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Newsletter

Daily Newsletter, Saturday, 12/29/2007

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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

Santa Has Left the Building

The pre Christmas holiday cheer lost its fizz like a week old open bottle of pop. The post holiday markets were still in celebration mode until news of the Pakistani assassination killed the enthusiasm and reminded traders what a fragile world we live in. Fears of an Al Qaeda takeover of a nuclear-armed country put the world on watch and the markets on hold. Volume fell sharply and traders went into hold mode until next week. Any year-end shuffling has already been completed and we are waiting for the New Years ball to drop over Time Square to trigger a new trading year.

Dow Chart - Daily

Nasdaq Chart - Daily

If you were looking for a reason to trade on Friday you had to look hard and I doubt you found good one. The economics were mixed but I doubt anyone was paying attention. The surprise came from the Chicago PMI with a headline number jumping nearly 4 points to 56.6 for December. That was the second month of strong gains from the October 8-month low at 49.7. The unexpected spike pushed the index to a 6-month high. Expectations were for a decline to 51.0 from last months 52.9. The spike was powered by a sudden jump in backorders from 45.9 to 60.7 and new orders from 53.9 to 58.4. Even more surprising was the drop in prices paid by more than 12 points. The strength in the PMI is in stark contrast to the rest of the regional manufacturing reports, which show activity slowing. This surprising strength suggests the national ISM on Wednesday could be stronger than the weak number previously expected. If these economic reports continue to show improvement the Fed will be hard pressed to make any further rate cuts.

Chicago PMI Table

The NAPM-NY report also showed an unexpected gain to 449.1 from 445.0. That was the third consecutive month of gains that pushed it to the highest point since June. Activity levels increased but both the current conditions component and the six-month outlook fell by 2 points. Business is improving but respondents are unsure it will continue. Hiring slowed but that is common in December. Unemployment is holding at 4.6% and inline with the national rate but initial unemployment claims are rising. Given the turbulence in the financial markets centered in New York hiring was expected to be even weaker. This was a positive report given the pessimism surrounding the impact of the current financial woes on the New York area.

The report that did not surprise anyone was the New Home Sales for November. Sales fell to 647,000 annualized units falling -9% from October and -34% from the prior November. This was the steepest year-over-year decline so far in this cycle. The biggest decline came from the Midwest with a month-to-month drop of 27.6%. Months of supply on the market increased to 9.3 months. Surprisingly the median price of a home sold rose +7.3% due mostly to a firming of sales on the west coast. The NAHB Housing Market Index is still holding at its record low of 19 where it has been for the last 3-months. The high for the year was 39 back in February. You could say two months without a decline in the index may be positive since we are only 3-months away from the start of the spring sales season. Builders may start showing signs of hope once the holiday doldrums have passed. December is the worst month for home sales because potential consumers have their attentions focused elsewhere.

New Home Sales Chart

Next week's economic calendar has some important events. The calendar will start out grim with the existing home sales on Monday and they should also show a sharp decline. The ISM Index for December will follow on Wednesday and analysts are not expecting any major change. However with the unexpected jump in the PMI (Purchasing Manager Index) we could see a positive surprise in the ISM. Also on Wednesday the FOMC minutes for the Dec-11th meeting will be released and we will get to see what the Fed was thinking when they cut rates by a quarter point. Future rate cut hopes for the Jan-29th meeting will ride on these FOMC minutes, the ISM and on Friday's employment report.

The Nonfarm Payroll report on Friday is officially expected to show a gain of 70,000 jobs but the unofficial whisper numbers are dropping fast. Most are in the 50K range but some are nearing zero. Unexpected strength here would turn the Fed off completely but unexpected weakness could pull the Fed back into the picture. It should be an interesting economic week.

Economic Calendar

It has been an interesting year in the markets. The Dow is on track to post a +7% gain, S&P +4% and Nasdaq +11%. The Russell is on track to lose 2% for the full year and that is significantly better than the -7% drop we were seeing back on Dec 18th. The Santa bounce tacked +65 points on the Russell before the assassination killed interest in small caps. The biggest Dow gainer was Honeywell (HON) at +35% and the biggest loser was Citigroup (C) at -48%. The leading sector was energy at +33% and financials at -21% were the losers.

