Option Investor

Daily Newsletter, Monday, 10/01/2007

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Table of Contents

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

Market Wrap

Citigroup and UBS Warnings Send Stocks Surging

The major indexes surged higher on Monday despite warnings out of Citigroup (NYSE:C) $47.72 +2.24% and Switzerland-based UBS AG (NYSE:UBS) $54.94 +3.17% that significant loan-related losses in the third-quarter would impact results.

After a modestly higher open for the major indexes and the thought that both money center banks may be overstating write-downs in order to begin 2008 with a clean slate, buyers built bullish momentum towards the close with advancers easily outnumbering decliners throughout the session.

While near-term bullish leadership at the big board took a rest last week with the NYSE's 5-day NH/NL ratio reversing into a column of "O," at 01:00 PM EDT the 213 new highs began to surpass a recent NH benchmark of 210 found at the conclusion of the September 19th session, when the NYSE new high tally reached 210.

The last time we witnessed 260 new highs at the big board was July 19th when 259 stocks managed to trade a new 52-week higher compared to a then-mounting 110 new lows.

The number of new highs at the NASDAQ ended just shy of the 201 found on September 19th.

It would currently take respective 64% and 66% for the NYSE and NASDAQ 5-day NH/NL ratios to reverse back up into a column of "X."

Shares of Dow Industrials (INDU) 14,087.55 +1.38% component and S&P 100 Index (OEX.X) 723.78 +1.30% heavyweight Citigroup (C) opened lower at $45.89 then darted to a morning low of $46.68 after the banking giant said it estimated third-quarter profits will decline about 60% to roughly $2.2 billion. The largest U.S. bank said it would likely write down about $1.4 billion of its $57 billion portfolio of highly leveraged loans, lose about $1.3 billion on the value of securities backed by subprime loans, and lose $600 million in fixed-income credit trading. Citigroup also said consumer credit costs rose $2.6 billion, mostly due to a boost in loan-loss reserves.

"Looking ahead to the fourth quarter, while we obviously cannot predict market movement or other unforeseeable events that may affect our business, we expect to return to a more normal earnings environment as the year progresses," CEO Chuck Prince said in a recorded call.

As traders and investors digested the quarterly update out of Citigroup, one of the firm's analysts raised his rating on several home-builders (CTX $27.92 +5.08%, DHI $13.46 +5.07%, LEN $23.27 +2.73%, PHM $14.79 +8.67% and RYL $22.56 +5.27%) to "buy" from "hold" on signs the worst may behind the industry.

Citigroup (NYSE:C) - $1 Box Scale

From an institutional perspective, shares of Citigroup (C) $47.72 +2.24% were little changed on Monday. The point and figure chart remains bearish and below trend, with a bearish vertical count of $36 still intact. A trade at $44 would be further bearish and break important near-term support at the $45.00 level. A trade at $50 would be viewed as bullish and have demand (X) starting to outstrip supply (O), and also have the stock breaking above it bearish resistance trend.

I would strongly suggest market participants have alerts set at $50 and $44 as trades at either of these levels will likely have GREAT impact on INDU/SPX/SPY/OEX direction!

UBS AG (UBS) $54.94 +3.17% actually gapped higher to open at $54.43 after the banker said it would write down $3.4 billion in the third quarter because of problems in U.S. subprime mortgages. For the first time in nine years, UBS said it will likely post a pretax loss, which the bank estimated at $690 million.

UBS AG (NYSE:UBS) - $1 Box Scale

After achieving, then exceeding a bearish vertical count of $52 in late August, shares of UBS generated a reversing higher double top buy signal at $55 on September 19th.

According to Dorsey/Wright & Associates, their banking sector bullish % (BPBANK) is currently "bull alert" status at 40% having reversed up from "bear confirmed" at a very oversold measure of 22% in early August (number 8 on a PnF chart).

Several sessions ago I received an email question from a reader wondering about the market/economy with all the "bad news" regarding the credit crunch and subprime issues.

Today's news out of Citigroup and UBS provides a GREAT test for a VOTE from market participants going forward. Is it "good news," or "bad news?"

