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Daily Newsletter, Monday, 12/03/2007

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Table of Contents

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

Market Wrap

Looking For a "Dip," Then a "Rip"

After an impressive round of buying last week, the major averages gave back some of those gains to start the week, but some observations dating back to Tuesday at 11:00 AM EST up to tonight's close has me looking for a dip, then a rip higher as witnessed in August as a year-end rally looks to be in the making.

One of "today's top stories" in my opinion was released late Friday and had homebuilder Lennar Corp. (NYSE:LEN) $16.74 +5.68% saying it sold a total of 11,000 residential sites in eight states (California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey) to a venture mostly owned by the real-estate arm of Morgan Stanley (NYSE:MS) $52.28 -0.83% for $525 million.

Lennar said late Friday it formed a land investment deal with Morgan Stanley Real Estate to acquire, develop, manage and sell residential real estate, with Lennar selling properties valued at $1.3 billion to the venture for $525 million.

If my math is correct, that has Lennar selling land assets at about $0.40 on the dollar!

What the deal does is give Lennar some much needed cash as it tries to weather the storm of a bloated inventory and also suggests to me that the homebuilder is changing its business model to a leaner "just in time inventory" model.

That is, instead of sitting on inventory, during times of contraction or expansion, the homebuilder is shifting its business model toward a higher inventory turnover and return of capital invested model.

And what about Morgan Stanley? Well, at $0.40 on the dollar, they're getting some real estate at what would appear to be a discounted price should the residential real estate market(s) in some of the above mentioned markets reverse their lows, or continue to see a bullish bounce as witnessed in the regional CME housing futures in Denver, CO.

In Thursday evening's Market Monitor at OptionInvestor.com, I updated investors on the various CME Residential Housing futures (Composite; Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington D.C.).

CME Residential Housing Futures - Feb'08 and May'08

I had to "shrink" the above table to horizontally fit within the market wrap limits, but if you squint, you can probably see that Boston and Denver have been the only "bright spots" among some of the major metropolitan areas traded.

I don't follow these regional housing data on a day-to-day basis.

Other than a "fix and flip" where you're actually investing capital to improve a property with the hopes of selling at a higher price than capital invested (price of home + improvement expenses) that a home price purchased today will advance 10% by next month.

Still, as it relates to the near-term Feb'08 contracts, my latest benchmark data of 11/29/07 had the Composite just off a recent benchmark low of 207.20 from 11/14/07.

On a benchmark date of 9/04/07 Boston at 164.40 would have risen above its 03/02/07 benchmarking of 163.60 and risen higher to 167.00 on the 11/29/07 benchmarking.

Denver, which at one time was leading the nation in foreclosures just recently traded 136.60, slightly above its early March benchmark highs of 133.40.

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Conversely, Las Vegas, Los Angeles and San Diego are still showing new benchmarking lows for the February'08 contract.

Anyhow, this isn't a "Housing Newsletter," but with housing and mortgage-related issues grabbing headlines anytime we see a declining stock market, I think the CME residential housing futures give us some insights as to why Lennar is doing what it is doing, and perhaps why Morgan Stanley's real estate venture might see some decent risk/reward profile in $0.40 on the dollar transaction.

The Dow Jones Home Construction Index (DJUSHB) 306.22 +1.58% was atop today's list of sector winners. It's 5DyNet% is up a whopping 13.98% and would suggest to me some formidable amounts of short-covering during that time. Perhaps even a little bit of bullish buying trying to catch "the bottom."

Plenty of time to accumulate bullish positions with the DJUSHB down 58.23% the last 52-weeks.

Certainly Morgan Stanley is looking at the venture LONG-term. Lennar (LEN) looking for some cash and adjusting their business model.

Daily Internals - 12/03/07

On an intra-day basis, we did see a mixed open, but advancing issues at both exchanges were modestly negative throughout.

Today's economic news released at 10:00 AM EST had the Institute for Supply Management (ISM) saying its November Manufacturing Index edged lower to an expansionary 50.8 versus October's 50.9.

A quick look inside the numbers had the prices paid rising to 67.5 from 63.0 in October, while the employment index fell to a contraction level of 47.8 from October's 52.0.

