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Daily Newsletter, Monday, 10/08/2007

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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

Going Batty!

After a blood curdling 4.9% gain last week, spurred by a stronger-than-forecasted jobs number, the small caps of the Russell 2000 (RUT.X) 840.14 -0.56% found modest profit taking to start the week, but the NASDAQ-100 Tracker (NASDAQ:QQQQ) $53.15 +0.62% continued it outperformance with heavyweight's Apple (NASDAQ:AAPL) $167.91 +4.00% and Google (NASDAQ:GOOG) $609.62 +2.62% leading the charge.

Decliners outnumbered advancers at both the NYSE and NASDAQ from the opening bell, but bullish leadership as depicted by the NH/NL ratios remains steady.

Shares of Sun Microsystems (NASDAQ:JAVA) $6.05 +4.31% were atop today's list of most actively traded and provided a lift after a bullish test of their 200-day SMA ($5.59) in late September.

Shares of Vonage (NYSE:VG) $2.57 +123.47% more-than doubled and were today's most actively traded at the big board. The VOIP (voice over Internet protocol) service provider said it had settled a patent suit filed by Sprint Nextel (NYSE:S) $18.50 -2.68%.

On September 25th, a jury in the U.S. District Court in Kansas City, Kansas, found that Vonage infringed on six Sprint patents, and ordered Vonage to pay $69.5 million in damages. The settlement today resolved all claims in that suit for $80 million, the companies said.

Sprint also agreed to license Vonage its portfolio of more than 100 patents on connecting calls between a regular telephone network and a packet-switched network such as the Internet. The settlement does not put all of Vonage's legal troubles behind it. In March, another jury awarded Verizon (NYSE:VZ) $44.96 -0.57%, $58 million in damages, plus 5.5% royalties on future revenues after finding that Vonage violated 3 Verizon patents. Litigation continues in that suit. Vonage denies infringement and says it has deployed workarounds for two of the patented technologies.

U.S. Market Watch - 10/08/2007 Close

November Crude Oil (cl07x) futures settled down $2.20, or -2.71% at $79.02 with traders citing a rebound in the US$ and diminishing weather-related activity to U.S. Gulf of Mexico production as a catalyst for today's weakness.

Refiners such as Valero Energy (NYSE:VLO) $70.77 +3.54% bucked broader energy sector weakness as the crack spread widened between November Crude Oil and Reformulated Gasoline for a fifth-straight session.

Brokers and banks gave back some of last weeks gains after the NYSE fined 14 member firms and 1 former member firm $10.43 million for failing to deliver prospectus to investors. Dow Jones reported that the largest fines were assessed to Citigroup Global Markets, Deutsche Bank Securities and Lehman Bros.

Shares of Citigroup (NYSE:C) $47.80 -1.03%, Deutsche Bank (NYSE:DB) $133.61 -1.14% and Lehman Bros. (NYSE:LEH) $62.78
-1.87% finished lower on the session.

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M&A activity presented itself with Germany's SAP AG (NYSE:SAP) $56.36 -4.84% saying it had agreed to buy France's Business Objects (NASDAQ:BOBJ) $57.83 +15.03% in a deal valued at $6.8 billion.

Unmanned aircraft maker United Industries (NYSE:UIC) $80.39 +6.30% said it had agreed to be acquired by Textron (NYSE:TXT) $64.01 -2.09% for $1.1 billion.

Spooky!

Having witnessed BIG and NARROW leading and advance, and now observing that strength is BROADENING out to the economically sensitive small caps, I can no longer look in the mirror and straddle the fence of denial should the S&P 500 Index (SPX.X) 1,552.58 -0.32% find a close above 1,565.

Besides, as Halloween nears, when I look in the mirror, I see no reflection.

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

A bullish close much above 1,564 (say 1,565) has the SPX breaking to all-time highs and would likely have this market void of many sellers until the institutionally computer-derived MONTHLY R2 of 1,601.04.

According to the StockTrader's Almanac, tomorrow (Tuesday) and Wednesday are historically "bearish," but after that October tends to be a real "bear killer," and has been the "best month" for bulls since 1998.

Dow Transports (TRAN) - Daily Intervals

This week's "key sector," or index may well be the transports. I've made the above chart as "bearish" as I can. A further "easing" or lower trade in oil prices may have the transports getting into gear on a move above 5,021.
 


