the upcoming hurricane season. BP looks like a potential candidate to capture future strength in the group. The stock has been bouncing around the $66-70 level for weeks and is poised to breakout over resistance near $70.00. We are suggesting a trigger to buy calls at $70.25. If triggered our target is the $74.85-75.00 range. We do see some resistance near $73.50. Friday's rally hit an intraday high of $70.05 and that move over $70.00 has produced a new triple-top breakout buy signal on the Point & Figure chart with a $90.00 target. More aggressive traders may want to aim higher than our $75 target but keep in mind that we plan to exit ahead of the late July earnings report.

Suggested Options:
We are suggesting the July calls. Our suggested trigger to open positions is at $70.25.

BUY CALL JUL 65.00 BP-GM open interest= 7938 current ask $5.00
BUY CALL JUL 70.00 BP-GN open interest=15829 current ask $1.45
BUY CALL JUL 75.00 BP-GO open interest= 4325 current ask $0.20

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 3.5 million

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Central Euro. Media - CETV - cls: 92.75 chg: +1.95 stop: 87.90

Company Description:
CME is a TV broadcasting company operating leading networks in six Central and Eastern European countries with an aggregate population of approximately 90 million people. (source: company press release or website)

Why We Like It:
Most of CETV's weekly and daily technical indicators are turning positive with Friday's bullish breakout. The stock had been consolidating sideways between $86 and $90 and Friday's breakout looks like a new entry point to buy calls. There is resistance at the May highs in the $96-97 zone but we are aiming for a rally into the $99.00-100.00 range. The P&F chart is bullish with a $103 target.

Suggested Options:
We are suggesting the July calls although we'd prefer August calls when they become available.

BUY CALL JUL 90.00 EVU-GR open interest=274 current ask $5.20
BUY CALL JUL 95.00 EVU-GS open interest= 90 current ask $2.55
BUY CALL JUL 100.0 EVU-GT open interest= 55 current ask $0.95

Picked on June 17 at $ 92.75
Change since picked: + 0.00
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 124 thousand

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Chevron Corp. - CVX - close: 83.17 chg: +0.84 stop: 79.90

Company Description:
Chevron is one of the world's leading energy companies. With approximately 56,000 employees, Chevron subsidiaries conduct business in more than 180 countries around the world, producing and transporting crude oil and natural gas, and refining, marketing, and distributing fuels and other energy products. Chevron is based in San Ramon, Calif. (source: company press release or website)

Why We Like It:
As one of the biggest oil companies on the planet CVX should be a great proxy to play any future strength in oil and the energy sector. The stock has been bouncing around the $79-83.50 trading range for several weeks. If shares see any more strength it will be at new highs. We are suggesting a trigger to buy calls at $83.75. More conservative traders will want to consider waiting for a breakout over $84.00. We will also be watching for a pull back and another bounce near $80 as an alternative entry point. If we're triggered at $83.75 our target is the $89.00-90.00 range. The P&F chart is very bullish with a $120 target.

Suggested Options:
We are suggesting the July or September calls although we plan to exit ahead of the late July earnings report.

BUY CALL JUL 80.00 CVX-GP open interest=7200 current ask $4.40
BUY CALL JUL 85.00 CVX-GQ open interest=5181 current ask $1.35

BUY CALL SEP 80.00 CVX-IP open interest=9231 current ask $5.90
BUY CALL SEP 85.00 CVX-IQ open interest=6458 current ask $2.95

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 9.1 million

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Deere Co - DE - close: 121.75 change: +1.03 stop: 117.45

Company Description:
John Deere (Deere & Company - NYSE: DE) is the world's leading provider of advanced products and services for agriculture and forestry and a major provider of advanced products and services for construction, lawn and turf care, landscaping and irrigation. John Deere also provides financial services worldwide and manufactures and markets engines used in heavy equipment. Since it was founded in 1837, the company has extended its heritage of integrity, quality, commitment and innovation around the globe. (source: company press release or website)

Why We Like It:
Shares of DE have rallied back to the top of its recent trading range. Any further market strength should spark a breakout to new highs for DE. We're suggesting a trigger to buy calls at $123.55. If that doesn't occur we'll be watching for an alternative entry point in the $115-116 zone but we'll evaluate it as it occurs. If we are triggered at $123.55 we will have two targets. Our first target is the $129.50-130.00 range. Our second target is the $134-135 range. The P&F chart is bullish with a $152 target.

