Option Investor

Daily Newsletter, Monday, 09/24/2007

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Table of Contents

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

Market Wrap

Airlines and Housing Offset Tech Gains

After an option expiration week that saw call sellers scrambling to cover positions into Friday's expiration, the major indexes started the week out mixed to lower with airlines and homebuilders offsetting gains in technology.

The AMEX Airlines Index (XAL.X) 43.00 -5.41% was today's sector loser with shares of AMR Corp. (NYSE:AMR) $20.77 -14.38% grounded after the parent of American Airlines warned late Friday that third-quarter revenue per mile flown by American Airlines passengers would rise 4 to 5 percent from a year earlier, which was less than most analysts were expecting.

Jamie Baker, an analyst with JP Morgan, said AMR's comments pointed to slightly lower revenue and higher non-fuel costs than he had expected for the quarter. Mr. Baker questioned the company's claim that bad weather added to summer costs, calling it "a somewhat flimsy excuse."

Other brokers also weighed in with Bear Stearns cutting their Q3 profit forecast for AMR to $0.71/share from $1.00/share. Morgan Stanley had been at the low end of consensus and raised their Q3 EPS estimate to $0.66/share from $0.54/share.

AMR's cautious Q3 outlook further dampened any bullish sentiment in the commercial passenger group with XAL.X heavyweights Skywest (NASDAQ:SKYW) $24.75 -1.55% (9.65% weighting), Frontier Airlines (NASDAQ:FRNT) $6.04 -0.33%, Airtran Holdings (NYSE:AAI) $9.92 -4.24%, UAL Corp. (NASDAQ:UAUA) $43.23 -6.04%, Southwest Airlines (NYSE:LUV) $14.99 -2.28% and Continental Airliners (NYSE:CAL) $30.46 -6.85% (7.89% weighting) trading lower.


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The housing sector remained weak ahead of tomorrow's housing data (see Saturday's Market Wrap). The Dow Jones U.S. Home Construction Index (DJUSHB) 362.75 -5.22% closed at a new multi-year low.

Economic data released today was largely regional.

The Chicago Fed Index was -0.57 in August, down from +0.03 in July. The three-month moving average decreased from -0.11 in July to -0.21 in August, where the negative value suggests that growth in national economic activity was below its historical trend. The Federal Reserve Bank of Chicago notes that a three-month moving average below -0.70 following a period of economic, would begin to suggest that there is an increasing likelihood that a recession has begun.

After tonight's closing bell, shares of home improvement giant Lowes Companies (NYSE:LOW) $30.55 -0.22% fell to $28.70 in electronic trade after the company said its full-year (2008) earnings will come in at the low end, or below its prior guidance of $1.97 to $2.01 a share, because current sales are trending below earlier expectations. Analysts were expecting the company to post a full-year profit of $1.99/share on revenue of $49.58 billion.

U.S. Market Watch - 09/24/07 Close

The NASDAQ-100 Index (NDX.X) 2,057.25 +0.37% does get a close at a new multi-year high, as does its tracker QQQQ $50.59 +0.45%.

NASDAQ-100 heavyweights Apple Computer (NASDAQ:AAPL) $148.28 +2.86% (10.41% weighting), Microsoft (NASDAQ:MSFT) $29.08 +1.50% (5.43% weighting), Qualcomm (NASDAQ:QCOM) $41.64% +1.98% (4.87% weighting) and Google (NASDAQ:GOOG) $568.02 +1.41% (4.66% weighting) traded higher, while 5th-most heavily weighted shares of networking giant Cisco Systems (NASDAQ:CSCO) $31.88 -1.30% (4.00% weighting) finished lower.

Wynn Resorts (NASDAQ:WYNN) $156.01 +8.67% and Garmin Ltd. (NASDAQ:GRMN) $115.03 +5.82% continued their torrid advances to lead a narrow list of NDX/QQQQ gainers (33 up Vs. 67 down), while telecom equipment maker Tellabs (NASDAQ:TLAB) $9.46 -4.05% and aforementioned UAL Corp. (UAUA) $43.24 -6.04% traded lower.