UBS is certainly suggesting that DEMAND (X) is getting the upper hand on SUPPLY (O) and that would remain "true" as long as the stock does NOT trade $50.00.


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Conversely, C has yet to hint that DEMAND (X) is outstripping supply (O) and that would remain "true" as long as the stock does NOT trade $50.00..

I now have an UPSIDE alert set on C at $50.00 and a DOWNSIDE alert set on UBS at $50.00.

That's $50/$50 and with today's news and guidance going forward, market participants (bulls and bears) can make the decision..

My feel, based on observation is that the MARKET may have determined that things aren't as bad as some have thought as all of our major market bullish percent remain in a column of X.

Again, this could be further tested going forward with C and UBS.

U.S. Market Watch - 10/01/2007 Close

Major equity indexes here in the U.S. had the INDU/DIA, OEX, COMPX, NDX/QQQQ closing at either all-time, or new 52-week highs.

Sector action did show the MSH.X, XCI.X, SWH, IIX.X, IXTCX and HUI.X also closing at new 52-week highs.

The StreetTracks Gold Trust (NYSE:GLD) $73.90 ($739.90) also closed at a new 52-week high.

I should note that the U.S. Dollar Index (CEC:DXY) 77.94 would show a fractional advance of 0.20, or +0.26% from Friday's close of 77.74.

With the BIG and NARROW indexes (INDU, OEX and NDX) closing at new 52-week highs, bulls look for bullishness to broaden out in the S&P 500 (SPX.X) 1,547.07 +1.32%.

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

The S&P 500 Index (SPX.X) showed impressive strength again today and shorts look like they've "conceded" a test of the July highs.

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

With the BIG and NARROW INDU, OEX and NDX at new highs, I'm also going to show the SPX with its institutionally traded MONTHLY Pivot retracement. The MONTHLY S2 (support 2), S1 (support 1), Pivot (mid-point of September), R1 (resistance 1) and R2 (resistance 2) are mathematically derived levels that institutional computers will often times be set to trade.

These levels can be helpful when a security, or basket of stocks break to new highs, or new lows.

Buyers certainly look to be in control above 1,525.

On September 19, the institutionally monitored S&P 500 Bullish % (BPSPX) from Dorsey/Wright & Associates achieved "bull confirmed" status with 60.77%, or 304 of the 500 components showing buy signals when the SPX itself traded September's MONTHLY R1.

Today, we see that level find further buying, despite the "news" out of Citigroup (C).

At tonight's close, Dorsey/Wright's S&P 500 Bullish % (BPSPX) saw an additional gain to 63.38% from Friday's 62.37%.

New Plays

New Option Plays

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

New Calls

Deutsche Bank - DB - cls: 130.79 chg: +2.40 stop: 124.99

Company Description:
Deutsche Bank is a leading global investment bank with a strong and profitable private clients franchise. A leader in Germany and Europe, the bank is continuously growing in North America, Asia and key emerging markets. (source: company press release or website)

Why We Like It:
Positive comments from Citigroup that the fourth quarter should return to "normal" lifted the financials and sparked a huge wave of short covering across the markets. Shares of DB reacted with a 1.8% gain and a bullish breakout over $130 and its 50-dma. We're suggesting readers buy the breakout over $130. There is potential resistance at the 200-dma near $138.70 so we're targeting a rally into the $138.00-140.00 range. The P&F chart is bullish with a $154 target.

Suggested Options:
We are suggesting the November calls although we plan to exit ahead of the late October earnings report.