The new orders index rose to 52.6 from October's 52.5, while production rose to 51.9 after October's contraction of 49.6. Inventories continued to fall at 46.9 from October's 47.2.

Readings above 50.00 are considered "expansion," while readings below 50.00 are viewed as "contraction."

Just after 01:00 PM EST, we saw some selling come in when General Motors (NYSE:GM) $28.61 -4.08% announced that November US sales fell 11%, reversing a 3-month streak of higher sales.

Despite a holiday clearance sale to spur demand, GM said sales of light trucks fell 15% (compared to Nov'06) to 156,196, while car sales fell 4.5% to 105,077. Analysts citied the decline in truck and SUV sales as being partially attributed to higher fuel prices and the housing downturn.

Ford Motor (NYSE:F) $7.25 -3.46% said later in the afternoon that that sales rose 0.7% in November (compared to Nov'06), which ended a year-long losing streak of declining monthly-comparison sales trends.

Ford said a 25% jump in sales to commercial fleet and government customers drove the increase.

Toyota (NYSE:TM) $110.92 -1.36% said sales were flat for the month compared with last November. Toyota did see a 4% increase in car sales with its hybrid Prius jumping 109%. Truck and SUV sales fell 5%.

Chrysler said it saw car sales surge 41%, led by the new Sebring convertible as well as the Dodge Charger and Avenger. Those sedans helped lift Dodge's car sales by 75% for the month. Chrysler added that truck sales were down 13.

Oil prices reversed early morning losses and I'd have to think that also attributed to some of this afternoon's broader market losses.

January Crude Oil (cl08f) traded as low as $87.15 just prior to the 11:00 hour, but reversed those losses to settle higher by $0.60, or 0.68% at $89.31.

Comments out of OPEC members the past week have kept traders on their toes into Wednesday's meeting.

When January crude threatened $100/barrel, a 750,000 barrel/day increase seemed like a "sure thing," but the recent drop below $90.00 has some speculating that the cartel could easily leave current production targets unchanged.

Since last Monday's Market Wrap, we've seen some notable changes on what I consider to be "slower moving" internals. Changes that certainly suggest a more bullish shift like that found in late August.

For example; at today's close, the NYSE's 10-day NH/NL ratio reversed back up into a column of X. (see table above)

Crazy as it may seem, it was exactly 10-days ago that I reviewed the NYSE NH/NL ratio chart in the 11/19/07 Market Wrap.

We've seen this before. As recent as August 24th when the NYSE 10-day NH/NL ratio reversed up from a low chart measure of 10.0% on 8/07/07 to 16% on 8/24/07.

NYSE NH/NL Ratio Chart - 12/03/2007

Here's an updated chart of the NYSE NH/NL ratio that I showed in the Monday 11/19/07 Market Wrap.

VERY SIMILAR to August 7, the NYSE's 10-day (Os and Xs) has fallen to 10%, and SIMILAR to August 24th, has reversed back up to 16%. This suggests to me that BEARISH leadership (number of new lows relative to new highs) is abating.

It would be open to great debate as to whom is doing the buying, but all I think we should be alert to is that SOMEBODY is buying.

For example, late Tuesday evening (11/27/07) as I was updating some of my own very short-term PRICE indicators (daily pivot levels), I saw a notable volume spike in the Dow Diamonds (DIA) $133.31 -0.63% that took place between 10:55 AM EST and 11:00 AM EST.

For an "old" trader like myself that has heard the term, and seen what can happen regarding the phrase "volume proceeds price action," I alerted traders in the OptionInvestor.com Market Monitor of the trade.

Further investigation uncovered some unusual option activity in the CBOE Dow Jones Industrial Index Average ($DJX.X) $133.15
-0.42% at the $130 strike.

Dow Diamonds (DIA) - 15-minute intervals

I'm showing a 15-minute interval chart to try and capture some time proceeding and the eventual outcome of a notable intra-day volume spike in the Dow Diamonds (AMEX:DIA) from last Tuesday.

If my math is correct, 2 million shares multiplied by $129 equates to $258 million transaction.

As a trader/investor it would be "nice to know" if it were a BULL buying or a BULL selling. It would be "nice to know" if it were a BEAR shorting, or a BEAR covering.

We don't know, nor perhaps, will we ever.