We are only a week away from the start of the earnings season and surprisingly the number of warnings has been minimal once the initial flurry passed. Next week will be the last chance many will have to confess before the actual earnings cycle begins with the first Dow component, Alcoa (AA), reporting on Jan-8th.

This was a window dressing week and it was progressing pretty well until the assassination spoiled the party. Monday is going to be a full trading day but not likely a day full of trading. The real trading will begin on Wednesday and the start of tax selling. Anyone holding their gains to avoid taxes in 2007 will be free to dump away on Wednesday. This should be a short 2-3 day event and can be offset by the end of year retirement contributions hitting the market. Mutual funds who dressed up their portfolios heading into year-end will also be free to shuffle the books heading into a new trading year. Since funds wanting to buy had no reason to wait the bias could be to the downside for the first couple days of 2008. Expect those stocks with the biggest 2007 gains to see the sharpest selling.

The dog shoppers will be active and you can expect a temporary bounce in those stocks most out of favor in 2007. There is a long track record of winning trades from buying the dogs of the Dow early in the year. Historically the average gains on the dogs of the Dow are around 14% for the year. The Dow dogs analysts are pointing to this year are GM, PFE, DD, C and CAT. Conversely the Dow stocks going into January with the best ratings typically return the least for the full year. The stocks analysts following this strategy suggest avoiding are HPQ, T, MO, WMT and AIG.

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Warren Buffett was feeling the holiday spirit last week with multiple purchases. On Friday he agreed to buy the NRG reinsurance business from ING for $441 million. He also announced a move to setup a municipal bond insurer with a triple-A rating to compete with companies like MBIA and Ambac. The new company will initially operate in New York but is expected to apply for licenses in other states as well. This company is going to be a competitive threat given Berkshire's stronger financial position. MBIA (MBI) fell 14% and Ambac (ABK) lost 12% on the news. Buffett announced on Christmas Day that Berkshire was spending $4.5 billion to buy 60% of Marmon. This is the industrial conglomerate controlled by the Pritzker family. Berkshire currently has $50 billion in excess cash and has been rumored to be looking at positions in a major financial entity. However, Buffett told CNBC he has not seen anything yet that caused him to get excited. "Everybody knows our phone number but nobody has brought us anything we are willing to move on."

Citigroup and HSBC were in the news on Friday as the Wall Street Journal claimed they were preparing to sell off units to raise capital and prepare for rough times ahead. Citigroup is expected to sell or shutter several of its mid-sized units worth $12 billion or more. These are considered non-critical assets and could be sold to raise additional capital. Units possibly up for sale include Student Loan Corp, its North American auto lending business, Brazilian credit card company Redecard SA and its Japanese finance business. HSBC could exit all or part of its $13 billion auto finance business according to the Journal. Citi is expected to announce more job cuts above the already announced 17,000. Citi employs 300,000 workers in over 100 countries.

The NYSE won the bragging rights for new business in 2007. There were 425 new IPOs worth more than $78 billion. There is no news yet about the potential for a repeat in 2008. 25 of those IPOs were Chinese companies. With the Chinese market up +97% for the year the odds are good there will be some more IPOs to follow. Meanwhile the CME is about to break initial support on the news the 12 major banks are going to start their own futures exchange.

CME Chart - 60 min

Amazon moved close to a new high on Friday after it was announced they were selling 17 Nintendo Wii games per second when the games were in stock prior to Christmas. Amazon said this was the best holiday season in its 13 years as a web merchant. Dec-10th was the busiest day with customers buying 5.4 million items. They shipped 3.9 million items on their biggest shipping day. I cannot even conceive of the scale needed to process and ship 3.9 million orders in one day. Just exactly how many UPS trucks does that take to make the pickup? Amazon has definitely grown up into the dominant merchant on the web. Now the real trick will be if their stock can avoid the normal January decline. Shorting AMZN on Jan-2nd has been a consistent winning trade but recent strong earnings may have jinxed that trend.