Suggested Options:
We are suggesting the July or September calls. We would prefer August strikes when they become available. Our trigger to buy calls is at $123.55.

BUY CALL JUL 120 DE-GD open interest=1493 current ask $5.20
BUY CALL JUL 125 DE-GE open interest=2137 current ask $2.75
BUY CALL JUL 130 DE-GF open interest= 669 current ask $1.30

BUY CALL SEP 120 DE-ID open interest=1453 current ask $9.20
BUY CALL SEP 125 DE-IE open interest=2631 current ask $6.60
BUY CALL SEP 130 DE-IF open interest=1820 current ask $4.20

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/15/07 (unconfirmed)
Average Daily Volume = 2.6 million

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Manpower - MAN - cls: 92.84 change: +0.84 stop: 89.90

Company Description:
Manpower Inc. is a world leader in the employment services industry; creating and delivering services that enable its clients to win in the changing world of work. The $18 billion company offers employers a range of services for the entire employment and business cycle including permanent, temporary and contract recruitment; employee assessment and selection; training; outplacement; outsourcing and consulting. (source: company press release or website)

Why We Like It:
Without a doubt shares of MAN, like most of the market, are overbought and due for a correction. However, until the trend actually changes the path of least resistance seems to be up. So far the stock has been resistant to any significant sell-off. If the major market indices breakout to new highs we believe MAN will follow. Currently shares of MAN are consolidating under resistance at $94.00. Therefore we're suggesting a trigger to buy calls at $94.15. If triggered our target is the $99.50-100.00 range. We'll start with a stop loss at $89.90 but more conservative traders may want to use a tighter stop in the $91.25-91.50 range. MAN's P&F chart points to a $110 target.

Suggested Options:
We are suggesting the July calls. We do not want to hold over the July earnings report. Our trigger to buy calls is at $94.15.

BUY CALL JUL 90.00 MAN-GR open interest=229 current ask $5.60
BUY CALL JUL 95.00 MAN-GS open interest= 67 current ask $2.80
BUY CALL JUL 100.0 MAN-GT open interest=301 current ask $1.25

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/07 (unconfirmed)
Average Daily Volume = 829 thousand

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PACCAR - PCAR - cls: 90.66 change: +0.88 stop: 85.95

Company Description:
PACCAR is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy-duty trucks under the Kenworth, Peterbilt and DAF nameplates. It also provides financial services and information technology and distributes truck parts related to its principal business. (source: company press release or website)

Why We Like It:
Shares of PCAR are breaking out from a six-week trading range. Friday's rally was fueled by above average volume and the close over $90.00 looks like a new entry point to buy calls. The MACD has produced a new buy signal. We're suggesting calls now with PCAR over $90.00. More conservative traders may want more confirmation with a move over $92.00. Our target is the $99.00-100.00 range. The P&F chart points to a $106 target. We do not want to hold over the late July earnings report.

Suggested Options:
We are suggesting the July or August calls. Our preference is for the August strikes.

BUY CALL JUL 90.00 PAQ-GR open interest=969 current ask $3.70
BUY CALL JUL 95.00 PAQ-GS open interest=235 current ask $1.45

BUY CALL AUG 90.00 PAQ-HR open interest=1066 current ask $5.10
BUY CALL AUG 95.00 PAQ-HS open interest= 444 current ask $2.80
BUY CALL AUG 100.0 PAQ-HT open interest= 346 current ask $1.30

Picked on June 17 at $ 90.66
Change since picked: + 0.00
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 1.7 million

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Penn National Gaming - PENN - cls: 62.12 chg: +10.98 stop: n/a