BUY CALL NOV 130 DB-KF open interest=110 current ask $6.20
BUY CALL NOV 135 DB-KG open interest= 80 current ask $3.80

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 633 thousand

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Broadcom - BRCM - cls: 37.17 change: +0.73 stop: 34.45

BRCM enjoyed a strong session thanks to the rally in tech stocks. Shares rose 2% and closed over resistance at the $37.00 level. Volume remained very light, which undermines the strength of this rally. Tomorrow will be an interesting session to see if shares of BRCM will react to news that the EU is now investigating rival QCOM. Our BRCM 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: + 1.32
Earnings Date 10/10/07 (unconfirmed)
Average Daily Volume = 11.0 million


Citigroup - C - clos: 47.72 change: +1.05 stop: 45.79

A "return to normal" was a key phrase today. Citigroup was the market-moving story on Monday. The company came out with an earnings warning for its third quarter results. Citigroup now expects third quarter profits to dive 60% compared to last year. That's about $6 billion in writedowns and losses. C's claim that things will return to normal in the fourth quarter help spark the rally. Plus, comments from Saudi Prince Alwaleed Bin Talal, C's largest individual shareholder, that he fully backs C's current management helped soothe investors' concerns. Citigroup's stock dipped to $45.86 this morning and then surged past technical resistance at its 50-dma. Today's move is a bullish engulfing (reversal) pattern candlestick. Our initial target is the $49.85-50.00 range. 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: + 1.08
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million


Ceradyne - CRDN - cls: 77.64 change: +1.90 stop: 71.74

The DFI defense index climbed to another new all-time high. Meanwhile shares of CRDN also surged this morning and the stock posted a 2.5% gain. Our biggest concern here was the lackluster volume, which doesn't inspire a lot of confidence. Our short-term target is the $79.50-80.00 range. The P&F chart is bullish with a $92 target.

Picked on September 25 at $ 74.61
Change since picked: + 3.03
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 653 thousand


Intl. Bus. Mach.- IBM - cls: 119.03 chg: +1.23 stop: 113.90

IBM rallied to a new multi-year high. The stock rose more than 1% and closed above short-term resistance at $119.00. This looks like a new bullish entry point to buy the stock. More conservative traders may want to wait for a rally past potential round-number resistance near $120. The stock has already hit our first target in the $118-120 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: + 5.79
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million


L-3 Comm. - LLL - cls: 104.43 chg: +2.29 stop: 97.99 *new*

The defense sector shot to another new all-time high and helping lead the group was LLL. Shares of LLL marked a 2.2% gain and confirmed the recent breakout over resistance near $102.50. The move over $103 was another entry point to consider buying calls. Please note that we're adjusting our stop loss to $97.99. Our target is the $107.50-110.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $115 target.

Picked on September 25 at $100.96
Change since picked: + 3.47
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 904 thousand


Stryker - SYK - cls: 70.13 change: +1.37 stop: 66.49

SYK surged to a 2% gain and managed to close over round-number resistance at the $70.00 mark. This could be used as a new bullish entry point. However, we want to see a new relative high first. That's why we're suggesting a trigger to open positions at $70.65. Our biggest challenge right now is our time frame. SYK is due to report earnings on October 17th and we do not want to hold over the earnings report. 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. 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


Terex - TEX - cls: 90.04 change: +1.02 stop: 81.99

TEX bounced back above the $90.00 level, which is encouraging but we probably would not open new positions here. We remain bullish on the stock. More conservative traders might want to use a higher stop loss. The P&F chart is very bullish with a $100 target. Our target is the $94-95 range.

Picked on September 25 at $ 86.50
Change since picked: + 3.54
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 1.8 million


Whole Foods - WFMI - cls: 48.74 change: -0.22 stop: 44.85

A downgrade for grocer Supervalue (SVU) undermined the rest of the industry. Shares of WFMI under performed the market with a 0.4% decline. The trend continues to look bullish but we're not suggesting new positions at this time. Our first target is the $49.75-50.00 range. Our second target is the $52.50-55.00 zone. We do not want to hold over the early November earnings report.