Amazon Chart - Daily

Wal-Mart closed its movie download service that it launched less than a year ago. Wal-Mart accounts for 40% of all DVD sales but the download service was never a big hit. Wal-Mart tried a DVD rental business as well but gave up on that in 2005 and turned the service over to Netflix. Wal-Mart still operates a music download service. Wal-Mart blamed the decision on Hewlett-Packard, which provided the software running the site. Wal-Mart said Hewlett "made a business decision to discontinue its video download merchant store service." HPQ said it dropped the service because it was not performing as expected. Last month AOL scrapped its pay-for-download movie service. That leaves only Apple iTunes and Amazon's Unbox service as the remaining video download options. WMT stock failed to move on the announcement. The problem with the video download service is the time required for the download and they won't run on normal DVD players. Watching a movie on your PC just has not caught on yet when players like cable giant Comcast offer thousands of videos at a cheaper price that play on your TV. ITunes just announced an alliance with News Corp's Fox to rent digital movie downloads. With more and more entertainment center receivers offering iPod connections it appears companies like Blockbuster and Netflix have another wave of competitive pressure ahead. Netflix passed on a partnership with Tivo to allow movies to be downloaded directly so it may have shot itself in the foot with that decision.

The indexes are leaving 2007 right in the middle of their congestion ranges. The Dow found support the prior week at 13200 and resistance this week at 13550. Both levels are bracketed by even stronger resistance/support about 400 points further in each direction. If it were not for the window dressing the week would have been a bigger bust than it was. We still can't apply much weight to the market action since stock news was slim and volume slimmer. The last three days barely broke 4 billion in volume across all the exchanges. The NYSE managed to break 2 billion on Friday but only barely. It is year-end, everyone has already positioned their portfolios for the end of the tax year and now we just wait until Jan-2nd to execute the next plan. The Dow should test 13200 again next week and how it reacts to that support will give us an initial direction but we need to get past the lingering holiday volume and beginning of year trades before any real direction should appear. That means any volatility next week should be ignored with Tuesday Jan-8th the first real day of 2008.

The Nasdaq showed the most strength with a two-week rebound to retest resistance at 2725. Whether that was just window dressing or retail traders spending their holiday bonus is unclear. The Nasdaq held the high ground pretty well with only a -50 point decline on the Bhutto killing. Since the Nasdaq is being held up by gains in AAPL, RIMM and AMZN with help from INTC and MSFT the odds are good we could see a continued dip late next week. Those first three are up on expectations of a strong holiday season and now that it is over the tendency is to take profits rather than be disappointed by earnings. There is no guarantee but AAPL and AMZN have both had a good run.

The S&P-500 is again back below resistance at 1490. The two-day attempt to hold Monday's breakout was very lackluster but that could also be due to end of year window dressing and position squaring rather than real buying interest. I still think we should be long over 1490 and short below that level.

S&P-500 Chart - Daily

Russell-2000 Chart - Daily

The Russell was the surprise in the velocity it attained going into the holidays but it was no surprise to see it fail at 800 once again. That is very strong resistance that has been with us since August. We are at that point on the calendar where small caps should be our guide. After the first couple days of 2008 pass we need to be watching the Russell very carefully to see if fund managers are buying or selling small caps. That tells us if they are confident of market direction or afraid of further market weakness. Support on the Russell is 740 and resistance 800. We closed on Friday at 771 almost exactly in the middle.

I would not get too excited about trading on Monday even though it is a full day. Volume is going to be sparse and without some external event direction will be entirely chaotic. It is a day to spend getting ready to party the New Year in rather than donating spreads to the market makers.

Happy New Year!

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None ATI None
  ESS  
  VNO  

Play Editor's Note: Volume has been extremely light this week, which is to be expected during the holidays. Unfortunately, it makes our job as traders tougher. Monday is not going to be any different. It will be a full day of trading but it will probably be a lackluster day at best. We're not loading up on a lot of new plays since we should really wait to see how the market reacts on Wednesday, when most market participants should be back to work. Jim's market outlook is flat to down so we're adding put plays. FYI: Bonus play - Aggressive traders might want to consider a speculative strangle on VRSN. The stock has been almost pinned to the $38 level for days now. Consider buying a January $40 call and a January $35 put. You'd have three weeks to see a move.


New Calls

None today.
 