Banks traded mostly lower with the S&P Banks Index (BIX.X) 362.12 -1.60% and KBW Bank Index (BKX.X) 106.72 -1.62% stride-for-stride after Merrill Lynch downgraded Well Fargo (NYSE:WFC) $35.96 -0.77% to "neutral" from "buy" and KeyCorp (NYSE:KEY) $32.88 -2.43% and Regions Financial (NYSE:RF) $30.06 -1.47% to "sell" from "neutral," citing their recent stock performance and rising credit losses amid the housing downturn and credit crunch.

Exacerbating the weakness in the financials was a Reuters report that Germany's Deutsche Bank (NYSE:DB) $126.34 -2.27% may have to write-down a $40.96 billion loan portfolio by $2.4 billion. The investment banking giant declined to comment, but the write-down would amount to almost 6% of its total pipeline of leveraged loans promised to clients.

Global Equity Benchmarks and Currencies Table

With many global equity benchmarks showing gains since last Monday's Market Wrap, which encompasses Tuesday's FOMC decision on interest rates, I think traders and investors will now begin to focus on Wednesday's (11:10 AM EDT) commentary out of Europe and the ECB's President Jean-Claude Trichet when he addresses the ABP European Pension Summit, in the Netherlands.

On Saturday, Mr. Trichet will deliver a speech titled "Challenges to the International Monetary System: Rebalancing Currencies, Institutions and Rules" at the Salzburg Seminar, in Austria.

With the euro still showing strength against the US$ and the Japanese yen, it becomes apparent to me (Jeff Bailey) that the ECB may well have to lower rates.

I will note to traders and investors that Great Britain's Pound (GBP), or Great Britain is NOT directly impacted by the ECB (European Central Bank).

Japan's Nikkei-225 ($NIKK) showed what I would consider to be a very anemic "bounce" and with the BOJ hesitant to raise rates from 0.50%, the ECB may well have to follow the Fed's move and begin easing.

Over-the-Counter Bullish % (BPOTC) Reverses Up!

Market participants may have already begun to factor in some ECB rate cuts on the heels of last week's FOMC action as the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright and Associates reverses back up into a column of X and begins to confirm the reversal up in the VERY BROAD NYSE Bullish % (BPNYSE).

OTC Bullish % (BPOTC) - 2% box

At the close of Thursday's trade (09/20/07) the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright & Associates reversed back up into a column of X.

It is thought by market technicians (like myself) that a "healthier" market advance sees broader strength, and that's what I'm seeing as 41.73% of roughly more than 3,000 four and five-lettered stock symbols listed at the NASDAQ now show Point and Figure buy signals associated with their supply (O)/demand (X) charts.

StockCharts.com's NASDAQ Comp. Bullish % ($BPCOMPQ) also reversed back up into a column of X from 34% to 40% and finished at 43.55% as of tonight's close (+0.28% Monday).

NASDAQ Composite ($COMPQ) - 20-point box

The reversal UP in the $BPCOMPQ certainly gives internal "confirmation" to the double top "buy signal" from 09/04/07 at 2,640. I've highlighted in "PINK BOXES" the approximate REVERSAL UP points that would correspond to the $BPCOMPQ.

As of tonight's close (09/24/07) all major market bullish are signaling that DEMAND is back in control of U.S. Equity Markets.

The "last" to reverse up has been the ($BPCOMPQ).

One way I would use the above observation is to now have a more BULLISH bias as internal strength broadens out.

The first sign of MEANINGFUL weakness in the NASDAQ Composite chart above would be a trade at 2,520.

From current levels of trade (2,668), that would equate to a 5.54% decline.

I would NOT condone, nor suggest FULL BULLISH POSITIONS, but look to initiate NEW positions should we see a 2.5% pullback in either the NASDAQ Comp., or other major U.S. Index.

For the WEAKEST and also broad Russell 2000 Index ($RUT.X), I would now have to initiate a STOP LOSS should the RUT.X trade 824. If FULL POSITION SHORT, look to REDUCE short exposure to 50% on a decline to 784.

For iShare Russell 2000 (IWM) $80.39 -0.70%, this would be equivalent to a STOP at $82.40, and REDUCE short exposure to 50% on a decline to $78.40.