However, what we DO KNOW is that the RESOLUTION of that trade at $129.00 DIA was to the UPSIDE and would have to be deemed bullish price action.

Bottom line! $129.00 becomes a VERY INFLUENCIAL PRICE LEVEL going forward.

On the above chart, I've also take a retracement from the 11/26/07 low to Friday morning's opening high.

Now note the 61.8% retracement of that range.

DIA $130.09 would be darned close to the suspicious $DJX option action I also noted that evening.

What I hope to do here is provide a LEVEL that you and I can view as a MAJOR level of price support to TRADE against in the coming sessions.

I'm looking to get BULLISH the CLOSER the DIA comes to $130, because as it does (if it does) then that REMOVES DOWNSIDE RISK from a BULLISH trade, say with a DIA stop loss on a trade BELOW $129, or $128.66.

Even better for an options trader is utilizing a CALL option where they could view a session CLOSE below $129.00, or $128.66 as bearish.

For fibonacci retracement like that shown above, whenever a security retraces MORE THAN 61.8% of a move, that tends to SUGGEST a concerning REVERSAL of PRICE action.

Now that we've perhaps uncovered "the trade" that may have sparked the recent rally (big bets like this usually have some premise behind them) are there other signs of a reversal we should be alert to?

Yes!

While the Dow Industrials are just 30 stocks, the S&P 500 Index ($SPX) contains 500 stocks.

While we're seeing some signs of a reversal in the NH/NL ratios, Wednesday's action also saw the broad S&P 500 Bullish % (BPSPX) from Dorsey/Wright reverse back up to "bull confirmed" status at 42%.

At tonight's close, Dorsey/Wright's BPSPX was unchanged at 46.79%.

What this tells us is than since the inflection low of 35.74% on 11/27/07, we've seen a net gain of roughly 55 stocks give reversing HIGHER point and figure "buy signals."

What I would IMMEDIATELY suggest bullish and bearish traders/investors do is KNOW where the INDEX you like to trade CLOSED at on 11/27/07.

S&P Dep. Receipts (SPY) - 15-minute interval chart

The SPY allows us to "turn on the volume" for an observation that the SPX itself doesn't allow.

What we see in the DIA doesn't show up in the SPY, but SOMEBODY is/was BUYING the big guns and mega-caps.

With the BPSPX reversing back up to "bull confirmed" status, it is TIME for bears to be playing DEFENSE and looking for a pullback after the VERY strong move that began on 11/28/07.

For the QQQQ $50.88 -0.83%, a 61.8% retracement of the recent range would be a trade at $50.18. I had profiled a BULLISH trade for the QLD $103.53 -1.83% on Tuesday at $99.96, but "sold too soon" on Wednesday as it rose to $104.85.

I'd like a 2nd chance to nip away at another 1/4 position if given the chance. Perhaps round up to 1/2 position should the QLD then take out Friday's high of $109.01, or QQQQ $52.24 for the "rip" higher.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
NOV CELG None

New Calls

Nat.Oilwell - NOV - close: 70.73 change: +2.58 stop: 64.90

Company Description:
National Oilwell Varco is a worldwide leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production operations, the provision of oilfield services, and supply chain integration services to the upstream oil and gas industry. (source: company press release or website)

Why We Like It:
NOV was one of a handful of stocks I listed in the Play Editor's Note over the weekend to watch as a potential candidate. The stock displayed relative strength today with a bullish breakout over the $70.00 level and its late November highs. We are suggesting new call positions now with NOV over $70.00 but this probably qualifies as an aggressive play. Not only does NOV have potential resistance at its 50-dma near $71.80 but we're suggesting bullish positions in a market that looks poised for more profit taking. We're listing a stop loss at $64.90 but more conservative traders might want to put their stop loss near $67.00 instead. An alternative entry point would be to wait for a rally over the 50-dma but if you wait we would use a higher stop loss. Our target is the $79.00-80.00 range. The Point & Figure chart is bullish with an $84 target.