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

Amgen Inc. - AMGN - cls: 56.58 change: -0.26 stop: 54.90

It was a quiet day in the markets on Monday. The biotech index digested some of its gains from Friday. Shares of AMGN also dipped lower. We are still on the sidelines waiting for a breakout to new relative highs. Our strategy suggests that readers use a trigger to buy calls at $58.01. If triggered our target is the $64.00-65.00 range, which might be a little too aggressive given our time frame. AMGN is due to report earnings around October 25th and we don't want to hold over the report. Furthermore chart readers will notice that AMGN has likely resistance at its 200-dma near around $59.50 and then again near $60.00. It's also worth noting that AMGN's P&F chart is still bearish and it will take a breakout over $60.00 to change it back into a bullish pattern.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 11.7 million

---

Biogen Idec - BIIB - cls: 66.42 chg: -1.21 stop: 64.95

BIIB also encountered some profit taking on Monday and shares pulled back 1.79%. We would still consider new bullish positions here but readers really have a choice. You could wait for another dip and bounce near short-term support at $65.00. You could wait for a rebound from current levels near $66.50 or you could wait for a new relative high and another breakout over its short-term trendline of lower highs. There is potential resistance near $70.00 but we're going to aim for the $72.40-72.50 range. The P&F chart points to an $86 target. Part of our challenge is time. We do not want to hold over the October 23rd earnings report.

Picked on October 07 at $ 67.63
Change since picked: - 1.21
Earnings Date 10/23/07 (confirmed)
Average Daily Volume = 4.4 million

---

Broadcom - BRCM - cls: 39.47 change: +2.17 stop: 35.75 *new*

It was a big day for BRCM. The stock surged 5.8% on significant volume and shares have definitely smashed through resistance near $37.50. Fueling the move was an announcement from BRCM involving an expanded deal with Samsung. Here's an excerpt from their press release:

BRCM..."today announced that it has expanded its relationship with Samsung Electronics to include advanced 3G cellular solutions for a new series of Samsung mobile handsets that are now available. Broadcom launched its first generation 3G cellular baseband technology with Samsung over a year ago with the SGH-Z220, and the new handsets leverage the companies' prior joint investment. The new Samsung 3G mobile phones are now shipping to leading cellular operators in multiple countries in Europe, Asia, Africa, Australia and elsewhere."

BRCM's intraday high was $39.59. Our target is the $39.85-40.00 range. More conservative traders may want to consider an early exit now. Aggressive traders could aim higher since we have some time ahead of the October 23rd earnings report. BRCM doesn't seem to have a lot of short interest so we doubt this will turn into any sort of real short squeeze. Please note that we're adjusting the stop loss to $35.75.

Picked on September 12 at $ 35.85
Change since picked: + 2.92
Earnings Date 10/23/07 (confirmed)
Average Daily Volume = 11.0 million

---

Citigroup - C - clos: 47.80 change: -0.50 stop: 45.79

Financial stocks were no exception from the market's profit taking today. Shares of C pulled back just over 1% but it looks like traders might defend it near $47.50. We're not suggesting new positions at this time, especially if there is a chance that C might dip toward its 50-dma near $47.00, which would be a better entry point. Readers will want to strongly consider using a tighter (higher) stop loss. 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: + 1.16
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

---

Ceradyne - CRDN - cls: 77.66 change: -0.39 stop: 73.95

CRDN slipped lower but it looks like traders were buying the dip near its rising 10-dma this morning. More conservative traders may want to tighten their stop losses again. 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: + 3.01
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 653 thousand

---

Deutsche Bank - DB - cls: 133.61 chg: -1.55 stop: 128.99

DB is another financial stock that suffered some profit taking on Monday. While a mild pull back is not much of a concern it is worth noting that shares of DB have now slipped under the bottom of its three-day trading range. Shares might be poised to further retrace closer to its rising 10-dma around $131. We would wait for further signs of a pull back and bounce before considering new positions. 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.

Picked on October 01 at $130.79
Change since picked: + 2.82
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 633 thousand

---

Intl. Bus. Mach.- IBM - cls: 117.77 chg: +1.47 stop: 114.49

Tech stocks, specifically hardware-related stocks, out performed the broader markets today. Shares of IBM rose 1.2% and looks ready to make another breakout attempt. If you think IBM can breakout over resistance in the $119-120 zone then this is a new entry point for calls. 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: + 4.53
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

Kohl's - KSS - close: 60.45 change: -0.72 stop: 57.90

Retail stocks slipped on Monday as well. KSS dipped toward $59.50 before traders stepped in to buy the pull back. The bounce back this afternoon looks like a new entry point for bullish positions and more aggressive traders may want to take advantage of it. We're going to stick to our plan, which suggests readers use a trigger to open positions at $62.01. If we are triggered at $62.01 our target is the $67.00-68.00 range. Keep a wary eye on the 100-dma as potential overhead resistance. We do not want to hold over the November earnings report.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume = 5.9 million

---

L-3 Comm. - LLL - cls: 106.50 chg: +1.76 stop: 99.99 *new*

Shares of LLL continued to show relative strength. The stock rose almost 1.7% and broke through short-term resistance near $105.00. LLL is quickly nearing our target in the $107.50-110.00 range. We're adjusting our stop loss to $99.99 but more conservative traders may want to use a tighter stop loss. More aggressive traders may want to use a higher target. The P&F chart points to a $115 target.