New Puts

Allegheny Tech. - ATI - cls: 87.68 change: +0.78 stop: 90.05

Company Description:
Allegheny Technologies Incorporated (ATI) is one of the largest and most diversified specialty metals producers in the world with revenues of $5.6 billion during the most recent four quarters ending September 30, 2007. (source: company press release or website)

Why We Like It:
The trend in ATI has definitely changed from 2005 and 2006. This year (2007) definitely saw ATI experience a lot of volatility. In the last few months ATI had been consolidating along support near $90.00. The stock broke that support in mid December. The oversold bounce stalled right where you would expect it to with new resistance at $90.00. We are very tempted to just buy puts right here at $87.68. However, we're going to suggest waiting for a little more confirmation with a trigger to open positions at $86.75. We'll place the stop right above support at $90.05. Our target is the $80.50-80.00 zone.

Suggested Options:
We are suggesting the January or February puts. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk. We do not want to hold over the late January earnings report. FYI: January strikes expire in three weeks.

BUY PUT JAN 90.00 ATI-MR open interest=4437 current ask $5.00
BUY PUT JAN 85.00 ATI-MQ open interest=2552 current ask $2.50
BUY PUT JAN 80.00 ATI-MP open interest=2550 current ask $1.20

BUY PUT FEB 85.00 ATI-NQ open interest= 90 current ask $4.70
BUY PUT FEB 80.00 ATI-NP open interest=147 current ask $2.90

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 2.0 million

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Essex Property - ESS - close: 95.34 chg: -2.06 stop: 100.55

Company Description:
Essex Property Trust, Inc., located in Palo Alto, California and traded on the New York Stock Exchange (ESS), is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast communities. Essex currently has ownership interests in 138 multifamily properties (units), and has 28,364 units in various stages of development. (source: company press release or website)

Why We Like It:
Most of the REIT stocks are in decline. ESS recently broke down from its $98-108 trading range. The last couple of weeks have seen new resistance form at the $100 level. Friday saw the stock under perform and close at its lows for the year. The P&F chart is bearish with an $82 target. We're suggesting puts now with ESS under $100. We have two targets. Our first target is the $90.25-90.00 range. Our second target is the $85.50-85.00 zone. We do not want to hold over the early February earnings report.

Suggested Options:
We are suggesting the January or February puts. FYI: January strikes expire in three weeks. Plus, we don't see any January strikes under $95 at this time.

BUY PUT JAN 95.00 ESS-MS open interest= 3 current ask $3.60

BUY PUT FEB 95.00 ESS-NS open interest= 0 current ask $4.70
BUY PUT FEB 90.00 ESS-NR open interest= 0 current ask $2.85

Picked on December 30 at $ 95.34
Change since picked: + 0.00
Earnings Date 02/04/08 (unconfirmed)
Average Daily Volume = 315 thousand

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Vornado Realty Trust - VNO - cls: 86.30 chg: -0.75 stop: 90.05

Company Description:
Vornado Realty Trust is a fully integrated equity real estate investment trust. (source: company press release or website)

Why We Like It:
VNO is another REIT that is moving lower. The stock broke down from a bear-flag pattern in mid December. The recent oversold bounce ran into resistance near $90.00. This looks like a new entry point for puts. We're suggesting a stop just above $90.00. Our initial target is the $80.50-80.00 range. We are considering a second, more aggressive target near $75. Currently the P&F chart is bearish with a $73 target. We would not want to hold over the late February earnings report.

Suggested Options:
We are suggesting the January or February puts. FYI: January strikes expire in three weeks.

BUY PUT JAN 85.00 VNO-MQ open interest=105 current ask $2.90
BUY PUT JAN 80.00 VNO-MP open interest=121 current ask $1.45

BUY PUT FEB 85.00 VNO-NQ open interest= 0 current ask $4.80
BUY PUT FEB 80.00 VNO-NP open interest= 0 current ask $2.85

Picked on December 30 at $ 86.30 <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume = 1.3 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Energen - EGN - close: 64.88 change: -0.24 stop: 62.95

Unfortunately, EGN provided more of the same on Friday. We've been cautioning readers that the stock looked headed lower toward $65 or $64. The close under what should have been round-number, psychological support near $65.00 is bearish. Plus, three days of declines is weighing on the short-term technical oscillators turning them bearish. EGN should find support at its rising 50-dma and the bottom of its rising bullish channel both near $63.80. Wait for a bounce near $64.00 before considering new bullish positions. More conservative traders could tighten their stops but even though the 50-dma should be strong support we don't want to be immediately under it. EGN needs a little bit of room to maneuver. Our target is the $69.50-70.00 range. The P&F chart is bullish with a $74 target.