Suggested Options:
We are suggesting the January calls but February strikes would also work. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL JAN 70.00 NOV-AN open interest=749 current ask $5.80
BUY CALL JAN 75.00 NOV-AO open interest=795 current ask $3.40
BUY CALL JAN 80.00 NOV-AP open interest=455 current ask $1.90

Picked on December 03 at $ 70.73
Change since picked: + 0.00
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume = 5.5 million
 

New Puts

Celgene - CELG - close: 60.28 change: -1.27 stop: 64.05

Company Description:
Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation. (source: company press release or website)

Why We Like It:
CELG has been under performing its peers and now the stock is breaking down under its 200-dma and is poised to breakdown under support near $60.00. Shares hit an intraday low of $59.65. Today's drop produced a new sell signal on the Point & Figure chart with a $50.00 target. We are suggesting a trigger to buy puts at $59.49. We have a wide, aggressive stop at $64.05 and more conservative traders will want to consider a tighter stop loss. We have two targets. Our first target is the $55.50-55.00 zone. Our second target is the $51.00-50.00 region.

Suggested Options:
We are suggesting the January puts. Our suggested trigger is at $59.49.

BUY PUT JAN 60.00 LQH-ML open interest=12343 current ask $3.30
BUY PUT JAN 55.00 LQH-MK open interest=15628 current ask $1.55

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 4.2 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Constellation Energy - CEG - cls: 99.91 chg: -0.30 stop: 95.95

CEG made the new 52-week high list with this morning's rally to $101.48. Unfortunately the rally quickly melted away and shares spent the session churning sideways between $99 and $100. The trend is still bullish but if you're looking for a new entry point we would suggest waiting for another dip near $98.00 or a new relative high over $101.50. Our target is the $107.50-110.00 range.

Picked on November 20 at $100.56
Change since picked: - 0.65
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.3 million

---

Energizer - ENR - close: 114.49 chg: +0.86 stop: 107.85

Bulls quickly bought the dip near $112 and its rising 10-dma this morning. ENR out performed the market with a 0.75% gain and the stock looks poised for more gains. The P&F chart target is now $157. Our target is the $119.00-120.00 range

Picked on November 26 at $112.75 *triggered
Change since picked: + 1.74
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume = 511 thousand

---

Fording Candn. Coal - FDG - cls: 34.36 chg: +0.27 stop: 29.95

There is no change from our weekend comments on FDG. We're waiting on a dip back to the $32.50-32.00 range. More aggressive traders might want to jump in now or near $33.00. Our suggested stop loss is at $29.95 but more conservative types could try and get away with a stop closer to $32.00. If triggered our target is the $37.00-37.50 zone. The P&F chart is still bullish in spite of the big sell-off, which was sparked by FDG's latest earnings report.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 770 thousand

---

Flowserve - FLS - cls: 93.01 change: -1.08 stop: 88.45

FLS followed the major indices lower today. We would expect a dip back toward the $92.00 region and possibly the $90 level. Wait for signs of a bounce before considering new bullish positions. We have our stop loss under the late November low but more conservative traders may want to consider a stop loss closer to $90.00. Our target is the $99.50-100.00 range.

Picked on November 25 at $ 93.04
Change since picked: - 0.03
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 724 thousand

---

Gilead Sciences - GILD - cls: 45.94 change: -0.60 stop: 43.85

There is nothing out of the ordinary here. GILD ran into some profit taking after last week's surge. We are not suggesting new bullish positions. More conservative traders may want to close their positions early right now. A dip back toward $45.00 or $44.00 would not be a surprise. We're still aiming for the $47.00-48.00 range. More aggressive traders may want to aim higher.

Picked on November 13 at $ 43.11
Change since picked: + 2.83
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.6 million

---

Holly Corp. - HOC - close: 48.48 change: +0.03 stop: 44.95

HOC continued to trade sideways but shares maintained the short-term bullish trend of higher lows, which is a good sign. The intraday high at $50.58 is a bad tick. If you look at the intraday chart HOC never traded over $49.00. Unfortunately, since bad ticks are a real life hazard we are going to "open" this play at $50.58 (the opening trade). Our alternative entry point was a breakout over $50.00 at $50.05. We strongly suggest readers wait for a true breakout over $50.00 or our original plan for a dip into the $47.00-46.00 range. Our initial target is the $54.75-55.00 range. FYI: The P&F chart is still very bearish following the November sell-off.