Picked on September 25 at $100.96
Change since picked: + 5.54
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 904 thousand

---

Martin Marietta - MLM - cls: 141.50 chg: -1.11 stop: 134.85

MLM spent Columbus Day 2007 churning sideways. We remain bullish on the stock with shares above broken resistance and what should be support near $140. However, MLM is still struggling with technical resistance at its 100-dma. More conservative traders might want to consider a tighter stop loss. The P&F chart now points to a $170 target. We have two targets. Our first target is the $149.00-150.00 range. Our second target is the $157.00-160.00 zone. We do not want to hold over the late October earnings report.

Picked on October 02 at $141.31
Change since picked: + 0.19
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

Stryker - SYK - cls: 72.48 change: -0.66 stop: 68.49

After several days of gains SYK finally hit some profit taking. Shares slipped less than 1% but the correction may not be over yet. While we remain very bullish on SYK we're not suggesting new positions at current levels. Wait and watch for a dip into the $71-70 zone. Broken resistance should now act as new support. We are adjusting our stop loss to $68.49. Our target is the $74.90-75.00 range. It would be tempting to aim higher, maybe the $77.50-80.00 range, but we don't have much time. SYK is due to report earnings on October 17th and we do not want to hold over the report. FYI: The P&F chart is bullish with an $83 target.

Picked on October 02 at $ 70.65
Change since picked: + 1.83
Earnings Date 10/17/07 (confirmed)
Average Daily Volume = 1.4 million

---

Terex - TEX - cls: 87.76 change: +1.35 stop: 83.75

It doesn't look like much on the daily chart but today's 1.5% gain in TEX is rather bullish. Traders bought the dip this morning and shares slowly began to inch higher. We would use this as a new bullish entry point to buy calls. The P&F chart is very bullish with a $100 target. Our target is the $94-95 range although more conservative traders may want to exit near $91.00.

Picked on September 25 at $ 86.50
Change since picked: + 1.26
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 1.8 million
 

Put Updates

None
 

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: 140.44 chg: -0.22 stop: n/a

We now have less than two full weeks left before October options expire. Readers may want to consider an early exit now. We're going to stick with it given the DJIA's generally bullish trend. 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: + 6.01
Earnings Date 00/00/00
Average Daily Volume = million
 

Dropped Calls

None
 

Dropped Puts

IDEXX Labs - IDXX - cls: 112.97 change: +0.57 stop: 113.85

IDXX continued to show a lot of volatility on Monday. The stock produced an early morning rally higher that hit an intraday high of $113.90. Our stop loss was $113.85 so the play has been closed. We remain skeptical of the rebound in IDXX and would keep an eye on it for further weakness and potential entries for a new bearish play down the road.

Picked on September 30 at $109.59
Change since picked: + 3.38
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 210 thousand
 

Dropped Strangles

None
 


Trader's Corner

Bullish Current Market View Versus Dow Theory Warnings

I discussed last week in my last Trader's Corner column how, technically, the major indexes (including the Russell 2000) could be viewed as having price objectives above and well above even, prior highs. This analysis was based on a type of 'measured move' objective that suggests that a second leg up will often at least match a first spurt higher. This pattern fits the picture of a 'bull flag' where a first sharp run up (9/18-9/19) is followed by a narrow backing filling movement near the high end of that first advance. When prices rally again to above the top end of such a narrow price consolidation (the 'flag'), a next price objective measured from such a 'breakout' point often suggests that a next move will carry (from that point) as far as the first upswing. Measure out this distance and it becomes a possible 'minimum' next objective.

This measuring technique for bull flag patterns is how I arrived at possible (minimum) upside objectives to 2128 in the Nasdaq 100 (NDX), around 14300 in the Dow 30 (INDU), up to possibly 744 in the S&P 100 (OEX), to 1580 in the S&P 500 (SPX) and even a move back to the area of the 856 previous (summer) high in the Russell (RUT). I don't want to repeat the rationale and marked up charts I used, when anyone interested in back-tracking to this article can see my Wed., 9/26 Trader's Corner ("Waving a Flag") on the Option Investor website by clicking here.