Company Description:
Penn National Gaming owns and operates casino and horse racing facilities with a focus on slot machine entertainment. The Company presently operates eighteen facilities in fourteen jurisdictions including Colorado, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. In aggregate, Penn National's operated facilities feature nearly 23,000 slot machines, over 400 table games, approximately 1,731 hotel rooms and approximately 808,000 square feet of gaming floor space. In the latest twelve month period ended March 31, 2007, Penn National generated net revenues of approximately $2.3 billion. (source: company press release or website)

Why We Like It:
If you have already read tonight's market wrap then you already know that PENN has announced it will be acquired by Fortress and Centerbridge Partners for $8.9 billion, which is about $67 a share. The stock reacted with a 21% gain on Friday. So why would be buy calls on it now? Good question. Some of the analysts commenting on the deal believe there could be additional suitors and a bidding war could drive the price towards $80.00. Jim, our market commentator, disclosed that he bought some October $65 calls to speculate on any further price action. We're going to add PENN as a bullish candidate but readers should consider this a high-risk, speculative play. If another bidder fails to show up then these calls will evaporate pretty quickly.

Suggested Options:
We are suggesting the October calls. Unfortunately, at this time, the only out-of-the money October call is the $65 strike. Hopefully we see some new strikes soon as market makers react to the spike higher.

BUY CALL OCT 65.00 UQN-JM open interest=76 current ask $1.40

We did notice that the January 2008 $70 calls were available.

BUY CALL JAN 70.00 UQN-AN open interest=37 current ask $0.65

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

SanDisk - SNDK - cls: 46.40 change: +1.42 stop: 43.45

Company Description:
SanDisk is the original inventor of flash storage cards and is the world's largest supplier of flash data storage card products using its patented, high-density flash memory and controller technology. SanDisk is headquartered in Milpitas, CA and has operations worldwide, with more than half its sales outside the U.S. (source: company press release or website)

Why We Like It:
Shares of SNDK look attractive after Friday's bullish breakout over resistance near $46.00 and its 200-dma. The stock has been consolidating sideways for months. Friday's move pushed shares past significant resistance and on above average volume. The P&F chart now points to a $64 target. We are suggesting calls with SNDK above $46.00. We'll use two targets. Our conservative target is the $49.50-50.00 range. Our aggressive target is the $52.50-55.00 range, which might be too optimistic given our time frame. We don't want to hold over the mid July earnings report.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 42.50 SWQ-GV open interest=18222 current ask $4.60
BUY CALL JUL 45.00 SWF-GI open interest=21492 current ask $2.65
BUY CALL JUL 47.50 SWF-GW open interest=13210 current ask $1.25
BUY CALL JUL 50.00 SWF-GJ open interest=14364 current ask $0.55

Picked on June 17 at $ 46.40
Change since picked: + 0.00
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 7.6 million

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SunPower - SPWR - cls: 57.94 change: +0.54 stop: 52.49

Company Description:
SunPower Corporation designs and manufactures high-efficiency silicon solar cells and solar panels based on an all-back contact cell design. SunPower's solar cells and panels generate up to 50 percent more power per unit area than conventional solar technologies and have a uniquely attractive, all-black appearance. (source: company press release or website)

Why We Like It:
Rising oil prices doesn't just fuel rallies in oil stocks but it also fuels interest in alternative energy companies. Shares of SPWR are breaking out again after a six-week consolidation. We are suggesting call positions with SPWR above $56.00. Our target is the $64.00-65.00 range. The P&F chart points to a $70 target. We do not want to hold over the mid July earnings report.

Suggested Options:
We're suggesting the July calls.

BUY CALL JUL 55.00 QSU-GK open interest=2886 current ask $4.60
BUY CALL JUL 60.00 QSU-GL open interest=1400 current ask $2.00

Picked on June 17 at $ 57.94
Change since picked: + 0.00
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 1.5 million

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Valero Energy - VLO - cls: 76.50 chg: +0.47 stop: 73.45

Company Description:
Valero Energy Corporation is a Fortune 500 company based in San Antonio with approximately 22,000 employees and assets valued at $38 billion. The largest refiner in North America, Valero has an extensive refining system with a throughput capacity of approximately 3.3 million barrels per day. The company's geographically diverse refining network stretches from Canada to the U.S. Gulf Coast and West Coast to the Caribbean. (source: company press release or website)

Why We Like It:
Oil refining company VLO has seen its stock price rebound from support and back to the top of its recent trading range. Any further strength should produce a breakout to new highs. We are suggesting a trigger to buy calls at $77.55. If triggered our target is the $84.50-85.00 range. The P&F chart currently points to an $88 target. We'll also keep watch for an alternative entry on another dip but our official entry point at this time is $77.55.