Suggested Options:
If EGN provides a new bullish entry point we would suggest the January or February calls. FYI: January strikes expire in three weeks.

Picked on December 18 at $ 65.32
Change since picked: - 0.44
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 700 thousand

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Express Scripts - ESRX - cls: 72.93 chg: -0.57 stop: 69.49*new*

ESRX is still looking pretty good. After a four-day sprint higher it is not a surprise to see a couple of days of rest. Our bias for next week is flat to down. If you're looking for an entry point in ESRX we would wait and watch for a dip or a bounce near $72.00 or the $70.00 level. Either should be short-term support with $70.00 being stronger support. We are adjusting our stop loss to $69.49. Our target is the $77.50-80.00 range. The P&F chart is very bullish with a $97 target.

Suggested Options:
If ESRX provides a new entry point we would suggest the January or February calls. FYI: January strikes expire in three weeks.

Picked on December 23 at $ 71.09
Change since picked: + 1.84
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume = 2.5 million

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Goodrich - GR - close: 70.95 change: -1.49 stop: 69.95

Traders need to turn more cautious on GR. The stock under performed the market and its peers on Friday with a 2% loss. Furthermore the stock broke down under its 50-dma and produced what appears to be a bearish engulfing candlestick pattern. Given our outlook for next week being flat to down more conservative traders may want to exit early right now. We would still expect to see a bounce from support near $70.00 but Friday's performance is a little ominous. The DFI defense index also looks vulnerable to more selling pressure. We would want to see a convincing bounce in GR before considering new bullish positions. Our target is the $77.50-80.00 range. The P&F chart is bullish with a $99 target.

Suggested Options:
We are not suggesting new positions at this time but look for support near $70.00.

Picked on December 23 at $ 72.57
Change since picked: - 1.62
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.2 million

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Holly Corp. - HOC - close: 50.34 change: -0.62 stop: 48.95*new*

HOC is still testing what should be support near $50.00. It's common for broken resistance to become new support and we've been warning readers for days now that HOC looked like it was headed back toward the $50 region. A bounce from here could be used as a new bullish entry point. Please note that we're adjusting our stop loss to $48.95. More conservative traders could try and get by with a tighter stop. Our target on HOC is the $54.75-55.00 range. FYI: It does look like HOC has put in a bottom and the P&F chart now points to a $65 target. More aggressive traders may want to aim for the $58-60 zone.

Suggested Options:
If HOC bounces from here we would suggest the January or February calls. FYI: January strikes expire in three weeks.

Picked on December 03 at $ 50.58 *bad tick/gap open
Change since picked: - 0.24
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

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Hologic - HOLX - close: 69.65 chg: -0.17 stop: 65.99

We have some good news on HOLX. Friday's session failed to see any real follow through on Thursday's bearish reversal pattern. The stock continues to look short-term oversold and could see more profit taking but any profit taking may be more mild than previously expected. Right now we would watch for HOLX to find short-term support at the rising 10-dma or the $68.00 level. At this time we're not suggesting new bullish positions. HOLX has already hit our initial target in the $69.50-70.00 range. Our more aggressive target is the $74.00-75.00 range. FYI: The P&F chart is bullish and points to an $87 target.

Suggested Options:
We are not suggesting new positions in HOLX at this time.

Picked on December 18 at $ 66.22
Change since picked: + 3.43
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 2.8 million

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Noble Energy - NBL - close: 80.66 chg: +0.11 stop: 75.75

Friday was a quiet session for NBL. The stock spent the day trading sideways. The trend is still bullish and if shares hit any profit taking we would watch for the rising 10-dma to be short-term support. More conservative traders may want to tighten their stops. Another bounce near $80.00 could be used as a bullish entry point. Our target is the $84.50-85.00 range. The P&F chart is bullish with an $86 target.

Suggested Options:
If NBL provides a new entry point we would suggest the January or February calls. FYI: January strikes expire in three weeks.