Prices have broken out to new closing highs in the case of the Dow, the S&P 100, the Nasdaq Composite and Nas 100. Well, the Dow as of today hasn't stayed above it's prior 14000 prior high close, but all the major indices are consolidating just under, at, or just over their previous highs from July, which is bullish technical action, suggesting the market has still further upside potential. Maybe my targets will be hit all around. That is, besides the Nasdaq 100 (NDX), given the NDX high to date of 2121 and quite close to my idealized 2128 objective.

DOW THEORY

How can this picture we're seeing near term, suggest anything but a good economy and good market for the next few months? Technical analysis is good only for the near to intermediate-term outlook, right? Possibly WRONG! if we look at the market through the analysis of Charles Dow and his so-call 'Dow Theory'; Charles Dow never called his observations a 'theory'.

The fact that currently the Dow Transportation Average (TRAN) is lagging so much relative to the Dow 30 (INDU) and will be unlikely to ever 'confirm' a new weekly high close in INDU suggests that all may not be so rosy in the economy looking out over the coming 12-15 months.

MORE on Dow Theory shortly; doesn't any bearish concern here conflict with new highs in the Dow, since the market is supposed to be such a good 'discounting mechanism' in pointing to what lies ahead for the economy and future stock performance?

THE MARKET AS A DISCOUNTING MECHANISM

I saw an analyst on CNBC the other night speaking to this topic. He cited an economist at one of my prior corporate masters, Merrill Lynch, on his study of instances when the market was hitting new highs at about the same time the economy was going into, or about to go into, a recession.

The S&P 500 peaked on July 16, 1990 after a 3.4 percent rally over the prior month; a recession began that very same month. Going back to February 13, 1980 points out another instance. This when the market peaked after a huge 7.8% run up in the previous month. The fly in the ointment was that a recession was later judged to have begun the month before.

Could this be a warning to not get complacent on our investment outlook? We do know that some 90% of the economic data has come in below expectations in the past few weeks and some internal market studies, besides Dow Theory, are hitting low-water marks for the year.

Stock markets are not always perfect discounting mechanisms!

CHARLES DOW'S PERSPECTIVE

This foregoing discussion is by way of prefacing that there could be some trouble ahead that stocks have NOT discounted yet. I found this interesting and relevant to what I'm seeing with the lagging Dow Transportation (TRAN) Average. Since I worked at Dow Jones and wrote about Charles Dow there and in my book (Essential Technical Analysis), I will share briefly what the two respective Dow Averages might be telling us at this juncture; and, what Charles Dow's rationale on this subject was about.

Charles Dow, in his observations about the stock market made more than a hundred years ago, was that the transportations stocks, as reflected in his 20-stock average (TRAN), should mirror the 30 stock Dow Industrials (INDU) in making new weekly high or weekly low closes. (Dow didn't concern himself with highs made during the day or week, similar to the way that Candlestick charting considers intraday lows and highs merely 'shadows'.)

Dow observed that if the Industrial Average made a new closing high, it should be 'confirmed' by a new high close in the transports at some point ahead. He observed that if industrial output was good, the earnings trend would also look favorable to investors.

However, if goods start being shipped at a diminished rate, this slowdown will be reflected in declining transportation stock earnings and stock trends; in such a situation TRAN would not 'confirm' new highs in INDU, which is a 'divergence'. Such a non-confirmation can suggest an economic slowdown to come. Lower quarter-to-quarter growth over a certain number of quarters is what defines a recession. What we see on the diverging trends in the Dow 30 (INDU) and the Transports (TRAN) as seen in their weekly line (close-only) charts below, could be an early warning.

You can see that back in July, both Averages went to new highs, thereby 'confirming' the bull market trend. With this latest new high in INDU, there appears to be little prospect of a similar new closing high in TRAN. Not that a new high in TRAN has to occur in a close time frame. But the transports are quite far under the Industrials prior high.

TRAN also looks poised to fall below its long-term up trendline. This trendline aspect by the way is NOT something that Dow would have talked about. However, I take a close below such a long standing bullish up trendline as very significant in defining the point at which a long-term uptrend LOSES upside momentum.

GOING BACK:
LAST DOW AVERAGE NON-CONFIRMATION

The last Dow Theory non-confirmation back in early-2003 was a telling example of how divergences in the two Dow Averages can signal a major shift in the dominant trend; in this case, the shift from a bear market trend to a bull trend.

GOOD TRADING SUCCESS!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for my answer or feedback to Click here to email Leigh Stevens support@optioninvestor.com with my name ('Leigh Stevens') in the Subject line.
 

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

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