Suggested Options:
We are suggesting the July or September calls. Keep in mind we want to exit ahead of the late July earnings. Our suggested trigger to buy calls is at $77.55.

BUY CALL JUL 75.00 ZPY-GO open interest=23855 current ask $3.50
BUY CALL JUL 80.00 ZPY-GP open interest=21685 current ask $1.15

BUY CALL SEP 75.00 ZPY-IO open interest=34695 current ask $6.00
BUY CALL SEP 80.00 ZPY-IP open interest=19038 current ask $3.70
BUY CALL SEP 85.00 ZPY-IQ open interest= 6826 current ask $2.10

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 13.2 million
 

New Puts

Las Vegas Sands - LVS - cls: 76.78 chg: +0.20 stop: 80.26

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:
Shares of LVS have been under performing the market. The stock's oversold bounce from late May failed near $82 and its 50-dma. Now shares have a bearish trend of lower highs and the technical indicators are deteriorating. We are suggesting puts today after Friday's failed rally. More conservative traders may want to wait for a new relative low under $75.00. Our target is the $70.50-70.00 range. More aggressive traders may want to aim lower. FYI: More conservative traders may want to avoid opening new put positions if the major market indices breakout to new highs.

Suggested Options:
We are suggesting the July puts although Septembers would also work well.

BUY PUT JUL 80.00 LVS-SP open interest= 6401 current ask $4.90
BUY PUT JUL 75.00 LVS-SO open interest=10146 current ask $2.25
BUY PUT JUL 70.00 LVS-SN open interest= 2132 current ask $0.90

Picked on June 17 at $ 76.78
Change since picked: + 0.00
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.0 million
 

New Strangles

None today.

 


Play Updates

In Play Updates and Reviews

Call Updates

Ashland - ASH - cls: 62.40 change: +0.06 stop: 59.95

Shares of ASH hit a new two-month high on Friday at $64.00. The stock gapped open higher and ran to $64.00 before paring its gains. Unfortunately, the move now looks like a short-term (bearish) failed rally pattern. We didn't see any specific news or event to account for the early morning strength. However, the new relative high pushed the Point & Figure chart into a new buy signal with a new $75 price target. We would watch for a dip back toward $62.00. A dip or bounce near $62 could be used as a new entry point for bullish positions. However, bear in mind that we're aiming for the $200-dma near $64.50. More aggressive traders may want to aim higher but we would not hold over the late July earnings report.

Suggested Options:
If ASH provides a new entry point we would consider the July calls.

Picked on June 10 at $ 61.49
Change since picked: + 0.91
Earnings Date 07/23/07 (unconfirmed)
Average Daily Volume = 657 thousand

---

Avery Dennison - AVY - cls: 66.69 chg: +0.25 stop: 64.19

AVY continued to rally on Friday and shares hit new ten-week highs. We remain bullish on the stock and a move over $67.00 would reverse the P&F chart into a new buy signal. Readers can choose to buy calls here or look for a dip back toward $66.00 or the $65.50 zone. More conservative traders might still want to tighten their stops toward $64.80-65.00. Our target is the $69.75-70.00 range.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65.00 AVY-GM open interest=1194 current ask $3.00
BUY CALL JUL 70.00 AVY-GN open interest= 453 current ask $0.40

Picked on June 11 at $ 66.05
Change since picked: + 0.64
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 728 thousand

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Baker Hughes - BHI - cls: 88.01 change: +1.63 stop: 81.75

Oil stocks continue to rise. The OIX oil index and OSX oil services index are at historic highs. Shares of BHI surged to new 52-week highs and are nearing potential resistance at its own all-time highs from early 2006. We are not suggesting new positions at this time. Our target is the $89.00-90.00 range. More conservative traders may want to tighten their stops. Should BHI see any profit taking on Monday the $86 level looks like possible short-term support.