New Plays

New Option Plays

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

Play Editor's Note: Our market bias is still bullish but we need to expect volatility. Several of the bullish candidates we're following need to pull back before we can jump in. We do want to note that we're still watching LAMR and SHLD as potential bearish candidates. Both stocks are poised to breakdown under support.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Broadcom - BRCM - cls: 36.52 change: +0.40 stop: 33.95

BRCM displayed some volatility this morning. There was early weakness and a dip to $35.67 and then suddenly a spike toward $37.00 (actually 36.87) before shares pulled back. The $37 level is significant resistance so more conservative readers may want to wait for a breakout over $37 before initiating new positions. Our target is the $39.85-40.00 range. The Point & Figure chart is bullish with a $49 target. Please note that we do not want to hold over the mid October earnings report.

Picked on September 12 at $ 35.85
Change since picked: + 0.67
Earnings Date 10/10/07 (unconfirmed)
Average Daily Volume = 11.0 million


Citigroup - C - clos: 46.59 change: -0.92 stop: 45.65

Financial stocks were some of the market's worst performers today. The BKX banking index lost 1.7% and the BIX lost 1.6%. Shares of C were leading the way with a 1.9% decline and a bearish breakdown under what should have been support near $47.00 and its 10-dma. This doesn't look good for the bulls and readers might want to cinch up their stop losses toward the $46 level. We're not suggesting new positions at this time but we will be looking for a bounce near $46.00. Our initial target is the $49.85-50.00 range but we might decide later to add a more aggressive target at the 200-dma. Please note that we do not want to hold over the October 19th earnings report.

Picked on September 16 at $ 46.64
Change since picked: - 0.05
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million


Intl. Bus. Mach.- IBM - cls: 116.25 chg: -0.53 stop: 113.90

We warned readers over the weekend to look for IBM to pull back. The stock dipped to its 10-dma this afternoon. Short-term technical indicators are definitely turning into more bearish looking patterns. We would still expect a dip toward the $115 zone. Shares of IBM continue to have resistance near $119 (and probably the $120) level. A bounce near $115 could be used as a new entry point but more conservative traders might want to wait for a new relative high. 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. We do not want to hold over the mid October earnings report.

Picked on August 26 at $113.24
Change since picked: + 3.01
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million


Lockheed - LMT - cls: 102.35 change: -0.85 stop: 97.99

LMT spiked higher at the open, actually gapping open at $103.81, and shares hit $104.01 before turning south. We were suggesting that readers buy calls on a breakout over resistance at $103.50 and listed a trigger to open positions at $103.75. Therefore we would have been opened at today's first trade $103.81. Today's performance is a bit disappointing with a failed rally at $104 but traders were buying the dip near $102 all day long. Our biggest concern now is what appears to be news that came out after the closing bell. That news was an announcement from the U.S. Airforce warning LMT about cost overruns with the C-5 program. The Airforce or Congress could decide to shut down the program. At this time we did not see any after hours reaction in shares of LMT. If the stock does dip tomorrow then look for a bounce near $100 or its 10-dma as a new entry point for bullish positions. We remain positive on the stock with shares above $100. Our target is the $109.50-110.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $117 target. We do not want to hold over the late October earnings.

Picked on September 24 at $103.81 *gapped higher
Change since picked: - 1.46
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 2.7 million


Stryker - SYK - cls: 67.28 change: -0.73 stop: 65.90

There is no change from our previous comments on SYK. We are waiting for a breakout to new highs. Our plan calls for a trigger at $70.65 to open positions. If triggered at $70.65 our target is the $74.90-75.00 range. Given the length of SYK's consolidation we would actually aim higher, maybe the $77.50-80.00 range, but we don't have much time and plan to exit ahead of the mid October earnings report. The P&F chart is bullish with an $83 target.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/07 (confirmed)
Average Daily Volume = 1.4 million


Trina Solar - TSL - cls: 56.16 chg: +4.27 stop: 47.49

Wow! TSL is off to a strong start. Shares continued to surge today and closed with an 8.2% gain on volume nearing three times the daily average. This doesn't look like a short squeeze since TSL didn't have any significant short interest last time the numbers were counted. The big volume is a positive sign. We would not chase TSL here since our target is the $58.00-60.00 range.