Picked on December 19 at $ 78.25
Change since picked: + 2.41
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 1.5 million

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Syntel Inc. - SYNT - close: 39.04 chg: +0.78 stop: 35.75

SYNT displayed some relative strength on Friday. Traders bought the dip near $38 again and SYNT added 2% by the closing bell. This looks like another bullish entry point to buy calls. Our target is the $44.00-45.00 range. The P&F chart has recently produced a new buy signal with a $50 target.

Suggested Options:
We are suggesting the January or February calls. However, we would not want to hold over the late January earnings report.

BUY CALL JAN 40.00 DUB-AH open interest=73 current ask $1.00

BUY CALL FEB 40.00 DUB-BH open interest= 6 current ask $2.30

Picked on December 24 at $ 38.75 *triggered
Change since picked: + 0.29
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 232 thousand
 

Put Updates

Boeing - BA - close: 88.25 change: -0.63 stop: 91.43

Shares of BA continue to slip. Friday morning brought news that BA announced a five-month delay for delivery of its new Dreamliner jets to India. They were expected in September 2008 and now they won't be delivered until February 2009. Investors have been concerned about delays for this product line for months. The stock is in a bearish decline of lower lows and lower highs following a huge (bearish) double top in mid 2007. The recent failed rally near $90 looks like a new entry point to buy puts. We have two targets. Our first target is the $85.55-85.00 range. Our second target is the $81.50-80.00 zone. The P&F chart is bearish with a $75 target.

Suggested Options:
We are suggesting the January or February puts. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk. FYI: January strikes expire in three weeks.

BUY PUT JAN 90.00 BA-MR open interest=30158 current ask $3.10
BUY PUT JAN 85.00 BA-MQ open interest=15592 current ask $0.95

BUY PUT FEB 85.00 BA-NQ open interest= 7325 current ask $2.35

Picked on December 04 at $ 91.43 *triggered/gap down
Change since picked: - 3.18
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million

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Genentech - DNA - close: 67.51 chg: +0.38 stop: 70.05 *new*

We remain very dissatisfied with DNA's performance. The BTK biotech sector index continues to look bearish especially after Thursday's breakdown under the 200-dma. Yet shares of DNA continue to trade sideways. We came close to just dropping DNA as a bearish candidate today but decided that the short-term trend is still bearish with a pattern of lower highs and as long as DNA is under the 10-dma we're okay. We are dropping our stop loss to $70.05 and more conservative traders may want to adjust theirs even lower. At this point we would wait for a decline under $66.75 before considering new bearish positions. Our DNA target is the $62.50-60.00 range. The main hurdle for the bear is potential support near the early December lows. DNA's P&F chart is very bearish with a $54 target. FYI: Any time we play a biotech stock it should be considered high risk. You never know when news will come out about some successful or failed clinical trial or some FDA decision that could send the stock gapping one way or the other.

Suggested Options:
We are not suggesting new positions on DNA at this time.

Picked on December 16 at $ 68.43
Change since picked: - 0.92
Earnings Date 01/10/08 (unconfirmed)
Average Daily Volume = 4.3 million

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Garmin - GRMN - close: 99.17 chg: -1.65 stop: 105.05 *new*

Bears still appear to be in control with GRMN. They stopped the advance near resistance around $103.50. Now share are slipping again. Late Friday afternoon GRMN offered another entry point for puts with the dips under $99.00. We are adjusting our stop loss to $105.05. More conservative traders could slip theirs closer to $104. This remains a very high risk play due to the stock's volatility. A week ago GRMN exceeded our initial target in the $96.00-95.00 zone. Our second more aggressive target is the $91.00-90.00 range. The P&F chart is bearish with an $86 target but the P&F chart also shows potential support near $91.

Suggested Options:
We are suggesting the January or February puts. FYI: January strikes expire in three weeks.

Picked on December 11 at $104.78
Change since picked: - 5.61
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 6.2 million

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Ralph Lauren Polo - RL - cls: 61.76 change: +0.31 stop: 66.26

We don't have anything new to say about RL. Investors are still selling the mini-bounces the stock produces. Shares do look short-term oversold but broken support near $63.50-64.00 should be overhead resistance. Readers may want to wait for a new failed rally pattern to appear before initiating new positions. Actually, since we are expecting a bounce the first time RL hits $60 readers could wait until after this bounce rolls over before considering new positions. The Point & Figure chart produced a quadruple bottom breakdown sell signal and points to a $55 target. We were suggesting puts with RL under $64.00. Our target is the $58.00-57.00 range although odds are good the stock will see an oversold bounce near $60.00.

