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Daily Newsletter, Monday, 09/10/2007

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Table of Contents

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

Market Wrap

Majors Finish Mixed; Treasuries Hold Strong Bid

The major equity indices started the week out mixed in a notably, yet surprisingly light volume trade, as investors weighed an upbeat outlook from chip maker Intel (NASDAQ:INTC) $25.34 -0.51% against speeches from various Fed officials regarding the current credit crunch and its impact on the U.S. economy.

Some signs that momentum bulls are moving back to the sidelines present themselves in the new high/new low measures as the NASDAQ's 5-day NH/NL ratio reverses back down into a column of "O" at 50.00%.

It would currently take a closing measure of 32.00% for the NYSE 5-day NH/NL measure to reverses back lower, and that looks eminent as new highs at the big board begin to stall from Tuesday's inflection high of 60, while new lows begin to build greater than the 35 found on August 28th.

The major indices did gap modestly higher at the open after Intel said its revenue and profit margin for the third quarter should come in at the high end of, or exceed, its July forecast, thanks to "stronger-than-expected worldwide demand for its computing products." The chip giant said it now sees revenue of $9.4 billion to $9.8 billion, compared with prior revenue forecast of $9 billion to $9.6 billion.

The world's largest semiconductor company also told investors that gross profit margins, a key measure of profitability, is expected to be at the upper half of the company's previous estimate of 52% of revenue, plus or minus a couple of percentage points.

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October Crude Oil futures (cl07v) were strong for a 6th-straight session ahead of tomorrow's OPEC meeting. In their first gathering in six months, OPEC's representatives reportedly have various views on output quotas after last week's employment figures here in the U.S. hinted further of a cooling economy.

One proposal floated today called for a modest increase of 500,000 barrels a day.

October Crude Oil futures settled up $0.79/ barrel, or +1.03% at $77.49.

As traders returned from an extended Labor Day holiday, greater enthusiasm for Treasuries was found ahead of next week's FOMC decision on interest rates.

The shorter-dated 5-year yield Treasury bond found another strong round of buying, falling below the 4.00% level for the first time in nearly two years.

CClosing U.S. Market Watch - 09/10/07

San Francisco Fed President Janet llen said she thinks downside risks to the U.S. economic outlook have clearly risen in the wake of recent financial market turmoil, but the implications for monetary policy still remain uncertain.

"Some markets have become downright illiquid," she said in a speech to the National Association for Business Economics convention in San Francisco. While the Fed's recent responses to the market turmoil have been "helpful, these actions have not, however, served as a panacea," she said..

55-year Treasury Yield ($FVX.X) - Daily Intervals

In my last Market Wrap (8/20/07) I had marked the "low yield" on the 5-year ($VX.X) at 4.186%. Friday's strong round of buying drove its yield further lower and today's closing yield of 3.983% should solidify a 25-bp cut in Fed Funds to 5.00%, and I would also have to think an additional 50 bp, or 25 bp cut in the discount rate.

I say this now, and will test it late, but I think any decision by the FOMC to lower rates much more than a COMBINED 75 basis points (Fed Funds + Discount Rate) would trigger a broader market equity sell off as market participants would view such action as heightened economic concern.

RRussell 2000 Index ($RUT.X) - Daily Intervals

From a macro-economic perspective, the "small caps" as depicted by the Russell 2000 Index ($UT.X) remain most vulnerable to downside price action. Most have a lesser-degree of export exposure that may come from a weaker U.S. dollar, and with Fed observing spots of illiquid credit markets, that's just another area of risk to avoid near-term.

II do observe some stability after the Fed's 8/17/07 decision to lower the discount rate, but action in the 5-year YIELD ($FVX.X) now suggests addition liquidity is called for.

S&P 500 Index (SPX.X) - Daily Intervals

When I returned to my regular duties here at OptionInvestor.com on Tuesday, September 4th, the S&P 500 Index (SPX.X) had closed back above some important resistance at 1,485 and looked as if it might be set to stage a more meaningful rebound.

However, the continued strong demand for Treasuries still suggests to me that a defensive posture is warranted as last Tuesday's 5-year Yield ($FVX.X) decline below 4.20% gave a pretty good read on Friday's job report.

It had been, and continues to be my analysis, based on observation, that the RUT.X is WEAKEST (small and broad), and the S&P 500 Index (broad) is the next weakest major index.

With the shorter-dated 5-year Treasury Yield ($FVX.X) still falling, it would have to still be my analysis that equity buyers are hesitant.