Picked on September 23 at $ 51.89
Change since picked: + 4.27
Earnings Date 11/22/07 (unconfirmed)
Average Daily Volume = 1.1 million

Put Updates

Alexander & Baldwin - ALEX - cls: 48.44 chg: -1.06 stop: 52.01

Shares of ALEX continue to show relative weakness. The stock lost another 2% following Friday's bearish breakdown under support. Volume on today's decline was also above average, which is not a good sign for the share price. The P&F chart is already bearish with a $36 target. There is some support near $47.50 but we're aiming for a decline into the $45.50-45.00 range. We do not want to hold over the late October earnings.

Picked on September 23 at $ 49.50
Change since picked: - 1.06
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 337 thousand


Cephalon - CEPH - cls: 73.43 chg: +0.18 stop: 74.25

CEPH displayed some weakness this morning but bulls bought the dip near $72.00 again. We're waiting for a breakdown under short-term support at $72.00. We want to see a new relative low so we're suggesting a trigger to buy puts at $71.70. Please note that any time we trade a biotech stock it should be considered higher-risk. You never know when there is going to be a surprise announcement about an FDA approval or lack thereof or a surprise announcement on some new breakthrough or clinical trial. It's tough to defend against this sort of headline risk that could send a biotech stock gapping one way or the other. If we are triggered at $71.70 our target will be the $68.00-67.00 range. More aggressive traders could aim for the $65 region. The P&F chart is very bearish with a $50 target.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 1.5 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: 112.99 chg: -4.33 stop: n/a

Financial stocks were big under performers today and BSC helped lead the slide with a 3.7% sell-off and what looks like a failed rally at its 50-dma. We're not suggesting new positions at this time. Currently our strangle involves the October $115 call (BSC-JC) and the October $95 put (BVD-VS). Our estimated cost was $9.50 and we want to sell if either option hits $14.00 or more. This should be considered a more aggressive play.

Picked on September 09 at $105.37
Change since picked: + 7.62
Earnings Date 09/20/07 (confirmed)
Average Daily Volume = 8.7 million


Dow Jones Industrial Avg. - DJX - cls: 137.59 chg: -0.61 stop: n/a

We have nothing new to report on for the DJX. We are not suggesting new positions on the October version of our strangle. The options listed for our October strangle were the October $137 calls (DJY-JG) and the October $132 puts (DJW-VB) with an estimated cost of $4.75. We want to sell if either option hits $6.75.

Picked on September 16 at $134.43
Change since picked: + 3.16
Earnings Date 00/00/00
Average Daily Volume = million

Dropped Calls

Apple Inc. - AAPL - cls: 148.28 change: +4.13 stop: 135.99

Target achieved. Actually multiple targets achieved. Monday turned out to be a very bullish day for AAPL. Before the opening bell Citigroup reiterated their "buy" rating and upped their price target from $160 to $185 on AAPL. Shares of AAPL reacted by gapping open at $146.73 and surging to $149.86 before paring its gains. Our first target was the $144.75-145.00 range but we would have been taken out at the opening trade of $146.73. Our second target was the $149.00-150.00 range. We are still bullish on AAPL and will be looking for a dip back toward the $146-145 zone or a new high over $150 as a potential entry point for new positions.

Picked on September 17 at $140.25
Change since picked: + 8.03
Earnings Date 10/18/07 (unconfirmed)
Average Daily Volume = 39.9 million


Thornburg Mtg - TMA - cls: 12.57 chg: -0.81 stop: 11.90

Abandon ship! All hands abandon ship! We warned readers earlier that TMA was not looking very healthy and that the recent weakness was a real concern. While fundamentally there isn't any reason for TMA to be sold off on sub-prime fears the market doesn't seem to care. The stock lost six percent today as financial stocks trended lower. We would rather cut our losses now and look for a potential bounce wherever TMA can find a bottom.

Picked on September 16 at $ 13.63
Change since picked: - 1.06
Earnings Date 10/15/07 (unconfirmed)
Average Daily Volume = 5.4 million

Dropped Puts


Dropped Strangles


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


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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