Picked on September 26 at $ 46.26
Change since picked: + 2.48
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 3.2 million

Put Updates

Alexander & Baldwin - ALEX - cls: 50.94 chg: +0.81 stop: 52.01

Today's strength in ALEX and its multi-day bounce gives us plenty of reason to consider an early exit in ALEX. We were cautious late last week and remain defensive. However, the rally today did reverse and the stock closed under its 200-dma. That doesn't mean that the bears aren't in trouble here because they are. More conservative traders may want to tighten their stop toward today's high at $51.50. At this time we'd watch for a new decline under $49.70 or $49.50 as a new entry point to buy puts. 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: + 1.44
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 337 thousand


Cephalon - CEPH - cls: 73.57 chg: +0.51 stop: 74.25

Today's action in CEPH makes us nervous. There was no spike higher at the open. Shares slowly crept higher and look poised to challenge short-term resistance near $74.00. We are not suggesting new positions at this time. Wait for a new decline under $72.00 or even a new relative low under $71.00 before considering new put positions. Our target is 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. Remember that any time we play a biotech stock it should be considered higher-risk. There is always the chance that an unexpected headline about a successful or failed clinical trial or FDA decision could send the stock violently one direction or the other.

Picked on September 26 at $ 71.70
Change since picked: + 1.87
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume = 1.5 million


IDEXX Labs - IDXX - cls: 107.42 change: -2.17 stop: 113.85

It was another volatile day for IDXX. The bullish market helped lift shares of IDXX toward resistance near its 10-dma. Yet fortunately for the bears, the rally failed and the stock plunged five points on massive volume. This is the third HUGE volume day in a row for IDXX yet we still don't see anything specific in the news. Today's plunge under $110 and its 50-dma looks very bearish. Our target is the $101.00-100.00 range. We do not want to hold over the late October earnings report.

Picked on September 30 at $109.59
Change since picked: - 2.17
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 210 thousand


Sears Holding - SHLD - cls: 130.28 chg: +3.08 stop: 132.65

SHLD was under performing the market this morning but traders ended up buying the dip near $125 and the stock rebounded back toward resistance near $130. If there is any market follow through on today's rally then we would expect SHLD to hit our stop loss at $132.65 on Tuesday. More conservative traders, if you opened positions this morning, may want to exit early to cut their losses since this is arguable a short-term bullish reversal. We're not suggesting new positions at this time.

Picked on September 30 at $127.20
Change since picked: + 3.08
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume = 2.3 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.)


Dow Jones Industrial Avg. - DJX - cls: 140.88 chg: +1.92 stop: n/a

Monday's market rally lifted the DJIA and the DJX to new highs. The breakout over 14,000 (and 140) is pretty bullish. The October $137 calls (DJY-JG) are now trading at $4.50bid/$4.75ask. We only have three weeks left before October options expire. 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: + 6.45
Earnings Date 00/00/00
Average Daily Volume = million

Dropped Calls

Lockheed - LMT - cls: 108.74 change: +0.25 stop: 102.45

Target achieved. Defense stocks displayed momentum again and shares of LMT hit a new high at $109.86. Our target was the $109.50-110.00 range. While the play is now closed for us we will be watching for another possible entry point on a dip near $105.

Picked on September 24 at $103.81 *gapped higher
Change since picked: + 4.93
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 2.7 million

Dropped Puts

Lamar Advertising - LAMR - cls: 48.72 change: -0.25 stop: 51.55

LAMR continued to under perform the markets today. The stock lost 25 cents after announcing plans to raise another $225 million by selling debt due in 2015. However, that news wasn't the headliner today. After tonight's closing bell it was announced that Standard & Poor's would add LAMR to the S&P midcap 400 index. This after hours announcement pushed LAMR toward $50.50. Mutual funds that track the midcap index will have to buy shares of LAMR. We're suggesting an early exit immediately. Tomorrow's open will probably gap open higher but hopefully we can limit our losses!

Picked on September 30 at $ 48.97
Change since picked: - 0.25
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume = 1.2 million


POSCO - PKX - cls: 190.72 change: +11.95 stop: 185.05

The shorts got squeezed again! Today's market rally caught the bears off guard and the market saw a big short squeeze. PKX, a huge momentum stock over the last few weeks, saw a big move as shorts raced to cover. Hopefully none of our readers opened positions when they saw the gap open higher at $184.41. We have to record a loss with our stop at $185.05. Did we mention this was a high-risk play? Now you see why!

Picked on September 30 at $178.77
Change since picked: + 0.00
Earnings Date 10/08/07 (unconfirmed)
Average Daily Volume = 812 thousand

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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