As for BIG and NARROW, the Dow Industrials (INDU) 13,127.85 +0.11% certainly has NOT set a bull's world on fire, and trades relatively unchanged from my last Market Wrap on 8/20/07 close of 13,121.

Dow Industrials (INDU) - Daily Intervals

Despite dollar weakness, which should bode well for U.S. companies that EXPORT goods and services abroad, the mega-caps of the Dow Industrials are little changed the past couple of weeks.

NASDAQ-100 Index (NDX.X) - Daily Intervals

While "big tech" remains rather volatile, the NASDAQ-100 Index (NDX.X) 1,960.20 +0.09% is the only major index to still hold a close above its 6/04/07 close. That would also be very close to the NDX's 50% retracement.

NDX heavy-weight Apple Inc. (NASDAQ:AAPL) $136.71 +3.74% got a strong bounce from its curling higher 21-day SMA today after the company said its iPhone sales hit 1 million units ahead of forecast.

If looking for an INDEX to test MARKET SENTIMENT against, this would be "the index." br>
I'd have to say sentiment BULLISH on closes ABOVE 1,933 and more BEARISH BELOW 1,933.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Amazon.com - AMZN - close: 83.34 change: -1.18 stop: 78.95

AMZN suffered another round of profit taking on Monday. If the major averages continue to slip lower we would expect AMZN to test the 10-dma around $81.30 and potentially the $80.00 region. Wait for a bounce from either before considering new bullish positions. Our target is the $88.00-89.00 range. The P&F chart is very bullish with a $99 target.

Picked on September 04 at $ 80.85
Change since picked: + 2.49
Earnings Date 10/23/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

Intl. Bus. Mach.- IBM - cls: 115.80 chg: +0.25 stop: 111.59

IBM is still holding up relatively well. The early morning rally attempt failed at $117.50 but bulls are defending the stock near $115. More conservative traders may want to tighten their stops toward our entry around $113. Technical indicators are turning bearish. Truly conservative traders may want to abandon the play now since this is starting to look like a bearish double-top pattern. The stock has already hit our $118-120 target range. Our second, more-aggressive target is the $124.00-125.00 zone. FYI: The Point & Figure is very bullish with a $177 target.

Picked on August 26 at $113.24
Change since picked: + 2.56
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

Manitowoc - MTW - cls: 79.39 change: -1.67 stop: 74.95

MTW experienced a relatively volatile day. The early morning spike higher reversed into a big drop to $76.00. There were a couple more rally attempts and shares were bouncing higher into the close but MTW ended the session down 2.3%. A bounce from here could be used as a new entry point but readers will want to strongly consider a tighter stop near $76 (or $38 post-split). FYI: MTW is due to split 2-for-1 and will begin trading at its new price on September 11th. Don't forget that for current positions your option symbols and strikes will change due to the stock split. Plus you'll have twice as many contracts at a reduced value.

Picked on September 05 at $ 80.25
Change since picked: - 0.86
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

Transocean - RIG - cls: 108.31 change: -0.21 stop: 104.85

An analyst downgrade in the oil services sector took the whole group lower even though RIG received some positive comments in the analyst' opinion. Traders bought the dip again this morning and this looks like a potential entry point but RIG is facing short-term resistance in the $109-110 range. Readers looking for a new entry may want to wait for a breakout over $110. Our target is the $114.00-115.00 range.

Picked on August 31 at $105.75
Change since picked: + 2.56
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 7.3 million
 

Put Updates

Ashland Inc. - ASH - cls: 57.34 change: -1.50 stop: 61.01

ASH is off to a good start. The stock plunged through the $58.50 level and closed under any short-term support levels. Volume was rising on today's 2.5% decline, which is a bearish sign. The MACD is nearing a new sell signal. We would still consider new put positions here. We have two targets. Our first target is the $55.15-55.00 range. Our second target is the $52.65-52.50 range.

Picked on September 09 at $ 58.84
Change since picked: - 1.50
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume = 796 thousand

---

Acuity Brands - AYI - cls: 48.66 change: -1.53 stop: 54.01 *new*

The sell-off in AYI continues. Shares broke down under what should have been short-term support near $50.00. This is good news for the bears. We're dropping our stop loss to $54.01. We have two targets. Our first target is the $47.75-47.50 range. Our second target is the $45.25-45.00 zone.