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

Picked on June 04 at $ 84.26
Change since picked: + 3.75
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 4.3 million

---

FTSE China Index - FXI - cls: 122.73 chg: +2.88 stop: 114.90*new*

The FXI Chinese ETF continues to rocket higher. The exchange-traded fund gapped above potential resistance at the $120 level and posted a 2.4% gain on strong volume. We're raising the stop loss to $114.90. Our target is the $124.00-125.00 range. More aggressive traders may want to only close a portion of their positions in the $124-125 zone and let the rest ride. The $128-130 range might make a good aggressive target. Please note that the newsletter will close the play at $124.00 if FXI trades at or above that mark.

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

Picked on June 11 at $116.75
Change since picked: + 5.98
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 2.4 million

---

General Dynamics - GD - cls: 80.25 change: +0.21 stop: 78.35

Defense giant GD is struggling to participate in the market's rally and that should make the bulls nervous. The overall, long-term trend continues to look very positive but short-term GD can't seem to breakout over $81.00. Shares did hit $81.35 on Friday morning but only because an analyst firm reiterated their "buy" rating for the stock Friday morning. The strength didn't last and now the move looks like a short-term bearish failed rally pattern fueled by big volume - again this is another reason bulls should be nervous. We're not suggesting new positions at this level. Earlier last week we suggest buying calls above $81.00. At this time we would wait for a rally past $81.50 to initiate positions. We do not want to hold over the mid July earnings report. Currently we have two targets. Our first target is the $84.50-85.00 range. Our second target is the $87.50-90.00 range. The P&F chart is bullish with a $96 target.

Suggested Options:
If GD provides another entry point we would consider the July calls or August calls.

Picked on June 10 at $ 80.58
Change since picked: - 0.33
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 1.3 million

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Global SantaFe - GSF - cls: 71.67 chg: +1.05 stop: 66.65

Another positive day for crude oil contributed strength to the rally in oil and oil service stocks. GSF rose 1.4% to another new high. The stock got an extra boost after one analyst firm issued positive comments on the jackup driller industry. GSF was one of three companies they were bullish on. If you are looking for a new entry point we would watch for a dip back towards the $70.00 level. Our target is the $74.50-75.00 range.

Suggested Options:
If GSF provides a new entry point we'd suggest the July calls.

Picked on June 03 at $ 68.86
Change since picked: + 2.81
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 4.8 million

---

China Life - LFC - cls: 50.09 chg: +1.82 stop: 45.75

Investors jumped into LFC on Friday. The stock shot higher right at the open and closed up 3.7%. Volume came in pretty strong for the rally and the close over $50.00 is bullish. We would still consider new positions here but we would prefer to buy a dip in the $49.00-48.50 zone, which is possible if LFC tries to "fill the gap" from Friday morning. LFC might see some resistance from its May highs near $51.00. Our target is the $54.00-55.00 range.

Suggested Options:
We would suggest the July calls.

Picked on June 14 at $ 48.25
Change since picked: + 1.84
Earnings Date 08/25/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

XTO Energy - XTO - cls: 63.53 chg: +0.95 stop: 58.95

The rise in crude oil and the continuation of the market's rally helped XTO to another new all-time high. Volume continues to come in above average on XTO's rally, which is bullish. We are not suggesting new positions at this time. More conservative traders will want to strongly consider taking some profits right here! Our target is the $64.75-67.50 range.

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

Picked on May 27 at $ 57.63
Change since picked: + 5.90
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Allegheny Tech - ATI - cls: 110.20 chg: +0.78 stop: 112.15

The battle between the bulls and bears in ATI continues. Bulls were able to reverse the bearish breakdown on June 12th but thus far the bears are holding resistance near $112.00. If the Dow Industrials can breakout to a new high early next week we would expect ATI to stop us out. We're also at a risk if there is any M&A news in the steel and metals sector on Monday. On the technical side ATI has failed three times in the last several days at $112 and volume is fading on the rebound. More aggressive traders might want to consider new puts right here. We are suggesting that readers wait for a new decline under $107.75 or $107.50 before opening new put positions. More conservative traders may want to wait for a new decline under $106. We have two targets for ATI. Our first target is the $100.50-100.00 range. Our second target is the $95.50-95.00 range. More aggressive traders may want to aim for the simple 200-dma (currently near $92). Currently the P&F chart is bearish with a $94 target.