Suggested Options:
We would still consider the January or February puts. FYI: January strikes expire in three weeks.

Picked on December 19 at $ 63.11
Change since picked: - 1.35
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume = 1.5 million

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Sears Holding - SHLD - cls: 102.10 chg: +0.94 stop: 110.55

We do not see any changes from our previous comments on SHLD. The stock continues to look very bearish with a consistently bearish trend of lower highs. However, shares are short-term oversold after a three-week decline and they are resting on round-number, psychological support at $100. If there was going to be an oversold bounce it should be here. The positive sign for the bears is that SHLD keeps trying to rebound and investors keep selling it. SHLD has already hit our initial target in the $100.50-100.00 zone. We are not suggesting new bearish positions at this time. Our second more-aggressive target is the $92.50-90.00 zone. The P&F chart is bearish with a $78 target.

Suggested Options:
We are not suggesting new positions at this time.

Picked on December 11 at $110.28
Change since picked: - 8.18
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 3.3 million

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Shire Plc - SHPGY - close: 68.83 change: +0.15 stop: 70.26*new*

If you look at the technical indicators on SHPGY you're going to get a lot of mixed signals. Meanwhile looking at the chart we can see that shares are in a bearish channel. The stock has found resistance right where it should at the top of its gap down and near a cloud of overhead moving averages. We're actually adjusting our stop loss to $70.26, which is just above the 50-dma. We would consider new put positions here or on a drop below $68.00. Our initial target is the $65.25-65.00 range and we have decided to add a second, more aggressive target in the $62.00-60.00 zone. The Point & Figure chart is bearish with a $54 target. FYI: Any time we play a biotech or even a drug stock we're dealing with a higher-risk situation. We are at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other.

Suggested Options:
We are suggesting the January or February puts. FYI: January strikes expire in three weeks.

BUY PUT JAN 70.00 UGH-MN open interest=5548 current ask $2.85
BUY PUT JAN 67.50 UGH-MU open interest=1500 current ask $1.65
BUY PUT JAN 65.00 UGH-MM open interest=1144 current ask $0.95

BUY PUT FEB 65.00 UGH-NM open interest= 32 current ask $1.95

Picked on December 13 at $ 68.07 *triggered/gap down entry
Change since picked: + 0.76
Earnings Date 02/00/08 (unconfirmed)
Average Daily Volume = 956 thousand
 

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.)

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Encana - ECA - close: 69.21 chg: +0.77 stop: n/a

ECA displayed some relative strength on Friday but we need to see more momentum. We only have three weeks left before the January options expire. We're not suggesting new positions at this time. The options we listed for the strangle were the January $75 calls (ECA-AO) and the January $60 puts (ECA-ML). Our estimated cost is $0.65. We want to sell if either option hits $1.85 or higher. FYI: The P&F chart is bullish with a $92 target.

Suggested Options:
We are not suggesting new positions in ECA.

Picked on December 20 at $ 67.52
Change since picked: + 1.69
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 2.7 million
 

Dropped Calls

Cameron - CAM - close: 98.33 chg: +0.63 stop: 89.90

Target achieved. CAM gave us a little holiday bonus with a spike higher on Friday morning. Shares hit $99.14 before settling sideways into the weekend. Our target was the $99.00-100.00 range. The trend in CAM continues to look bullish and we'll keep an eye on it for another entry point. Right now we'd be watching a dip back toward the rising 100-dma or a breakout over resistance near $100. FYI: CAM is due to split 2-for-1 as of Monday.

Picked on December 18 at $ 91.85
Change since picked: + 6.48
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 2.1 million

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ConocoPhillips - COP - close: 89.13 chg: +0.48 stop: 83.85

Target achieved. Shares of COP also rallied higher on Friday morning. The stock hit $89.89 before paring its gains. Our target was the $89.50-90.00 range. The $90 level does look like significant resistance and after a strong two-week run up shares of COP are probably due for a correction. We remain bullish on COP and would watch for a dip and bounce near $85.00 or a breakout over $90.00 as a potential entry point for new call positions.