Picked on December 03 at $ 50.58 *bad tick/gap open
Change since picked: + 0.00
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

---

Itron Inc. - ITRI - close: 78.56 change: +1.01 stop: 73.35

We do not see any changes from our weekend comments. ITRI continued to trade sideways between $77.00 and $79.00. The intraday low at $76.30 was a bad tick. You can check an intraday chart. We're suggesting a trigger to buy calls on ITRI in the $76.00-74.00 zone (our "official" entry will be $76.00). If ITRI does not pull back our alternative entry point will be the $80.26 mark. If triggered our target is the $86.00-87.00 range near its 100-dma. The P&F chart is more encouraging with a $92 target.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume = 824 thousand

---

JA Solar - JASO - close: 55.45 change: -3.89 stop: 52.49

After a huge move last week shares of JASO hit some heavy profit taking today. The stock lost 6.5% and closed at its lows for the session. We were suggesting an entry point in the $57-55 zone with an "official" entry point at $56.25. The play is now open. However, if you have not opened positions yet we would wait. JASO looks poised to hit $55.00 and potentially $54.00 soon. Furthermore we would wait for signs of a bounce first before initiating positions. Our target is the $69.00-70.00 range. The P&F chart is very bullish with an $88 target.

Picked on December 03 at $ 56.25 *triggered
Change since picked: - 0.80
Earnings Date 03/31/08 (unconfirmed)
Average Daily Volume = 3.0 million

---

Synaptics Inc. - SYNA - close: 55.81 chg: +0.27 stop: 52.95

SYNA produced a minor oversold bounce on Monday in spite of the market's decline. We do not see any changes from our weekend comments. This is now starting to look like a potential bearish double-top pattern with the peak in earl November and now last week. SYNA should find some support in the $53-55 region but wait for signs of a bounce if you're looking for a new bullish entry. We are not suggesting new plays at this time. Our target is the $61.50-62.00 range.

Picked on November 26 at $ 56.55 *triggered
Change since picked: - 0.74
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 1.1 million

---

ExxonMobil - XOM - close: 88.85 chg: -0.31 stop: 83.95

Monday provided a quiet session for XOM with the oil giant's stock trading sideways. We do not see any changes from our weekend comments. More conservative traders might want to do a little profit taking near $90.00. On the other hand a rally over $90.00 or its 50-dma could be used as a new bullish entry point. However, if you're launching new positions now we'd suggest a might tighter stop loss, maybe near $87.50 (and we'd aim for the $94.50-95.00 zone). Our target is the $92.50-95.00 range. More aggressive traders might want to narrow their exit range to the $94-95 zone.

Picked on November 13 at $ 86.75
Change since picked: + 2.10
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 24.2 million
 

Put Updates

Boeing - BA - close: 91.79 change: -0.75 stop: 95.01

BA continued lower following Friday's bearish reversal. However, today's decline was not strong enough. The intraday low was $91.66. We are suggesting a trigger to buy puts at $91.50. If triggered our target is the $85.50-85.00 zone, just under the November lows. FYI: The P&F chart points to a $75 target although it's also suggesting a potential bullish reversal in progress.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million

---

ESSEX Property - ESS - cls: 101.67 chg: -2.07 stop: 105.55

All of the action in ESS occurred in the first half hour. The stock dropped under the $102 level and then churned sideways in a relatively narrow range. The stock began plunging again into the closing bell. We remain bearish but we're not suggesting new positions. Our target is support in the $94.00-93.00 range. The P&F chart is much more bearish with a $78 target (in spite of the recent bounce).

Picked on November 20 at $101.75
Change since picked: - 0.08
Earnings Date 10/31/07 (confirmed)
Average Daily Volume = 272 thousand

---

Harley Davidson - HOG - cls: 46.87 change: -1.15 stop: 50.01

HOG has produced another bearish reversal with a failed rally near its 50-dma and another bearish engulfing candlestick pattern. The drop under $47.00 looks like a new entry point for puts but more conservative traders may want to wait for a decline under $46.50 first. Our target is the $41.00-40.00 range. The P&F chart is bearish with a $38 target.

Picked on November 27 at $ 46.48
Change since picked: + 0.39
Earnings Date 01/17/08 (unconfirmed)
Average Daily Volume = 2.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

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.

DISCLAIMER

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