Suggested Options:
If ATI provides another entry point we would suggest the July puts.

Picked on June 12 at $106.70
Change since picked: + 3.50
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.1 million

---

Gilead Sciences - GILD - cls: 80.83 chg: +0.19 stop: 82.55

The bears may be in trouble with GILD. The stock spiked to $82.17 on Friday morning but eventually gave back most of its gains and closed back under technical resistance at its 50-dma. Most of the excitement was about a potential FDA approval for GILD's potential treatment for a severe lung disease. Well investors didn't have to wait too long. After the closing bell on Friday it was announced that the FDA did approve of GILD's new ambrisentan drug to treat pulmonary arterial hypertension (PAH). One Reuters article said the drug could eventually reach $1 billion in annual sales. You can read the press release here.

Shares of GILD were trading higher after hours in the $82.25 range. Odds are good the stock will spike higher on Monday morning. The question is whether or not it will hit our stop loss at $82.55. Even if GILD hits our stop the stock continues to have significant resistance in the $84-85 range. We're not suggesting new positions at this time. FYI: The stock is set to split
2-for-1 on June 25th.

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

Picked on June 07 at $ 79.90
Change since picked: + 0.93
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million

---

QUALCOMM - QCOM - cls: 42.63 change: +0.01 stop: 44.05

The first thing traders will note about QCOM's performance is how shares are not participating in the market's rally. You may recall that we're playing QCOM as a put play due to the legal battle between QCOM and BRCM. QCOM is currently on the losing end of a patent dispute and the courts have ordered a two-year ban on importing mobile phones into the U.S. with QCOM's latest 3G chips. QCOM is trying to get an emergency stay of that decision. We are at risk for any headline news in this case but right now we don't see any reason for investors to buy the stock. Readers can choose to buy puts right here or look for another failed rally under $44.00 or the 50-dma (near $43.50). More conservative traders may want to wait for a decline under $41.00 before opening positions. We're aiming for the $37.00-36.00 range.

Suggested Options:
We are suggesting the July puts. Please note that we do not want to hold over the mid July earnings report.

BUY PUT JUL 45.00 AAO-RI open interest=39448 current ask $2.45
BUY PUT JUL 42.50 AAO-RV open interest=42085 current ask $0.05
BUY PUT JUL 40.00 AAO-RH open interest=47297 current ask $0.05

Picked on June 10 at $ 41.87
Change since picked: + 0.76
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 18.0 million

---

Regency Centers - REG - cls: 74.38 chg: +0.63 stop: 77.76

REIT stock REG is still trying to bounce but it's stuck under round-number resistance at $75.00. The overall trend in REG continues to look bearish. However, we would watch the major averages and wait for market direction first before initiating new positions in REG. If the Dow Industrials and/or the S&P 500 breakout to new highs then we would not suggest new positions in REG. If the major averages fail at resistance and roll over then we would suggest new puts on REG. There is some support near $72.50 but our target is the $70.50-70.00 range.

Suggested Options:
Wait and watch the major averages before considering new positions in REG.

Picked on June 11 at $ 74.68
Change since picked: - 0.30
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 374 thousand

---

Weyerhauser - WY - cls: 82.05 chg: +0.25 stop: 82.05

We do not see any significant changes from our recent comments on WY. As of last Tuesday WY looked poised to breakout from a neutral pattern of higher lows and lower highs. We were suggesting a trigger to buy puts at $79.34. Yet instead of breaking down the stock moved higher. However, the bulls are having a tough time building on the "breakout" so we're not giving up just yet. If WY can close over $83.50 we'll drop WY as a bearish candidate. Until then we'll leave it on the newsletter with a suggested trigger to buy puts at $79.49, which is a new adjusted trigger. If we are triggered our target is the $75.00-74.00 range. The $75 level is likely to be psychological support and the $74 level was support back in March. The Point & Figure chart looks very bearish with a $61 target.