Picked on August 26 at $ 52.80
Change since picked: - 4.14
Earnings Date 10/04/07 (unconfirmed)
Average Daily Volume = 536 thousand

---

FTSE/Xinhau China iShares - FXI - cls: 149.35 chg: +2.57 stop: 151.51

The Chinese market can be very volatile, especially trading an ETF that is prone to gaps up and down every morning as it adjusts to overnight trading in China. The FXI displayed relative strength today with a 1.7% gain. Readers can choose to buy puts on a decline tomorrow or wait for a drop under $145.00 before initiating positions. Our target is the $135.50-135.00. More aggressive traders may want to aim lower. We may start looking for a bullish entry point near $130. Readers should consider this a more aggressive play.

Picked on September 09 at $146.78
Change since picked: + 2.57
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.2 million

---

L-3 Comm. - LLL - cls: 97.16 change: +0.21 stop: 98.55

LLL found some support at $96.00 this morning and LLL tried to rally but it didn't get very far. We're suggesting a trigger to buy puts at $95.90, which is under short-term support near $96.00. We're going to try and limit our risk with a tight stop at $98.55. More aggressive traders will want to use a wider stop (maybe above $100). If triggered at $95.90 our target is the $90.75-90.00 range but we may need to adjust that as the 200-dma continues to rise.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 936 thousand

---

Whirlpool - WHR - cls: 90.46 change; -2.31 stop: 97.01

WHR traded sideways for about 35-40 minutes this morning before the plunge began. Shares fell toward round-number support at $90.00 and closed with a 2.49% drop. The MACD is very close to a new sell signal (on the daily chart). More conservative traders could already be thinking about adjusting their stop loss lower. However, don't be surprised to see WHR bounce from the $90 level. The stock should have some resistance near $95.00. We have two targets. Our first target is the 87.75-87.50 range. Our second target is the $85.00-84.00 range.

Picked on September 09 at $ 92.77
Change since picked: - 2.31
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 1.1 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.)

---

Bear Stearns - BSC - cls: 107.50 chg: +2.13 stop: n/a

The gap open this morning was a bit of a surprise but BSC provided a great strangle entry point on the midday dip near $105. Overall we don't see any changes from our weekend comments. BSC reports earnings on Thursday morning. We need to have our positions open by the closing bell on Wednesday. We're going to play the September strikes even though they expire in two weeks. Some readers might want to adjust this strategy and play the October strikes. We're suggesting readers try and open positions in the $106.50-103.50 range. Considering the price of the options and our time frame (two weeks) this should be considered a more aggressive play. One idea to reduce the amount of time premium erosion we will suffer would be to wait until Wednesday to open positions. Our suggested options for BSC were the September $115 call (BVD-IC) and the September $95 put (BVD-US). Our estimated cost was $4.40. We want to sell if either option hits $7.85.

Picked on September 09 at $105.37
Change since picked: + 2.13
Earnings Date 09/20/07 (confirmed)
Average Daily Volume = 8.7 million

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Diamonds - DIA - cls: 131.43 chg: -0.09 stop: n/a

We are not suggesting new positions in the DIA at this time. Our strangle play suggested using the September $137 call (DAZ-IG) and the September $127 put (DAW-UW) with an estimated cost of $2.05. We want to sell if either option rises to $3.10 or more. We only have two weeks left before September options expire.

Picked on August 30 at $132.57
Change since picked: - 1.14
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 20.8 million

---

S&P 100 Index - OEX - cls: 678.04 chg: +0.30 stop: n/a

We're not suggesting new positions in the OEX at this time. Our strangle strategy suggested using the September 700 call (OEZ-IT) and the September 660 put (OEY-UL) with an estimated cost of $14.30. We want to sell if either option rises to $21.45 or more. Considering these prices we probably need to see a move into the $705-710 range or the $655-650 zone to be profitable.

Picked on August 30 at $680.46
Change since picked: - 2.42
Earnings Date 00/00/00
Average Daily Volume = 1306 thousand
 

Dropped Calls

Eaton Corp. - ETN - cls: 89.67 change: -1.71 stop: 91.99

ETN continues to sell-off. Shares broke down under what should have been support at the $90.00 level on Monday. We had been waiting for a breakout over resistance near $95.00 but at this point we're not going to wait any longer. Over the weekend we suggested that nimble traders might want consider buying puts if ETN breaks down under $90.00.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/16/07 (unconfirmed)
Average Daily Volume = 1.3 million
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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