Picked on December 20 at $ 85.23
Change since picked: + 3.90
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 11.4 million

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Foster Wheeler - FWLT - cls: 156.27 chg: -0.63 stop: 154.99

We have been stopped out of FWLT at $154.99. The intraday low was $152.73. We're still bullish on FWLT but this was probably just some end of year profit taking. The low for 2007 was $46.50. We would keep FWLT on our watch list for another entry point. It's certainly possible that FWLT could see more profit taking after the turn of the year. Look for support (and a bounce) near $150 or a breakout to new highs as potential entry points.

Picked on December 26 at $162.00 *triggered
Change since picked: - 5.73
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume = 1.7 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

More Tax Stuff

Fiction writers are taught end chapters with a note of suspense. That prompts the reader to turn the page, the theory goes, rather than put the book down at the end of the chapter.

Last week's Trader's Corner article ended with a note of suspense, too. It ended with the suggestion that there might be ways to avoid wash-sale rule calculations altogether when computing your taxes. If you didn't read last week's article, you probably should review it before continuing. You'll find the article at this link.

One point made in that article bears repeating. I'm not a tax professional. I've made every effort a lay person might make to ensure that the information in this article is up to date and correct. However, I spend my days trading and not reading tax code or judgments in lawsuits involving tax code. The topics discussed in this article are meant only to prompt you to determine which questions you ought to be asking your tax professional and not to give advice.

One quick-fix remedy for wash-sale rule computing has been batted about for years. Here's the remedy. If you've been actively trading a security throughout the year and have experienced losses in that security, exit all trades in "substantially identical" securities some time in December and don't buy them back for 31 days. For example, imagine that you've been trading GOOG's options all year. You took a few losses in March, but mostly you reeled in big gains straight through to October. Then you took loss after loss that wiped out all your gains and then some. You have a loss for the year on your GOOG option trades.

If you keep trading GOOG options straight through the end of this year and into January, you're not going to be able to count that 2007 loss on your 2007 tax return. It's going to be folded into the basis price for the options you're buying in January. Some sites suggest that if you sell all GOOG-related securities some time in December and then don't buy back anything GOOG-related until 31 days later, the wash-sale rule no longer applies. They suggest that since you're no longer required to fold those losses into the next purchases, you don't have to make the wash-sale calculations. You just report each purchase and sale as you would normally.

You can trade in January. Just trade something other than GOOG-related securities or any others in which you've suffered losses in the last 30 days.

Logically, this sounds okay, doesn't it? Since no wash-sale losses were being carried over into the next year, the gains and losses would be identical whether all those complicated wash-sale computations were made or not. If you were to run the calculations twice--once using regular notations for each transaction and once doing all the wash-sale computations--you'd come up with the same total, because the 31-day abstention from buying "substantially identical" securities breaks the train of wash-sale computations. However, the IRS isn't always logical. We know that already, because if it was, a front-month far OTM bear call credit spread on XOM wouldn't be identical in any way to a LEAP call on the company.

As I noted in last year's article concerning tax-related considerations, I don't take anybody's word for what I should do with my returns. I'm a rule follower, and I consider myself to be an ethical person. I want to do things right all the time, and you can bet I put extra diligence into that when I'm dealing with the IRS. I called the IRS to verify that, if I refrained from trading for 31 days, beginning some time in December in that particular case, I didn't have to make the wash-sale calculations on my return. Would that be acceptable, I asked?

"I guess you could do that" and "that sounds okay" were the answers I received. Less than confidence-inspiring, aren't they? Not only is that answer less than confidence-inspiring, but also those who track the answers given on telephone inquiries to the IRS say that agents often give erroneous advice. So, we're left with "that sounds okay" and our sense that it seems ethical and logical to us. Is that enough for you? My advice is to call the IRS, ask the question, and also consult your own tax professional. The logical part of me says one thing--why make the computations--but the rule-following part of me says something else--if there's even a hint of a chance that it's a problem, maybe those computations better be made.

That's the quick-fix method for avoiding wash-sale computations, if you feel comfortable employing it or if your tax professional agrees that it's okay. A more permanent solution exists, but it has pros and cons, too. We'll discuss the solution and the pros and cons in next week's article.

If you can't wait for the information in the next article, it's essentially reprising an article written last March. You can find that article here.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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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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