Suggested Options:
If triggered at $79.49 we would suggest the July puts.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/07 (unconfirmed)
Average Daily Volume = 2.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Overbought and Oversold Readings Are Often Overrated

Your favorite indicator has just moved into overbought territory. It may be time to sell, you're thinking.

Maybe not.

Annotated Daily Chart of the TRAN:

For traders unfamiliar with overbought or oversold measurements on lower indicators, many charting programs have default settings at which these lines are drawn. For RSI, those default lines are often drawn at 70 on the topside and 30 on the bottom, although some traders prefer 80 and 20 settings instead. RSI can vacillate from 100 down to 0, but once it gets beyond those 70 or 80 settings on the top and 30 or 20 on the bottom, the move has become extreme. In a range-bound trading situation, that's often a signal that a reversal might soon be expected.

That's not the case in a trending market, however, as the TRAN's chart illustrated. As can be judged on that chart, in such cases, the so-called overbought rating was instead signaling that upside momentum was strong. Going long a call would have been a much better choice than buying a put.

What tools can a trader use to identify those times when overbought is not overbought so much as still-going-strong or when oversold is not oversold but getting-weaker-by-the-minute? Coupling a bottom indicator such as RSI with a top indicator such as a Keltner channel, Donchian channel or even Bollinger band might help.

The next chart employs my favorite channel system, Keltner channels, to illustrate the point.

Annotated Daily Chart of the TRAN:

The choice of Keltner channels to make this point was particularly appropriate, since Keltner channels were designed specifically to identify breakout plays. Breakouts indicate that momentum is strong in the direction of the break.

How does one use such observations? I use them to warn me when a trending situation might be setting up. I don't tend to trade breakout plays too often, but some do use such observations to trade breakout plays. Price Headley, a webinar presenter on www.cbot.com, is one of those.

He uses proprietary top and bottom indicators to determine such setups and offers some further guidelines for those who would trade breakouts. For example, he would not have considered that first RSI dip back below 70 in mid-November to be an automatic exit signal for a long breakout play. In fact, he argues that such minor dips often offer new bullish entries, as long as prices continue to close the day above the channel line that marked the breakout. In the case illustrated above, that would have been the black upper Keltner channel line.

That's not a tactic that I've backtested and can verify, but it certainly worked in this case. Headley additionally cautions that it's the close of the period being watched that's important, not intra-period moves. I certainly agree with that observation when using Keltner channels, which Headley wasn't using. Candles often pierce a Keltner channel during a period, but then close in such a way as to show that support or resistance held.

Headley cautions that, if at all possible, traders should wait until that close before making any decisions. Of course, if prices reverse strongly during a period, waiting might not be possible or might not even be a sound account-management tactic.

In my own case, I consider breakouts to be in force until prices begin closing consistently below the breakout channel. I don't tend to trade breakouts, as those kinds of trades don't fit my trading style or temperament, but I do use these observations to tell me when my assumptions about the strength of resistance or support might be wrong.

Some studies in the past tagged breakout plays as the most profitable in the long run but only for those traders who had the funds, patience and stamina to endure many whipsawed trades. I have the funds and the patience to endure the whipsawed trades, but not, conversely, to hold onto a winning play. I tend to want to close out and pocket my profits, protecting them. That doesn't work for someone trading breakouts because the profits must be allowed to run to make up for the many whipsawed trades. Having two out of the three necessary qualifications doesn't cut it when trading. I lack the stamina to hold onto the winning plays long enough to make up for those whipsawed ones.

Maybe you think you have all three qualifications and want to trade breakouts. If so, coupling an upper channel system breakout or breakdown with a lower indicator reading of overbought or oversold might help you identify potential breakout plays. I caution again that this isn't a methodology that I've tested for this use. Traders leaping on breakout or breakdown plays need to adhere to their hard stops, because reversals from overbought or oversold levels can be hard if the breakout fails.

For the rest of us, this method helps warn us that a directional move is strong and that we should perhaps not trust those overbought or oversold readings. They can be overrated as a useful sign of a reversal when markets trend.
 

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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